-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7ys0fEzdDBlImJULirHQ4hkpZA6XwUleZtzUoBbd21gow10kGb65mhZztZyEdzA HMWx8+eeu9LyVK1ORSgySQ== 0000017843-98-000002.txt : 19980123 0000017843-98-000002.hdr.sgml : 19980123 ACCESSION NUMBER: 0000017843-98-000002 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971215 ITEM INFORMATION: FILED AS OF DATE: 19980122 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARPENTER TECHNOLOGY CORP CENTRAL INDEX KEY: 0000017843 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 230458500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-05828 FILM NUMBER: 98511151 BUSINESS ADDRESS: STREET 1: PO BOX 14662 CITY: READING STATE: PA ZIP: 19612-4662 BUSINESS PHONE: 2152082000 MAIL ADDRESS: STREET 1: P O BOX 14662 CITY: READING STATE: PA ZIP: 19612-4662 8-K/A 1 AMENDMENT TO FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT TO CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Amendment No. #1 Amendment to Current Report on Form 8-K dated December 5, 1997, and filed December 15, 1997. CARPENTER TECHNOLOGY CORPORATION ---------------------------------------------------- (Exact name of Registrant as specified in its Charter) Delaware 1-5828 23-0458500 - ------------------------- ------------ ------------------- (State or other juris- (Commission (I.R.S. Employer diction of incorporation) File Number) Identification No.) 101 West Bern Street, Reading, Pennsylvania 19612-4662 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610)208-2000 The undersigned registrant hereby amends the following item of its Current Report on Form 8-K dated December 5, 1997, and filed December 15, 1997, as set forth in the pages attached hereto: Item 7. Financial Statements and Exhibits Page In This Report ------- (a) Financial Statements of Talley Industries, Inc. as of and for the year ended December 31, 1996: (1) Report of Independent Accountants.......... F-3 (2) Consolidated Statement of Earnings - Years ended December 31, 1996, 1995 and 1994.............................. F-4 (3) Consolidated Balance Sheet - December 31, 1996 and 1995.............. F-5 - F-6 (4) Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1996, 1995 and 1994........... F-7 (5) Consolidated Statement of Cash Flows - Years ended December 31, 1996, 1995 and 1994....................................... F-8 (6) Notes to Consolidated Financial Statements, including Summary of Segment Operations...................... F-9 - F-43 (b) Unaudited Financial Statements of Talley Industries, Inc. as of and for the three and nine months ended September 30, 1997: (1) Consolidated Balance Sheet - September 30, 1997 and December 31, 1996... F-44 (2) Consolidated Statement of Earningss - Three Months and Nine Months Ended September 30, 1997 and 1996................ F-45 (3) Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1997 and 1996................................... F-46 (4) Consolidated Statement of Changes in Stockholders' Equity - Nine Months Ended September 30, 1997 and 1996.......... F-47 (5) Notes to Consolidated Financial Statements............................. F-48 - F-51 (c) Unaudited Pro Forma Financial Information to reflect the registrant's acquisition of Talley Industries, Inc.: (1) Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 1997.... PF-3 (2) Unaudited Pro Forma Condensed Combined Statements of Income for the Year Ended June 30, 1997 and the Three Months Ended September 30, 1997........ PF-4 - PF-5 (3) Notes to Pro Forma Condensed Combined Financial Statements................... PF-6 - PF-7 (d) Exhibits -------- Number Exhibit ------ ------- 23 Consent of Independent Accountants F-1 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. CARPENTER TECHNOLOGY CORPORATION By s/G. Walton Cottrell ------------------------------ G. Walton Cottrell Sr. Vice President - Finance & Chief Financial Officer Date: January 22, 1998 F-2 Report of Independent Accountants --------------------------------- TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TALLEY INDUSTRIES, INC. In our opinion, the consolidated financial statements listed in Item 7 (a) in the index appearing on page F-1 present fairly, in all material respects, the financial position of Talley Industries, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Phoenix, Arizona February 17, 1997 F-3 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statement of Earnings
Years Ended December 31, 1996 1995 1994 - -------------------------------------------- ------------ ------------ ------------- Sales $309,169,000 $301,296,000 $249,201,000 Services 70,315,000 58,821,000 59,989,000 Royalties 123,214,000 25,169,000 18,570,000 - -------------------------------------------- ------------ ------------ ------------- 502,698,000 385,286,000 327,760,000 - -------------------------------------------- ------------ ------------ ------------- Cost of sales 249,307,000 224,236,000 182,415,000 Cost of services 62,258,000 51,485,000 52,314,000 Selling, general and administrative expenses 64,393,000 63,297,000 62,763,000 Provision for reserve on realty assets 85,000,000 7,000,000 - - -------------------------------------------- ------------ ------------ ------------- 460,958,000 346,018,000 297,492,000 - -------------------------------------------- ------------ ------------ ------------- Earnings from operations 41,740,000 39,268,000 30,268,000 Other income (expense), net 16,295,000 (3,629,000) (2,978,000) - -------------------------------------------- ------------ ------------ ------------- 58,035,000 35,639,000 27,290,000 Interest expense 25,406,000 28,666,000 28,089,000 - -------------------------------------------- ------------ ------------ ------------- Earnings (loss) before income taxes and extraordinary gains (loss) 32,629,000 6,973,000 (799,000) Income tax provision (benefit) 1,836,000 3,418,000 (4,305,000) - -------------------------------------------- ------------ ------------ ------------- Earnings before extraordinary gains (loss) 30,793,000 3,555,000 3,506,000 Extraordinary gains (loss), net of income taxes (12,052,000) 14,409,000 - - -------------------------------------------- ------------ ------------ ------------- Net earnings $ 18,741,000 $ 17,964,000 $ 3,506,000 ============================================ ============ ============ ============= Earnings applicable to common shares (after deduction of preferred stock dividends and value of induced conversion) $ 5,608,000 $ 15,801,000 $ 1,339,000 ============================================ ============ ============ ============= Earnings per share of common stock and common stock equivalents: Before extraordinary gains (loss) $ 2.13 $ .25 $ .13 Extraordinary gains (loss) (.87) 1.03 - Value of induced conversion (.86) - - - -------------------------------------------- ------------ ------------ ------------- Net earnings $ .40 $ 1.28 $ .13 ============================================ ============ ============ ============= Weighted average shares outstanding 13,913,000 14,001,000 10,412,000 ============================================ ============ ============ ============= The accompanying notes are an integral part of the financial statements.
F-4 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Balance Sheet December 31, 1996 1995 - --------------------------------- ------------ ------------ ASSETS Cash and cash equivalents $ 48,758,000 $ 10,475,000 Accounts receivable, net of allowance for doubtful accounts of $925,000 in 1996 and $1,275,000 in 1995 53,090,000 69,453,000 Inventories 64,684,000 67,191,000 Deferred income taxes 3,660,000 1,200,000 Prepaid expenses 6,100,000 8,296,000 - --------------------------------- ------------ ------------ Total current assets 176,292,000 156,615,000 Realty assets - 104,964,000 Long-term receivables, net 6,517,000 10,113,000 Property, plant and equipment, at cost, net of accumulated depreciation of $98,588,000 in 1996 and $92,395,000 in 1995 49,324,000 48,760,000 Intangibles, at cost, net of accumulated amortization of $18,313,000 in 1996 and $16,985,000 in 1995 41,965,000 43,969,000 Deferred charges and other assets 6,287,000 8,178,000 - --------------------------------- ------------ ------------ Total assets $280,385,000 $372,599,000 ================================= ============ ============ F-5 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES December 31, 1996 1995 - ------------------------------------------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current maturities of long-term debt $ 5,160,000 $ 3,734,000 Current maturities of realty debt 362,000 2,155,000 Accounts payable 20,116,000 22,473,000 Accrued expenses 44,189,000 32,851,000 - ------------------------------------------- ------------ ------------ Total current liabilities 69,827,000 61,213,000 Long-term debt 123,185,000 227,736,000 Long-term realty debt - 7,980,000 Deferred income taxes 2,179,000 7,437,000 Other liabilities 10,708,000 9,899,000 Commitments and contingencies - - Stockholders' equity: Preferred stock, $1 par value, authorized 5,000,000; shares issued: Series A - 14,000 shares (67,000 in 1995) ($345,000 involuntary liquidation preference) 14,000 67,000 Series B - 750,000 shares (1,548,000 in 1995) ($14,992,000 involuntary liquidation preference) 750,000 1,548,000 Series D - 0 shares (120,000 in 1995) - 120,000 Common stock, $1 par value, authorized 20,000,000; shares issued: 14,618,000 shares (10,053,000 in 1995) 14,618,000 10,053,000 Capital in excess of par value 79,884,000 86,035,000 Foreign currency translation adjustments (562,000) (530,000) Accumulated deficit (20,218,000) (38,959,000) - -------------------------------------------- ------------ ------------ Total stockholders' equity 74,486,000 58,334,000 - -------------------------------------------- ------------ ------------ Total liabilities and stockholders' equity $280,385,000 $372,599,000 ============================================ ============ ============ The accompanying notes are an integral part of the financial statements. F-6 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity
Capital in Retained Preferred Stock Common Excess of Treasury Earnings Series A Series B Series D Stock Par Value Stock (Deficit) -------- ---------- -------- ----------- ----------- ---------- ------------ 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) ============================== ======= ========== ======== =========== =========== ========= ============ The accompanying notes are an integral part of the financial statements.
F-7 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows
Years Ended December 31, 1996 1995 1994 - ----------------------------------------------- ------------ ------------ ------------ Cash and cash equivalents at beginning of year $ 10,475,000 $ 13,002,000 $ 12,194,000 - ----------------------------------------------- ------------ ------------ ------------ Cash flows from operating activities: Net earnings 18,741,000 17,964,000 3,506,000 Adjustments to reconcile net income to cash flows from operating activities: Extraordinary items 12,052,000 (14,409,000) - Change in deferred income taxes (7,718,000) 382,000 (5,565,000) Depreciation and amortization 8,878,000 8,443,000 9,557,000 (Gain) loss on sale of property and equipment 147,000 (62,000) (173,000) Original discount amortization 8,639,000 10,187,000 9,024,000 Provision reserve for realty assets 85,000,000 7,000,000 - Other 9,154,000 (7,000) 4,801,000 Changes in assets and liabilities, net of effects of acquisitions and divestitures: (Increase) decrease in accounts receivable 16,569,000 (13,379,000) 2,935,000 (Increase) decrease in inventories 2,507,000 (1,122,000) (93,000) (Increase) decrease in prepaid expenses 1,941,000 (401,000) 1,769,000 Decrease in realty assets 16,030,000 5,947,000 6,036,000 Increase in other assets (3,000,000) (240,000) (587,000) Increase (decrease) in accounts payable (2,357,000) (3,501,000) 2,353,000 Increase (decrease) in accrued expenses 5,054,000 (277,000) (1,154,000) Decrease in other liabilities (2,124,000) (1,714,000) (722,000) Other, net 3,151,000 (314,000) 471,000 - ------------------------------------------------ ------------ ------------ ------------ Cash flows from operating activities 172,664,000 14,497,000 32,158,000 - ------------------------------------------------ ------------ ------------ ------------ Cash flows from investing activities: Purchase of assets of acquired business (4,337,000) (287,000) (5,688,000) Purchases of property and equipment (6,752,000) (8,931,000) (3,932,000) Reduction of long-term receivables 1,890,000 1,020,000 237,000 New long-term receivables (1,418,000) - (551,000) Proceeds from sale of property and equipment 347,000 772,000 302,000 - ------------------------------------------------ ------------ ------------ ------------ Cash flows from investing activities (10,270,000) (7,426,000) (9,632,000) - ------------------------------------------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from exercise of stock options 3,524,000 11,000 - Payment of cash dividends (4,398,000) - - Issuance of common stock 384,000 - - Purchase of common stock (2,068,000) - - Redemption of Discount Debentures (97,451,000) - - Reduction in borrowings under line of credit (385,792,000) (490,361,000) (399,918,000) Other reductions in debt (3,734,000) (4,215,000) (2,209,000) Repayment of realty debt (9,790,000) (6,593,000) (2,145,000) Proceeds from borrowings under line of credit 375,214,000 491,560,000 382,554,000 - ------------------------------------------------ ------------ ------------ ------------ Cash flows from financing activities (124,111,000) (9,598,000) (21,718,000) - ------------------------------------------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 38,283,000 (2,527,000) 808,000 - ------------------------------------------------ ------------ ------------ ------------ Total cash and cash equivalents at end of year $ 48,758,000 $ 10,475,000 $ 13,002,000 ================================================ ============ ============ ============ The accompanying notes are an integral part of the financial statements.
F-8 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-9 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-10 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-11 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-12 Notes to Consolidated Financial Statements Inventories Inventories are summarized as follows: (balances in thousands) 1996 1995 - --------------------------------------- ------- ------- Raw material and supplies $10,995 $11,878 Work-in-process 11,564 11,222 Finished goods 26,158 28,955 Inventories substantially applicable to fixed-price government contracts in process, reduced by progress payments of $7,924,000 and $5,870,000 in 1996 and 1995, respectively 15,967 15,136 - --------------------------------------- ------- ------- $64,684 $67,191 ======= ======= Realty Assets In 1992, the Company initiated a plan for the orderly disposition of all its remaining real estate assets. With the resolution of the airbag royalty dispute with TRW and after receiving payments in connection therewith in the third quarter of 1996, and also in view of the slower than expected improvement in the market conditions for real estate assets, the Company re-evaluated and changed its strategy for exiting the real estate business. The Company adjusted its strategy of selling properties to end users in an orderly process over time, to a strategy of liquidation sales through pricing adjustments and/or joint development arrangements. This change in strategy resulted in an $85,000,000 writedown in real estate assets for financial reporting purposes. In December of 1996 all real estate properties, except for one, were sold for cash and assumption of certain liabilities. The Company plans to dispose of the single property not included in this bulk sale. Realty assets are stated at the lower of historical cost or estimated net realizable value and include land held for sale together with related development and carrying costs (interest and F-13 Notes to Consolidated Financial Statements Realty Assets, (continued) property taxes during development), and equity investments in realty joint ventures. For financial reporting purposes, realty assets must be carried at the lower of historical cost or estimated net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs of completion (to the stage of completion assumed in determining the selling price), holding and disposal. The Company accounts for and reports the value of foreclosed realty assets at fair value less the estimated costs to sell the assets. In 1995, non-cash Realty asset transactions included an increase in both Realty assets and Realty debt in the amount of $4,038,000 and $3,649,000, respectively, upon the consolidation of a previously unconsolidated joint venture. Non-cash Realty items in 1995 also included reductions of $4,677,000 due to forfeitures of properties and other transactions. The value of foreclosed assets at December 31, 1995 was $29,773,000. There were no foreclosed assets at December 31, 1996. Long-Term Receivables Long-term receivables consist of the following: (balances in thousands) 1996 1995 - ------------------------------------- -------- -------- Notes receivable, including accrued interest and income tax refunds $ 6,640 $ 10,584 Amounts due within one year, included in accounts receivable (123) (471) -------- -------- $ 6,517 $ 10,113 ======== ======== Long-term receivables include income tax receivables of $5,431,000, which must be approved by the Congressional Joint Committee on Taxation before payment will be received, and accordingly are classified as non-current. The remaining notes F-14 Notes to Consolidated Financial Statements Long-Term Receivables, continued range in length from one to fourteen years and bear interest at December 31, 1996 at rates ranging from 8% to 10%. Payment terms vary by note, but generally require monthly, quarterly or annual interest and principal payments. The notes receivable balance is net of reserves of $4,086,000 and $1,260,000 at December 31, 1996 and 1995, respectively. Property, Plant and Equipment Property, plant and equipment, is summarized as follows: (balances in thousands) 1996 1995 - ----------------------------------- -------- -------- Machinery and equipment $114,020 $107,576 Buildings and improvements 31,338 30,791 Land 2,554 2,788 - ----------------------------------- -------- -------- $147,912 $141,155 ======== ======== Depreciation of property, plant and equipment was $7,278,000, $6,834,000, and $7,735,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Long-Term Debt Long-term debt consists of the following: (balances in thousands) 1996 1995 - --------------------------------------- -------- -------- 10-3/4% Senior Notes, due 2003 $115,000 $115,000 12-1/4% Senior Discount Debentures, due 2005 (face amount $2,553,000) 2,066 90,878 Notes, interest based on prime or other variable market rates, due 1998 11,263 14,341 Revolving credit facilities - 10,579 Capitalized leases and other 16 672 - --------------------------------------- -------- -------- 128,345 231,470 Less current maturities 5,160 3,734 - --------------------------------------- -------- -------- Long-term debt $123,185 $227,736 ======================================= ======== ======== F-15 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-16 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-17 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-18 Notes to Consolidated Financial Statements Benefit Plans, (continued) Stock Option Plans, continued ----------------------------- issuance in connection with incentive stock options, non-qualified stock options, stock appreciation rights, bonus stock, awards in lieu of cash obligations and other stock-based awards. The Plan also permits cash payments either as a separate award or as a supplement to a stock-based award. Options may be granted at an exercise price, in the case of an incentive stock option, of not less than the fair market value of the shares on the date of grant, and in the case of an option other than an incentive stock option, of not less than 50% of the fair market value of the shares on the date of grant. The Plan replaces the Company's 1983 Restricted Stock Plan, the 1983 Long-Term Incentive Plan (both of which plans have terminated) and the 1978 and 1990 Stock Option Plans. As a result of the approval of the Plan, no further grants of options will be made under either the 1978 or 1990 Stock Options Plans. As of December 31, 1996 no options have been granted under the 1996 Comprehensive Stock Plan. As of December 31, 1996, outstanding options under the 1990 and 1978 plans were 56,000 and 199,050, respectively. The 1990 and 1978 plans require incentive stock option prices to be no less than the market value at the date of the grant and that all options, incentive and non-qualified, become exercisable generally in five years, but in no case greater than ten years from the date of grant, as specified in the individual grants. Information regarding these option plans for 1996, 1995 and 1994 is as follows: 1996 1995 1994 ------------------- -------------------- -------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Shares -------- -------- -------- -------- -------- Options outstanding, beginning of year 878,300 $5.46 933,925 $5.97 855,925 Options exercised (612,500) 4.36 - - - Options forfeited (10,750) 8.00 (192,675) 9.73 (22,000) Options granted - - 137,050 8.00 100,000 -------- ------ -------- ------ -------- Options outstanding, end of year 255,050 $8.00 878,300 $5.46 933,925 ======== ====== ======== ====== ======== F-19 Notes to Consolidated Financial Statements Benefit Plans, (continued) Stock Option Plans, continued ----------------------------- 1996 1995 1994 Shares Shares Shares ----------- ----------- ----------- Option price range at end of year $5.38-$9.75 $4.25-$9.75 $4.25-$9.75 ----------- ----------- ----------- Option price range for exercised shares $4.25-$8.00 - $4.25-$9.75 ----------- ----------- ----------- Options available for grant at end of year 1,200,000 360,986 200,186 ----------- ----------- ----------- Weighted average fair value of options granted during the year - $2.61 ----------- ----------- Information on the Company's fixed price stock options outstanding at December 31, 1996 is as follows: Remaining Options Options Contractual Number Outstanding Price Life Exercisable ----------- ------- ----------- ----------- 83,750 $9.75 4 Years 83,750 56,000 5.38 3 Years 2,000 115,300 8.00 4 Years 16,260 ------- ------- 255,050 102,010 ======= ======= The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" at December 31, 1996. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: F-20 Notes to Consolidated Financial Statements Benefit Plans, (continued) Stock Option Plans, continued ----------------------------- (balance in thousands, except per share amounts) 1996 1995 - ----------------------------------------------------------------- Net earnings - as reported $18,741 $17,964 Net earnings - pro forma $18,673 $17,858 Earnings per share - as reported $ .40 $ 1.28 Earnings per share - pro forma $ .40 $ 1.27 - ----------------------------------------------------------------- The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995: dividend yield of 0%; risk-free interest rate of 6.21%; expected volatility of 43 %, and expected lives of 5.0 years. There were no grants of options during 1996. In April 1996, the Company's shareholders approved the "1996 Non-Employee Director Stock Plan of Talley Industries, Inc." (the Director Plan) effective as of January 1, 1996 for non-employee directors of the Company. Under the Director Plan, 200,000 shares of Common stock are available for issuance in connection with the Annual Restricted Stock Grants or the Annual Option Grants. The exercise price under an option will be equal to the fair market value of the Common stock on the date of grant. At December 31, 1996, a total of 10,000 options for shares of Common stock had been granted under the Director Plan with an option price of $7.88. Retirement Plans The Company and its subsidiaries have pension plans covering a majority of its employees. Normal retirement age is 65, but provisions are made for early retirement. For subsidiaries with defined benefit plans, benefits are generally based on years of service and salary levels. Contributions to the respective defined contribution plans are based on each participant's annual pay and age. The Company also has a retirement plan for its Board of Directors. Benefits are payable under the plan after five years of service upon reaching age 68, or retirement if later. Net pension cost in 1996, 1995 and 1994 was $3,695,000, $4,132,000 and $4,837,000, respectively. F-21 Notes to Consolidated Financial Statements Benefit Plans, (continued) Retirement Plans, continued The Company generally contributes the greater of the amounts expensed or the minimum statutory funding requirements. Pension costs for defined benefit plans include the following components: (balances in thousands) 1996 1995 1994 - ----------------------------- -------- -------- -------- Service cost-benefits earned during the year $ 1,542 $ 1,138 $ 1,377 Interest cost on projected benefit obligation 2,785 2,781 2,360 Actual return on assets (6,731) (11,377) 643 Net amortization and deferral 2,602 8,035 (3,493) - ----------------------------- -------- -------- -------- Net pension cost $ 198 $ 577 $ 887 ============================= ======== ======== ======== The following table sets forth the aggregate funded status of defined benefit plans at December 31, 1996 and 1995:
1996 1995 ------------- ------------------------------ Assets Exceed Assets Exceed Accumulated Accumulated Accumulated Benefits (balances in thousands) Benefits Benefits Exceed Assets - ---------------------------- ------------- ------------- ------------- Fair value of plan assets $ 52,471 $ 45,857 $ 1,852 Projected benefit obligation (42,439) (41,955) (1,998) - ---------------------------- -------- -------- -------- Projected benefit obligation (in excess of) less than plan assets 10,032 3,902 (146) Unrecognized net loss (gain) (11,356) (5,008) (175) Unrecognized prior service cost (234) (252) 4 Unrecognized net liability 692 520 344 Unfunded accumulated benefit obligation - - (173) - ---------------------------- -------- -------- -------- Pension liability $ (866) $ (838) $ (146) ============================ ======== ======== ======== Accumulated benefits $ 38,035 $ 37,046 $ 1,998 Vested benefits $ 36,336 $ 35,094 $ 1,955
F-22 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 f 1996 and 1995 were $247,000 and $234,000, respectively. Assumptions used in 1996, 1995 and 1994 to determine the actuarial present value of plan benefit obligations were: 1996 1995 1994 ---- ---- ---- Assumed discount rate 7.25% 6.5% 8.5% Assumed rate of compensation increase 4.5% 4.5% 5.0% Expected rate of return on plan assets 9.0% 9.0% 9.0% Net periodic pension cost is determined using the assumptions as of the beginning of the year. The funded status is determined using the assumptions as of the end of the year. Assets of the Company's pension plans consist of marketable equity securities, guaranteed investment contracts and corporate and government debt securities. At December 31, 1996 the total value of defined benefit plan assets exceed total vested benefits by $16,135,000. Effective January 1, 1984, the Company established an employee stock purchase plan for eligible U.S. employees. Each eligible employee who elects to participate may contribute 1% to 5% of his or her pretax compensation from the Company. The Company contributes an amount equal to 50% of the employee contributions. Total Company contributions during 1996 and 1995 were $535,000 and $502,000, respectively. Other Postemployment Benefits ----------------------------- Health care and life insurance benefits are presently provided to a small number of retired employees of one of the Company's subsidiaries. The cost of retiree health care and life insurance benefits are minor in amount and are recognized as benefits are paid. The Company adopted Statement of Financial Accounting F-23 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-24 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-25 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-26 Notes to Consolidated Financial Statements Leases, (continued) Aggregate future minimum payment under capital leases for the year ending December 31, 1997 is $18,000, with no payments in later years. The present value of net minimum lease payments is $16,000 after deduction of $2,000, representing interest and estimated executory costs. The net book value of leased buildings and equipment under capital leases at December 31, 1996 and 1995 amounted to $-0- and $656,000, respectively. Income Taxes Earnings before income taxes and extraordinary items and the provision (credit) for income taxes consists of the following: (balances in thousands) 1996 1995 1994 - ------------------------------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary items: United States $ 31,899 $ 4,541 $ (2,341) Foreign 730 2,432 1,542 - ------------------------------- -------- -------- -------- $ 32,629 $ 6,973 $ (799) ======== ======== ======== Current tax expense: United States $ 3,768 $ 728 $ - Foreign 350 1,154 731 State and local 5,436 1,154 530 - ------------------------------- -------- -------- -------- 9,554 3,036 1,261 -------- -------- -------- Deferred tax expense (credit): United States (3,754) (701) - Foreign 14 25 15 State and local (3,978) 1,058 (5,581) (7,718) 382 (5,566) - ------------------------------- -------- -------- -------- $ 1,836 $ 3,418 $ (4,305) ======== ======== ======== F-27 Notes to Consolidated Financial Statements Income Taxes, (continued) Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for 1996 and 1995 are as follows: (balances in thousands) 1996 1995 - ------------------------------ -------- -------- Gross deferred tax assets: Net operating losses and tax credit carryforward $ - $ 1,484 Reserves on realty assets 10,165 7,883 Accrued expenses 8,211 11,356 Other 3,106 2,498 Valuation allowance for deferred tax assets (10,368) (17,664) - ------------------------------ -------- -------- Net deferred tax assets 11,114 5,557 - ------------------------------ -------- -------- Gross deferred tax liabilities: Depreciation 5,703 5,957 Accrued expenses 1,954 4,604 Other 1,976 1,233 -------- -------- Gross deferred tax liabilities 9,633 11,794 - -------------------------------- -------- -------- Net deferred tax asset (liability) $ 1,481 $ (6,237) ================================== ======== ======== During the year ended December 31, 1996 the valuation allowance for deferred tax assets decreased $7,296,000. Approximately $6,900,000 of the reduction was related to the deferred tax asset associated with the Company's Senior Discount Debentures, which were substantially all redeemed in 1996, including the amortized original issue discount, which accordingly reduced income taxes in 1996. Reasons for the differences between the amount of income tax determined by applying the applicable statutory federal income tax rate to pretax income are: (balances in thousands) 1996 1995 1994 - --------------------------------- -------- -------- -------- Computed tax at statutory U.S. tax rates $ 11,095 $ 2,371 $ (272) Effect of loss carryforwards and valuation allowance (13,289) (1,476) (1,751) Goodwill and other non-deductible items 3,202 519 574 State and local taxes 1,458 2,212 (5,051) Other (630) (208) 2,195 - --------------------------------- -------- -------- -------- $ 1,836 $ 3,418 $ (4,305) ======== ======== ======== F-28 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-29 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-30 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-31 Notes to Consolidated Financial Statements Commitments and Contingencies, (continued) Environmental, continued ------------------------ The current owner of a site in Athens, Georgia is conducting an informal investigation of alleged groundwater contamination. A subsidiary of the Company was an owner of the site until March 1988, and is cooperating with the investigation. The Georgia Environmental Protection Division made a determination in 1995 that the site should be listed on its Hazardous Site Inventory. No lawsuit or administrative enforcement proceedings have been initiated in this matter. Based on remediation estimates received, management believes that any reasonably anticipated losses from the alleged contamination will not result in a material adverse impact on the results of operations or the financial position of the Company. Fair Value of Financial Instruments The following table presents the carrying amounts and fair values of the Company's financial instruments for which it is practicable to estimate. Financial Accounting Standards Board Statement No. 107 "Disclosures about Fair Value of Financial Instruments", defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a force or liquidation sale. (balances in thousands) 1996 1995 - ----------------------- ------------------ ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Cash & cash equivalents $ 48,758 $ 48,758 $ 10,475 $ 10,475 Non-trade receivables 6,644 6,644 10,584 10,584 Realty debt 362 362 10,135 10,135 Other debt 128,345 131,978 231,470 238,881 F-32 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-33 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-34 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-35 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 Commitments and Contingencies Footnote.) 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-36 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-37 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-38 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-39 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-40 Notes to Consolidated Financial Statements Segment Operations, (continued) Other Matters, continued which provide that the customer is obligated to pay only for services rendered pursuant to specific (funded) task orders and is not obligated to issue additional task orders or to pay the estimated total contract price. The term "unfunded" used herein refers to the portion of the Company's total backlog that represents the excess of the stated value of the Company's executed contracts over the amounts funded by the customer for such contracts including unexercised options. The tables which follow show assets, depreciation and amortization and capital expenditures by segment: (in thousands) 1996 1995 1994 - ---------------------------------------- -------- -------- -------- Assets by Segment Government Products and Services $104,480 $100,226 $ 98,424 Airbag Royalties - 5,434 4,700 Stainless Steel Products 67,331 75,082 65,397 Industrial Products 47,345 58,351 55,884 Realty 673 106,540 114,642 - ---------------------------------------- -------- -------- -------- 219,829 345,633 339,047 Corporate 60,556 26,966 30,856 - ---------------------------------------- -------- -------- -------- $280,385 $372,599 $369,903 ======== ======== ======== Depreciation and Amortization by Segment Government Products and Services $ 3,779 $ 3,143 $ 3,306 Airbag Royalties - - - Stainless Steel Products 2,589 2,608 3,354 Industrial Products 2,196 2,373 2,557 Realty 14 15 15 - ---------------------------------------- -------- -------- -------- 8,578 8,139 9,232 Corporate 300 304 325 - ---------------------------------------- -------- -------- -------- $ 8,878 $ 8,443 $ 9,557 ======== ======== ======== Capital Expenditures by Segment Government Products and Services $ 2,393 $ 2,532 $ 1,820 Airbag Royalties - - - Stainless Steel Products 2,491 3,821 999 Industrial Products 1,823 2,469 982 Realty 2 1 - - ---------------------------------------- -------- -------- -------- 6,709 8,823 3,801 Corporate 43 108 131 - ---------------------------------------- -------- -------- -------- $ 6,752 $ 8,931 $ 3,932 ======== ======== ======== F-41 Notes to Consolidated Financial Statements TALLEY INDUSTRIES, INC. AND SUBSIDIARIES Summary of Segment Operations (in thousands)
Years Ended December 31, 1996 1995 1994 1993 1992 - ----------------------------------- -------- -------- -------- -------- -------- 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) - ----------------------------------- ======== ======== ======== ======== ========
F-42 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-43 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (THOUSANDS)
SEPTEMBER 30, DECEMBER 31, ASSETS 1997 1996 - -------------------------------------------- --------- --------- Cash and cash equivalents $ 40,957 $ 48,758 Accounts receivable, net of allowance for doubtful accounts of $1,228 at September 30, 1997 and $925 at December 31, 1996 50,609 53,090 Inventories, net 67,207 64,684 Deferred income taxes 3,800 3,660 Prepaid expenses 7,361 6,100 --------- --------- Current assets 169,934 176,292 Property, plant and equipment, net 53,298 49,324 Intangibles 38,296 41,965 Deferred charges and other assets 17,114 12,804 --------- --------- Total assets $ 278,642 $ 280,385 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current maturities of long-term debt $ 3,010 $ 5,522 Accounts payable 24,016 20,116 Accrued expenses 37,251 44,189 --------- --------- Current liabilities 64,277 69,827 Long-term debt 122,946 123,185 Deferred income taxes 3,650 2,179 Other liabilities 10,686 10,708 Stockholders' equity: Preferred stock, $1 par value, authorized 5,000,000 shares: Series A 14 14 Series B 749 750 Common stock, $1 par value, authorized 20,000,000 shares 14,114 14,618 Capital in excess of par value 75,534 79,884 Foreign currency translation adjustment (34) (562) Accumulated deficit (13,294) (20,218) --------- --------- Total stockholders' equity 77,083 74,486 --------- --------- Total liabilities and stockholders' equity $ 278,642 $ 280,385 ========= ========= The accompanying notes are an integral part of the financial statements.
F-44 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Sales $ 67,184 $ 76,667 $200,389 $219,256 Services 20,627 17,082 62,896 49,904 Royalties 179 109,023 891 122,709 -------- -------- -------- -------- 87,990 202,772 264,176 391,869 -------- -------- -------- -------- Cost of sales 48,364 70,115 146,267 177,808 Cost of services 18,481 15,168 56,316 44,036 Selling, general, and administrative expenses 14,547 12,761 49,910 47,574 Provision (reversal) of reserves on realty assets - 85,000 (6,300) 85,000 -------- -------- -------- -------- 81,392 183,044 246,193 354,418 -------- -------- -------- -------- Earnings from operations 6,598 19,728 17,983 37,451 Other income (expense), net (435) 16,780 320 14,587 -------- -------- -------- -------- 6,163 36,508 18,303 52,038 Interest expense 3,589 6,694 10,910 21,066 -------- -------- -------- -------- Earnings before income taxes and extraordinary loss 2,574 29,814 7,393 30,972 Income tax provision 219 502 469 1,575 -------- -------- -------- -------- Earnings before extraordinary loss 2,355 29,312 6,924 29,397 Extraordinary loss - - - (1,642) -------- -------- -------- -------- Net earnings $ 2,355 $ 29,312 $ 6,924 $ 27,755 ======== ======== ======== ======== Earnings applicable to common shares $ 2,164 $ 29,121 $ 6,351 $ 14,813 ======== ======== ======== ======== Earnings (loss) per share of common stock and common stock equivalents: Earnings before extraordinary loss $ .15 $ 1.85 $ .45 $ 1.93 Extraordinary loss - - - (.11) -------- -------- -------- -------- Net earnings before consideration for induced conversion of preferred stock .15 1.85 .45 1.82 Assumed value of conversion inducement - - - (.79) -------- -------- -------- -------- Earnings applicable to common shares $ .15 $ 1.85 $ .45 $ 1.03 ======== ======== ======== ======== Weighted average shares outstanding 14,156 15,855 15,246 15,202 ======== ======== ======== ======== The accompanying notes are an integral part of the financial statements.
F-45 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 -------- -------- Cash and cash equivalents at beginning of year $ 48,758 $ 10,475 -------- -------- Cash flows from operating activities: Net earnings 6,924 27,755 Adjustments to reconcile net income to cash flows from operating activities: Change in deferred income taxes 1,331 (3,099) Depreciation and amortization 6,684 6,628 Original discount amortization - 7,929 Loss on sale of subsidiary and product line 1,325 - Provision (reversal) of reserve on realty assets (6,300) 85,000 Other 1,318 15,425 Changes in assets and liabilities, net of effects from acquired businesses: (Increase)decrease in accounts receivable (533) 17,028 Increase in inventories (6,910) (329) (Increase) decrease in prepaid expenses (6,431) 476 Decrease in realty assets - 3,967 Increase in accounts payable 3,900 3,289 Increase in accrued expenses 1,053 8,172 Increase (decrease) in other liabilities 493 (588) Other, net (186) 2,863 -------- -------- Cash flows from operating activities 2,668 174,516 Cash flows from investing activities: Proceeds from sale of subsidiary and product line 6,162 - Investment in joint-venture (3,510) - Purchase of assets of acquired business - (4,327) Purchases of property and equipment (9,921) (4,675) Reduction of income tax receivables 4,400 - Reduction in other assets 97 370 Proceeds from sale of property and equipment 78 150 -------- -------- Cash flows from investing activities (2,694) (8,482) Cash flows from financing activities: Preferred stock conversion cost - 3,637 Payment of dividends (573) - Purchase of common stock (4,339) - Common stock issued 57 - Repayment of long-term debt (2,920) (18,694) Proceeds from borrowings under line of credit - 375,213 Reduction in borrowings under line of credit - (385,792) -------- -------- Cash flows from financing activities (7,775) (25,636) Net decrease in cash and cash equivalents (7,801) 140,398 -------- -------- Total cash and cash equivalents at September 30, $ 40,957 $150,873 ======== ======== The accompanying notes are an integral part of the financial statements.
F-46 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (THOUSANDS)
PREFERRED STOCK CAPITAL IN RETAINED -------------------------------------- COMMON EXCESS OF EARNINGS SERIES A SERIES B SERIES D STOCK PAR VALUE (DEFICIT) -------- -------- -------- -------- -------- -------- 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) ======== ======== ======== ======== ======== ======== The accompanying notes are an integral part of the financial statements.
F-47 TALLEY INDUSTRIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 - GENERAL In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 1997 and December 31, 1996 and the results of operations for the three-month and nine-month periods ended September 30, 1997 and 1996, and cash flows and changes in stockholders' equity for the nine-month periods ended September 30, 1997 and 1996. Such results, however, may not be indicative of the results for the full year. For additional information regarding significant accounting policies, and accounting matters applicable to the Company, reference should be made to the Company's Annual Report to Shareholders for the year ended December 31, 1996. NOTE 2 - INVENTORIES Inventories are summarized as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ Raw materials and supplies $12,710 $10,995 Work-in-process 11,311 11,564 Finished goods 26,784 26,158 Inventories applicable to government contracts 16,402 15,967 ------- ------- $67,207 $64,684 ======= ======= NOTE 3 - EARNINGS PER SHARE Earnings per share of Common stock and Common stock equivalents has been computed on the basis of the average number of Common shares outstanding during each period. The average number of shares has been adjusted for assumed exercise at the beginning of the period (or date of grant, if later) for any dilutive stock options, with funds obtained thereby used to purchase shares of F-48 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. F-49 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. F-50 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. F-51 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Condensed Combined Financial Statements reflect the acquisition of Talley Industries, Inc. ("Talley") by Carpenter Technology Corporation ("Carpenter"). On December 5, 1997, Score Acquisition Corp. ("Score"), a wholly-owned subsidiary of Carpenter, accepted approximately 75% of the voting stock of Talley for payment pursuant to the Agreement and Plan of Merger dated September 25, 1997 and upon the terms and subject to the conditions set forth in Score's Offer to Purchase dated October 2, 1997. Upon consummation of the merger, scheduled for February, 1998, Talley will become a wholly-owned subsidiary of Carpenter. Accordingly, the Unaudited Pro Forma Condensed Combined Financial Statements reflect the 100% acquisition of Talley (the "Talley Merger"). The Unaudited Pro Forma Condensed Combined Statement of Income for the year ended June 30, 1997 also reflects the acquisitions by Carpenter of Dynamet Incorporated in February, 1997 and Rathbone Precision Metals, Inc. in June, 1997 (the "Other Acquisitions"). The following Unaudited Pro Forma Financial Statements are filed with this report: Page ---- Unaudited Pro Forma Condensed Combined Balance Sheet at September 30, 1997...................................... PF-3 Unaudited Pro Forma Condensed Combined Statement of Income for the year ended June 30, 1997.................... PF-4 Unaudited Pro Forma Condensed Combined Statement of Income for the three months ended September 30, 1997....... PF-5 Notes to Unaudited Pro Forma Condensed Combined Financial Statements....................................... PF-6 The Unaudited Pro Forma Condensed Combined Balance Sheet reflects the Talley Merger as if it had occurred on September 30, 1997. The unaudited Pro Forma Condensed Combined Statements of Income for the year ended June 30, 1997 and for the three months ended September 30, 1997 reflect the Talley Merger and the Other Acquisitions as if they had occurred at the beginning of the year ended June 30, 1997. The pro forma information is based on the historical financial statements of Carpenter and Talley after giving effect to the Talley Merger and the Other Acquisitions using the purchase method of accounting. Under this method of PF-1 accounting, the aggregate purchase price is allocated to assets acquired and liabilities assumed based on their estimated fair values. For purposes of the Unaudited Pro Forma Condensed Combined Financial Statements, the purchase price for Talley has been allocated based primarily on preliminary information. The final allocation of the purchase price will be determined within a reasonable time after consummation of such transaction and will be based on a complete evaluation of the assets acquired, including net assets held for sale, and liabilities assumed. Accordingly, the information presented herein may differ from the final purchase price allocation. The Unaudited Pro Forma Condensed Combined Financial Statements also reflect assumptions and adjustments deemed appropriate by Carpenter, which are described in the accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Statements. The unaudited pro forma condensed combined information does not purport to be indicative of Carpenter's financial position or results of operations had the Talley Merger and the Other Acquisitions actually occurred on the dates presented nor is it necessarily indicative of Carpenter's future financial position or future operating results. The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the separate audited historical consolidated financial statements of Carpenter and the notes thereto set forth in Carpenter's 1997 Annual Report on Form 10-K, and the historical consolidated financial statements of Talley and the notes thereto set forth in Item 7(a) of this Form 8-K/A. In the opinion of Carpenter's management, all adjustments have been made that are necessary to present fairly the pro forma data. PF-2
Carpenter Technology Corporation Unaudited Pro Forma Condensed Combined Balance Sheet September 30, 1997 (in thousands)
Adjustments To Reclassify Carpenter Talley Net Assets Held Pro Forma Pro Forma Historical Historical For Sale (B) Adjustments Combined ASSETS Current Assets: Cash and cash equivalents $ 15,639 $ 40,957 $ (343) $ $ 56,253 Accounts receivable, net of allowance for doubtful accounts 145,614 50,609 (35,870) (808)C 159,545 Inventories 238,235 67,207 (38,860) 3,900 A 270,482 Deferred income taxes - 3,800 (3,800)A 0 Other current assets 16,257 7,361 (6,130) 17,488 Net assets held for sale - - 103,108 58,371 A 161,479 --------------------------------------------------------------------- Total current assets 415,745 169,934 21,905 57,663 665,247 Property, plant, and equipment, net 532,507 53,298 (30,069) 37,000 A 592,736 Prepaid pension cost 105,270 - 105,270 Goodwill, net 108,219 37,325 (36,934) 65,167 A 173,777 Investment in Subsidiaries - 3,510 (3,510) 0 Other assets 104,397 14,575 (792) 1,887 A 120,067 --------------------------------------------------------------------- TOTAL ASSETS $1,266,138 $ 278,642 $(49,400) $ 161,717 $1,657,097 ===================================================================== LIABILITIES Current Liabilities: Short-term debt 82,217 - 86,700 A 168,917 Accounts payable 80,833 24,016 (12,219) (808)C 91,822 Accrued compensation 18,922 14,111 (12,601) 20,432 Accrued income taxes 19,062 - 32 19,094 Deferred income taxes 7,137 - 16,142 A 23,279 Other accrued liabilities 40,558 23,140 (20,885) 14,500 A 57,313 Current portion of long-term debt 3,245 3,010 133,946 A 140,201 --------------------------------------------------------------------- Total current liabilities 251,974 64,277 (45,673) 250,480 521,058 Long-term debt, net of current portion 284,734 122,946 (22,946)A 384,734 Accrued postretirement benefits 134,693 236 (236) 134,693 Deferred income taxes 110,689 3,650 11,300 A 125,639 Other liabilities 23,314 10,450 (3,525) 30,239 SHAREHOLDERS' EQUITY 460,734 77,083 34 (77,117)A 460,734 --------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,266,138 $ 278,642 $(49,400) $ 161,717 $1,657,097 ===================================================================== See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
PF-3 Carpenter Technology Corporation Unaudited Pro Forma Condensed Combined Statement of Income for the year ended June 30, 1997 (in thousands) Adjustments
Talley to Present Historical Talley Talley Pro Forma For The Historical Historical Carpenter Year For The 12 For The 12 Carpenter Other and Other Ended Mo. Ended Months Ended Pro Forma Pro Forma Historical Acquisitions Acquisitions 12/31/96 6/30/97 (I) 6/30/97 Adjustments Combined Net sales $939,000 $83,771 $1,022,771 $502,698 $(12,911) $489,787 $(365,606)(G) $1,132,461 (14,491)(H) _______________________________________________________________________________________________________ Cost of sales 697,892 51,059 748,951 311,565 (823) 310,742 1,494 (D) 841,789 (204,907)(G) (14,491)(H) Selling and administrative expenses 126,357 17,144 143,501 64,393 550 64,943 1,928 (D) 155,902 (54,470)(G) Interest expense 19,930 3,484 23,414 25,406 (8,693) 16,713 8,600 (E) 32,014 (16,713)(G) Equity in loss of joint venture 1,188 - 1,188 - - - - 1,188 Provision (reversal) for reserve on realty assets - - - 85,000 (6,300) 78,700 (78,700)(G) 0 Other (income) expense, net (4,238) (230) (4,468) (16,295) (2,948) (19,243) 18,539 (G) (5,172) _______________________________________________________________________________________________________ 841,129 71,457 912,586 470,069 (18,214) 451,855 (338,720) 1,025,721 Income from continuing operations before income taxes 97,871 12,314 110,185 32,629 5,303 37,932 (41,377) 106,740 Income tax expense (benefit) 37,878 5,611 43,489 1,836 (823) 1,013 (1,865)(F) 42,776 139 (G) _______________________________________________________________________________________________________ Income from continuing operations $ 59,993 $ 6,703 $ 66,696 $ 30,793 $ 6,126 $ 36,919 $ (39,651) $ 63,964 ======================================================================================================= Primary earnings per common share from continuing operations* $ 3.30 $ 3.29 $ 3.15 Fully diluted earnings per common share from continuing operations* $ 3.16 $ 3.17 $ 3.04 Average common shares outstanding - primary* 17,703 19,782 19,782 See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. * The Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share," which became effective for periods ending after December 15, 1997. Carpenter will adopt this statement effective with the quarter ending December 31, 1997. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. The adoption of SFAS 128 would not have had a material effect on these pro forma financial statements.
PF-4 Carpenter Technology Corporation Unaudited Pro Forma Condensed Combined Statement of Income for the three months ended September 30, 1997 (in thousands)
Carpenter Talley Pro Forma Pro Forma Historical Historical Adjustments Combined Net sales $249,495 $87,990 $(58,652)(G) $277,307 (1,526)(H) _______________________________________________ Cost of sales 179,419 66,845 242 (D) 202,591 (42,389)(G) (1,526)(H) Selling and administrative expenses 36,209 14,547 459 (D) 39,274 (11,941)(G) Interest expense 5,848 3,589 2,100 (E) 7,948 (3,589)(G) Other expense (income), net 78 435 140 (G) 653 _______________________________________________ 221,554 85,416 (56,504) 250,466 Income from continuing operations before income taxes 27,941 2,574 (3,674) 26,841 Income tax expense (benefit) 10,857 219 (717)(F) 10,583 224 (G) _______________________________________________ Income from continuing operations $ 17,084 $ 2,355 $ (3,181) $ 16,258 =============================================== Primary earnings per common share from continuing operations* $ 0.85 $ 0.80 Fully diluted earnings per common share from continuing operations* $ 0.82 $ 0.78 Average common shares outstanding-primary* 19,737 19,737 See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements. * The Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share," which became effective for periods ending after December 15, 1997. Carpenter will adopt this statement effective with the quarter ending December 31, 1997. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. The adoption of SFAS 128 would not have had a material effect on these pro forma financial statements.
PF-5 Carpenter Technology Corporation Notes to Unaudited Pro Forma Condensed Combined Financial Statements (in thousands) BALANCE SHEET ADJUSTMENTS: A) The aggregate purchase price for Talley is summarized below: Total cash to be paid to Talley shareholders $183,200* Debt assumed at fair value 136,956 Acquisition costs 3,500 ________ Aggregate Purchase Price $323,656 ======== * Includes $137,400 paid in December 1997 and $45,800 to be paid upon completion of the Talley Merger. The allocation of the aggregate purchase price and adjustments to Talley historical balances follow:
Talley Purchase Historical Price Balances As Acquisition Allocation Adjusted(1) Financing Adjustments Cash and Cash Equivalents $ 40,614 $ 40,614 $ - $ - Accounts Receivable, net of allowance for doubtful accounts 14,739 14,739 - - Inventories 32,247 28,347 - 3,900 Deferred Income Taxes - Current - 3,800 - (3,800) Other Current Assets 1,231 1,231 - - Net assets held for sale 161,479 103,108 - 58,371 Property, Plant and Equipment, net 60,229 23,229 - 37,000 Goodwill, net 65,558 391 - 65,167 Other Assets 15,670 13,783 - 1,887 Short-Term Debt - - (86,700)(2) (86,700) Accounts Payable (11,797) (11,797) - - Accrued Compensation (1,510) (1,510) - - Accrued Income Taxes (32) (32) - - Deferred Income Taxes - Current (16,142) - - (16,142) Other Accrued Liabilities (16,755) (2,255) - (14,500) Current Portion of Long-Term Debt - (3,010) (136,956)(2) (133,946) Long-Term Debt, net of current portion - (122,946) (100,000)(2) 22,946 Deferred Income Taxes - Non-Current (14,950) (3,650) - (11,300) Other Liabilities (6,925) (6,925) - - Shareholders' Equity - (77,117) - 77,117 ____________________________________________________ $323,656 $ 0 $(323,656) $ 0 ==================================================== (1) As adjusted for reclassification of assets held for sale (see note B). (2) Reflects the adjustment to record the debt assumed and incurred by Carpenter including 1) Talley's debt with fair value of $136,956 and 2) additional borrowings under revolving credit agreement of $186,700 to finance purchase of outstanding Talley stock, including acquisition costs. The Talley debt was classified as current because Carpenter intends to repay it within one year. Of the $186,700 of Carpenter borrowings in the form of short-term debt, $100,000 was classified as long-term debt because Carpenter has the ability and intent to refinance this portion on a long-term basis under the revolving credit agreement.
PF-6 Carpenter Technology Corporation Notes to Unaudited Pro Forma Condensed Combined Financial Statements BALANCE SHEET ADJUSTMENTS CONTINUED: Carpenter plans to retain the Stainless Steel Products segments of Talley and divest of the Government Products and Services and Industrial Products segments of Talley. Adjustment B is to reclassify the assets and liabilities related to Talley's business segments to be disposed of by Carpenter as net assets held for sale. The classification as a current asset reflects management's plan to dispose of the net assets within one year of the acquisition. Generally, any difference between the amount of the purchase price allocated to the net assets held for sale and the amount realized upon their dispositions will be reflected in Carpenter's consolidated balance sheet as an adjustment to goodwill, and will not be reflected in Carpenter's consolidated statement of income. C) Adjustment to eliminate trade receivables and payables between Carpenter and Talley. INCOME STATEMENT ADJUSTMENTS: D) Adjustments to provisions for depreciation and amortization for estimated fair value adjustments related to property, plant and equipment, depreciated over 15 years on a straight-line basis, goodwill, amortized over 40 years on a straight-line basis, and other intangible assets (trademarks and tradenames), amortized over 30 years on a straight-line basis. E) Additional interest expense on borrowings resulting from the purchase of Talley. Interest is assumed at an average rate of 6.1%, the approximate current short-term borrowing rate of Carpenter. F) Reflects the income tax effects related to pro forma adjustments. The adjustment to income taxes reflects the application of the estimated effective tax rate on a pro forma basis to income (loss) before income taxes for historical and pro forma adjustment amounts. G) Adjustments to eliminate revenues and expenses related to net assets held for sale. H) Adjustment to eliminate sales and cost of sales between Carpenter and Talley. I) Adjustments to present Talley's consolidated statement of earnings for the year ended June 30, 1997. The adjustments reflect the net differences between the amounts for the six months ended June 30, 1997 and amounts for the six months ended June 30, 1996. J) Cost savings benefits from synergies to be derived from the acquisition of the Stainless Steel Products segment of Talley, which may be significant, are not reflected in the Unaudited Pro Forma Condensed Combined Financial Statements. There can be no assurance, however, as to the amount of cost savings benefits, if any, that will be realized as a result of such acquisition. PF-7 EX-23 2 CONSENT EXHIBIT Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-83780, 2-81019, 2-60469, 33-42536, 33-65077, 33-54045, 33-40991) and Form S-3 (No. 33-51613) of Carpenter Technology Corporation of our report dated February 17, 1997 relating to the financial statements of Talley Industries, Inc., which appears in the Current Report on Form 8-K/A of Carpenter Technology Corporation dated January 22, 1998. PRICE WATERHOUSE LLP Phoenix, Arizona January 21, 1998 -----END PRIVACY-ENHANCED MESSAGE-----