<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended September 29, 1996
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employe
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding on October 31, 1996: 31,455,455
----------
<PAGE> 2
TITANIUM METALS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1995 and 3-4
September 29, 1996
Consolidated Statements of Operations - Three months and nine 5
months ended October 1, 1995 and September 29, 1996
Consolidated Statement of Stockholders' Equity - Nine months ended 6
September 29, 1996
Consolidated Statements of Cash Flows - Nine months ended 7-8
October 1, 1995 and September 29, 1996
Notes to Consolidated Financial Statements 9-17
Item 2. Management's Discussion and Analysis of Financial Condition 18-23
and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 24
Item 6. Exhibits and Reports on Form 8-K. 24
</TABLE>
2
<PAGE> 3
TITANIUM METALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
ASSETS 1995 1996
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24 $ 2,220
Accounts and notes receivable, net 27,932 99,247
Receivable from related parties 3,070 1,400
Inventories 69,134 140,652
Prepaid expenses 3,452 7,547
Deferred income taxes - 1,386
---------------- ----------------
Total current assets 103,612 252,452
---------------- ----------------
Other assets:
Investment in joint ventures 13,853 19,938
Prepaid pension cost 1,253 1,253
Intangible pension asset 1,424 1,424
Goodwill, net - 10,111
Other 3,774 9,727
---------------- ----------------
Total other assets 20,304 42,453
---------------- ----------------
Property and equipment:
Land 4,598 6,032
Buildings 17,783 33,343
Equipment 127,228 171,809
Construction in progress 3,120 9,381
---------------- ----------------
152,729 220,565
Less accumulated depreciation 27,861 39,212
---------------- ----------------
Net property and equipment 124,868 181,353
---------------- ----------------
$ 248,784 $ 476,258
================ ================
</TABLE>
3
<PAGE> 4
TITANIUM METALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
------------------ ------------------
<S> <C> <C>
Current liabilities:
Notes payable $ - $ 1,139
Current maturities of long-term debt 45,695 1,497
Payable to related parties 2,627 1,519
Accounts payable 27,136 66,104
Accrued liabilities 20,963 40,679
Income taxes 47 7,281
Deferred income taxes 596 1,305
------------------ ------------------
Total current liabilities 97,064 119,524
------------------ ------------------
Noncurrent liabilities:
Long-term debt 21,540 1,472
Capital lease obligation to related parties - 9,796
Payable to related parties 23,942 1,288
Accrued postretirement benefit cost 28,152 27,978
Accrued pension cost 5,966 5,600
Deferred income taxes 789 8,713
Other 3,203 2,670
------------------ ------------------
Total noncurrent liabilities 83,592 57,517
------------------ ------------------
Minority interest - 3,268
------------------ ------------------
Stockholders' equity:
Common stock 157 315
Additional paid-in capital 142,720 345,771
Accumulated deficit (72,653) (49,180)
Adjustments:
Currency translation 283 1,422
Pension liabilities (2,379) (2,379)
------------------ ------------------
Total stockholders' equity 68,128 295,949
------------------ ------------------
$ 248,784 $ 476,258
================== ==================
</TABLE>
Commitments and contingencies (Note 11)
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TITANIUM METALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------ ------------------------------
October 1, SEPTEMBER 29, October 1, SEPTEMBER 29,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $ 47,911 $ 123,435 $ 135,203 $ 349,825
Equity in earnings of joint ventures 1,677 2,204 3,828 5,960
Other, net (662) 107 (823) 633
------------- ------------- ------------- -------------
48,926 125,746 138,208 356,418
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 43,667 100,922 127,572 294,153
Selling, administrative, and development 2,959 6,459 9,077 18,614
Special charges - 380 - 4,688
Interest 2,563 414 7,867 7,266
------------- ------------- ------------- -------------
49,189 108,175 144,516 324,721
------------- ------------- ------------- -------------
Income (loss) before income taxes, minority
interest, and preacquisition earnings (263) 17,571 (6,308) 31,697
Income tax expense 57 4,261 156 7,791
Minority interest - (22) - (22)
Preacquisition earnings - - - (411)
------------- ------------- ------------- -------------
Net income (loss) $ (320) $ 13,288 $ (6,464) $ 23,473
============= ============= ============= =============
Net income (loss) per common share $ (.02) $ .42 $ (.42) $ .89
============= ============= ============= =============
Weighted average common and common
equivalent shares outstanding (Note 2) 15,693 31,469 15,275 26,346
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TITANIUM METALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 29, 1996
(In thousands)
<TABLE>
<CAPTION> Adjustments
Additional -------------------------
Common Common paid-in Accumulated Currency Pension
shares stock capital deficit translation liabilities Total
------ -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 15,693 $ 157 $142,720 $ (72,653) $ 283 $ (2,379) $ 68,128
Net income - - - 23,473 - - 23,473
Common stock issued:
IMI Titanium Acquisition (Note 3) 9,561 96 69,904 - - - 70,000
Offerings (Note 8) 6,200 62 132,926 - - - 132,988
Other 1 - 28 - - - 28
Other, net - - 193 - - - 193
Adjustments, net - - - - 1,139 - 1,139
------ -------- -------- ---------- -------- -------- --------
Balance at September 29, 1996 31,455 $ 315 $345,771 $ (49,180) $ 1,422 $ (2,379) $295,949
====== ======== ======== ========== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
TITANIUM METALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
October 1, SEPTEMBER 29,
1995 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,464) $ 23,473
Depreciation and amortization 8,821 12,580
Earnings of joint ventures in excess of distributions (3,828) (5,814)
Minority interest and preacquisition earnings - 433
Special charges - 4,688
Pension benefits 65 (1,096)
Other, net (423) 284
Change in assets and liabilities, net of acquisitions:
Accounts and notes receivable (11,503) (33,320)
Inventories (4,749) (24,405)
Prepaid expenses (1,005) (3,922)
Accounts payable 7,729 14,269
Accrued liabilities (974) 3,341
Income taxes 156 5,991
Accounts with related parties (842) (3,892)
Other, net 2,104 (2,063)
------------- --------------
Net cash used by operating activities (10,913) (9,453)
------------- --------------
Cash flows from investing activities:
Capital expenditures (2,274) (10,836)
Purchase of interest in subsidiaries:
IMI Titanium Business - (2,250)
Other - (2,940)
Other, net 421 149
------------- --------------
Net cash used by investing activities (1,853) (15,877)
--------------- ---------------
</TABLE>
7
<PAGE> 8
TITANIUM METALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
October 1, SEPTEMBER 29,
1995 1996
-------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Notes payable and long-term debt:
Borrowings $ 15,322 $ 18,248
Reductions (3,956) (83,307)
Proceeds from issuance of common stock, net - 131,488
Capital contribution from related party 1,148 -
Related parties loans (repayments) 2,500 (42,505)
-------------- --------------
Net cash provided by financing activities 15,014 23,924
-------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities 2,248 (1,406)
Cash acquired, net - 3,399
Currency translation 43 203
-------------- --------------
Balance at beginning of period - 24
-------------- --------------
Balance at end of period $ 2,291 $ 2,220
============== ==============
Supplemental disclosures:
Cash paid for:
Interest $ 7,914 $ 6,689
Income taxes 53 874
Acquisitions:
Cash and cash equivalents $ - $ 4,105
Noncash assets - 168,491
Liabilities - (97,406)
Common stock issued to IMI - (70,000)
-------------- --------------
Cash paid $ - $ 5,190
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
TITANIUM METALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Titanium Metals Corporation ("TIMET") was 30%-owned by Tremont
Corporation at September 29, 1996. Contran Corporation holds, directly or
through subsidiaries, approximately 44% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of the children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons may be deemed
to control each of Contran, Tremont, TIMET and NL Industries, Inc., an indirect
subsidiary of Contran.
The consolidated balance sheet of TIMET and subsidiaries (collectively
the "Company") at December 31, 1995 has been condensed from the Company's
audited consolidated financial statements at that date. The consolidated
balance sheet at September 29, 1996 and the consolidated statements of
operations and cash flows for the three and nine month interim periods ended
October 1, 1995 and September 29, 1996, and the consolidated statement of
stockholders' equity for the nine month interim period ended September 29, 1996
have been prepared by the Company without audit. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for interim periods are
not necessarily indicative of the operating results of a full year or of future
operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Registration Statement on Form
S-1, as amended (File No. 333-2940), for the year ended December 31, 1995 and
the three months ended March 31, 1996.
Note 2 - Income (loss) per common share:
Common shares outstanding for all periods presented have been adjusted
to reflect the 65-for-1 stock split effective June 4, 1996 (the "Stock Split").
Income (loss) per common share is based upon the weighted average number of
common shares and equivalents outstanding after giving effect, in all periods
presented, to the Stock Split. Common stock equivalents, consisting of
nonqualified stock options, are excluded from the computation when their effect
is immaterial or anti-dilutive. See Note 8.
9
<PAGE> 10
Note 3 - Business combinations and joint ventures:
IMI Titanium Acquisition
On February 15, 1996, the Company acquired the titanium metals
businesses of IMI plc ("IMI") (the "IMI Titanium Acquisition"). IMI previously
conducted its titanium businesses (the "IMI Titanium Business") principally
through its wholly owned United Kingdom subsidiary, IMI Titanium Ltd. (now
known as TIMET UK), and its United States subsidiary, IMI Titanium, Inc. (now
known as TIMET Castings). TIMET UK is Western Europe's leading producer of
titanium ingot and mill products for aerospace and industrial applications.
TIMET Castings manufactures titanium castings for aerospace applications and
golf club heads. IMI conveyed all of its titanium related businesses to the
Company in exchange for 9.6 million newly issued shares of the Company's common
stock valued at $70 million, and the Company issued $20 million of the
Company's subordinated debt to IMI in exchange for a like amount of debt
previously owed to IMI by its U.K. subsidiary. In connection with the IMI
Titanium Acquisition, Tremont, which currently owns 30% of TIMET, was granted
an option expiring February 15, 1999 to purchase up to an additional 2 million
shares of the Company's common stock (after giving effect to the Stock Split)
from IMI for $16 million. Tremont assigned to UTSC the right to acquire from
IMI .5 million shares of the Company's common stock (after giving effect to the
Stock Split) under the option.
The Company has accounted for the IMI Titanium Acquisition by the
purchase method of accounting. The purchase price of approximately $72
million, including transaction costs, has been allocated to the individual
assets and liabilities of the IMI Titanium Business based on preliminary
information. The actual allocation of the purchase price may be different from
the preliminary allocation due to adjustments in the purchase price and
refinements in estimates of the fair values of the net assets acquired.
Goodwill approximated $9 million and is being amortized on a straight-line
basis over 15 years. The Company has included the results of operations of the
IMI Titanium Business in its consolidated results of operations effective at
the beginning of fiscal 1996 with preacquisition earnings of approximately $.4
million of the IMI Titanium Business reflected as a separate deduction in
determining net income for the nine months ended September 29, 1996.
Preacquisition sales of the IMI Titanium Business included in the Company's
consolidated sales for the nine months ended September 29, 1996 were
approximately $11.7 million.
The following pro forma financial information has been prepared
assuming the IMI Titanium Acquisition occurred at the beginning of the
respective periods. The pro forma financial information is not necessarily
indicative of the operating results that might have occurred if the transaction
had been completed at such earlier dates or the operating results which may
occur in the future.
<TABLE>
<CAPTION>
Nine months ended
----------------------------------
October 1, SEPTEMBER 29,
1995 1996
--------------- ---------------
(unaudited)
(In millions, except per share data)
<S> <C> <C>
Revenues $ 243.9 $ 356.4
Net income (loss) (22.1) 23.9
Net income (loss) per common share (.89) .86
</TABLE>
10
<PAGE> 11
Axel Johnson Metals Acquisition
On October 1, 1996, the Company acquired (the "AJM Acquisition")
substantially all of the assets and assumed substantially all of the
liabilities of Axel Johnson Metals, Inc. ("AJM") for approximately $96 million
cash. The AJM Acquisition was completed through a newly formed subsidiary,
Titanium Hearth Technologies, Inc. ("THT, Inc."), and included the acquisition
of the 50% partnership interest in Titanium Hearth Technologies ("THT"), a
general partnership, that TIMET did not previously own (see below). The
purchase price was funded through borrowings under TIMET's U.S. credit
facility. THT, Inc. and its subsidiaries operate titanium scrap processing
facilities and electron beam cold hearth melting furnaces. TIMET will account
for the AJM acquisition by the purchase method and consolidate the financial
position and results of operations of THT, Inc. beginning in the fourth quarter
of 1996.
Titanium Hearth Technologies
Prior to the AJM Acquisition, TIMET had a 50% interest in THT, a
partnership with AJM. Summarized financial information of THT is shown below:
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
October 1, SEPTEMBER 29,
1995 1996
-------------- --------------
(In thousands)
<S> <C> <C>
Income statement:
Revenues $ 34,388 $ 58,114
Operating costs and expenses 28,136 45,750
Interest and other expenses 455 465
-------------- --------------
Net income $ 5,797 $ 11,899
============== ==============
Equity in earnings of THT $ 2,714 $ 5,815
============== ==============
Distributions paid to TIMET from THT $ - $ -
============== ==============
</TABLE>
TISTO
TIMET held a 26% interest in TISTO, a German distributor of titanium
products, on June 30, 1996. In July 1996, TIMET acquired the remaining 74%
equity interest for approximately $2 million in cash and guaranteed
approximately $2 million in existing loans from former TISTO shareholders.
TIMET has consolidated TISTO's results effective July 1, 1996 and TISTO's
revenues approximated $5 million for the three months ended September 29, 1996.
The pro forma effect of the TISTO acquisition would not be material.
11
<PAGE> 12
TIMET Savoie
Effective August 1, 1996, TIMET and Compagnie Europeenne du
Zirconium-CEZUS, S.A. ("CEZUS") completed an agreement to form a new
jointly-owned French company ("TIMET Savoie") to manufacture and sell titanium
products. TIMET Savoie is 70%-owned by TIMET and 30%-owned by CEZUS. CEZUS
contributed cash, equipment and the CEZUS titanium business to TIMET Savoie,
and certain CEZUS employees became employees of TIMET Savoie. TIMET
contributed proprietary technology, all of its interest in its previously
existing France-based distribution businesses and cash valued at a total of
approximately $8 million. TIMET Savoie will manufacture products inside
CEZUS' production facility in Ugine, France both directly, utilizing its own
personnel and equipment and, for melting, forging and certain other operations,
indirectly by subcontracting to CEZUS under a long-term manufacturing
agreement with CEZUS. The Company consolidated TIMET Savoie effective August 1,
1996. TIMET Savoie's revenues for the two months ended September 29, 1996 was
approximately $5 million.
Upon formation of TIMET Savoie, CEZUS provided TIMET Savoie with a
French franc denominated credit facility providing, under certain
circumstances, for borrowings up to approximately $13 million. Additionally,
CEZUS has the right to sell their interest in TIMET Savoie to the Company for
30% of TIMET Savoie's registered capital after TIMET Savoie has had two
consecutive years of profitable operations and all outstanding borrowings to
CEZUS have been repaid. The Company has the right to purchase CEZUS' 30%
interest in TIMET Savoie for 30% of TIMET Savoie's book equity determined under
French accounting principles on or after December 31, 1997 and following the
repayment of all outstanding borrowings to CEZUS.
Joint Ventures
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
1995 1996
---------------- ----------------
(In thousands)
<S> <C> <C>
THT joint venture $ 13,853 $ 19,668
Other - 270
---------------- ----------------
$ 13,853 $ 19,938
================ ================
</TABLE>
12
<PAGE> 13
Note 4 - Business segment information:
The Company's operations are conducted in one business segment,
titanium metals operations. The Company is an integrated producer and
distributor of titanium sponge, ingot, mill and cast products for aerospace,
industrial, and other applications.
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------- ------------------------------
October 1, SEPTEMBER 29, October 1, SEPTEMBER 29,
1995 1996 1995 1996
-------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Net sales $ 47,911 $ 123,435 $ 135,203 $ 349,825
============== ============= ============= =============
Operating income (loss) $ 2,325 $ 17,824 $ 1,778 $ 38,395
General corporate income (expense), net (25) 161 (219) 568
Interest expense 2,563 414 7,867 7,266
-------------- ------------- ------------- -------------
Income (loss) before income taxes, minority
interest and preacquisition earnings $ (263) $ 17,571 $ (6,308) $ 31,697
============== ============= ============= =============
</TABLE>
Operating income for three months and nine months ended September 29,
1996 includes special charges of $.4 million and $4.7 million, respectively,
resulting principally from the IMI Titanium Acquisition and related integration
of the IMI Titanium Business. The special charges include $3 million of
compensation costs and $1.7 million of integration and other costs relating to
the relocation of personnel and the consolidation of certain facilities.
Integration costs are charged to operations as incurred. Special charges are
expected to aggregate $5 million for fiscal 1996. See Note 8.
Note 5 - Inventories:
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
1995 1996
----------------- ----------------
(In thousands)
<S> <C> <C>
Raw materials $ 7,778 $ 18,155
In process and finished products 57,538 114,847
Supplies 3,818 7,650
----------------- ----------------
$ 69,134 $ 140,652
================= ================
</TABLE>
The average cost of LIFO inventories exceeded the net carrying amount
of such inventories by approximately $19 million at December 31, 1995 and $30
million at September 29, 1996.
13
<PAGE> 14
Note 6 - Accrued liabilities:
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
1995 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Postretirement benefit costs $ 2,240 $ 2,266
Pension costs 1,378 1,948
Other employee benefits 9,210 18,527
Restructuring costs 777 -
Environmental costs 1,143 1,643
Customer contract losses - 3,425
Taxes, other than income 1,655 2,805
Other 4,560 10,065
----------------- -----------------
$ 20,963 $ 40,679
================= =================
</TABLE>
Note 7 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
1995 1996
----------------- -----------------
(In thousands)
<S> <C> <C>
Notes payable $ - $ 1,139
================= =================
Long-term debt:
U.S. credit agreement:
Revolver $ 42,555 $ 1,357
Term 24,400 -
Other 280 1,612
----------------- -----------------
67,235 2,969
Less current maturities 45,695 1,497
----------------- -----------------
$ 21,540 $ 1,472
================= =================
</TABLE>
TIMET's $105 million U.S. credit facility provides for term loans
aggregating $24 million at September 29, 1996 with the balance of the facility
available as a revolving credit/letter of credit facility. Borrowings under
the revolving portion are limited to a formula-determined amount of accounts
receivable and inventories (the "borrowing base"). Interest accrues at the
Company's option at the prime rate plus .75% or LIBOR plus 2.25% (9% at
September 29, 1996) and the credit facility matures on December 31, 1998.
Borrowings are collateralized by substantially all of the Company's assets.
The credit agreement prohibits dividends on the Company's common stock in
excess of 20% of the Company's net income in any fiscal year, limits TIMET's
additional indebtedness and contains other covenants customary in agreements of
this type. At September 29, 1996, TIMET had about $102 million of borrowings
available under its U.S. credit agreement.
14
<PAGE> 15
TIMET UK has a L10 million ($15 million) overdraft/revolving credit
facility maturing January 31, 1997. The agreement restricts payments of
dividends from TIMET UK, loans and other transactions with related parties and
contains other covenants customary in agreements of this type. Borrowings
under this agreement are collateralized by substantially all of TIMET UK's
assets and accrue interest at the bank's base rate plus 2% (7.75% at September
29, 1996). There were no borrowings outstanding under this facility at
September 29, 1996.
TISTO has Deutsche Mark ("DM") denominated short term bank credit
agreements and notes payable to former TISTO shareholders with outstanding
balances of $1.1 million and $1.5 million, respectively, at September 29, 1996.
Interest accrues at 9.25% and 11%, respectively, at September 29, 1996.
TIMET Savoie has a French franc denominated short-term credit facility
available from CEZUS which provides, under certain circumstances, for
borrowings up to approximately $13 million. At September 29, 1996 no amounts
were outstanding.
Note 8 - Stockholders' equity:
On June 4, 1996, the Company completed the sale of 6.2 million shares
of its common stock to the public (the "Offerings") pursuant to a registration
statement filed with the Securities and Exchange Commission. In connection
with the Offerings, the Company effected the Stock Split, increased its
authorized common shares to 99 million shares, increased its authorized
preferred stock to 1 million shares, reserved up to 3.1 million shares to be
issued under the newly adopted 1996 Long Term Performance Incentive Plan, and
granted options to acquire approximately 437,500 shares at prices ranging from
$23 to $29 per share.
The Company's net proceeds from the Offerings approximated $131
million. The Company used approximately $42.5 million of the net proceeds to
repay existing indebtedness to stockholders ($22.5 million to Tremont and $20
million to IMI) and $82 million to repay indebtedness under its U.S. credit
facility. Supplemental earnings per share for the 1995 and 1996 nine-month
interim periods, assuming the Offerings had been completed at the beginning of
fiscal year 1995, would have been $.07 and $.97, respectively.
Certain key executive officers of the Company received shares (the
"Management Shares") of the Company's Class B common stock and cash payments
with a combined value of approximately $3 million in consideration for their
services in connection with the IMI Titanium Acquisition. The Class B
Management Shares were converted into 93,000 shares of the Company's common
stock in connection with the Offerings, and no Class B shares are currently
outstanding or authorized.
In connection with the AJM Acquisition, the Company issued options to
purchase up to 80,000 shares of the Company's common stock to key officers of
THT, Inc. under the Company's 1996 Long-Term Performance Incentive Plan at an
exercise price of $28.5625 per share.
In November 1996, the Company announced plans to form the TIMET Capital
Trust I, a Delaware business trust, to offer tax- advantaged convertible
preferred securities in a private offering to qualified institutional buyers in
the United States in reliance on Rule 144A under the Securities Act of 1933, as
amended. TIMET will own all of the common securities of the Trust. TIMET plans
to use the proceeds of the offering to retire indebtedness to lenders (excluding
capital leases) and for general corporate purposes. It is anticipated that the
Trust will offer $150 million in convertible preferred securities and will grant
the initial purchasers an option to purchase an additional $22.5 million in
convertible preferred securities to cover overallotments. The securities will
represent undivided beneficial ownership interests in the Trust and will be
effectively guaranteed by TIMET. The assets of the Trust will consist solely of
TIMET's convertible junior subordinated debentures due 2026. The convertible
preferred securities of the Trust will be convertible at the option of the
holders thereof into common stock of TIMET.
15
<PAGE> 16
Note 9 - Income taxes:
The difference between the income tax expense (benefit) attributable
to the Company's income (loss) before income taxes, minority interest and
preacquisition earnings and the amounts that would be expected using the U.S.
federal statutory income tax rate of 35% is presented below.
<TABLE>
<CAPTION>
Nine months ended
------------------------------------
October 1, SEPTEMBER 29,
1995 1996
---------------- ----------------
(In thousands)
<S> <C> <C>
Expected income tax expense (benefit) $ (2,208) $ 11,094
Incremental tax and rate differences on equity
in income of companies not included in the
consolidated tax group (312) 145
Adjustment of deferred tax
valuation allowance 2,661 (4,453)
U.S. state income taxes, net - 669
Other, net 15 336
---------------- ----------------
$ 156 $ 7,791
================ ================
</TABLE>
At September 29, 1996, the Company had, for financial reporting
purposes, U.S. net operating loss carryforwards ("NOL") of approximately $30
million. The utilization of the Company's NOLs is subject to an annual
limitation of approximately $15 million.
Note 10 - Related party transactions:
Receivables from related parties at December 31, 1995 principally
relate to sales to UTSC and TISTO. Receivables from related parties at
September 29, 1996 relate to sales to UTSC. Payables to related parties,
excluding long-term capital lease obligations to IMI, are summarized below.
<TABLE>
<CAPTION>
December 31, SEPTEMBER 29,
1995 1996
----------------- ----------------
(In thousands)
<S> <C> <C>
Current liabilities:
Tremont $ - $ 505
IMI - 65
THT 2,627 949
----------------- ----------------
$ 2,627 $ 1,519
================= ================
Noncurrent liabilities:
Tremont:
Loans and interest $ 22,460 $ -
Other 1,482 1,288
----------------- ----------------
$ 23,942 $ 1,288
================= ================
</TABLE>
16
<PAGE> 17
Note 11 - Commitments and contingencies:
For information concerning certain legal proceedings and certain
contingencies related to the Company, see (i) Item 2 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations," (ii)
Part II, Item 1 -- "Legal Proceedings," (iii) TIMET's Registration Statement on
Form S-1, as amended (File No. 333-2940), and (iv) TIMET's Quarterly Report on
Form 10-Q for the period ended June 30, 1996.
17
<PAGE> 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations for 1996 include the results of the IMI
Titanium Business acquired on February 15, 1996, TISTO acquired on July 9, 1996
and TIMET Savoie formed on August 1, 1996. All price and volume comparisons
are pro forma assuming the IMI Titanium Acquisition occurred at the beginning
of fiscal 1995. The pro forma effect of TISTO and TIMET Savoie on price and
volume information would not be material.
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------- ----------------------------
October 1, SEPTEMBER 29, October 1, SEPTEMBER 29,
1995 1996 Change 1995 1996 Change
------------ ------------ ------- ----------- ------------ ------
(In millions, except percentages and price data)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 47.9 $ 123.4 $ 75.5 $ 135.2 $ 349.8 $214.6
============ ============ ======= =========== ============ ======
Operating income (loss) $ 2.3 $ 17.8 $ 15.5 $ 1.8 $ 38.4 $ 36.6
General corporate
income (expense), net - .2 .2 (.2) .6 .8
Interest expense 2.6 .4 2.2 7.9 7.3 .6
------------ ------------ ------- ----------- ------------ ------
Income (loss) before
income taxes, minority
interest and
preacquisition earnings $ (0.3) $ 17.6 $ 17.9 $ (6.3) $ 31.7 $ 38.0
============ ============ ======= =========== ============ ======
Mill products:
Sales volume (in pounds) 5.2 7.1 1.9 15.5 19.6 4.1
Average price per pound $ 12.68 $ 14.09 $ 1.41 $ 12.14 $ 14.04 $ 1.90
Percent changes:
Mill product sales volume +36% +26%
Average selling prices +13% +16%
</TABLE>
The Company's operating income in the third quarter and first nine
months of 1996 improved significantly from the comparable periods in 1995. The
improvement was principally driven by price and volume increases for titanium
products in the commercial aerospace and golf club market. For the first nine
months of 1996, sales volume of titanium mill products increased to 19.6
million pounds compared to 15.5 million pounds in the year-ago period. Average
selling prices in the first nine months of 1996 were up approximately 16% over
the first nine months of 1995, and third quarter average selling prices were
approximately 13% higher than the third quarter of 1995.
The selling price increases reflect both the pass-through of cost
increases, particularly raw material costs, and real price improvement
associated with increased market demand. Although the Company and the titanium
industry are continuing to experience increases in the cost of certain raw
materials, the Company's increased selling prices more than offset those cost
increases. Prices on recent orders for titanium products have continued to
increase relative to 1995 levels and the Company expects this trend to
continue. The Company's backlog of firm orders approximated $400 million at
September 29, 1996.
Operating levels at the Company's plants in the first nine months of
1996 were higher than the same period in 1995 and contributed to the better
operating results. The VDP
18
<PAGE> 19
titanium sponge plant operated at about 85% of its practical capacity of 20
million pounds annually in the first nine months of 1996 compared to about 75%
of practical capacity in 1995. The Company restarted production of titanium
sponge at its original Kroll-leach facility during July in response to demand
for certain grades of titanium sponge. TIMET presently intends to increase
Kroll-leach titanium sponge production to at least 10 million pounds of annual
production. Costs to restart the Kroll-leach facility were $1.4 million in
the first nine months of 1996 and are expected to aggregate approximately $2
million for the full year. The Company's overall mill product capacity
utilization for the first nine months of 1996 approximated 85%. Depreciation
expense increased $3.8 million in the first nine months of 1996 over the
year-ago period principally as a result of the IMI Titanium Acquisition.
TIMET Castings' sales to the aerospace and golf club industry
aggregated $13.5 million for the third quarter of 1996 and $39.6 million for
the first nine months of 1996. Operating income for TIMET Castings was $1
million for the third quarter and $4 million for the first nine months of 1996.
The Company's operating income in the first nine months of 1996 included $5.8
million related to equity in earnings of THT compared to $2.7 million in the
year-ago period. The Company's consolidated net sales and operating income
(prior to intercompany eliminations) for the three months ended September 29,
1996 included $10 million and nil, respectively, attributable to TISTO and
TIMET Savoie.
The Company recorded special charges of $.4 million and $4.7 million
in the third quarter and first nine months of 1996, respectively, related to
the IMI Titanium Acquisition. Such charges included $3 million ($1.5 million
common stock and $1.5 million cash) related to compensation of certain of the
Company's officers in consideration for their services in connection with the
IMI Titanium Acquisition, and $1.7 million related to integration and other
costs. The Company expects to incur additional special charges related to
integration costs during the balance of 1996 of approximately $.5 million.
Selling, administrative and development expenses increased relative to
the year-ago periods principally due to the IMI Titanium Acquisition. General
corporate items principally consist of foreign exchange gains and losses and,
prior to October 1995, the Company's equity in earnings of former real estate
ventures.
Interest expense in the third quarter of 1996 was below that of the
same period in 1995 principally due to the reduction of indebtedness associated
with the use of the Offerings' proceeds in the second quarter of 1996.
Interest expense in the fourth quarter of 1996 will be higher than the third
quarter of 1996 due to the AJM Acquisition. See "Liquidity and Capital
Resources".
As of September 30, 1996, approximately 45% of the Company's employees
worked under collectively bargained agreements. The Company recently entered
into a four-year agreement with the union representing approximately 390 hourly
workers at its Nevada facility that expires in October 2000.
19
<PAGE> 20
See Note 3 to the Consolidated Financial Statements regarding the IMI
titanium, AJM and TISTO acquisitions and TIMET Savoie formation and Note 8
regarding the Offerings.
INCOME TAXES
The Company's income tax rate in the first nine months of 1995 varied
from the U.S. statutory rate due to losses which resulted in temporary
differences between book and taxable income for which recognition of a deferred
tax asset was not considered appropriate at the time. The Company's income tax
rate in the first nine months of 1996 varied from the U.S. statutory rate
principally due to a reduction in the deferred tax valuation allowance to
reflect the expected utilization of a portion of its U.S. NOLs in 1996.
SFAS No. 109 requires a valuation allowance against all or a portion
of a net deferred tax asset when it is more likely than not that some portion
or all of the deferred tax assets will not be realized. It further states that
forming a conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent years. The
Company incurred losses in each of its past five fiscal years. Although the
Company has reported net income in its four most recent fiscal quarters, the
Company does not believe the weight of evidence supports release of any of its
valuation allowance at September 29, 1996 in excess of NOLs expected to be
utilized in 1996. The Company may release a portion of its deferred tax asset
valuation allowance in the future, resulting in a tax benefit, if it concludes
that the "more likely than not" realization criteria of SFAS No. 109 are met.
In making its assessment of realizability, the Company will continue to
consider a number of factors, including the length of time it has remained
profitable, its backlog level, general improvement in overall industry
operating conditions, the cyclicality of the commercial aerospace market and
business fundamentals in the Company's key market sectors. When preparing
future financial statements, the Company will evaluate its strategic and
business plans, in light of evolving business conditions, and the valuation
allowance will be adjusted for future expectations resulting from that process,
to the extent different from those inherent in the valuation allowance as of
September 29, 1996.
At September 29, 1996, the Company had, for financial reporting
purposes, U.S. NOLs of approximately $30 million. The utilization of the
Company's NOLs is subject to an annual limitation of approximately $15 million.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing, and
financing activities for the nine months ended October 1, 1995 and September
29, 1996 are presented below.
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------
October 1, SEPTEMBER 29,
1995 1996
---------------- ---------------
(In millions)
<S> <C> <C>
Net cash provided (used) by:
Operating activities $ (10.9) $ (9.4)
Investing activities (1.9) (15.9)
Financing activities 15.0 23.9
---------------- ---------------
$ 2.2 $ (1.4)
================ ================
</TABLE>
The Company's 1996 earnings have improved significantly compared to
the losses it incurred in recent years. The Company's results include
significant noncash items. Depreciation expense increased to $12.6 million in
the first nine months of 1996 compared to $8.8 million for the year-ago period
principally as a result of the IMI Titanium Acquisition. The Company recorded
$4.7 million of special charges in the first nine months of 1996 related to the
IMI Titanium Acquisition, approximately $1.5 million of which was noncash for
common stock. The Company's equity in earnings of THT were $2.7 million and
$5.8 million for the first nine months of 1995 and 1996, respectively, while
THT made no distributions in either period. Cash flow from operations in the
first nine months of both 1995 and 1996 was reduced by increases in accounts
receivable and inventories, which was partially offset by increases in accounts
payable.
The Company's capital expenditures in the first nine months of 1996
were $10.8 million compared to $2.3 million in the year-ago period. The
Company estimates capital expenditures in 1996 will be less than $20 million.
The Company completed the Offerings on June 4, 1996. The Company's
net proceeds from the Offerings approximated $131 million. The Company used
approximately $42.5 million of the net proceeds to repay existing indebtedness
to stockholders ($22.5 million to Tremont and $20 million to IMI) and $82
million to repay indebtedness under its U.S. credit facility.
The Company's U.S. credit facility provides for revolving
loans/letters of credit aggregating up to $105 million at September 29, 1996.
Borrowings are limited to a formula-determined amount of accounts receivable
and inventories (the "borrowing base"). Interest accrues at the prime rate
plus .75% or, at the Company's option, LIBOR plus 2.25% (9% at September 29,
1996). Borrowings are collateralized by substantially all of the Company's
assets. The credit agreement prohibits dividends on the Company's common stock
in excess of 20% of the Company's net income in any fiscal year, limits the
Company's additional indebtedness and contains other covenants customary in
transactions of this type. The Company had $102 million of borrowings
available under its U.S. credit agreement at September 29, 1996 and drew $90
million on October 1, 1996 in connection with the AJM
21
<PAGE> 22
Acquisition. The Company has requested an increase to $135 million in the
borrowings available under the U.S. credit facility.
TIMET UK has a L10 million ($15 million) overdraft/revolving credit
facility maturing January 31, 1997. The agreement restricts payments of
dividends from TIMET UK, loans and other transactions with related parties and
contains other covenants customary in transactions of this type. Borrowings
under this agreement are collateralized by substantially all of TIMET UK's
assets and accrue interest at the bank's base rate plus 2% (7.75% at September
29, 1996). There were no borrowings outstanding under this facility at
September 29, 1996.
In July 1996, the Company acquired the remaining 74% interest in TISTO
for approximately $2 million in cash and guaranteed approximately $2 million in
existing loans from former TISTO shareholders. The Company previously owned a
26% equity interest in TISTO, which is the largest German-based distributor of
titanium products. The acquisition was funded with borrowings under TIMET UK's
credit facility.
TISTO has DM denominated short term bank credit agreements and notes
payable to former TISTO shareholders with outstanding balances of $1.1 million
and $1.5 million, respectively, at September 29, 1996. Interest accrues at
9.25% and 11%, respectively, on such facilities.
Effective August 1, 1996, TIMET and CEZUS completed an agreement to
form TIMET Savoie to manufacture and sell titanium products. TIMET Savoie is
70%-owned by TIMET and 30%-owned by CEZUS. CEZUS contributed cash, equipment
and the CEZUS titanium business to TIMET Savoie, and certain CEZUS employees
became employees of TIMET Savoie. TIMET contributed proprietary technology,
all of its interest in its previously existing France-based distribution
businesses and cash valued at a total of approximately $8 million. TIMET Savoie
has a French franc-denominated credit facility available from CEZUS which
provides for working capital borrowings up to $13 million under certain
circumstances. No borrowings were outstanding at September 29, 1996.
On October 1, 1996, the Company acquired substantially all of the
assets and assumed substantially all of the liabilities of AJM for
approximately $96 million plus the assumption of approximately $6 million in
debt. The AJM Acquisition was completed through a newly formed subsidiary,
THT, Inc., and included the acquisition of the 50% general partnership interest
in THT that TIMET did not previously own. THT, Inc. and its subsidiaries
operate titanium scrap processing facilities and electron beam cold hearth
melting furnaces. The purchase price was funded through borrowings under
TIMET's U.S. credit facility. A THT, Inc. subsidiary has a bank credit
facility which provides for borrowings up to $15 million. The facility accrues
interest at the borrower's option at either LIBOR plus .85% or the higher of
the Federal funds rate plus 1/2% or the prime rate, and matures on January 31,
1997. The Company has offered a third party in the titanium industry an
opportunity to acquire a minority interest in THT, Inc. (or the THT
partnership), to which the third party has not yet responded.
In November 1996, the Company announced plans to form the TIMET
Capital Trust I, a Delaware business trust, to offer tax- advantaged
convertible preferred securities in a private offering to qualified
institutional buyers in the United States in reliance on Rule 144A under the
Securities Act of 1933, as amended. TIMET will own all of the common
securities of the Trust. TIMET plans to use the proceeds of the offering to
retire indebtedness to lenders (excluding capital leases) and for general
corporate purposes. It is anticipated that the Trust will offer $150 million
in convertible preferred securities and will grant the initial purchasers an
option
22
<PAGE> 23
to purchase an additional $22.5 million in convertible preferred securities to
cover overallotments. The securities will represent undivided beneficial
ownership interests in the Trust and will be effectively guaranteed by TIMET.
The assets of the Trust will consist solely of TIMET's convertible junior
subordinated debentures due 2026. The convertible preferred securities of the
Trust will be convertible at the option of the holders thereof into common
stock of TIMET.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt
and equity capital, and estimated future operating cash flows. As a result of
this process, the Company has in the past and may in the future seek to raise
additional capital, restructure ownership interests, refinance or restructure
indebtedness, sell marketable securities or other assets, or take a combination
of such steps or other steps to increase or manage its liquidity and capital
resources. In the normal course of business, the Company may investigate,
evaluate and discuss acquisition, joint venture and other business combination
opportunities in the titanium and specialty metal industries, and in this
regard the Company has been exploring a potential strategic relationship with a
large titanium producer in Russia. In the event of any future acquisition or
joint venture opportunities, the Company may consider using available cash,
issuing equity securities or incurring indebtedness.
The statements contained in this Report on Form 10-Q ("Quarterly
Report") which are not historical facts, including, but not limited to,
statements found under the captions "Results of Operations" and "Liquidity and
Capital Resources", both contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements
that involve a number of risks and uncertainties. The actual results of the
future events described in such forward-looking statements in this Quarterly
Report could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in the Quarterly Report,
including, without limitation, the portions of such reports under the captions
referenced above and in the Company's Registration Statement on Form S- 1, as
amended (File No. 333-2940), and the uncertainties set forth from time to time
in TIMET's filings with the Securities and Exchange Commission, and other
public statements.
23
<PAGE> 24
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to the Company's Registration Statement on Form S-1,
as amended (File No. 333-2940), and the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996 for descriptions of certain previously
reported legal proceedings.
Frank D. Seinfeld v. Harold C. Simmons, et al. (Superior Court of New
Jersey, Bergen County, Chancery Division, No. C-336- 96). Plaintiff brought
this action in September 1996 on behalf of himself and derivatively, on behalf
of NL Industries, Inc. ("NL"), an 18%-owned subsidiary of Tremont Corporation
which in turn holds approximately 44% of the outstanding common stock of the
Company, against NL, Valhi, Inc. and certain current and former members of NL's
Board of Directors including J. Landis Martin, the Company's Chairman and Chief
Executive Officer. The complaint alleges, among other things, that NL's August
1991 "Dutch Auction" tender offer was an unfair and wasteful expenditure of
NL's funds. Plaintiff seeks, among other things, to rescind NL's purchase of
approximately 10.9 million shares of its common stock from Valhi pursuant to
the Dutch Auction. The Company understands that each of the defendants
believes the complaint is without merit. The Company further understands that
each of the defendants intend to defend the action vigorously.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Executive Severance Agreement between William C.
Acton and the Registrant's wholly owned subsidiary,
Titanium Hearth Technologies, Inc. dated September
27, 1996.
27.1 Financial Data Schedule for the nine-month period
ended September 29, 1996.
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter ended
September 29, 1996 and for the month of October 1996:
July 22, 1996 - Reported Items 5 and 7
July 22, 1996 - Reported Items 5 and 7
August 13, 1996 - Reported Items 5 and 7
September 10, 1996 - Reported Items 5 and 7
September 20, 1996 - Reported Items 5 and 7
October 4, 1996 - Reported Items 5 and 7
October 16, 1996 - Reported Items 5 and 7
October 18, 1996 - Reported Items 5 and 7
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
-----------------------------------
(Registrant)
Date: November 12, 1996 By /s/ Joseph S. Compofelice
- ------------------------ ----------------------------------
Joseph S. Compofelice
Vice President and
Chief Financial Officer
By /s/ Mark A. Wallace
----------------------------------
Mark A. Wallace
Vice President - Finance and
Treasurer
(Chief Accounting Officer)
25
<PAGE> 26
EXHIBIT INDEX
No. Page
--- ----
10.1 Executive Severance Agreement between William C.
Acton and the Registrant's wholly owned subsidiary,
Titanium Hearth Technologies, Inc. dated September
27, 1996.
27.1 Financial Data Schedule for the nine-month period
ended September 29, 1996.
<PAGE> 1
EXECUTIVE SEVERANCE AGREEMENT
This AGREEMENT, dated as of September 27, 1996 is entered into
by and between Titanium Hearth Technologies, Inc., a Delaware corporation (the
"Company") and William C. Acton ("Executive").
TERMS AND CONDITIONS
In consideration of the respective covenants and agreements of
the parties contained in this Agreement, the parties agree as follows:
1. GENERAL. This Agreement is not an employment
contract nor does it in any way alter the status of Executive as an at-will
employee of the Company serving at the pleasure of the Company's Board of
Directors. Executive's employment with the Company may be terminated without
notice (except as required by section 2 hereof) at any time, for any reason by
the Company or by Executive.
Executive shall be entitled to the severance benefits set
forth in section 3 of this Agreement upon termination of Executive's employment
by the Company unless such termination is for Cause (as defined below).
Executive's termination of employment with the Company by virtue of death,
disability (as defined below), or retirement shall not be considered as a
termination of Executive by the Company. For purposes of this Agreement,
"Cause" shall mean (i) Executive's conviction of any criminal violation
involving dishonesty, fraud or breach of trust or any felony, or (ii)
Executive's gross negligence or misconduct in the performance of his duties
that materially and adversely affects the financial condition of the Company or
could reasonably have a material and adverse effect on the Company or its
business. The Executive shall be deemed to have a "disability" if, by reason
of physical or mental incapacity, Executive becomes unable to perform his
normal duties, and Executive shall be deemed to have a disability if Executive
is absent from employment for more than 90 days in the aggregate (excluding
infrequent and temporary absence due to ordinary transitory illness) during any
12-month period.
Executive shall be entitled to the severance benefits set
forth in section 3 of this Agreement upon termination of Executive's employment
with the Company by Executive only if such termination is for Good Reason. For
purposes of this Agreement, Executive shall be deemed to have resigned for
"Good Reason" if Executive resigns from employment with the Company within 90
days following the occurrence of any one of the following events without
Executive's consent: (i) the assignment of Executive to any duties
substantially inconsistent with his position, duties, responsibilities or
status with the Company immediately prior to such assignment, or a substantial
reduction of the duties or responsibilities, as compared with the duties or
responsibilities immediately prior to such reduction; or (ii) a Substantial
Reduction in Pay, which shall mean a substantial reduction by the Company in
the amount of Executive's annual base salary as in effect as of the date
<PAGE> 2
of this Agreement or as the same may be increased from time to time, except for
across-the-board salary reductions similarly affecting all executives of the
Company.
2. NOTICE OF CERTAIN TERMINATIONS. In the event that
either (i) the Company shall terminate Executive for Cause or (ii) Executive
shall resign for Good Reason, then any such termination shall be communicated
by written notice to the other party. Any such notice shall specify (i) the
effective date of termination (the "Termination Date"), which shall not be more
than 30 days after the date the notice is delivered; and (ii) in reasonable
detail the facts and circumstances underlying a determination that the
termination is for Cause or for Good Reason, as the case may be. If within 15
days after any notice is given, the party receiving such notice notifies the
other party in good faith that a good faith dispute exists concerning the
characterization of the termination, the Termination Date shall be the date on
which such dispute is finally resolved either by written agreement of the
parties or by a final judicial determination. Notwithstanding the pendency of
any such dispute, the Company shall continue Executive and his dependents as
participants in all medical, dental and any other health insurance and similar
benefit plans of the Company in which he or they were participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved. Benefits provided under this section 2 are in addition to all other
amounts due under this Agreement and shall not be offset against, or reduce any
other amounts due under, this Agreement.
3. SEVERANCE BENEFITS. Subject to the conditions set
forth in section 1, if Executive is terminated by the Company without Cause or
if Executive resigns for Good Reason, within 15 days after the Termination
Date, the Company shall pay to Executive (subject to any applicable payroll or
other taxes required to be withheld) a lump sum amount equal to Executive's
base salary as of the Termination Date for a period of 18 months, provided,
however, that if the Termination Date occurs after the third anniversary of the
effective date of this Agreement, such amount shall equal Executive's base
salary as of the Termination Date for a period of 12 months, and provided
further, that if Executive resigns for Good Reason following a Substantial
Reduction in Pay, Executive's base salary for this purpose shall be such base
salary prior to the Substantial Reduction in Pay. In addition, upon any
termination of Executive's employment with the Company, the Company shall,
within 15 days following the Termination Date, pay to Executive (subject to any
applicable payroll or other taxes required to be withheld) an amount equal to
(i) accrued but unpaid salary through the Termination Date and (ii) unpaid
salary with respect to any vacation days accrued but not taken as of the
Termination Date.
Executive is not required to seek other employment or
otherwise mitigate the amount of any payments to be made by the Company
pursuant to this Agreement. The payments provided in this Agreement shall not
be reduced by any compensation earned by Executive as the result of employment
by another employer after the Termination Date, or otherwise.
4. CONFIDENTIALITY AND PROPRIETARY RIGHTS.
(a) Executive recognizes and acknowledges that
the trade secrets and proprietary information and procedures of the Company and
its affiliates, as they may exist from time
- 2 -
<PAGE> 3
to time, are valuable, special and unique assets of the Company and its
affiliates' business, access to and knowledge of which are essential to the
performance of Executive's duties hereunder. Executive agrees to hold as the
Company and its affiliates' property, all memoranda, books, papers, letters,
formulas and other data, and all copies thereof and therefrom, in any way
relating to the Company and its affiliates' business and affairs, whether made
by him or otherwise coming into his possession, and on termination of his
employment, or on demand of the Company or any of its affiliates, at any time,
to deliver the same to the Company or any of its affiliates.
(b) Executive hereby agrees he will not at any
time during his employment or thereafter disclose to any third party (other
than in the ordinary course of business of the Company or any of its
affiliates) or use for the benefit of himself or any third party any
Confidential Information (as such term is defined in section 4(d) below)
without prior written authorization of the Company or one of its affiliates.
(c) Executive hereby sells, transfers and assigns
to the Company all of his entire right, title and interest to the Proprietary
Rights (as such term is defined in section 4(e) below) and agrees to promptly
take all action and sign and deliver all instruments as the Company or any of
its affiliates may require at any time hereafter: (i) to vest or perfect in
the Company and its successors, assigns and nominees all right, title and
interest in and to the Proprietary Rights; (ii) to assist the Company or any of
its affiliates in filing or prosecuting any application for registration, in
Executive's name, the Company's name, the name of any of its affiliates or any
other name, in any country, for any patent, trademark, service mark, copyright,
mask work or other registration on the Proprietary Rights, or any modification,
reissue, division, continuation, revival or extension thereof; or (iii) in
conducting any legal or administrative proceedings for securing, protecting or
enforcing any of the foregoing or otherwise relating to the Proprietary Rights.
Executive further agrees to disclose to the Company or any of its affiliates
promptly all information, details and data pertaining to the Proprietary Rights
to the extent such information, details or data are not presently known to the
Company or any of its affiliates.
(d) As used in this Agreement, "Confidential
Information" shall mean information which is not generally known to the public
in the form available to Executive and which was or is used, developed or
obtained by the Company or any of its affiliates relating to the business of
the Company or any of its affiliates, or research and development, including,
but not limited to, all client or customer lists, marketing strategies and
techniques, trade secrets, engineering or other know-how or other information
pertaining to the financial condition, business, research and development or
prospects of the Company or any of its affiliates.
(e) As used in this Agreement "Proprietary
Rights" shall mean any and all inventions, discoveries, research, engineering
methods, systems, formulas, designs, mask works, copyrights, software, data,
processes, products, projects, improvements and developments all whether or not
published, confidential, protected or susceptible of protection by patent,
trademark, service mark, copyright or other form of legal protection and
whether or not any attempt has been made to secure such protection, which were
made, conceived or reduced to practice at any time by Executive
- 3 -
<PAGE> 4
or by any other employee or consultant of the Company or any of its affiliates,
or in whole or in part at the expense of, on the premises of, or with the
assistance of the employees or consultants of, with the equipment or supplies
or those of the employees or consultants of, the Company or any of its
affiliates, and any and all other Confidential Information.
5. NON-COMPETITION AND NON-SOLICITATION AGREEMENT.
(a) In consideration of the Company's agreements
as set forth in this Agreement, as well as other agreements, Executive agrees
that during his employment and for a period of two (2) years thereafter
(provided, however, that such two year period shall be extended by any period
during which Executive is in violation of this section 5), he will not in any
way, directly or indirectly, except in the proper exercise of his employment
pursuant to this Agreement:
(i) engage in, represent, furnish consultant services to,
be employed by, or have any interest (whether as owner, principal,
director, officer, partner, agent, consultant, stockholder, or
otherwise) in any business that is engaged in designing, constructing,
fabricating or operating a hearth melting furnace for the melting of
(A) titanium or titanium alloys or (B) any other specialty metal in
which the Company or any of its affiliates is actively doing business
as of the Termination Date. Such restrictions shall apply in the
specific geographic and customer markets served by the Company or any
of its affiliates at any time during or upon termination of,
Executive's employment (which shall include but not be limited to the
United States). This section 5(a)(i) shall not prevent Executive from
owning up to one percent (1%) of the outstanding stock of any publicly
traded company which competes with the Company provided Executive does
not participate in the business of such entity;
(ii) (A) solicit, offer employment to, otherwise attempt
to hire, or assist in the hiring of any employee of the Company or any
of its affiliates, (B) encourage, induce, assist, or assist others in
inducing any such person to terminate his or her employment with the
Company or any of its affiliates, or (C) in any way interfere with the
relationship between the Company or any of its affiliates and their
employees; or
(iii) (A) contact or solicit, or direct or assist others to
contact or solicit, for the purpose of promoting any person's or
entity's attempt to compete with the Company or any of its affiliates,
in any business carried on by the Company or any of its affiliates
during Executive's employment, any customers, suppliers or other
business associates of the Company or any of its affiliates that were
existing or identified prospective customers, suppliers or associates
during Executive's employment, or (B) otherwise interfere in any way
in the relationships between the Company or any of its affiliates and
their customers, suppliers and business associates.
(b) If Executive resigns prior to the third
anniversary of the Effective Date (as defined in section 17 of this Agreement)
under circumstances in which Executive is not entitled to severance benefits
pursuant to section 3 of this Agreement, then the Company will (unless the
- 4 -
<PAGE> 5
obligations of Executive under this section 5 have been waived by the Company)
pay to the Executive (subject to any applicable payroll or other taxes required
to be withheld) an amount equal to Executive's base salary as of the
Termination Date, payable in equal monthly installments of 1/24 of such base
salary.
(c) Executive agrees that this covenant is
reasonable with respect to its duration, geographic area and scope. It is the
desire and intent of the parties that the provisions of this section 5 shall be
enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought. Accordingly, if
any particular portion of this section 5 shall be adjudicated to be invalid or
unenforceable, this section 5 shall be deemed amended to delete therefrom the
portion thus adjudicated to be invalid or unenforceable, such deletion to apply
only with respect to the operation of this section 5 in the particular
jurisdiction in which such adjudication is made.
6. FURTHER ASSISTANCE. During Executive's employment by
the Company and thereafter, Executive will not make any disclosure, issue any
public statements or otherwise cause to be disclosed any information which is
designed, intended or might reasonably be anticipated to discourage suppliers
or customers of the Company or any of its affiliates or otherwise have a
negative impact or adverse effect on the Company or any of its affiliates.
Following Termination Date, Executive will provide assistance reasonably
requested by the Company in connection with actions taken by Executive during
Executive's employment by the Company, including but not limited to assistance
in connection with any lawsuits or other claims against the Company arising
from events during Executive's employment by the Company.
7. COMPLETE AGREEMENT. This Agreement, those documents
expressly referred to herein and other documents executed by the parties of
even date embody the complete agreement between the parties in respect to the
subject matter of this Agreement, and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way. The
provisions herein shall be regarded as divisible, and if any of such provisions
or any part thereof are declared invalid or unenforceable, the validity and
enforceability of the remainder of such provisions or parts thereof and the
applicability thereof shall not be affected thereby. All rights of Executive
and Executive's beneficiaries under this Agreement shall at all times be
entirely unfunded and no provision shall at any time be made with respect to
segregating assets of the Company or payment of any amounts due hereunder.
Neither Executive nor his beneficiaries shall have any interest in or rights
against any specific assets of the Company, and Executive and his spouse or
other beneficiary shall have only the rights of a general unsecured creditor of
the Company.
8. COUNTERPARTS. This Agreement may be executed in
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
- 5 -
<PAGE> 6
9. SUCCESSORS AND ASSIGNS. This Agreement is intended
to bind and inure to the benefit of and be enforceable by Executive, the
Company and their respective successors and assigns; provided that in no event
shall Executive's obligations under this Agreement be delegated or transferred
by Executive, nor shall Executive's rights be subject to encumbrance or to the
claims of Executive's creditors. This Agreement is for the sole benefit of the
parties hereto and shall not create any rights in third parties other than the
Company's affiliates.
10. REMEDIES. The Company will be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights to which it may be entitled. Executive agrees and acknowledges
that money damages may not be an adequate remedy for breach of the provisions
of this Agreement and that the Company may in its sole discretion apply to any
court of law or equity of competent jurisdiction for specific performance
and/or injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement. In the event that either party files an action
against the other in any court to collect, enforce, protect or preserve its
rights under this Agreement, the prevailing party in such action shall be
entitled to receive reimbursement from such other party of all reasonable costs
and expenses, including attorneys' fees, which such prevailing party incurred
in prosecuting or defending such action, as the case may be.
11. REPRESENTATIONS AND WARRANTIES OF EXECUTIVE.
Executive represents and warrants that he has full power and authority to enter
into this Agreement and to perform his obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of Executive, enforceable
in accordance with its terms and conditions. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
will not (a) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate modify of cancel or require any notice under any contract, lease,
sublease, license, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, security interest or other
obligation or liability to which Executive is a party or by which he is bound
or to which any of his assets is subject (including but not limited to
employment, nondisclosure and confidentiality agreements) or (b) violate any
statute, regulation, rule, judgment, order, decree or other restriction of any
government, government agency or court to which Executive is subject.
12. CHOICE OF LAW. All questions concerning the
construction, validity and interpretation of this Agreement will be governed by
the internal law, and not the law of conflicts, of the State of Colorado.
13. MODIFICATIONS AND WAIVERS. No provision of this
Agreement may be modified, altered or amended except by an instrument in
writing executed by the parties hereto. No waiver by any party hereto of any
breach by any other party hereto of any term or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar terms or provisions at the time or at any prior or subsequent time.
- 6 -
<PAGE> 7
14. HEADINGS. The headings contained herein are solely
for the purpose of reference, are not part of this Agreement and shall not in
any way affect the meaning or interpretation of this Agreement.
15. NOTICES. Except as otherwise expressly set forth in
this Agreement, all notices, requests and other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be given (and, except as otherwise provided in this
Agreement, shall be deemed to have been duly given if so given) in person, by
cable, telegram, facsimile transmission, mailed by first class registered or
certified mail, postage, prepaid or sent by overnight courier to the parties at
the following addresses (or such other address as shall be furnished in writing
by like notice, provided, however, that notice of change of address shall be
effective only upon receipt):
Notices to Executive:
---------------------
215 Welsh Pool Road
Lionville, Pennsylvania 19353
Notices to the Company:
-----------------------
1999 Broadway, Suite 4300
Denver, Colorado 80202
Attn.: General Counsel
16. EXPENSES. Each party will pay its own expenses in
connection with this Agreement and the performance of the transactions and
obligations contemplated by this Agreement.
17. EFFECTIVE DATE. This Agreement is entered into in
anticipation of the acquisition, by the Company, of substantially all of the
assets of Axel Johnson Metals, Inc. pursuant to an asset purchase agreement.
The parties agree that this Agreement shall become effective upon the closing
of such acquisition (the "Effective Date"), but shall be null and void and of
no further effect if such acquisition does not close on or prior to December
31, 1996.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the day and year first above written.
EXECUTIVE
/s/ William C. Acton
-----------------------------------
TITANIUM HEARTH TECHNOLOGIES, INC.
By: /s/ Robert E. Musgraves
--------------------------------
Its: President
-------------------------------
- 8 -
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