-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LxjhCCysuC4leXjGI72xdlN7RQo1rkSeDR7cgxJLTMXWrShkKah7jwz877dqCru7 YXxkyozQBGfCUD56MptM/g== 0000949111-97-000011.txt : 19970325 0000949111-97-000011.hdr.sgml : 19970325 ACCESSION NUMBER: 0000949111-97-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OREGON METALLURGICAL CORP CENTRAL INDEX KEY: 0000074856 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 930448167 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01339 FILM NUMBER: 97560699 BUSINESS ADDRESS: STREET 1: 530 W 34TH AVE STREET 2: P O BOX 580 CITY: ALBANY STATE: OR ZIP: 97321 BUSINESS PHONE: 5039264281 MAIL ADDRESS: STREET 1: 530 34TH AVENUE SW STREET 2: PO BOX 580 CITY: ALBANY STATE: OR ZIP: 97321 10-K 1 OREMET 10-K 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ to ________ COMMISSION FILE NUMBER 0-1339 OREGON METALLURGICAL CORPORATION -------------------------------------------------- (Exact name of registrant as specified in its charter) Oregon 93-0448167 ------------------------------ ------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 530 34th Ave. S.W., Albany, OR 97321 ------------------------------- ------------------------- (Address of principal executive (Zip Code) offices) Registrant's Telephone number, including area code: (541) 967-9000 -------------- Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class which is registered ------------------- --------------------- None None -------------------------- ------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 Par Value -------------------------------------------- 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if the 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based on the closing sales price of the Common Stock on March 17, 1997 as reported on the Nasdaq National Market, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $327,977,161. The number of shares outstanding of the registrant's common stock, $1.00 par value was 16,196,403 at March 17, 1997. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Selected sections of the Oregon Metallurgical Corporation Annual Report to Shareholders for 1996 are incorporated by reference in Parts II and IV of Form 10-K as stated herein. Selected sections of the Oregon Metallurgical Corporation Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 1997, are incorporated by reference in Part III of Form 10-K as stated herein. TABLE OF CONTENTS
Page ------------------------------------------------- Year 1996 Year 1996 March 14, 1997 Item Form 10-K Annual Report Proxy Stmt. - ---- --------- ------------- -------------- PART I 1. Business.............................................. 2 --- --- The Company.................................... 2 --- --- Strategy and Outlook .......................... 2 --- --- Industry Overview.............................. 3 --- --- Production Process............................. 4 --- --- Products....................................... 5 --- --- Electron Beam Furnace.......................... 7 --- --- Raw Materials.................................. 8 --- --- Markets........................................ 9 --- --- Marketing, Distribution and Service Centers.... 10 --- --- International and Export Sales................. 11 --- --- Backlog........................................ 11 --- --- Competition.................................... 12 --- --- Employee Relations............................. 14 --- --- Research, Technical and Product Development... 14 --- --- Joint Ventures................................. 14 --- --- Regulatory and Environmental Matters........... 14 --- --- 2. Properties............................................ 16 --- --- 3. Legal Proceedings..................................... 16 --- --- 4. Submission of Matters to a Vote of Security Holders... 16 --- --- PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters.................. 17 41 --- 6. Selected Financial Data............................... 17 53 --- 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 17 34-40 --- 8. Financial Statements and Supplementary Data........... 17 17-32 --- 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.............. 17 --- --- PART III 10. Directors and Executive Officers of the Registrant.... 18 --- 4-5 11. Executive Compensation................................ 18 --- 6-15 12. Security Ownership of Certain Beneficial Owners and Management................................... 18 --- 2-3 13. Certain Relationships and Related Transactions........ 18 --- 14 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 19 --- ---
ITEM 1. BUSINESS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF THE COMPANY. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, DEPENDENCE ON AEROSPACE, UNCERTAINTY OF EMERGING GOLF MARKET, HIGHLY COMPETITIVE MARKET, SUBSTANTIAL EXCESS PRODUCTION CAPACITY, PLANNED SIGNIFICANT INVESTMENT IN ELECTRON BEAM FURNACE, DEPENDENCE ON ESSENTIAL MACHINERY AND EQUIPMENT, DEPENDENCE ON RAW MATERIALS AND SERVICES, ENVIRONMENTAL REGULATION, AND LABOR AGREEMENTS. THE COMPANY The Company is one of two U.S. integrated producers and distributors of titanium sponge, ingot, mill products and castings for use in the aerospace, industrial, golf and military markets. Since 1993, the Company has developed new market opportunities for titanium, expanded its distribution network, increased its production capacity, and improved its manufacturing efficiency. As a result, management believes that it is well-positioned to capitalize on improving and emerging markets in the titanium industry. In 1996, the Company reported net sales of $236.9 million, operating income of $35.1 million and net income of $22.3 million. On August 26, 1996, the Company completed an Offering (the Offering) of 4.6 million shares of its Common Stock for a price of $23.75 per share. Proceeds from the Offering, net of underwriting fees and expenses, amounted to $103 million. The proceeds will be used to construct a new EB furnace and raw material processing facility, expand the Company's distribution business, and for working capital and other general corporate purposes. On September 20, 1994, the Company completed the acquisition of the net assets and subsidiaries of the Titanium Industries Distribution Group from Kamyr, Inc. The acquired business is being operated under the name of Titanium Industries, Inc., an 80% owned subsidiary of OREMET. TI operates full-line titanium metal service centers in the U.S., U.K., Germany and Canada, and it produces small diameter titanium bar, weld wire and fine wire. The acquisition was accounted for as a purchase, with the results of TI included in the Company's financial statements from the acquisition date. The Company was incorporated in Oregon in 1955 and began operations in 1956. The Company funded its growth internally and through investments by corporate partners. In December 1987, the Company repurchased its Common Stock from its major corporate partner and immediately sold shares of its Common Stock to the ESOP. Initially, the ESOP owned approximately 67% of the Common Stock and at December 31, 1996, the ESOP's ownership interest was approximately 5%. STRATEGY AND OUTLOOK Beginning in 1993, several members of the Company's current executive management team, including Carlos E. Aguirre, the President and Chief Executive Officer, joined the Company from other companies within the titanium industry. The Company's management team intends to continue to focus on the following strategic objectives to further improve its competitive position: o MAINTAIN LEADERSHIP IN NEW MARKET APPLICATIONS AND PRODUCTS OREMET has developed many new and improved applications for titanium with or for its customers. Sales for non-aerospace applications have increased from $12.7 million in 1993 to $135.1 million in 1996. In addition to the golf market, OREMET has established a major presence in new markets such as armor for sale to the military and high purity sponge for the electronics industry. For the aerospace industry, OREMET has developed a unique production process for titanium aluminides. As a result of these efforts, the Company has diversified its revenue base while maintaining the flexibility to respond to changing market conditions. 2 o BENEFIT FROM VERTICAL INTEGRATION AND SCRAP HANDLING CAPABILITIES OREMET is one of only two companies in North America which are vertically integrated in the production of sponge and mill products. The Company is a large producer of titanium sponge and a large purchaser and processor of titanium scrap, two key materials used in the manufacture of mill products. The ability to both produce and purchase sponge or scrap allows the Company considerable flexibility in optimizing its mix of raw material purchases and reduces the Company's exposure to raw material price fluctuations. As a result of this flexibility, the Company is well positioned to control the costs of producing titanium ingot and mill products. o EXPAND SERVICE CENTER BUSINESS The Company's distribution strategy is to establish new titanium metal service centers in growth markets throughout the world. The Company's and TI's nine full-line titanium metal service centers located in the U.S., U.K., France, Germany and Canada significantly enhance OREMET's distribution capabilities. Historically, TI's service centers have reported results that are more stable and less cyclical than the Company's core manufacturing business. These service centers also provide OREMET with timely feedback from a wide range of customers which is useful in determining new market applications and product development. o INVEST IN A NEW ELECTRON BEAM FURNACE The Company intends to use a portion of the net proceeds from the Offering to build a 20 million pound capacity EB furnace. In addition to the increased melt capacity, the Company believes that the EB furnace will replace some of its less efficient melting capacity, lower production costs, improve flexibility in using various raw materials and provide a broader range of products. The Company estimates that the EB furnace will be partially operational during the first half of 1998 and fully operational in 2000. INDUSTRY OVERVIEW Titanium was first commercially produced in the 1950s. Titanium's superior strength-to-weight ratio, stability at high temperatures and corrosion resistance make it well suited for the aerospace and jet engine market. Historically, approximately 70% to 80% of U.S. titanium consumption has been for aerospace applications both in the commercial and military sectors. The aerospace industry has historically been characterized by severe cyclicality, which has had a significant impact on the sales and profitability of titanium producers, including OREMET. The last peak in the titanium industry cycle occurred in the 1988-1990 period when domestic industry mill product shipments averaged over 50 million pounds per year. In 1991, U.S. titanium industry shipments declined by approximately 35% to 34 million pounds. This decline was primarily due to lower demand resulting from a slump in the commercial aerospace industry and the curtailment or cancellation of military programs resulting from the end of the Cold War. Data reported by the U.S. Geological Survey ("USGS") indicate that domestic industry mill product shipments increased by approximately one million pounds per year in 1992 and 1993, while they dropped to approximately 35 million pounds in 1994. The USGS reported that U.S. industry shipments of titanium mill products increased 30% to 57 million pounds in 1996, compared to 44 million pounds in 1995. The improvement in industry shipments is the result of increased demand from the commercial aerospace industry and from the producers of golf clubheads. Beginning in 1995, demand for titanium significantly strengthened due primarily to increased demand from the aerospace market. Historically, commercial airlines have tended to place new aircraft orders when their operating profits were improving. In 1995, the domestic commercial airline industry reported significantly higher operating profits than the prior year, and in the second half of 1995 aircraft manufacturers began to increase aircraft build rates. Newer wide body planes, such as the Boeing 777 and the Airbus A-330 and A-340, use a higher percentage of titanium in their airframes, engines and parts (as measured by total fly weight) than narrow body planes. "Fly weight" is the empty weight of a finished 3 aircraft with engines but without fuel or passengers. The Boeing 777, for example, utilizes titanium for approximately 9% of total fly weight, compared to between 2% and 3% on the older 737, 747 and 767 models. The following table reflects aircraft orders (number of planes) for the three major aircraft producers (based on company reports):
MAJOR COMMERCIAL AIRCRAFT PRODUCERS --------------------------------------- Aircraft Orders (Number of Planes) ---------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Boeing ............................... 717 346 119 247 243 McDonnell Douglas .................... 47 110 9 10 36 Airbus ............................... 484 106 136 38 118 ----- ----- ----- ----- ----- Total ........................... 1,248 562 264 295 397 ===== ===== ===== ===== =====
Aerospace industry-related sales represented approximately 43% of the Company's net sales for 1996. The aerospace industry is expected to remain the largest source of demand for titanium products. However, many opportunities exist in the non-aerospace markets where the characteristics of titanium metal provide advantages over competing materials, such as aluminum, nickel and stainless steel. Golf clubhead manufacturers are using titanium because of its strength and low weight which enables production of clubs with larger heads. Titanium's resistance to the effects of atmospheric conditions and a variety of chemicals and acids make it an attractive metal for marine and other industrial applications where corrosion is of critical concern. As a result, titanium is used increasingly in pollution control equipment, offshore oil installations, mining operations and waste storage facilities. Its favorable strength-to-weight ratio and biocompatibility also make it an increasingly popular metal for biomedical products such as medical implants, and consumer products such as eyeglass frames and bicycles. PRODUCTION PROCESS Since it began operations in 1956, OREMET has been innovative in developing process technologies for the production of titanium. The production of titanium requires several raw materials, including titanium tetrachloride (a liquid derivative of rutile ore, coke and chlorine gas), magnesium, titanium scrap and master alloys, such as vanadium-aluminum. See "Business - Raw Materials." The flow of the Company's titanium production process is illustrated below: OREMET TITANIUM PRODUCTION PROCESS [Description of Graphic: The remainder of this page contains a flow chart, with directional arrows, demonstrating the Company's titanium production process, beginning with the input of titanium tetrachloride and magnesium to produce titanium sponge. The flow chart shows that the titanium sponge is then either sold to non-integrated producers or used internally, along with master alloys and titanium scrap, to produce ingot. In addition, the flow chart shows that ingot is then either used to produce mill products, which are sold to aerospace, golf product and industrial parts manufacturers, used to produce castings, which are sold to industrial and marine product manufacturers, or used by forgers and mill product manufacturers.] 4 The Company's manufacturing processes are dependent on the reliable operation of its machinery and equipment. The Company has certain critical pieces of machinery and equipment which may require significant lead times to complete necessary repairs or replacements and the functions of which may not be easily replaced by an outside converter. Additionally, given the Company's belief that all other titanium manufacturers are currently operating at or near production capacity, there can be no assurance that the Company could locate an outside converter that has sufficient available capacity to enable the Company to meet its production demands in a timely manner, or that an agreement could be reached with any such outside converter on commercially acceptable terms. Any such event could result in a disruption in the Company's production or distribution which could have a material adverse effect on the Company, its financial condition or its prospects. Additionally, although the Company maintains business interruption insurance to reduce the potential effect of any such loss, a natural disaster or other catastrophic event occurring at its Albany manufacturing facilities could have a material adverse effect on the Company, its financial condition or its prospects. PRODUCTS Titanium products is the Company's single business segment. A full range of titanium products is produced for applications in both the aerospace and non-aerospace markets. The principal product forms are titanium sponge, titanium ingots, titanium mill products and castings. The amount of the Company's consolidated sales and the percentage of consolidated sales represented by each class of product during the three years ended December 31, 1996, were as follows:
Year Ended December 31, ------------------------------------------------------ 1996 1995 1994 -------- -------- -------- (in thousands) Net Sales: Sponge ....................................................... $ 16,866 7% $ 10,558 7% $ 12,360 18% Ingot ........................................................ 45,087 19 22,315 15 14,992 21 Mill Products ................................................ 88,552 37 46,839 32 22,752 32 Castings ..................................................... 9,995 4 7,225 5 6,442 9 Distribution ................................................. 70,898 30 54,455 37 11,517 16 Other ........................................................ 5,519 3 5,461 4 3,103 4 -------- -------- -------- -------- -------- -------- Total Net Sales ......................................... $236,917 100% $146,853 100% $ 71,166 100% ======== ======== ======== ======== ======== ========
SPONGE. Titanium sponge is the commercially pure, elemental form of titanium metal. Titanium sponge is produced by OREMET at its facility in Albany, Oregon by reducing titanium tetrachloride using magnesium as the reduction agent. OREMET produces titanium sponge in 15,000 pound batches by using a modified Kroll process developed by OREMET engineers. Titanium tetrachloride and magnesium are combined in a horizontal retort and swept with heated helium in one of the Company's eight sponge reduction furnaces, producing titanium sponge and magnesium chloride. The magnesium chloride is separated electrolytically into magnesium and chlorine in OREMET's magnesium recovery facility. The recovered magnesium is recycled for use in the Company's titanium sponge manufacturing facility. The chlorine by-product is sold, but does not produce material revenues for the Company. OREMET began producing titanium sponge for internal use in 1970 and began selling it in 1987. The Company sells sponge principally to domestic non-integrated titanium producers who use the sponge to produce ingot and mill products. During 1996, the sponge plant operated at near its practical annual capacity of 13.5 million pounds. The Company supplements its sponge needs by purchasing from third parties. See "Business - Raw Materials" and "Business Competition." The Company has a contract to supply titanium sponge and certain other titanium products to RMI Titanium Company ("RMI") through 2003. Under this contract, RMI may require that the Company supply it with up to seven million pounds of titanium sponge per year (approximately 52% of the sponge plant's capacity). RMI has notified the Company that it will take approximately 80% of the maximum amount of sponge at specified prices per pound during 1997. Thereafter, through 2003, the price of the sponge supplied will at RMI's option be at either U.S. market prices or the prices in effect under the contract for 5 1996 plus adjustments for changes in certain of the Company's costs, such as labor, electricity and materials, but in any event, the price charged will not be below the Company's cost. The Company's agreement to supply titanium sponge has not had and is not likely to have a material adverse effect on the Company, its financial condition or its prospects. Sales to RMI accounted for approximately 5% of OREMET's net sales in 1996 and 1995, and 13% in 1994. No other customer accounted for more than 10% of OREMET's net sales in any of these periods. INGOT. Titanium ingots are cylinders with a weight of up to 20,000 pounds and a diameter of up to 36 inches. Titanium ingots are made by OREMET at its facility in Albany, Oregon by melting sponge or titanium scrap, or a combination of the two, with certain other elements to form titanium alloys. Prior to melting, the materials are measured by a computerized weighing system to meet customer specifications and compacted into briquettes that are welded together to form an electrode. An electrode can also be formed by melting the materials in the Company's plasma furnace, which allows the Company to combine a larger percentage and more varied types of titanium scrap. An electrode is then melted in one of the Company's vertical, water-cooled vacuum arc furnaces. Melting may be repeated once or twice to produce standard and premium grades of titanium ingot. The melting process is monitored through computer-operated sensors, controls and video displays to maintain high levels of quality and consistency. After melting, samples from finished ingots are analyzed in the Company's laboratory to ensure proper chemical content and quality. Ingots are converted in a forge, either by OREMET or by its customers, into semi-finished shapes and then into finished mill products. The Company produces ingots in a variety of sizes and grades to meet the customer's specifications. During 1996, the ingot plant operated at near its estimated annual capacity of 22 million pounds. In addition to its own ingot production, the Company contracts to have melting done by other domestic and international suppliers. In order to meet long-term needs, the Company plans to expand its capacity to produce ingot and mill products by increasing its melt capacity with an investment in EB technology. The Company expects to continue to utilize such suppliers until the EB furnace is operational. See "Business - Electron Beam Furnace." MILL PRODUCTS. Titanium mill products result from the forging, rolling, drawing and/or extruding of titanium ingots or slabs. OREMET produces titanium billet, bar, rod, wire, plate and sheet. OREMET sells its mill products to manufacturers of products for: aircraft and jet engines; and vessels and piping for chemical plants, prosthetic and orthopedic implants, armor, golf clubheads and other consumer goods. OREMET produces mill products at its plants in Albany, Oregon and Frackville, Pennsylvania. During 1996, the mill products facility in Albany, Oregon operated at approximately 65% of its estimated annual capacity of 15 million pounds and is currently operating at approximately 70% of its capacity. The Company is dependent on the services of outside processors to perform certain important processing functions. For some of its products, OREMET is dependent on the services provided by THT, an outside processor which is wholly-owned by one of the Company's principal competitors. THT owns and operates an EB furnace which the Company utilizes for melting titanium slab, that is further processed into titanium plate and sheet for non-aerospace applications, and titanium electrodes for aerospace applications. OREMET has not experienced any delays or problems associated with the competitor's ownership of THT. Other than for those provided by THT, the services performed by the outside processors are typically available from multiple sources. Services are provided by THT in accordance with a one-year agreement ending December 31, 1997, and various specific project agreements which have been negotiated on an as-needed basis. Should the THT services agreements not be renewed, OREMET would attempt to obtain these services from another competitor which has a cold hearth melting furnace. OREMET believes that the loss of the services provided by THT would result in production delays and have an adverse effect on the Company, its financial condition or its prospects. In order to address its long-term melting requirements, the Company intends to construct a new EB furnace. See "Business Electron Beam Furnace." The Company maintains a process engineering staff which continually evaluates and identifies potential improvements in the manufacturing process. OREMET's quality control group tests products for compliance with customer specifications, including detailed metallurgical and chemical analyses, sonic tests and mechanical capability and property tests. The results of these tests are certified for conformity to specifications and then recorded for future traceability. 6 CASTINGS. In 1957, OREMET completed construction of a titanium and zirconium casting foundry and began producing components in commercial quantities. Since then, the foundry has continued to develop new technology and make process improvements. OREMET produces titanium and zirconium castings for customers primarily for the non-aerospace industry. Castings are made by melting metal which is then poured under vacuum into graphite molds. Castings generally weigh from one pound to 2,000 pounds. OREMET's castings are made at its Albany, Oregon plant to customer specifications and are used in marine and other industrial applications where corrosion is of critical concern. Titanium and zirconium castings are used in a diversity of applications including offshore oil production, chemical processing, mining, armor, aerospace, power generation, pulp and paper manufacturing and marine products. Both titanium and zirconium are recognized as cost-effective materials for construction because of their light weight, excellent corrosion resistance, low maintenance, high quality and long life cycle. As new applications for titanium continue to grow, the Company expects the demand for castings to follow. To address this increasing demand, the OREMET foundry is in the process of increasing its production capacity by approximately 30%. OTHER PRODUCTS. OREMET provides services to other titanium producers and sells by-products of its titanium production process. Non-integrated producers of titanium ingot and mill products contract with OREMET to melt sponge or titanium scrap into ingot or to convert ingot into mill products. OREMET also sells titanium scrap for use as an alloy addition in the production of other metals such as steel and aluminum. ELECTRON BEAM FURNACE The Company intends to expand its melting capabilities by constructing a new EB furnace. This technology offers cost advantages over the existing production practices and is required to meet the requirements of certain critical aerospace applications. EB technology offers the advantage of directly casting semi-finished shapes, thereby reducing the amount and cost of subsequent conversion operations and processing required prior to shipping the completed product. In addition, the EB technology will allow the use of different types and greater amounts of scrap input materials, thus allowing for cost savings and improved inventory utilization. The EB furnace is expected to enhance the Company's capacity to produce ingot and mill products. The Company estimates that the cost to construct an EB furnace facility with an annual melting capacity of 20 million pounds, together with a related raw materials processing facility, will total approximately $32 million. The Company is currently working with engineers and equipment suppliers on the construction of the EB furnace. The Company estimates that the facility will be in operation during the first half of 1998 and will be capable of producing 5 million pounds in 1998, 11 million pounds in 1999 and at near capacity in 2000. The Company expects that the EB furnace will replace some of the Company's less efficient existing melting capacity. The Company anticipates that it will have an immediate need for a substantial portion of the production of the EB furnace and that it will be able to obtain long-term commitments from others for the furnace capacity which is not utilized by the Company. While the Company currently intends to construct its own EB furnace, the Company, as an alternative, may evaluate an investment in a joint venture to obtain enhanced access to EB technology. The Company will only consider a joint venture if such an arrangement can be structured with a suitable partner, on favorable terms and in a timely manner to allow for production using EB technology in accordance with the Company's schedule. All North American EB furnaces producing titanium in commercial quantities are owned by THT. The Company believes that these furnaces are running at near capacity. In addition to the Company's plans to invest in EB furnace technology, additional EB furnaces may be built and may result in excess capacity. The Company may experience design and start-up difficulties, such as cost overruns, operational difficulties, and significant delays. If the Company implements new technology, there is no assurance that such technology will work or will not result in delays or difficulties. Such events could have a material adverse effect on the Company, its financial condition or its prospects. 7 RAW MATERIALS The primary raw materials used by the Company are titanium tetrachloride, magnesium, titanium scrap and certain combinations of primary metals that form master alloys. Titanium tetrachloride and magnesium are the principal materials used in the production of titanium sponge. The principal materials used in the production of titanium ingot are sponge, titanium scrap and alloying elements. OREMET purchases its titanium tetrachloride requirements under a long-term contract that expires in 2001. While the Company believes it could obtain commercial quantities of sufficiently pure titanium tetrachloride from other sources, but at a potentially higher cost, any extended disruption in the supply could have a material adverse effect on OREMET's ability to produce titanium sponge and could have a material adverse effect on the Company, its financial condition or its prospects. Magnesium is generally available from a number of suppliers. While the Company is one of seven major worldwide producers of titanium sponge, a basic raw material in the production of titanium ingot and mill products, under current market conditions it cannot supply all of its needs for titanium sponge internally and is dependent, therefore, on third parties for a portion of its titanium sponge needs. Since 1993, the Company has purchased sponge from third parties to take advantage of lower-priced materials and to supplement that which it produces. The Company purchased approximately 30% of its sponge requirements from third parties during 1996. The Company obtains sponge from domestic and foreign producers of sponge, both on a spot purchase basis and pursuant to short-term sponge contracts. The Company's purchases of imported sponge, in pounds, compared to total purchases and production of sponge were 30%, 12%, and 7% for the years ended December 31, 1996, 1995, and 1994, respectively. There can be no assurance that the Company will not experience interruptions in its sponge supplies, which could have a material adverse effect on the Company, its financial condition or its prospects. Titanium scrap is typically available from many sources. The Company is a major recycler of titanium scrap. Where possible, the Company utilizes titanium scrap as a cost-effective alternative to titanium sponge; both materials are used as primary ingredients in the manufacture of ingots. Much of the titanium scrap which is purchased by the Company originates from within the Former Soviet Union ("FSU") as the availability of attractively priced domestic scrap in sufficient quantities varies due to fluctuations in the U.S. titanium market and demands from other purchasers, including steel and aluminum producers. Certain of the primary metal compounds used to form master alloys are produced by a limited number of suppliers. During January 1996, in response to rapidly increasing scrap costs, the Company added raw material surcharges to its product prices to offset the higher costs it was experiencing. The Company has historically obtained approximately 50% of its feedstock for producing titanium ingot from sponge and the other 50% from scrap. The Company believes it will continue to be able to obtain sufficient quantities of sponge and scrap to enable it to meet its production needs. When available at attractive prices, the Company has purchased titanium sponge and scrap from various countries, including the FSU. The Company's purchases of imported sponge and scrap, in pounds, compared to total purchases and production of sponge and scrap were 41%, 11%, and 6% for the years ended December 31, 1996, 1995, and 1994, respectively. Continued availability of these materials at attractive prices from the FSU cannot be assured due to the uncertainties concerning the manufacturing capabilities of the FSU titanium producers and the potential for political and economic instability within the FSU. Historically, the Company has sought to recover increases in titanium scrap and sponge prices through price increases of its products. The Company has added raw material surcharges to its contracts in order to more directly link changes in raw material costs to its sales prices. Generally, the Company does not incur import tariffs and anti-dumping duties on purchases of FSU sponge as it is ultimately exported in the form of finished goods. If such tariffs and duties were incurred, the Company would adjust the price or surcharge accordingly. There is no import tariffs or duties on scrap. Any increases in titanium scrap and sponge prices which are not offset by increases in the Company's sales prices could have a material adverse effect on the Company, its financial condition or its prospects. 8 MARKETS AEROSPACE. The Company sells its titanium products to non-integrated producers and fabricators which process the material for use by the aerospace industry. While the percentage of its sales to the aerospace industry accounted for approximately 43% and 46% in 1996 and 1995, respectively, compared to 61% in 1994 and 77% in 1993, aggregate sales to the aerospace industry increased from $42.6 million in 1993 to $101.8 million in 1996. The Company has also expanded its capability to include more complex alloys and mill products used by the aerospace industry. The Company anticipates that future aerospace industry sales will vary from 40% to 60% of total net sales depending upon demand and profitability. The Company's main route of supply is to provide products to numerous forging houses, machine shops and other mill product producers who in turn supply components to the major air frame and jet engine manufacturers. Since 1994 the Company has been supplying products direct to Airbus Industries for the fabrication of engine pylons. OREMET's commercial aerospace product sales are dependent upon the production rates of major airplane manufacturers both as a direct and as an indirect supplier. The Company has historically experienced a high level of order cancellation and deferrals in periods of industry downturn. The cyclicality of the commercial and military aerospace industry has had and may continue to have a material adverse effect on the Company, its financial condition or its prospects. See "Business Industry Overview" and "Business - Products." The Company can give no assurance as to the extent or duration of any recovery in the aerospace market or the extent to which such recovery will result in increases in demand for titanium products. GOLF. The titanium golf clubhead market evolved in 1988 when a few investment casting houses started producing clubheads for export to markets in the Far East. At the same time, some companies in Japan started to produce clubheads by casting and forging. By 1993, the technology and manufacturing processes were well developed and major U.S. club producers became interested in producing heads with a larger hitting surface. Since 1993, most of the major golf club manufacturers have started their own lines of titanium head drivers. The Company estimates that the use of titanium has grown from 1.5 million pounds in 1994 to approximately 10 million pounds in 1996. The Company estimates that due to a 3 million pound titanium reserve in 1996, the golf market will buy 4.5 million pounds in 1997 and approximately 8 million pounds in 1998. Golf club manufacturers are starting to produce titanium fairway woods, irons and putters. The Company believes that it is the market share leader in shipments to the golf industry, with shipments of 5.5 million pounds in 1996. The Company believes that the market for golf clubheads has grown to be the second largest consumer of titanium, after the commercial aerospace market. The market for the Company's products sold to golf clubhead producers has only recently begun to emerge as a significant component of the Company's net sales, and there can be no assurance that demand for titanium products used in the golf industry or the Company's products in particular, will continue or that this market will expand as the Company anticipates. In addition, the Company's major competitors in the titanium industry have begun to supply the golf clubhead market and there is no assurance that the Company will be able to maintain its leading market share. The Company estimates that titanium producers located in the FSU are supplying up to 25% of the titanium shipments to the golf club industry. ARMOR. Titanium has been studied by the defense industry as a ballistic protection material. In the mid 1970s, titanium was designed into the A-10 military airplane to provide protection for the pilots performing close-in ground support missions. As a result of the deficiencies with aluminum protection systems experienced during the Faulkland's War, titanium was studied as a replacement material for protecting strategic areas aboard naval fighting ships. In order to deploy forces more rapidly, certain military forces turned to titanium to reduce the weight of vehicles while assuring good ballistic protection. Since 1992, hatch covers on the Bradley fighting vehicle have been made with titanium. In 1994 and 1995, OREMET supplied over 300,000 pounds of titanium plate for ballistic protection on a new French aircraft carrier, the CHARLES DEGAULLE. OREMET is supplying titanium parts for construction of the Swedish Leopard II tank and the U.S. M1A2 tank. Military engineers continue to search for other armor applications that can take advantage of titanium's light weight and ballistic protection characteristics. Research efforts for armor applications continue to be a high priority for OREMET. The Company believes that titanium usage on tanks and on various types of personnel carriers will increase. 9 In an effort to lessen the titanium industry's dependence on the aerospace industry and to increase participation in other markets, the Company, its competitors and certain end-users of titanium are devoting significant efforts and resources to developing new markets and applications for titanium, certain of which are still in the preliminary stages. Developing these emerging applications involves substantial risk and uncertainties due to the fact that titanium must compete with less expensive materials in these potential applications. There can be no assurance that the Company will be able to develop new markets and applications for its products, or as to the time required for such development, or as to the extent to which it will face competition in this regard. If the Company is unable to develop these markets to a substantial degree, management expects that the Company's business would be largely dependent on the cyclical aerospace industry and the emerging golf market. MARKETING, DISTRIBUTION AND SERVICE CENTERS OREMET markets primarily to manufacturers of titanium metal end products. The Company also sells its products to non-integrated titanium producers, regional value-added distributors and other mill product consumers. The majority of sales are made through the Company's internal sales force. OREMET also uses independent sales representatives for the sale of products outside of North America. Shipments to customers may be made directly from one of the Company's mills in Albany, Oregon or Frackville, Pennsylvania; from an outside processor; or from one of the Company's service centers in North America and Europe. The Company's service centers maintain a large inventory of titanium mill products available for rapid delivery to points around the globe. A complete line of first stage processing equipment is available and outside machining can be arranged by the service centers to meet the needs of their customers. For nearly 25 years, TI, including its predecessor company, has been supplying and developing titanium applications for industrial and commercial customers. TI maintains a network of service centers established to satisfy the titanium needs of the non-aerospace industry. TI opened its first service center during 1972 in Fairfield, New Jersey. In response to the increasing demands of its customers and in order to provide improved response times, TI established additional service centers throughout North America. In 1988, TI established a service center in Birmingham, U.K. and in 1992, expanded its position in the European market by acquiring an existing service center distribution business, also in Birmingham. During 1996, TI opened service centers in Dusseldorf, Germany, and Windsor, CT. To support the increasing demands for titanium in diverse commercial, consumer, aerospace and industrial markets, the Company intends to continue to expand its distribution business geographically. In addition to pursuing growth opportunities through the establishment of additional service centers, TI intends to grow through acquisitions of existing service centers and through the expansion of its participation in the aerospace market. The Company estimates that approximately 25% of TI's shipments are to the aerospace market, primarily in Europe. TI is currently evaluating service center opportunities in the Pacific Rim, Southern Europe and Western United States. 10 The Company and TI maintain titanium sales offices and service centers (which also include sales personnel) in the following locations: Location Established Function -------- ----------- -------- United States Albany, OR 1956 Sales Office Parsippany, NJ 1972 Service Center Chicago, IL 1986 Service Center Jacksonville, FL 1986 Service Center Los Angeles, CA 1987 Service Center Dallas, TX 1989 Sales Office Pittsburgh, PA 1994 Sales Office Windsor, CT 1996 Service Center Canada Montreal, Quebec 1973 Service Center Vancouver, B.C. 1989 Sales Office Europe Birmingham, U.K. 1988 Service Center Paris, France 1994 Service Center Dusseldorf, Germany 1996 Service Center INTERNATIONAL AND EXPORT SALES International and export sales, primarily in Europe and Asia, totaled approximately 19%, 20% and 14% of OREMET's net sales in 1996, 1995 and 1994, respectively. In May 1994, OREMET signed a three-year contract with Aerospatiale, Societe Nationale Industrielle for engine pylon parts for the Airbus aircraft, and in the second half of 1994 began supplying product under the contract. The acquisition of TI provided the Company with a service center located in the U.K. with an established operation. In 1996, TI opened a service center in Germany. The Company intends to utilize these facilities to meet its customers' needs in Europe and Asia. See Note 14 to the Company's Consolidated Financial Statements. BACKLOG The Company's twelve-month sales order backlog was $183 million at December 31, 1996, compared to $105 million at December 31, 1995 and $44 million at December 31, 1994. OREMET produces titanium ingot, mill products and castings in response to specific customer orders. Production times vary among products and can be several months or more. The Company includes in its backlog only those firm purchase orders scheduled for delivery during the subsequent twelve-month period (which are generally subject to cancellation by the customer). The Company has historically experienced a high level of order cancellations and deferrals in periods of industry downturn.
Twelve-Month Sales Order Backlog As of the Quarter Ended -------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (in millions) 1996 ............................. $134 $141 $160 $183 1995 ............................. 48 64 65 105 1994 ............................. 28 29 37 44 1993 ............................. 27 25 19 18
During the second half of 1995 and continuing through 1996, the Company experienced a significant increase in the volume of incoming orders at increased prices. The Company has not opened its 1998 order book, pending assessment of future raw material costs. The increase in demand has been driven primarily by the recovery in the commercial aerospace market and the emergence of the golf clubhead market. As capacity utilization in the titanium industry continues to grow and lead times lengthen, the Company expects prices on new orders to continue to strengthen. 11 COMPETITION Although OREMET's sales are predominately to the domestic market, the titanium industry is competitive on a worldwide basis as a result of many factors, particularly the presence of excess capacity, which has intensified competition for available business. The Company is one of two integrated producers in the U.S. and one of four in the world (the Company considers an integrated producer one that produces at least titanium sponge and ingot). OREMET's principal competitors are other integrated and non-integrated producers of titanium located primarily in the U.S., Europe, Japan, China and the FSU. There are also a number of non-integrated producers that produce mill products from purchased sponge, scrap or ingot. In each of the Company's major product lines, OREMET competes primarily on the basis of price, quality, delivery time and customer service. The principal methods of competition in the titanium industry and for all of the Company's products are product quality and qualifications to supply products. Many of the Company's products (sponge, ingot, mill products and castings) are qualified for both aerospace and non-aerospace applications. The Company competes by maintaining strict quality standards. In addition, as one of two integrated producers in the U.S., the Company is positioned to control quality and the costs of producing sponge, ingot, mill products, and castings. Availability of material and lead time to produce are competitive factors with respect to mill products, castings and distribution sales. The Company maintains an inventory of finished and intermediate inventory to meet customer delivery requirements. The Company also works on cycle time reduction to be more responsive to customer needs. In addition, the Company provides engineered products to customer specifications. In the U.S. market, the increasing presence of non-U.S. participants has become a significant competitive factor. Until 1993, imports of foreign titanium products into the U.S. had not been significant due to relatively favorable currency exchange rates, tariffs, and with respect to Japan and Russia, existing and prior duties (including anti-dumping duties). However, imports of titanium sponge, scrap, and other products, principally from the FSU, have increased in recent years and have had a significant competitive impact on the U.S. titanium industry. To the extent the Company has been able to take advantage of this situation by purchasing such sponge, scrap or intermediate mill products for use in its own operations during the last three years, the negative effect of these imports on the Company has been somewhat diminished. Given the current political and economic uncertainties in some of the countries of the FSU, there can be no assurance that this supply of titanium products will continue to be available to the Company without interruption or at attractive prices. See "Business - Raw Materials." The Company estimates that its share of U.S. sponge capacity is approximately 30% and that its share of world capacity is about 5%. While approximately 20% of the world's sponge production capacity is located within the U.S., up to one half is located within the FSU (which sponge capacity was primarily developed to serve the needs of the Soviet military, principally the aerospace and submarine services, both of which have been sharply curtailed). The Company believes that the FSU production capacity may be limited as a result of deferred plant maintenance and a general lack of financing. As a result, significant unused production capacity, beyond that which is now supplying the FSU's export markets (including sales to the Company), may exist in this region. If exports of titanium products from the FSU were to increase significantly, this additional supply could adversely affect the demand for the Company's products. After the end of the Cold War, sponge produced in the FSU became available and has been imported into the U.S. at low prices. USGS estimates that in 1996, approximately 9.5 million pounds of sponge was imported from the FSU, compared to approximately 12.2 million pounds during 1995. Based on data supplied from the USGS, 1996 sponge imports from the FSU represents approximately 15% of 1996 sponge consumption by U.S. producers. The excess capacity of sponge in the FSU is beneficial, at this time, to different sectors of the industry as it provides additional raw material to meet the increasing raw material needs of ingot producers. In the event such sponge is qualified for aerospace applications and large quantities were introduced into the market, especially in a market downturn, such effect would be adverse to the existing sponge producers, including the Company. 12 As the participation of non-U.S. companies increases, the competitive environment for the Company may become more difficult, especially as existing tariffs are eased and certain market participants are no longer subject to anti-dumping duties. Currently, imports of titanium sponge, ingot and mill products from countries that receive most favored nation (MFN) tariff rate are subject to a 15% tariff. The tariff rate applicable to imports from countries that do not receive MFN treatment is 25% for sponge and ingot and 45% for mill products. The U.S. Department of Commerce announced that pursuant to the Generalized System Preferences, certain mill products imported directly from Russia between October 1, 1996 and May 31, 1997 are not subject to duty. In addition to regular tariffs, imports of titanium sponge from certain countries in the FSU (Russia, Kazakhstan and Ukraine) are subject to anti-dumping duties of 83.96%, except as follows: The U.S. Department of Commerce, International Trade Administration (ITA) published final results of an anti-dumping review for imports of titanium sponge from Russia. The review covered imports from Berezniki Titanium-Magnesium Works (AVISMA), Interlink Metals and Chemicals, Inc., and Cometals, Inc., during the period August 1, 1994, through July 31, 1995. Under the review, the ITA concluded that AVISMA, a producer of titanium sponge would continue to be subject to the Russia-wide 83.96% anti-dumping margin. However, the ITA determined the margin for the two trading companies, Interlink and Cometals, would be revised to 0% and 28.31%, respectively. As a result of the easing of the anti-dumping duties, substantial additional capacity could enter the market, and if the demand for the industry's products is less than its capacity, the profitability of the industry, including the Company, could be adversely affected. USGS reported the following information regarding the importation and consumption of titanium products:
U.S. IMPORTATION AND CONSUMPTION OF SELECTED TITANIUM PRODUCTS -------------------------------------------------------------- (As compiled by USGS) (Pounds in Millions) 1996 1995 ------------------------------------ ------------------------------------ Imports as Imports as Titanium U.S. U.S. a % of U.S. U.S. a % of Product Imports Consumption Consumption Imports Consumption Consumption - -------- ------- ----------- ----------- ------- ----------- ----------- Sponge: Japan 8.5 2.5 FSU 9.5 12.2 Other 2.3 2.0 ---- ---- Total 20.3 62.6 32% 16.7 47.4 35% ==== ==== === ==== ==== === Waste and Scrap: Japan 5.3 4.0 FSU 11.6 8.4 UK 7.5 5.2 Other 9.1 6.9 ---- ---- --- ---- ---- --- Total 33.5 58.0 58% 24.5 45.4 54% ==== ==== === ==== ==== === Ingot and Billet: FSU 3.0 2.0 Other 1.9 2.1 ---- ---- --- ---- ---- ---- Total 4.9 84.4 6% 4.1 67.5 6% ==== ==== === ==== ==== ==== Mill Products* 12.0 57.1 21% 3.5 43.7 8% ==== ==== === ==== ==== ====
* The country of export is not available. The Company believes that the majority of mill products imports to the U.S. originate from the FSU. 13 It is believed that FSU producers have the largest titanium mill products production capacity in the world. Continued expansion into the U.S. market by FSU producers could materially affect the operations of the Company and the industry to the extent that the worldwide supply of product exceeds market demand and prices are reduced. EMPLOYEE RELATIONS As of December 31, 1996, the Company employed 731 employees, of which approximately 50 were employed outside of the U.S. All of the hourly production and maintenance workers (approximately 400) at the Albany, Oregon and Frackville, Pennsylvania manufacturing facilities are represented by labor unions. In August 1994, the Company and the union representing the Albany, Oregon employees agreed upon a new labor contract which will continue through July 2000. This contract can be re-opened after three years to address economic issues. The contract covering the Frackville, Pennsylvania employees was negotiated in September 1994, and will continue for three years. Since 1974, the Company has not experienced a strike or labor disruption. OREMET considers its relations with its employees and the union to be good. RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT ("RT&D") OREMET's RT&D efforts are focused on improving production processes and developing new applications and markets for titanium. Production process improvements have included improving sponge production efficiencies, making technical improvements to scrap processes, revising vacuum arc melting techniques, enhancing forging practices and improving overall yield. In addition, the Company strives to reduce costs by shortening cycle times, by implementing synchronous manufacturing principles and by eliminating product rejections. OREMET's focus on product development has resulted in the development of high purity sponge for use by the electronics industry, consistent production of titanium aluminides for aerospace applications and new alloys for armor and golf applications. In order to keep abreast of new developments, the Company maintains contact with university and research facilities, as well as with major end users of titanium products. These groups assess new applications for titanium and the need for new or alternative alloys and titanium compositions. OREMET then develops alloy systems, processes and procedures for the manufacture of new products. JOINT VENTURES OREMET is involved in several joint ventures which, like its RT&D efforts, utilize shared investment as a means to access technology or capabilities. OREMET is a 50% partner with Precision Castparts Corporation in a joint venture which owns a plasma furnace operated by OREMET in Albany, Oregon. The plasma furnace produces remelt electrodes for both parties' consumption. The venture started in 1983 and is producing in excess of 2 million pounds of electrode per year. OREMET is a 33% member in MZI, L.L.C., which owns an advanced ultrasonic inspection system for testing of certain aerospace products. The other members are Titanium Metals Corporation and Teledyne Allvac. This venture is in its second year of operations. REGULATORY AND ENVIRONMENTAL MATTERS The Company is subject to federal, state and local statutes and regulations concerning environmental matters and land use. Although the Company believes it is in material compliance with these laws, they are frequently modified to be more restrictive and it is impossible to predict accurately the future effect that changes in these laws may have on the Company. There can be no assurance that the Company will not face costs and liabilities as a result of environmental regulation which could have a material adverse effect on the Company, its financial position, results of operations and liquidity. 14 The Company's operations pose continuing risk of environmental impacts. The Company uses and produces substantial quantities of substances, chemicals and compounds that have been identified as hazardous or toxic under federal, state and local environmental and worker safety and health laws and regulations. Consequently, the Company is subject to various environmental laws that impose compliance obligations and can create liability for historical releases of hazardous substances. While the Company takes environmental, safety, and health precautions appropriate for the industry, the Company's operations pose an ongoing risk of accidental releases of, and worker exposure to, hazardous or toxic substances. The Company conducts its operations at industrial sites where hazardous materials have been managed for many years in connection with its operations, including periods before careful management of these materials was generally believed to be necessary. The Company entered into a consent order in August 1994 with the Oregon Department of Environmental Quality ("ODEQ") pursuant to which the Company is conducting an investigation of hazardous substances in portions of the soil and groundwater at its plant site in Albany, Oregon. The Company anticipates that its investigation will result in a determination that at least some remedial action is necessary, for which an accrual has been made. A neighboring property owner also is investigating groundwater contamination at its property that has migrated to the Company's property and for which OREMET may have legal claims to recover a portion of its investigation costs. The Company anticipates that a number of its production wells will have to be reconstructed in response to concerns about migration of groundwater contamination. The Company also has claims against its drilling contractor with respect to the construction of the wells. In February 1995, the ODEQ modified the Company's wastewater discharge permit for its Albany facility. The new permit imposes more stringent discharge limits, and the Company has entered into a Mutual Agreement and Order with the ODEQ under which the Company will achieve the more stringent units according to a specified schedule. The Company has identified several alternatives for meeting the new limits, the most expensive of which would require capital expenditures of approximately $0.7 million. The Company is working with ODEQ to explore less expensive alternatives. Over the past several years, the Company has voluntarily undertaken extensive testing of the air emissions from its Albany plant. This testing indicates that emissions from some units may be greater than previously recognized. The Company entered into a memorandum of understanding with ODEQ on July 19, 1996, under which the Company will conduct certain air quality impact analyses and may potentially install additional emissions control equipment. In the course of this work, the Company has determined that the matter can be better resolved through an aggressive emissions reduction and control program that will also accommodate expansion plans. The Company is engaged in discussions with ODEQ to amend the memorandum to incorporate this emissions reduction program. The Company has estimated that the capital cost of the emissions controls will be $1.5 million in 1997. The Company believes this matter will be resolved by the end of 1997. Based upon its engineering studies regarding the above matters, the Company made provisions for environmental expenses in 1995, 1994, and 1993 of $0, $0.2 million, and $1.0 million, respectively, of which approximately $0.9 million remains at December 31, 1996. These amounts are in addition to recurring environmental costs which are expensed as incurred and are included in cost of sales. At the present time, management cannot reasonably predict when all of these environmental issues will be resolved. Additionally, it is reasonably possible that a change in the estimate will occur in the near term. Commencing in 1991, the Pennsylvania Department of Environmental Regulation and the Environmental Protection Agency ("EPA") have performed periodic site inspections, including soil and water sampling, at TI's site in Frackville, Pennsylvania, in connection with a regional groundwater investigation of the Frackville, Pennsylvania area. While this investigation is ongoing, the Company has not been informed by either agency of any pending or potentially required actions which may arise from this investigation. In conjunction with the Company's purchase of TI, Kamyr, Inc. has agreed to undertake specified cleanup activities. In addition, Kamyr, Inc. has agreed to a limited indemnification of the Company in the event damages arise that result from conditions which were not in compliance with environmental laws and regulations as they existed at the time the Company purchased TI. 15 ITEM 2. PROPERTIES The Company's principal executive office and production facilities are located in Albany, Oregon on 210 acres of property owned (in fee without any major encumbrances) by the Company. The Company occupies approximately 461,000 square feet in six buildings and uses approximately 65 acres on the site. The facilities include plants for the production of titanium sponge, ingot, mill products and castings. The Company also maintains separate facilities for recovering magnesium and processing titanium scrap. TI's executive offices are located in Fairfield, New Jersey and it owns (in fee without any major encumbrances) and operates a production facility in Frackville, Pennsylvania. The Company believes that the plants are adequate and suitable in conjunction with the Company's access to outside processing vendors, for its current operating needs. Other than the facility in Birmingham, U.K., the service centers and sales offices which the Company utilizes are leased. See "Business Products" for a discussion of productive capacity and extent of utilization. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is a party to claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders during the fourth quarter of 1996. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS (a) MARKET INFORMATION: Registrant's Common Stock is traded over the counter, and its Nasdaq symbol is OREM. Registrant's stock commenced trading on the Nasdaq National Market on March 5, 1985. Information concerning the market price of Registrant's Common Stock is incorporated by reference to the Quarterly Stock Data Section on Page 41 of the 1996 Annual Report to Shareholders. (b) HOLDERS: At March 7, 1997, there were 2,038 holders of Registrant's Common Stock, based on the holders of record as certified by the Transfer Agent. The Company believes that there are an additional 9 to 10 thousand shareholders who maintain their ownership in "street name". The Company estimates that there are 11 to 12 thousand beneficial owners of its Common Stock. (c) DIVIDENDS: There were no dividends declared in either 1996 or 1995, except as described in Note 17 to the Company's Consolidated Financial Statements on Page 32 of the 1996 Annual Report to Shareholders. Limitations on dividends are discussed in Note 9 to the Company's Consolidated Financial Statements on Page 26 of the 1996 Annual Report to Shareholders. Both notes are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is contained in the Five-Year Summary of Selected Financial Data Section on Page 33 of the 1996 Annual Report to Shareholders, and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in Accounting Principles: In February 1997, The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, earnings per share ("FAS128"). FAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application of FAS 128 is not permitted. The effect of implementing FAS 128 on the Company's earnings per share computations has not been determined. The remaining information required by this item is contained in the Management's Discussion and Analysis Section on Pages 34 through 40 of the 1996 Annual Report to Shareholders, and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained on Pages 17 through 32 in the 1996 Annual Report to Shareholders, and is incorporated by reference herein as listed in Item 14 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in the Proxy Statement of Registrant for the Annual Shareholders Meeting to be held April 24, 1997 ("Proxy Statement"), in the sections titled "Directors", "Executive Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance". The Proxy Statement was filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report, and the sections specified in the preceding sentence are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained on Pages 6-15 of the Proxy Statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the Proxy Statement, in the section titled "Security Ownership of Certain Beneficial Owners and Management", and the section specified is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in the Proxy Statement, in the section titled "Related Party Transactions", and the section is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS: The following Financial Statements of Oregon Metallurgical Corporation and Report of Independent Accountants are incorporated by reference from Pages 17 through 32 of the Registrant's 1996 Annual Report to Shareholders: Report of Independent Accountants. Consolidated Statements of Operations - For The Years Ended December 31, 1996, 1995, and 1994. Consolidated Balance Sheets - December 31, 1996 and 1995. Consolidated Statements of Shareholders' Equity - For The Years Ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows - For The Years Ended December 31, 1996, 1995, and 1994. Notes to Consolidated Financial Statements. 2. FINANCIAL STATEMENT SCHEDULES: The following financial statement schedule of Oregon Metallurgical Corporation for the years ended December 31, 1996, 1995, and 1994 is filed as part of this Report, and should be read in conjunction with the Consolidated Financial Statements of Oregon Metallurgical Corporation: Page ---- Report of Independent Accounts on Financial Statements Schedules.................................. S-1 Schedule II: Valuation and Qualifying Accounts....... S-2 Schedules not listed above have been omitted because they are not applicable, or are not required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. EXHIBITS: The Exhibit Index of this Annual Report on Form 10-K lists the exhibits that are filed as part of this Report. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the fourth quarter ended December 31, 1996. 19 [Letterhead of Coopers & Lybrand L.L.P.] REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Our report on the consolidated financial statements of Oregon Metallurgical Corporation and subsidiaries has been incorporated by reference in this Form 10-K from the 1996 Annual Report to Shareholders of Oregon Metallurgical Corporation and subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in item 14(a) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Eugene, Oregon February 4, 1997 S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS OREGON METALLURGICAL CORPORATION (In Thousands)
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR - ----------- ---------- ---------- ---------- ------- Allowance for Doubtful Accounts: Year Ended December 31, 1996 $1,257 $ 227 $(990)(a) $ 494 ------ ------ ------ ------ Year Ended December 31, 1995 $1,024 $ 237 $ (4)(a) $1,257 ------ ------ ------ ------ Year Ended December 31, 1994 $ 117 $ 962 $ (55)(a) $1,024 ------ ------ ------ ------ Amounts written off, less recoveries
S-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. OREGON METALLURGICAL CORPORATION Date: March 19, 1997 /s/ Carlos E. Aguirre --------------------------------- Carlos E. Aguirre, President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated effective on March 19, 1997. PRINCIPAL FINANCIAL OFFICER, AND PRINCIPAL ACCOUNTING OFFICER /s/ Dennis P. Kelly --------------------------------- Dennis P. Kelly, Vice President, Finance and Treasurer PRINCIPAL EXECUTIVE OFFICER /s/ Carlos E. Aguirre --------------------------------- Carlos E. Aguirre, President, Chief Executive Officer and Director BOARD OF DIRECTORS /s/ Howard T. Cusic* --------------------------------- Howard T. Cusic, Chairman of the Board /s/ Gilbert E. Bezar* --------------------------------- Gilbert E. Bezar, Director /s/ Thomas B. Boklund* --------------------------------- Thomas B. Boklund, Director /s/ Roger V. Carter* --------------------------------- Roger V. Carter, Director /s/ Nicholas P. Collins* --------------------------------- Nicholas P. Collins, Director /s/ David H. Leonard* --------------------------------- David H. Leonard, Director /s/ James S. Paddock* --------------------------------- James S. Paddock, Director /s/ James R. Pate* --------------------------------- James R. Pate, Director * /s/ Dennis P. Kelly ------------------------------------- By: Dennis P. Kelly, Attorney-In-Fact EXHIBIT LIST EXHIBIT NO. DESCRIPTION 2.1 Stock and Asset Purchase Agreement between Kamyr, Inc. and New TI, Inc. (Filed as exhibit 2.1 to Form 8-K dated September 20, 1994) 3.1 Restated Articles of Incorporation. (Filed as exhibit 3.1 to Form 10-K for the year ended December 31, 1993) 3.2 Restated Bylaws. (Filed as exhibit 3.2 to Form 10-K for the year ended December 31, 1994) 3.3 Amendment to Restated Articles of Incorporation, dated April 28, 1995. (Filed as exhibit 3.1 to Form 10-Q for the quarter ended June 30, 1995) 4.1 Specimen Common Stock Certificate. (Previously filed) 4.2 Warrant Agreement (Nontransferable Warrant) between James S. Paddock and the Company, dated September 19, 1994. (Filed as exhibit 4.1 to Form 8-K/A-2 dated September 20, 1994) 10.1 Employee Stock Ownership Plan of the Company. (Filed as exhibit 4.3 to Form S-8 Registration Statement 33-18650) * 10.2 Amendment to Employee Stock Ownership Plan of the Company. (Filed as exhibit 10.1 to Form 10-Q for the quarter ended March 31, 1996) * 10.3 Trust Agreement under Oregon Metallurgical Corporation Employee Stock Ownership Plan. (Filed as exhibit 10.2 to Form 10-K for the year ended December 31, 1995) * 10.4 Employment Agreement dated July 1, 1996 between the Company and Carlos E. Aguirre. * 10.5 Employment Agreement dated October 11, 1993 between the Company and Dennis P. Kelly. (Filed as exhibit 10.4 to Form 10-K for the year ended December 31, 1994) * 10.6 Employment Agreement dated October 8, 1993 between the Company and Steven H. Reichman. (Filed as exhibit 10.5 to Form 10-K for the year ended December 31, 1994) * 10.7 Employment Agreement dated February 20, 1995 between the Company and John P. Byrne. (Filed as exhibit 10.6 to Form 10-K for the year ended December 31, 1994) * 10.8 Sales Agreement between RMI Titanium Company and the Company. (Filed as exhibit 10 to Form 10-Q/A-2 for the quarter ended September 30, 1994) (Confidential Treatment Requested) 10.9 Corporate Organization and Shareholders Agreement Among James S. Paddock, the Company and New TI, Inc., dated September 19, 1994. (Filed as exhibit 10.1 to the Form 8-K/A-2 dated September 20, 1994) * 10.10 OREMET Employment Agreement between James S. Paddock and the Company, dated September 19, 1994. (Filed as exhibit 10.2 to the Form 8-K/A-2 dated September 20, 1994) * 10.11 Employment Agreement between James S. Paddock and New TI, Inc., dated September 19, 1994. (Filed as exhibit 10.3 to the Form 8-K/A-2 dated September 20, 1994) * 10.12 Titanium Tetrachloride Agreement between SCM Chemicals, Inc. and the Company, dated August 11, 1990. (Filed as exhibit 10.14 to Form 10-K for the year ended December 31, 1994) 10.13 Subordinated promissory note between New TI, Inc. and the former Titanium Industries, Inc., dated September 19, 1994. (Filed as exhibit 10.15 to Form 10-K for the year ended December 31, 1994) 10.14 Employment Agreement between the Company and David G. Floyd, dated December 18, 1995. (Filed as exhibit 10.16 to Form 10-K for the year ended December 31, 1995) * 10.15 Oregon Metallurgical Corporation Long Term Incentive Compensation Stock Appreciation Rights Plan. (Filed as exhibit 10.17 to Form 10-K for the year ended December 31, 1995) * 10.16 Oregon Metallurgical Corporation Savings Plan. (Filed as exhibit 10.18 to Form 10-K for the year ended December 31, 1995) * 10.17 Amendment to Oregon Metallurgical Corporation Savings Plan. (Filed as exhibit 10.1 to Form 10-Q for the period ended September 30, 1996) * 10.18 Trust Agreement Under Oregon Metallurgical Corporation Savings Plan. (Filed as exhibit 10.19 to Form 10-K for the year ended December 31, 1995) * 10.19 Loan and Security Agreement dated as of September 19, 1994 among the Company, New TI, Inc. and Bank of America Illinois. (Filed as exhibit 10.7 to Form 10-K for the year ended December 31, 1994) 10.20 Amendment No. 1 dated as of March 17, 1995, to Loan and Security Agreement with Oregon Metallurgical Corporation and Titanium Industries, Inc., dated as of September 19, 1994. (Filed as exhibit 10.16 to the Form 10-Q for the quarter ended March 31, 1995) 10.21 Amendment No. 2 dated as of June 30, 1995, to Loan and Security Agreement with Oregon Metallurgical Corporation and Titanium Industries, Inc., dated as of September 19, 1994. (Filed as exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 1995) 10.22 Amendment No. 3 dated as of March 14, 1996, to Loan and Security Agreement with Oregon Metallurgical Corporation and Titanium Industries, Inc., dated as of September 19, 1994. (Filed as exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 1996) 10.23 Amendment No. 4 dated as of May 1, 1996, to Loan and Security Agreement with Oregon Metallurgical Corporation and Titanium Industries, Inc., dated as of September 19, 1994. (Filed as exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 1996) 11.1 Statement re: Computation of Per Share Earnings. 13.1 Portions of the 1996 Annual Report to Shareholders which have been incorporated by reference into this Form 10-K. Except for such portions expressly incorporated by reference, the 1996 Annual Report to Shareholders is not deemed to be filed as part of this Form 10-K. 21.1 Subsidiaries of the Company. 23.1 Consent of Independent Accountants. 24.1 Power of Attorney. 27 Financial Data Schedule. * Management contract or compensatory plan. EX-10 2 CARLOS AGUIRRE EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT DATE: July 1, 1996 PARTIES: OREGON METALLURGICAL CORPORATION, (the "Company") an Oregon corporation 530 34th Avenue SW P.O. Box 580 Albany, OR 97321 CARLOS E. AGUIRRE ("Employee") 19053 SW 35th Place Lake Oswego, OR 97034 RECITALS: 1. Company desires that Employee remain in the employment of the Company, thereby assuring continuity of management and policies responsible for the Company's success in the past and assuring the Company of the efforts of the Employee during the term of this Agreement, and Employee desires to so remain in the employment of the Company. 2. The additional substantial financial and other consideration provided by this Agreement represents the bona fide advancement of Employee with the Company. AGREEMENT: The parties agree as follows: SECTION 1. EMPLOYMENT 1.1 FIXED TERM. Company agrees to employ Employee as its President and Chief Executive Officer for a term commencing on July 1, 1996, and terminating on June 30, 2001, or until termination in accordance with Section 5. If not terminated in accordance with Section 5, upon expiration of the initial term of this Agreement, this Agreement shall automatically renew for successive two (2) year terms thereafter. 1 - EMPLOYMENT AGREEMENT 1.2 DUTIES. Employee agrees to continue employment with Company on the terms and conditions set forth in this Agreement, and agrees to devote his full time and attention (reasonable periods of illness and normal vacations excepted) to the performance of his duties under this Agreement. In general, such duties shall consist of those duties generally performed by the President and Chief Executive Officer of a corporation engaged in the business of metals manufacturing and distribution. Employee shall perform such specific duties and shall exercise such specific authority as may be assigned to Employee from time to time by the board of directors of the Company, if so elected by the shareholders. In performing such duties, Employee shall be subject to direction and control of the board of directors of the Company. Employee further agrees that in all aspect of such employment, Employee shall comply with the policies, standards, and regulations of the Company established from time to time, and shall perform his duties faithfully, intelligently, to the best of his ability, and in the best interest of the Company. Employee shall serve as director of the Company without additional compensation. The devotion of reasonable periods of time by Employee for personal purposes, outside business activities, trade associations or charitable activities shall not be deemed a breach of this Agreement, provided that such purposes or activities do not materially interfere with the services required to be rendered to or on behalf of the Company. SECTION 2. NONCOMPETITION/CONFIDENTIALITY/RETURN OF DOCUMENTS 2.1 SEPARATE NONCOMPETE AND CONFIDENTIALITY AGREEMENTS. Simultaneous with execution of this Agreement and as consideration for the substantial financial and other consideration granted to Employee, Employee shall execute a separate agreement with the Company governing noncompetition and confidentiality, return of documents and related matters ("Noncompetition Agreement"). SECTION 3. COMPENSATION 3.1 BASE COMPENSATION. In consideration of all services to be rendered by Employee to the Company, the Company shall pay to Employee base compensation of Two Hundred Sixty-Five Thousand Dollars ($265,000.00) per year, payable in semi-monthly installments on the first and fifteenth days of each month. Employee shall receive annual reviews, and may receive annual upward salary adjustments at the discretion of the board of directors. 3.2 BONUS. Employee will participate in the Company's Salaried Employees Annual Incentive Compensation Plan as the same now exists or may hereafter be amended. In accordance with the provision of such plan, Employee's benefits shall be calculated the same as the benefits for all salaried employees of the Company. 2 - EMPLOYMENT AGREEMENT 3.3 LONG-TERM INCENTIVE PROGRAM - SARS/STOCK OPTIONS. Employee will participate in the Stock Appreciation Rights program of the Company, any other Stock Option Plan in effect, and any future plans that apply to the key employees of the Company. 3.4 STOCK COMPENSATION PROGRAM. The Company has in place two stock compensation programs pursuant to which salaried employees, other than officers, are issued one share of stock for each One Hundred Dollars ($100.00) of compensation, and one share of stock for each day worked. Employee shall be paid in cash the market value of the number of share of stock that he would have been entitled to receive pursuant to such plan, the value of such stock to be calculated at the market value on the date the stock is distributed to other salaried employees, but in no event shall the value of said stock exceed the stock valuation caps, Twenty Dollars ($20.00) per share and Thirty-Two Dollars ($32.00) per share for each program respectively, that are applicable to all employees. Employee shall also participate in all future amendments to said stock compensation plan and in any subsequently adopted stock compensation plan which applies to salaried employees. 3.5 OTHER BENEFITS. The Company will provide Employee with those reasonable benefits which are customarily provided to the Chief Executive Officer of a corporation of approximately the same size as the Company. In addition to the other plans described in this Section 3, Employee will participate in all compensation and other benefit plans of the Company applicable to its key employees during the period that any existing or future plans are in effect. Such compensation and benefit plans presently include, without limitation, ESOP, Excess Benefit Plan, Savings Plan, Pension Plan, Supplemental Pension Plan and medical benefits plan. The Company also agrees to provide Employee and Employee's family with the same benefits that the Company provides to other salaried employees and their families, subject to Employee's satisfaction of the respective eligibility conditions for such benefits. 3.6 ANNUAL PHYSICAL EXAMINATION. Employee shall obtain an annual physical examination, and the Company shall pay for said examination. The annual physical examination is for the benefit of Employee, and the results thereof shall be provided to the Employee and the Chairman of the board of the Company. Employee agrees to provide such results to insurance companies to support applications by the Company for key employee insurance. SECTION 4. EXPENSES 4.1 REIMBURSEMENT. Employee shall be entitled to reimbursement from the Company for reasonable expenses incurred by Employee in the performance of Employee's duties under this Agreement, upon presentation of vouchers indicating in detail the amount and business purpose of each such expense and upon compliance with the Company's reimbursement policies established from time to time. 3 - EMPLOYMENT AGREEMENT SECTION 5. TERMINATION This Agreement is or may be terminated for the following reasons, subject to the terms and provision herein provided: 5.1 DEATH. In the event of Employee's death, Employee's designated beneficiary shall be entitled to receive salary, stock compensation and bonus payments, to the extent not received by Employee at the time of death, determined on a pro rata basis for the number of days Employee was employed by the Company in the fiscal year in which death occurs and for an additional ninety (90) days. 5.2 DISABILITY. In the event Employee becomes disabled as defined herein, the Company, acting through a vote of at least a majority of the board of directors of the Company, shall have the right to terminate this Agreement. In such event and provided that Employee delivers a full release to the Company, Employee shall be entitled to receive salary, stock compensation and bonus payments, to the extent not received by Employee at the time of termination, determined on a pro rata basis through the date of termination and for an additional one hundred and twenty (120) days. Termination under this Section 5.2 shall not affect the terms of the Noncompetition Agreement. For purposes of this Agreement, Employee shall be deemed to be "disabled," if both (1) and (2) apply: (1) if he suffers from any physical or mental disease, condition, disorder, injury (including self-inflicted injuries), or abuse of substances hazardous to health (including drugs and alcohol), or mental illness; and (2) if one of the following conditions is satisfied: 5.2.1 Under the terms of the bona fide disability income insurance policy provided by the Company that insures Employee, the insurance company that underwrites such insurance policy determines that Employee has been totally disabled for purposes of such insurance policy for a period of six (6) months during any one-year period; or 5.2.2 A physician licensed to practice medicine in the state of Oregon, who has been selected by Employee (or the conservator of his estate) and the board of directors of the Company, certifies that Employee is partially or totally disabled so that Employee will be unable to be employed gainfully on a full-time basis by the Company for a 6-month period in the position that Employee occupied before such disability. The costs and expenses of such physician shall be borne by the Company; or 5.2.3 Employee (or the conservator of his estate) and the board of directors of the Company agree in writing that Employee is partially or totally disabled so that he will be unable to be employed gainfully on a full-time basis by the Company for a 6-month period in the position that Employee occupied before such disability. 4 - EMPLOYMENT AGREEMENT Employee acknowledges that he has certain rights under the Americans with Disabilities Act ("ADA"). In the event that Employee is "disabled" as defined in this section, a condition to payment under this Section shall be that Employee agrees to waive any rights he may have under the ADA or applicable state disability discrimination or workers compensation laws relating to reinstatement, modified schedules or job duties, or other accommodations to the fullest extent permissible under law. It is the parties' intent, that this Agreement exclusively govern whether Employee is "disabled" and exclusively set out the benefits and remedies to be provided to the fullest extent permissible under law. 5.3 FOR CAUSE OR VOLUNTARY TERMINATION. The Company has the right to terminate Employee's employment for cause resulting in a termination of this Agreement, the elimination of any bonus payment for that year and the payment of salary only through the day of termination for cause. Termination under this Section 5.3 shall not affect the terms of the Noncompetition Agreement. Termination for cause would result from any of the following: 5.3.1 Employee willfully and continuously fails or refuses to comply with the reasonable policies, standards and regulations of the Company established from time to time or engages in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; or 5.3.2 Employee breaches or fails to perform any material provision of this Agreement or the Noncompetition Agreement, and fails to cure the breach or fails to perform within fifteen (15) days of written notice by the board of directors to Employee of such breach or failure; or 5.3.3 Employee engages in fraud, dishonesty, or any other act of serious misconduct in the performance of Employee's duties on behalf of the Company; or 5.3.4 Employee voluntarily terminates his employment with the Company prior to June 30, 2001, and during any renewal period thereafter, except (i) as provided in Section 5.5 or (ii) when the Company is in breach of this Agreement in any material respect and the board of directors of the Company fails to cause the breach to be cured within fifteen (15) days of written notice of such breach by Employee to the board of directors. 5.4 INVOLUNTARY TERMINATION NOT FOR CAUSE. At the request of a majority of the board of directors of the Company, Employee agrees to tender his resignation as an officer, director and employee of the Company. Other than his position and responsibilities as an employee, director and officer of the Company, and other than as set forth in the following, such resignation will not affect the term, base compensation, bonus payments or benefits of this Agreement or the Noncompetition Agreement. As consideration for tendering his resignation as an officer, director and employee of the Company and provided that Employee delivers a full release to the Company, Employee will receive, in addition to the other payments to which he 5 - EMPLOYMENT AGREEMENT is entitled, an amount equal to two (2) times his base compensation and bonus for the calendar year prior to the year in which the resignation is tendered. 5.5 TERMINATION BY PRIOR NOTICE. The employment of Employee by the Company may be terminated by either the Company or Employee by giving written notice on or before June 30, 2000, that this Agreement shall terminate at the end of the initial term of this Agreement. After such date (including during any subsequent renewal term of this Agreement) the term of this Agreement may be terminated at the end of such renewal term by either party by giving written notice on or before June 30 of the year prior to the end of the renewal term. Termination under this Section 5.5 shall not affect the terms of the Noncompetition Agreement. If the Company provides written notice of nonrenewal to Employee in accordance with this Subsection prior to June 30, 2005, and so long as Employee is not in breach of the Noncompetition Agreement, and Employee delivers a full release to the Company, the Company will pay to Employee annually for two (2) years after the effective date of such termination, the sum of .75 or 75% of Employee's annual base compensation at the time of nonrenewal, payable in semi-monthly payments. 5.6 OUT-PLACEMENT ASSISTANCE. In the event of any termination pursuant to Subsection 5.4 or any termination by the Company pursuant to Subsection 5.5, in addition to the other benefits provided for in this Agreement, Employee will be entitled to out-placement assistance of a nature customary for a person with the position of president and chief executive officer of a comparable-sized company. Such assistance shall commence six (6) months prior to the effective date of the termination. 5.7 MEDICAL AND DENTAL BENEFITS. In the event of any termination pursuant to Subsection 5.4 or any termination by the Company pursuant to Subsection 5.5, and so long as Employee is not in breach of the Noncompetition Agreement, the Company will provide Employee with the medical and dental programs maintained by the Company for its employees generally (including the Company's portion of family coverage). If COBRA benefits are available to Employee, the Company shall pay the cost of such benefits including any administrative surcharge. If Employee is not eligible to participate in the Company's medical and dental programs through COBRA or otherwise, the Company will pay Employee an amount sufficient to acquire comparable coverage with comparable deductions and contribution levels. Benefits under this Subsection 5.7 shall be provided for the two (2) year period after effective date of such termination. 5.8. Termination by Employee. Employee may terminate this Agreement for "good reason." "Good Reason" shall mean the occurrence, after a Change in Control, of any of the following circumstances without the express written consent of Employee, unless such circumstances are fully corrected prior to the date of termination: 6 - EMPLOYMENT AGREEMENT (a) a significant reduction by the Company in the duties and responsibilities assigned to Employee from those assigned immediately before the Change in Control; or (b) the reduction by the Company in Employee's annual base compensation as in effect on the date the Change in Control occurs. SECTION 6. CHANGE OF CONTROL AND SEVERANCE PAY 6.1 ELIGIBILITY FOR BENEFITS. Employee shall be eligible for the benefits described in this Section 6 if, concurrently with or within thirty-six (36) months after a Change in Control, Employee's employment with the Company terminates, provided that such termination of employment (a) is not by the Company in accordance with Section 5.3, or (b) is not by Employee for other than Good Reason. 6.2 TYPES AND AMOUNTS OF TERMINATION BENEFITS. 6.2.1 Company shall pay to Employee his full base compensation through the date of termination at the rate in effect at the time of termination, no later than the fifth (5th) day following the date of termination, plus all other amounts to which Employee is entitled under any compensation or fringe benefit plan of the Company, at the time such payments are due. 6.2.2 In lieu of any further salary payments for a period subsequent to the date of termination, the Company shall pay as severance pay to Employee, the following amounts, a lump sum severance payment equal to three (3) times his "Annual Pay", consisting of annual base compensation as in effect as of the date of termination or immediately prior to the Change in Control, whichever is greater and his bonus. 6.3.3 Company shall pay to Employee all legal fees and expenses incurred by Employee in seeking to obtain or enforce any right or benefit provided to Employee pursuant to this Agreement, if Employee is the prevailing party. 6.2.4 Company shall arrange to provide Employee with accident and group health insurance benefits substantially similar to those which Employee was receiving immediately prior to the termination at the same cost to Employee as the Company charges other employees. Such benefits shall continue during the life of employee or until employee is provided with group health insurance benefits by a subsequent employer. 6.3 CHANGE IN CONTROL. A "Change in Control" means a change in control of a nature that would be required to be reported in response to item 6(a) of Schedule 14A or Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("1934 Act), provided that such a change in control shall be deemed to have occurred at such time as 7 - EMPLOYMENT AGREEMENT (i) any "person" (as that term is used in Section 13(d) and 14(d)(2) of the 1934 Act), is or become the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act) directly or indirectly, of securities representing 20% or more of the combined voting power for election of directors of the then outstanding securities of the Company or any successor of the Company; (ii) during any period of two (2) consecutive years or less, individuals who at the beginning of such period constituted the board of directors of the Company cease, for any reason, to constitute at least a majority of the board, unless the election or nomination for election of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; (iii) the shareholders of the Company approve any merger or consolidation as a result of which the shares shall be changed, converted or exchanged (other than a merger with a wholly owned subsidiary of the Company) or any liquidation of the Company or any sale or other disposition of 50% or more of the assets or earning power of the Company; or (iv) the shareholders of the Company approve any merger or consolidation to which the Company is a party as a result of which the persons who were shareholders of the Company immediately prior to the effective date of the merger or consolidation shall have beneficial ownership of less than 50% of the combined voting power for election of directors of the surviving corporation following the effective date of such merger or consolidation. SECTION 7. VACATION; ILLNESS 7.1 VACATION. Employee shall be entitled each calendar year to a vacation of six (6) weeks, during which time his compensation shall be paid in full. 7.2 ILLNESS. Subject to Section 5, Employee shall receive full compensation for any period of illness or incapacity during the term of this Agreement unless such illness or incapacity is covered under any disability policy. SECTION 8. DIRECTOR While this Agreement is in effect, Employee shall be a director of the Company if so elected by the shareholders. No additional compensation or sums shall be paid to Employee in the form of director's fees. SECTION 9. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE 9.1 EMPLOYEE'S REPRESENTATIONS AND WARRANTIES. Employee represents and warrants to the Company that there is no employment contract or any other contractual obligation to which Employee is subject, or any other factors which prevent Employee from 8 - EMPLOYMENT AGREEMENT entering into this Agreement, or from performing fully Employee's duties under this Agreement, or which would in any way conflict with this Agreement. SECTION 10. MISCELLANEOUS PROVISIONS 10.1 BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the parties and their heirs, personal representatives, successors, and, to the extent permitted by Section 10.2, assigns. 10.2 ASSIGNMENT. Except with the other party's prior written consent, a party may not assign any rights or obligations under this Agreement. 10.3 AMENDMENTS. This Agreement may be amended only by an instrument in writing executed by all the parties. 10.4 HEADINGS. The headings used in this Agreement are solely for convenience of reference, are not part of this Agreement, and are not to be considered in construing or interpreting this Agreement. 10.5 ENTIRE AGREEMENT. This Agreement, together with the Noncompetition Agreement, set forth the entire understanding of the parties with respect to the subject matter of this Agreement and supersedes any and all prior understandings and agreements, whether written or oral, between the parties with respect to such subject matter. 10.6 COUNTERPARTS. This Agreement may be executed by the parties in separate counterparts, each of which when executed and delivered shall be an original, but all of which together shall constitute on and the same instrument. 10.7 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any respect for any reason, the validity and enforceability of any such provision in any other respect and of the remaining provisions of this Agreement shall not be in any way impaired. 10.8 WAVIER. A provision of this Agreement may be waived only by a written instrument executed by the party waiving compliance. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Failure to enforce any provision of this Agreement shall not operate as a waiver of such provision or any other provision. 10.9 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Oregon. Application of the Internal Revenue Code or the 1934 Act shall include application to any successor provisions and amendments. Any 9 - EMPLOYMENT AGREEMENT payments provided for shall be paid net of any applicable withholding required under federal, state or local law. 10.10 VENUE. If any suit or action is filed by any party to enforce this Agreement or otherwise with respect to the subject matter of this Agreement, venue shall be in the federal or state courts in Portland, Oregon, or the state court in Albany, Oregon, unless venue there would prevent the joining of appropriate third parties. 10.11 ATTORNEYS FEES. If any suit or action is filed by any party to enforce this Agreement or otherwise with respect to the subject matter of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys fees incurred in preparation or in prosection or defense of such suit or action as fixed by the court of courts in which the suit or action, including any appeal therein, is tried, heard or decided. Attorneys fees shall include fees of paralegals and deposition expenses, and shall further include attorneys fees incurred by any party in connection with any bankruptcy or similar proceeding. The provisions of this Section shall also apply to arbitrations per Section 10.12 of this Agreement. 10.12 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, except with regard to the Company's right to obtain any injunctive relief under the Noncompetition Agreement, including, without limitation, the making, performance, or interpretation of this Agreement, shall be settled by arbitration. Except as otherwise provided in this Agreement and unless otherwise agreed, the arbitration shall be conducted in Albany, Oregon, in accordance with the then-current Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held before a single arbitrator (unless otherwise agreed by the parties). The arbitrator shall be chosen in accordance with the then-current Commercial Arbitration Rules of the American Arbitration Association. If the arbitration is commenced, the parties agree to permit discovery proceedings of the type provided by the Oregon Rules of Civil Procedure both in advance of, and during recesses of, the arbitration hearings. The parties agree that the arbitrator shall have no jurisdiction to consider evidence with respect to or render an award or judgment for punitive damages (or any other amount awarded for the purpose of imposing a penalty). The parties agree that all facts and other information relating to any arbitration arising under this Agreement shall be kept confidential to the fullest extent permitted by law. 10.13 NOTICE. Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, when transmitted by facsimile transmission and appropriate answer back received or if sent by registered or certified mal, return receipt requested, or overnight courier or express mail to the address set forth on the first page of this Agreement, or to such other address as hereafter may be designated by either party in writing to the other by notice satisfying this Section. 10 - EMPLOYMENT AGREEMENT IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. The COMPANY: OREGON METALLURGICAL CORPORATION, an Oregon corporation By /s/ Orval N. Thompson ------------------------------------- Title: Secretary --------------------------------- EMPLOYEE: /s/ Carlos E. Aguirre ---------------------------------------- CARLOS E. AGUIRRE 11 - EMPLOYMENT AGREEMENT EX-11 3 EARNINGS PER SHARE COMPULATION OREGON METALLURGICAL CORPORATION EXHIBIT 11.1 Earnings per share computation
Three Years Ended December 31, 1996 (in thousands except per share data) 1996 1995 1994 ------- ------- ------- Net Income $22,258 $(2,415) $(2,023) ======= ======= ======== Weighted average shares outstanding 12,943 10,921 10,997 Weighted average share equivalents assumed issued from Excess Benefit Plan 61 121 -- Weighted average share equivalents assumed issued from exercise of warrants 91 59 4 Weighted average share equivalents assumed issued as part of Employee Compensation policy 72 118 -- ------- ------- -------- Weighted average share and share equivalents outstanding 13,167 11,219 11,001 ======= ======= ======= Net income (loss) per share $ 1.69 $ (0.22) $ (0.18) ======= ======= =======
Earnings per share computed on both the primary and fully-diluted bases are the same. EX-13 4 PORTIONS OF 1996 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13.1 Exhibit 13.1 contains the following portions of the 1996 Annual Report to Shareholders: 1. FINANCIAL STATEMENTS: Report of Independent Accountants. Consolidated Statements of Operations - For The Years Ended December 31, 1996, 1995, and 1994. Consolidated Balance Sheets - December 31, 1996 and 1995. Consolidated Statements of Shareholders' Equity - For The Years Ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows - For The Years Ended December 31, 1996, 1995, and 1994. Notes to Consolidated Financial Statements. 2. Five-Year Summary of Selected Financial Data 3. Management's Discussion and Analysis of Financial Condition and Results of Operations 4. Quarterly Stock Data [Letterhead of Coopers & Lybrand L.L.P.] REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of Oregon Metallurgical Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 Oregon Metallurgical Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Eugene, Oregon February 4, 1997 [Page 17 of the 1996 Annual Report] CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Net sales $236,917 $146,853 $ 71,166 Cost of sales 179,187 131,002 64,527 -------- -------- -------- Gross profit 57,730 15,851 6,639 Research, technical and product development expenses 1,968 1,595 1,376 Selling, general and administrative expenses 20,682 14,512 7,517 Provision for estimated environmental costs -- -- 240 -------- -------- -------- Income (loss) from operations 35,080 (256) (2,494) Interest income 1,642 391 Interest expense (2,031) (2,104) (606) Minority interests (1,005) (480) (29) -------- -------- -------- Income (loss) before income taxes 33,686 (2,840) (2,738) Income tax (expense) benefit (11,428) 425 715 -------- -------- -------- Net income (loss) $ 22,258 $ (2,415) $ (2,023) ======== ======== ======== Net income (loss) per share $1.69 $(0.22) $(0.18) ===== ======= ======= Weighted average common shares and equivalents outstanding 13,167 11,219 11,001 ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. [Page 18 of the 1996 Annual Report to Shareholders] CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) as of December 31, 1996 and 1995
1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 1,460 $ 572 Short-term investments available-for-sale 67,712 -- Accounts receivable, less allowance for doubtful accounts of $494 and $1,257 37,300 25,894 Inventories 119,553 66,010 Prepayments and other current assets 406 689 Deferred tax assets 4,701 3,242 -------- ------- Total current assets 231,132 96,407 Property, plant and equipment, net 34,890 35,138 Other assets, net 1,382 1,532 -------- -------- Total assets $267,404 $133,077 ======== ======== LIABILITIES Current liabilities: Current portion of long-term debt $ 3,785 $ 616 Book overdraft 4,359 2,014 Accounts payable 19,915 16,973 Accrued payroll and employee benefits 10,418 6,659 Accrued loss on long-term agreements 2,710 2,781 Other liabilities 9,231 3,595 -------- -------- Total current liabilities 50,418 32,638 Long-term debt, less current portion 4,212 26,746 Deferred tax liabilities 5,078 3,149 Deferred compensation payable 232 678 Accrued postretirement benefit 1,621 1,563 Accrued loss on long-term agreements, less current portion -- 1,636 Minority interests 1,990 780 -------- -------- Total liabilities 63,551 67,190 -------- -------- Commitments and contingencies (Note 13) SHAREHOLDERS' EQUITY Common stock, $1.00 par value; 25,000 shares authorized; 16,127 and 11,018 shares issued and outstanding 16,127 11,018 Additional paid-in capital 148,520 38,340 Retained earnings 38,803 16,545 Cumulative foreign currency translation adjustment 403 (16) -------- -------- Total shareholders' equity 203,853 65,887 -------- -------- Total liabilities and shareholders' equity $267,404 $133,077 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. [Page 19 of the Annual Report to Shareholders] CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) for the years ended December 31, 1996, 1995 and 1994
Cumulative Foreign Common Stock Additional Currency Note -------------- Paid-in Retained Translation Receivable Shares Amount Capital Earnings Adjustment ESOP Total ------ ------ ---------- -------- ----------- ---------- ----- Balances, December 31, 1993 10,888 $10,888 $ 37,420 $ 20,983 $ -- $ (2,226) $ 67,065 Repayment of loan by ESOP -- -- -- -- -- 2,226 2,226 Issuance of common stock for employee benefits 5 5 25 -- -- -- 30 Currency transaction adjustment -- -- -- -- $ (16) -- (16) Net loss -- -- -- (2,023) -- -- (2,023) ------ ------ ------ -------- ------ ------ -------- Balances, December 31, 1994 10,893 10,893 37,445 18,960 (16) -- 67,282 Awards for stock compensation plans 125 125 895 -- -- -- 1,020 Net loss -- -- -- (2,415) -- -- (2,415) ------ ------ ------ -------- ------ ------ ------- Balances, December 31, 1995 11,018 11,018 38,340 16,545 (16) -- 65,887 Common stock offering, net of related expenses 4,600 4,600 98,638 -- -- -- 103,238 Awards for stock compensation plans 429 429 9,671 -- -- -- 10,100 Exercise of stock purchase warrants 80 80 430 -- -- -- 510 Tax benefits on issuance of common stock for employee benefits -- -- 1,441 -- -- -- 1,441 Currency translation adjustment -- -- -- -- 419 -- 419 Net income -- -- -- 22,258 -- -- 22,258 ------ ------- -------- -------- ------ ------ -------- Balances, December 31, 1996 16,127 $16,127 $148,520 $ 38,803 $ 403 $ -- $203,853 ====== ======= ======== ======== ====== ====== ========
The accompanying notes are an integral part of these consolidated financial statements. [Page 20 of the 1996 Annual Report to Shareholders] CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 22,258 $ (2,415) $ (2,023) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 4,434 4,632 4,014 Deferred income tax expense (benefit) 470 (674) (1,434) Employee benefits paid or payable in common stock 8,159 2,666 125 Provision for losses on long-term agreements -- 4,417 -- Minority interests 1,005 480 29 Changes in current assets and liabilities, net of effects of acquisition of a business: Accounts receivable (11,406) (5,450) (4,158) Inventories (53,543) (16,987) (12,209) Prepayments and other current assets (221) 663 1,107 Accounts payable 2,942 113 7,198 Accrued payroll and employee benefits 5,408 2,153 1,577 Accrued loss on long-term agreements (1,707) -- -- Other accrued expenses 7,077 (478) 920 Other 134 (89) 395 -------- -------- -------- Net cash used in operating activities (14,990) (10,969) (4,459) Cash flows from investing activities: Acquisition of a business, net of cash acquired -- -- (8,223) Additions to property, plant and equipment (3,682) (1,914) (1,929) Short-term investments - purchased (73,777) -- (1,228) Short-term investments - matured 6,065 -- 8,811 Other 150 (334) (111) -------- -------- -------- Net cash used in investing activities (71,244) (2,248) (2,680) -------- -------- -------- Cash flows from financing activities: Proceeds from revolving credit agreements 149,569 107,049 40,361 Payments on revolving credit agreements (168,980) (97,800) (27,865) Proceeds from issuance of common stock 103,238 -- -- Capitalized loan fees and acquisition costs -- (54) (1,260) Proceeds from long-term debt 174 990 -- Payments of long-term debt (128) (54) (4,754) Book overdraft 2,345 2,014 -- Proceeds from note receivable - ESOP -- -- 2,226 Proceeds from exercise of stock purchase warrants 510 -- -- Special tax refund (Note 17) 8,097 -- -- Special tax refund dividend paid (Note 17) (8,097) -- -- Other -- -- 46 -------- -------- -------- Net cash provided by financing activities 86,728 12,145 8,754 -------- -------- -------- Effect of exchange rates on cash and cash equivalents 394 8 (16) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 888 (1,064) 1,599 Cash and cash equivalents, beginning of year 572 1,636 37 -------- -------- -------- Cash and cash equivalents, end of year $ 1,460 $ 572 $ 1,636 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. [Page 21 of the 1996 Annual Report to Shareholders] (in thousands) 1. ORGANIZATION AND OPERATIONS: Oregon Metallurgical Corporation ("OREMET") and subsidiaries (the "Company") is one of two U.S. integrated producers and distributors of titanium sponge, ingot, mill products and castings for use in the aerospace, golf, industrial and military markets. Titanium Industries, Inc. ("TI"), an 80% owned subsidiary, operates full-line titanium metal service centers in the U.S., Canada, U.K. and Germany and produces small diameter bar, weld wire and fine wire. As of December 31, 1996 and December 31, 1995, the Company is 5% and 35% owned, respectively, by the Oregon Metallurgical Corporation Employee Stock Ownership Plan (the "ESOP"). In September 1994, the Company completed the acquisition of the net operating assets and subsidiaries of Titanium Industries Distribution Group from Kamyr, Inc. The acquisition cost of approximately $13,502 was funded by $5,000 in cash, $4,002 of bank financing and $4,500 of seller financing. The acquisition of TI was accounted for as a purchase, with its results included in the Company's financial statements from the acquisition date. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF CONSOLIDATION - The consolidated financial statements include the accounts of OREMET, TI and another wholly owned subsidiary. All material intercompany accounts and transactions are eliminated in consolidation. USE OF ESTIMATES - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt securities with a maturity of 90 days or less at the time of purchase to be cash equivalents. SHORT-TERM INVESTMENTS - The Company has classified its entire investment portfolio as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains and losses included in shareholders' equity. At December 31, 1996, unrealized gains and losses were not material. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. The cost of securities sold is based on the specific identification method. CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and trade receivables. The Company places its cash and cash equivalents and short-term investments with high credit quality financial institutions and limits the amount of credit exposure at any one financial institution. At times, temporary cash investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Management believes that risk of loss on the Company's trade receivables is significantly reduced by ongoing credit evaluations of customers' financial condition. Generally, the Company does not require collateral. INVENTORIES - Inventories are carried at the lower of cost or market. Cost is determined using the weighted average cost method. Inventory costs generally include material, labor cost and manufacturing overhead. PROPERTY, EQUIPMENT AND DEPRECIATION - Property, plant and equipment are recorded at historical cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets for financial reporting purposes and accelerated methods are used for income tax reporting purposes. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in the statement of operations. The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount or an asset may not be recoverable. EXCESS OF COST OVER NET ASSETS ACQUIRED - Excess cost over the fair value of net assets acquired of TI of $857 is included in other assets and is being amortized on a straight-line basis over 15 years. Accumulated amortization was $125 and $70 in 1996 and 1995, respectively. INCOME TAXES - The Company uses the liability method to record deferred tax assets and liabilities that are based on the difference between the financial reporting and tax bases of assets and liabilities. RETIREMENT PLANS - The Company and its subsidiaries sponsor retirement plans for the benefit of substantially all employees. Pension costs under the defined benefit plan are actuarially computed and include current service costs. FORWARD FOREIGN EXCHANGE CONTRACTS - The Company may enter into forward foreign exchange contracts as a hedge against currency fluctuations relating to net foreign currency transactions and commitments denominated in foreign currencies. Gains and losses on forward contracts are deferred and offset against foreign exchange gains or losses on the underlying hedged items. FOREIGN CURRENCY TRANSLATION - The Company's foreign subsidiaries' accounts are measured using local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at year end. Revenues and expenses are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included in the cumulative adjustment account in shareholders' equity, net of related deferred income taxes. NET INCOME (LOSS) PER SHARE - Net income (loss) per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents consist of stock options, warrants and amounts due to be settled in shares pursuant to OREMET's benefit plans. Common stock equivalents are computed using the treasury stock method. REVENUE RECOGNITION - Revenues from the sale of commercial products are primarily recognized upon shipment. Revenues from long-term, fixed price agreements are recognized as the product is shipped. Estimated losses at completion of agreements are recognized and charged to income in the period such losses are estimated. [Page 22 of the 1996 Annual Report to Shareholders] (in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Continued: ACCOUNTING STANDARDS PRONOUNCEMENTS - The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". This Statement, which is effective for all companies in 1996, allows, but does not require, the recording of compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation under the provisions of Accounting Principles Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, the adoption of this Standard did not affect the Company's results of operations, financial position or liquidity. RECLASSIFICATIONS - Certain amounts in the 1994 and 1995 financial statements have been reclassified to conform with the current year's presentation. The reclassifications do not affect previously reported results of operations or cash flows. 3. COMMON STOCK OFFERING: On August 26, 1996, the Company completed an offering of 4.6 million shares of its common stock for a price of $23.75 per share. Proceeds from the Offering, net of underwriting fees and expenses, amounted to $103,238. The Company has used $18,037 of the proceeds to pay down its U.S. revolving credit agreement. The balance of the proceeds will be used to construct a new electron beam furnace, to expand the Company's distribution business, for working capital and for other general corporate purposes. 4. INVENTORIES: December 31 ------------------ 1996 1995 ---- ---- Finished goods $ 33,739 $ 18,141 Work-in-progress 34,897 19,837 Raw materials 50,917 28,032 -------- -------- Total $119,553 $ 66,010 ======== ======== 5. SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE: December 31, 1996 ------------ Corporate debt securities $ 32,322 Bankers' acceptances 21,493 Certificates of deposit 15,029 -------- 68,844 Less cash equivalents (1,132) -------- $ 67,712 ======== At December 31, 1996, all of the Company's short-term investments had maturities of less than one year. The fair value of investments approximates amortized cost. 6. PROPERTY, PLANT AND EQUIPMENT: December 31 ------------------ 1996 1995 ---- ---- Land $ 1,189 $ 1,189 Buildings and improvements 11,531 11,455 Machinery and equipment 44,790 42,248 Integrated sponge facility 46,045 45,641 Construction in progress 1,459 846 -------- -------- 105,014 101,379 Less accumulated depreciation 70,124 66,241 -------- -------- $ 34,890 $ 35,138 ======== ======== [Page 23 of the 1996 Annual Report to Shareholders] (in thousands) 7. PROVISION FOR LOSS ON LONG-TERM AGREEMENTS: The Company has historically entered into long-term agreements ("LTAs") with certain customers, primarily in the aerospace industry. The LTAs typically obligate the Company to sell the product at a fixed price for a two- or three-year period. As a result of projected raw materials and processing costs being higher than those anticipated when the LTAs were executed, the Company recorded a provision for loss on LTAs of $5,717 during the year ended December 31, 1995, of which $2,710 and $4,417 remained outstanding at December 31, 1996 and 1995, respectively. 8. INCOME TAXES: The income tax provision (benefit) consists of the following:
Year Ended December 31 --------------------------------------- 1996 1995 1994 ---- ---- ---- Current provision (benefit): Federal $ 9,386 $ (372) $ 422 State 659 155 80 Foreign 913 466 -- Deferred provision (benefit) 470 (674) (1,217) ------- ------ ------ Total tax expense (benefit) $11,428 $ (425) $ (715) ======= ====== ======
The differences between the Company's income tax provision (benefit) and federal tax provision (benefit) at statutory rates are as follows:
Year Ended December 31 --------------------------------------- 1996 1995 1994 ---- ---- ---- Federal provision (benefit) at statutory rates $11,790 $ (966) $ (931) State tax provision (benefit) 2,348 (193) (179) Change in valuation allowance (2,948) 1,138 216 Adjustment of prior-year taxes 79 (264) -- Other 159 (140) 179 ------- ------ ------ Total $11,428 $ (425) $ (715) ======= ====== ======
At December 31, 1996, the Company has net operating loss ("NOL") carryforwards for state income tax purposes, which may be used to offset future taxable income. These NOL carryforwards expire as follows: Year ---- 2007 $ 1,163 2008 7,052 2009 2,051 2010 231 ------- $10,497 ======= At December 31, 1996, the Company also had federal alternative minimum tax ("AMT") and state tax credit carryforwards of $717 and $70, respectively, which may be utilized to offset regular income taxes payable in future years. The AMT credit has an indefinite carryforward period. The state tax credits expire in 1997. [Page 24 to the 1996 Annual Report to Shareholders] (in thousands) 8. INCOME TAXES, Continued: The components of the deferred taxes are as follows:
December 31 ------------------ 1996 1995 ---- ---- Deferred tax assets: NOL and tax credit carryforwards $ 1,213 $ 4,089 Pension, retirement and other employment related items 2,505 1,715 Allowance for doubtful accounts 150 455 Safe harbor lease 139 215 Environmental accrual 350 350 Capitalized inventory costs 370 281 Provision for losses on long-term agreements 858 1,627 Other 730 871 Less valuation allowance -- (2,948) ------- ------- 6,315 6,655 Deferred tax liabilities: Accumulated depreciation and amortization 6,692 6,562 ------- ------- Net deferred tax assets (liabilities) $ (377) $ 93 ======= ======= Balance sheet classification: Current deferred tax assets $ 4,701 $ 3,242 Long-term deferred tax liabilities (5,078) (3,149) ------- ------- Net deferred tax assets (liabilities) $ (377) $ 93 ======= =======
The Company recorded a valuation allowance in 1995 with respect to its deferred tax assets for federal and state NOL and tax credit carryforwards because of uncertainties regarding their future realization. Realization was dependent on generating sufficient taxable income prior to expiration of the NOL carryforwards and the reversal of certain deferred tax credits. In 1996, all of the Company's federal NOL carryforwards and a portion of its state NOL carryforwards were utilized. Due to the utilization of these deferred tax assets and because future taxable income is anticipated to be sufficient to utilize the remaining NOL and tax credit carryforwards, the valuation allowance was eliminated. 9. LONG-TERM DEBT:
December 31 ------------------ 1996 1995 ---- ---- U.S. revolving credit agreement - $21,228 U.K. based credit facility $ 2,334 517 Subordinated loan with Kamyr, Inc. 4,500 4,500 Obligations under capital leases and other 1,163 1,117 ------- ------- 7,997 27,362 Less current maturities 3,785 616 ------- ------- $ 4,212 $26,746
[Page 25 to the 1996 Annual Report to Shareholders] (in thousands) 9. LONG-TERM DEBT. Continued: U.S. REVOLVING CREDIT AGREEMENT - The Company may borrow up to $10,000 under the terms of a revolving credit agreement with a U.S. bank at an interest rate of prime (8.25% and 8.5% at December 31, 1996 and 1995, respectively) plus 1%, or LIBOR (5.69% at December 31, 1996 and 6.43% at December 31, 1995) plus 2.5%. Borrowings under the agreement are collateralized by accounts receivable, inventories and other intangible assets, including the Company's stock in TI. The Company must pay a nonuse fee of .5% annually on the unused portion of the commitment. The credit agreement matures in September 1997 and can be renewed for one-year periods with the consent of both parties. The credit agreement contains restrictive covenants with regard to various financial ratios and imposes limitations on capital expenditures and dividends. Annual cash dividends are limited to the lesser of fifty percent (50%) of net income or $1.8 million. U.K. BASED CREDIT FACILITY - Titanium International, Ltd. ("TIL"), a wholly owned subsidiary of TI, has a credit facility with Midland Bank plc, which provides for a credit facility of approximately $2,300, a foreign exchange facility for $900 and other guarantees of approximately $450. Aggregate borrowings which include Parent loans cannot exceed TIL's shareholders' equity less intangible assets. The credit facility is collateralized by the assets of TIL only. Interest is to be charged at the rate of 1.5% over Midland Bank's base rate on amounts borrowed up to $1,500 and 2% over Midland Bank's base rate on amounts borrowed in excess of $1,500. The credit facility has financial covenants pertaining to net worth and prepayment of loan to TI. In January 1997, the credit facility was amended to increase the credit facility to approximately $3,300, increase the foreign exchange facility to $2,000 and increase the other guarantees to $1,000. The Bank has the option of terminating the availability of credit at its discretion and the facility is subject to review on May 31, 1997. SUBORDINATED LOAN FROM KAMYR, INC. - On September 19, 1994, as part of the Company's acquisition of TI, TI entered into a subordinated debt agreement with the seller, Kamyr, Inc., for $4,500, interest at 8%, payable quarterly. The initial principal payment of $300 is due March 1997, with additional quarterly installments of $350 through March 2000. The subordinated debt agreement includes covenants relative to shareholders' equity, the maximum amount of senior debt, relative financial ratios and restrictions on dividends, new borrowings and guarantees and liens. The loan is collateralized by a second lien on the accounts receivable, inventories, and general intangibles of TI. OTHER NOTES PAYABLE - Other notes payable principally consist of capital lease obligations and are payable in monthly installments of $15, including interest. A balloon payment of $264 is due in July 2002. The loans bear interest at rates between 6.9% and 8.5%. The loans are collateralized by certain machinery and equipment. Aggregate contractual maturities of long-term debt approximate the following at December 31, 1996: 1997 $ 3,785 1998 1,578 1999 1,555 2000 533 2001 136 Thereafter 410 ------- $ 7,997 ======= 10. STOCK PURCHASE WARRANTS: At December 31, 1996, warrants to purchase 120 thousand shares of common stock were outstanding in connection with the Company's acquisition of TI. The warrants were issued at fair market value and are exercisable at $6.375 per share, expiring in September 2004. In May 1996, warrants to purchase 80 thousand shares were exercised. The warrant holder is the president of TI, who is also an officer and director of the Company. [Page 26 to the 1996 Annual Report to Shareholders] (in thousands) 11. EMPLOYEE BENEFIT PLANS: PENSION PLANS - The Company sponsors various retirement plans for most full-time employees. Total pension expense for 1996, 1995 and 1994 was $1,616, $1,581 and $1,287, respectively. Pension plan benefits are based primarily on participants' compensation and years of credited service. It has been the Company's policy to fund all current and prior service costs under retirement plans, and all liabilities for accrued vested and nonvested benefits have been fully funded. The following table sets forth the amounts recognized in the Company's financial statements for the salaried plan:
1996 1995 1994 ---- ---- ---- Pension costs for the year: Service cost $ 524 $ 474 $ 522 Interest cost 951 981 859 Actual return on plan assets (1,315) (2,252) (250) Net amortization of deferral 402 1,571 (397) ------- ------- ------- Net pension cost $ 562 $ 774 $ 734 ======= ======= ======= Plan assets at fair value $13,280 $12,246 $ 9,863 ------- ------- ------- Actuarial value of benefits based on employment service to date and present pay levels: Vested 10,405 10,036 7,976 Nonvested 445 528 300 ------- ------- ------- Accumulated benefit obligation 10,850 10,564 8,276 Additional amounts related to projected compensation increases 3,349 4,443 2,550 ------- ------- ------- Projected benefit obligation 14,199 15,007 10,826 ------- ------- ------- Projected benefit obligation in excess of plan assets (919) (2,761) (963) Unrecognized net obligation 197 237 276 Unrecognized prior service cost 137 255 182 Unrecognized net loss from experience different from actuarial assumptions 155 1,874 76 ------- ------- ------- Accrued pension liability $ (430) $ (395) $ (429) ======= ======= =======
Assumptions utilized to measure net pension cost and the projected benefit obligations are as follows:
1996 1995 1994 ---- ---- ---- Weighted average discount rate 7.25% 7.25% 8.50% Rate of compensation increase 4.50 4.50 4.50 Long-term rate of return on plan assets 8.00 8.00 8.00
[Page 27 to the 1996 Annual Report to Shareholders] (in thousands) 11. EMPLOYEE BENEFIT PLANS, Continued: POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS - The Company accrues the cost of postretirement benefits other than pensions during the period of employment of the salaried employees. The following table sets forth the plan's status, reconciled with the amounts recognized in the Company's financial statements. The components of net periodic postretirement benefit costs are as follows:
1996 1995 1994 ---- ---- ---- Service cost, benefits attributed to employee service during the year $ 66 $ 89 $ 96 Interest cost on accumulated postretirement benefit obligation 84 119 118 Net amortization and deferral (16) -- 15 ---- ---- ---- Net periodic postretirement benefit cost $134 $208 $229 ==== ==== ====
The components of accrued postretirement benefit cost are as follows:
1996 1995 1994 ---- ---- ---- Accumulated postretirement benefit obligation: Retirees $ 479 $ 611 $ 638 Fully eligible plan participants 202 121 140 Other active plan participants 593 1,190 770 ------ ------ ------ 1,274 1,922 1,548 Unrecognized gain (loss) from experience different from actuarial assumptions 347 (359) (91) ------ ------ ------ Accrued postretirement benefit cost $1,621 $1,563 $1,457 ====== ====== ======
For measurement purposes, an 8.5% annual increase in the per capita cost of postretirement medical benefits was assumed for 1996; the rate is assumed to decrease gradually to 6% in 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant affect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $146, and the aggregate of the service and interest cost components of net periodic postretirement cost for the year then ended by $20. The discount rate used in determining the accumulated postretirement benefit obligation was 7.25% for 1996 and 1995 and 8.5% for 1994. The changes in the unrecognized net loss reflect the changes in the discount rate. THE ESOP - In 1987, the Company established The Oregon Metallurgical Corporation Employee Stock Ownership Plan ("ESOP"), an employee stock ownership plan covering substantially all employees of OREMET. The ESOP borrowed $17 million from the Company to purchase approximately 6.3 million shares of common stock. The loan obligation of the ESOP is considered unearned employee benefit expense and, as such, is recorded as a reduction of shareholders' equity. Both the loan obligation and the unearned benefit expense have been reduced by loan repayments made by the ESOP. In December 1994, the note receivable from the ESOP was fully repaid. As of December 31, 1996, the ESOP owned approximately 5% of the outstanding common stock of the Company. All of the common stock held in the ESOP has been allocated to OREMET employees. The Company made no contribution to the ESOP in 1996 or 1995. The ESOP contribution expense totaled $2,382 in 1994. EXCESS BENEFIT PLAN ("EBP") - OREMET maintains an unfunded EBP for participants whose allocations of common stock to the ESOP are reduced as a result of limitations imposed under federal income tax law. The Company made no contributions to the EBP in 1996 or 1995. EBP costs were $332 in 1994. At December 31, 1996 and 1995, the Company had recorded liabilities to the EBP of 39 thousand shares and 115 thousand shares, respectively. DEFINED CONTRIBUTION PLANS - OREMET sponsors a domestic 401(k) retirement savings plan for the benefit of both its union and salaried employees. Under the provisions of the plan, OREMET will contribute one share of stock for each day worked (subject to certain limitations) or approximately 260 shares a year for a full-time employee. OREMET will also contribute a matching contribution based on the profitability of the Company. The matching contribution is limited to 3% of the participant's compensation. OREMET's costs under the plan totaled $4,005 and $1,041 in 1996 and 1995, respectively. [Page 28 to the 1996 Annual Report to Shareholders] (in thousands) 11. EMPLOYEE BENEFIT PLANS. Continued: TI sponsors a domestic 401(k) retirement saving plan. Under the provisions of the plan, participants may contribute a percentage of their compensation not to exceed 12%. TI matches the participants' contributions up to 3%. Participants are fully vested with regard to TI's contributions and earnings thereon after one year of service. TI's contributions to the plan were approximately $67 in 1996 and $64 in 1995. T.I.L. sponsors a defined contribution pension plan for all employees over the age of 25 with one year of service. Under the plan, participants may contribute between 17.5% to 40% of base pay depending upon their age. Participants are fully vested and T.I.L. matches between 2% and 14% of the employee's base pay, depending upon employee age and as long as the employee's contributions are at least 2%. T.I.L.'s contributions for 1996 and 1995 were approximately $49 and $51, respectively. STOCK APPRECIATION RIGHTS ("SARS") - In December of 1995, the Company established an incentive SARs plan. At the discretion of the Board of Directors, SARs may be granted to officers and other key employees. Upon exercise of a SAR, the holder is entitled to receive cash equal to the amount by which the market value of the common stock on the exercise date exceeds the market value of the common stock on the date of grant. The SARs become fully exercisable over a four-year vesting period measured from the date of grant; no SARs are vested as of December 31, 1996. The Board of Directors awarded 166.5 thousand SARs, with a grant price of $10.25 per share, on December 14, 1995 and 187.5 thousand SARs, with a grant price of $33.75 per share, on December 12, 1996 (fair market value at dates of award). Unless exercised, the SARs expire ten years after the date of grant. Total SARs compensation expense for the year ended December 31, 1996 was $1,493. STOCK COMPENSATION PLANS - Beginning in 1995, Oremet implemented stock compensation plans for the benefit of both its union and salaried employees. The employee earns one share of the Company's common stock for every one hundred dollars earned in salaries and wages, subject to certain limitations. Stock Compensation Plan costs were $4,082 and $1,750 in 1996 and 1995, respectively. 12. STOCK OPTION PLAN: Effective June 11, 1996, certain eligible employees of OREMET were each granted options to buy five hundred shares of the Company's Common Stock (approximately 252 thousand total shares) at $30.25, the fair value of the Company's common stock on the date of grant. Such options vest 100% on the fourth anniversary and expire on the tenth anniversary of the date of the grant. The Company had adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the options issued under the stock option plan. Had compensation cost been determined based on the fair value at the date of grant consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would not have been materially different. Weighted Average Exercise Option Price ------ -------- Granted, June 11, 1996 $252 $30.25 Forfeited 8 30.25 ---- Outstanding at December 31, 1996 $244 $30.25 ==== ====== 13. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES - Minimum annual rental commitments at December 31, 1996, under noncancelable operating leases, principally for facilities and equipment, are payable as follows: Operating Leases --------- 1997 $ 1,046 1998 733 1999 607 2000 386 2001 352 Thereafter 278 ------- Total minimum lease payments $ 3,402 ======= Total rental costs were $1,003, $951 and $533 in 1996, 1995 and 1994, respectively. [Page 29 of the 1996 Annual Report to Shareholders] (in thousands) 13. COMMITMENTS AND CONTINGENCIES. Continued: OTHER - At the time of the acquisition of TI, OREMET entered into an agreement with the minority shareholder to acquire the remaining 20% interest in TI, based upon a formula related to the book value of TI, in annual increments of at least 15% no earlier than 1999 and no later than 2004. ENVIRONMENTAL MATTERS - The Company is subject to federal, state and local statutes and regulations concerning environmental matters and land use. Although the Company believes it is in material compliance with these laws, they are frequently modified to be more restrictive and it is impossible to predict accurately the future effect that changes in these laws may have on the Company. There can be no assurance that the Company will not face costs and liabilities as a result of environmental regulation which could have a material adverse effect on the Company, its financial position, results of operations and liquidity. The Company's operations pose continuing risk of environmental impacts. The Company uses and produces substantial quantities of substances, chemicals and compounds that have been identified as hazardous or toxic under federal, state and local environmental and worker safety and health laws and regulations. Consequently, the Company is subject to various environmental laws that impose compliance obligations and can create liability for historical releases of hazardous substances. While the Company takes environmental, safety and health precautions appropriate for the industry, the Company's operations pose an ongoing risk of accidental releases of, and worker exposure to, hazardous or toxic substances. The Company conducts its operations at industrial sites where hazardous materials have been managed for many years in connection with its operations, including periods before careful management of these materials was generally believed to be necessary. The Company has entered into a consent order in August 1994 with the Oregon Department of Environmental Quality ("ODEQ") pursuant to which the Company is conducting an investigation of hazardous substances in portions of the soil and groundwater at its plant site in Albany, Oregon. The Company anticipates that its investigation will result in a determination that at least some remedial action is necessary for which an accrual has been made. A neighboring property owner also is investigating groundwater contamination at its property that has migrated to the Company's property and for which OREMET may have legal claims to recover a portion of its investigation costs. The Company anticipates that a number of its production wells will have to be reconstructed in response to concerns about migration of groundwater contamination. The Company also has claims against its drilling contractor with respect to the reconstruction of the wells. In February 1995, the ODEQ modified the Company's wastewater discharge permit for its Albany facility. The new permit imposes more stringent discharge limits, and the Company has entered into a Mutual Agreement and Order with the ODEQ under which the Company will achieve the more stringent units according to a specific schedule. The Company has identified several alternatives for meeting the new limits, the most expensive of which would require capital expenditures of approximately $700. The Company is working with the ODEQ to explore less expensive alternatives. Over the past several years, the Company has voluntarily undertaken extensive testing of the air emissions from its Albany plant. This testing indicates that emissions from some units may be greater than previously recognized. The Company entered into a memorandum of understanding with ODEQ on July 19, 1996, under which the Company will conduct certain air quality impact analyses and may potentially install additional emissions control equipment. In the course of this work, the Company has determined that the matter can be better resolved through an aggressive emissions reduction and control program that will also accommodate expansion plans. The Company is engaged in discussions with ODEQ to amend the memorandum to incorporate this emissions reduction program. The Company has estimated that the capital cost of the emissions controls will be $1,500 in 1997. The Company believes this matter will be resolved by the end of 1997. Based upon its engineering studies regarding the above matters, the Company made provisions for environmental expenses in 1995, 1994 and 1993 of $0, $240 and $970, respectively, of which approximately $909 remains at December 31, 1996. These amounts are in addition to recurring environmental costs which are expensed as incurred and are included in cost of sales. At the present time, management cannot reasonably predict when all of these environmental issues will be resolved. Additionally, it is reasonably possible that a change in the estimate will occur in the near term. Commencing in 1991, the Pennsylvania Department of Environmental Regulation and the Environmental Protection Agency ("EPA") performed periodic site inspections, including soil and water sampling, at TI's site in Frackville, Pennsylvania, in connection with a regional groundwater investigation of the Frackville, Pennsylvania, area. While this investigation is ongoing, the Company has not been informed by either agency of any pending or potentially required actions which may arise from this investigation. In conjunction with the Company's purchase of TI, Kamyr, Inc. has agreed to undertake specified cleanup activities. In addition, Kamyr, Inc. has agreed to a limited indemnification of the Company in the event damages arise that result from conditions which were not in compliance with environmental laws and regulations as they existed at the time the Company purchased TI. LEGAL PROCEEDINGS - From time to time, the Company is involved in legal proceedings which arise in the normal course of business. The Company is not currently involved as a defendant in any legal proceedings where the outcome, if determined adversely, could have a material effect on the financial position, results of operations or liquidity of the Company. [Page 30 of the 1996 Annual Report to Shareholders] (in thousands) 14. BUSINESS SEGMENTS: The Company's operations are conducted primarily in one business segment, the production and marketing of titanium metal and related products. In May 1994, OREMET signed a three-year contract with Aerospatiale Societe Nationale Industrielle for engine pylon parts for the Airbus aircraft, and in the second half of 1994 began supplying product under the contract. The acquisition of TI provided the Company with a service center located in the U.K. with an established operation. In 1996, TI opened a service center in Germany. The Company intends to utilize these facilities to meet its customers' needs in Europe. The Company's foreign operations (principally in Europe) are summarized as follows:
1996 1995 1994 ---- ---- ---- Revenues - unaffiliated customers $23,520 $18,882 $ 4,123 Operating profits 2,712 1,370 219 Identifiable assets at year end 17,298 11,509 10,685
Export sales from the Company's United States operations (primarily to Europe and Asia) approximated $22 million, $11 million and $6 million for the years ended December 31, 1996, 1995 and 1994, respectively. No individual foreign region had sales in excess of 10% of total sales during 1996, 1995 or 1994. 15. FINANCIAL INSTRUMENTS: FOREIGN CURRENCY CONTRACTS - The Company enters into forward foreign exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its committed exposures. The Company does not enter into foreign currency contracts for trading or speculative purposes. This hedging minimizes the impact of foreign exchange rate movements on the Company's operating results. The Company's foreign exchange contracts do not subject the Company's results of operations to risk due to exchange rate movements because gains and losses on these contracts generally offset losses and gains on the assets and liabilities being hedged. At December 31, 1996 and 1995, the Company had notional principal amounts of approximately $790 and $490, respectively, in contracts to buy U.S. dollars in the future, with maturities of less than eight months. Net foreign currency transaction gains occurring for 1996 and 1995 were approximately $29 and $121, respectively, which have been included in cost of goods sold. OTHER FINANCIAL INSTRUMENTS - At December 31, 1996 and 1995, the carrying value of financial instruments classified as current assets or liabilities approximated their fair values, based on the short-term maturities of these instruments. Fair value is determined based on future cash flows, discounted at market interest rates, and other appropriate valuation methodologies. At December 31, 1996 and 1995, the fair value of long-term debt with fixed interest terms approximated carrying value. Both periods include long-term borrowing with variable interest terms, for which the carrying value approximated market. The fair value of debt is determined by obtaining quotes from financial institutions. Exposure to market risk on foreign currency contracts results from fluctuations in currency rates during the periods the contracts are outstanding. The counterparties to foreign currency exchange contracts are major financial institutions. Credit loss from counterparty nonperformance is not anticipated. 16. ADDITIONAL CASH FLOWS STATEMENT INFORMATION: The Company's noncash investing and financing activities and cash payments for interest and income taxes for years ended December 31 are as follows:
1996 1995 1994 ---- ---- ---- Cash paid (received) for: Interest $2,031 $ 2,253 $ 614 Income taxes (refunds, net of payments) 3,157 9 (1,327) Noncash investing and financing activities: Acquisition of business, net of cash acquired: Working capital, other than cash $(9,630) Property, plant and equipment (3,278) Long-term debt assumed 185 Note payable issued to seller 4,500 ------- $(8,223) =======
[Page 31 of the 1996 Annual Report to Shareholders] (in thousands) 17. SPECIAL TAX REFUND DIVIDEND: The Company's Board of Directors declared a special tax refund dividend which was paid on December 20, 1996 to shareholders of record as of November 27, 1987. The special tax refund relates to a long-standing tax refund claim which was recently settled with the Internal Revenue Service. The federal refund in the amount of $8,097, including interest and net of expenses, was received by the Company on July 30, 1996. The dividend related to the net federal refund will be $0.5227 per share. The dividend, if any, related to the State of Oregon refund will be determined at such time as the refund is received by the Company. As it relates to this matter, the Company is obligated by past agreement to act in the capacity of a conduit between the shareholders of record as of November 17, 1987, and the Federal and State of Oregon taxing authorities. As such, the Company has not recorded the proceeds from the federal refund in income or shareholders' equity, nor will the Company reflect the payment of the dividend in the consolidated statements of shareholders' equity. 18. SHAREHOLDER RIGHTS PLAN: In December 1996, the Company adopted a Shareholder Rights Plan (the "Plan"). The Plan is designed to prevent a person or group from gaining control of the Company or obtaining a position that could deter the acquisition of control by others, without offering an adequate price to all shareholders and to deter other abusive takeover tactics which are not in the best interest of shareholders. Under the Plan, each outstanding share of the Company's Common Stock carries one right which is composed of common stock and debt. The rights may only become exercisable under certain circumstances, including acquisitions of the Company's Common Stock by a person or group of persons without the prior approval of the Company. Depending on the circumstances, if the rights become exercisable, the holder may be entitled to purchase shares of the Company's Common Stock and receive debt or shares of Common Stock of the acquiring person at discounted prices. The rights at the option of the Company are redeemable at one cent per right. Unexpired rights expire in December 2006. 19. QUARTERLY INFORMATION (Unaudited): The following table presents the Company's unaudited consolidated quarterly financial data for fiscal years 1996 and 1995. Although the Company's business is not seasonal, growth rates of sales have varied from quarter to quarter as a result of the timing of new products, industry cyclicality, and general U.S. and international economic conditions.
Net Income (Loss) Gross Net Per Profit Income Share Sales (Loss) (Loss) (3) ----- ------ ------ ------ 1996 Quarter: 1st $ 51,309 $10,361 $ 3,345 $ 0.30 2nd 58,760 14,268 5,186 0.46 3rd 64,729 16,239 6,445 0.48 4th 62,119 16,862 7,282 0.45 -------- ------- ------- $236,917 $57,730 $22,258 $ 1.69 ======== ======= ======= ======= 1995 Quarter: 1st $ 30,838 $ 5,332 $ 535 $ 0.05 2nd(1) 35,125 5,291 453 0.04 3rd 41,236 4,090 (439) (0.04) 4th(1)(2) 39,654 1,138 (2,964) (0.26) -------- ------- ------- $146,853 $15,851 $(2,415) $ (0.22) ======== ======= ======= ======= During the second quarter of 1995, the Company reported a pre-tax charge to income of $1,300 to reflect the impact of projected conversion costs on long-term agreements which were in excess of selling price. During the fourth quarter of 1995, the Company reported a pre-tax charge to income of $4,417 to reflect the impact of increased raw material costs on long-term agreements. The Company concluded the first nine months of 1995 with an effective tax provision rate of 37.9% on income before income taxes and minority interest of $1,434. For the fourth quarter of 1995, the Company's effective tax benefit rate was 25.5% on a net loss before income taxes and minority interest of $3,794. The Company's 1995 effective tax benefit rate was 18.0%. The above change in the Company's effective tax rate reflects the establishment of a valuation allowance on a substantial portion of the deferred tax assets which were generated by the Company's loss incurred during the fourth quarter of 1995. Earnings per share are computed independently for each of the quarters presented. The sum of the quarterly earnings per share in 1995 do not equal the total computed for the year due to stock issued under employee benefit plans.
[Page 32 of the 1996 Annual Report to Shareholders] FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (In Thousands, Except Employee and Per-Share Data)
Year Ended December 31, ------------------------------------------------------------- 1996 1995 1994(2) 1993 1992(1) -------- -------- --------- -------- ---------- Statement of Operations Data: Net Sales $236,917 $146,853 $ 71,166 $ 55,351 $ 56,785 Income (loss) from operations(3) 35,080 (256) (2,494) (6,179) (5,934) Income (loss) before cumulative effect of changes in accounting principles(1) 22,258 (2,415) (2,023) (4,098) (4,122) Income (loss) per common share before cumulative effect of changes in accounting principles 1.69 (.22) (.18) (.38) (.38) Weighted average common shares and equivalents outstanding 13,167 11,219 11,001 10,839 10,754 Balance Sheet Data: Working capital $180,714 $ 63,769 $ 49,082 $ 36,467 $ 37,296 Total Assets 267,404 133,077 111,972 83,326 85,701 Long-term debt, including current maturities 7,997 27,362 17,177 4,750 8,100 Shareholders' equity 203,853 65,887 67,282 67,065 68,402 Other Operatinng Data: EBITDA $ 38,509 $ 3,896 $ 1,882 $ (1,426) $ (1,352) Cash flows provided by (used in): Operating activities (14,990) (10,969) (4,459) 841 7,454 Investing activities (71,244) (2,248) (2,680) (1,974) (11,201) Financing activities 86,728 12,145 8,754 (921) 2,278 ------- ------- ------- ------- -------- Total 494 (1,072) 1,615 (2,054) (1,469) ======= ======= ======= ======= ======== Product Sales: Aerospace 101,835 67,148 43,254 42,620 45,428 Non-aerospace 135,082 79,705 27,912 12,731 11,357 Order backlog at year end(4) 183,000 105,000 44,000 18,000 28,000 Product Shipments (in pounds): Ingot 6,980 4,418 3,517 2,319 3,447 Mill Products 9,164 6,910 3,540 3,119 1,892 Active employees at year end 731 580 482 310 359 The cumulative effect of changes in accounting principles reflects the adoption in 1992 of Statement of Financial Accounting Standards ("SFAS") No. 109. "Accounting for Income Taxes", which resulted in the recognition of $0.6 million, or $0.05 per share of income. Simultaneously, the Company adopted SFAS No. 106. "Employer's Accounting for Postretirement Benefits Other Than Pensions", which resulted in the recognition of $0.7 million, or $0.06 per share, of expense, net of tax benefits of $0.4 million. The combined effect of adopting SFAS No.'s 109 and 106 was the recognition of $69, or $0.01 per share, of additional expense. Includes Titanium Industries, Inc., after its acquisition by the Company on September 20, 1994. Operating income (loss) includes restructuring and environmental charges of $240 in 1994, $2,997 in 1993, and $200 in 1992. A provision for a loss on long-term agreements of $4,417 was recorded in the fourth quarter of 1995. See notes 7 and 13 in the Company's Financial Statements. Order backlog is defined as firm purchase orders scheduled for delivery during the subsequent twelve-month period (which are generally subject to cancellation by the customer upon payment of specified charges).
[Page 33 of the 1996 Annual Report to Shareholders] THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF THE COMPANY. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, DEPENDENCE ON AEROSPACE, UNCERTAINTY OF EMERGING GOLF MARKET, HIGHLY COMPETITIVE MARKET, SUBSTANTIAL EXCESS PRODUCTION CAPACITY, PLANNED SIGNIFICANT INVESTMENT IN ELECTRON BEAM FURNACE, DEPENDENCE ON ESSENTIAL MACHINERY AND EQUIPMENT, DEPENDENCE ON RAW MATERIALS AND SERVICES, ENVIRONMENTAL REGULATION, AND LABOR AGREEMENTS. OVERVIEW Demand for the Company's products was strong in 1996. The Company reported record sales, record production, and except for 1989, a year in which the Company received an unusual tax refund, record net income. The U.S. Geological Survey (USGS) reported that U.S. industry shipments of titanium mill products increased 30% to 57 million pounds in 1996, compared to 44 million pounds in 1995. The improvement in industry shipments was the result of an increase in demand in the commercial aerospace market and the emergence of new uses of titanium metal, primarily in golf clubheads. The commercial aerospace market continued to be the Company's largest market, followed by shipments to the golf industry. International sales have increased 52%, to approximately $46 million in 1996, compared to approximately $30 million in 1995. In 1994, international sales approximated $10 million. Beginning in 1993, several members of the Company's current executive management team, including Carlos E. Aguirre, the President and Chief Executive Officer, joined the Company from other companies within the titanium industry. The new management implemented a plan to: (i) diversify the Company's revenue base from a market, customer and product perspective, (ii) develop and establish a major presence in new markets, (iii) expand the Company's distribution and service center business and (iv) increase production levels while improving product quality. Aerospace-related sales represented approximately 43% of net sales in 1996, compared to approximately 46% and 61% of net sales in 1995 and 1994, respectively. Reported orders for new commercial aircraft have increased significantly, particularly for wide body planes such as the Boeing 777 and the Airbus A-330 and A-340, which use a greater percentage of titanium per plane than narrow body aircraft. Aircraft manufacturers are reporting substantial backlogs and are continuing to increase their build rates. The Company believes that industry mill product shipments to the commercial aerospace market increased by more than 5 million pounds to 25 million pounds in 1996. The Company estimates that in 1996, industry shipments to the golf market approximated 10 million pounds, compared to 3.5 million pounds in 1995. The Company believes it is the market leader in shipments to the golf industry, with shipments of 5.5 and 1.8 million pounds in 1996 and 1995, respectively. The Company estimates that titanium producers located in the Former Soviet Union (FSU) are supplying up to 25% of the titanium shipments to the golf club industry. The Company expects that 1997 sales to golf clubhead producers will approximate $15 million, compared to actual sales of approximately $40 million in 1996. The estimated reduction in sales is due to a combination of inventory accumulation by the golf clubhead producers and their increased efficiency in recycling internal scrap. The Company believes that consumer demand for titanium golf clubs is continuing to increase. The Company has devoted significant resources to develop its presence in new markets. In addition to golf, other new markets where the Company has also established a major presence include armor for sale to the military and high purity sponge for the electronics industry. The Company also developed a process to produce titanium aluminide ingots, primarily for use by the aerospace industry. In 1996, the Company expanded its international network of sales and service centers to fourteen. The Company's service centers reported record shipments and earnings in 1996. To support the increasing demand for titanium in diverse commercial, consumer, aerospace, and industrial markets, the Company expects to continue to expand its distribution business geographically. On September 20, 1994, the Company completed the acquisition of Titanium Industries, Inc. ("TI") for $13.5 million. TI operates full-line titanium metal service centers in the U.S., U.K., Canada, and Germany, and also produces small diameter titanium bars, weld wire and fine wire. The acquisition was accounted for as a purchase, with the results of TI included in the Company's financial statements from the acquisition date. TI sells its products primarily to industrial markets and to a lesser extent, the commercial aerospace market. Historically, TI's service centers have reported results that are more stable and less cyclical than the Company's core manufacturing business. The acquisition of TI has enhanced the Company's revenue diversification and its ability to identify promising new market opportunities. The Company's twelve-month sales order backlog has increased 74% to $183 million as of December 31, 1996, compared to $105 million as of December 31, 1995. The Company's sales order backlog was $44 million as of December 31, 1994. OREMET's backlog is based on firm purchase orders scheduled for delivery [Page 34 of the 1996 Annual Report to Shareholders] the subsequent twelve-month period. Customer orders may be subject to cancellation by the customer upon payment of specified charges. Beginning in the second half of 1995 and continuing to the present, the Company has experienced a significant increase in requests for quotations as well as increased orders and prices on accepted orders. The increase in demand is primarily a result of the recovery in the commercial aerospace market and the growth of the golf clubhead market. Because of the strong demand, the Company has been increasingly selective in the new orders that it accepts. The increase in demand for titanium products has resulted in higher prices for certain raw materials used by the Company, including titanium scrap, titanium sponge and alloying materials. During 1995, the Company's profitability was negatively impacted by higher raw material costs and fixed price long-term sales agreements with certain customers, primarily in the commercial aerospace industry. The Company recorded a $4.4 million provision in the fourth quarter of 1995 to recognize anticipated losses on existing long-term agreements ("LTAs") as a result of higher raw material costs. During 1996, the Company incurred costs of $1.7 million on certain of its LTAs, reducing its accrual for future losses to $2.7 million at December 31, 1996. Starting with the first quarter of 1996, the Company added raw material surcharges in order to more directly link changes in raw material costs to its contracts. The Company has also instituted price increases for certain of its long-term sales agreements which were entered into prior to 1996. However, there can be no assurance as to the Company's continuing ability to recover raw material cost increases. The future profitability of the Company's fixed price LTAs is subject to change based upon the Company's costs of production. The strong demand for titanium products continues to challenge the Company's production capacities. During 1996, the Company operated its sponge and melting plants at near capacity. The Company's mill products plant operated at approximately 70% of its capacity. The Company is implementing a capital expansion program designed to increase capacity in various critical areas. The cornerstone of the 1997 capital plan is the construction of an electron beam (EB) furnace and related raw materials processing facility. The new EB plant will have an annual melting capacity of 20 million pounds, a doubling of present melting resources. On August 26, 1996, the Company completed an Offering (the Offering) of 4.6 million shares of its Common Stock for a price of $23.75 per share. Proceeds from the Offering, net of underwriting fees and expenses, amounted to $103 million. The proceeds will be used to construct a new EB furnace and raw material processing facility, expand the Company's distribution business, and for working capital and other general corporate purposes. Historically, aerospace applications in both the commercial and military sectors have accounted for a majority of U.S. titanium consumption. The aerospace industry has been characterized by severe cyclicality, which has had a significant impact on the sales and profitability of titanium producers, including OREMET. The last cyclical peak for the titanium industry occurred in the 1988-1990 period, when domestic industry mill product shipments averaged over 50 million pounds per year. In 1991, U.S. titanium industry mill product shipments declined by approximately 35% to 34 million pounds. This decline was primarily due to lower demand resulting from a slump in commercial aerospace and the curtailment or cancellation of military programs as the Cold War ended. Data reported by the USGS indicate that industry shipments reached approximately 36 million pounds in 1993,but dropped to about 35 million pounds in 1994. During the five years ended December 31, 1995, when the titanium industry was in a severe downturn, the Company incurred net losses of $4.7 million, $4.2 million, $4.1 million, $2.0 million and $2.4 million in 1991, 1992, 1993, 1994 and 1995, respectively. For the years 1993 through 1995, the Company's aggregate net losses were $8.5 million, and the combined losses of the Company and the other major titanium producers for whom data are publicly available (RMI, IMI plc, and Titanium Metals Corporation) were $181.3 million. Although the Company operated profitably in 1996, continuing profitable operations will depend on continued strength in orders from the aerospace, golf and other markets, favorable pricing and the Company's ability to control its raw material and other costs. [Page 35 of the 1996 Annual Report to Shareholders] RESULTS OF OPERATIONS The following table sets forth certain operating items from the Company's consolidated results of operations as a percentage of net sales for each of the years in the five-year period ended December 31, 1996.
YEAR ENDED DECEMBER 31 ------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit (loss)(1) 24.4 10.8 9.3 4.9 (1.0) Income (loss) from operations(1) 14.8 (0.2) (3.5) (11.2) (10.4) Net income 9.4% (1.6)% (2.8)% (7.4)% (7.4)% - ----------------- A provision for a loss on LTAs of $5.7 million was recorded in 1995. Gross profit and income from operations, exclusive of this provision, as a percentage of net sales would have been 13.8% and 2.8% in 1995, respectively.
QUARTERLY RESULTS OF OPERATIONS The following table presents the Company's unaudited consolidated quarterly financial data for fiscal years 1996, 1995 and 1994. Although the Company's business is not seasonal, growth rates of sales have varied from quarter to quarter as a result of the purchase of TI in September 1994, the timing of new products, industry cyclicality and general U.S. and international economic conditions.
1996 Quarters 1995 Quarters 1994 Quarters ----------------------------- ------------------------------- --------------------------- First Second Third Fourth First Second(1) Third Fourth(1) First Second Third Fourth ----- ------ ----- ------ ----- --------- ----- --------- ----- ------ ----- ------ (in millions) Net sales $ 51.3 $ 58.8 $64.7 $62.1 $30.8 $35.2 $41.2 $39.7 $13.3 $14.5 $17.0 $ 26.4 Gross profit 10.4 14.2 16.2 16.9 5.3 5.3 4.1 1.2 0.1 0.6 1.7 4.2 Income (loss) from operations 5.5 9.0 9.8 10.7 1.6 1.4 0.1 (3.4) (1.7) (0.9) (0.6) 0.7 Net income (loss) 3.3 5.2 6.4 7.3 0.5 0.5 (0.4) (3.0) (1.1) (0.6) (0.4) 0.1 - ----------------- During the second quarter of 1995, the Company reported a pre-tax charge to income of $1.3 million to reflect the impact of projected conversion costs on long-term agreements which were in excess of selling price. During the fourth quarter of 1995, the Company reported a pre-tax charge to income of $4.4 million to reflect the impact of increased raw material costs on long-term agreements.
Net sales for the fourth quarter of 1996, decreased $2.6 million to $62.1 million, compared to net sales of $64.7 million in the third quarter of 1996. The decrease in net sales between the two periods is primarily attributable to production difficulties encountered in the fourth quarter which adversely affected shipments of mill products. Additionally, due to inventory buildups, golf club manufacturers pushed out fourth quarter deliveries. COMPARISON OF 1996 TO 1995 NET SALES. Net sales increased $90.1 million, or 61% to $236.9 million in 1996, compared to $146.9 million in 1995. The increase in sales was primarily driven by increased demand and higher prices for both the Company's manufactured and service center products. Of the $90.1 million net sales increase, $45.1 million was the result of volume increases and $45.0 million from higher average selling prices. TITANIUM SPONGE. During 1996, the Company's integrated sponge facility operated at near capacity, primarily supplying the Company's internal demand for titanium sponge as well as sales to RMI under a long-term titanium sponge conversion agreement. Sales of titanium sponge and sponge conversion services increased 60% to $16.9 million from $10.6 million in 1996 compared to 1995. The 1996 increase in sales of $6.3 million was substantially the result of increased shipments and not an increase in the average selling price. The Company projects that it will continue to operate its sponge facility at near capacity with substantially all production being utilized for internal consumption and for supply to RMI (approximately 45% of capacity in 1996). The Company is presently supplementing its sponge production with purchases from other producers. [Page 36 of the 1996 Annual Report to Shareholders] INGOT. Sales of ingot increased 102% to $45.1 million for 1996 compared to $22.3 million for 1995. Ingot shipments increased 58% and the average ingot price per pound increased 28%. The Company operated its melt facilities at near capacity during 1996. The Company produces ingot for both internal use in its mill products division and for sale primarily to aerospace customers. MILL PRODUCTS. The Company produces or contracts for outside production a variety of mill products including: billet, bar, plate, sheet and engineered parts. Mill product sales increased 89% to $88.6 million for 1996 compared to $46.8 million for 1995. Shipments of mill products increased 33% and the average price per pound increased 42%. Sales to producers of aerospace components and golf clubheads are responsible for a substantial portion of the growth in mill product sales. CASTINGS. Sales of castings increased 38% to $10.0 million for 1996 compared to $7.2 million for 1995. The Company is operating at a higher production rate in 1996 and is expanding its casting facilities. DISTRIBUTION. The Company's service centers market a wide variety of mill products including engineered parts that are manufactured by various producers. During 1996, sales of service center products increased 31% to $70.9 million compared to $54.5 million for 1995. The increase in sales was due to increased shipments and favorable pricing and product mix. COST OF SALES AND GROSS PROFIT. Cost of sales for 1996 increased 37% to $179.2 million, compared to $131.0 million in 1995. The primary reason for the increase in cost of sales was increased shipments. The Company's gross profit margin increased to 24.4% for 1996 from 10.8% for 1995, as a result of higher prices and improved production efficiencies. RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES. Research, technical and product development expenses ("RT&D") increased by $0.4 million for 1996 to $2.0 million from $1.6 million in 1995. The main focus of RT&D is to develop enhanced production procedures, provide customers with required technical support and develop new products and markets. RT&D works jointly on projects with customers, research agencies and universities. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("SG&A") increased $6.2 million, or 43%, for 1996 to $20.7 million from $14.5 million in 1995. The increase is primarily a result of additional employees hired to support the increase in operating activity. As a percentage of sales, SG&A decreased to 8.7% in 1996 from 9.9% in 1995. INTEREST INCOME. The Company earned $1.6 million of interest income during 1996. No interest income was earned in 1995. Net proceeds from the Offering have been invested in a portfolio of short-term marketable securities. This is the primary factor for the increase in interest income. INTEREST EXPENSE. Interest expense decreased $0.1 million to $2.0 million in 1996 compared to 1995. In August 1996, the Company paid down its U.S. revolving credit agreement with funds received from the Offering. As a result of the Offering and cash generated by operations, management anticipates that interest expense for 1997 will be less than in 1996. PROVISION FOR INCOME TAXES. The Company reported a provision for income taxes of $11.4 million, or an effective tax rate of 33% (on income before income taxes and minority interests) for 1996 compared to a 1995 tax benefit of $0.4 million, or an effective tax rate of 18%. The difference between the federal and state combined statutory tax rate of 39.5% and the effective tax rate of 33% for 1996 is primarily due to a change in the Company's deferred tax asset valuation allowance, reflecting the belief that the deferred tax assets will be realized by the Company. NET INCOME. The Company reported net income of $22.3 million, $1.69 per share, for 1996 compared to a net loss of $2.4 million, $0.22 per share, for 1995. COMPARISON OF 1995 AND 1994 NET SALES. Net sales increased $75.7 million, or 106% to $146.9 million in 1995, compared to $71.2 million in 1994. 1995 represented the first complete year in which TI results were consolidated with the Company. On a pro forma basis, as if TI had been included in results for all of 1994, the sales increase in 1995 would have been 53%. The increase in sales was primarily driven by increased demand and higher prices for both the Company's manufactured and service center products. Of the $75.7 million net sales increase, $61.5 million was the result of volume increases and $14.2 million from higher average selling prices. TITANIUM SPONGE. Sales of titanium sponge and sponge conversion services decreased 15% to $10.6 million in 1995, compared to $12.4 million in 1994. Sponge shipments decreased 18% and average sponge prices per pound increased. Sales of titanium sponge have decreased due to greater internal consumption by the Company. During the second half of 1995, the Company's integrated sponge facility operated at near capacity, primarily supplying the Company's internal demand for titanium sponge and sales to RMI under a long-term titanium sponge conversion agreement. [Page 37 of the 1996 Annual Report to Shareholders] INGOT. Sales of ingot increased 49% to $22.3 million in 1995, compared to $15.0 million in 1994. Ingot shipments increased 26% and the average ingot price per pound also increased 19%. The Company began operating its melt facilities at near capacity during the second half of 1995. The increase of sales is primarily due to higher demand from the aerospace industry. MILL PRODUCTS. Mill product sales increased 106% to $46.8 million in 1995, compared to $22.8 million in 1994. Shipments of mill products increased 95% and the average price per pound increased 5%. During 1995, mill products sales increased across all product lines. Sales to the casters of golf clubheads had a favorable effect on 1995 mill product sales. CASTINGS. Sales of castings increased 12% to $7.2 million in 1995, compared to $6.4 million in 1994. During the fourth quarter of 1995, a significant competitor of the Company discontinued its casting operations which had a positive impact on casting orders and sales. DISTRIBUTION. Sales of service center products were included for a full year in 1995, compared to approximately three months in 1994. During 1995, the increase in sales was due to increased shipments and favorable pricing and product mix. The markets served by the Company's service centers, which were entered by the Company with the acquisition of TI, displayed strong growth during 1995. COST OF SALES AND GROSS PROFIT. Cost of sales for 1995 increased 103% to $131.0 million, compared to $64.5 million in 1994. TI's cost of sales were included for a full year in 1995, compared to approximately three months in 1994. The primary reasons for the increase in cost of sales were increased shipments coupled with rising raw material costs. The Company's gross profit margin increased to 10.8% in 1995 from 9.3% in 1994. The Company recorded a provision for loss on LTAs of $4.4 million in the fourth quarter of 1995 to cover estimated losses on LTAs with certain aerospace customers. The provision for losses on LTAs was charged to cost of sales. The Company's most significant unfavorable LTA expires during the third quarter of 1997. In response to the changing market conditions, the Company has negotiated more favorable terms on many of its LTAs and has instituted raw material surcharges. RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES. RT&D increased $0.2 million to $1.6 million compared to $1.4 million in 1994. RT&D salaries and related expenses increased in 1995 compared to 1994, reflecting an increase in technical personnel to support the Company's long-term commitments for research, development of new products and improvements in operating processes. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $7.0 million, or 93%, in 1995 to $14.5 million from $7.5 million in 1994. The inclusion of TI for a full year in the Company's 1995 results is the primary reason for the increase in the Company's SG&A. In response to an increased activity level, all departments included in the SG&A category added personnel during 1995. However, as a percentage of sales, SG&A decreased to 9.9% in 1995 from 10.6% in 1994. INTEREST EXPENSE. Interest expense increased by $1.5 million to $2.1 million in 1995 compared to $0.6 million in 1994. The increase in interest expense in 1995 compared to 1994 is the direct result of the purchase of TI in September 1994 and increased borrowing required to support the Company's increased operating levels. INCOME TAX BENEFIT. The Company's 1995 effective tax rate on the net loss before income tax benefit and minority interests was 18%. The Company's income tax rate varied from the normally expected statutory rate due to differences between book and tax income for which recognition of a deferred tax asset was not considered appropriate. NET LOSS. The Company reported a net loss of $2.4 million, $0.22 per share, for 1995 compared to a net loss of $2.0 million, $0.18 per share, for 1994. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW Net cash used in operating activities totaled $15.0 million for 1996, compared to $11.0 million for 1995. Net cash used in operating activities totaled $4.5 million for 1994. Working capital increases required to support the sharp increase in operating levels and the sales backlog were responsible for the most significant portion of the cash used by the Company's operating activities for the three-year period. The increase in the amount of cash flow used in operating activities is a trend which began in the second quarter of 1994, consistent with the Company's experience of increasing sales, sales order backlog and production. During 1996 and 1995, the Company incurred $8.2 million and $2.7 million, respectively, in expenses relating to its Stock Compensation Plans and Savings Plan. Liabilities arising under these plans are satisfied by issuing shares of the Company's Common Stock. Increases in the average market value of the Common Stock and in the number of eligible employees are the primary factors for the 1996 increase. See Note 11 to the Company's Consolidated Financial Statements. [Page 38 of the 1996 Annual Report to Shareholders] During the fourth quarter of 1995, the Company incurred a non-cash charge to earnings of $4.4 million to establish a provision for anticipated future losses on fixed price LTAs. During 1996, the Company utilized $1.7 million of the reserve to offset losses incurred on its LTA's. See Note 7 to the Company's Consolidated Financial Statements. Net cash used in investing activities totaled $71.2 million for 1996 compared to $2.2 million for 1995. Net cash used in investing activities totaled $2.7 million in 1994. Of the net proceeds from the Offering, $67.7 million were invested in short-term marketable securities. The Company additions to property, plant and equipment were $3.7 million in 1996 and $1.9 million in 1995 and 1994. In 1994, the Company paid $8.2 million, net of cash received of $0.8 million, and issued debt to the seller in the amount of $4.5 million, for the purchase of TI. Net cash provided by financing activities totaled $86.7 million for 1996, compared to $12.1 million for 1995. Net cash provided by financing activities totaled $8.8 million in 1994. The Company received net proceeds of $103.2 million from the Offering (see Note 3 to the Company's Consolidated Financial Statements). The Company used $18 million of the proceeds from the Offering to pay down its U.S. revolving credit agreement. In July 1996, the Company received a Federal tax refund and related interest in the amount of $8.1 million which was subsequently paid in the form of a dividend to shareholders of record as of November 27, 1987 (see Note 17 to the Company's Consolidated Financial Statements). In 1995, $11.3 million was provided from net borrowings on the Company's credit facilities and book overdraft, and $1.0 million from a capital lease obligation. REVIEW OF SIGNIFICANT WORKING CAPITAL ACCOUNTS INVENTORIES. Inventories increased by $53.5 million, or 81% during 1996 to $119.6 million, while they increased $17.0 million, or 35%, to $66.0 million at December 31, 1995, compared to $49.0 million at December 31, 1994. In addition to an increase in finished goods inventory, increases in raw materials and work-in-process have been made in support of higher production levels. In response to a growing sales backlog, the Company is continuing to raise its production levels. The Company is also experiencing higher raw material and conversion costs, which have increased the cost of the Company's inventory. ACCOUNTS RECEIVABLE. Accounts receivable increased by $11.4 million, or 44% to $37.3 million, during 1996, while they increased $5.5 million, or 27%, to $25.9 million at December 31, 1995, compared to $20.4 million as of December 31, 1994. The increase in accounts receivable is consistent with the Company's increase in sales volume. BOOK OVERDRAFT. The Company had a book overdraft at December 31, 1996, 1995 and 1994 of $4.4 million, $2.0 million and $0.0 million, respectively. The book overdraft represents Company checks which have been disbursed and are in transit as of the end of the reporting period. ACCOUNTS PAYABLE. Accounts payable increased by $2.9 million, or 17% during 1996 to $19.9 million, while the balances at December 31, 1995 and 1994 were $17.0 million and $16.9 million, respectively. The increase in accounts payable for 1996 is related to the timing of raw material purchases. ACCRUED PAYROLL AND EMPLOYEE BENEFITS. Accrued payroll and employee benefits increased $5.4 million, or 61% during 1996 to $10.7 million, while they increased $3.7 million, or 126% to $6.7 million at December 31, 1995, compared to $2.9 million at December 31, 1994. Accruals related to the Company's cash bonus program and stock appreciation rights plan account for a substantial portion of the increase. CREDIT AGREEMENTS The Company may borrow up to $10 million under the terms of a U.S. revolving credit agreement with BankAmerica Business Credit, Inc. ("BABC"). The U.S. credit agreement expires in September 1997. There is no balance outstanding under the credit agreement as of December 31, 1996. As of December 31, 1996, interest charged under the credit agreement was calculated based on BABC's reference rate plus 1% or a borrowing option based on LIBOR plus 2.5%. Subsequent to the Offering in August 1996, the Company reduced its credit line under this agreement to $10 million from $35 million. The Company is in the process of evaluating proposals from lending institutions for a new $60 million credit agreement. As of December 31, 1995, the Company was not in compliance with certain of its financial covenants contained in its BABC credit agreement. The Company obtained a written waiver from BABC on these matters. The U.S. credit agreement was amended as of March 14, 1996 and May 1, 1996 to, among other things, modify the debt to equity ratio covenant and certain other restrictive covenants and to increase the line from $25 to $35 million. The amendments to the covenants were needed for the Company to remain in compliance with certain financial [Page 39 of the Annual Report to Shareholders] covenants in the U.S. credit agreement in light of increased working capital growth. The Company is in compliance with its financial covenants as of December 31, 1996. Titanium International Limited, a subsidiary of TI, has a short-term credit facility with Midland Bank plc, in the U.K., permitting borrowings of approximately $3.3 million. The U.K. credit agreement is subject to renewal on May 31, 1997. The balance outstanding under the U.K. credit agreement as of December 31, 1996 was $2.3 million. CAPITAL EXPENDITURES The Company intends to use approximately $32 million of the net proceeds from the Offering for the construction, equipment and facility costs for a new EB furnace and related raw materials processing facilities. The construction and production ramp-up periods are expected to take approximately 18 months with approximately $18 million expended in 1997 (design, procurement and construction phases), and approximately $14 million in 1998 (construction and testing phase). The Company intends to expend approximately $15 million of the net proceeds from the offering to establish or purchase additional service centers. The Company anticipates that capital expenditures during 1997, other than those related to the EB furnace and the service center expansion, will approximate $14 million which will be provided by internally generated funds or credit facilities. Capital expenditures required to maintain compliance with applicable environmental regulations are included in the Company's capital expenditure plan to the extent that they can be determined. The Company has no material open commitments which obligate it to make future capital expenditures. INCOME TAXES In 1996, the Company utilized $3.5 million and $19.5 million of Federal and State net operating loss carryforwards, respectively. The Company anticipates that in 1997 it will fully utilize its federal alternative minimum tax (AMT) credit carryforward of $0.7 million and its remaining State of Oregon net operating loss carryforwards of $10.5 million. In addition to federal and State of Oregon income taxes, the Company pays minimal franchise and income taxes in various states and foreign jurisdictions. ADEQUACY OF LIQUIDITY AND CAPITAL RESOURCES The Company's access to borrowing facilities, public markets and internally generated cash are expected to be sufficient to support the Company's operating needs and to finance its continued growth, capital expenditures and repayment of long-term debt obligations. NON-U.S. OPERATIONS AND MONETARY ASSETS Approximately 10% of the Company's net sales for 1996 and 13% of the Company's 1995 net sales were derived from its service centers in the U.K., Canada, Germany and France. Changes in the value of non-U.S. currencies relative to the U.S. dollar cause fluctuations in U.S. dollar financial position and operating results. The impact of currency fluctuations on the Company were not significant in 1996 and 1995. IMPACT OF INFLATION Inflation can be expected to have an effect on many of the Company's operating costs and expenses. Due to worldwide competition in the titanium industry, the Company may not be able to pass through such increased costs to its customers. [Page 40 of the 1996 Annual Report to Shareholders] QUARTERLY STOCK DATA For the year ended December 31, 1996 For the year ended December 31, 1995 High Low High Low ------------------------ ------------------------ First 22 1/8 11 First 8 1/4 6 Second 35 17 5/8 Second 9.63 6.563 Third 35 1/4 21 1/2 Third 13 1/2 9 3/8 Fourth 38 3/4 28 Fourth 12 1/2 9 1/8 [Page 41 of the 1996 Annual Report to Shareholders] EX-21 5 SUBSIDIARIES OF THE COMPANY OREGON METALLURGICAL CORPORATION EXHIBIT 21.1 Subsidiaries of Oregon Metallurgical Corporation: - --------------------------------- State or Country Name of Subsidiary in Which Organized - ------------------ ------------------ OREMET France S.a.r.l. (1)(3) France Titanium Industries, Inc. *(1)(3) Oregon Titanium Wire Corporation ** (2)(4) Pennsylvania Titanium International Limited ** (2)(3) United Kingdom Titanium International GmbH** (3)(5) Germany * Titanium Industries, Inc. is a majority-owned (80%) subsidiary of Oregon Metallurgical Corporation. ** The companies are wholly-owned subsidiaries of Titanium Industries, Inc. (1) Created 1994 (2) Acquired 1994 (3) Operates titanium Service Centers (4) Manufactures titanium rod and wire (5) Began operation in February 1996 EX-23 6 COOPERS & LYBRAND CONSENT [Letterhead of Coopers & Lybrand L.L.P.] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Oregon Metallurgical Corporation and subsidiaries on Form S-8 (File Nos. 333-20909, 333-00167 and 33-63449) of our report dated February 4, 1997, on our audits of the consolidated financial statements and financial statement schedule of Oregon Metallurgical Corporation and subsidiaries as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, which reports are included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Eugene, Oregon March 19, 1997 EX-24 7 POWER OF ATTORNEY POWER OF ATTORNEY Each of the undersigned directors of OREGON METALLURGICAL CORPORATION, an Oregon corporation ("Company"), constitutes and appoints CARLOS E. AGUIRRE and DENNIS P. KELLY, and each or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead in his capacity as a director of the Company, to execute an annual report of the Company on Form 10-K for the fiscal year ended December 31, 1996 ("Report"), and any and all amendments, and to file such Report, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each or either of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, ratifying and confirming all that the attorneys-in-fact and agents, and each or either of them, or substitute or substitutes, may lawfully do or cause to be done by virtue of this Power of Attorney, it being understood that the documents executed by such attorney-in-fact pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. IN WITNESS WHEREOF, each of the undersigned directors of the Company has executed this Power of Attorney as of February 28, 1997. /s/ Howard T. Cusic Chairman, Board of Directors - -------------------------------------- (Howard T. Cusic) /s/ Gilbert. Bezar Director - -------------------------------------- (Gilbert E. Bezar) /s/ Thomas B. Boklund Director - -------------------------------------- (Thomas B. Boklund) /s/ Roger V. Carter Director - -------------------------------------- (Roger V. Carter) /s/ Nicholas P. Collins Director - -------------------------------------- (Nicholas P. Collins) /s/ David H. Leonard Director - -------------------------------------- (David H. Leonard) /s/ James S. Paddock Director - -------------------------------------- (James S. Paddock) /s/ James R. Pate Director - -------------------------------------- (James R. Pate) EX-27 8
5 This schedule contains summary financial information extracted from the Company's report on Form 10-K for the period ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,460 67,712 37,794 (494) 119,553 231,132 105,014 (70,124) 267,404 50,418 7,997 0 0 16,127 187,323 267,404 236,917 236,917 179,187 179,187 0 0 2,031 33,686 11,428 22,258 0 0 0 22,258 1.69 1.69
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