<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 1, 1996
TITANIUM METALS CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 0-28538 13-5630895
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
1999 BROADWAY, SUITE 4300 80202
DENVER, COLORADO (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (303) 296-5600
NOT APPLICABLE
(Former name or former address, if changed since last report)
<PAGE> 2
The Registrant's Current Report on Form 8-K dated October 1, 1996 filed
with the Securities and Exchange Commission on October 16, 1996 is amended as
follows.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired. The financial statements
of Axel Johnson Metals, Inc. and Titanium Hearth Technologies are set forth as
Exhibit 99.1, and are incorporated by reference herein.
(b) Pro Forma Financial Statements. Pro forma condensed consolidated
financial statements of Titanium Metals Corporation and Subsidiaries are set
forth as Exhibit 99.2 and are incorporated by reference herein.
(c) Exhibits
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PAGES
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99.1 Financial statements of (i) Axel Johnson Metals, Inc. as of December 31,
1995 and for the year then ended and as of September 30, 1996 and for
the nine-month period then ended and (ii) Titanium Hearth Technologies
as of December 31, 1994 and 1995 and for each of the three years in the
period ended December 31, 1995 and as of September 30, 1996 and for the
nine-month period then ended. With respect to the unaudited financial
information of Axel Johnson Metals, Inc. as of and for the nine-month
period ended September 30, 1996 included (or incorporated by reference)
in this Form 8-K/A, Price Waterhouse LLP reported that they have applied
limited procedures in accordance with professional standards for review
of such information. However, their separate report dated November 19,
1996, appearing (or incorporated by reference) herein, states that they
did not audit and they do not express an opinion on that unaudited
financial information. Price Waterhouse LLP has not carried out any
significant or additional audit tests beyond those which would have been
necessary had their report not been included. Accordingly, the degree of
reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied. Price
Waterhouse LLP is not subject to the liability provisions of section 11
of the Securities Act of 1933 for their report on the unaudited
financial information because that report is not a "report" or a "part"
of the registration statement prepared or certified by Price Waterhouse
LLP within the meaning of sections 7 and 11 of the Act. With respect to
the unaudited financial information of Titanium Hearth Technologies as
of and for the nine-month period ended September 30, 1996 included (or
incorporated by reference) in this Form 8-K/A, Price Waterhouse LLP
reported that they have applied limited procedures in accordance with
professional standards for review of such information. However, their
separate report dated November 19, 1996, appearing (or incorporated by
reference) herein, states that they did not audit and they do not
express an opinion on that unaudited financial information. Price
Waterhouse LLP has not carried out any significant or additional audit
tests beyond those which would have been necessary had their report not
been included. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of
the review procedures applied. Price Waterhouse LLP is not subject to
the liability provisions of section 11 of the Securities Act of 1933 for
their report on the unaudited financial information because that report
is not a "report" or a "part" of the registration statement prepared or
certified by Price Waterhouse LLP within the meaning of sections 7 and
11 of the Act........................................................... F-1
99.2 Titanium Metals Corporation and Subsidiaries pro forma condensed
financial statements as of September 29, 1996 and for the fiscal year
ended December 31, 1995 and for the nine-month period ended September
29, 1996................................................................ PF-1
</TABLE>
1
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
/s/ J. Thomas Montgomery, Jr.
------------------------------------
J. Thomas Montgomery, Jr.,
Vice President -- Finance and
Treasurer
(Chief Accounting Officer)
December 4, 1996
2
<PAGE> 4
EXHIBIT 99.1
TITANIUM METALS CORPORATION
INDEX TO FINANCIAL STATEMENTS
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PAGE
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FINANCIAL STATEMENTS:
Axel Johnson Metals, Inc.:
Report of Independent Accountants........................................... F-2
Review Report of Independent Accountants.................................... F-3
Balance Sheet at December 31, 1995 and September 30, 1996 (unaudited)....... F-4
Statement of Income for the year ended December 31, 1995 and the nine month
period ended September 30, 1996 (unaudited)................................ F-5
Statement of Stockholder's Equity for the year ended December 31, 1995 and
the nine month period ended September 30, 1996 (unaudited)................. F-6
Statement of Cash Flows for the year ended December 31, 1995 and the nine
month period ended September 30, 1996 (unaudited).......................... F-7
Notes to Financial Statements............................................... F-8/F-16
Titanium Hearth Technologies:
Report of Independent Accountants........................................... F-17
Review Report of Independent Accountants.................................... F-18
Balance Sheets at December 31, 1994 and 1995 and September 30, 1996
(unaudited)................................................................ F-19
Statements of Income for the years ended December 31, 1993, 1994 and 1995
and for the nine months ended September 30, 1996 (unaudited)............... F-20
Statements of Changes in Partners' Capital for the years ended December 31,
1993, 1994 and 1995 and for the nine months ended September 30, 1996
(unaudited)................................................................ F-21
Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1996 (unaudited)..... F-22
Notes to Financial Statements............................................... F-23/F-28
</TABLE>
F-1
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Titanium Hearth Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements
of income, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Axel Johnson Metals, Inc. (a
wholly-owned subsidiary of Axel Johnson Inc.) at December 31, 1995, and the
results of its operations and its cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
November 19, 1996
F-2
<PAGE> 6
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Titanium Hearth Technologies, Inc.
We have reviewed the accompanying balance sheet and the related statements
of income, of stockholder's equity and of cash flows of Axel Johnson Metals,
Inc. (a wholly-owned subsidiary of Axel Johnson Inc.) as of September 30, 1996,
and for the nine-month period then ended. This financial information is the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
November 19, 1996
F-3
<PAGE> 7
AXEL JOHNSON METALS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 12 $ 14
Accounts receivable, net...................................... 1,993 2,568
Accounts receivable, joint venture............................ 3,904 4,264
Inventories................................................... 3,039 4,070
Deferred income taxes......................................... 175 544
Prepaid expenses and other current assets..................... 388 113
------- -------
Total current assets.................................. 9,511 11,573
Property, plant and equipment, net.............................. 5,545 8,565
Investment in joint venture..................................... 7,713 13,651
Other assets.................................................... 683 508
------- -------
$23,452 $34,297
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,676 $ 2,841
Accrued expenses.............................................. 1,945 3,158
------- -------
Total current liabilities............................. 3,621 5,999
Deferred income taxes........................................... 2,601 2,678
Other liabilities............................................... 645 710
------- -------
Total liabilities..................................... 6,867 9,387
------- -------
Commitments and contingencies (Note 8)
Stockholder's equity:
Common stock, $1.00 par value, 10,000 shares authorized,
issued and outstanding..................................... 10 10
Retained earnings............................................. 16,575 24,900
------- -------
Total stockholder's equity............................ 16,585 24,910
------- -------
$23,452 $34,297
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 8
AXEL JOHNSON METALS, INC.
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net sales..................................................... $12,932 $10,077
Net sales to joint venture.................................... 6,659 7,836
Billings to joint venture..................................... 4,144 3,305
------- -------
23,735 21,218
------- -------
Costs and expenses:
Cost of sales................................................. 18,197 16,070
Other operating costs......................................... 2,519 1,860
Selling, general and administrative........................... 2,185 1,968
Restructuring................................................. -- 900
------- -------
22,901 20,798
------- -------
Income from operations.......................................... 834 420
Interest income................................................. 202 --
Interest expense -- related party............................... (233) (129)
Other........................................................... 188 --
------- -------
Income before equity in earnings of joint venture and income
taxes......................................................... 991 291
Equity in earnings of joint venture............................. 4,851 5,938
------- -------
Income before income taxes...................................... 5,842 6,229
Income taxes.................................................... 2,285 2,434
------- -------
Net income...................................................... $ 3,557 $ 3,795
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 9
AXEL JOHNSON METALS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994......................... 10,000 $10 $15,070 $15,080
Net income........................................... -- -- 3,557 3,557
Payments to Axel Johnson Inc., net................... -- -- (2,052) (2,052)
------ --- ------- -------
Balance at December 31, 1995......................... 10,000 10 16,575 16,585
Net income (unaudited)............................... -- -- 3,795 3,795
Contributions from Axel Johnson Inc., net
(unaudited)........................................ -- -- 4,530 4,530
------ --- ------- -------
Balance at September 30, 1996 (unaudited)............ 10,000 $10 $24,900 $24,910
====== === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 10
AXEL JOHNSON METALS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 3,557 $ 3,795
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in earnings of joint venture in excess of
distributions............................................ (2,229) (5,938)
Depreciation and amortization.............................. 827 648
Deferred income taxes...................................... 83 (292)
Changes in assets and liabilities:
Accounts receivable...................................... 71 (575)
Accounts receivable, joint venture....................... 476 (360)
Inventories.............................................. (263) (1,031)
Prepaid expenses and other current assets................ 1,141 450
Accounts payable......................................... 660 1,165
Accrued expenses and other liabilities................... 672 1,278
------- -------
Net cash provided by (used in) operating activities... 4,995 (860)
------- -------
Cash flows from investing activities:
Purchase of property and equipment............................ (1,778) (3,668)
------- -------
Net cash used in investing activities................. (1,778) (3,668)
------- -------
Cash flows from financing activities:
Payments on long-term debt.................................... (1,200) --
Payments (to) from Axel Johnson Inc........................... (2,052) 4,530
------- -------
Net cash provided by (used in) financing activities... (3,252) 4,530
------- -------
(Decrease) increase in cash..................................... (35) 2
Cash at beginning of period..................................... 47 12
------- -------
Cash at end of period........................................... $ 12 $ 14
======= =======
Supplemental disclosures:
Cash paid for
Interest................................................... $ 52 $ --
Income taxes............................................... 185 603
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 11
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Axel Johnson Metals, Inc. (the "Company") is a wholly-owned subsidiary of
Axel Johnson Inc. ("Axel Johnson") (see Note 9).
The Company operates a titanium scrap processing facility and melts and
refines titanium and other metals for use in high-performance applications in
the aerospace, marine, power generation, chemical processing, pulp and paper,
electronics and petrochemical industries. The Company operates plants in
California and Pennsylvania.
Investment in Joint Venture
The Company has a 50% interest in Titanium Hearth Technologies ("THT" or
the "Partnership"), a partnership with Titanium Metals Corporation ("TIMET").
THT owns and operates cold hearth melting furnaces located in Pennsylvania and
Nevada. The Company accounts for the joint venture on the equity method.
Management estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash
The Company participates in Axel Johnson's centralized cash management
system. In general, the cash funding requirements of the Company have been met
by, and substantially all cash generated by the Company has been transferred to,
Axel Johnson.
Revenue recognition
Revenue from product sales and service revenue derived from the processing
and melting of customer supplied material is recognized upon shipment of the
product.
Inventories
Inventories are stated at the lower of cost, determined using the first-in
first-out method, or market.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets which range from three to twenty five years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful lives or the lease term.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for Long-Lived Assets to Be Disposed Of," effective January 1, 1996.
FAS 121 requires that the Company review long-lived assets and certain
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
annually performs an undiscounted cash flow analysis to determine if an asset
has been impaired and any
F-8
<PAGE> 12
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
impairment would be charged to operations in the period such determination is
made. There was no financial statement effect of the adoption of FAS 121.
Income taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts. Current tax expense
has been determined as if the Company was a separate taxpayer. Income taxes
currently payable are deemed to have been remitted by the Company to Axel
Johnson in the period that the liability arose. Income taxes currently
receivable are deemed to have been received by the Company from Axel Johnson in
the period that the refund could have been recognized by the Company had the
Company been a separate taxpayer.
Employee benefit plans
Axel Johnson has a noncontributory defined benefit pension plan and an
unfunded retirement restoration plan covering substantially all of the Company's
employees and a postretirement benefit program for employees who meet service
requirements. The Company's retirement benefit costs are limited to amounts
allocated by Axel Johnson. The cost of these plans has been allocated to the
Company based on the compensation of the Company's employees. Amounts allocated
are not necessarily indicative of the costs that would have been incurred if the
Company had been operated as a separate entity.
Other operating costs
Other operating costs include amounts billed to THT under the
administrative services agreement (see Note 5).
Restructuring charge (unaudited)
During 1996, the Company charged $900,000 (unaudited) to operations for
lease termination and site restoration costs related to the closing and
consolidation of its Lionville, Pennsylvania scrap processing operations to new
facilities in Morgantown, Pennsylvania.
Fair value of financial instruments
The estimated carrying value of the Company's financial instruments is
considered to approximate fair value due to the relatively short maturities of
the respective instruments.
Concentrations of credit risk
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of accounts receivable. The Company's accounts receivable
are derived from sales to customers primarily in the United States. The Company
performs ongoing credit evaluations of its customers, and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses. At December 31, 1995, receivables from three customers
represented 16%, 12%, and 11% respectively, of gross accounts receivable. At
September 30, 1996, receivables from three customers represented 24%, 16% and
12%(unaudited), respectively, of gross accounts receivable.
F-9
<PAGE> 13
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unaudited Interim results
The accompanying balance sheet at September 30, 1996, and the related
statements of income, stockholder's equity and cash flows for the nine months
ended September 30, 1996 are unaudited. In the opinion of management, these
statements have been prepared on a consistent basis with the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair statement of the interim period. The
information disclosed in these Notes to Financial Statements as of September 30,
1996 and the nine months ended September 30, 1996 are unaudited. The results of
operations for the interim period are not necessarily indicative of the
operating results of a full year.
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Gross accounts receivable....................... $ 2,018 $ 2,593
Less: allowance for doubtful accounts........... (25) (25)
-------- --------
$ 1,993 $ 2,568
======== ========
Inventories:
Raw materials................................... $ 758 $ 297
Work-in-process................................. 2,137 3,038
Finished goods.................................. 144 735
-------- --------
$ 3,039 $ 4,070
======== ========
Property, plant and equipment, net:
Land............................................ $ 429 $ 429
Buildings....................................... 2,546 2,553
Machinery and equipment......................... 11,849 13,280
Leasehold improvements.......................... 875 875
Furniture and fixtures.......................... 320 320
Computers and software.......................... 310 408
Construction in progress........................ 600 2,858
-------- --------
16,929 20,723
Less: accumulated depreciation and
amortization................................. (11,384) (12,158)
-------- --------
$ 5,545 $ 8,565
======== ========
Accrued expenses:
Accrued bonus................................... $ 1,350 $ 1,430
Accrued restructuring costs..................... -- 900
Other current liabilities....................... 595 828
-------- --------
$ 1,945 $ 3,158
======== ========
</TABLE>
F-10
<PAGE> 14
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- NET SALES
The following table summarizes sales for customers accounting for more than
10% of the Company's net sales:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
TIMET........................................... $1,914 $ 1,618
Customer "A".................................... 1,799 1,373
Customer "B".................................... 1,372 1,129
Customer "C".................................... 1,312 --
</TABLE>
NOTE 4 -- JOINT VENTURE:
Investment in Joint Venture
Summarized financial information of THT, the Company's unconsolidated joint
venture, is shown below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
Income statement:
Revenues...................................... $ 47,091 $58,114
Operating costs and expenses.................. 38,573 45,702
Interest and other expenses, net.............. 626 466
-------- -------
Net income.................................... $ 7,892 $11,946
======== =======
Balance sheet:
Current assets................................ $ 17,992 $29,149
Noncurrent assets............................. 20,263 19,878
Current liabilities........................... 6,386 14,212
Noncurrent liabilities........................ 9,000 --
Equity........................................ 22,869 34,815
</TABLE>
In accordance with the joint venture agreement, the Company is entitled to
a preferred distribution in an amount equal to the excess gross profit of the
joint venture from other than TIMET sales over a base amount. The total
preferred distribution payable to the Company is limited to the present value of
$4 million as of the date of the agreement using the prime rate as the discount
rate and has been fully accrued as of December 31, 1995.
F-11
<PAGE> 15
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- RELATED PARTY TRANSACTIONS:
TRANSACTIONS WITH AXEL JOHNSON
Related party transactions with Axel Johnson not disclosed elsewhere in the
financial statements are as follows:
Intercompany balances
Amounts due to or from Axel Johnson consist of cash remittances made by the
Company to Axel Johnson from its operating bank accounts offset by cash advances
and other charges for purchases of property and equipment, acquisitions, current
income tax liabilities, intercompany allocations and other charges, and
fluctuating working capital needs. Neither Axel Johnson nor the Company charged
interest on the balances due. Interest expense was allocated to the Company from
Axel Johnson based on a working capital formula. At the end of each period, the
intercompany balances were charged to equity.
Employee benefit programs
The Company participates in various employee benefit programs which are
sponsored by Axel Johnson. These programs include medical, dental and life
insurance, and workers' compensation. The Company reimburses Axel Johnson for
its proportionate cost of these programs based on historical experience and
relative headcount. The costs reimbursed to Axel Johnson include costs for
reported claims, as well as incurred but not reported claims. The Company
recorded expense related to the reimbursement of these costs of approximately
$277,000 and $217,000 (unaudited) in 1995 and the nine months ended September
30, 1996, respectively. The costs are charged to cost of sales and selling,
general and administrative expense based on the number of employees in each of
these categories. The Company believes the allocation by Axel Johnson of the
proportionate cost is reasonable but is not necessarily indicative of the costs
that would have been incurred had the Company operated on a stand-alone basis.
See Note 7 for other benefit plans.
Administrative services
Axel Johnson provides limited services to the Company, including certain
treasury, accounting, tax, internal audit, legal and human resource functions.
The costs of these functions have been allocated to the Company based primarily
on the Company's revenues. Management believes that such allocations are
reasonable. Such charges and allocations are not necessarily indicative of the
costs that would have been incurred if the Company had been a separate entity.
The allocated cost of these services amounting to $380,000 and $314,000
(unaudited) in 1995 and the nine months ended September 30, 1996, respectively,
have been included in selling, general and administrative expenses in the
statement of operations.
TRANSACTIONS WITH THT
Pursuant to the THT partnership agreement, certain services are provided to
THT at negotiated amounts. Activity under these service agreements for the year
ended December 31, 1995 and nine months ended September 30, 1996 are as follows:
Administrative services agreement
Pursuant to the formation of THT, the Company entered into an agreement to
provide to the Partnership administrative, technical and managerial services, as
defined, through August 31, 1997, with automatic one year renewals unless either
party gives notice of termination in accordance with the
F-12
<PAGE> 16
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
provisions of the agreement. The fee for such services is based on 90% of a Base
Rate, as defined (subject to escalation at a rate of 5% per annum commencing
January 1, 1993), plus all out of pocket expenses incurred by the Company
attributable to performing such services. The fees are subject to reduction, as
defined, in the event the Base Rate exceeds 90% of actual costs incurred by the
Company. The Company charged THT $4,144,000 and $3,305,000 (unaudited) for
services and out of pocket expenses under this agreement for the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
Raw materials supply and processing agreement
Pursuant to the formation of the Partnership, the Company, THT and TIMET
entered into an agreement effective through August 31, 1997 whereby the Company
agreed to (a) sell to THT, subject to availability in the market, at the fair
market value, scrap that THT orders from the Company and (b) subject to
available capacity, to provide scrap processing services to THT with respect to
scrap owned by THT and TIMET at rates set forth in the agreement. Such rates are
dependent on the relative strength of the titanium market, as defined in the
agreement. This agreement is subject to automatic one year renewals unless the
Company gives THT and TIMET one year's prior notice of termination. Amounts
charged to THT by the Company under this agreement totaled $2,824,000 and
$4,482,000 (unaudited) for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively.
Reciprocal conversion services agreement
Pursuant to the formation of the Partnership, the Company and THT entered
into an agreement whereby, to the extent of available capacity, each party would
perform cold hearth melting services through August 31, 1997 with automatic one
year renewals unless either party terminates with one year's prior notice. As
amended, this agreement provides that fees for services rendered under the
agreement will be charged at an amount equal to the lesser of either (a) three
times the providing party's Direct Cost, as defined, or (b) in the event the
Company is the providing party, the Company's Direct Cost to provide such
services plus one-half of THT's average gross profit per pound for all of THT's
products for the month in which such services are provided multiplied by the
number of pounds produced with such services, subject to certain adjustments and
conditions per the agreement. The Company charged THT $3,835,000 and $3,354,000
(unaudited) under this agreement for the year ended December 31, 1995 and the
nine months ended September 30, 1996, respectively.
Other
Accounts receivable, joint venture of $3,904,000 and $4,264,000 (unaudited)
as of December 31, 1995 and September 30, 1996, respectively, related to
services performed under the above agreements.
In connection with the formation of the Partnership, the Company
contributed a joint ownership interest in certain patents which are used by the
Partnership.
F-13
<PAGE> 17
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
Current:
Federal....................................... $1,781 $2,205
State......................................... 421 521
------ ------
2,202 2,726
------ ------
Deferred:
Federal....................................... 67 (259)
State......................................... 16 (33)
------ ------
83 (292)
------ ------
Provision for income taxes...................... $2,285 $2,434
====== ======
</TABLE>
The following is a reconciliation of the U.S. federal income tax rate to
the Company's effective income tax rate:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Provision at statutory rate..................... 34.0% 34.0%
State income taxes, net of federal tax
benefits...................................... 4.9 4.9
Other........................................... .2 .1
---- ----
Effective rate.................................. 39.1% 39.0%
==== ====
</TABLE>
For the nine months ended September 30, 1996, an overall effective rate of
39% was used which reflects the Company's estimate of the effective rate for the
year ending December 31, 1996.
Deferred tax assets/liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Accrued expenses................................ $ 296 $ 640
Reserves........................................ 59 128
Other........................................... 57 --
------ ------
412 768
------ ------
Deferred tax liabilities:
Depreciation and amortization................... 2,238 2,385
THT Partnership................................. 513 513
Other........................................... 87 4
------ ------
2,838 2,902
------ ------
Net deferred tax liability........................ $2,426 $2,134
====== ======
</TABLE>
F-14
<PAGE> 18
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- EMPLOYEE BENEFIT PLANS:
Thrift plan
The Company participates in an Axel Johnson Thrift Plan qualified under
Section 401(k) of the Internal Revenue Code. The Thrift Plan allows employees to
defer up to 16% of their compensation not to exceed the amount allowed by the
applicable Internal Revenue Service guidelines. The Company matches 60% of
employee contributions made on a pre-tax basis and 30% of employee contributions
made on a post-tax basis, subject to a maximum of 6% of total eligible employee
compensation. Company contributions vest ratably over 5 years of service or 2
years of Plan participation, whichever occurs first. Contributions by the
Company under the Thrift Plan amounted to $157,000 and $137,000 (unaudited) in
1995 and the nine months ended September 30, 1996, respectively.
Pension plan
The Company's employees participate in a noncontributory defined benefit
pension plan sponsored by Axel Johnson. Benefits under the plan are based on
years of service and employees' compensation. The plan's assets are invested
principally in equity and fixed-income securities. It is Axel Johnson's policy
to satisfy the minimum funding requirements of the Employees Retirement Income
Security Act of 1974 (ERISA).
Net periodic pension cost was determined by measuring the Projected Benefit
Obligation ("PBO") for the Company's employees using a discount rate of 8.5% and
7.3% (unaudited), and an assumed long-term rate of compensation of 5.3% and 4.5%
(unaudited) in 1995 and the nine months ended September 30, 1996, respectively.
The PBO for such employees was determined using a discount rate of 7.3% at
December 31, 1995. The PBO so measured was $2,350,000 at December 31, 1995.
Certain elements of pension costs, including expected return on assets
(which was 9% in 1995 and 9.5% for the nine months ended September 30, 1996),
and net amortization, were allocated based on the relationship of the PBO for
the Company to the total PBO of the defined benefit pension plan. The elements
of pension cost allocated to the Company using this method were:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
Service cost.................................... $ 193 $ 203
Interest cost................................... 165 139
Net amortization................................ (155) (141)
Expected return on assets....................... (181) (135)
----- -----
$ 22 $ 66
===== =====
</TABLE>
The Company's employees are also eligible to participate in the Axel
Johnson retirement restoration plan. This plan is for employees whose benefits
under the defined benefit pension plans are reduced due to limitation under
federal tax laws. The Company's pension expense for this plan, using the same
methodology as described above, was $9,000 and $11,000 (unaudited) in 1995 and
the nine months ended September 30, 1996, respectively. The projected benefit
obligation at December 31, 1995 was $66,000.
F-15
<PAGE> 19
AXEL JOHNSON METALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Postretirement benefits plan
Company employees, who meet the service requirements, participate in
postretirement benefit programs which provide health care and life insurance
benefits sponsored by Axel Johnson. Axel Johnson funds such benefits as they are
incurred.
Net postretirement benefit cost was determined by measuring the
postretirement projected benefit obligation for the Company's employees using a
discount rate of 8.5% and 7.3% (unaudited), and an assumed rate of increase in
future healthcare costs ranging from 6% to 10.5% and 5.5% to 9.5% (unaudited) in
1995 and the nine months ended September 30, 1996, respectively. The PBO for
such employees was determined using a discount rate of 7.3% at December 31,
1995. The PBO so measured was $565,000 at December 31, 1995.
Certain elements of postretirement benefit cost were allocated based on the
relationship of the PBO for the Company to the total PBO of the plan. The
elements of postretirement benefit cost allocated to the Company using this
method were:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Service cost.................................... $ 17 $17
Interest cost................................... 40 31
Net amortization................................ 16 14
--- ---
$ 73 $62
=== ===
</TABLE>
NOTE 8 -- COMMITMENTS:
The Company leases certain of its manufacturing and office facilities.
Total rent expense in 1995 and the nine months ended September 30, 1996 was
$550,000 and $427,000 (unaudited), respectively. Future annual minimum lease
payments under all noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
---------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1996........................................ $ 592
1997........................................ 438
1998........................................ 184
1999........................................ 130
2000 and thereafter......................... 13
------
$1,357
======
</TABLE>
The Company has accrued $400,000 of future lease payments related to the
closure of its Lionville, Pennsylvania facility as described in Note 1.
The Company is one of the guarantors of a $150 million revolving line of
credit and a $50 million term loan obtained by Axel Johnson.
NOTE 9 -- SUBSEQUENT EVENT:
On October 1, 1996, TIMET acquired substantially all of the assets and
assumed substantially all of the liabilities of the Company for approximately
$96 million.
F-16
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Committee
and Partners of Titanium Hearth Technologies
In our opinion, the accompanying balance sheets and the related statements
of income, of changes in partners' capital and of cash flows present fairly, in
all material respects, the financial position of Titanium Hearth Technologies
(the "Partnership") at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
January 26, 1996
F-17
<PAGE> 21
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Management Committee and Partners of
Titanium Hearth Technologies
We have reviewed the accompanying balance sheet and the related statements
of income, of changes in partners' capital and of cash flows of Titanium Hearth
Technologies (the "Partnership") as of September 30, 1996, and for the
nine-month period then ended. This financial information is the responsibility
of the Partnership's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
November 19, 1996
F-18
<PAGE> 22
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash.................................................... $ 83 $ 84 $ 94
Accounts receivable..................................... 4,056 5,301 11,204
Accounts receivable, partner............................ 1,915 2,627 1,492
Inventories............................................. 5,770 9,457 16,341
Prepaid expenses........................................ 31 523 18
------- ------- -------
Total current assets.......................... 11,855 17,992 29,149
Machinery and equipment, net............................ 18,465 20,259 19,861
Other assets............................................ 20 4 17
------- ------- -------
Total assets.................................. $30,340 $38,255 $49,027
======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current portion of long-term debt....................... $ -- $ -- $ 6,300
Accounts payable and accrued expenses................... 1,135 2,482 3,648
Accounts payable, partner............................... 920 2,208 4,264
Distributions payable................................... 3,312 1,696 --
------- ------- -------
Total current liabilities..................... 5,367 6,386 14,212
Long-term debt.......................................... 6,300 9,000 --
------- ------- -------
Total liabilities............................. 11,667 15,386 14,212
------- ------- -------
Commitments and contingencies (Note 12)
Contributed capital..................................... 19,000 19,000 19,000
Accumulated earnings (deficit).......................... (327) 3,869 15,815
------- ------- -------
Net partners' capital......................... 18,673 22,869 34,815
------- ------- -------
Total liabilities and partners' capital....... $30,340 $38,255 $49,027
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 23
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Product sales................................ $13,421 $10,333 $27,551 $39,490
Service revenues............................. 5,250 7,994 9,516 9,314
Sales to related parties..................... 8,155 7,939 10,024 9,310
------- ------- ------- -------
Net sales.................................... 26,826 26,266 47,091 58,114
Cost of sales................................ 19,375 17,900 33,200 41,055
------- ------- ------- -------
Gross profit................................. 7,451 8,366 13,891 17,059
Selling, general and administrative
expenses................................... 4,159 4,508 5,373 4,647
------- ------- ------- -------
Income from operations....................... 3,292 3,858 8,518 12,412
Interest expense............................. (260) (400) (630) (466)
Interest income.............................. 8 6 4 --
------- ------- ------- -------
Net income................................... $ 3,040 $ 3,464 $ 7,892 $11,946
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 24
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND NINE MONTHS ENDED SEPTEMBER 30,
1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
CONTRIBUTED EARNINGS
CAPITAL (DEFICIT) TOTAL
----------- ----------- -------
<S> <C> <C> <C>
Balance at December 31, 1992.............................. $19,000 $ 806 $19,806
Net income................................................ -- 3,040 3,040
Distributions paid and payable............................ -- (2,244) (2,244)
------- ------- -------
Balance at December 31, 1993.............................. 19,000 1,602 20,602
Net income................................................ -- 3,464 3,464
Distributions paid and payable............................ -- (5,393) (5,393)
------- ------- -------
Balance at December 31, 1994.............................. 19,000 (327) 18,673
Net income................................................ -- 7,892 7,892
Distributions paid and payable............................ -- (3,696) (3,696)
------- ------- -------
Balance at December 31, 1995.............................. 19,000 3,869 22,869
Net income (unaudited).................................... -- 11,946 11,946
------- ------- -------
Balance at September 30, 1996 (unaudited)................. $19,000 $15,815 $34,815
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 25
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 3,040 $ 3,464 $ 7,892 $11,946
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 829 909 1,148 1,087
Changes in operating assets and
liabilities:
Accounts receivable................... (1,368) 200 (1,245) (5,903)
Accounts receivable, partner.......... (905) 154 (712) 1,135
Inventories........................... (1,395) (580) (3,687) (6,884)
Prepaid expenses...................... (8) (16) (492) 505
Other assets.......................... 13 20 16 (13)
Accounts payable and accrued
expenses........................... 382 17 1,347 1,166
Accounts payable, partner............. 2,431 (1,819) 1,288 2,056
------- ------- ------- -------
Net cash provided by operating
activities....................... 3,019 2,349 5,555 5,095
------- ------- ------- -------
Cash flows from investing activities:
Purchases of machinery and equipment....... (361) (899) (2,942) (689)
------- ------- ------- -------
Cash flows from financing activities:
Net borrowings under line of credit........ (700) 1,000 2,700 (2,700)
Distributions paid......................... (1,944) (2,381) (5,312) (1,696)
------- ------- ------- -------
Net cash used in financing
activities....................... (2,644) (1,381) (2,612) (4,396)
------- ------- ------- -------
Net change in cash........................... 14 69 1 10
Cash at beginning of period.................. -- 14 83 84
------- ------- ------- -------
Cash at end of period........................ $ 14 $ 83 $ 84 $ 94
======= ======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest... $ 250 $ 375 $ 590 $ 476
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 26
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. ORGANIZATION AND OPERATION
Organization and Description of the Business. Titanium Hearth Technologies
(the "Partnership") was formed pursuant to a Joint Venture Agreement (the
"Agreement") between Axel Johnson Metals, Inc. ("AJM") and Titanium Metals
Corporation ("TIMET") on August 31, 1992. (See Notes 8 and 9.)
The Partnership was formed pursuant to the Pennsylvania Uniform Partnership
Act.
The Partnership produces titanium slabs, ingots and alloy electrodes at
plants in Morgantown, Pennsylvania and Verdi, Nevada. The primary application
for titanium has historically been the aerospace industry where it is used in
both air frames and engines. Other major markets for titanium include power
generation, chemical processing, pulp and paper, desalinization, medical
implants and recreational equipment. The primary customers for the Partnership's
products are titanium mill product producers in the United States and abroad.
These producers manufacture semi-finished products such as plates, sheets,
strip, bar, billets and tubing. Secondary customers for the Partnership's
products include a number of smaller fabrication shops and service centers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Reclassifications. The Partnership has reclassified certain balances for
comparative purposes.
Revenue Recognition. Sales are recognized at time of shipment of titanium
and titanium alloy products. Sales are also recognized at time of shipment for
service revenues derived from the melting of customer supplied materials.
Cash and Cash Equivalents. For the purposes of the statement of cash flows,
the Partnership considers all highly liquid short term investments with an
original maturity of three months or less to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out (FIFO) method. Elements of cost in
inventories include raw materials, direct labor and manufacturing overhead.
Machinery and Equipment. The initial contribution of machinery and
equipment by the partners was recorded at fair market value as determined by an
independent appraisal. (See Note 8.) Subsequent additions to machinery and
equipment are carried at cost. Maintenance, repairs and minor renewals are
charged to expense as incurred. When assets are sold or otherwise disposed of,
the related cost and accumulated depreciation are removed from the accounts, and
any resulting gain or loss is included in the results of operations.
Depreciation of machinery and equipment is computed on the straight-line method
over the estimated useful lives of the assets which range from 5 to 25 years.
Concentrations of Credit Risk. Accounts receivable credit risk is dispersed
across approximately 25 United States customers and several European and
Japanese customers. Over 68%, 76% and 83% of current accounts receivable credit
risk is concentrated between three customers.
F-23
<PAGE> 27
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
UNAUDITED INTERIM RESULTS
The accompanying balance sheet at September 30, 1996, and the related
statements of income, changes in partners' capital and cash flows for the nine
months ended September 30, 1996 are unaudited. In the opinion of management,
these statements have been prepared on a consistent basis with the audited
financial statements and include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results for the
interim period. The information disclosed in these Notes to Financial Statements
as of September 30, 1996 and the nine months ended September 30, 1996 are
unaudited. The results of operations for the interim period are not necessarily
indicative of the operating results of a full year.
3. NET SALES
Significant Customers. Included in net sales for the years ended December
31, 1993, 1994 and 1995 are sales to 3, 2 and 3 customers (A, B and C, A and B
and A, B and D, respectively), which amounted to approximately 25%, 29% and 17%,
28% and 30%, and 24%, 21%, and 13% of annual sales, respectively.
Export Sales. Net sales based on point of destination by geographic area
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States................... $24,347 $21,935 $34,668 $43,254
International................... 2,479 4,331 12,423 14,860
------- ------- ------- -------
$26,826 $26,266 $47,091 $58,114
======= ======= ======= =======
</TABLE>
4. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods............................ $1,602 $2,482 $ 4,662
Work-in-process........................... 2,805 5,383 8,658
Raw materials............................. 1,363 1,592 3,021
------ ------ -------
$5,770 $9,457 $16,341
====== ====== =======
</TABLE>
5. MACHINERY AND EQUIPMENT
A summary of machinery and equipment and related accumulated depreciation
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment.................. $20,463 $23,405 $24,094
Less: Accumulated depreciation......... (1,998) (3,146) (4,233)
------- ------- -------
$18,465 $20,259 $19,861
======= ======= =======
</TABLE>
F-24
<PAGE> 28
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Depreciation expense was $829, $909, $1,148 and $1,087 (unaudited) for the
years ended December 31, 1993, 1994 and 1995 and the nine months ended September
30, 1996, respectively.
6. DEBT
The Partnership has a credit agreement with two banks which provides for
borrowings up to $12,000. The outstanding balance at December 31, 1994 and 1995
and September 30, 1996 was $6,300, $9,000 and $6,300 (unaudited), respectively.
The term of the credit agreement expires on December 29, 1997, as revised.
Borrowings under the agreement bear interest, at the Partnership's option, at
the higher of LIBOR plus 1.25% or the Federal funds rate plus .50% or the prime
rate (7.13% at December 31, 1995 and a weighted average of 7.23% for the year
ended December 31, 1995). During January 1996, the interest rate was revised to
the higher of LIBOR plus .85% or the Federal funds rate plus .50% or the prime
rate. Additionally, the Partnership shall pay a quarterly fee of .125% per annum
on the unborrowed portion of the commitment and shall pay a facility fee on a
quarterly basis of .25% per annum on the aggregate commitment.
The credit line is nonrecourse to either partner but is secured by
substantially all Partnership assets, including accounts receivable, inventory
and certain machinery and equipment.
The credit line agreement contains certain restrictions that require the
Partnership, among other things, to maintain (a) a quick ratio, as defined, of
not less than 2 to 1, (b) a tangible net worth, excluding distributions payable,
of at least $24,180 and (c) a minimum ratio of inventory and accounts receivable
to the loan of 1 to 1 and places limitations on (a) the incurrence of additional
indebtedness, (b) the payment of annual distributions to partners, (c) the
transfer of assets, and (d) the incurrence of capital expenditures. In addition,
for years beginning on and after January 1, 1994, the Partnership is required to
maintain income from operations before interest expense for each year of at
least $3,000.
In July, 1996 the Partnership's credit agreement was revised to provide for
borrowings up to $15,000 (unaudited). See Note 13.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that are subject to fair value disclosure
requirements are carried in the financial statements at amounts that approximate
fair value. Based on the terms of the line of credit as discussed in Note 6, the
carrying value of the borrowing under the line of credit approximates its fair
value.
8. PARTNERS' CONTRIBUTIONS AND PREFERRED DISTRIBUTIONS
Immediately prior to the formation of the Partnership, AJM sold to TIMET,
for cash and a note, an undivided 50% interest in certain machinery and
equipment with a fair value of approximately $19 million. This machinery and
equipment was contributed to the Partnership at formation.
In accordance with the Agreement, AJM is entitled to a preferred
distribution in an amount equal to the excess gross profit of the Partnership
from other than TIMET sales over a base amount. The total preferred distribution
payable to AJM is limited to the present value of $4,000 as of the date of the
Agreement using the prime rate as the discount rate and has been fully accrued
as of December 31, 1995.
9. RELATED PARTY TRANSACTIONS
Under the Agreement, certain services are provided either to the
Partnership by the partners or to the partners by the Partnership at negotiated
amounts. Activity under these service agreements for the
F-25
<PAGE> 29
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
years ended December 31, 1993, 1994 and 1995 and the nine months ended September
30, 1996 was as follows:
Conversion Services Agreement. Pursuant to the formation of the
Partnership, TIMET and the Partnership entered into an agreement whereby the
Partnership is to provide cold hearth melting services to TIMET through August
31, 1997 with automatic one year renewals unless either party gives one year's
prior written notice to terminate. The pricing for such services are specified
in the agreement, subject to a defined maximum price, and are a function of the
Adjusted Annual Aggregate Melt Volume, as defined, and the relative strength of
the titanium market, as determined in accordance with the agreement. TIMET also
committed to purchase certain minimum volume requirements throughout the term of
the agreement. Titanium conversion services by the Partnership for TIMET
totalled $7,428, $7,800, $10,024 and $9,310 (unaudited) for the years ended
December 31, 1993, 1994 and 1995 and for the nine months ended September 30,
1996, respectively.
Administrative Services Agreement. Pursuant to the formation of the
Partnership, AJM entered into an agreement to provide to the Partnership
administrative, technical and managerial services, as defined, through August
31, 1997, with automatic one year renewals unless either party gives notice of
termination in accordance with the provisions of the agreement. The fee for such
services is based on 90% of a Base Rate, as defined (subject to escalation at a
rate of 5% per annum commencing January 1, 1993), plus all out of pocket
expenses incurred by AJM attributable to performing such services. The fees are
subject to reduction, as defined, in the event the Base Rate exceeds 90% of
actual costs incurred by AJM. AJM charged the Partnership $3,605, $3,873, $4,144
and $3,305 (unaudited) for services and out of pocket expenses under this
agreement for the years ended December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1996, respectively.
Raw Materials Supply and Processing Agreement. Pursuant to the formation of
the Partnership, the Partnership, AJM and TIMET entered into an agreement
effective through August 31, 1997 whereby AJM agreed to (a) sell to the
Partnership, subject to availability in the market, at the fair market value,
scrap that the Partnership orders from AJM and (b) subject to available
capacity, to provide scrap processing services to the Partnership with respect
to scrap owned by the Partnership and TIMET, at rates set forth in the
agreement. Such rates are dependent on the relative strength of the titanium
market, as defined in the agreement. This agreement is subject to automatic one
year renewals unless AJM gives the Partnership and TIMET one year's prior notice
of termination. Amounts charged to the Partnership by AJM under this agreement
totalled $6,496, $2,067, $2,824 and $4,482 (unaudited) for the years ended
December 31, 1993, 1994 and 1995 and for the nine months ended September 30,
1996, respectively.
Reciprocal Conversion Services Agreement. Pursuant to the formation of the
Partnership, the Partnership and AJM entered into an agreement whereby, to the
extent of available capacity, each party would perform cold hearth melting
services through August 31, 1997 with automatic one year renewals unless either
party terminates with one year's prior notice. As amended, this agreement
provides that fees for services rendered under the agreement will be charged at
an amount equal to the lesser of either (a) three times the providing party's
Direct Cost, as defined, or (b) in the event AJM is the providing party, AJM's
Direct Cost to provide such services plus one-half of the Partnership's average
gross profit per pound for all of the Partnership's products for the month in
which such services are provided multiplied by the number of pounds produced
with such services, subject to certain adjustments and conditions per the
agreement. The Partnership was charged $2,693, $3,069, $3,835 and $3,354
(unaudited) by AJM under this agreement for the years ended December 31, 1993,
1994 and 1995 and for the nine months ended September 30, 1996, respectively.
F-26
<PAGE> 30
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
Other. Accounts receivable, partner includes $1,915, $2,627 and $1,492
(unaudited) due from TIMET at December 31, 1994 and 1995 and September 30, 1996,
respectively, related to services performed under the above agreements and
product sales to TIMET. Accounts payable, partner includes $920, $2,208 and
$4,264 (unaudited) due to AJM at December 31, 1994 and 1995 and September 30,
1996, respectively, related to services rendered under the above agreements and
inventory purchases from AJM.
The Partnership has also paid to TIMET $100 per year under a technical
services agreement which expires on December 31, 1996.
In connection with the formation of the Partnership, AJM contributed a
joint ownership interest in certain patents which are used by the Partnership.
See Note 12 regarding facilities leased by the Partnership from AJM.
10. INCOME TAXES
As a Partnership, Titanium Hearth Technologies is not liable for the
payment of taxes on income. Net income is allocated to the respective partners
on an annual basis, and it is the partners' responsibility to pay income taxes,
if any, thereon according to their respective tax positions.
11. EMPLOYEE BENEFITS
Post Retirement Benefits. Employees of the Partnership, meeting the service
requirements, are members of the Axel Johnson Inc. (parent company of AJM)
postretirement benefit program which provides health care benefits and life
insurance benefits to employees. This is treated by the Partnership as a
multiemployer plan under Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
postretirement benefit cost to the Partnership was approximately $1, $2, $2 and
$2 (unaudited) for the years ended December 31, 1993, 1994 and 1995 and for the
nine months ended September 30, 1996, respectively.
Pension Plan. Employees of the Partnership, meeting the service
requirements, are members of the Axel Johnson Inc. defined benefit pension plan.
This is treated by the Partnership as a multiemployer plan under Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." The
pension cost to the Partnership was $11, $16, $21 and $34 (unaudited) for the
years ended December 31, 1993, 1994 and 1995 and for the nine months ended
September 30, 1996, respectively.
401(k) Thrift Plan. Employees of the Partnership, meeting the service
requirements, are members of the Axel Johnson Inc. defined contribution 401(k)
thrift plan. The Partnership, on a nondiscretionary basis, will match
participating employees' contributions based on 60% of the first 6% contributed
to the plan by employees. The Partnership's matching contribution was $16, $23,
$41 and $41 (unaudited) for the years ended December 31, 1993, 1994 and 1995 and
for the nine months ended September 30, 1996, respectively.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases. Since its formation, the Partnership has leased building
space used in its Morgantown production facilities from AJM. This lease, which
has been recorded as an operating lease, provides for rental payments of $50 per
year and will remain in effect until August 31, 2021. The terms of this lease
are considered to be favorable to the Partnership as a result of the related
party nature of the
F-27
<PAGE> 31
TITANIUM HEARTH TECHNOLOGIES
(A JOINT VENTURE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
participants to this lease. The Partnership also leases facilities for its
Verdi, Nevada operations under an agreement which provides for rental payments
of approximately $65 per year through April, 1998.
Contingencies. The Partnership is not involved in any claims and disputes
which the Partnership's management believes will have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
13. UNAUDITED SUBSEQUENT EVENTS:
On October 1, 1996, Timet acquired substantially all of the assets,
including AJM's share of the Partnership, and assumed substantially all of the
liabilities of AJM for approximately $96,000.
In connection with the sale of AJM, the Partnership's lenders agreed to
continue to make the credit line available through December 31, 1996 at which
time the credit line would need to be renewed or refinanced. Therefore, the
amount due under the credit line is classified as a current liability.
F-28
<PAGE> 32
EXHIBIT 99.2
TITANIUM METALS CORPORATION
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS:
Unaudited Pro Forma Condensed Consolidated Financial Statements............. PF-2
Report of Independent Accountants........................................... PF-3
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 29,
1996....................................................................... PF-4
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet........... PF-5
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the fiscal year 1995.................................................. PF-6
Notes to unaudited Pro Forma Condensed Consolidated Statement of Operations
for the fiscal year 1995................................................... PF-7-9
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
nine-month period ended September 29, 1996................................. PF-10
Notes to unaudited Pro Forma Condensed Consolidated Statement of Operations
for the nine-month period ended September 29, 1996......................... PF-11
</TABLE>
PF-1
<PAGE> 33
TITANIUM METALS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements reflect the consolidated financial position and results of continuing
operations of Titanium Metals Corporation and Subsidiaries ("the Company") as of
and for the periods indicated giving effect to the IMI Titanium Acquisition and
the AJM Acquisition under the assumptions and estimates set forth in the notes
thereto. The IMI Titanium Acquisition has been accounted for by the purchase
method of accounting and consolidated in the Company's historical financial
statements effective January 1, 1996. The AJM Acquisition will be accounted for
using the purchase method of accounting effective October 1, 1996.
These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements of the Company, the IMI
Titanium Business, AJM and THT, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Offering Memorandum. The unaudited pro forma financial statements do not reflect
any incremental sales or cost savings that the Company may achieve from the
combinations. The unaudited pro forma financial statements do not purport to be
indicative of the results which actually would have been obtained if the IMI
Titanium Acquisition and the AJM Acquisition had been effected on the dates
indicated or of the results which may be obtained in the future.
Although information as to the fair values, for purchase accounting
purposes, of the aforementioned acquisitions' individual assets and liabilities
is not complete, a preliminary estimate of the allocation of the purchase price
was made on the basis of available information. The actual allocation of the
purchase price may be different from that reflected in the unaudited pro forma
condensed consolidated financial statements. Such differences would result from
adjustments in the purchase price and refinements in the estimates of fair
values of the net assets acquired. However, the Company does not expect such
adjustments and refinements in estimates to materially affect the pro forma
information as presented.
All financial information reflected in the unaudited pro forma financial
statements is presented in accordance with U.S. generally accepted accounting
principles, is reported in U.S. dollars, and reflects the 1996 Stock Split for
all periods presented.
PF-2
<PAGE> 34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Titanium Metals Corporation:
We have reviewed the pro forma adjustments reflecting the transactions
described in the notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements and the application of those adjustments to the historical amounts in
the accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet of
Titanium Metals Corporation and Subsidiaries ("TIMET") as of September 29, 1996,
and the Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and for the nine-month period ended September
29, 1996. These historical financial statements are derived from the historical
audited and unaudited financial statements of TIMET, which were audited or
reviewed by us, and of the IMI Titanium Business, Axel Johnson Metals, Inc. and
Titanium Hearth Technologies, which were audited or reviewed by other
accountants, appearing elsewhere herein. Such pro forma adjustments are based on
management's assumptions as described in the notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements. Our review was conducted in
accordance with standards established by the American Institute of Certified
Public Accountants.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
transactions described in the notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements occurred at an earlier date. However, the
Unaudited Pro Forma Condensed Consolidated Financial Statements are not
necessarily indicative of the results of operations that would have been
attained had the above-mentioned transactions actually occurred earlier.
Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the transactions
described in the notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements, that the related pro forma adjustments do not give appropriate
effect to those assumptions, or that the pro forma column does not reflect the
proper application of those adjustments to the historical financial statement
amounts in the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 29, 1996, and the Unaudited Pro Forma Condensed Consolidated
Statements of Operations for the year ended December 31, 1995 and for the
nine-month period ended September 29, 1996.
COOPERS & LYBRAND, L.L.P.
Denver, Colorado
November 20, 1996
PF-3
<PAGE> 35
TITANIUM METALS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 29, 1996
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA PRO FORMA
TIMET AJM THT ADJUSTMENTS CONSOLIDATED
------ ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 2.2 $ -- $ .1 $ -- $ 2.3
Accounts and notes receivable, net................... 99.2 2.6 11.2 -- 113.0
Receivable from related parties...................... 1.4 4.3 1.5 (5.7)(b) 1.5
Inventories.......................................... 140.7 4.1 16.3 3.5 (a) 164.6
Prepaid expenses..................................... 7.5 -- -- -- 7.5
Deferred income taxes................................ 1.4 .5 -- (.5)(a) 1.4
------ ----- ----- ------ ------
Total current assets........................... 252.4 11.5 29.1 (2.7) 290.3
------ ----- ----- ------ ------
Other assets:
Investment in joint ventures......................... 19.9 13.7 -- (19.7)(c) .2
(13.7)(d)
Goodwill, net........................................ 10.1 -- -- 50.9 (a) 59.6
(1.4)(c)
Other................................................ 12.5 .5 -- 13.5 (a) 26.5
------ ----- ----- ------ ------
Total other assets............................. 42.5 14.2 -- 29.6 86.3
------ ----- ----- ------ ------
Property and equipment................................. 220.6 20.7 24.1 (16.3)(a) 249.1
Less accumulated depreciation.......................... 39.2 12.1 4.2 (16.3)(a) 39.2
------ ----- ----- ------ ------
Net property and equipment..................... 181.4 8.6 19.9 -- 209.9
------ ----- ----- ------ ------
$476.3 $34.3 $49.0 $ 26.9 $586.5
====== ===== ===== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................................ $ 1.1 $ -- $ -- $ -- $ 1.1
Current maturities of long-term debt................. 1.5 -- 6.3 97.0 (e) 104.8
Payable to related parties........................... 1.5 -- 4.3 (5.7)(b) .1
Accounts payable and accrued liabilities............. 106.8 6.0 3.6 (2.0)(a) 114.4
Deferred income taxes................................ 1.3 -- -- -- 1.3
Income taxes......................................... 7.3 -- -- -- 7.3
------ ----- ----- ------ ------
Total current liabilities...................... 119.5 6.0 14.2 89.3 229.0
------ ----- ----- ------ ------
Noncurrent liabilities:
Long-term debt....................................... 1.5 -- -- -- 1.5
Capital lease obligations to related parties......... 9.8 -- -- -- 9.8
Payable to related parties........................... 1.3 -- -- -- 1.3
Accrued postretirement benefit cost.................. 28.0 -- -- -- 28.0
Accrued pension cost................................. 5.6 -- -- -- 5.6
Deferred income taxes................................ 8.7 2.7 -- (2.7)(a) 8.7
Other................................................ 2.7 .7 -- -- 3.4
------ ----- ----- ------ ------
Total noncurrent liabilities................... 57.6 3.4 -- (2.7) 58.3
------ ----- ----- ------ ------
Minority interest...................................... 3.3 -- -- -- 3.3
------ ----- ----- ------ ------
Stockholders' equity:
Common stock......................................... .3 -- -- -- .3
Additional paid-in capital........................... 345.8 -- 19.0 (19.0)(a) 345.8
Retained earnings (accumulated deficit).............. (49.2) 24.9 15.8 (13.7)(d) (49.2)
(5.9)(a)
(21.1)(c)
Other................................................ (1.0) -- -- -- (1.0)
------ ----- ----- ------ ------
Total stockholders' equity..................... 295.9 24.9 34.8 (59.7) 295.9
------ ----- ----- ------ ------
$476.3 $34.3 $49.0 $ 26.9 $586.5
====== ===== ===== ====== ======
</TABLE>
PF-4
<PAGE> 36
TITANIUM METALS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 29, 1996
(IN MILLIONS)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited Pro Forma Condensed Consolidated Balance Sheet has been
prepared assuming that the acquisition (the "AJM Acquisition") of Axel Johnson
Metals, Inc. ("AJM") occurred as of September 29, 1996. Prior to this
acquisition, AJM and TIMET both owned a 50% interest in Titanium Hearth
Technologies (THT). As a result of the acquisition, TIMET now owns 100% of THT.
The estimated cost of the AJM Acquisition is summarized below:
<TABLE>
<S> <C>
Costs of the AJM Acquisition:
Cash....................................................................... $96.0
Transaction and other direct costs......................................... 1.0
-----
$97.0
=====
Purchase accounting adjustments:
Historical carrying amount of net assets acquired.......................... $24.9
Purchase accounting adjustments:
Inventories............................................................. 3.5
Intangibles, $5 million for a non-compete agreement and $8.5 million for
patents................................................................ 13.5
Goodwill................................................................ 50.9
Liabilities assumed by AJM's parent company............................. 2.0
Deferred income taxes................................................... 2.2
-----
$97.0
=====
</TABLE>
NOTE 2 -- PRO FORMA ADJUSTMENTS:
(a) Record purchase price and initial allocation to assets acquired and
liabilities assumed.
(b) To eliminate intercompany account balances.
(c) To eliminate the investment in THT recorded by TIMET.
(d) To eliminate the investment in THT recorded by AJM.
(e) To record debt incurred by TIMET for the purchase of AJM.
PF-5
<PAGE> 37
TITANIUM METALS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR FISCAL YEAR 1995
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
IMI IMI ADJUSTMENTS
TITANIUM TITANIUM PRO FORMA AJM/THT PRO FORMA
TIMET BUSINESS (NOTE 2) CONSOLIDATED AJM THT (NOTE 3) CONSOLIDATED
------ -------- ----------- ------------ ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues and other income:
Net sales.................. $184.7 $147.2 $ -- $331.9 $23.7 $47.1 $ (22.7)(c) $380.0
Equity in earnings of joint
ventures................. 4.8 -- -- 4.8 4.9 -- (8.8)(d) .9
Other, net................. .4 -- -- .4 .4 -- -- .8
------ -------- ----------- ------------ ----- ----- ----------- ------------
189.9 147.2 -- 337.1 29.0 47.1 (31.5) 381.7
------ -------- ----------- ------------ ----- ----- ----------- ------------
Costs and expenses:
Cost of sales.............. 170.7 167.6(1) 1.1(a) 338.8 20.7 33.2 (21.2)(c) )
(.6)(b) 5.3 (a) ) 380.3
3.5 (e) )
Selling, general,
administrative and
development.............. 14.0 12.3 -- 26.3 2.2 5.4 -- 33.9
Special charges (credit)... (1.2) 5.0 -- 3.8 -- -- -- 3.8
Interest................... 10.4 8.9 (6.0)(c) 14.9 .2 .6 8.7(f) 24.4
1.6(d)
------ -------- ----------- ------------ ----- ----- ----------- ------------
193.9 193.8 (3.9) 383.8 23.1 39.2 (3.7) 442.4
------ -------- ----------- ------------ ----- ----- ----------- ------------
Income (loss) before
income taxes,
minority interest
and preacquisition
earnings........... (4.0) (46.6) 3.9 (46.7) 5.9 7.9 (27.8) (60.7)
Income tax benefit
(expense).................. (.2) 13.8 (1.6)(e) 12.0 (2.3) -- 2.4(b) 12.1
------ -------- ----------- ------------ ----- ----- ----------- ------------
Net income (loss).... $ (4.2) $(32.8) $ 2.3 $(34.7) $ 3.6 $ 7.9 $ (25.4) $(48.6)
====== ======== =========== ============ ===== ===== =========== ============
Net loss per common share.... $ (.27) $(1.39) $(1.94)
====== ============ ============
Weighted average common
shares
outstanding................ 15.4 9.6(f) 25.0 25.0
====== =========== ============ ============
</TABLE>
- ---------------
(1) IMI Titanium Business cost of sales includes charges of $16.1 million for
customer contract losses and other charges incurred in 1995.
PF-6
<PAGE> 38
TITANIUM METALS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR FISCAL YEAR 1995
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited Pro Forma Condensed Consolidated Statement of Operations has
been prepared assuming the following transactions occurred as of the beginning
of fiscal 1995: (i) the IMI Titanium Acquisition, (ii) IMI's December 1995 $80
million capital contribution of related party indebtedness previously owed to
IMI by the IMI Titanium Business, (iii) the IMI Titanium Business entered into
long-term capital leases with IMI principally covering its Witton, England
production facilities, and purchased its previously leased Waunarlwydd, Wales
facility from IMI for $1.6 million, and (iv) the AJM Acquisition. Prior to the
acquisition, AJM and TIMET both owned a 50% interest in Titanium Hearth
Technologies (THT). As a result of the acquisition, TIMET now owns 100% of THT.
The estimated cost of the IMI Titanium Acquisition is summarized below:
<TABLE>
<S> <C>
Costs of the IMI Titanium Acquisition:
Issuance of 9.6 million shares of common stock to IMI...................... $70.0
Cash....................................................................... .1
Transaction and other direct costs......................................... 2.2
-----
$72.3
=====
Purchase accounting adjustments:
Historical carrying amount of net assets acquired.......................... $60.6
Purchase accounting adjustments:
Property and equipment, net............................................. 4.0
Goodwill and intangibles, including $4 million for patents.............. 11.2
Pension liabilities..................................................... (1.0)
Severance and other liabilities......................................... (.5)
Deferred income taxes, net.............................................. (2.0)
-----
$72.3
=====
</TABLE>
The estimated cost of the AJM Acquisition is summarized below:
<TABLE>
<S> <C>
Costs of the AJM Acquisition:
Cash....................................................................... $96.0
Transaction and other direct costs......................................... 1.0
-----
$97.0
=====
Purchase accounting adjustments:
Historical carrying amount of net assets acquired.......................... $24.9
Purchase accounting adjustments:
Inventories............................................................. 3.5
Intangibles, $5 million for a non-compete agreement and $8.5 million for
patents................................................................ 13.5
Goodwill................................................................ 50.9
Liabilities assumed by AJM's parent company............................. 2.0
Deferred income taxes................................................... 2.2
-----
$97.0
=====
</TABLE>
PF-7
<PAGE> 39
TITANIUM METALS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS -- (CONTINUED)
FOR FISCAL YEAR 1995
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 2 -- PRO FORMA ADJUSTMENTS, IMI TITANIUM ACQUISITION:
(a) Additional depreciation and amortization expense resulting from
purchase accounting basis differences:
<TABLE>
<S> <C>
Intangibles (patents) amortized over their average remaining lives of 9
years.................................................................. $ .4
Depreciation of property and equipment over 15 years..................... .3
Goodwill amortized over 15 years......................................... .4
----
$1.1
====
</TABLE>
(b) Reflects the net effect of (i) increased depreciation expense of $.3
million principally related to the Witton, England facility (leased
under a thirty-year capital lease with IMI entered into in connection
with the IMI Titanium Acquisition), (ii) increased depreciation expense
of $.1 million on the Waunarlwydd, Wales facility (purchased in 1995 in
contemplation of the IMI Titanium Acquisition and depreciated over 15
years), and (iii) reduced rent expense of $1.0 million in respect of
the aforementioned facilities.
(c) Eliminate interest expense associated with the $80 million capital
contribution of related party indebtedness at an average interest rate
of 7.5%.
(d) Interest expense of $2.0 million on $20 million of subordinated debt
issued to IMI at 10.4% and interest expense of $1.0 million related to
the capital lease obligations, offset by elimination of $1.4 million of
interest expense on $20 million of intercompany indebtedness.
(e) Tax effects at the U.K. statutory rate of 33% on other pro forma
adjustments, except for goodwill amortization reflected in (a) above
and U.S. related interest in (d) above which would increase the
Company's U.S. losses for which no associated tax benefit was
available.
(f) Reflects shares issued to IMI in connection with the IMI Titanium
Acquisition.
NOTE 3 -- PRO FORMA ADJUSTMENTS, AJM ACQUISITION:
(a) Additional amortization expense resulting from purchase accounting
basis differences:
<TABLE>
<S> <C>
Intangibles (patents) amortized over their average remaining lives of
10 years............................................................. $ .9
Goodwill amortized over 15 years...................................... 3.4
Amortization of non-compete agreement over 5 years.................... 1.0
----
$5.3
====
</TABLE>
(b) Tax effects differ from the U.S. statutory rate of 35% on pro forma
adjustments due to no benefit being available on losses.
(c) Adjustment to eliminate sales and cost of sales for intercompany sales
between AJM, TIMET and THT.
(d) To eliminate the equity in THT earnings recorded by TIMET and AJM.
(e) To record the additional cost of sales applicable to the excess
purchase price allocated to inventories.
PF-8
<PAGE> 40
TITANIUM METALS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS -- (CONTINUED)
FOR FISCAL YEAR 1995
(IN MILLIONS, EXCEPT SHARE DATA)
(f) To record interest expense (at 9% per annum) applicable to the $97
million of new debt TIMET incurred for the purchase of AJM.
NOTE 4 -- NONRECURRING COSTS:
The unaudited Pro Forma Condensed Consolidated Statement of Operations does
not include non-recurring charges resulting from the IMI Titanium Acquisition
and related integration of the IMI Titanium Business. Certain key executive
officers of the Company received approximately 93,000 shares of the Company's
Class B common stock and cash payments with a combined value of approximately $3
million ($1.5 million common stock and $1.5 million cash) in consideration for
their services in connection with the IMI Titanium Acquisition. The Class B
common stock converted into Common Stock in connection with the Stock Offering.
The Company will also incur integration costs relating to the transfer of
certain manufacturing process technology, relocation of personnel, and
consolidation of certain facilities, including the closure of the Company's
original U.K. facilities. Anticipated integration costs for fiscal 1996 are
summarized as follows:
<TABLE>
<S> <C>
Facilities consolidation.............................................. $ .3
Relocation of personnel............................................... .6
Manufacturing process technology transfer............................. .6
Other................................................................. .5
----
$2.0
====
</TABLE>
Compensation expense related to the aforementioned consideration and
certain integration costs aggregating $4.7 million were recorded as a charge to
the Company's operating income in the first nine months of 1996. Integration
costs are charged to operations as incurred.
PF-9
<PAGE> 41
TITANIUM METALS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 29, 1996
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
IMI TITANIUM AJM/THT PRO FORMA
TIMET (NOTE 2) AJM THT (NOTE 3) CONSOLIDATED
------ ------------ ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and other income:
Net sales............................ $349.8 $ -- $21.2 $58.1 $ (22.0)(c) $407.1
Equity in earnings of joint
ventures.......................... 6.0 -- 5.9 -- (11.9)(d) --
Other, net........................... .6 -- -- -- -- .6
------ --- ----- ----- ------- ------
356.4 -- 27.1 58.1 (33.9) 407.7
------ --- ----- ----- ------- ------
Costs and expenses:
Cost of sales........................ 294.1 -- 17.9 41.1 (20.1)(c) 337.0
4.0(a)
Selling, general and administrative
and development................... 18.6 -- 2.0 4.6 -- 25.2
Special charges...................... 4.7 -- .9 -- -- 5.6
Interest............................. 7.3 -- .1 .5 6.5(e) 14.4
------ --- ----- ----- ------- ------
324.7 -- 20.9 46.2 (9.6) 382.2
------ --- ----- ----- ------- ------
Income (loss) before income taxes,
minority interest and preacquisition
earnings............................. 31.7 -- 6.2 11.9 (24.3) 25.5
Income tax expense (benefit)........... 7.8 -- 2.4 -- (3.8)(b) 6.4
Preacquisition earnings................ (.4) .4(a) -- -- -- --
------ --- ----- ----- ------- ------
Net Income (loss)............ $ 23.5 $ .4 $ 3.8 $11.9 $ (20.5) $ 19.1
====== === ===== ===== ======= ======
Net income per common share............ $ .89 $ .68
====== ======
Weighted average common shares
outstanding.......................... 26.3 1.6(b) 27.9
====== === ======
</TABLE>
PF-10
<PAGE> 42
TITANIUM METALS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 29, 1996
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited Pro Forma Condensed Consolidated Statement of Operations has
been prepared assuming the IMI Titanium Acquisition and the AJM Acquisition
occurred at the beginning of fiscal 1995. Prior to the AJM acquisition, AJM and
TIMET both owned a 50% interest in Titanium Hearth Technologies (THT). As a
result of the acquisition, TIMET now owns 100% of THT.
NOTE 2 -- PRO FORMA ADJUSTMENTS IMI TITANIUM:
(a) Elimination of preacquisition earnings.
(b) Adjustment to reflect shares issued to IMI in connection with the IMI
Titanium Acquisition as of the beginning of fiscal 1995.
NOTE 3 -- PRO FORMA ADJUSTMENTS AXEL JOHNSON METALS:
(a) Additional amortization expense resulting from purchase accounting
basis differences:
<TABLE>
<S> <C>
Intangibles (patents) amortized over their average remaining lives of
10 years............................................................ $ .6
Goodwill amortized over 15 years...................................... 2.6
Amortization of non-compete agreement over 5 years.................... .8
----
$4.0
====
</TABLE>
(b) Tax effects differ from the U.S. statutory rate of 35% on pro forma
adjustments due to the effect of net operating loss carryforwards.
(c) Adjustment to eliminate sales and cost of sales for intercompany sales
between AJM, TIMET and THT.
(d) To eliminate the equity in THT earnings recorded by TIMET and AJM.
(e) To record interest expense (at 9% per annum) applicable to the $97
million of new debt TIMET incurred for the purchase of AJM.
NOTE 4 -- NONRECURRING COSTS:
See Note 4 to the unaudited Pro Forma Condensed Consolidated Statement of
Operations for fiscal year 1995 regarding non-recurring charges resulting from
the IMI Titanium Acquisition and related integration of the IMI Titanium
Business.
PF-11
