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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                   FORM 10-K
 
                               ----------------
 
[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  For the Fiscal Year Ended December 31, 1998
 
[_]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                        Commission File Number: 0-28942
 
                           PRIMEX TECHNOLOGIES, INC.
            (Exact name of registrant as specified in its charter)
 
               Virginia                              06-1458069
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)             Identification Number)
 
       10101 Ninth Street North                      33716-3807
        St. Petersburg, Florida                      (Zip Code)
    (Address of principal executive
               offices)
 
      Registrant's telephone number, including area code: (727) 578-8100
 
       Securities registered pursuant to Section 12(b) of the Act: None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                              Title of each class
                    Common Stock, Par Value $1.00 Per Share
                       Series A Participating Cumulative
                        Preferred Stock Purchase Rights
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.   Yes [X]   No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of such stock as of February 26, 1999,
as reported on The Nasdaq Stock Market(R) was $205,334,149.
 
  The number of common shares, par value $1.00 per share, outstanding as of
February 26, 1999 was 5,084,359.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  The definitive Proxy Statement for the 1999 Annual Meeting of Shareholders
is incorporated by reference into Part III of this Form 10-K.
 
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                               TABLE OF CONTENTS
 
                                   FORM 10-K
 
<TABLE>
<CAPTION>
                                                                         Page No.
                                                                         --------
 <C>        <S>                                                          <C>
 PART I
    Item 1  Business..................................................       1
    Item 2  Properties................................................      13
    Item 3  Legal Proceedings.........................................      14
    Item 4  Submission of Matters to a Vote of Security Holders.......      14
 PART II
    Item 5  Market for Registrant's Common Equity and Related
             Stockholder Matters......................................      15
    Item 6  Selected Financial Data...................................      16
    Item 7  Management's Discussion and Analysis of Financial
             Condition and Results of
             Operations...............................................      17
    Item 7A Quantitative and Qualitative Disclosure About Market Risk.      23
    Item 8  Financial Statements and Supplementary Data...............      24
    Item 9  Changes in and Disagreements with Accountants on
             Accounting and Financial
             Disclosure...............................................      46
 PART III
    Item 10 Directors and Executive Officers of the Registrant........      46
    Item 11 Executive Compensation....................................      46
    Item 12 Security Ownership of Certain Beneficial Owners and
             Management...............................................      46
    Item 13 Certain Relationships and Related Transactions............      46
 PART IV
    Item 14 Exhibits, Financial Statements, Schedules, and Reports on
             Form 8-K.................................................      47
</TABLE>
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                                    PART I
 
ITEM 1. BUSINESS
 
General
 
  Primex Technologies, Inc. ("PRIMEX") is an ordnance and aerospace contractor
with strong systems management and manufacturing capability. PRIMEX was
organized under the laws of the Commonwealth of Virginia in May 1996 and has
been publicly owned since December 31, 1996, when Olin Corporation ("Olin")
made a distribution (the "Distribution") to its shareholders of all the
outstanding shares of PRIMEX common stock (the "Common Stock"). Prior to the
Distribution, the assets and business of Olin's ordnance and aerospace
businesses were transferred to PRIMEX. PRIMEX provides a variety of ordnance
and aerospace products and services to the U.S. Government, friendly foreign
governments, and domestic and international commercial and industrial
customers. As used in this Form 10-K the term "PRIMEX" or the "Company" shall
refer to Primex Technologies, Inc. and its subsidiaries and, with respect to
periods prior to the Distribution, the assets and business entities of Olin's
ordnance and aerospace businesses.
 
  PRIMEX's business operations are organized into two segments that correspond
to its primary products and services. Through its Ordnance and Tactical
Systems Division, the Company designs and manufactures tank and other large
and medium caliber ammunition for U.S. and friendly foreign government
customers. These products are used in ships, aircraft, tanks, and fighting
vehicle based weapons and other applications. Additionally, the Ordnance and
Tactical Systems Division manufactures precision metal components and provides
explosive load, assemble, and pack services for a variety of tactical missile
and rocket programs. The Ordnance and Tactical Systems Division also designs
and produces shaped charge warheads that are used in various weapons. Ball
Powder (R) propellant, which is sold to U.S. and friendly foreign militaries,
commercial ammunition manufacturers, and sporting and recreational customers,
is also manufactured by this division.
 
  The Aerospace and Electronics Division designs and manufactures electronic
products utilized primarily in aeronautic applications, as well as rocket
engines and electronic products used in space applications. This division also
produces solid propellant products used in munitions dispensing and inflation
devices.
 
  As a result of Olin's prior ownership of the Company and the Distribution,
the Company continues to have various relationships and agreements with Olin.
As part of the Distribution, Olin and PRIMEX entered into agreements providing
for the allocation of tax and certain other liabilities and obligations
arising from the period prior to the Distribution and agreements governing the
ownership and use of certain intellectual property and technology developed
both before and after the Distribution. Olin and PRIMEX are also parties to
agreements pursuant to which Olin and the Company will purchase products from
each other and agreements pursuant to which Olin will act, in certain limited
situations, as an agent or distributor for the sale of certain of the
Company's products. Olin and the Company have also agreed that for a period of
five years from the Distribution, subject to certain exceptions, Olin will not
compete with the Company for the sale of medium and large caliber ammunition
and the Company will not compete with Olin for the sale of small caliber
ammunition.
 
 
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Products and Services
 
  The following table sets forth the principal products and services offered
by the Company and identifies the percentage of sales represented by each
category for the years shown.
 
<TABLE>
<CAPTION>
      Products and Services                                       1998 1997 1996
      ---------------------                                       ---- ---- ----
<S>                                                               <C>  <C>  <C>
Tank and other Large Caliber Ammunition (1)...................... 32%  29%  35%
Medium Caliber Ammunition........................................ 15%  19%  18%
Ball Powder(R) propellant........................................  9%  10%  10%
Electronic Products.............................................. 14%  10%   7%
Space Products...................................................  8%   9%   7%
Other Products and Services (2)(3)............................... 22%  23%  23%
</TABLE>
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(1) The Company has two multi-year contracts with the U.S. Government for the
    supply of 120mm tactical and training ammunition that represented
    approximately 14% and 17%, respectively, of 1998 sales; 16% and 12%,
    respectively, of 1997 sales; 25% and 10%, respectively, of 1996 sales.
    These multi-year contracts provide for deliveries through mid-1999. In
    February 1999, the Company was awarded a follow-on multi-year contract for
    the supply of 120mm training ammunition that provides for deliveries
    through mid-2004.
(2) Approximately 4% of 1998 sales and 5% of 1997 sales resulted from
    artillery propelling charge contracts.
(3) Approximately 4% of 1996 sales resulted from a U.S. Government contract
    for combined effects munitions. Sales under this contract were completed
    in 1996, and this contract was not renewed.
 
  Tank and Other Large Caliber Ammunition. The Company develops and produces a
family of tactical and training ammunition used primarily in the M1A1 and M1A2
Abrams class tanks of the U.S. Army and Marine Corps and certain U.S. allies.
The Company is currently the sole source producer of the 120mm M829A-2 round,
which is an armor piercing, fin stabilized, discarding sabot round with a
depleted uranium penetrator that utilizes kinetic energy to penetrate heavily
armored targets and is used primarily in tank-to-tank warfare. The Company is
also one of two suppliers of 120mm M865 and M831A-1 training rounds to the
U.S. Government. The M865 is the training round for the M829A-2 round and the
M831A-1 is the training round for the M830A-1 tactical multipurpose round
which is produced by the Company's U.S. tank ammunition competitor. During
1995, the Company entered into two contracts with four-year terms to produce
these training and kinetic energy tactical rounds for the U.S. Government. The
Company is currently performing under the fourth year of these contracts. In
February 1999, the Company entered into a follow-on five year contract for the
production of training rounds for the U.S. Government.
 
  A number of foreign countries will not buy ammunition containing depleted
uranium, and the U.S. Government limits the export of depleted uranium
ammunition to NATO and certain other friendly foreign governments. To improve
its opportunities to sell tank ammunition to foreign buyers, the Company, in
association with the foreign company that was the original developer of 120mm
tank ammunition, has developed an advanced 120mm kinetic energy round with a
tungsten alloy penetrator. During 1995, the Company signed a $20 million
contract with the U.S. Army for the sale of 120mm tungsten penetrator
ammunition to a foreign customer, for which delivery was made in 1997. In
February 1999, the Company entered into a $31.3 million contract for delivery
of advanced kinetic energy tungsten penetrator rounds to a foreign customer.
 
  Because the Company believes that a key element of its long-term
profitability is its continued participation as a major producer of tank
ammunition for the U.S. Government and friendly foreign governments, the
Company continually invests in research and development in this area, focusing
primarily on improving the effectiveness of kinetic energy tactical ammunition
and reducing the cost of training ammunition.
 
  The majority of the Company's large caliber ammunition production contracts
have, to date, related only to tank ammunition. However, the Company believes
that artillery ammunition presents an opportunity for future sales by the
Company because of an extended period of minimal investment by the U.S.
Government in this arena. This was highlighted during Operation Desert Storm,
when United States artillery systems were outranged by enemy guns. The Company
believes that the U.S. Government has recognized the need to match and surpass
 
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the capability of other countries and is investing in the development of new
artillery platforms and ammunition. During 1997 and early 1998, the Company
was awarded subcontracts by a major systems prime contractor to supply
projectile structure and payload under an engineering and manufacturing
development contract for advanced guided artillery rounds to be used by both
the U.S. Army and U.S. Navy. The Company anticipates these development
contracts will result in future production contracts.
 
  Medium Caliber Ammunition. The Company develops and produces medium caliber
ammunition. The Company's medium caliber product line includes 20mm, 25mm, and
30mm ammunition, which is utilized on a variety of platforms, including ships,
airplanes, helicopters, and fighting vehicles. The Company's family of medium
caliber ammunition includes armor piercing, high explosive-incendiary and
training rounds. In addition, through a license with Raufoss A/S, the Company
is a leading developer of multi-purpose medium caliber ammunition that
combines armor-piercing, high explosive and incendiary features in one round.
 
  The Company produces the 25mm M919 round, a medium caliber armor-piercing,
fin stabilized, discarding sabot round, utilizing a depleted-uranium
penetrator that offers increased range and lethality. This round is the
primary anti-armor round of the Bushmaster cannon used on the Bradley Fighting
Vehicle. In addition, the Company has several contracts with the U.S.
Government for the production of multi-purpose rounds. The Company believes
that the U.S. Government will continue to buy medium caliber ammunition for
the next several years. During 1995 and 1996, the Company experienced
difficulties in producing the M919 round within contract specifications for
accuracy and gun pressure. These difficulties increased the Company's costs
and lowered its margins on this round and delayed recognition of revenue from
1995 and 1996 until 1997. Medium caliber ammunition historically has been used
in aircraft as well as in land vehicles and ships. However, because of the
possible development of other aircraft weapon platforms that do not require
close strikes to be effective, the Company believes that medium caliber
ammunition may be used to a lesser extent in future aircraft.
 
  New Weapons and Ammunition. The U.S. Army is developing a series of small-
arms weapons to increase the firepower of 21st century soldiers. The Company
has been selected as the systems developer of the objective crew served weapon
("OCSW"). This two-person weapon system is slated to replace the machine gun
for use against lightly-armored vehicles, fortified positions, infantry and
low-flying aircraft. As systems developer, the Company is responsible for the
development of the entire OCSW, including both the gun and ammunition. The
OCSW is expected to be introduced to the field in seven to ten years.
 
  Ball Powder(R) Propellant. The Company manufactures and sells Ball Powder(R)
propellant, a smokeless gun powder with a spherical grain shape. The Company
manufactures more than one hundred different varieties of propellant in the
Ball Powder(R) product line. Significant amounts of all U.S. military small
caliber ammunition are loaded with the Company's Ball Powder(R) propellant. In
response to the decline in military procurements over recent years, the
Company has focused on increasing its sales of Ball Powder(R) propellant to
the commercial ammunition market. In 1998, 1997 and 1996, approximately 75%,
63% and 55%, respectively, of Ball Powder(R) propellant sales were to
manufacturers of commercial ammunition and other non-U.S. Government
customers.
 
  Olin's Winchester Division, a leading manufacturer of sporting ammunition,
was the Company's largest Ball Powder(R) propellant customer in 1998, 1997 and
1996, accounting for approximately 36%, 34% and 32% respectively, of the
Company's Ball Powder(R) propellant sales. In conjunction with the
Distribution, a long-term supply contract was entered into between the Company
and Olin with respect to future Ball Powder(R) propellant sales to Winchester.
See "Item 1. Business--Relationship Between Olin and the Company."
 
  Over the years, the Company has attempted to increase the use of Ball
Powder(R) propellant in medium and large caliber military ammunition.
Virtually all of the medium caliber ammunition manufactured by the Company,
except the 25mm M919 round, is now loaded with Ball Powder(R) propellant. Ball
Powder(R) propellant has achieved only limited use in U.S. Government large
caliber ammunition. The Company continues to pursue the use of Ball Powder(R)
propellant in additional types of large caliber ammunition.
 
 
                                       3
<PAGE>
 
  Electronic Products. The Company manufactures a variety of electronic
products for aerospace applications. The Company's line of airborne electronic
products includes controls for lighting, temperature, audio, power and flight
systems, as well as in-flight communications and entertainment components and
products. The Company also produces military ground support equipment,
including stores management and weapons system test sets for the F-16 and
other aircraft. The Company also manufactures a variety of power conditioning
units (which convert one form of electronic power into another) for military,
commercial and space applications.
 
  In 1996, the Company introduced its first EmPower(TM) product, an in-seat
power supply system for airplane passengers' laptop computers and other
personal electronic devices. The Company has contracted to provide EmPower(TM)
products for domestic and international airline companies, and is negotiating
with several additional prospective domestic and international customers.
During 1997, the Company made its first significant deliveries of this
product.
 
  Space Products. The Company is the world's leading supplier of
monopropellant hydrazine and electric propulsion ("EP") products. The
Company's hydrazine propulsion products include individual rocket engines or
thrusters, rocket engine modules, gas generators, propellant pressurization
systems and complete integrated propulsion systems. Ranging in power from 0.1
to several hundred pounds of thrust, these products are integral to the
growing commercial launch vehicle and satellite markets. The Company has
delivered over 10,000 rocket engines for spacecraft applications including
orbit insertion, maneuvering, and attitude control, as well as launch vehicle
and upper-stage attitude and velocity control applications.
 
  EP devices represent an advance over standard chemical rocket engines. The
current generation of these products uses satellite electrical power to heat
propellant gases to provide additional energy and velocity in the process of
producing thrust. There are significant gains in fuel efficiency using the
Company's EP products over conventional hydrazine thrusters. This fuel
efficiency translates into economic benefit for satellite manufacturers and
service providers by reducing spacecraft weight, increasing in-orbit life
and/or allowing for the use of lower cost launch vehicles. The Company is the
only commercially available U.S. source of qualified and flight proven
electric propulsion products. The Company currently has five models in
production. The first EP product, a resistojet, was launched in 1983 and is
now flying on a number of satellites. The latest EP device, the arcjet, was
first flown in 1993 on the Telstar-4 satellite.
 
  The Company is currently developing advanced EP products which it
anticipates will provide greatly improved performance compared to conventional
hydrazine thrusters with commensurate economic benefits to users. These
advanced EP products were flight-tested on experimental flights in 1998 and
will continue to be tested in 1999. During 1997, to further advance its
propulsion technology, the Company entered into a licensing agreement for an
advanced thruster technology with fuel efficiency capabilities approaching ten
times that of first generation hydrazine thrusters. A number of domestic and
foreign companies are developing EP products, and the Company expects
increased competition in this area.
 
Other Products and Services
 
  In November 1998, the Company acquired CMS, Inc. and Defense Research
Incorporated (the "CMS Group"). The CMS Group operates in four business
disciplines. First, the CMS Group manufactures precision metal assemblies for
use in tactical missiles and rockets. This manufacturing process utilizes
custom designed tools and fixtures for high volume production at fine
tolerances. Second, the CMS Group provides explosive load, assemble and pack
services for a variety of missile and rocket programs. These services include
the ability to press explosives into large diameter warheads, the mixing and
coating of explosives, and the assembly of ordnance products. Key missile and
rocket programs include the Hydra-70, a 2.75 inch rocket, the Advanced Medium
Range Air to Air Missile (AMRAAM) and the Javelin Missile. The Hydra-70 rocket
is a low cost, unguided munition which is used on a range of rotary and fixed
wing aircraft. Third, the foregoing activities are supported by research and
development in the areas of warhead design and development, and analysis of
system effectiveness and aircraft compatibility. Finally, the CMS Group is the
manufacturer of combat anti-armor weapons systems such as the Shoulder-
Launched-Multipurpose Assault Weapon ("SMAW") and the Dragon
 
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which are anti-armor weapons used by individual soldiers. The CMS Group
products, which are either tube or rail launched, complement and expand the
range of products offered by the Ordnance Division which have historically
been comprised primarily of gun launched products. The Company believes as
technology and products advance, access to all of these capabilities will be a
determinant of success.
 
  The Company manufactures a range of solid propellant products. The Company's
products are primarily used in military applications, although the Company is
continuously examining potential commercial applications. Although the
products are diverse, they are based on a common technology, namely controlled
burning of a solid propellant and the use of the resulting exhaust products
for a variety of functions.
 
  The Company provides small gas generators and devices incorporating gas
generators used in a variety of military and commercial applications,
including tactical missiles, jet engine starter cartridges, inflatables,
including buoyancy devices and specialized structures, and ammunition
initiating devices. The Company also is developing a family of fire
suppression systems offering a low-volume alternative to halon compounds, in
situations such as fighter aircraft "dry bay" areas, where size and weight
constraints are significant considerations.
 
  During 1997, the Company entered into an agreement for the production of
artillery propelling charges. Artillery propelling charges are bags or modules
loaded into the breech of an artillery gun which propel the artillery
projectile out of the gun and towards the target. A follow-on contract was
entered into in 1998.
 
  The Company is also a developer, for the United States, Swiss and other
governmental agencies, of precision anti-tank warheads and ordnance systems
used in smart weapons. This development activity includes applied research,
advanced development, engineering, development manufacturing and low-rate
initial production programs.
 
  The U.S. Government has decided that it needs to demilitarize or disassemble
large stocks of obsolete conventional ammunition. The Company has bid on a
number of these contracts, and was awarded two small contracts for
demilitarization services and a follow-on contract in 1996. During 1996 and
1997, the Company experienced cost overruns on the performance of these
contracts. During 1998, the Company's ammunition demilitarization contracts
were profitable.
 
  Since 1995, the Company has been a supplier of forged-steel petroleum
drilling pipe joints and other heavy industrial cylindrical steel products.
These products are produced at the Company's Red Lion, Pennsylvania facility,
which principally produces components for large caliber ammunition and has
successfully utilized its existing manufacturing capability and expertise for
this commercial application.
 
Customers
 
  The Company's largest customer is the U.S. Government. PRIMEX sells products
to the U.S. Department of Defense, NASA, and other U.S. Government
agencies/laboratories. Other customers of the Company include friendly foreign
governments, major ordnance and aerospace contractors and a variety of
commercial customers. The Company is highly dependent on U.S. Government
sales, which accounted for approximately 67%, 66%, and 78% in 1998, 1997 and
1996, respectively, of the Company's sales. See "Item 1. Business--U.S.
Government Contracts and Regulations." With the exception of the U.S.
Government and its agencies, no other single customer accounted for more than
10% of the Company's total annual sales during any of the Company's last three
fiscal years.
 
Raw Materials and Supplies
 
  The raw materials used in the manufacture of ammunition, and ammunition
components, and tactical missile and rocket components include metals,
composite materials, chemicals and nitrocellulose. In addition, the
manufacture of ammunition requires components, including propellants,
cartridge cases and primers, all of which
 
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may be provided by subcontractors or supplied directly by the customer. The
Company also purchases, for use in its products, various electronic piece
parts, printed wire boards, hydrazine liquid propellants, solid propellant
ingredients and subcontracted components, including capacitors, various metals
and explosives. The Company has not experienced difficulty in recent years in
obtaining an adequate supply of any raw materials, components or other
supplies needed in its manufacturing processes, although continued downsizing
and consolidation in the defense industry may create difficulties in procuring
certain components in the future. Additionally, availability and cost of
certain unique components will reflect market conditions and the increasing
technical complexity of product requirements. U.S. Government contractors,
such as the Company, are frequently directed to procure materials, components
or services from sources of supply approved or designated by the U.S.
Department of Defense.
 
U.S. Government Contracts and Regulations
 
  The Company's U.S. Government business is performed under fixed-price
contracts (firm fixed-price and fixed-price incentive) and, to a lesser
extent, under cost-reimbursable contracts (cost-plus-fixed-fee or cost-plus-
incentive-fee).
 
  Under firm fixed-price contracts, the Company agrees to perform certain work
for a fixed price and, accordingly, realizes all the benefit or detriment
resulting from decreases or increases in the costs of performing the contract.
From time to time, the Company has experienced cost overruns on fixed-price
contracts. Fixed-price incentive contracts are fixed-price contracts providing
for adjustment of profit and establishment of final contract prices by a
formula based on the relationship which final total costs bear to total target
cost. In 1998, 1997 and 1996, approximately 91%, 88%, and 78%, respectively,
of the Company's sales to the U.S. Government were derived from firm fixed-
price contracts.
 
  Cost-plus-fixed-fee contracts provide for reimbursement of costs, to the
extent that such costs are allowable, and the payment of a fixed fee. Cost-
plus-incentive-fee contracts provide for increases or decreases in the
contract fee, within specific limits, based upon actual results as compared to
contractual targets for cost. In 1998, 1997 and 1996, approximately 8%, 12%,
and 19%, respectively, of the Company's sales to the U.S. Government were
derived from cost-plus-fixed-fee and cost-plus-incentive-fee contracts.
 
  Under U.S. Government regulations, certain costs, including certain
organization and financing costs, acquisition and restructuring costs,
portions of research and development costs, certain compensation expenses,
certain marketing expenses related to the preparation of competitive bids and
proposals, lobbying costs, and international and commercial sales, are not
reimbursable. In addition, the accuracy and appropriateness of certain direct
and indirect costs of the Company under both fixed-price and cost-plus
contracts are subject to extensive regulation and are audited by the Defense
Contract Audit Agency ("DCAA"), an arm of the U.S. Department of Defense. The
DCAA has the right to challenge the Company's cost estimates or allocations
with respect to any such contract. If a DCAA audit establishes overcharges or
other discrepancies in costs or accounting, it can seek the repayment of such
overcharges or seek other reconciliations.
 
  Because the Company engages in U.S. Government contracting activities and
sells to the U.S. Government and prime U.S. Government contractors, it is
subject to extensive and complex U.S. Government procurement laws and
regulations. These laws and regulations provide for U.S. Government audits and
reviews of contractor quality, procurement, performance and administration.
Failure to comply, even inadvertently, with these laws and regulations and
with laws governing the export of munitions and other controlled products and
commodities, could subject the Company or one or more of its businesses to
price adjustments, to civil and criminal penalties, and under certain
circumstances, suspension or debarment from bidding on future U.S. Government
contracts for a specified period of time. See "Item 3. Legal Proceedings." In
connection with the resolution of the investigation of certain testing
irregularities at the Company's Marion, Illinois facility, which was owned by
Olin at the time of the alleged irregularities and the investigation, Olin
entered into an Administrative Agreement (the "Agreement") with the United
States Department of the Air Force (the "Air Force"). In addition, the Company
has entered into a similar agreement with the Air Force which obligates the
Company to implement and maintain
 
                                       6
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an ethics action plan. This plan is designed to ensure that the Company and
its employees maintain their present responsibilities as required of all U.S.
Government contractors. The Agreement requires, among other things, a
communication and training program for all employees, the operation of a toll-
free, dedicated telephone number for confidential calls to report suspected
misconduct and a self-governance program that includes the periodic submission
of written reports to the Air Force describing the measures taken by the
Company to implement and maintain the Agreement.
 
  U.S. Government contracts are, by their terms, subject to termination by the
U.S. Government either for its convenience or for default by the contractor.
Cost-reimbursable contracts provide that, upon termination, the contractor is
entitled to reimbursement of its allowable costs, and if the termination is
for convenience, a total fee proportionate to the percentage of the work
completed under the contract. Fixed-priced contracts provide for payment upon
termination for items delivered to and accepted by the U.S. Government, and,
if the termination is for convenience, for payment of cost incurred, plus
profit, for work performed, plus the costs of settling and paying claims by
terminated subcontractors and other settlement expenses. If a contract
termination is for default, however, (i) the contractor is paid an amount
agreed upon for completed and partially completed products and services
accepted by the U.S. Government, (ii) the U.S. Government is not liable for
the contractor's costs with respect to unaccepted items, and is entitled to
repayment of advance payments and progress payments, if any, related to the
terminated portions of the contracts, and (iii) the contractor may be liable
for excess costs incurred by the U.S. Government in procuring undelivered
items from another source.
 
  In addition to U.S. Government termination rights, Government contracts are
dependent upon the levels and continuing availability of Congressional
appropriations. Congress usually appropriates program funds on a fiscal-year
basis even though contract performance may require more than one year.
Consequently, for multi-year programs, the contract is usually partially
funded, and additional monies are normally committed to the contract by the
procuring agency only as appropriations are made by Congress for future fiscal
years. Accordingly, the Company, like other U.S. Government contractors, is
continually subject to the business risks associated with changes in
Congressional appropriations and the failure of programs which have been
awarded to the Company to be funded for future years.
 
  Because a large percentage of the Company's business is related, directly or
indirectly, to national defense, the Company is subject to the business risks
associated with changes in national defense policies. Future reductions in the
level of defense procurement or changes in the strategic direction of defense
spending could adversely affect the Company's financial performance in future
years, including its income, liquidity, capital resources and financial
condition. The impact of any of these changes will depend on the timing and
magnitude thereof and the Company's ability to mitigate their impact with new
business, business consolidations or cost reductions. In view of the
uncertainty regarding the priorities of the Department of Defense, the
historical financial information of the Company's businesses may not be
indicative of future performance.
 
  U.S. Government contract awards may also be subject to protest or challenge
by unsuccessful bidders.
 
  Licenses are required from U.S. Government agencies for export of many of
the Company's products, including munitions and spacecraft and military
aircraft components and subsystems. These licenses are administered by the
U.S. Department of State and the U.S. Department of Commerce and restrict
exports of certain products and technologies. Failure to comply with these
laws and regulations could subject the Company or one or more of its
businesses to penalties, including, under certain circumstances, the
suspension or debarment from future export licenses for a specified period of
time. In addition, the U.S. Bureau of Alcohol, Tobacco and Firearms ("BATF")
licenses the Company for the handling of explosives and certain other devices.
Failure to comply with BATF regulations could subject the Company to the
revocation of these required licenses.
 
  There can be no assurance that the U.S. Government will exercise options to
extend existing contracts, not terminate existing contracts, or continue to
purchase products from the Company over the long term. The termination of any
of the Company's significant contracts or the failure to obtain either
renewals of existing
 
                                       7
<PAGE>
 
contracts or additional contracts with the U.S. Government could have a
material adverse effect on the Company's results of future operations and
financial condition.
 
Competition
 
  The Company encounters strong competition in the sale of each of its
products and services. The degree to which the Company participates in future
U.S. Government business will depend, to a large extent, on its ability to
offer better program performance than its competitors at a lower price to the
U.S. Government.
 
  The Company competes principally with Alliant Techsystems Inc. ("Alliant")
for the supply of large and medium caliber ammunition to the U.S. Government
and foreign governments. The Company also faces competition for international
sales of tank and medium caliber ammunition from foreign suppliers.
 
  Ball Powder(R) propellant is the primary propellant used by the U.S.
Government in small caliber ammunition. The Company competes with Alliant and
Expro Chemical Products ("Expro"), a Canadian company, for the supply of
gunpowder for medium caliber ammunition and other military applications. In
many cases, the gunpowder available varies from one supplier to another and,
as a result, competition is based on both price and performance
characteristics. In the commercial gunpowder market, the Company competes with
Alliant, Expro and a variety of foreign suppliers.
 
  In other product lines, the Company competes with a number of companies both
foreign and domestic, including the in-house capabilities of major ordnance
and aerospace contractors.
 
Research and Development; Patents
 
  The Company's research activities are conducted at a number of facilities.
Company-sponsored research expenditures were approximately $9 million, $6
million, and $6 million for 1998, 1997, and 1996, respectively. Customer-
sponsored research expenditures by the Company (primarily sponsored by the
U.S. Government) were approximately $18 million, $54 million, and $32 million,
respectively, for such years. The higher levels of customer-sponsored research
in 1997 were the result of an increased number of programs in the areas of
large and medium caliber ammunition and space products.
 
  The Company owns, or is the licensee under, a number of technologies and/or
patents relating to various products and processes. The Company believes that,
in the aggregate, the rights under its technological assets and licenses are
important to the Company but, except as discussed herein, the Company does not
consider any one technology, patent or license or group thereof related to a
specific process or product to be of material importance to the Company as a
whole. The Ball Powder(R) propellant technology is material to the Company's
St. Marks, Florida operation. This technology includes proprietary
manufacturing know-how and trade secret information which is critical in the
manufacture of propellants. A patent covers an important aspect of that know-
how, namely, a process for the production of spherical, single-base, low-
density propellant grains. The patent was issued in 1987 and will expire on
February 26, 2006.
 
Backlog
 
  The aggregate amount of contracted backlog orders for the Company on
December 31, 1998, and 1997 was approximately $439 million and $399 million,
respectively. The backlog represents the value of contracts for which goods
and services are yet to be provided. Under multiyear contracts, a portion of
the backlog is subject to approval of Government appropriations. The backlog
consists of firm contracts, and although they can be and sometimes are changed
or canceled, the amount of changes and cancellations historically has been
insignificant.
 
Export Sales
 
  The Company's export sales from the United States were approximately $53
million, $68 million and $29 million in 1998, 1997, and 1996, respectively.
Higher export sales during 1998 and 1997 are primarily the result
 
                                       8
<PAGE>
 
of a contract for artillery propelling charges and EmPower(TM) in-seat laptop
computer power supply systems.
 
Seasonality
 
  Although the business of the Company is not seasonal in nature, sales to the
Department of Defense are historically stronger in the latter part of the
year, reflecting the procurement cycle utilized by the U.S. Army. Certain
commercial sales, such as Ball Powder(R) propellant volumes, tend to be
stronger in the first half of the year.
 
Operations by Industry Segment and Geographic Area
 
  Industry segment and geographic area data for the years 1998, 1997 and 1996
included in the notes to the Company's financial statements on pages 43 and 44
of this report is an integral part of this description of the Company's
business.
 
Environmental Matters
 
  The establishment and implementation of federal, state and local standards
to regulate air, water and land quality has affected, and will continue to
affect, substantially all of the Company's manufacturing facilities. Federal
legislation providing for regulation of the manufacture, transportation, use
and disposal of hazardous and toxic substances has imposed additional
regulatory requirements on the industry. In addition, implementation of
environmental laws, such as the Resource Conservation and Recovery Act and the
Clean Air Act, has required and will continue to require new capital
expenditures and will increase operating costs. In order to help finance the
cleanup of waste disposal sites, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986, imposes a tax on the disposal of certain
hazardous wastes. The Company employs waste minimization programs at most of
its manufacturing sites.
 
  In connection with the Distribution, the Company and Olin have agreed,
pursuant to an Assumption of Liabilities and Indemnity Agreement, that the
Company will assume, and indemnify and hold Olin harmless against, all
liabilities associated with the removal, remediation and control of
environmental conditions at several of the Company's existing and former plant
sites. Such liabilities are not expected to have a material adverse effect
upon the Company's financial condition or results of operations. See "Item 1.
Business--Relationship Between Olin and the Company--Assumption of Liabilities
and Indemnity Agreement."
 
Relationship Between Olin and the Company
 
  The Company and Olin are parties to certain agreements governing their
relationship subsequent to the Distribution and providing for the allocation
of tax and certain other liabilities and obligations arising from periods
prior to the Distribution. While these agreements contain terms which
generally are comparable to those which would have been reached in arms-length
negotiations with unaffiliated parties, these agreements were reached while
the Company was wholly owned by Olin. Certain of these agreements are
described below.
 
 Powder Supply Requirements Agreement; Component Supply Agreement
 
  The Company and Olin have a powder supply requirements agreement (the
"Powder Supply Requirements Agreement") and a component supply agreement (the
"Component Supply Agreement") which set forth the terms on which Olin
purchases propellant powder from the Company and the Company purchases certain
ammunition components from Olin.
 
  The Powder Supply Requirements Agreement generally provides that Olin must
purchase, at prices to be agreed upon from time to time, a certain percentage
of the propellant powder required in any calendar year by
 
                                       9
<PAGE>
 
its Winchester Division from the Company, starting at 100% of such
requirements for 1997 for Ball Powder(R) propellant and decreasing annually to
70% for 2002. The prices are expected to be at a range of discounts from
competitive prices depending on requirements purchased. The Powder Supply
Requirements Agreement provides for reductions in the amounts of propellant
powder that Olin is required to purchase to the extent that the Company is
unable or unwilling to meet a request by Olin to produce a type of propellant
powder or to match pricing and other terms offered by third parties. The
arrangement provides that Olin will reimburse the Company for any lost profits
resulting from Olin's failure to purchase the required amount of propellant
powder from the Company in any year. The term of the Powder Supply
Requirements Agreement expires on December 31, 2002, unless earlier terminated
in accordance with its terms. Pursuant to the Powder Supply Requirements
Agreement, the Company must indemnify Olin against all losses arising from
actual or alleged manufacturing or design defects in the products delivered
pursuant thereto, and Olin shall indemnify the Company against all losses
arising from Olin's negligent misuse or improper handling thereof or defects
in the ammunition (other than powder defects).
 
  The Component Supply Agreement provides that the Company must purchase
certain ammunition components (the "Components") from Olin at agreed-upon
prices until December 31, 1999, unless the Component Supply Agreement is
earlier terminated in accordance with its terms. Pursuant to the Component
Supply Agreement, Olin will indemnify the Company against all losses arising
in connection with actual or alleged manufacturing and design defects in the
Components delivered pursuant thereto, and the Company will indemnify Olin
against all losses arising in connection with the Company's negligent misuse
or improper handling of the Components delivered pursuant thereto.
 
 Assumption of Liabilities and Indemnity Agreement
 
  The Company and Olin have entered into an assumption of liabilities and
indemnity agreement (the "Assumption of Liabilities and Indemnity Agreement")
which generally provides for the assumption of liabilities and cross
indemnities designed to place with the Company responsibility for liabilities
of the Ordnance/Aerospace Business and with Olin responsibility for
liabilities of the businesses retained by Olin after the Distribution.
Specifically, the Company has agreed, subject to certain exceptions, to
assume, and indemnify and hold Olin harmless from and against, all damages,
losses, liabilities, fines, penalties, costs and expenses arising out of or
associated with the business, conduct, operations, assets, properties or
status of the Company prior to, on or after the Distribution.
 
  The Assumption of Liabilities and Indemnity Agreement also provides that the
Company will assume, and indemnify and hold Olin harmless from, all
liabilities in connection with the removal, remediation or control of
environmental conditions at certain of the Company's facilities (see "Item 1.
Business--Environmental Matters") and that the Company will indemnify Olin for
any liabilities arising out of Olin's existing guarantee of certain lease
obligations of the Company. The Assumption of Liabilities and Indemnity
Agreement also provides for cross indemnities relating to certain employee
benefit claims.
 
 Covenant Not To Compete Agreement
 
  The Company and Olin have entered into a covenant not to compete agreement
which generally provides that, for a period of five years ending December 31,
2001, Olin will not, subject to certain exceptions, directly or indirectly
manufacture, sell or distribute medium or large caliber ammunition or
components and that the Company will not, subject to certain exceptions,
directly or indirectly manufacture, sell or distribute small caliber
ammunition or components, ejection cartridges or shotshells.
 
 Novation of U.S. Government Contracts
 
  In connection with the Distribution, the Company became successor in
interest to Olin on certain contracts between Olin and the U.S. Government. As
required by federal procurement regulations providing for the U.S. Government
to recognize the Company as the successor in interest to Olin on such
contracts, Olin has entered
 
                                      10
<PAGE>
 
into novation agreements with the Company and the U.S. Government which
provide, among other things, for Olin to directly or indirectly guarantee or
otherwise become liable for the performance of the Company's obligations under
such contracts which were transferred to the Company in connection with the
Distribution (the "Guaranteed Contracts"), including post-novation
modifications to the Guaranteed Contracts. Such novation agreements also
provide that the Company assumes all obligations under the Guaranteed
Contracts and that the U.S. Government recognizes the transfer of such
Guaranteed Contracts and related assets. While these Guaranteed Contracts are
scheduled to be performed over a period of time, it is not expected that they
will be fully and finally discharged for a number of years.
 
  The Company has agreed in the Assumption of Liabilities and Indemnity
Agreement to perform all of its obligations under each Guaranteed Contract and
to indemnify Olin against any liability Olin may incur under the novation
agreements by reason of any failure by the Company to perform such
obligations.
 
Employees
 
  As of December 31, 1998, the Company had approximately 3,000 employees, six
of whom were working in foreign countries. Approximately 500 of the hourly
paid employees of the Company located at its St. Marks, Florida and Marion,
Illinois facilities are represented, for purposes of collective bargaining, by
local unions affiliated with the United Steelworkers of America. The Company
is a party to labor contracts expiring in October 2000 and December 2001
relating to such employees at its St. Marks, Florida and Marion, Illinois
facilities, respectively. No major work stoppages have occurred in the last
three years. While relations between the Company and its employees and their
various representatives are generally considered satisfactory, there can be no
assurance that new labor contracts can be concluded without stoppages.
 
Executive Officers of the Company
 
  Set forth below is certain information regarding the Company's executive
officers.
 
<TABLE>
<CAPTION>
      Name and Age                                          Position
      ------------                                          --------
<S>                      <C>
James G. Hascall, 60.... Chairman of the Board and Chief Executive Officer
J. Douglas DeMaire, 52.. President
William W. Smith, 64.... Executive Vice President and President, Aerospace and Electronics Division
Michael S. Wilson, 52... Executive Vice President and President, Ordnance and Tactical Systems Division
John E. Fischer, 43..... Vice President and Chief Financial Officer
George H. Pain, 48...... Vice President, General Counsel and Secretary
Stephen C. Curley, 46... Vice President and Treasurer
Jackson C. Picker, 49... Vice President, Human Resources and Administration
</TABLE>
 
  Mr. Hascall has served as Chairman and Chief Executive Officer of the
Company since January 1997. From January 1, 1996 through December 1996, Mr.
Hascall served as Executive Vice President of Olin Corporation, having
operating responsibility for Olin's Brass, Winchester, Ordnance and Aerospace
Divisions. From 1985 through 1995, Mr. Hascall served as President of Olin's
Brass Division. He was an Olin Corporate Vice President from 1985 to 1990 and
an Olin Senior Vice President from 1990 to December 1995.
 
  Mr. DeMaire was elected President of the Company effective January 1, 1999.
From January 1997 to December 1998, he served as Executive Vice President of
the Company. From January 1996 to December 1996, he served as Corporate Vice
President, Corporate Planning for Olin. From 1991 to December 1995, Mr.
DeMaire served as Vice President, Planning for Olin's Winchester Division and
from 1985 to 1995 served as Vice President, Planning for Olin's Brass
Division.
 
  Mr. Smith has served as Executive Vice President of the Company and
President of the Company's Aerospace and Electronics Division since January
1997. From April 1993 until December 1996 he served as Corporate Vice
President for Olin, where he also served as President of Olin's Aerospace
Division from 1988 through January 1997.
 
                                      11
<PAGE>
 
  Mr. Wilson was elected Executive Vice President and President at the
Company's Ordnance and Tactical Systems Division effective January 1, 1999.
From January 1997 to December 1998, he served as Vice President of the Company
and President of the Company's Ordnance and Tactical Systems Division. From
1991 to December 1996, Mr. Wilson served as Vice President of Tank Ammunition
for Olin. From 1990 to 1991, Mr. Wilson served as Vice President of Marketing
for Olin's Ordnance Division where he served as Vice President of Programs
from 1988 to 1990. Prior to that time, Mr. Wilson served as Director of
Business Planning for Olin's Ordnance Division since 1985.
 
  Mr. Fischer has served as Vice President and Chief Financial Officer of the
Company since January 1997. From January 1995 to December 1996, he served as
Vice President and Chief Financial Officer of Olin's Ordnance Division. Prior
to January 1995, Mr. Fischer served in a number of financial and contract
management positions with Olin's subsidiary, General Defense Corporation
("GDC"). Mr. Fischer was Corporate Controller of GDC when it was acquired by
Olin in 1988.
 
  Mr. Pain has served as Vice President, General Counsel and Secretary of the
Company since January 1997. From January 1995 until December 1996, Mr. Pain
served as Vice President, Legal of Olin's Brass and Winchester Divisions, and
as Deputy General Counsel of Olin. Prior to that time, Mr. Pain had served in
Olin's legal department since 1986.
 
  Mr. Curley has served as Vice President and Treasurer of the Company since
January 1997. From September 1990 to December 1996, Mr. Curley served as
Assistant Treasurer of Olin. Prior to that date, Mr. Curley served as Senior
Tax Counsel in Olin's Tax Department.
 
  Mr. Picker has served as Vice President, Human Resources and Administration
of the Company since January 1997. From 1989 to December 1996, Mr. Picker
served as Vice President, Human Resources for Olin's Ordnance Division. Prior
to that time, Mr. Picker had served in various human resources positions with
Olin since 1975.
 
                                      12
<PAGE>
 
ITEM 2. PROPERTIES
 
  The table below sets forth the locations where the Company conducts its
business and a brief description of the activities conducted at each
identified location. The Company believes its facilities are sufficiently
maintained and suitable and adequate for its immediate needs and that
additional space is available to accommodate expansion. Unless otherwise noted
below, the identified location is owned by the Company.
 
<TABLE>
<CAPTION>
          Location                          Primary Activities
          --------                          ------------------
 <C>                        <S>
 St. Petersburg, Florida    Corporate headquarters
  (1)...................... Systems management operation for large caliber
                            ammunition
 Red Lion, Pennsylvania     Manufacturing and research and development
  (2)...................... facility for large
                            caliber ammunition metal parts and composite parts
 Redmond, Washington (2)... Design, manufacturing and test facility for space,
                            solid propellant
                            and electronic products
                            Office facilities
                            Research and development laboratory
 St. Marks, Florida........ Manufacturing facility for Ball Powder(R)
                            Propellant
                            Research and development laboratory
 Marion, Illinois (1)...... Loading, assembly and packing of medium caliber
                            ammunition and
                            artillery propelling changes
                            Manufacturing and test facility for solid
                            propellant products
                            Demilitarization services
                            Research and development laboratory
 Marion, Illinois.......... Test range
 San Leandro, California    Advanced warhead engineering and management
  (1)......................
 Downey, California (2).... Manufacturing facility for medium caliber
                            ammunition components
                            and air dispensed munitions components
                            System management and research and development
 Moses Lake, Washington     Manufacturing and test facility for solid
  (1)...................... propellant products
 Camden, Arkansas (2)...... Test range
                            Load, assembly and pack operations
 Tracy, California......... Manufacturing and test facility for advanced anti-
                            armor
                            warhead systems
 Lucerne, Switzerland (1).. Design, development and testing of anti-armor
                            warhead systems for
                            the Swiss Government
 Shalimar, Florida (1)..... Engineering and manufacturing of air dispensed
                            weapons
 Titusville, Florida (1)... Office facilities
                            Manufacture of munition components
 Wiggins, Mississippi (1).. Under construction (load, assembly and pack)
                            Office facilities
 Anniston, Alabama (1)..... Office facilities
                            Fine tolerance machining and assembly of missile
                            components
 Niceville, Florida (1).... Office facilities
                            Warhead design, research & development services
 Rock Hill, Florida........ Testing of warheads
</TABLE>
--------
(1) Leased.
(2) Leased in part and owned in part.
 
                                      13
<PAGE>
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is a party to a number of pending or threatened investigations,
claims and proceedings. Except for the investigations, claims and proceedings
described below, the Company believes that all such investigations, claims and
proceedings are immaterial to the Company or routine and incidental to the
Company's business.
 
  One such investigation concluded in 1996. In May 1994, the Company
discovered that an employee may have modified inspection and testing software
used on certain medium caliber ammunition production lines at its Marion,
Illinois testing facility to permit inspections to be performed at tolerances
which may not have been fully compliant with applicable contract
specifications. Upon discovering the issue, the Company promptly notified U.S.
Government contract representatives, voluntarily disclosed the circumstances
then known to the Department of Defense's Office of the Inspector General and
expressed its intent to investigate fully the matter and take all necessary
corrective actions. In September 1994, a federal grand jury in the United
States District Court for the Southern District of Illinois issued two
subpoenas to the Company requesting production of documents relating generally
to certain medium caliber ammunition programs and specifically to the software
modification described above. Subsequently, the Company received additional
subpoenas and several Marion employees received subpoenas to testify before
the grand jury. The Company complied with the subpoenas and cooperated with
Government officials to resolve the matter. After discussion with the U.S.
Attorney's Office regarding the investigation of the performance of the
contracts in question, the Company and the U.S. Attorney entered into an
agreement to settle this matter on September 11, 1996. Under the agreement,
the U.S. Government agreed not to pursue any criminal or civil claims against
the Company or its subsidiaries in connection with these government contracts.
The Company has paid to the U.S. Government $8.0 million in connection with
the settlement and without admitting to any wrongdoing or liability. The
Company's financial statements reflect the expenses associated with this
matter, including the $8.0 million settlement, of which $6.0 million was
charged to operations during 1996.
 
  The Company is a party to a contract dispute with the Belgium Ministry of
Defense related to a 1985 sale of artillery ammunition. The Belgium Ministry
of Defense has alleged improprieties committed by the Belgium national who
represented the Company in the transaction. Based on these allegations, the
Belgium Ministry of Defense withheld final payment on the contract. On July 2,
1990, the Company's wholly owned subsidiary G.D. International ("GDI")
instituted an action in the Court of First Instance of Brussels (the "Court")
seeking that the Court declare that, because the Ministry of Defense withheld
the final payment, the contract had been terminated and GDI's obligations
thereunder extinguished. The Company agreed to extend a letter of credit
related to the contract guarantee pending resolution of the underlying
contract dispute. In March 1996, the trial court ruled against the Company.
The Company's financial statements reflect a 1996 charge to operations in the
amount of $4.5 million, which represented the estimate, at that time, of the
Company's net cost resulting from this judgement. The trial court decision has
been appealed. The resultant liability is currently estimated at approximately
$5.4 million because of accrued interest and exchange rate fluctuations. Since
Olin has agreed, in conjunction with the Distribution, to assume
responsibility for legal fees and costs, monetary judgments and civil
settlements associated with this contract dispute in Belgium, the Company has
not recognized any additional charge in connection with this matter.
 
  While the Company cannot predict the ultimate outcome of the dispute
summarized above, as well as other pending or threatened proceedings,
including matters arising under provisions relating to the protection of the
environment, it does not believe that the consequences will be materially
adverse to its results of operation or financial position or that the
Company's liability with respect thereto will exceed the amounts which have
previously been charged to operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
 
                                      14
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The shares of the Company's common stock commenced regular way trading on
The Nasdaq Stock Market(R) under the symbol PRMX on January 7, 1997. As of
February 26, 1999, there were approximately 6,100 holders of record of the
Company's common stock. The following table sets forth the quarterly high and
low closing sale prices for 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                            Sales Price
                                                            ----------------
   Quarter Ended                                            High        Low
   -------------                                            ------     -----
   <S>                                                      <C>        <C>
   March 30, 1998.......................................... $ 49 1/2   $ 31 1/4
   June 28, 1998........................................... $ 53 3/4   $ 44 3/4
   September 27, 1998...................................... $ 53       $ 31 1/2
   December 31, 1998....................................... $ 43 15/16 $ 28 1/16
<CAPTION>
                                                            Sales Price
                                                            ----------------
   Quarter Ended                                            High        Low
   -------------                                            ------     -----
   <S>                                                      <C>        <C>
   March 31, 1997.......................................... $ 21 1/8   $ 16
   June 30, 1997........................................... $ 24       $ 17 3/4
   September 30, 1997...................................... $ 35       $ 22
   December 31, 1997....................................... $ 37 3/4   $ 30 3/4
</TABLE>
 
  The Company has maintained a quarterly dividend rate of $0.15 per share
throughout 1997 and 1998. The Company anticipates it will continue its policy
of paying regular quarterly cash dividends which, on an annual basis will
aggregate $0.60 per share. The payment of cash dividends in the future will be
dependent upon the Company's results of operations, earnings, capital
requirements, contractual restrictions and other factors considered relevant
by the Board of Directors.
 
  The Company's credit facility imposes limits ("Restricted Payments") on the
payment or declaration of dividend, as well as any other distribution,
liquidation, purchase or other acquisition of the Company's stock by it or any
subsidiary. At December 31, 1998, the amount available for Restricted Payments
was approximately $20.5 million.
 
  On February 2, 1999, the Company's Board of Directors authorized a 2-for-1
split of its common stock payable March 22, 1999, in the form of a 100% stock
dividend, for shareholders of record on February 22, 1999.
 
                                      15
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following table summarizes certain selected historical financial and
operating data of the Company for the five most recently completed fiscal
years. This historical data should be read in conjunction with the
Consolidated Financial Statements of the Company and the related notes thereto
in Item 8 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.
 
<TABLE>
<CAPTION>
                                       Years Ended December 31,
                             ------------------------------------------------
                               1998      1997      1996      1995      1994
                             --------  --------  --------  --------  --------
                               ($ in thousands, except per share data)
<S>                          <C>       <C>       <C>       <C>       <C>
Operations for the Year:
Sales....................... $495,268  $490,824  $471,488  $508,113  $416,148
Cost of Goods Sold..........  392,956   401,590   399,187   428,707   335,303
Selling and Administration..   67,756    62,751    53,336    51,297    46,758
Research and Development....    9,253     5,568     6,241     5,016     5,364
Other Charges (1)...........      --        --     10,500     2,000       --
                             --------  --------  --------  --------  --------
Operating Income............   25,303    20,915     2,224    21,093    28,723
Interest Expense............    3,275     3,735     9,256     9,276     8,638
Other Income, Net...........    2,711     1,776       663       807     1,743
Non-recurring Income........    2,920       --        --        --        --
                             --------  --------  --------  --------  --------
Income (Loss) Before Taxes..   27,659    18,956    (6,369)   12,624    21,828
Income Tax Provision........   11,396     8,331     1,533     6,963     9,805
                             --------  --------  --------  --------  --------
Net Income (Loss)........... $ 16,263  $ 10,625  $ (7,902) $  5,661  $ 12,023
                             ========  ========  ========  ========  ========
Financial Position at Year-
 End:
Property Plant and
 Equipment, Net............. $118,906  $ 98,660  $105,023  $114,473  $114,113
Total Assets................  471,335   296,291   373,743   380,979   364,175
Capitalization:
  Short-Term Borrowing......   10,800    24,100       --        --        --
  Long-Term Debt............  160,000       --    145,000   125,000   125,000
  Shareholders' Equity......  165,483   152,801   145,134   158,535   131,113
                             --------  --------  --------  --------  --------
Total Capitalization........ $336,283  $176,901  $290,134  $283,535  $256,113
                             ========  ========  ========  ========  ========
Total Debt to Total
 Capitalization.............     50.8%     13.6%     50.0%     44.1%     48.8%
Other Operating Data:
Depreciation................ $ 16,862  $ 16,731  $ 17,211  $ 16,633  $ 16,955
Capital Expenditures........   17,894    10,641    13,273    19,191    17,821
Per Share Data:
Net Income (Loss) Per Share
 (2)(3)(4):
  Basic..................... $   3.17  $   2.05  $  (1.51) $   1.08  $   2.30
  Diluted................... $   3.02  $   2.01  $  (1.51) $   1.08  $   2.30
  Cash Dividends Per Share.. $   0.60  $   0.60  $    --   $    --   $    --
</TABLE>
--------
(1) Other charges include a charge for the settlement of claims relating to a
    government investigation of certain testing irregularities at the
    Company's Marion, Illinois facility ($6.0 million in 1996 and $2.0 million
    in 1995) and a $4.5 million charge in 1996 related to a trial court ruling
    involving a contract dispute with the Belgium Ministry of Defense related
    to a 1985 sale of artillery ammunition.
(2) The calculation of net income per share for all periods prior to 1997 is
    presented on a pro forma basis assuming that all 5,220,276 shares of
    Common Stock outstanding immediately after the Distribution were
    outstanding for all periods prior to the Distribution.
(3) The earnings per share amounts have been restated as required to comply
    with Statement of Financial Accounting Standards No. 128, Earnings Per
    Share.
(4) In February 1999, the Company's Board of Directors declared a two-for-one
    stock split payable on March 22, 1999 to shareholders of record on
    February 22, 1999. Pro forma basic and diluted per share amounts,
    respectively, reflecting this split are as follow; 1998: $1.58 and $1.51,
    respectively; 1997: $1.03 and $1.00, respectively; 1996: $(0.76) both;
    1995: $0.54 both; 1994: $1.15 both.
 
                                      16
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  This Management's Discussion and Analysis of Financial Condition and Results
of Operations covers the Company's years ended December 31, 1998 and 1997 as
well as periods prior to 1997 when the Company operated as the Ordnance and
Aerospace Divisions of Olin, but has been prepared as if the Company were a
separate entity for all periods discussed.
 
Results of Operations
 
  The following table sets forth certain data, expressed as a percentage of
sales, from the Company's consolidated Statements of Operations for the three
years ending December 31, 1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                                                 1998 1997 1996
                                                                 ---- ---- -----
<S>                                                              <C>  <C>  <C>
Sales:
  Large caliber ammunition......................................  32%  29%  35 %
  Medium caliber ammunition.....................................  15%  19%  18 %
  BALL POWDER(R) Propellant.....................................   9%  10%  10 %
  Electronic products...........................................  14%  10%   7 %
  Space products................................................   8%   9%   7 %
  Other products and services...................................  22%  23%  23 %
                                                                 ---- ---- -----
                                                                 100% 100% 100 %
Cost of goods sold..............................................  79%  82%  85 %
                                                                 ---- ---- -----
Gross profit....................................................  21%  18%  15 %
Selling and administration expense..............................  14%  13%  11 %
Research and development expense................................   2%   1%   1 %
Other charges...................................................  --   --    2 %
                                                                 ---- ---- -----
Operating income................................................   5%   4%   1 %
Interest expense................................................   1%   1%   2 %
Other income, net...............................................   1%   1%  --
Non-recurring income............................................   1%  --   --
                                                                 ---- ---- -----
Income (loss) before income taxes...............................   6%   4%  (1)%
Income tax provision............................................   3%   2%   1 %
                                                                 ---- ---- -----
Net income (loss)...............................................   3%   2%  (2)%
                                                                 ==== ==== =====
</TABLE>
 
Year ended December 31, 1998 compared to 1997
 
  The Company's sales of $495.3 million during 1998 increased by $4.5 million,
or 1% compared to 1997. The 1998 sales increase includes higher Ordnance and
Tactical Systems Division sales which were $360.7 million in 1998 compared to
$358.9 million in 1997. This increase reflects higher sales of large caliber
ammunition, steel pipe joints and the inclusion of $12.0 million of sales
associated with the CMS Group which was acquired in November of 1998. Ordnance
and Tactical Systems sales increases were offset by declines in the sales of
medium caliber ammunition which benefited in 1997 from a catch-up in
production resulting from delays in 1996. Aerospace and Electronics Division
sales increased to $134.6 million in 1998 as compared to $131.9 million in
1997. Aerospace and Electronics Division electronic products sales reflect a
36% increase in
 
                                      17
<PAGE>
 
the sales of EmPower(TM) airline passenger seat power supply systems and solid
systems sales reflect a 21% increase resulting from munitions dispensing
devices used on two missile systems. These increases more than offset the
decline in sales associated with the high-power pulsed energy device product
line that was sold in April 1998 and the decline in space systems sales.
 
  Gross margin as a percentage of sales increased to 21% in 1998 from 18% in
1997. Margins on large caliber ammunition increased 11% during 1998 due to
improved operations. Margins on electronic products increased 45% during 1998
due to improved performance and a more favorable product mix. Margins also
improved in 1998 due to the absence of cost overruns, which were experienced
in 1997 on ammunition demilitarization and high-power pulsed energy contracts.
 
  Selling and administrative expenses as a percentage of sales increased to
14% from 13% in 1997. The increase reflects the combination of higher bid and
proposal costs, which increased 43% over the 1997 level, and higher management
incentive expense associated with improvements in the Company's operating
performance. Research and development costs increased 66% from 1997 due to new
product initiatives in the space and electronics businesses.
 
  Non-operating income and expense for 1998 include a pre-tax gain of $0.8
million recognized on the sale of the Company's high-power pulsed energy
device product line and a pre-tax charge of $0.8 million associated with a
settlement regarding costs for environmental remediation at a former
manufacturing site.
 
  During 1998, the Company was awarded, net of expenses, $4.2 million in a
binding arbitration concerning a breach of contract. The award was based on
the defendant's ceasing and failing to complete payments on the production of
certain components used in automobile airbags. $1.3 million of the award
represents payments due under the contract and was included in 1998 operating
income. The balance of $2.9 million represents future payments which have been
recognized as 1998 non-recurring income.
 
  Interest expense during 1998 decreased 12% from 1997. This reduction
reflects lower average outstanding debt balances during 1998 as compared to
1997. The average debt outstanding during 1998 was $47 million with an average
effective interest rate of 6.9% compared to average debt outstanding during
1997 of $54 million with an average effective interest rate of 6.9%.
 
  Income tax expense of $11.4 million and $8.3 million was recorded in 1998
and 1997, respectively, on pre-tax income of $27.7 million in 1998 and $19.0
million in 1997. The Company's 1998 and 1997 effective tax rate of 41.2% and
43.9%, respectively, differ from statutory rates due principally to expenses
associated with goodwill which are not deductible for federal and state income
tax purposes and from the favorable federal tax treatment given to certain
export sales.
 
Year ended December 31, 1997 compared to 1996
 
  The Company's sales of $490.0 million in 1997 increased by $19.3 million, or
4% compared to 1996. The 1997 sales increase is primarily due to higher
shipments of medium caliber ammunition, artillery propelling charges, Ball
Powder(R) propellant, steel pipe joints, and space and electronics products.
These increases offset lower sales of international tank ammunition, solid
propellant products, and electromagnetic systems. Increases in medium caliber
ammunition sales reflect the correction of production problems that delayed
shipments in 1996. The increases in artillery propelling charge sales reflect
activity on a contract received in early 1997, for which there was no
comparable activity in 1996. Ball Powder(R) propellant sales increased 8% over
the 1996 depressed levels, principally due to improved commercial sales. Space
products sales increases reflect higher shipments associated with the
commercial satellite market. Electronics sales increases resulted from the
introduction of the Company's EmPower(TM) airline passenger seat power supply.
 
  Gross margin as a percentage of sales increased to 18% in 1997 from 15% in
1996. The gross margin percentage on medium caliber ammunition increased by
approximately 181% and reflects the improved delivery
 
                                      18
<PAGE>
 
and cost performance for those products. Margin improvements also benefited
from a product mix which included sales of artillery propelling charges and
higher space, electronics, and Ball Powder(R) propellant sales. These higher
margin sales offset unfavorable performance that resulted in cost overruns
during 1997 on ammunition de-militarization and high-powered pulsed energy
contracts.
 
  Selling and administration expenses as a percentage of sales increased to
13% in 1997 from 11% in 1996. The increase reflects the combination of higher
bid and proposal costs, which increased 19% over the 1996 level, additional
costs associated with the Company's start-up and status as a new independent
public company and management incentive expense associated with improvements
in the Company's operating performance.
 
  Interest expense decreased 60% from the 1996 level. This reduction reflects
the application of the Company's cash flow to debt reduction and lower
interest rates on outstanding debt. The 1996 financial statements reflected
$125 million of debt outstanding for the entire year with an average effective
interest rate of 7.4%. The average debt outstanding during 1997 was $54
million with an average effective interest rate of 6.9%.
 
  Income tax expense of $8.3 million and $1.5 million was recorded in 1997 and
1996, respectively, on pre-tax income of $19.0 million in 1997 and a pre-tax
loss of $6.4 million in 1996. The Company's 1997 effective tax rate of 43.9%
is higher than statutory rates due principally to goodwill amortization, which
is non-deductible.
 
U.S. Government Sales
 
  U.S. Government sales amounted to $330.8 million in 1998, $322.6 million in
1997 and $368.3 million in 1996. See "Item 1. Business--U.S. Government
Contracts and Regulations." Approximately 86%, 88% and 75%, respectively, of
total 1998, 1997 and 1996 U.S. Government sales were to the United States
Department of Defense ("DoD") or agencies thereof. Changes in the strategic
direction of defense spending, the timing of defense procurements and specific
defense program appropriation decisions may adversely affect the performance
of the Company in future years, including its income, liquidity, capital
resources, and financial condition. The precise impact of these decisions will
depend upon their timing and the size of changes and the Company's ability to
mitigate their impact with new business, business consolidations or cost
reductions. In view of the continuing uncertainty regarding the size, content
and priorities of the annual DoD budget, the historical financial information
of the Company may not be indicative of future performance and the viability
of certain facilities and equipment may also be impacted. DoD sales activities
are historically stronger in the latter part of the year because the timing of
the recognition of the DoD ammunition sales tends to reflect the procurement
cycle utilized by the U.S. Army.
 
  Since the U.S. Government usually awards and funds ordnance contracts on a
year-by-year basis and the Company's business is dependent upon periodic
awards of new contracts and the exercise of options contained in existing
contracts, there can be no assurance that the U.S. Government will continue to
purchase the Company's products and services over the long-term. The
termination of any of the Company's significant contracts or the failure to
obtain either renewals of certain existing contracts or additional contracts
with the U.S. Government would have a material adverse effect on its results
of future operations and financial condition.
 
Environmental
 
  The Company is a party to various governmental and private environmental
actions associated with waste disposal, manufacturing and test sites.
Associated costs of investigatory and remedial activities are provided for in
accordance with generally accepted accounting principles governing probability
and the ability to reasonably estimate future costs.
 
  Cash outlays for remedial and investigatory activities associated with
former manufacturing and test facilities and past operations were not charged
to income but instead were charged to reserves established for such costs
identified and expensed to income in prior years. Cash outlays for normal
plant operations for the disposal of waste and the operation and maintenance
of pollution control equipment and facilities to ensure
 
                                      19
<PAGE>
 
compliance with mandated and voluntarily imposed environmental quality
standards were charged to income. Historically, the Company has funded its
environmental capital expenditures through cash flow from operations and
expects to do so in the future.
 
  The Company's consolidated balance sheets included liabilities for future
environmental expenditures to investigate and remediate known sites amounting
to $1.8 million and $1.2 million at December 31, 1998 and 1997, respectively,
which are classified as other non-current liabilities. Those amounts did not
take into account any discounting of future expenditures or any consideration
of insurance recoveries or advances in technology. Those liabilities are
reassessed periodically to determine if environmental circumstances have
changed and/or remediation efforts and their costs can be better estimated. As
a result of these reassessments, future charges to income may be made for
additional liabilities.
 
  Environmental-related cash outlays for site investigation and remediation,
capital projects and normal plant operations are expected to range between $2
million and $5 million annually over the next several years. While the Company
does not anticipate a material increase in the projected annual level of its
environmental-related costs, there is always the possibility that such
increases may occur in the future in view of the uncertainties associated with
environmental exposures. Environmental exposures are difficult to assess for
numerous reasons, including the identification of new sites, developments at
sites resulting from investigatory studies, advances in technology, changes in
environmental laws and regulations and their application, the scarcity of
reliable data pertaining to identified sites, the difficulty in assessing the
involvement and financial capability of other potentially responsible parties
and the Company's ability to obtain contributions from other parties and the
time periods (sometimes lengthy) over which site remediation occurs. It is
possible that some of these matters (the outcomes of which are subject to
various uncertainties) may be resolved unfavorably against the Company.
 
Service Costs
 
  From the time of the Distribution to December 31, 1997, the Company obtained
certain services from Olin, such as payroll and benefits administration,
mainframe computing services, and telecommunications support. Olin was
reimbursed by the Company at rates comparable to the pre-Distribution inter-
company charges. The cost of these services for 1997 was approximately $1.4
million. During 1998, the Company obtained these services on its own, at costs
which approximate the rates charged by Olin.
 
New Accounting Standards
 
  In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (The "Statement"), Accounting for Derivative Instruments and Hedging
Activities. The Company expects to adopt the new statement effective January
1, 2000. The Statement will require the Company to recognize all derivatives
on the balance sheet at fair value. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
 
Liquidity and Capital Resources
 
  As a result of the Distribution, the Company assumed all obligations for a
revolving credit agreement ("RCA") entered into December 23, 1996, by Olin,
under the terms of which participating banks have committed a maximum of
$160.0 million to the Company for cash borrowings and letters of credit. The
RCA expires on December 31, 2001. The Company pays interest under the RCA on
outstanding borrowings at the Company's choice of various floating rate
options and is required to pay a facility fee ranging from 0.125% to 0.3125%
of the borrowing commitment. To facilitate short-term borrowing flexibility,
certain RCA participating banks have agreed to provide the Company uncommitted
and unsecured short-term lines of credit at interest rates similar to those
under the RCA. Aggregate borrowings under the RCA and short-term lines are
limited to the committed maximum of $160.0 million. Outstanding borrowings
under the RCA at December 31, 1998 were $100.0 million with a weighted average
note interest rate of 5.7%. Outstanding borrowings under short-term lines
 
                                      20
<PAGE>
 
of credit at December 31, 1998 were $10.8 million with a weighted average note
interest rate of 5.9%. Interest paid in 1998 and 1997 was $2.0 million and
$3.6 million, respectively.
 
  In December 1998, the Company issued 7.5% Senior Notes (the "Term Notes") in
the amount of $60.0 million. Interest on the Term Notes is payable
semiannually. Scheduled principal repayments on the Term Notes are $5.0
million annually commencing in 2000 with the remaining principal balance due
in December 2008.
 
  The RCA and Term Notes both contain a number of financial covenants
including requirements to maintain ratios of (i) minimum earnings before
interest and taxes to interest expense, and (ii) maximum total debt to
earnings before interest, taxes, depreciation and amortization and contain
certain minimum tangible net worth requirements. The RCA also contains
limitations on amounts available to pay dividends or repurchase Company stock
("Restricted Payments"). At December 31, 1998, the amount available for
Restricted Payments was $20.5 million. Under the terms of these financial
covenants the Company had up to an additional $23.0 million available for
borrowings at December 31, 1998.
 
  During December 1998, the Company entered into hedging transactions, in the
form of interest rate swap agreements, to protect against increases in market
interest rates on long-term borrowings under the RCA. The notional principal
subject to interest rate swap agreements at December 31, 1998 was $40.0
million on which the Company was receiving a weighted-average variable
interest rate of 5.2% and paying a weighted average fixed rate of 4.8%. The
resulting reduction in interest expense for 1998 was not significant.
 
  For the year ended December 31, 1998, net cash used by operations totaled
$5.7 million compared to cash provided by operations in 1997 of $116.3. During
1997, the Company experienced working capital reductions associated with
receipt of contract advances and the correction of delivery delays experienced
in 1996. These contract advances require the achievement of certain
performance milestones which accelerate contract payments in exchange for
reduced selling prices. During 1998, the favorable impact of these contract
advances were reduced due to a reduction in the value of contracts providing
for accelerated payments and an increase in the value of contracts with less
favorable payment terms. This change in the mix of contract payment terms
resulted in a usage of cash of approximately $16.1 million during 1998. During
the fourth quarter, the Company also experienced working capital investment in
accounts receivable and inventories due to delays in the shipment of medium
caliber ammunition and the start-up of an artillery propelling charge
contract. The combined impact of changing levels of contract advances and
working capital investment caused operating cash flow in 1997 to be greater
than, and in 1998 to be less than, the cash flows that ordinarily would have
been realized.
 
  Capital expenditures for property, plant and equipment in 1998 increased 68%
from 1997 due to higher planned spending.
 
  In 1998, the Company received $10.0 million from the sale of assets related
to its high-powered pulsed energy device product line.
 
  In November 1998, the Company acquired all of the issued and outstanding
stock of CMS, Inc. and Defense Research Incorporated (the "CMS" Group") for
$124.8 million, including $1.8 million of transaction costs.
 
  In August 1998, the Board of Directors of the Company authorized the
repurchase, at management's discretion, of up to 500,000 shares of the
Company's common stock. During 1998, the Company purchased and retired 56,400
shares of common stock at an aggregate cost of approximately $2.1 million.
 
  Cash dividends paid during 1998 and 1997 totaled approximately $3.1 million.
 
  The net cash usage from operating activities, after capital spending, stock
repurchases, dividends, acquisitions and divestitures totaled $143.5 million
in 1998 which was funded by increases in debt. During 1997, the Company
generated net cash from operating activities of $100.9 million after capital
spending, stock repurchases and dividends, which was used to reduce debt.
 
 
                                      21
<PAGE>
 
  Subject to the risk factors identified in the "Forward-Looking Statements"
section set forth below and based upon the availability under the RCA and the
Company's projected cash flow from operations, management believes that the
Company's capital resources are adequate to meet its foreseeable business
needs.
 
Effect of Inflation
 
  Because of the relatively low level of inflation experienced in the United
States, inflation did not have a material adverse effect on the sales or
operating results of the Company during the three most recent fiscal years.
 
Impact of Year 2000
 
  The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk.
 
  The Company's processes for evaluating and managing the risks and costs
associated with this potential problem are being managed by a team of internal
staff and outside consultants. The Company's financial and operational systems
are being identified and assessed for Year 2000 compliance, and efforts to
modify existing software or convert to new compliant software are underway.
The Company believes the identification and assessment phase of this process
is substantially complete.
 
  The Company employs a number of information technology systems in its
operations, including, without limitation, computer networking systems,
financial systems and other similar systems. A number of these systems have
been recently implemented by the Company and these recently implemented
systems are believed to be Year 2000 compliant. The Company's assessment has
indicated that some of the Company's financial systems could be affected by
the Year 2000 problems and accordingly, the Company has begun a process of
either modifying or converting these systems to make them Year 2000 compliant.
The Company believes that the modification or conversion of these financial
systems will be substantially completed by mid 1999.
 
  The Company also employs electronic equipment containing software and
embedded chips in its production and manufacturing systems. The Company's
assessment has indicated that this electronic equipment is not likely to be
susceptible to a material system failure resulting from Year 2000 problems.
Selective equipment upgrades are currently being implemented where warranted
and the Company believes that it can complete necessary modifications and
conversions without a material impact on the Company.
 
  The Company has completed an assessment of Year 2000 issues associated with
major products that the Company has sold and believes that the Company has no
material exposure related to Year 2000 problems for products it has sold.
 
  The Company has initiated communications with significant vendors, customers
and other third party service providers to evaluate whether they are making
adequate efforts to achieve Year 2000 compliance. To date, the Company is not
aware of any third parties with a Year 2000 issue that would materially impact
the Company. However, the Company has no means of ensuring that third parties
will be Year 2000 ready, and the effect of non-compliance by third parties is
not determinable by the Company. The Company has material relationships with
the U.S. Government. Year 2000 non-compliance by the U.S. Government, such as
the inability to process payments to the Company, could have a material impact
on the Company.
 
  The Company will continue to evaluate the status of its Year 2000 compliance
to determine whether a contingency plan is necessary, but no such contingency
plan has yet been adopted by the Company. The Company has not yet determined
what the nature and timing of any such contingency plan would be.
 
  The total cost of the Company's internal Year 2000 project is presently
estimated to be less than $1.0 million, which includes the purchase of new
software and equipment which will be capitalized.
 
 
                                      22
<PAGE>
 
  The cost of the Company becoming Year 2000 compliant and the timing in which
the Company believes it will complete the necessary Year 2000 modifications
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans, and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
success of the Company in identifying systems and programs having Year 2000
issues, the nature and amount of programming required to upgrade or replace
the affected programs, the availability and cost of personnel trained in this
area, and the extent to which the Company might be adversely impacted by
vendors, customers and other third party service provider's failure to
remediate their own Year 2000 issues.
 
Forward Looking Statements
 
  All statements other than statements of historical facts in this Form 10-K
are "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995, and are based on management's current
expectations of the Company's near-term results, based on current information
available and pertaining to the Company. The Company assumes no obligation to
update publicly any forward-looking statement. Actual results may differ
materially from those projected in the forward-looking statements. These
forward-looking statements involve risks and uncertainties, including, but not
limited to, the following: demand for commercial powder; international
business opportunities; ammunition lot acceptance; timing of contract funding
and continued receipt of performance-based payments under tank ammunition
contracts; changing economic and political conditions in the United States and
in other countries; changes in governmental laws and regulations surrounding
various matters, such as environmental remediation, contract pricing, and
international trading restrictions; changes in governmental spending and
budgetary policies, such as reductions in the level of defense spending or
redirection of Department of Defense program funding; production and pricing
levels of important raw materials, lower than anticipated levels of plant
utilization resulting in production inefficiencies and higher costs, whether
related to the delay of new product introductions, improved production
processes or equipment, or labor relations issues; difficulties or delays in
the development, production, testing and marketing of products; product
margins and customer product acceptance; unforeseen difficulties associated
with the integration of acquired businesses; and costs and effects of legal
and administrative cases, proceedings, settlements and investigations
involving the Company.
 
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk and Risk Management Policies
 
  The Company manages its exposures to changes in foreign currency exchange
rates on certain firm sales commitments and anticipated, but not yet committed
sales, by entering into foreign currency forward contracts and foreign
currency option contracts, respectively. The Company also is exposed to
changes in interest rates, primarily from its long-term revolving credit
agreement, and uses interest rate swap agreements to fix interest rates on
variable rate debt and reduce certain exposures to interest rate fluctuations.
The Company's risk management objective in entering into such contracts and
agreements is only to reduce its exposure to the effects of foreign currency
exchange rate movements and interest rate fluctuations and not for speculative
investment. At December 31, 1998 the fair market values of market risk
sensitive instruments or potential for near-term losses of earnings or cash
flows for such instruments was not material.
 
                                      23
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                                    INDEX TO
                       CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report--Ernst & Young LLP...........................   25
Independent Auditors' Report--KPMG LLP....................................   26
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.   27
Consolidated Statements of Operations, Years Ended December 31, 1998, 1997
 and 1996.................................................................   28
Consolidated Statements of Shareholders' Equity, Years Ended December 31,
 1998, 1997 and 1996......................................................   29
Consolidated Statements of Cash Flow, Years Ended December 31, 1998, 1997
 and 1996.................................................................   30
Notes to Consolidated Financial Statements................................   31
</TABLE>
 
                                       24
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
 Primex Technologies, Inc.
 
  We have audited the accompanying consolidated balance sheets of Primex
Technologies, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Primex
Technologies, Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
 
                                          Ernst & Young LLP
 
Tampa, Florida
February 1, 1999
 
                                      25
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
 Primex Technologies, Inc.:
 
  We have audited the consolidated statements of operations, shareholders'
equity, and cash flows of Primex Technologies, Inc. and subsidiaries for the
year ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Primex Technologies, Inc. and subsidiaries for
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
 
                                          KPMG LLP
 
Tampa, Florida
February 13, 1997
 
                                      26
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                    ($ in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
                          Assets
Current Assets:
  Cash..................................................... $  3,193  $    --
  Receivables..............................................  131,390    94,657
  Inventories, Net.........................................   67,085    35,157
  Other Current Assets.....................................    8,449     7,263
                                                            --------  --------
    Total Current Assets...................................  210,117   137,077
Property, Plant and Equipment, Net.........................  118,906    98,660
Goodwill, Net..............................................  117,617    44,821
Other Assets...............................................   24,695    15,733
                                                            --------  --------
    Total Assets........................................... $471,335  $296,291
                                                            ========  ========
           Liabilities and Shareholders' Equity
Current Liabilities:
  Short-Term Borrowing..................................... $ 10,800  $ 24,100
  Accounts Payable.........................................   40,624    28,894
  Contract Advances........................................   18,922    35,070
  Accrued Liabilities......................................   42,797    32,522
                                                            --------  --------
    Total Current Liabilities..............................  113,143   120,586
Long-Term Debt.............................................  160,000       --
Other Liabilities..........................................   32,709    22,904
                                                            --------  --------
    Total Liabilities......................................  305,852   143,490
Commitments and Contingencies
Shareholders' Equity:
  Common Stock, $1.00 par value; 60,000,000 shares
   authorized; 5,081,976 and
   5,137,637 shares issued and outstanding in 1998 and
   1997, respectively......................................    5,082     5,138
  Additional Paid-in Capital...............................  142,500   144,510
  Retained Earnings........................................   20,301     7,322
  Unamortized Value of Restricted Stock Grants.............   (2,099)   (4,145)
  Accumulated Other Comprehensive Income...................     (301)      (24)
                                                            --------  --------
    Total Shareholders' Equity.............................  165,483   152,801
                                                            --------  --------
    Total Liabilities and Shareholders' Equity............. $471,335  $296,291
                                                            ========  ========
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                       27
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    ($ in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                   --------------------------
                                                     1998     1997     1996
                                                   -------- -------- --------
<S>                                                <C>      <C>      <C>
Sales............................................. $495,268 $490,824 $471,488
Operating Expenses:
  Cost of Goods Sold..............................  392,956  401,590  399,187
  Selling and Administration......................   67,756   62,751   53,336
  Research and Development........................    9,253    5,568    6,241
  Other Charges...................................      --       --    10,500
                                                   -------- -------- --------
Operating Income..................................   25,303   20,915    2,224
Interest Expense..................................    3,275    3,735    9,256
Other Income, Net.................................    2,711    1,776      663
Non-Recurring Income..............................    2,920      --       --
                                                   -------- -------- --------
Income (Loss) Before Taxes........................   27,659   18,956   (6,369)
Income Tax Provision..............................   11,396    8,331    1,533
                                                   -------- -------- --------
Net Income (Loss)................................. $ 16,263 $ 10,625 $ (7,902)
                                                   ======== ======== ========
Net Income (Loss) Per Share (1996 Unaudited Pro
 forma Information):
  Basic........................................... $   3.17 $   2.05 $  (1.51)
                                                   ======== ======== ========
  Diluted......................................... $   3.02 $   2.01 $  (1.51)
                                                   ======== ======== ========
</TABLE>
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                       28
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                ($ in thousands)
 
<TABLE>
<CAPTION>
                            Common Stock
                          -----------------
                                                                               Accumulated
                                                                  Unamortized     Other     Equity in
                                             Additional             Value of     Compre-     Earnings       Total
                                              Paid-in   Retained   Restricted    hensive     Prior to   Shareholders'
                           Shares    Amount   Capital   Earnings  Stock Grants   Income    Distribution    Equity
                          ---------  ------  ---------- --------  ------------ ----------- ------------ -------------
<S>                       <C>        <C>     <C>        <C>       <C>          <C>         <C>          <C>
Balance December 31,
 1995...................                                                                     $158,535     $158,535
Net Intercompany
 Activity with Olin.....                                                                       (5,499)      (5,499)
Net Loss................                                                                       (7,902)      (7,902)
Capitalization of
 Divisional Equity......  5,220,276  $5,220   $139,914      --          --          --       (145,134)         --
                          ---------  ------   --------  -------     -------       -----      --------     --------
Balance December 31,
 1996...................  5,220,276   5,220    139,914      --          --          --            --       145,134
Grant of 344,000
 Restricted Stock
 Units..................        --      --       6,128      --       (6,128)        --            --           --
Amortization of
 Restricted Stock Grant.        --      --         --       --        1,983         --            --         1,983
Dividends Paid..........        --      --         --    (3,098)        --          --            --        (3,098)
Dividends on Stock
 Compensation...........        --      --         --      (205)        --          --            --          (205)
Issuance of Stock Under
 Directors Stock Plan...      2,807       3         49      --          --          --            --            52
Purchase of Common
 Stock..................    (85,446)    (85)    (1,581)     --          --          --            --        (1,666)
Translation Adjustments.        --      --         --       --          --          (24)          --           (24)
Net Income..............        --      --         --    10,625         --          --            --        10,625
                          ---------  ------   --------  -------     -------       -----      --------     --------
Balance December 31,
 1997...................  5,137,637   5,138    144,510    7,322      (4,145)        (24)          --       152,801
Grant of 2,000
 Restricted Stock Units.        --      --          95      --          (95)        --            --           --
Forfeiture of Restricted
 Stock Units............        --      --         (89)     --           51         --            --           (38)
Amortization of
 Restricted Stock Grant.        --      --         --       --        2,090         --            --         2,090
Dividends Paid..........        --      --         --    (3,078)        --          --            --        (3,078)
Dividends on Stock
 Compensation...........        --      --         --      (206)        --          --            --          (206)
Issuance of Stock Under
 Directors Stock Plan...        739     --          25      --          --          --            --            25
Purchases of Common
 Stock..................    (56,400)    (56)    (2,041)     --          --          --            --        (2,097)
Translation Adjustments.        --      --         --       --          --            4           --             4
Minimum Pension
 Liability Adjustment...        --      --         --       --          --         (281)          --          (281)
Net Income..............        --      --         --    16,263         --          --            --        16,263
                          ---------  ------   --------  -------     -------       -----      --------     --------
Balance December 31,
 1998...................  5,081,976  $5,082   $142,500  $20,301     $(2,099)      $(301)     $    --      $165,483
                          =========  ======   ========  =======     =======       =====      ========     ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       29
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                ($ in thousands)
 
<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                               ------------------------------
                                                 1998       1997       1996
                                               ---------  ---------  --------
<S>                                            <C>        <C>        <C>
Operating Activities
Net Income (Loss)............................. $  16,263  $  10,625  $ (7,902)
Adjustments to Reconcile Net Income (Loss) to
 Net Cash Provided (Used) by Operating
 Activities:
Depreciation..................................    16,862     16,731    17,211
Amortization of Intangibles...................     3,180      2,977     2,954
Deferred Taxes................................    (2,590)    (2,863)   (3,805)
Stock Compensation............................     1,869      2,035       --
Other.........................................       (91)        43       947
Changes in Operating Assets and Liabilities:
  Receivables.................................   (29,993)    29,001    29,418
  Inventories.................................    (9,941)    22,084    (7,478)
  Other Current Assets........................      (336)      (431)      659
  Other Assets................................    (6,348)    (1,552)   (7,737)
  Accounts Payable............................    10,720     (1,253)  (12,634)
  Contract Advances...........................   (16,148)    35,070       --
  Accrued Liabilities.........................     1,261      3,649     5,161
  Other Liabilities...........................     9,610        189    (2,472)
                                               ---------  ---------  --------
  Net Operating Activities....................    (5,682)   116,305    14,322
                                               ---------  ---------  --------
Investing Activities
Expenditures for Property, Plant and
 Equipment....................................   (17,894)   (10,641)  (13,273)
Proceeds from Disposition of Property, Plant
 and Equipment................................        73        --      4,565
Cash Paid for Purchase of Business............  (124,829)       --        --
Proceeds from Sale of Business................    10,000        --        --
Other Investing Activities....................       --         --       (195)
                                               ---------  ---------  --------
  Net Investing Activities....................  (132,650)   (10,641)   (8,903)
                                               ---------  ---------  --------
Financing Activities
Net Short-Term Borrowing (Repayment)..........   (13,300)    24,100       --
Net Revolving Credit Agreement Borrowing
 (Repayment)..................................   100,000   (145,000)   20,000
Proceeds from Issuance of Term Notes..........    60,000        --        --
Net Transfers to Olin.........................       --         --     (5,419)
Repurchase of Common Shares...................    (2,097)    (1,666)      --
Dividends Paid................................    (3,078)    (3,098)      --
                                               ---------  ---------  --------
  Net Financing Activities....................   141,525   (125,664)   14,581
                                               ---------  ---------  --------
Net Increase (Decrease) in Cash...............     3,193    (20,000)   20,000
Cash, Beginning of Year.......................       --      20,000       --
                                               ---------  ---------  --------
Cash, End of Year............................. $   3,193  $     --   $ 20,000
                                               =========  =========  ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       30
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    ($ in thousands, except per share data)
 
Formation of Primex Technologies, Inc. and Description of Business
 
  Primex Technologies, Inc. (the "Company") was organized in May 1996 and has
been publicly owned since December 31, 1996, when Olin Corporation ("Olin")
made a distribution (the "Distribution") to its shareholders consisting of all
of the outstanding shares of the Company's common stock. Regular way trading
in the Common Stock commenced on The Nasdaq Stock Market(R) on January 7,
1997. Prior to December 31, 1996, the Company was a wholly owned subsidiary of
Olin.
 
  The Company is an ordnance and aerospace contractor providing systems
management and manufacturing services. The Company's operations are organized
into two segments that correspond to its primary products and services.
 
  The Ordnance and Tactical Systems Division ("Ordnance") produces large and
medium caliber ammunition for aircraft, artillery, tanks and warships; Ball
Powder(R) propellant for sporting, military and commercial applications;
precision metal assemblies for use in missiles and rockets; and propulsion
systems for large caliber gun systems. Ordnance also provides load, assembly
and pack services for a variety of missile and rocket programs. Ordnance's
primary customers are the U.S. Department of Defense and other U.S. Government
research and development agencies/laboratories, allied U.S. Governments and
sporting ammunition manufacturers.
 
  The Aerospace and Electronics Division's ("Aerospace") products include
rocket engines, advanced electric propulsion systems, aerospace electronic
products, and solid propellant products, including munitions dispensing
systems. Primary Aerospace customers are satellite, aircraft and missile
contractors and airlines; other defense/aerospace subsystems and systems
contractors; NASA and other U.S. Government research and development
agencies/laboratories.
 
Basis of Presentation and Significant Accounting Policies
 
  The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany balances and
transactions between entities included in these financial statements have been
eliminated.
 
  The accompanying consolidated financial statements, prior to the
Distribution, include the combined operations of Olin's former Ordnance and
Aerospace Divisions and have been prepared as if the Company had operated as a
separate stand-alone entity and include only those assets and liabilities
transferred to the Company, and revenues and expenses attributable to the
Company's operations. An assessment of corporate overhead is included in
selling and administration expenses with the allocation based on either effort
committed or number of employees. Management believes that the allocation
method used to allocate the costs and expenses was reasonable. However, such
allocated amounts may not be indicative of what selling and administration
expenses would have been if the Company operated independently of Olin.
 
  The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from those
estimates.
 
 Cash and Cash Equivalents
 
  The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
 
                                      31
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Long-Term Contracts
 
  Sales and cost of sales related to government contracts that extend beyond
one year are primarily recognized under the percentage-of-completion method of
accounting as costs are incurred. Profits expected to be realized on contracts
are based on the Company's estimates of costs at completion compared to total
contract sales value; profits for interim reporting periods are based on costs
incurred relative to total estimated costs at completion. When the Company
believes the cost of completing a contract will exceed contract-related
revenues, the full amount of the anticipated contract loss is recognized. For
contracts or commercial orders with performance periods of under one year,
sales are recognized on the units shipped method of accounting.
 
  Contract advances represent payments received by the Company for costs which
have not yet been incurred and are liquidated as costs on the related
contracts are recognized.
 
 Inventories
 
  Inventories are stated at the lower of cost or net realizable value. Work-
in-process inventories related to long-term contracts and programs are stated
at the accumulated cost of material, labor and manufacturing overhead, less
the estimated cost of units delivered. To the extent total costs relating to
long-term contracts and programs are estimated to exceed the total sales
price, charges are made to current operations to reduce inventoried costs to
net realizable value.
 
  Approximately 21% and 38% of 1998 and 1997 consolidated total inventories,
respectively, are valued by the dollar value last-in, first-out (LIFO) method
of inventory accounting.
 
  Pursuant to contract provisions, agencies of the U.S. Government and other
customers have title to, or a security interest in, certain inventories as a
result of progress payments and advances.
 
 Property, Plant and Equipment
 
  Property, plant and equipment are recorded at cost. Depreciation is computed
on a straight-line basis over the following estimated useful lives:
 
<TABLE>
     <S>                                                          <C>
     Improvements to land........................................ 10 to 20 years
     Building and building equipment.............................  5 to 45 years
     Machinery and equipment.....................................  3 to 12 years
</TABLE>
 
  Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less.
 
 Goodwill
 
  Goodwill, the excess of the purchase price of acquired businesses over the
fair value of their respective net assets, is amortized on a straight-line
basis over periods ranging from thirty to forty years. Accumulated
amortization was $25,732 and $22,994 at December 31, 1998 and 1997
respectively. The Company periodically reviews the value of its goodwill to
determine if an impairment has occurred. The Company assesses the potential
impairment of recorded goodwill by comparing the undiscounted value of
expected future operating cash flows to its carrying cost. An impairment, if
necessary, would be recorded based on the estimated fair value or a cash flow
measure.
 
 
                                      32
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Environmental Liabilities and Expenditures
 
  Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based upon current law and existing technologies. These amounts,
which are not discounted and exclusive of claims against third parties, are
adjusted periodically as assessment and remediation efforts progress or
additional technical or legal information becomes available. Environmental
remediation costs are charged to expense. Environmental costs are capitalized
if the costs increase the value of the property and/or mitigate or prevent
contamination from future operations.
 
 Stock-Based Compensation
 
  The Company accounts for stock-based employee compensation using the
intrinsic value method of accounting.
 
 Income Taxes
 
  The Company accounts for income taxes under the liability method. Deferred
taxes are provided for differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Prior to the Distribution,
the Company's operations were included in the U.S. federal consolidated tax
returns of Olin. The provision for income taxes included the Company's
allocated share of Olin's consolidated income tax provision and was calculated
on a separate Company basis.
 
 Fair Value of Financial Instruments
 
  The fair value of financial instruments, consisting primarily of cash,
receivables, and accounts payable, approximates carrying value due to the
liquid nature of the instruments. The fair value of life insurance policies,
included in other assets, approximates cash surrender value, which is carrying
value. The fair value of the short-term borrowing and long-term debt
approximately carrying value based on borrowing rates available to the Company
for borrowings with similar terms and maturities.
 
 Foreign Currency Translation
 
  Adjustments resulting from translating foreign functional currency financial
statements of a foreign subsidiary into U.S. dollars are included as a
component of other comprehensive income.
 
 Derivatives
 
  The Company enters into foreign currency contracts in order to reduce the
impact of certain foreign currency fluctuations. Firmly committed transactions
and the related receivables and payables may be hedged with forward exchange
contracts or purchased options. Premiums paid on purchased options and any
gains or losses are included in other assets or accrued liabilities and are
recognized in earnings when the transaction being hedged is recognized.
 
  The Company uses interest rate swap agreements to fix interest rates on
variable rate debt and reduce certain exposures to interest rate fluctuations.
The agreements involve the exchange of amounts based on a variable interest
rate for amounts based on fixed interest rates over the life of the agreement,
without an exchange of the notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is accrued
and recognized as an adjustment of interest expense related to the debt. The
fair value of the swap agreements are not recognized in the financial
statements. Neither the Company nor the counterparties,
 
                                      33
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
which are prominent financial institutions, are required to collateralize
their respective obligations under these swaps. The Company does not believe
that any reasonable likely change in interest rates would have a material
adverse effect on the financial position, the results of operations or cash
flow of the Company.
 
  In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (the "Statement"), Accounting of Derivative Instruments and Hedging
Activities. The Company expects to adopt the new statement effective January
1, 2000. The Statement will require the Company to recognize all derivatives
on the balance sheet at fair value. The Company does not anticipate that the
adoption of the Statement will have a significant effect on its results of
operations or financial position.
 
Acquisitions
 
  On November 6, 1998, the Company acquired all of the issued and outstanding
stock of CMS, Inc. and Defense Research Incorporated (the "CMS Group") for
$124,829 ($123,000 in cash and $1,829 of acquisition related costs). The
operations of the CMS Group are included in the consolidated statement of
operations from the date of acquisition. The transaction was accounted for as
a purchase and the excess cost over fair value of the net assets acquired
(goodwill), of $75,647, is being amortized on a straight-line basis over forty
years. The allocation of the purchase price for the CMS Group acquisition is
tentative pending completion of a facilities consolidation review, assessment
of the underlying value, if any, of certain identifiable intangible assets,
and the assessment of acquired tax net operating losses utilization.
 
  The pro forma results of operations for the years ended December 31, 1998
and 1997, assumes the purchase of the CMS Group had been consummated as of
January 1, 1997. The pro forma results of operations include adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects and is
not necessarily indicative of the results of operations that would have
occurred had the purchase been made at the beginning of the periods presented
or the future results of the combined operations.
 
  Pro Forma Operating Results (Unaudited):
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                               -------- --------
     <S>                                                       <C>      <C>
     Sales...................................................  $568,351 $570,337
     Net income..............................................  $ 15,510 $  8,882
     Net income per share:
       Basic.................................................  $   3.02 $   1.72
       Diluted...............................................  $   2.88 $   1.68
</TABLE>
 
Dispositions
 
  On April 15, 1998, the Company sold substantially all of the assets related
to its high-power pulsed energy device product line for $10,000 in cash. A
gain on this sale of approximately $800 was included in other income. Sales of
products and services in this product line were $3,698 in 1998 prior to the
sale and $16,833 for the year ending December 31, 1997.
 
 
                                      34
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Receivables
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                              --------  -------
     <S>                                                      <C>       <C>
     Receivables, consist of the following:
       Contract receivables:
         Billed receivables.................................. $ 69,292  $46,369
         Unbilled receivables................................   61,533   46,823
       Trade and other receivables...........................      943    1,475
       Allowance for doubtful accounts.......................     (378)     (10)
                                                              --------  -------
       Total receivables..................................... $131,390  $94,657
                                                              ========  =======
</TABLE>
 
  Unbilled receivables represent the balance of recoverable costs and accrued
profit comprised principally of revenue recognized on contracts for which
billings have not been presented to the customer because the amounts were
earned but not billable as of the balance sheet date under the contractual
terms. Billed and unbilled contract receivables, respectively, include amounts
related to Government contracts of $46,082 and $42,906 in 1998, and $18,664
and $25,678 in 1997.
 
Inventories
 
<TABLE>
<CAPTION>
                                                                 1998    1997
                                                                ------- -------
     <S>                                                        <C>     <C>
     Inventories consist of the following:
       Raw materials and work-in-progress...................... $65,909 $34,832
       Finished goods..........................................   8,805   8,232
                                                                ------- -------
       Total inventories.......................................  74,714  43,064
       Less revaluation to LIFO................................   7,629   7,907
                                                                ------- -------
       Inventories, net........................................ $67,085 $35,157
                                                                ======= =======
</TABLE>
 
  Inventory balances at December 31, 1998 and 1997 are net of reductions for
progress payments in the amount of $282 and $9,657, respectively.
 
  During 1998 and 1997, contract inventory quantities valued at LIFO were
reduced resulting in a LIFO liquidation, the effect of which decreased cost of
sales by approximately $278 and $1,616, respectively.
 
Property, Plant and Equipment
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                              -------- --------
     <S>                                                      <C>      <C>
     Land and improvements to land........................... $ 16,817 $ 14,913
     Building and building equipment.........................   49,868   41,526
     Machinery and equipment.................................  186,920  170,601
     Leasehold improvements..................................   19,844   20,238
     Construction-in-progress................................   14,191   12,911
                                                              -------- --------
     Total property, plant & equipment.......................  287,640  260,189
     Less accumulated depreciation...........................  168,734  161,529
                                                              -------- --------
     Plant, property & equipment, net........................ $118,906 $ 98,660
                                                              ======== ========
</TABLE>
 
 
                                      35
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Credit Agreements and Long Term Debt
 
  As a result of the Distribution, the Company assumed all obligations for a
revolving credit agreement ("RCA") entered into on December 23, 1996, by Olin,
under the terms of which participating banks have committed a maximum of
$160,000 to the Company for cash borrowings and letters of credit. The RCA
expires on December 31, 2001. The Company pays interest under the RCA on
outstanding borrowings at the Company's choice of various floating rate
options and is required to pay a facility fee ranging from 0.125% to 0.3125%
of the borrowing commitment. To facilitate short-term borrowing flexibility,
certain RCA participating banks have agreed to provide the Company uncommitted
and unsecured short-term lines of credit at interest rates similar to those
under the RCA. Aggregate borrowings under the RCA and short-term lines are
limited to the committed maximum of $160,000. Outstanding borrowings under the
RCA at December 31, 1998 were $100,000 with a weighted average note interest
rate of 5.7%. Outstanding borrowings under short-term lines of credit at
December 31, 1998 were $10,800 with a weighted average note interest rate of
5.9%. RCA interest paid in 1998, 1997 and 1996 was $2,008, $3,585 and $9,256,
respectively.
 
  In December 1998, the Company issued 7.5% Senior Notes (the "Term Notes") in
the amount of $60,000. Interest on the Term Notes is payable semiannually.
Scheduled principal repayments on the Term Notes are $5,000 annually
commencing in 2000 with the remaining principal balance due in December 2008.
 
  The RCA and Term Notes both contain a number of financial covenants
including requirements to maintain ratios of (i) minimum earnings before
interest and taxes to interest expense, and (ii) maximum total debt to
earnings before interest taxes, depreciation and amortization and contain
certain minimum tangible net worth requirements. The RCA also contains
limitations on amounts available to pay dividends or repurchase Company stock
("Restricted Payments"). At December 31, 1998, the amount available for
Restricted Payments was $20,506. Under the terms of these financial covenants,
the Company had up to an additional $23,000 available for borrowings at
December 31, 1998.
 
  During December 1998, the Company entered into hedging transactions, in the
form of interest rate swap agreements, to protect against increases in market
interest rates on long-term borrowings under the RCA. The notional principal
subject to interest rate swap agreements at December 31, 1998 was $40,000 on
which the Company was receiving a weighted-average variable interest rate of
5.2% and paying a weighted-average fixed rate of 4.8%. The resulting reduction
in interest expense for 1998 was not significant.
 
Non-Recurring Items
 
  During 1998, the Company received an arbitration award in the amount, net of
expenses, of $4,189 as the result of a binding arbitration concerning a breach
of contract of which $1,269 represents payments due under the contract which
were included in operating income. The remaining $2,920 balance of the award
represents future payments which have been recognized as non-recurring income.
 
  During 1996, the Company recorded a provision for the settlement of claims
relating to a government investigation of certain testing irregularities at
the Company's Marion, Illinois facility of $6,000 and a $4,500 provision
relating to the Belgian contract dispute, both of which have been recognized
as other charges. See note titled "Legal Proceedings" included herein.
 
 
                                      36
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Accrued Liabilities
 
<TABLE>
<CAPTION>
                                                                 1998    1997
                                                                ------- -------
     <S>                                                        <C>     <C>
     Accrued liabilities consist of the following:
       Accrued payroll and employee benefits................... $16,045 $17,266
       Contract liabilities....................................  22,510  13,982
       Other...................................................   4,242   1,274
                                                                ------- -------
       Total accrued liabilities............................... $42,797 $32,522
                                                                ======= =======
</TABLE>
 
  Contract liabilities are principally reserves for anticipated losses on
certain incomplete contracts, reserves for contract adjustments and estimated
costs to perform future contractual services in connection with completed
contracts.
 
Income Taxes
 
    Components of Income Tax Expense (Benefit):
<TABLE>
<CAPTION>
                                                    1998      1997      1996
                                                   -------   -------   -------
     <S>                                           <C>       <C>       <C>
     Current:
       Federal...................................  $11,615   $ 9,528   $ 4,509
       State.....................................    2,371     1,666       829
     Deferred....................................   (2,590)   (2,863)   (3,805)
                                                   -------   -------   -------
     Income tax expense..........................  $11,396   $ 8,331   $ 1,533
                                                   =======   =======   =======
     Effective Tax Rate Reconciliation (percent):
<CAPTION>
                                                    1998      1997      1996
                                                   -------   -------   -------
     <S>                                           <C>       <C>       <C>
     Statutory federal tax rate..................     35.0%     35.0%    (35.0)%
     State income taxes, net.....................      4.1%      4.4%      2.4%
     Goodwill....................................      3.6%      4.7%     14.1%
     Fines and penalties.........................      --        --       33.0%
     Supplemental pension........................     (2.0)%    (2.6)%     --
     Foreign sales corporation tax benefit.......     (2.5)%    (3.6)%     --
     Other, net..................................      3.0%      6.0%      9.6%
                                                   -------   -------   -------
     Effective tax rate..........................     41.2%     43.9%     24.1%
                                                   =======   =======   =======
     Components of Deferred Tax Assets and
      Liabilities:
<CAPTION>
                                                    1998      1997
                                                   -------   -------
     <S>                                           <C>       <C>       <C>
     Deferred tax assets:
       Post-retirement benefits..................  $ 5,602   $ 5,084
       Accruals and reserves.....................   20,344    12,622
       Net operating loss carryforwards..........   11,500       --
       Other miscellaneous items.................    1,385     1,632
                                                   -------   -------
     Total deferred tax assets...................   38,831    19,338
     Deferred tax liabilities:
       Property, plant and equipment.............   10,125     9,725
       Deferred contract income..................    9,186     5,958
                                                   -------   -------
     Total deferred tax liability................   19,311    15,683
                                                   -------   -------
     Net deferred tax asset before valuation
      allowance..................................   19,520     3,655
     Valuation allowance.........................   (6,300)      --
                                                   -------   -------
     Net deferred tax asset......................  $13,220   $ 3,655
                                                   =======   =======
</TABLE>
 
                                      37
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Included in other current assets at December 31, 1998 and 1997,
respectively, are $6,436 and $5,706 of net current deferred tax assets.
 
  At December 31, 1998 the Company had net operating loss carryforwards
("NOLs") of approximately $29,606 for income tax purposes that expire from
2003 through 2009. The Company obtained the future benefit of these NOLs as a
result of the 1998 acquisition of the CMS Group. Future utilization of these
NOLs is subject to limitations. For financial reporting purposes, a valuation
allowance of $6,300 has been recorded to offset the deferred tax asset related
to the NOLs, which when realized will be applied to reduce goodwill related to
the acquisition of the CMS Group.
 
  Income taxes paid in 1998 and 1997 were $12,831 and $12,117, respectively.
Income taxes allocated for periods prior to 1997 were settled with Olin on a
current basis.
 
Employee Benefit Plans
 
  Pension benefits for substantially all domestic employees are provided
through the Company's sponsorship of a defined contribution plan (the "PRIME
Plan"). The PRIME Plan is intended to meet the requirements of Section 401(k)
of the Internal Revenue Code. The PRIME Plan allows the Company to match
participant contributions up to certain limits and to make age weighted profit
sharing contributions for eligible participants. Total expense for PRIME Plan
contributions in 1998 and 1997 was $6,341 and $6,244, respectively.
 
  Prior to the Distribution, substantially all domestic employees of the
Company participated in one of several Olin defined benefit pension plans. The
pension liability for active and retired employees participating in these Olin
plans prior to the Distribution remained with Olin. Additionally, prior to the
Distribution, Company employees participated in a defined contribution plan
available to essentially all domestic Olin employees which provided a match of
employee contributions. The total pension plan expense and matching
contribution was $7,872 in 1996.
 
  Certain Company employees participate in a supplemental non-qualified
pension plan (the "MSP Plan"). The Company's benefit obligation under the MSP
Plan is secured by life insurance agreements on the lives of the participants.
The Company owns the policies and pays the premiums. At December 31, 1998 and
1997 the discounted value of benefits payable under the MSP Plan, included in
other liabilities, was $7,713 and $8,093, respectively, and the cash value of
the life insurance policies, included in other assets, was $14,876 and
$13,453, respectively. MSP Plan expenses during 1998 and 1997 were $1,250 and
$1,280, respectively, which were offset by increases in insurance cash values
and policy proceeds of $1,318 and $1,490, respectively.
 
  Prior to the Distribution, certain Company employees participated in
supplemental non-qualified executive benefit plans for which the expenses were
$1,036 in 1996. The liability for payment of benefits accrued under these
plans prior to the Distribution remained with Olin.
 
  The Company has a defined benefit pension plan covering approximately 500
bargaining employees (the "Bargaining Employees Pension Plan"). The Bargaining
Employees Pension Plan provides a flat rate benefit based on the employee's
years of service. The Company's funding policy provides that payments to the
pension trust shall be at least equal to the minimum funding required by
applicable regulations.
 
  The Company provides certain post-retirement health care and life insurance
benefits for eligible domestic employees (the "Post-Retirement Benefit Plan").
The Post-Retirement Benefit Plan is unfunded. On August 1, 1998, the Company
amended the Post-Retirement Benefit Plan to limit eligibility to employees who
were employed prior to that date. The liability for similar benefits under
Olin plans for employees retired prior to the Distribution remained with Olin.
 
                                      38
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The status of the Bargaining Employees Pension Plan and Post-Retirement
Benefit Plan at December 31, 1998 and 1997 is summarized below:
 
<TABLE>
<CAPTION>
                                     Bargaining Employees    Post-Retirement
                                         Pension Plan          Benefit Plan
                                     ----------------------  -----------------
                                        1998        1997       1998     1997
                                     ----------  ----------  --------  -------
<S>                                  <C>         <C>         <C>       <C>
Change in benefit obligation:
Benefit obligation at beginning of
 year............................... $    1,709  $      --   $  9,642  $ 7,812
  Service cost......................        479         336       682      639
  Interest cost.....................        133          78       616      621
  Plan amendments...................        268         969       --       --
  Business Divestiture..............        --          --        262      --
  Actuarial losses/(gain)...........        (47)        328      (949)     668
  Benefits paid.....................         (9)         (2)     (212)     (98)
                                     ----------  ----------  --------  -------
Benefit obligation at end of year... $    2,533  $    1,709  $ 10,041  $ 9,642
                                     ==========  ==========  ========  =======
Change in plan assets:
Fair value of plan assets at
 beginning of year.................. $      --   $      --   $    --   $   --
  Actual return on plan assets......         13         --        --       --
  Company contributions.............        756           2       --       --
  Benefit paid......................         (9)         (2)      --       --
                                     ----------  ----------  --------  -------
Fair value of plan assets at end of
 year...............................        760         --        --       --
Under funded status of the plan.....     (1,773)     (1,709)  (10,041)  (9,642)
Unrecognized net actuarial (gain)
 losses.............................        281         328      (183)     573
Unamortized prior service cost......      1,074         898       --       --
                                     ----------  ----------  --------  -------
Accrued benefit cost................ $     (418) $     (483) $(10,224) $(9,069)
                                     ==========  ==========  ========  =======
Amounts recognized in the statement of
 financial position consists of:
  Accrued benefit liability......... $   (1,773) $   (1,380) $(10,224) $(9,069)
  Intangible asset..................      1,074         897       --       --
  Accumulated other comprehensive
   income...........................        281         --        --       --
                                     ----------  ----------  --------  -------
Net amount recognized............... $     (418) $     (483) $(10,224) $(9,069)
                                     ==========  ==========  ========  =======
Weighted-average assumptions as of
 December 31
Discount rate.......................       7.00%       7.25%     7.00%    7.25%
Expected return on plan assets......       8.50%       8.50%      --       --
Components of net periodic benefit
 cost
Service cost........................ $      479  $      336  $    682  $   639
Interest cost.......................        133          78       616      621
Expected return on plan assets......        (13)        --        --       --
Amortization of prior service cost..         91          71       --       --
Recognized net actuarial loss.......          1         --        --       --
                                     ----------  ----------  --------  -------
Net periodic benefit cost........... $      691  $      485  $  1,298  $ 1,260
                                     ==========  ==========  ========  =======
</TABLE>
 
 
                                      39
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The assumed health care cost trend rate has a significant effect on the
amounts reported for the Post-Retirement Benefits Plan. A one-percentage-point
change in the assumed health care cost trend rate would have the following
effects:
 
<TABLE>
<CAPTION>
                             1-Percentage-Point Increase 1-Percentage-Point Decrease
                             --------------------------- ---------------------------
     <S>                     <C>                         <C>
     Effect on total of
      service and interest
      cost components in
      1998..................            $ 42                        $ (48)
     Effect on benefit
      obligation as of
      December 31, 1998.....            $435                        $(477)
</TABLE>
 
Long-Term Incentive Plan
 
  The Company has adopted a long-term incentive plan to encourage selected
salaried employees to acquire a proprietary interest in the Company's growth
and performance and to attract and retain qualified individuals. The plan
provides the ability to grant stock options, stock appreciation rights,
restricted stock and restricted stock units, performance awards, and other
stock-based awards.
 
  At December 31, 1998, a total of 350,000 shares of common stock were
reserved for issuance in connection with restricted stock unit grants, of
which a total of 341,000 restricted stock units have been granted to certain
officers and employees of the Company. Unearned compensation was charged to
shareholder's equity for the market value of the restricted shares when
granted and is being amortized over the vesting period expected to expire in
January 2000. Compensation expense recognized on restricted stock units in
1998 and 1997 was $2,089 and $1,983, respectively.
 
  At December 31, 1998, a total of 500,000 shares of common stock were
reserved for issuance in connection with stock option grants of which a total
of 250,000 and 25,000 stock options were granted to certain key employees on
January 2, and May 5, 1998, respectively. The exercise price of the January
and May options is $33.88 and $47.44 per share, respectively, which was the
fair market value of the Company's common stock on the date of grant. These
options generally become vested in one-third installments over a three-year
period beginning one year from the date of grant and have a ten-year term from
the date of grant. All options granted were outstanding at December 1998. The
Company accounts for stock-based employee compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees; accordingly, no compensation cost has been
recognized for the stock options granted.
 
  Had compensation expense been determined for awards under the plan based
upon fair values at the grant dates and the resulting expense amortized over
the options' vesting period in accordance with Statement of Financial
Accounting Standards 123, Accounting for Stock-Based Compensation, the
Company's net income and income per share would have been reduced to the pro
forma amounts indicated below. For purposes of pro forma disclosures, the fair
value for options was estimated at the date of grant using Black-Scholes
option pricing model with the following weighted-average assumptions for 1998:
risk free interest rate range of 5.84% to 5.96% depending on grant date;
dividend yield of 1.40%; volatility factors of the expected market price of
the Company's stock of 41.3%; and an expected life ranging from 2 to 7 years.
The per share weighted-average fair value of options granted during 1998 was
$12.24. The Company's pro forma information for the year ended December, 1998,
the first year which the Company had stock option grants, is as follows:
 
<TABLE>
<CAPTION>
                                                                         1998
                                                                        -------
     <S>                                                                <C>
     Pro forma net income.............................................. $14,609
     Pro forma income per share:
       Basic........................................................... $  2.84
       Diluted......................................................... $  2.72
</TABLE>
 
 
                                      40
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Shareholder Rights Plan
 
  The Company has adopted a Shareholder Rights Plan which is designed to
prevent a potential acquirer from gaining control of the Company without
offering a fair price to all shareholders. Each right entitles a shareholder
(other than the acquirer) to buy one-thousandth of a share of Series A
Participating Cumulative Preferred Stock at an exercise price of $55. The
rights are exercisable only if a person acquires more than 15% of the
Company's common stock or if the Board of Directors so determines following
the commencement of a tender or exchange offer to acquire more than 15% of the
Company's common stock. If any person acquires more than 15% of the Company's
common stock and in the event of a subsequent merger or combination, each
right will entitle the holder (other than the acquirer) to purchase stock or
other property of the acquirer having a value of twice the exercise price. The
rights will expire on December 19, 2006, unless earlier redeemed at $0.01 per
right by the Company.
 
Commitments and Contingencies
 
  The Company leases certain properties, such as manufacturing, warehousing
and office space, and data processing and office equipment. Leases covering
these properties generally contain escalation clauses based on increased costs
of the lessor, primarily property taxes, maintenance and insurance and have
renewal or purchase options. Total rent expense charged to operations amounted
to $5,648 in 1998, $5,515 in 1997 and $5,222 in 1996 (sublease income is not
significant). Future minimum rent payments under operating leases having
initial or remaining non-cancelable lease terms in excess of one year at
December 31, 1998 are as follows: $5,253 in 1999; $4,506 in 2000; $2,914 in
2001; $2,484 in 2002; $1,962 in 2003.
 
  In the ordinary course of business, the Company is contingently liable for
performance under letters of credit totaling approximately $8,543 at December
31, 1998. The Company does not believe that exposure to loss is likely and is
of the opinion that the fair value of these instruments is zero.
 
Environmental
 
  The Company is party to various governmental and private environmental
actions associated with waste disposal, manufacturing and test sites.
Environmental provisions charged to operations were $830 in 1998, and none in
1997 and 1996. The consolidated balance sheets include reserves for future
environmental expenditures to investigate and remediate known sites amounting
to $1,834 and $1,186 at December 31, 1998 and 1997, respectively, which are
classified as other non-current liabilities.
 
  During 1998, the Company agreed to a settlement regarding costs associated
with environmental remediation at a location where the Company formerly had
manufacturing operations. As a result of this settlement, a charge to
operations of $800 was made during 1998.
 
  Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting
from investigator studies, advances in technology, changes in environmental
laws and regulations and their application, the scarcity of reliable data
pertaining to identified sites, the difficulty in assessing the involvement
and financial capability of other potentially responsible parties and the time
periods (sometimes lengthy) over which site remediation occurs. It is possible
that some of these matters (the outcomes of which are subject to various
uncertainties) may be resolved unfavorably against the Company.
 
Legal Proceedings
 
  The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. In the opinion of
management, none of these matters will materially affect the Company's
consolidated financial position or results of operations.
 
                                      41
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  In May 1994, the Company discovered that an employee may have modified
inspection and testing software used on certain medium caliber ammunition
production lines at its Marion, Illinois testing facility to permit
inspections to be performed at tolerances which may not have been fully
compliant with applicable contract specifications. Upon discovering the issue,
the Company promptly notified U.S. Government contracting representatives,
voluntarily disclosed the circumstances then known to the Department of
Defense's Office of the Inspector General and expressed its intent to fully
investigate the matter and take all necessary corrective actions. In September
of 1996 this matter was settled with the U.S. Government for $8,000. The
settlement charges, of which $6,000 was charged to operations during 1996, are
included in "Other Charges" in the accompanying consolidated statements of
operations.
 
  The Company is involved in a contract dispute with the Belgium Ministry of
Defense related to the 1985 sale of artillery ammunition. The Belgium Ministry
of Defense has alleged improprieties committed by the Belgium national who
represented the Company in the transaction. Based on these allegations, the
Belgium Ministry of Defense withheld final payment on the contract and the
Company agreed to extend the letter of credit related to the contract
guarantee pending a decision by the Belgium courts on the underlying contract
dispute. The trial court ruled against the Company. The decision has been
appealed. A provision for the estimated settlement, in the amount of $4,500,
is included in "Other Charges" in the accompanying 1996 consolidated
statements of operations. However, since the net liability for this matter
including legal fees and costs, monetary judgments, and cost settlements was
assumed by Olin in conjunction with the Distribution the balance sheet does
not include any reserves and there have been no subsequent charges to
operations related to this matter.
 
Related Party Transactions
 
  The Company and Olin have entered into an agreement which generally provides
that Olin will purchase from the Company, at prices to be agreed upon from
time to time, a certain percentage of the propellant powder required in any
calendar year by its Winchester Division, starting at 100% of such
requirements for 1997 for Ball Powder(R) propellant and decreasing annually to
70% for 2002. The prices are expected to be at a range of discounts from
competitive prices depending on requirements purchased. Propellant sales to
Olin's Winchester Division were $15,832 in 1998, $16,547 in 1997 and $15,813
in 1996.
 
  The Company obtained various transition related services from Olin after the
distribution. These services include, but are not limited to, administration
of employee benefit programs, tax compliance, internal audit, management
information systems, and treasury. The cost of these services, was
approximately $1,389 during 1997 and not significant during 1998.
 
  Prior to 1997, the Company was charged by Olin for the Company's share of
expenses of certain centralized activities using various allocation bases.
These services were similar to the transition services and included legal and
general corporate functions. Charges to the Company for centralized corporate
services were $4,273 in 1996, which included a number of one time costs
associated with the Distribution.
 
                                      42
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Net Income Per Share
 
  The following sets forth the number of shares of common stock included in
the computation of basic and diluted net income per share for the years ended
December 31, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                    1998      1997      1996
                                                  --------- --------- ---------
                                                                        (Pro
                                                                       forma)
     <S>                                          <C>       <C>       <C>
     Denominator for basic net income per share:
       Weighted average shares outstanding and
        vested................................... 5,136,915 5,173,669 5,220,276
     Effect of dilutive securities:
       Employee Stock Options ...................    29,212       --        --
       Restricted Stock Unit Grants..............   212,565   113,239       --
                                                  --------- --------- ---------
                                                    241,777   113,239       --
                                                  --------- --------- ---------
     Denominator for diluted net income per
      share...................................... 5,378,692 5,286,908 5,220,276
                                                  ========= ========= =========
</TABLE>
 
  The number of shares included in the 1996 pro forma computation assumes that
all 5,220,276 common shares outstanding immediately after the Distribution
were outstanding for all periods prior to the Distribution.
 
Accumulated Other Comprehensive Income
 
  The components of other comprehensive income are as follows:
 
<TABLE>
<CAPTION>
                                              Currency Translation   Minimum Pension
                                                  Adjustments      Liability Adjustment Total
                                              -------------------- -------------------- -----
     <S>                                      <C>                  <C>                  <C>
     Balance at December 31, 1996 ..........          $--                 $ --          $ --
       Currency translation adjustment......           (24)                 --            (24)
                                                      ----                -----         -----
     Balance at December 31, 1997...........           (24)                 --            (24)
       Currency translation adjustment......             4                  --              4
       Minimum pension liability adjustment.           --                  (281)         (281)
                                                      ----                -----         -----
     Balance at December 31, 1998...........          $(20)               $(281)        $(301)
                                                      ====                =====         =====
</TABLE>
 
Business Segment Information
 
  The Company's operations are classified into two reportable segments which
reflect management's organization of operations around business units that
offer different products and services. Each reportable segment is managed
separately and requires different technology and marketing strategies. The
Ordnance and Tactical Systems segment ("Ordnance") includes the development
and production of ammunition, propellant, shaped charged warheads and
precision metal assemblies. Additionally, Ordnance provides explosive load
assemble and pack services. The Aerospace and Electronics segment
("Aerospace") includes the design, development and manufacturing of space,
electronic, and solid propellant products and systems.
 
  The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Corporate administration costs
are allocated between reportable segments based on sales, assets and
personnel. Corporate interest expense is allocated between reportable segments
based on working capital employed. Company management evaluates performance
based on segment profit or loss from operations before unusual items and
income taxes.
 
  The Company's largest customer is the U.S. Government. Sales from contracts
with the U.S. Government or U.S. Government prime contractors were
approximately 67%, 66% and 78% of total 1998, 1997 and 1996 sales,
respectively. Export sales from the United States were $52,984, $67,867 and
$28,875 in 1998, 1997 and 1996, respectively.
 
                                      43
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
The following table presents information about reportable segment operations
and assets:
 
<TABLE>
<CAPTION>
                                                       1998     1997     1996
                                                     -------- -------- --------
   <S>                                               <C>      <C>      <C>
   Revenues from external customers:
     Ordnance......................................  $360,675 $358,879 $341,655
     Aerospace.....................................   134,593  131,945  129,833
                                                     -------- -------- --------
   Total consolidated revenues.....................   495,268  490,824  471,488
                                                     ======== ======== ========
   Depreciation and amortization
     Ordnance......................................    14,256   13,624   13,296
     Aerospace.....................................     5,434    5,753    6,457
     All other.....................................       352      331      412
                                                     -------- -------- --------
   Total consolidated depreciation and
    amortization...................................    20,042   19,708   20,165
                                                     ======== ======== ========
   Interest expense:
     Ordnance......................................     1,676      957    6,812
     Aerospace.....................................     1,599    2,778    2,444
                                                     -------- -------- --------
   Total consolidated interest expense.............     3,275    3,735    9,256
                                                     ======== ======== ========
   Segment profit (loss):
     Ordnance......................................    18,589   14,428   (1,145)
     Aerospace.....................................     6,150    4,528    5,276
                                                     -------- -------- --------
   Total segment profit............................    24,739   18,956    4,131
   Reconciling items:
     Non-recurring income..........................     2,920      --       --
     Non-recurring charges.........................       --       --   (10,500)
                                                     -------- -------- --------
   Total consolidated income (loss) before income
    taxes..........................................    27,659   18,956   (6,369)
                                                     ======== ======== ========
   Segment assets:
     Ordnance......................................   348,264  172,318  241,300
     Aerospace.....................................   107,922  115,141  105,838
                                                     -------- -------- --------
   Total segment assets............................   456,186  287,459  347,138
   Corporate assets................................    15,149    8,832   26,605
                                                     -------- -------- --------
   Total consolidated assets.......................   471,335  296,291  373,743
                                                     ======== ======== ========
   Expenditures for additions to long lived assets:
     Ordnance......................................    10,972    6,531    9,885
     Aerospace.....................................     6,840    3,793    3,388
     All other.....................................        82      317      --
                                                     -------- -------- --------
   Total expenditures for additions to long-lived
    assets.........................................  $ 17,894 $ 10,641 $ 13,273
                                                     ======== ======== ========
</TABLE>
 
                                       44
<PAGE>
 
                           PRIMEX TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Quarterly Financial Data (Unaudited)
 
  The following is a summary of unaudited quarterly operating results for
years ending December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                              First    Second   Third    Fourth
                                             Quarter  Quarter  Quarter  Quarter
                                             -------- -------- -------- --------
     <S>                                     <C>      <C>      <C>      <C>
     1998:
     Sales ................................. $112,251 $111,068 $112,753 $159,196
     Gross Profit ..........................   23,462   26,916   24,146   27,788
     Operating Income ......................    5,217    5,458    5,905    8,723
     Net Income ............................    2,968    5,064    3,800    4,431
     Net Income Per Share:
       Basic ............................... $   0.58 $   0.98 $   0.74 $   0.87
       Diluted ............................. $   0.55 $   0.94 $   0.71 $   0.82
     1997:
     Sales.................................. $114,799 $112,921 $118,861 $144,243
     Gross Profit...........................   19,086   23,166   22,173   24,809
     Operating Income.......................    3,387    6,079    5,734    5,715
     Net Income.............................      871    2,864    3,027    3,863
     Net Income Per Share:
       Basic................................ $   0.17 $   0.55 $   0.58 $   0.75
       Diluted.............................. $   0.17 $   0.55 $   0.57 $   0.72
</TABLE>
 
Subsequent Event (Unaudited)
 
  On February 2, 1999, subsequent to the date of the independent auditors
report, the Company's Board of Directors authorized a 2-for-1 split of its
common stock payable March 22, 1999, in the form of a 100% stock dividend, for
shareholders of record on February 22, 1999. Pro forma per share amounts
giving effect to the stock split are as follow:
 
<TABLE>
<CAPTION>
                                             First   Second   Third   Fourth
                                            Quarter  Quarter Quarter  Quarter
                                            -------  ------- -------  -------
     <S>                                    <C>      <C>     <C>      <C>
     Pro Forma Net Income (Loss)Per Share:
       1998:Basic.......................... $ 0.29    $0.49  $ 0.37   $ 0.43
          Diluted ......................... $ 0.28    $0.47  $ 0.35   $ 0.41
       1997:Basic ......................... $ 0.08    $0.28  $ 0.29   $ 0.38
          Diluted ......................... $ 0.08    $0.27  $ 0.29   $ 0.36
       1996:Basic.......................... $(0.54)   $0.09  $(0.29)  $(0.02)
          Diluted ......................... $(0.54)   $0.09  $(0.29)  $(0.02)
</TABLE>
 
                                      45
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Not Applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information relating to executive officers is included in this report at the
end of Part I under the caption "Executive Officers of the Company."
 
  The information relating to directors appearing under the caption "Proposal
No. 1--Election of Directors" in the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders and filed with the Securities and Exchange
Commission is incorporated herein by reference.
 
  The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, appearing under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement
for the 1999 Annual Meeting of Shareholders and filed with the Commission is
incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information contained under the caption "Executive Compensation"
contained in the definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders and filed with the Commission is incorporated herein by
reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information contained under the captions "Security Ownership of
Directors and Officers" and "Certain Beneficial Owners" contained in the
definitive Proxy Statement for the 1999 Annual Meeting of Shareholders and
filed with the Commission is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information contained under the caption "Certain Relationships and
Related Transactions" contained in the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders and filed with the Commission is incorporated
herein by reference.
 
                                      46
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a)Documents Filed as Part of this Report:
 
  (1)Financial Statements.
 
    The following is a list of all the Consolidated Financial Statements
    included in Item 8 of Part II.
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
   <S>                                                                     <C>
   Independent Auditors' Report--Ernst & Young LLP........................  25
   Independent Auditors' Report--KPMG LLP.................................  26
   Consolidated Balance Sheets as of December 31, 1998 and 1997...........  27
   Consolidated Statements of Operations, Years Ended December 31, 1998,
    1997 and 1996.........................................................  28
   Consolidated Statements of Shareholders' Equity, Years Ended December
    31, 1998, 1997 and 1996...............................................  29
   Consolidated Statements of Cash Flow, Years Ended December 31, 1998,
    1997 and 1996.........................................................  30
   Notes to the Consolidated Financial Statements.........................  31
</TABLE>
 
  (2)Financial Statement Schedules
 
  All schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated Financial
Statements or notes thereto.
 
  (3)Exhibits
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  2      Stock Purchase Agreement by and between the Company and Daimler-Benz
         Finance Corporation, dated October 9, 1998. Incorporated by reference
         to Exhibit 2.1 to the Company's Form 8-K filed November 23, 1998 (SEC
         File No. 0-28942). (Pursuant to Item 601(b)(2) of Regulation S-K, the
         Company hereby agrees to furnish supplementally to the Commission,
         upon request, a copy of any schedule or exhibit omitted from such
         Stock Purchase Agreement as filed herewith.)
  3.1    Amended and Restated Articles of Incorporation. Incorporated by
         reference to Exhibit 3.1 to the Company's Form 8-K/A filed January 24,
         1997 (SEC File No. 0-28942).
  3.2    Amended and restated By-laws of the Company, dated January 1, 1999.
  4.1    Amended and restated Articles of Incorporation. Incorporated by
         reference to Exhibit 3.1 to the Company's Amendment No. 1 to the Form
         8-K/A filed January 25, 1997 (SEC File No. 0-28942).
  4.2    Amended and restated By-laws of the Company, dated January 1, 1999
         (filed as Exhibit 3.2 hereto).
  4.3    Rights Agreement, dated December 19, 1996, between the Company and
         ChaseMellon Shareholder Services, L.L.C. Incorporated by reference to
         Exhibit 4.4 to the Company's Form 10-K filed March 27, 1997 (SEC File
         No. 0-28942).
  4.4    Rights Certificate. Incorporated by reference as Exhibit B to Exhibit
         4.4 to the Company's Form 10-K filed March 27, 1997 (SEC File No. 0-
         28942)
  4.5    1996 Long Term Incentive Plan of Primex Technologies, Inc., as
         amended.*
  4.6    Primex Technologies, Inc. Restoration Bonus Plan, as amended.*
  4.7    Primex Technologies, Inc. Stock Plan for Nonemployee Directors, as
         amended.*
  4.8    The Employment Transition Benefit Plan of Primex Technologies, Inc.,
         as amended.*
 10.1    Executive Agreement between Primex Technologies, Inc. and James G.
         Hascall dated May 5, 1998.*
 10.2    Executive Agreement between Primex Technologies, Inc. and Angelo A.
         Catani dated May 5, 1998.*
</TABLE>
 
 
                                      47
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.3    Executive Agreement between Primex Technologies, Inc. and J. Douglas
         DeMaire dated May 5, 1998.*
 10.4    Executive Agreement between Primex Technologies, Inc. and Michael S.
         Wilson dated May 5, 1998.*
 10.5    Executive Agreement between Primex Technologies, Inc. and William W.
         Smith dated May 5, 1998.*
 10.6    Form of Executive Agreement for Company executives other than the
         Named Executive Officers.
 10.7    Primex Technologies, Inc. Stock Plan for Nonemployee Directors, as
         amended (filed as Exhibit 4.7 hereto).
 10.8    1996 Long Term Incentive Plan of Primex Technologies, Inc. as amended
         (filed as Exhibit 4.5 hereto).*
 10.9    Technology Transfer and License Agreement dated December 30, 1996
         between Primex Technologies, Inc. and Olin Corporation. Incorporated
         by reference to Exhibit 10.2 to the Company's Form 8-K/A filed January
         24, 1997 (SEC File No. 0-28942).
 10.10   Assumption of Liabilities and Indemnity Agreement dated December 31,
         1996 between Primex Technologies, Inc. and Olin Corporation.
         Incorporated by reference to Exhibit 10.6 to the Company's Form 8-K/A
         filed January 24, 1997 (SEC File No. 0-28942).
 10.11   Covenant Not to Compete Agreement dated December 31, 1996 between
         Primex Technologies, Inc. and Olin Corporation. Incorporated by
         reference to Exhibit 10.7 to the Company's Form 8-K/A filed January
         24, 1997 (SEC File No. 0-28942).
 10.12   Primex Technologies, Inc. Incentive Compensation Plan, as amended.
 10.13   Transition Bonus Program of Primex Technologies, Inc., as amended.
 10.14   Building and Igloo Lease between U.S. Fish and Wildlife Service and
         Primex Technologies, Inc. dated January 1, 1997. Incorporated by
         reference to Exhibit 10.23 to the Company's 10-K filed March 19, 1998
         (SEC File No. 0-28942).
 10.15   Land Lease Agreement between D. Hebden Porteus, David M. Haig, Fred C.
         Weyand and Paul M. Ganley, The Connecticut National Bank and Merced
         Associates (includes Primex Technologies, Inc. through assignment)
         dated December 29, 1986. Incorporated by reference to Exhibit 10.24 to
         the Company's 10-K filed March 19, 1998 (SEC File No. 0-28942).
 10.16   Lease Agreement between Zaser and Longston, Inc. and Rocket Research
         Company (now Primex Aerospace Company) dated July 14, 1982.
         Incorporated by reference to Exhibit 10.25 to the Company's 10-K filed
         March 19, 1998 (SEC File No. 0-28942).
 10.17   Lease Agreement between The Northwestern Mutual Life Insurance Company
         and Rheem Manufacturing Company (now U.S. Ordnance Company) dated July
         1, 1956. Incorporated by reference to Exhibit 10.26 to the Company's
         10-K filed March 19, 1998 (SEC File No. 0-28942).
 10.18   Facility Lease between The Connecticut National Bank, Merced
         Associates and Physics International Company (now Primex Tactical
         Systems, Inc.) dated December 29, 1986. Incorporated by reference to
         Exhibit 10.27 to the Company's 10-K filed March 19, 1998 (SEC File No.
         0-28942).
 10.19   Lease Agreement between Heger Realty Corporation and Aerojet Ordnance
         Company (now U.S. Ordnance Company) dated October 15, 1985.
         Incorporated by reference to Exhibit 10.28 to the Company's 10-K filed
         March 19, 1998 (SEC File No. 0-28942).
 10.20   Lease Agreement between Hitech, Inc. (now Hitech Holdings, Inc.) and
         IP Timberlands Operating Company, Ltd. dated May 26, 1995.
 10.21   Lease Agreement between Hitech, Inc. (now Hitech Holdings, Inc.) and
         IP Timberlands Operating Company, Ltd. dated May 20, 1985.
 10.22   Lease Agreement between CMS Defense Systems, Inc. (now Hitech
         Holdings, Inc.) and the Board of Education of the Stone County School
         District dated September 1, 1998.
</TABLE>
 
 
                                       48
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.23   Lease Agreement between OTI International, Inc. (now Hitech Holdings,
         Inc. d/b/a CMS Defense Systems) and Richard R. Bennett and Betty J.
         Bennett dated February 27, 1994.
 10.24   Stock Purchase Agreement by and between Primex Technologies, Inc. and
         Daimler-Benz Finance Corporation, dated October 9, 1998. Incorporated
         by reference to Exhibit 2.1 to the Company's Form 8-K/A filed November
         23, 1998 (SEC File No. 0-28942). (Pursuant to Item 601(b)(2) of
         Regulation S-K, the Company hereby agrees to furnish supplementally to
         the Commission, upon request, a copy of any schedule or exhibit
         omitted from such Stock Purchase Agreement as filed herewith.)
 16      Letter of consent from KPMG LLP regarding change in certifying
         accountant. Incorporated by reference to Exhibit 16 to the Company's
         Form 8-K/A filed February 19, 1997 (SEC File No. 0-28942).
 21      List of subsidiaries of Primex Technologies, Inc.
 23.1    Consent of KPMG LLP.
 23.2    Consent of Ernst & Young LLP.
 27      Financial Data Schedule.
</TABLE>
--------
*  Denotes a management contract or compensatory plan or arrangement required
   to be filed as an exhibit to Item 14(c) of Form 10-K.
 
(b)Reports on Form 8-K:
 
  Form 8-K/A filed November 23, 1999.
 
  The Company filed a Current Report on Form 8-K, during the fourth quarter of
1998, which report was dated November 6, 1998 and reported the acquisition of
CMS, Inc. and Defense Research Incorporated (the "CMS Group"). That Current
Report on form 8-K was subsequently amended to include the financial
statements of the CMS Group companies required to be filed in accordance with
Regulation S-X.
 
                                      49
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          Primex Technologies, Inc.
                                          (Registrant)
March 2, 1999
 
                                                    /s/ George H. Pain
                                          By: _________________________________
                                              George H. Pain Vice President,
                                               General Counsel and Secretary
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
 
              Signature                      Capacity                Date
 
        /s/ James G. Hascall           Chairman of the          March 2, 1999
-------------------------------------   Board and Chief
          James G. Hascall              Executive Officer
                                        and Director
 
       /s/ J. Douglas DeMaire          President and            March 2, 1999
-------------------------------------   Director
         J. Douglas DeMaire
 
         /s/ John E. Fischer           Vice President and       March 2, 1999
-------------------------------------   Chief Financial and
           John E. Fischer              Accounting Officer
 
       /s/ Edwin M. Glasscock          Director                 March 2, 1999
-------------------------------------
         Edwin M. Glasscock
 
           /s/ David Lasky             Director                 March 2, 1999
-------------------------------------
             David Lasky
 
          /s/ Bob Martinez             Director                 March 2, 1999
-------------------------------------
            Bob Martinez
 
       /s/ William B. Mitchell         Director                 March 2, 1999
-------------------------------------
         William B. Mitchell
 
          /s/ Robert H. Rau            Director                 March 2, 1999
-------------------------------------
            Robert H. Rau
 
       /s/ Anthony W. Ruggiero         Director                 March 2, 1999
-------------------------------------
         Anthony W. Ruggiero
 
         /s/ Leon E. Salomon           Director                 March 2, 1999
-------------------------------------
           Leon E. Salomon
 
                                      50