SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ to ________
COMMISSION FILE NUMBER 0-1339
OREGON METALLURGICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Oregon 93-0448167
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
530 34th Ave. S.W., Albany, OR 97321
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(Address of principal executive (Zip Code)
offices)
Registrant's Telephone number, including area code: (541) 967-9000
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class which is registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sales price of the Common Stock on March 17, 1997 as
reported on the Nasdaq National Market, the aggregate market value of the voting
stock held by nonaffiliates of the registrant was $327,977,161.
The number of shares outstanding of the registrant's common stock, $1.00 par
value was 16,196,403 at March 17, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Selected sections of the Oregon Metallurgical Corporation Annual Report to
Shareholders for 1996 are incorporated by reference in Parts II and IV of Form
10-K as stated herein.
Selected sections of the Oregon Metallurgical Corporation Proxy Statement for
the Annual Meeting of Shareholders to be held April 24, 1997, are incorporated
by reference in Part III of Form 10-K as stated herein.
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TABLE OF CONTENTS
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Page
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Year 1996 Year 1996 March 14, 1997
Item Form 10-K Annual Report Proxy Stmt.
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PART I
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1. Business.............................................. 2 --- ---
The Company.................................... 2 --- ---
Strategy and Outlook .......................... 2 --- ---
Industry Overview.............................. 3 --- ---
Production Process............................. 4 --- ---
Products....................................... 5 --- ---
Electron Beam Furnace.......................... 7 --- ---
Raw Materials.................................. 8 --- ---
Markets........................................ 9 --- ---
Marketing, Distribution and Service Centers.... 10 --- ---
International and Export Sales................. 11 --- ---
Backlog........................................ 11 --- ---
Competition.................................... 12 --- ---
Employee Relations............................. 14 --- ---
Research, Technical and Product Development... 14 --- ---
Joint Ventures................................. 14 --- ---
Regulatory and Environmental Matters........... 14 --- ---
2. Properties............................................ 16 --- ---
3. Legal Proceedings..................................... 16 --- ---
4. Submission of Matters to a Vote of Security Holders... 16 --- ---
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters.................. 17 41 ---
6. Selected Financial Data............................... 17 53 ---
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 17 34-40 ---
8. Financial Statements and Supplementary Data........... 17 17-32 ---
9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.............. 17 --- ---
PART III
10. Directors and Executive Officers of the Registrant.... 18 --- 4-5
11. Executive Compensation................................ 18 --- 6-15
12. Security Ownership of Certain Beneficial Owners
and Management................................... 18 --- 2-3
13. Certain Relationships and Related Transactions........ 18 --- 14
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................... 19 --- ---
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ITEM 1. BUSINESS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FIVE-YEAR
SUMMARY OF SELECTED FINANCIAL DATA AND THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO OF THE COMPANY. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND
EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, DEPENDENCE ON AEROSPACE, UNCERTAINTY OF EMERGING GOLF MARKET, HIGHLY
COMPETITIVE MARKET, SUBSTANTIAL EXCESS PRODUCTION CAPACITY, PLANNED SIGNIFICANT
INVESTMENT IN ELECTRON BEAM FURNACE, DEPENDENCE ON ESSENTIAL MACHINERY AND
EQUIPMENT, DEPENDENCE ON RAW MATERIALS AND SERVICES, ENVIRONMENTAL REGULATION,
AND LABOR AGREEMENTS.
THE COMPANY
The Company is one of two U.S. integrated producers and distributors of
titanium sponge, ingot, mill products and castings for use in the aerospace,
industrial, golf and military markets. Since 1993, the Company has developed new
market opportunities for titanium, expanded its distribution network, increased
its production capacity, and improved its manufacturing efficiency. As a result,
management believes that it is well-positioned to capitalize on improving and
emerging markets in the titanium industry. In 1996, the Company reported net
sales of $236.9 million, operating income of $35.1 million and net income of
$22.3 million.
On August 26, 1996, the Company completed an Offering (the Offering) of
4.6 million shares of its Common Stock for a price of $23.75 per share. Proceeds
from the Offering, net of underwriting fees and expenses, amounted to $103
million. The proceeds will be used to construct a new EB furnace and raw
material processing facility, expand the Company's distribution business, and
for working capital and other general corporate purposes.
On September 20, 1994, the Company completed the acquisition of the net
assets and subsidiaries of the Titanium Industries Distribution Group from
Kamyr, Inc. The acquired business is being operated under the name of Titanium
Industries, Inc., an 80% owned subsidiary of OREMET. TI operates full-line
titanium metal service centers in the U.S., U.K., Germany and Canada, and it
produces small diameter titanium bar, weld wire and fine wire. The acquisition
was accounted for as a purchase, with the results of TI included in the
Company's financial statements from the acquisition date.
The Company was incorporated in Oregon in 1955 and began operations in
1956. The Company funded its growth internally and through investments by
corporate partners. In December 1987, the Company repurchased its Common Stock
from its major corporate partner and immediately sold shares of its Common Stock
to the ESOP. Initially, the ESOP owned approximately 67% of the Common Stock and
at December 31, 1996, the ESOP's ownership interest was approximately 5%.
STRATEGY AND OUTLOOK
Beginning in 1993, several members of the Company's current executive
management team, including Carlos E. Aguirre, the President and Chief Executive
Officer, joined the Company from other companies within the titanium industry.
The Company's management team intends to continue to focus on the following
strategic objectives to further improve its competitive position:
o MAINTAIN LEADERSHIP IN NEW MARKET APPLICATIONS AND PRODUCTS
OREMET has developed many new and improved applications for titanium
with or for its customers. Sales for non-aerospace applications have
increased from $12.7 million in 1993 to $135.1 million in 1996. In
addition to the golf market, OREMET has established a major presence
in new markets such as armor for sale to the military and high purity
sponge for the electronics industry. For the aerospace industry,
OREMET has developed a unique production process for titanium
aluminides. As a result of these efforts, the Company has diversified
its revenue base while maintaining the flexibility to respond to
changing market conditions.
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o BENEFIT FROM VERTICAL INTEGRATION AND SCRAP HANDLING CAPABILITIES
OREMET is one of only two companies in North America which are
vertically integrated in the production of sponge and mill products.
The Company is a large producer of titanium sponge and a large
purchaser and processor of titanium scrap, two key materials used in
the manufacture of mill products. The ability to both produce and
purchase sponge or scrap allows the Company considerable flexibility
in optimizing its mix of raw material purchases and reduces the
Company's exposure to raw material price fluctuations. As a result of
this flexibility, the Company is well positioned to control the costs
of producing titanium ingot and mill products.
o EXPAND SERVICE CENTER BUSINESS
The Company's distribution strategy is to establish new titanium
metal service centers in growth markets throughout the world. The
Company's and TI's nine full-line titanium metal service centers
located in the U.S., U.K., France, Germany and Canada significantly
enhance OREMET's distribution capabilities. Historically, TI's
service centers have reported results that are more stable and less
cyclical than the Company's core manufacturing business. These
service centers also provide OREMET with timely feedback from a wide
range of customers which is useful in determining new market
applications and product development.
o INVEST IN A NEW ELECTRON BEAM FURNACE
The Company intends to use a portion of the net proceeds from the
Offering to build a 20 million pound capacity EB furnace. In addition
to the increased melt capacity, the Company believes that the EB
furnace will replace some of its less efficient melting capacity,
lower production costs, improve flexibility in using various raw
materials and provide a broader range of products. The Company
estimates that the EB furnace will be partially operational during
the first half of 1998 and fully operational in 2000.
INDUSTRY OVERVIEW
Titanium was first commercially produced in the 1950s. Titanium's
superior strength-to-weight ratio, stability at high temperatures and corrosion
resistance make it well suited for the aerospace and jet engine market.
Historically, approximately 70% to 80% of U.S. titanium consumption has been for
aerospace applications both in the commercial and military sectors.
The aerospace industry has historically been characterized by severe
cyclicality, which has had a significant impact on the sales and profitability
of titanium producers, including OREMET. The last peak in the titanium industry
cycle occurred in the 1988-1990 period when domestic industry mill product
shipments averaged over 50 million pounds per year. In 1991, U.S. titanium
industry shipments declined by approximately 35% to 34 million pounds. This
decline was primarily due to lower demand resulting from a slump in the
commercial aerospace industry and the curtailment or cancellation of military
programs resulting from the end of the Cold War. Data reported by the U.S.
Geological Survey ("USGS") indicate that domestic industry mill product
shipments increased by approximately one million pounds per year in 1992 and
1993, while they dropped to approximately 35 million pounds in 1994. The USGS
reported that U.S. industry shipments of titanium mill products increased 30% to
57 million pounds in 1996, compared to 44 million pounds in 1995. The
improvement in industry shipments is the result of increased demand from the
commercial aerospace industry and from the producers of golf clubheads.
Beginning in 1995, demand for titanium significantly strengthened due
primarily to increased demand from the aerospace market. Historically,
commercial airlines have tended to place new aircraft orders when their
operating profits were improving. In 1995, the domestic commercial airline
industry reported significantly higher operating profits than the prior year,
and in the second half of 1995 aircraft manufacturers began to increase aircraft
build rates. Newer wide body planes, such as the Boeing 777 and the Airbus A-330
and A-340, use a higher percentage of titanium in their airframes, engines and
parts (as measured by total fly weight) than narrow body planes. "Fly weight" is
the empty weight of a finished
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aircraft with engines but without fuel or passengers. The Boeing 777, for
example, utilizes titanium for approximately 9% of total fly weight, compared to
between 2% and 3% on the older 737, 747 and 767 models.
The following table reflects aircraft orders (number of planes) for the
three major aircraft producers (based on company reports):
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MAJOR COMMERCIAL AIRCRAFT PRODUCERS
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Aircraft Orders (Number of Planes)
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1996 1995 1994 1993 1992
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Boeing ............................... 717 346 119 247 243
McDonnell Douglas .................... 47 110 9 10 36
Airbus ............................... 484 106 136 38 118
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Total ........................... 1,248 562 264 295 397
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</TABLE>
Aerospace industry-related sales represented approximately 43% of the
Company's net sales for 1996. The aerospace industry is expected to remain the
largest source of demand for titanium products. However, many opportunities
exist in the non-aerospace markets where the characteristics of titanium metal
provide advantages over competing materials, such as aluminum, nickel and
stainless steel. Golf clubhead manufacturers are using titanium because of its
strength and low weight which enables production of clubs with larger heads.
Titanium's resistance to the effects of atmospheric conditions and a variety of
chemicals and acids make it an attractive metal for marine and other industrial
applications where corrosion is of critical concern. As a result, titanium is
used increasingly in pollution control equipment, offshore oil installations,
mining operations and waste storage facilities. Its favorable strength-to-weight
ratio and biocompatibility also make it an increasingly popular metal for
biomedical products such as medical implants, and consumer products such as
eyeglass frames and bicycles.
PRODUCTION PROCESS
Since it began operations in 1956, OREMET has been innovative in
developing process technologies for the production of titanium. The production
of titanium requires several raw materials, including titanium tetrachloride (a
liquid derivative of rutile ore, coke and chlorine gas), magnesium, titanium
scrap and master alloys, such as vanadium-aluminum. See "Business - Raw
Materials."
The flow of the Company's titanium production process is illustrated below:
OREMET TITANIUM PRODUCTION PROCESS
[Description of Graphic:
The remainder of this page contains a flow chart, with directional
arrows, demonstrating the Company's titanium production process,
beginning with the input of titanium tetrachloride and magnesium
to produce titanium sponge. The flow chart shows that the
titanium sponge is then either sold to non-integrated producers
or used internally, along with master alloys and titanium scrap,
to produce ingot. In addition, the flow chart shows that ingot
is then either used to produce mill products, which are sold to
aerospace, golf product and industrial parts manufacturers, used
to produce castings, which are sold to industrial and marine
product manufacturers, or used by forgers and mill product
manufacturers.]
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The Company's manufacturing processes are dependent on the reliable
operation of its machinery and equipment. The Company has certain critical
pieces of machinery and equipment which may require significant lead times to
complete necessary repairs or replacements and the functions of which may not be
easily replaced by an outside converter. Additionally, given the Company's
belief that all other titanium manufacturers are currently operating at or near
production capacity, there can be no assurance that the Company could locate an
outside converter that has sufficient available capacity to enable the Company
to meet its production demands in a timely manner, or that an agreement could be
reached with any such outside converter on commercially acceptable terms. Any
such event could result in a disruption in the Company's production or
distribution which could have a material adverse effect on the Company, its
financial condition or its prospects. Additionally, although the Company
maintains business interruption insurance to reduce the potential effect of any
such loss, a natural disaster or other catastrophic event occurring at its
Albany manufacturing facilities could have a material adverse effect on the
Company, its financial condition or its prospects.
PRODUCTS
Titanium products is the Company's single business segment. A full range
of titanium products is produced for applications in both the aerospace and
non-aerospace markets. The principal product forms are titanium sponge, titanium
ingots, titanium mill products and castings.
The amount of the Company's consolidated sales and the percentage of
consolidated sales represented by each class of product during the three years
ended December 31, 1996, were as follows:
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Year Ended December 31,
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1996 1995 1994
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(in thousands)
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Net Sales:
Sponge ....................................................... $ 16,866 7% $ 10,558 7% $ 12,360 18%
Ingot ........................................................ 45,087 19 22,315 15 14,992 21
Mill Products ................................................ 88,552 37 46,839 32 22,752 32
Castings ..................................................... 9,995 4 7,225 5 6,442 9
Distribution ................................................. 70,898 30 54,455 37 11,517 16
Other ........................................................ 5,519 3 5,461 4 3,103 4
-------- -------- -------- -------- -------- --------
Total Net Sales ......................................... $236,917 100% $146,853 100% $ 71,166 100%
======== ======== ======== ======== ======== ========
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SPONGE. Titanium sponge is the commercially pure, elemental form of
titanium metal. Titanium sponge is produced by OREMET at its facility in Albany,
Oregon by reducing titanium tetrachloride using magnesium as the reduction
agent. OREMET produces titanium sponge in 15,000 pound batches by using a
modified Kroll process developed by OREMET engineers. Titanium tetrachloride and
magnesium are combined in a horizontal retort and swept with heated helium in
one of the Company's eight sponge reduction furnaces, producing titanium sponge
and magnesium chloride. The magnesium chloride is separated electrolytically
into magnesium and chlorine in OREMET's magnesium recovery facility. The
recovered magnesium is recycled for use in the Company's titanium sponge
manufacturing facility. The chlorine by-product is sold, but does not produce
material revenues for the Company.
OREMET began producing titanium sponge for internal use in 1970 and began
selling it in 1987. The Company sells sponge principally to domestic
non-integrated titanium producers who use the sponge to produce ingot and mill
products. During 1996, the sponge plant operated at near its practical annual
capacity of 13.5 million pounds. The Company supplements its sponge needs by
purchasing from third parties. See "Business - Raw Materials" and "Business
Competition."
The Company has a contract to supply titanium sponge and certain other
titanium products to RMI Titanium Company ("RMI") through 2003. Under this
contract, RMI may require that the Company supply it with up to seven million
pounds of titanium sponge per year (approximately 52% of the sponge plant's
capacity). RMI has notified the Company that it will take approximately 80% of
the maximum amount of sponge at specified prices per pound during 1997.
Thereafter, through 2003, the price of the sponge supplied will at RMI's option
be at either U.S. market prices or the prices in effect under the contract for
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1996 plus adjustments for changes in certain of the Company's costs, such as
labor, electricity and materials, but in any event, the price charged will not
be below the Company's cost. The Company's agreement to supply titanium sponge
has not had and is not likely to have a material adverse effect on the Company,
its financial condition or its prospects. Sales to RMI accounted for
approximately 5% of OREMET's net sales in 1996 and 1995, and 13% in 1994. No
other customer accounted for more than 10% of OREMET's net sales in any of these
periods.
INGOT. Titanium ingots are cylinders with a weight of up to 20,000 pounds
and a diameter of up to 36 inches. Titanium ingots are made by OREMET at its
facility in Albany, Oregon by melting sponge or titanium scrap, or a combination
of the two, with certain other elements to form titanium alloys. Prior to
melting, the materials are measured by a computerized weighing system to meet
customer specifications and compacted into briquettes that are welded together
to form an electrode. An electrode can also be formed by melting the materials
in the Company's plasma furnace, which allows the Company to combine a larger
percentage and more varied types of titanium scrap. An electrode is then melted
in one of the Company's vertical, water-cooled vacuum arc furnaces. Melting may
be repeated once or twice to produce standard and premium grades of titanium
ingot. The melting process is monitored through computer-operated sensors,
controls and video displays to maintain high levels of quality and consistency.
After melting, samples from finished ingots are analyzed in the Company's
laboratory to ensure proper chemical content and quality. Ingots are converted
in a forge, either by OREMET or by its customers, into semi-finished shapes and
then into finished mill products. The Company produces ingots in a variety of
sizes and grades to meet the customer's specifications. During 1996, the ingot
plant operated at near its estimated annual capacity of 22 million pounds. In
addition to its own ingot production, the Company contracts to have melting done
by other domestic and international suppliers. In order to meet long-term needs,
the Company plans to expand its capacity to produce ingot and mill products by
increasing its melt capacity with an investment in EB technology. The Company
expects to continue to utilize such suppliers until the EB furnace is
operational. See "Business - Electron Beam Furnace."
MILL PRODUCTS. Titanium mill products result from the forging, rolling,
drawing and/or extruding of titanium ingots or slabs. OREMET produces titanium
billet, bar, rod, wire, plate and sheet. OREMET sells its mill products to
manufacturers of products for: aircraft and jet engines; and vessels and piping
for chemical plants, prosthetic and orthopedic implants, armor, golf clubheads
and other consumer goods. OREMET produces mill products at its plants in Albany,
Oregon and Frackville, Pennsylvania. During 1996, the mill products facility in
Albany, Oregon operated at approximately 65% of its estimated annual capacity of
15 million pounds and is currently operating at approximately 70% of its
capacity.
The Company is dependent on the services of outside processors to perform
certain important processing functions. For some of its products, OREMET is
dependent on the services provided by THT, an outside processor which is
wholly-owned by one of the Company's principal competitors. THT owns and
operates an EB furnace which the Company utilizes for melting titanium slab,
that is further processed into titanium plate and sheet for non-aerospace
applications, and titanium electrodes for aerospace applications. OREMET has not
experienced any delays or problems associated with the competitor's ownership of
THT. Other than for those provided by THT, the services performed by the outside
processors are typically available from multiple sources. Services are provided
by THT in accordance with a one-year agreement ending December 31, 1997, and
various specific project agreements which have been negotiated on an as-needed
basis. Should the THT services agreements not be renewed, OREMET would attempt
to obtain these services from another competitor which has a cold hearth melting
furnace. OREMET believes that the loss of the services provided by THT would
result in production delays and have an adverse effect on the Company, its
financial condition or its prospects. In order to address its long-term melting
requirements, the Company intends to construct a new EB furnace. See "Business
Electron Beam Furnace."
The Company maintains a process engineering staff which continually
evaluates and identifies potential improvements in the manufacturing process.
OREMET's quality control group tests products for compliance with customer
specifications, including detailed metallurgical and chemical analyses, sonic
tests and mechanical capability and property tests. The results of these tests
are certified for conformity to specifications and then recorded for future
traceability.
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CASTINGS. In 1957, OREMET completed construction of a titanium and
zirconium casting foundry and began producing components in commercial
quantities. Since then, the foundry has continued to develop new technology and
make process improvements. OREMET produces titanium and zirconium castings for
customers primarily for the non-aerospace industry. Castings are made by melting
metal which is then poured under vacuum into graphite molds. Castings generally
weigh from one pound to 2,000 pounds. OREMET's castings are made at its Albany,
Oregon plant to customer specifications and are used in marine and other
industrial applications where corrosion is of critical concern. Titanium and
zirconium castings are used in a diversity of applications including offshore
oil production, chemical processing, mining, armor, aerospace, power generation,
pulp and paper manufacturing and marine products. Both titanium and zirconium
are recognized as cost-effective materials for construction because of their
light weight, excellent corrosion resistance, low maintenance, high quality and
long life cycle. As new applications for titanium continue to grow, the Company
expects the demand for castings to follow. To address this increasing demand,
the OREMET foundry is in the process of increasing its production capacity by
approximately 30%.
OTHER PRODUCTS. OREMET provides services to other titanium producers and
sells by-products of its titanium production process. Non-integrated producers
of titanium ingot and mill products contract with OREMET to melt sponge or
titanium scrap into ingot or to convert ingot into mill products. OREMET also
sells titanium scrap for use as an alloy addition in the production of other
metals such as steel and aluminum.
ELECTRON BEAM FURNACE
The Company intends to expand its melting capabilities by constructing a
new EB furnace. This technology offers cost advantages over the existing
production practices and is required to meet the requirements of certain
critical aerospace applications. EB technology offers the advantage of directly
casting semi-finished shapes, thereby reducing the amount and cost of subsequent
conversion operations and processing required prior to shipping the completed
product. In addition, the EB technology will allow the use of different types
and greater amounts of scrap input materials, thus allowing for cost savings and
improved inventory utilization. The EB furnace is expected to enhance the
Company's capacity to produce ingot and mill products.
The Company estimates that the cost to construct an EB furnace facility
with an annual melting capacity of 20 million pounds, together with a related
raw materials processing facility, will total approximately $32 million. The
Company is currently working with engineers and equipment suppliers on the
construction of the EB furnace. The Company estimates that the facility will be
in operation during the first half of 1998 and will be capable of producing 5
million pounds in 1998, 11 million pounds in 1999 and at near capacity in 2000.
The Company expects that the EB furnace will replace some of the Company's less
efficient existing melting capacity. The Company anticipates that it will have
an immediate need for a substantial portion of the production of the EB furnace
and that it will be able to obtain long-term commitments from others for the
furnace capacity which is not utilized by the Company. While the Company
currently intends to construct its own EB furnace, the Company, as an
alternative, may evaluate an investment in a joint venture to obtain enhanced
access to EB technology. The Company will only consider a joint venture if such
an arrangement can be structured with a suitable partner, on favorable terms and
in a timely manner to allow for production using EB technology in accordance
with the Company's schedule.
All North American EB furnaces producing titanium in commercial
quantities are owned by THT. The Company believes that these furnaces are
running at near capacity. In addition to the Company's plans to invest in EB
furnace technology, additional EB furnaces may be built and may result in excess
capacity. The Company may experience design and start-up difficulties, such as
cost overruns, operational difficulties, and significant delays. If the Company
implements new technology, there is no assurance that such technology will work
or will not result in delays or difficulties. Such events could have a material
adverse effect on the Company, its financial condition or its prospects.
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RAW MATERIALS
The primary raw materials used by the Company are titanium tetrachloride,
magnesium, titanium scrap and certain combinations of primary metals that form
master alloys. Titanium tetrachloride and magnesium are the principal materials
used in the production of titanium sponge. The principal materials used in the
production of titanium ingot are sponge, titanium scrap and alloying elements.
OREMET purchases its titanium tetrachloride requirements under a
long-term contract that expires in 2001. While the Company believes it could
obtain commercial quantities of sufficiently pure titanium tetrachloride from
other sources, but at a potentially higher cost, any extended disruption in the
supply could have a material adverse effect on OREMET's ability to produce
titanium sponge and could have a material adverse effect on the Company, its
financial condition or its prospects. Magnesium is generally available from a
number of suppliers.
While the Company is one of seven major worldwide producers of titanium
sponge, a basic raw material in the production of titanium ingot and mill
products, under current market conditions it cannot supply all of its needs for
titanium sponge internally and is dependent, therefore, on third parties for a
portion of its titanium sponge needs. Since 1993, the Company has purchased
sponge from third parties to take advantage of lower-priced materials and to
supplement that which it produces. The Company purchased approximately 30% of
its sponge requirements from third parties during 1996. The Company obtains
sponge from domestic and foreign producers of sponge, both on a spot purchase
basis and pursuant to short-term sponge contracts. The Company's purchases of
imported sponge, in pounds, compared to total purchases and production of sponge
were 30%, 12%, and 7% for the years ended December 31, 1996, 1995, and 1994,
respectively. There can be no assurance that the Company will not experience
interruptions in its sponge supplies, which could have a material adverse effect
on the Company, its financial condition or its prospects.
Titanium scrap is typically available from many sources. The Company is a
major recycler of titanium scrap. Where possible, the Company utilizes titanium
scrap as a cost-effective alternative to titanium sponge; both materials are
used as primary ingredients in the manufacture of ingots. Much of the titanium
scrap which is purchased by the Company originates from within the Former Soviet
Union ("FSU") as the availability of attractively priced domestic scrap in
sufficient quantities varies due to fluctuations in the U.S. titanium market and
demands from other purchasers, including steel and aluminum producers. Certain
of the primary metal compounds used to form master alloys are produced by a
limited number of suppliers. During January 1996, in response to rapidly
increasing scrap costs, the Company added raw material surcharges to its product
prices to offset the higher costs it was experiencing.
The Company has historically obtained approximately 50% of its feedstock
for producing titanium ingot from sponge and the other 50% from scrap. The
Company believes it will continue to be able to obtain sufficient quantities of
sponge and scrap to enable it to meet its production needs.
When available at attractive prices, the Company has purchased titanium
sponge and scrap from various countries, including the FSU. The Company's
purchases of imported sponge and scrap, in pounds, compared to total purchases
and production of sponge and scrap were 41%, 11%, and 6% for the years ended
December 31, 1996, 1995, and 1994, respectively. Continued availability of these
materials at attractive prices from the FSU cannot be assured due to the
uncertainties concerning the manufacturing capabilities of the FSU titanium
producers and the potential for political and economic instability within the
FSU.
Historically, the Company has sought to recover increases in titanium
scrap and sponge prices through price increases of its products. The Company has
added raw material surcharges to its contracts in order to more directly link
changes in raw material costs to its sales prices. Generally, the Company does
not incur import tariffs and anti-dumping duties on purchases of FSU sponge as
it is ultimately exported in the form of finished goods. If such tariffs and
duties were incurred, the Company would adjust the price or surcharge
accordingly. There is no import tariffs or duties on scrap. Any increases in
titanium scrap and sponge prices which are not offset by increases in the
Company's sales prices could have a material adverse effect on the Company, its
financial condition or its prospects.
8
<PAGE>
MARKETS
AEROSPACE. The Company sells its titanium products to non-integrated
producers and fabricators which process the material for use by the aerospace
industry. While the percentage of its sales to the aerospace industry accounted
for approximately 43% and 46% in 1996 and 1995, respectively, compared to 61% in
1994 and 77% in 1993, aggregate sales to the aerospace industry increased from
$42.6 million in 1993 to $101.8 million in 1996. The Company has also expanded
its capability to include more complex alloys and mill products used by the
aerospace industry. The Company anticipates that future aerospace industry sales
will vary from 40% to 60% of total net sales depending upon demand and
profitability. The Company's main route of supply is to provide products to
numerous forging houses, machine shops and other mill product producers who in
turn supply components to the major air frame and jet engine manufacturers.
Since 1994 the Company has been supplying products direct to Airbus Industries
for the fabrication of engine pylons. OREMET's commercial aerospace product
sales are dependent upon the production rates of major airplane manufacturers
both as a direct and as an indirect supplier. The Company has historically
experienced a high level of order cancellation and deferrals in periods of
industry downturn. The cyclicality of the commercial and military aerospace
industry has had and may continue to have a material adverse effect on the
Company, its financial condition or its prospects. See "Business Industry
Overview" and "Business - Products." The Company can give no assurance as to the
extent or duration of any recovery in the aerospace market or the extent to
which such recovery will result in increases in demand for titanium products.
GOLF. The titanium golf clubhead market evolved in 1988 when a few
investment casting houses started producing clubheads for export to markets in
the Far East. At the same time, some companies in Japan started to produce
clubheads by casting and forging. By 1993, the technology and manufacturing
processes were well developed and major U.S. club producers became interested in
producing heads with a larger hitting surface. Since 1993, most of the major
golf club manufacturers have started their own lines of titanium head drivers.
The Company estimates that the use of titanium has grown from 1.5 million pounds
in 1994 to approximately 10 million pounds in 1996. The Company estimates that
due to a 3 million pound titanium reserve in 1996, the golf market will buy 4.5
million pounds in 1997 and approximately 8 million pounds in 1998. Golf club
manufacturers are starting to produce titanium fairway woods, irons and putters.
The Company believes that it is the market share leader in shipments to the golf
industry, with shipments of 5.5 million pounds in 1996.
The Company believes that the market for golf clubheads has grown to be
the second largest consumer of titanium, after the commercial aerospace market.
The market for the Company's products sold to golf clubhead producers has only
recently begun to emerge as a significant component of the Company's net sales,
and there can be no assurance that demand for titanium products used in the golf
industry or the Company's products in particular, will continue or that this
market will expand as the Company anticipates. In addition, the Company's major
competitors in the titanium industry have begun to supply the golf clubhead
market and there is no assurance that the Company will be able to maintain its
leading market share. The Company estimates that titanium producers located in
the FSU are supplying up to 25% of the titanium shipments to the golf club
industry.
ARMOR. Titanium has been studied by the defense industry as a ballistic
protection material. In the mid 1970s, titanium was designed into the A-10
military airplane to provide protection for the pilots performing close-in
ground support missions. As a result of the deficiencies with aluminum
protection systems experienced during the Faulkland's War, titanium was studied
as a replacement material for protecting strategic areas aboard naval fighting
ships.
In order to deploy forces more rapidly, certain military forces turned to
titanium to reduce the weight of vehicles while assuring good ballistic
protection. Since 1992, hatch covers on the Bradley fighting vehicle have been
made with titanium. In 1994 and 1995, OREMET supplied over 300,000 pounds of
titanium plate for ballistic protection on a new French aircraft carrier, the
CHARLES DEGAULLE. OREMET is supplying titanium parts for construction of the
Swedish Leopard II tank and the U.S. M1A2 tank. Military engineers continue to
search for other armor applications that can take advantage of titanium's light
weight and ballistic protection characteristics. Research efforts for armor
applications continue to be a high priority for OREMET. The Company believes
that titanium usage on tanks and on various types of personnel carriers will
increase.
9
<PAGE>
In an effort to lessen the titanium industry's dependence on the
aerospace industry and to increase participation in other markets, the Company,
its competitors and certain end-users of titanium are devoting significant
efforts and resources to developing new markets and applications for titanium,
certain of which are still in the preliminary stages. Developing these emerging
applications involves substantial risk and uncertainties due to the fact that
titanium must compete with less expensive materials in these potential
applications. There can be no assurance that the Company will be able to develop
new markets and applications for its products, or as to the time required for
such development, or as to the extent to which it will face competition in this
regard. If the Company is unable to develop these markets to a substantial
degree, management expects that the Company's business would be largely
dependent on the cyclical aerospace industry and the emerging golf market.
MARKETING, DISTRIBUTION AND SERVICE CENTERS
OREMET markets primarily to manufacturers of titanium metal end products.
The Company also sells its products to non-integrated titanium producers,
regional value-added distributors and other mill product consumers. The majority
of sales are made through the Company's internal sales force. OREMET also uses
independent sales representatives for the sale of products outside of North
America.
Shipments to customers may be made directly from one of the Company's
mills in Albany, Oregon or Frackville, Pennsylvania; from an outside processor;
or from one of the Company's service centers in North America and Europe. The
Company's service centers maintain a large inventory of titanium mill products
available for rapid delivery to points around the globe. A complete line of
first stage processing equipment is available and outside machining can be
arranged by the service centers to meet the needs of their customers.
For nearly 25 years, TI, including its predecessor company, has been
supplying and developing titanium applications for industrial and commercial
customers. TI maintains a network of service centers established to satisfy the
titanium needs of the non-aerospace industry. TI opened its first service center
during 1972 in Fairfield, New Jersey. In response to the increasing demands of
its customers and in order to provide improved response times, TI established
additional service centers throughout North America. In 1988, TI established a
service center in Birmingham, U.K. and in 1992, expanded its position in the
European market by acquiring an existing service center distribution business,
also in Birmingham. During 1996, TI opened service centers in Dusseldorf,
Germany, and Windsor, CT. To support the increasing demands for titanium in
diverse commercial, consumer, aerospace and industrial markets, the Company
intends to continue to expand its distribution business geographically. In
addition to pursuing growth opportunities through the establishment of
additional service centers, TI intends to grow through acquisitions of existing
service centers and through the expansion of its participation in the aerospace
market. The Company estimates that approximately 25% of TI's shipments are to
the aerospace market, primarily in Europe. TI is currently evaluating service
center opportunities in the Pacific Rim, Southern Europe and Western United
States.
10
<PAGE>
The Company and TI maintain titanium sales offices and service centers
(which also include sales personnel) in the following locations:
Location Established Function
-------- ----------- --------
United States Albany, OR 1956 Sales Office
Parsippany, NJ 1972 Service Center
Chicago, IL 1986 Service Center
Jacksonville, FL 1986 Service Center
Los Angeles, CA 1987 Service Center
Dallas, TX 1989 Sales Office
Pittsburgh, PA 1994 Sales Office
Windsor, CT 1996 Service Center
Canada Montreal, Quebec 1973 Service Center
Vancouver, B.C. 1989 Sales Office
Europe Birmingham, U.K. 1988 Service Center
Paris, France 1994 Service Center
Dusseldorf, Germany 1996 Service Center
INTERNATIONAL AND EXPORT SALES
International and export sales, primarily in Europe and Asia, totaled
approximately 19%, 20% and 14% of OREMET's net sales in 1996, 1995 and 1994,
respectively. In May 1994, OREMET signed a three-year contract with
Aerospatiale, Societe Nationale Industrielle for engine pylon parts for the
Airbus aircraft, and in the second half of 1994 began supplying product under
the contract. The acquisition of TI provided the Company with a service center
located in the U.K. with an established operation. In 1996, TI opened a service
center in Germany. The Company intends to utilize these facilities to meet its
customers' needs in Europe and Asia. See Note 14 to the Company's Consolidated
Financial Statements.
BACKLOG
The Company's twelve-month sales order backlog was $183 million at
December 31, 1996, compared to $105 million at December 31, 1995 and $44 million
at December 31, 1994. OREMET produces titanium ingot, mill products and castings
in response to specific customer orders. Production times vary among products
and can be several months or more. The Company includes in its backlog only
those firm purchase orders scheduled for delivery during the subsequent
twelve-month period (which are generally subject to cancellation by the
customer). The Company has historically experienced a high level of order
cancellations and deferrals in periods of industry downturn.
<TABLE>
<CAPTION>
Twelve-Month Sales Order Backlog
As of the Quarter Ended
--------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in millions)
<S> <C> <C> <C> <C>
1996 ............................. $134 $141 $160 $183
1995 ............................. 48 64 65 105
1994 ............................. 28 29 37 44
1993 ............................. 27 25 19 18
</TABLE>
During the second half of 1995 and continuing through 1996, the Company
experienced a significant increase in the volume of incoming orders at increased
prices. The Company has not opened its 1998 order book, pending assessment of
future raw material costs. The increase in demand has been driven primarily by
the recovery in the commercial aerospace market and the emergence of the golf
clubhead market. As capacity utilization in the titanium industry continues to
grow and lead times lengthen, the Company expects prices on new orders to
continue to strengthen.
11
<PAGE>
COMPETITION
Although OREMET's sales are predominately to the domestic market, the
titanium industry is competitive on a worldwide basis as a result of many
factors, particularly the presence of excess capacity, which has intensified
competition for available business. The Company is one of two integrated
producers in the U.S. and one of four in the world (the Company considers an
integrated producer one that produces at least titanium sponge and ingot).
OREMET's principal competitors are other integrated and non-integrated producers
of titanium located primarily in the U.S., Europe, Japan, China and the FSU.
There are also a number of non-integrated producers that produce mill products
from purchased sponge, scrap or ingot. In each of the Company's major product
lines, OREMET competes primarily on the basis of price, quality, delivery time
and customer service. The principal methods of competition in the titanium
industry and for all of the Company's products are product quality and
qualifications to supply products. Many of the Company's products (sponge,
ingot, mill products and castings) are qualified for both aerospace and
non-aerospace applications. The Company competes by maintaining strict quality
standards. In addition, as one of two integrated producers in the U.S., the
Company is positioned to control quality and the costs of producing sponge,
ingot, mill products, and castings.
Availability of material and lead time to produce are competitive factors
with respect to mill products, castings and distribution sales. The Company
maintains an inventory of finished and intermediate inventory to meet customer
delivery requirements. The Company also works on cycle time reduction to be more
responsive to customer needs. In addition, the Company provides engineered
products to customer specifications.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant due to relatively favorable
currency exchange rates, tariffs, and with respect to Japan and Russia, existing
and prior duties (including anti-dumping duties). However, imports of titanium
sponge, scrap, and other products, principally from the FSU, have increased in
recent years and have had a significant competitive impact on the U.S. titanium
industry. To the extent the Company has been able to take advantage of this
situation by purchasing such sponge, scrap or intermediate mill products for use
in its own operations during the last three years, the negative effect of these
imports on the Company has been somewhat diminished. Given the current political
and economic uncertainties in some of the countries of the FSU, there can be no
assurance that this supply of titanium products will continue to be available to
the Company without interruption or at attractive prices. See "Business - Raw
Materials."
The Company estimates that its share of U.S. sponge capacity is
approximately 30% and that its share of world capacity is about 5%. While
approximately 20% of the world's sponge production capacity is located within
the U.S., up to one half is located within the FSU (which sponge capacity was
primarily developed to serve the needs of the Soviet military, principally the
aerospace and submarine services, both of which have been sharply curtailed).
The Company believes that the FSU production capacity may be limited as a result
of deferred plant maintenance and a general lack of financing. As a result,
significant unused production capacity, beyond that which is now supplying the
FSU's export markets (including sales to the Company), may exist in this region.
If exports of titanium products from the FSU were to increase significantly,
this additional supply could adversely affect the demand for the Company's
products. After the end of the Cold War, sponge produced in the FSU became
available and has been imported into the U.S. at low prices. USGS estimates that
in 1996, approximately 9.5 million pounds of sponge was imported from the FSU,
compared to approximately 12.2 million pounds during 1995. Based on data
supplied from the USGS, 1996 sponge imports from the FSU represents
approximately 15% of 1996 sponge consumption by U.S. producers. The excess
capacity of sponge in the FSU is beneficial, at this time, to different sectors
of the industry as it provides additional raw material to meet the increasing
raw material needs of ingot producers. In the event such sponge is qualified for
aerospace applications and large quantities were introduced into the market,
especially in a market downturn, such effect would be adverse to the existing
sponge producers, including the Company.
12
<PAGE>
As the participation of non-U.S. companies increases, the competitive
environment for the Company may become more difficult, especially as existing
tariffs are eased and certain market participants are no longer subject to
anti-dumping duties. Currently, imports of titanium sponge, ingot and mill
products from countries that receive most favored nation (MFN) tariff rate are
subject to a 15% tariff. The tariff rate applicable to imports from countries
that do not receive MFN treatment is 25% for sponge and ingot and 45% for mill
products. The U.S. Department of Commerce announced that pursuant to the
Generalized System Preferences, certain mill products imported directly from
Russia between October 1, 1996 and May 31, 1997 are not subject to duty. In
addition to regular tariffs, imports of titanium sponge from certain countries
in the FSU (Russia, Kazakhstan and Ukraine) are subject to anti-dumping duties
of 83.96%, except as follows:
The U.S. Department of Commerce, International Trade Administration (ITA)
published final results of an anti-dumping review for imports of titanium
sponge from Russia. The review covered imports from Berezniki
Titanium-Magnesium Works (AVISMA), Interlink Metals and Chemicals, Inc.,
and Cometals, Inc., during the period August 1, 1994, through July 31,
1995. Under the review, the ITA concluded that AVISMA, a producer of
titanium sponge would continue to be subject to the Russia-wide 83.96%
anti-dumping margin. However, the ITA determined the margin for the two
trading companies, Interlink and Cometals, would be revised to 0% and
28.31%, respectively.
As a result of the easing of the anti-dumping duties, substantial
additional capacity could enter the market, and if the demand for the industry's
products is less than its capacity, the profitability of the industry, including
the Company, could be adversely affected.
USGS reported the following information regarding the importation and
consumption of titanium products:
<TABLE>
<CAPTION>
U.S. IMPORTATION AND CONSUMPTION OF SELECTED TITANIUM PRODUCTS
--------------------------------------------------------------
(As compiled by USGS)
(Pounds in Millions)
1996 1995
------------------------------------ ------------------------------------
Imports as Imports as
Titanium U.S. U.S. a % of U.S. U.S. a % of
Product Imports Consumption Consumption Imports Consumption Consumption
- -------- ------- ----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sponge:
Japan 8.5 2.5
FSU 9.5 12.2
Other 2.3 2.0
---- ----
Total 20.3 62.6 32% 16.7 47.4 35%
==== ==== === ==== ==== ===
Waste and Scrap:
Japan 5.3 4.0
FSU 11.6 8.4
UK 7.5 5.2
Other 9.1 6.9
---- ---- --- ---- ---- ---
Total 33.5 58.0 58% 24.5 45.4 54%
==== ==== === ==== ==== ===
Ingot and Billet:
FSU 3.0 2.0
Other 1.9 2.1
---- ---- --- ---- ---- ----
Total 4.9 84.4 6% 4.1 67.5 6%
==== ==== === ==== ==== ====
Mill Products* 12.0 57.1 21% 3.5 43.7 8%
==== ==== === ==== ==== ====
</TABLE>
* The country of export is not available. The Company believes that the
majority of mill products imports to the U.S. originate from the FSU.
13
<PAGE>
It is believed that FSU producers have the largest titanium mill products
production capacity in the world. Continued expansion into the U.S. market by
FSU producers could materially affect the operations of the Company and the
industry to the extent that the worldwide supply of product exceeds market
demand and prices are reduced.
EMPLOYEE RELATIONS
As of December 31, 1996, the Company employed 731 employees, of which
approximately 50 were employed outside of the U.S. All of the hourly production
and maintenance workers (approximately 400) at the Albany, Oregon and
Frackville, Pennsylvania manufacturing facilities are represented by labor
unions. In August 1994, the Company and the union representing the Albany,
Oregon employees agreed upon a new labor contract which will continue through
July 2000. This contract can be re-opened after three years to address economic
issues. The contract covering the Frackville, Pennsylvania employees was
negotiated in September 1994, and will continue for three years. Since 1974, the
Company has not experienced a strike or labor disruption. OREMET considers its
relations with its employees and the union to be good.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT ("RT&D")
OREMET's RT&D efforts are focused on improving production processes and
developing new applications and markets for titanium. Production process
improvements have included improving sponge production efficiencies, making
technical improvements to scrap processes, revising vacuum arc melting
techniques, enhancing forging practices and improving overall yield. In
addition, the Company strives to reduce costs by shortening cycle times, by
implementing synchronous manufacturing principles and by eliminating product
rejections.
OREMET's focus on product development has resulted in the development of
high purity sponge for use by the electronics industry, consistent production of
titanium aluminides for aerospace applications and new alloys for armor and golf
applications.
In order to keep abreast of new developments, the Company maintains
contact with university and research facilities, as well as with major end users
of titanium products. These groups assess new applications for titanium and the
need for new or alternative alloys and titanium compositions. OREMET then
develops alloy systems, processes and procedures for the manufacture of new
products.
JOINT VENTURES
OREMET is involved in several joint ventures which, like its RT&D
efforts, utilize shared investment as a means to access technology or
capabilities.
OREMET is a 50% partner with Precision Castparts Corporation in a joint
venture which owns a plasma furnace operated by OREMET in Albany, Oregon. The
plasma furnace produces remelt electrodes for both parties' consumption. The
venture started in 1983 and is producing in excess of 2 million pounds of
electrode per year.
OREMET is a 33% member in MZI, L.L.C., which owns an advanced ultrasonic
inspection system for testing of certain aerospace products. The other members
are Titanium Metals Corporation and Teledyne Allvac. This venture is in its
second year of operations.
REGULATORY AND ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local statutes and
regulations concerning environmental matters and land use. Although the Company
believes it is in material compliance with these laws, they are frequently
modified to be more restrictive and it is impossible to predict accurately the
future effect that changes in these laws may have on the Company. There can be
no assurance that the Company will not face costs and liabilities as a result of
environmental regulation which could have a material adverse effect on the
Company, its financial position, results of operations and liquidity.
14
<PAGE>
The Company's operations pose continuing risk of environmental impacts.
The Company uses and produces substantial quantities of substances, chemicals
and compounds that have been identified as hazardous or toxic under federal,
state and local environmental and worker safety and health laws and regulations.
Consequently, the Company is subject to various environmental laws that impose
compliance obligations and can create liability for historical releases of
hazardous substances. While the Company takes environmental, safety, and health
precautions appropriate for the industry, the Company's operations pose an
ongoing risk of accidental releases of, and worker exposure to, hazardous or
toxic substances. The Company conducts its operations at industrial sites where
hazardous materials have been managed for many years in connection with its
operations, including periods before careful management of these materials was
generally believed to be necessary.
The Company entered into a consent order in August 1994 with the Oregon
Department of Environmental Quality ("ODEQ") pursuant to which the Company is
conducting an investigation of hazardous substances in portions of the soil and
groundwater at its plant site in Albany, Oregon. The Company anticipates that
its investigation will result in a determination that at least some remedial
action is necessary, for which an accrual has been made. A neighboring property
owner also is investigating groundwater contamination at its property that has
migrated to the Company's property and for which OREMET may have legal claims to
recover a portion of its investigation costs. The Company anticipates that a
number of its production wells will have to be reconstructed in response to
concerns about migration of groundwater contamination. The Company also has
claims against its drilling contractor with respect to the construction of the
wells.
In February 1995, the ODEQ modified the Company's wastewater discharge
permit for its Albany facility. The new permit imposes more stringent discharge
limits, and the Company has entered into a Mutual Agreement and Order with the
ODEQ under which the Company will achieve the more stringent units according to
a specified schedule. The Company has identified several alternatives for
meeting the new limits, the most expensive of which would require capital
expenditures of approximately $0.7 million. The Company is working with ODEQ to
explore less expensive alternatives.
Over the past several years, the Company has voluntarily undertaken
extensive testing of the air emissions from its Albany plant. This testing
indicates that emissions from some units may be greater than previously
recognized. The Company entered into a memorandum of understanding with ODEQ on
July 19, 1996, under which the Company will conduct certain air quality impact
analyses and may potentially install additional emissions control equipment. In
the course of this work, the Company has determined that the matter can be
better resolved through an aggressive emissions reduction and control program
that will also accommodate expansion plans. The Company is engaged in
discussions with ODEQ to amend the memorandum to incorporate this emissions
reduction program. The Company has estimated that the capital cost of the
emissions controls will be $1.5 million in 1997. The Company believes this
matter will be resolved by the end of 1997.
Based upon its engineering studies regarding the above matters, the
Company made provisions for environmental expenses in 1995, 1994, and 1993 of
$0, $0.2 million, and $1.0 million, respectively, of which approximately $0.9
million remains at December 31, 1996. These amounts are in addition to recurring
environmental costs which are expensed as incurred and are included in cost of
sales. At the present time, management cannot reasonably predict when all of
these environmental issues will be resolved. Additionally, it is reasonably
possible that a change in the estimate will occur in the near term.
Commencing in 1991, the Pennsylvania Department of Environmental
Regulation and the Environmental Protection Agency ("EPA") have performed
periodic site inspections, including soil and water sampling, at TI's site in
Frackville, Pennsylvania, in connection with a regional groundwater
investigation of the Frackville, Pennsylvania area. While this investigation is
ongoing, the Company has not been informed by either agency of any pending or
potentially required actions which may arise from this investigation.
In conjunction with the Company's purchase of TI, Kamyr, Inc. has agreed
to undertake specified cleanup activities. In addition, Kamyr, Inc. has agreed
to a limited indemnification of the Company in the event damages arise that
result from conditions which were not in compliance with environmental laws and
regulations as they existed at the time the Company purchased TI.
15
<PAGE>
ITEM 2. PROPERTIES
The Company's principal executive office and production facilities are
located in Albany, Oregon on 210 acres of property owned (in fee without any
major encumbrances) by the Company. The Company occupies approximately 461,000
square feet in six buildings and uses approximately 65 acres on the site. The
facilities include plants for the production of titanium sponge, ingot, mill
products and castings. The Company also maintains separate facilities for
recovering magnesium and processing titanium scrap. TI's executive offices are
located in Fairfield, New Jersey and it owns (in fee without any major
encumbrances) and operates a production facility in Frackville, Pennsylvania.
The Company believes that the plants are adequate and suitable in conjunction
with the Company's access to outside processing vendors, for its current
operating needs. Other than the facility in Birmingham, U.K., the service
centers and sales offices which the Company utilizes are leased. See "Business
Products" for a discussion of productive capacity and extent of utilization.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to claims, disputes, legal
actions and other proceedings involving contracts, employment and various other
matters. In the opinion of management, the outcome of these matters should not
have a material adverse effect on the consolidated financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of 1996.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
(a) MARKET INFORMATION: Registrant's Common Stock is traded over the
counter, and its Nasdaq symbol is OREM. Registrant's stock
commenced trading on the Nasdaq National Market on March 5, 1985.
Information concerning the market price of Registrant's Common
Stock is incorporated by reference to the Quarterly Stock Data
Section on Page 41 of the 1996 Annual Report to Shareholders.
(b) HOLDERS: At March 7, 1997, there were 2,038 holders of Registrant's
Common Stock, based on the holders of record as certified by the
Transfer Agent. The Company believes that there are an additional 9
to 10 thousand shareholders who maintain their ownership in "street
name". The Company estimates that there are 11 to 12 thousand
beneficial owners of its Common Stock.
(c) DIVIDENDS: There were no dividends declared in either 1996 or 1995,
except as described in Note 17 to the Company's Consolidated
Financial Statements on Page 32 of the 1996 Annual Report to
Shareholders. Limitations on dividends are discussed in Note 9 to
the Company's Consolidated Financial Statements on Page 26 of the
1996 Annual Report to Shareholders. Both notes are incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is contained in the Five-Year
Summary of Selected Financial Data Section on Page 33 of the 1996 Annual Report
to Shareholders, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Changes in Accounting Principles: In February 1997, The Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
128, earnings per share ("FAS128"). FAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Earlier application of FAS 128 is not
permitted. The effect of implementing FAS 128 on the Company's earnings per
share computations has not been determined.
The remaining information required by this item is contained in the
Management's Discussion and Analysis Section on Pages 34 through 40 of the 1996
Annual Report to Shareholders, and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained on Pages 17 through
32 in the 1996 Annual Report to Shareholders, and is incorporated by reference
herein as listed in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the Proxy
Statement of Registrant for the Annual Shareholders Meeting to be held April 24,
1997 ("Proxy Statement"), in the sections titled "Directors", "Executive
Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance". The
Proxy Statement was filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this Report, and the sections
specified in the preceding sentence are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained on Pages 6-15 of
the Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Proxy
Statement, in the section titled "Security Ownership of Certain Beneficial
Owners and Management", and the section specified is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Proxy
Statement, in the section titled "Related Party Transactions", and the section
is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS: The following Financial Statements of
Oregon Metallurgical Corporation and Report of Independent
Accountants are incorporated by reference from Pages 17
through 32 of the Registrant's 1996 Annual Report to
Shareholders:
Report of Independent Accountants.
Consolidated Statements of Operations - For The Years Ended
December 31, 1996, 1995, and 1994.
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Shareholders' Equity - For The
Years Ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows - For The Years Ended
December 31, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES: The following financial
statement schedule of Oregon Metallurgical Corporation for
the years ended December 31, 1996, 1995, and 1994 is filed as
part of this Report, and should be read in conjunction with
the Consolidated Financial Statements of Oregon Metallurgical
Corporation:
Page
----
Report of Independent Accounts on Financial
Statements Schedules.................................. S-1
Schedule II: Valuation and Qualifying Accounts....... S-2
Schedules not listed above have been omitted because they are
not applicable, or are not required, or the information
required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
3. EXHIBITS: The Exhibit Index of this Annual Report on Form
10-K lists the exhibits that are filed as part of this
Report.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
fourth quarter ended December 31, 1996.
19
<PAGE>
[Letterhead of Coopers & Lybrand L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Oregon Metallurgical
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from the 1996 Annual Report to Shareholders of Oregon Metallurgical
Corporation and subsidiaries. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in item 14(a) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Eugene, Oregon
February 4, 1997
S-1
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
OREGON METALLURGICAL CORPORATION
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ----------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended
December 31, 1996 $1,257 $ 227 $(990)(a) $ 494
------ ------ ------ ------
Year Ended
December 31, 1995 $1,024 $ 237 $ (4)(a) $1,257
------ ------ ------ ------
Year Ended
December 31, 1994 $ 117 $ 962 $ (55)(a) $1,024
------ ------ ------ ------
<FN>
<F-A> Amounts written off, less recoveries
</FN>
</TABLE>
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OREGON METALLURGICAL CORPORATION
Date: March 19, 1997 /s/ Carlos E. Aguirre
---------------------------------
Carlos E. Aguirre, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated effective on March 19, 1997.
PRINCIPAL FINANCIAL OFFICER,
AND PRINCIPAL ACCOUNTING OFFICER
/s/ Dennis P. Kelly
---------------------------------
Dennis P. Kelly, Vice President,
Finance and Treasurer
PRINCIPAL EXECUTIVE OFFICER
/s/ Carlos E. Aguirre
---------------------------------
Carlos E. Aguirre, President,
Chief Executive Officer and
Director
BOARD OF DIRECTORS
/s/ Howard T. Cusic*
---------------------------------
Howard T. Cusic, Chairman of the Board
/s/ Gilbert E. Bezar*
---------------------------------
Gilbert E. Bezar, Director
/s/ Thomas B. Boklund*
---------------------------------
Thomas B. Boklund, Director
/s/ Roger V. Carter*
---------------------------------
Roger V. Carter, Director
/s/ Nicholas P. Collins*
---------------------------------
Nicholas P. Collins, Director
/s/ David H. Leonard*
---------------------------------
David H. Leonard, Director
/s/ James S. Paddock*
---------------------------------
James S. Paddock, Director
/s/ James R. Pate*
---------------------------------
James R. Pate, Director
* /s/ Dennis P. Kelly
-------------------------------------
By: Dennis P. Kelly, Attorney-In-Fact
<PAGE>
EXHIBIT LIST
EXHIBIT
NO. DESCRIPTION
2.1 Stock and Asset Purchase Agreement between Kamyr, Inc. and New TI,
Inc. (Filed as exhibit 2.1 to Form 8-K dated September 20, 1994)
3.1 Restated Articles of Incorporation. (Filed as exhibit 3.1 to Form
10-K for the year ended December 31, 1993)
3.2 Restated Bylaws. (Filed as exhibit 3.2 to Form 10-K for the year
ended December 31, 1994)
3.3 Amendment to Restated Articles of Incorporation, dated April 28,
1995. (Filed as exhibit 3.1 to Form 10-Q for the quarter ended
June 30, 1995)
4.1 Specimen Common Stock Certificate. (Previously filed)
4.2 Warrant Agreement (Nontransferable Warrant) between James S.
Paddock and the Company, dated September 19, 1994. (Filed as
exhibit 4.1 to Form 8-K/A-2 dated September 20, 1994)
10.1 Employee Stock Ownership Plan of the Company. (Filed as exhibit
4.3 to Form S-8 Registration Statement 33-18650) *
10.2 Amendment to Employee Stock Ownership Plan of the Company. (Filed
as exhibit 10.1 to Form 10-Q for the quarter ended March 31,
1996) *
10.3 Trust Agreement under Oregon Metallurgical Corporation Employee
Stock Ownership Plan. (Filed as exhibit 10.2 to Form 10-K for the
year ended December 31, 1995) *
10.4 Employment Agreement dated July 1, 1996 between the Company and
Carlos E. Aguirre. *
10.5 Employment Agreement dated October 11, 1993 between the Company
and Dennis P. Kelly. (Filed as exhibit 10.4 to Form 10-K for the
year ended December 31, 1994) *
10.6 Employment Agreement dated October 8, 1993 between the Company and
Steven H. Reichman. (Filed as exhibit 10.5 to Form 10-K for the
year ended December 31, 1994) *
10.7 Employment Agreement dated February 20, 1995 between the Company
and John P. Byrne. (Filed as exhibit 10.6 to Form 10-K for the
year ended December 31, 1994) *
10.8 Sales Agreement between RMI Titanium Company and the Company.
(Filed as exhibit 10 to Form 10-Q/A-2 for the quarter ended
September 30, 1994) (Confidential Treatment Requested)
10.9 Corporate Organization and Shareholders Agreement Among James S.
Paddock, the Company and New TI, Inc., dated September 19, 1994.
(Filed as exhibit 10.1 to the Form 8-K/A-2 dated September 20,
1994) *
10.10 OREMET Employment Agreement between James S. Paddock and the
Company, dated September 19, 1994. (Filed as exhibit 10.2 to the
Form 8-K/A-2 dated September 20, 1994) *
10.11 Employment Agreement between James S. Paddock and New TI, Inc.,
dated September 19, 1994. (Filed as exhibit 10.3 to the Form
8-K/A-2 dated September 20, 1994) *
10.12 Titanium Tetrachloride Agreement between SCM Chemicals, Inc. and
the Company, dated August 11, 1990. (Filed as exhibit 10.14 to
Form 10-K for the year ended December 31, 1994)
<PAGE>
10.13 Subordinated promissory note between New TI, Inc. and the former
Titanium Industries, Inc., dated September 19, 1994. (Filed as
exhibit 10.15 to Form 10-K for the year ended December 31, 1994)
10.14 Employment Agreement between the Company and David G. Floyd, dated
December 18, 1995. (Filed as exhibit 10.16 to Form 10-K for the
year ended December 31, 1995) *
10.15 Oregon Metallurgical Corporation Long Term Incentive Compensation
Stock Appreciation Rights Plan. (Filed as exhibit 10.17 to Form
10-K for the year ended December 31, 1995) *
10.16 Oregon Metallurgical Corporation Savings Plan. (Filed as exhibit
10.18 to Form 10-K for the year ended December 31, 1995) *
10.17 Amendment to Oregon Metallurgical Corporation Savings Plan. (Filed
as exhibit 10.1 to Form 10-Q for the period ended September 30,
1996) *
10.18 Trust Agreement Under Oregon Metallurgical Corporation Savings
Plan. (Filed as exhibit 10.19 to Form 10-K for the year ended
December 31, 1995) *
10.19 Loan and Security Agreement dated as of September 19, 1994 among
the Company, New TI, Inc. and Bank of America Illinois. (Filed as
exhibit 10.7 to Form 10-K for the year ended December 31, 1994)
10.20 Amendment No. 1 dated as of March 17, 1995, to Loan and Security
Agreement with Oregon Metallurgical Corporation and Titanium
Industries, Inc., dated as of September 19, 1994. (Filed as
exhibit 10.16 to the Form 10-Q for the quarter ended March 31,
1995)
10.21 Amendment No. 2 dated as of June 30, 1995, to Loan and Security
Agreement with Oregon Metallurgical Corporation and Titanium
Industries, Inc., dated as of September 19, 1994. (Filed as
exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 1995)
10.22 Amendment No. 3 dated as of March 14, 1996, to Loan and Security
Agreement with Oregon Metallurgical Corporation and Titanium
Industries, Inc., dated as of September 19, 1994. (Filed as
exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 1996)
10.23 Amendment No. 4 dated as of May 1, 1996, to Loan and Security
Agreement with Oregon Metallurgical Corporation and Titanium
Industries, Inc., dated as of September 19, 1994. (Filed as
exhibit 10.1 to the Form 10-Q for the quarter ended June 30, 1996)
11.1 Statement re: Computation of Per Share Earnings.
13.1 Portions of the 1996 Annual Report to Shareholders which have been
incorporated by reference into this Form 10-K. Except for such
portions expressly incorporated by reference, the 1996 Annual
Report to Shareholders is not deemed to be filed as part of this
Form 10-K.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney.
27 Financial Data Schedule.
* Management contract or compensatory plan.
EMPLOYMENT AGREEMENT
DATE: July 1, 1996
PARTIES: OREGON METALLURGICAL CORPORATION, (the "Company")
an Oregon corporation
530 34th Avenue SW
P.O. Box 580
Albany, OR 97321
CARLOS E. AGUIRRE ("Employee")
19053 SW 35th Place
Lake Oswego, OR 97034
RECITALS:
1. Company desires that Employee remain in the employment of the
Company, thereby assuring continuity of management and policies responsible for
the Company's success in the past and assuring the Company of the efforts of the
Employee during the term of this Agreement, and Employee desires to so remain in
the employment of the Company.
2. The additional substantial financial and other consideration
provided by this Agreement represents the bona fide advancement of Employee with
the Company.
AGREEMENT:
The parties agree as follows:
SECTION 1. EMPLOYMENT
1.1 FIXED TERM. Company agrees to employ Employee as its President and
Chief Executive Officer for a term commencing on July 1, 1996, and terminating
on June 30, 2001, or until termination in accordance with Section 5. If not
terminated in accordance with Section 5, upon expiration of the initial term of
this Agreement, this Agreement shall automatically renew for successive two (2)
year terms thereafter.
1 - EMPLOYMENT AGREEMENT
<PAGE>
1.2 DUTIES. Employee agrees to continue employment with Company on the
terms and conditions set forth in this Agreement, and agrees to devote his full
time and attention (reasonable periods of illness and normal vacations excepted)
to the performance of his duties under this Agreement. In general, such duties
shall consist of those duties generally performed by the President and Chief
Executive Officer of a corporation engaged in the business of metals
manufacturing and distribution. Employee shall perform such specific duties and
shall exercise such specific authority as may be assigned to Employee from time
to time by the board of directors of the Company, if so elected by the
shareholders. In performing such duties, Employee shall be subject to direction
and control of the board of directors of the Company. Employee further agrees
that in all aspect of such employment, Employee shall comply with the policies,
standards, and regulations of the Company established from time to time, and
shall perform his duties faithfully, intelligently, to the best of his ability,
and in the best interest of the Company. Employee shall serve as director of the
Company without additional compensation. The devotion of reasonable periods of
time by Employee for personal purposes, outside business activities, trade
associations or charitable activities shall not be deemed a breach of this
Agreement, provided that such purposes or activities do not materially interfere
with the services required to be rendered to or on behalf of the Company.
SECTION 2. NONCOMPETITION/CONFIDENTIALITY/RETURN OF DOCUMENTS
2.1 SEPARATE NONCOMPETE AND CONFIDENTIALITY AGREEMENTS. Simultaneous
with execution of this Agreement and as consideration for the substantial
financial and other consideration granted to Employee, Employee shall execute a
separate agreement with the Company governing noncompetition and
confidentiality, return of documents and related matters ("Noncompetition
Agreement").
SECTION 3. COMPENSATION
3.1 BASE COMPENSATION. In consideration of all services to be rendered
by Employee to the Company, the Company shall pay to Employee base compensation
of Two Hundred Sixty-Five Thousand Dollars ($265,000.00) per year, payable in
semi-monthly installments on the first and fifteenth days of each month.
Employee shall receive annual reviews, and may receive annual upward salary
adjustments at the discretion of the board of directors.
3.2 BONUS. Employee will participate in the Company's Salaried
Employees Annual Incentive Compensation Plan as the same now exists or may
hereafter be amended. In accordance with the provision of such plan, Employee's
benefits shall be calculated the same as the benefits for all salaried employees
of the Company.
2 - EMPLOYMENT AGREEMENT
<PAGE>
3.3 LONG-TERM INCENTIVE PROGRAM - SARS/STOCK OPTIONS. Employee will
participate in the Stock Appreciation Rights program of the Company, any other
Stock Option Plan in effect, and any future plans that apply to the key
employees of the Company.
3.4 STOCK COMPENSATION PROGRAM. The Company has in place two stock
compensation programs pursuant to which salaried employees, other than officers,
are issued one share of stock for each One Hundred Dollars ($100.00) of
compensation, and one share of stock for each day worked. Employee shall be paid
in cash the market value of the number of share of stock that he would have been
entitled to receive pursuant to such plan, the value of such stock to be
calculated at the market value on the date the stock is distributed to other
salaried employees, but in no event shall the value of said stock exceed the
stock valuation caps, Twenty Dollars ($20.00) per share and Thirty-Two Dollars
($32.00) per share for each program respectively, that are applicable to all
employees. Employee shall also participate in all future amendments to said
stock compensation plan and in any subsequently adopted stock compensation plan
which applies to salaried employees.
3.5 OTHER BENEFITS. The Company will provide Employee with those
reasonable benefits which are customarily provided to the Chief Executive
Officer of a corporation of approximately the same size as the Company. In
addition to the other plans described in this Section 3, Employee will
participate in all compensation and other benefit plans of the Company
applicable to its key employees during the period that any existing or future
plans are in effect. Such compensation and benefit plans presently include,
without limitation, ESOP, Excess Benefit Plan, Savings Plan, Pension Plan,
Supplemental Pension Plan and medical benefits plan. The Company also agrees to
provide Employee and Employee's family with the same benefits that the Company
provides to other salaried employees and their families, subject to Employee's
satisfaction of the respective eligibility conditions for such benefits.
3.6 ANNUAL PHYSICAL EXAMINATION. Employee shall obtain an annual
physical examination, and the Company shall pay for said examination. The annual
physical examination is for the benefit of Employee, and the results thereof
shall be provided to the Employee and the Chairman of the board of the Company.
Employee agrees to provide such results to insurance companies to support
applications by the Company for key employee insurance.
SECTION 4. EXPENSES
4.1 REIMBURSEMENT. Employee shall be entitled to reimbursement from the
Company for reasonable expenses incurred by Employee in the performance of
Employee's duties under this Agreement, upon presentation of vouchers indicating
in detail the amount and business purpose of each such expense and upon
compliance with the Company's reimbursement policies established from time to
time.
3 - EMPLOYMENT AGREEMENT
<PAGE>
SECTION 5. TERMINATION
This Agreement is or may be terminated for the following reasons,
subject to the terms and provision herein provided:
5.1 DEATH. In the event of Employee's death, Employee's designated
beneficiary shall be entitled to receive salary, stock compensation and bonus
payments, to the extent not received by Employee at the time of death,
determined on a pro rata basis for the number of days Employee was employed by
the Company in the fiscal year in which death occurs and for an additional
ninety (90) days.
5.2 DISABILITY. In the event Employee becomes disabled as defined
herein, the Company, acting through a vote of at least a majority of the board
of directors of the Company, shall have the right to terminate this Agreement.
In such event and provided that Employee delivers a full release to the Company,
Employee shall be entitled to receive salary, stock compensation and bonus
payments, to the extent not received by Employee at the time of termination,
determined on a pro rata basis through the date of termination and for an
additional one hundred and twenty (120) days. Termination under this Section 5.2
shall not affect the terms of the Noncompetition Agreement. For purposes of this
Agreement, Employee shall be deemed to be "disabled," if both (1) and (2) apply:
(1) if he suffers from any physical or mental disease, condition, disorder,
injury (including self-inflicted injuries), or abuse of substances hazardous to
health (including drugs and alcohol), or mental illness; and (2) if one of the
following conditions is satisfied:
5.2.1 Under the terms of the bona fide disability income
insurance policy provided by the Company that insures Employee, the insurance
company that underwrites such insurance policy determines that Employee has been
totally disabled for purposes of such insurance policy for a period of six (6)
months during any one-year period; or
5.2.2 A physician licensed to practice medicine in the state
of Oregon, who has been selected by Employee (or the conservator of his estate)
and the board of directors of the Company, certifies that Employee is partially
or totally disabled so that Employee will be unable to be employed gainfully on
a full-time basis by the Company for a 6-month period in the position that
Employee occupied before such disability. The costs and expenses of such
physician shall be borne by the Company; or
5.2.3 Employee (or the conservator of his estate) and the
board of directors of the Company agree in writing that Employee is partially or
totally disabled so that he will be unable to be employed gainfully on a
full-time basis by the Company for a 6-month period in the position that
Employee occupied before such disability.
4 - EMPLOYMENT AGREEMENT
<PAGE>
Employee acknowledges that he has certain rights under the
Americans with Disabilities Act ("ADA"). In the event that Employee is
"disabled" as defined in this section, a condition to payment under this Section
shall be that Employee agrees to waive any rights he may have under the ADA or
applicable state disability discrimination or workers compensation laws relating
to reinstatement, modified schedules or job duties, or other accommodations to
the fullest extent permissible under law. It is the parties' intent, that this
Agreement exclusively govern whether Employee is "disabled" and exclusively set
out the benefits and remedies to be provided to the fullest extent permissible
under law.
5.3 FOR CAUSE OR VOLUNTARY TERMINATION. The Company has the right to
terminate Employee's employment for cause resulting in a termination of this
Agreement, the elimination of any bonus payment for that year and the payment of
salary only through the day of termination for cause. Termination under this
Section 5.3 shall not affect the terms of the Noncompetition Agreement.
Termination for cause would result from any of the following:
5.3.1 Employee willfully and continuously fails or refuses to
comply with the reasonable policies, standards and regulations of the Company
established from time to time or engages in conduct which is demonstrably and
materially injurious to the Company, monetarily or otherwise; or
5.3.2 Employee breaches or fails to perform any material
provision of this Agreement or the Noncompetition Agreement, and fails to cure
the breach or fails to perform within fifteen (15) days of written notice by the
board of directors to Employee of such breach or failure; or
5.3.3 Employee engages in fraud, dishonesty, or any other act
of serious misconduct in the performance of Employee's duties on behalf of the
Company; or
5.3.4 Employee voluntarily terminates his employment with the
Company prior to June 30, 2001, and during any renewal period thereafter, except
(i) as provided in Section 5.5 or (ii) when the Company is in breach of this
Agreement in any material respect and the board of directors of the Company
fails to cause the breach to be cured within fifteen (15) days of written notice
of such breach by Employee to the board of directors.
5.4 INVOLUNTARY TERMINATION NOT FOR CAUSE. At the request of a majority
of the board of directors of the Company, Employee agrees to tender his
resignation as an officer, director and employee of the Company. Other than his
position and responsibilities as an employee, director and officer of the
Company, and other than as set forth in the following, such resignation will not
affect the term, base compensation, bonus payments or benefits of this Agreement
or the Noncompetition Agreement. As consideration for tendering his resignation
as an officer, director and employee of the Company and provided that Employee
delivers a full release to the Company, Employee will receive, in addition to
the other payments to which he
5 - EMPLOYMENT AGREEMENT
<PAGE>
is entitled, an amount equal to two (2) times his base compensation and bonus
for the calendar year prior to the year in which the resignation is tendered.
5.5 TERMINATION BY PRIOR NOTICE. The employment of Employee by the
Company may be terminated by either the Company or Employee by giving written
notice on or before June 30, 2000, that this Agreement shall terminate at the
end of the initial term of this Agreement. After such date (including during any
subsequent renewal term of this Agreement) the term of this Agreement may be
terminated at the end of such renewal term by either party by giving written
notice on or before June 30 of the year prior to the end of the renewal term.
Termination under this Section 5.5 shall not affect the terms of the
Noncompetition Agreement.
If the Company provides written notice of nonrenewal to Employee in
accordance with this Subsection prior to June 30, 2005, and so long as Employee
is not in breach of the Noncompetition Agreement, and Employee delivers a full
release to the Company, the Company will pay to Employee annually for two (2)
years after the effective date of such termination, the sum of .75 or 75% of
Employee's annual base compensation at the time of nonrenewal, payable in
semi-monthly payments.
5.6 OUT-PLACEMENT ASSISTANCE. In the event of any termination pursuant
to Subsection 5.4 or any termination by the Company pursuant to Subsection 5.5,
in addition to the other benefits provided for in this Agreement, Employee will
be entitled to out-placement assistance of a nature customary for a person with
the position of president and chief executive officer of a comparable-sized
company. Such assistance shall commence six (6) months prior to the effective
date of the termination.
5.7 MEDICAL AND DENTAL BENEFITS. In the event of any termination
pursuant to Subsection 5.4 or any termination by the Company pursuant to
Subsection 5.5, and so long as Employee is not in breach of the Noncompetition
Agreement, the Company will provide Employee with the medical and dental
programs maintained by the Company for its employees generally (including the
Company's portion of family coverage). If COBRA benefits are available to
Employee, the Company shall pay the cost of such benefits including any
administrative surcharge. If Employee is not eligible to participate in the
Company's medical and dental programs through COBRA or otherwise, the Company
will pay Employee an amount sufficient to acquire comparable coverage with
comparable deductions and contribution levels. Benefits under this Subsection
5.7 shall be provided for the two (2) year period after effective date of such
termination.
5.8. Termination by Employee. Employee may terminate this Agreement for
"good reason." "Good Reason" shall mean the occurrence, after a Change in
Control, of any of the following circumstances without the express written
consent of Employee, unless such circumstances are fully corrected prior to the
date of termination:
6 - EMPLOYMENT AGREEMENT
<PAGE>
(a) a significant reduction by the Company in the duties and
responsibilities assigned to Employee from those assigned
immediately before the Change in Control; or
(b) the reduction by the Company in Employee's annual base
compensation as in effect on the date the Change in Control
occurs.
SECTION 6. CHANGE OF CONTROL AND SEVERANCE PAY
6.1 ELIGIBILITY FOR BENEFITS. Employee shall be eligible for the
benefits described in this Section 6 if, concurrently with or within thirty-six
(36) months after a Change in Control, Employee's employment with the Company
terminates, provided that such termination of employment (a) is not by the
Company in accordance with Section 5.3, or (b) is not by Employee for other than
Good Reason.
6.2 TYPES AND AMOUNTS OF TERMINATION BENEFITS.
6.2.1 Company shall pay to Employee his full base compensation
through the date of termination at the rate in effect at the time of
termination, no later than the fifth (5th) day following the date of
termination, plus all other amounts to which Employee is entitled under any
compensation or fringe benefit plan of the Company, at the time such payments
are due.
6.2.2 In lieu of any further salary payments for a period
subsequent to the date of termination, the Company shall pay as severance pay to
Employee, the following amounts, a lump sum severance payment equal to three (3)
times his "Annual Pay", consisting of annual base compensation as in effect as
of the date of termination or immediately prior to the Change in Control,
whichever is greater and his bonus.
6.3.3 Company shall pay to Employee all legal fees and
expenses incurred by Employee in seeking to obtain or enforce any right or
benefit provided to Employee pursuant to this Agreement, if Employee is the
prevailing party.
6.2.4 Company shall arrange to provide Employee with accident
and group health insurance benefits substantially similar to those which
Employee was receiving immediately prior to the termination at the same cost to
Employee as the Company charges other employees. Such benefits shall continue
during the life of employee or until employee is provided with group health
insurance benefits by a subsequent employer.
6.3 CHANGE IN CONTROL. A "Change in Control" means a change in control
of a nature that would be required to be reported in response to item 6(a) of
Schedule 14A or Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended ("1934 Act), provided that such a change in control shall be
deemed to have occurred at such time as
7 - EMPLOYMENT AGREEMENT
<PAGE>
(i) any "person" (as that term is used in Section 13(d) and 14(d)(2) of the 1934
Act), is or become the "beneficial owner" (as defined in Rule 13d-3 under the
1934 Act) directly or indirectly, of securities representing 20% or more of the
combined voting power for election of directors of the then outstanding
securities of the Company or any successor of the Company; (ii) during any
period of two (2) consecutive years or less, individuals who at the beginning of
such period constituted the board of directors of the Company cease, for any
reason, to constitute at least a majority of the board, unless the election or
nomination for election of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period; (iii) the shareholders of the Company approve any
merger or consolidation as a result of which the shares shall be changed,
converted or exchanged (other than a merger with a wholly owned subsidiary of
the Company) or any liquidation of the Company or any sale or other disposition
of 50% or more of the assets or earning power of the Company; or (iv) the
shareholders of the Company approve any merger or consolidation to which the
Company is a party as a result of which the persons who were shareholders of the
Company immediately prior to the effective date of the merger or consolidation
shall have beneficial ownership of less than 50% of the combined voting power
for election of directors of the surviving corporation following the effective
date of such merger or consolidation.
SECTION 7. VACATION; ILLNESS
7.1 VACATION. Employee shall be entitled each calendar year to a
vacation of six (6) weeks, during which time his compensation shall be paid in
full.
7.2 ILLNESS. Subject to Section 5, Employee shall receive full
compensation for any period of illness or incapacity during the term of this
Agreement unless such illness or incapacity is covered under any disability
policy.
SECTION 8. DIRECTOR
While this Agreement is in effect, Employee shall be a director of the
Company if so elected by the shareholders. No additional compensation or sums
shall be paid to Employee in the form of director's fees.
SECTION 9. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE
9.1 EMPLOYEE'S REPRESENTATIONS AND WARRANTIES. Employee represents and
warrants to the Company that there is no employment contract or any other
contractual obligation to which Employee is subject, or any other factors which
prevent Employee from
8 - EMPLOYMENT AGREEMENT
<PAGE>
entering into this Agreement, or from performing fully Employee's duties under
this Agreement, or which would in any way conflict with this Agreement.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of the parties and their heirs, personal representatives,
successors, and, to the extent permitted by Section 10.2, assigns.
10.2 ASSIGNMENT. Except with the other party's prior written consent, a
party may not assign any rights or obligations under this Agreement.
10.3 AMENDMENTS. This Agreement may be amended only by an instrument
in writing executed by all the parties.
10.4 HEADINGS. The headings used in this Agreement are solely for
convenience of reference, are not part of this Agreement, and are not to be
considered in construing or interpreting this Agreement.
10.5 ENTIRE AGREEMENT. This Agreement, together with the Noncompetition
Agreement, set forth the entire understanding of the parties with respect to the
subject matter of this Agreement and supersedes any and all prior understandings
and agreements, whether written or oral, between the parties with respect to
such subject matter.
10.6 COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when executed and delivered shall be an
original, but all of which together shall constitute on and the same instrument.
10.7 SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any respect for any reason, the validity and enforceability
of any such provision in any other respect and of the remaining provisions of
this Agreement shall not be in any way impaired.
10.8 WAVIER. A provision of this Agreement may be waived only by a
written instrument executed by the party waiving compliance. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
Failure to enforce any provision of this Agreement shall not operate as a waiver
of such provision or any other provision.
10.9 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Oregon. Application of the Internal
Revenue Code or the 1934 Act shall include application to any successor
provisions and amendments. Any
9 - EMPLOYMENT AGREEMENT
<PAGE>
payments provided for shall be paid net of any applicable withholding required
under federal, state or local law.
10.10 VENUE. If any suit or action is filed by any party to enforce
this Agreement or otherwise with respect to the subject matter of this
Agreement, venue shall be in the federal or state courts in Portland, Oregon, or
the state court in Albany, Oregon, unless venue there would prevent the joining
of appropriate third parties.
10.11 ATTORNEYS FEES. If any suit or action is filed by any party to
enforce this Agreement or otherwise with respect to the subject matter of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys fees incurred in preparation or in prosection or defense of such suit
or action as fixed by the court of courts in which the suit or action, including
any appeal therein, is tried, heard or decided. Attorneys fees shall include
fees of paralegals and deposition expenses, and shall further include attorneys
fees incurred by any party in connection with any bankruptcy or similar
proceeding. The provisions of this Section shall also apply to arbitrations per
Section 10.12 of this Agreement.
10.12 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, except with regard to the Company's right to obtain any
injunctive relief under the Noncompetition Agreement, including, without
limitation, the making, performance, or interpretation of this Agreement, shall
be settled by arbitration. Except as otherwise provided in this Agreement and
unless otherwise agreed, the arbitration shall be conducted in Albany, Oregon,
in accordance with the then-current Commercial Arbitration Rules of the American
Arbitration Association. The arbitration shall be held before a single
arbitrator (unless otherwise agreed by the parties). The arbitrator shall be
chosen in accordance with the then-current Commercial Arbitration Rules of the
American Arbitration Association. If the arbitration is commenced, the parties
agree to permit discovery proceedings of the type provided by the Oregon Rules
of Civil Procedure both in advance of, and during recesses of, the arbitration
hearings. The parties agree that the arbitrator shall have no jurisdiction to
consider evidence with respect to or render an award or judgment for punitive
damages (or any other amount awarded for the purpose of imposing a penalty). The
parties agree that all facts and other information relating to any arbitration
arising under this Agreement shall be kept confidential to the fullest extent
permitted by law.
10.13 NOTICE. Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given if
personally delivered, when transmitted by facsimile transmission and appropriate
answer back received or if sent by registered or certified mal, return receipt
requested, or overnight courier or express mail to the address set forth on the
first page of this Agreement, or to such other address as hereafter may be
designated by either party in writing to the other by notice satisfying this
Section.
10 - EMPLOYMENT AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
The COMPANY: OREGON METALLURGICAL CORPORATION,
an Oregon corporation
By /s/ Orval N. Thompson
-------------------------------------
Title: Secretary
---------------------------------
EMPLOYEE: /s/ Carlos E. Aguirre
----------------------------------------
CARLOS E. AGUIRRE
11 - EMPLOYMENT AGREEMENT
OREGON METALLURGICAL CORPORATION
EXHIBIT 11.1
Earnings per share computation
<TABLE>
<CAPTION>
Three Years Ended
December 31, 1996
(in thousands except per share data)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net Income $22,258 $(2,415) $(2,023)
======= ======= ========
Weighted average shares outstanding 12,943 10,921 10,997
Weighted average share equivalents
assumed issued from Excess Benefit Plan 61 121 --
Weighted average share equivalents
assumed issued from exercise of warrants 91 59 4
Weighted average share equivalents
assumed issued as part of Employee
Compensation policy 72 118 --
------- ------- --------
Weighted average share and share
equivalents outstanding 13,167 11,219 11,001
======= ======= =======
Net income (loss) per share $ 1.69 $ (0.22) $ (0.18)
======= ======= =======
</TABLE>
Earnings per share computed on both the primary and fully-diluted bases are the
same.
Exhibit 13.1
Exhibit 13.1 contains the following portions of the 1996 Annual Report
to Shareholders:
1. FINANCIAL STATEMENTS:
Report of Independent Accountants.
Consolidated Statements of Operations - For The Years Ended
December 31, 1996, 1995, and 1994.
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Shareholders' Equity - For The Years
Ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows - For The Years Ended
December 31, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
2. Five-Year Summary of Selected Financial Data
3. Management's Discussion and Analysis of Financial Condition and
Results of Operations
4. Quarterly Stock Data
<PAGE>
[Letterhead of Coopers & Lybrand L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF OREGON METALLURGICAL
CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Oregon
Metallurgical Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Oregon
Metallurgical Corporation and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Eugene, Oregon
February 4, 1997
[Page 17 of the 1996 Annual Report]
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $236,917 $146,853 $ 71,166
Cost of sales 179,187 131,002 64,527
-------- -------- --------
Gross profit 57,730 15,851 6,639
Research, technical and product development expenses 1,968 1,595 1,376
Selling, general and administrative expenses 20,682 14,512 7,517
Provision for estimated environmental costs -- -- 240
-------- -------- --------
Income (loss) from operations 35,080 (256) (2,494)
Interest income 1,642 391
Interest expense (2,031) (2,104) (606)
Minority interests (1,005) (480) (29)
-------- -------- --------
Income (loss) before income taxes 33,686 (2,840) (2,738)
Income tax (expense) benefit (11,428) 425 715
-------- -------- --------
Net income (loss) $ 22,258 $ (2,415) $ (2,023)
======== ======== ========
Net income (loss) per share $1.69 $(0.22) $(0.18)
===== ======= =======
Weighted average common shares and equivalents
outstanding 13,167 11,219 11,001
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
[Page 18 of the 1996 Annual Report to Shareholders]
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,460 $ 572
Short-term investments available-for-sale 67,712 --
Accounts receivable, less allowance for doubtful accounts
of $494 and $1,257 37,300 25,894
Inventories 119,553 66,010
Prepayments and other current assets 406 689
Deferred tax assets 4,701 3,242
-------- -------
Total current assets 231,132 96,407
Property, plant and equipment, net 34,890 35,138
Other assets, net 1,382 1,532
-------- --------
Total assets $267,404 $133,077
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 3,785 $ 616
Book overdraft 4,359 2,014
Accounts payable 19,915 16,973
Accrued payroll and employee benefits 10,418 6,659
Accrued loss on long-term agreements 2,710 2,781
Other liabilities 9,231 3,595
-------- --------
Total current liabilities 50,418 32,638
Long-term debt, less current portion 4,212 26,746
Deferred tax liabilities 5,078 3,149
Deferred compensation payable 232 678
Accrued postretirement benefit 1,621 1,563
Accrued loss on long-term agreements, less
current portion -- 1,636
Minority interests 1,990 780
-------- --------
Total liabilities 63,551 67,190
-------- --------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 25,000 shares authorized;
16,127 and 11,018 shares issued and outstanding 16,127 11,018
Additional paid-in capital 148,520 38,340
Retained earnings 38,803 16,545
Cumulative foreign currency translation adjustment 403 (16)
-------- --------
Total shareholders' equity 203,853 65,887
-------- --------
Total liabilities and shareholders' equity $267,404 $133,077
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
[Page 19 of the Annual Report to Shareholders]
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) for the years
ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency Note
-------------- Paid-in Retained Translation Receivable
Shares Amount Capital Earnings Adjustment ESOP Total
------ ------ ---------- -------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1993 10,888 $10,888 $ 37,420 $ 20,983 $ -- $ (2,226) $ 67,065
Repayment of loan by
ESOP -- -- -- -- -- 2,226 2,226
Issuance of common stock
for employee benefits 5 5 25 -- -- -- 30
Currency transaction
adjustment -- -- -- -- $ (16) -- (16)
Net loss -- -- -- (2,023) -- -- (2,023)
------ ------ ------ -------- ------ ------ --------
Balances, December 31,
1994 10,893 10,893 37,445 18,960 (16) -- 67,282
Awards for stock
compensation plans 125 125 895 -- -- -- 1,020
Net loss -- -- -- (2,415) -- -- (2,415)
------ ------ ------ -------- ------ ------ -------
Balances, December 31,
1995 11,018 11,018 38,340 16,545 (16) -- 65,887
Common stock offering,
net of related
expenses 4,600 4,600 98,638 -- -- -- 103,238
Awards for stock
compensation plans 429 429 9,671 -- -- -- 10,100
Exercise of stock
purchase warrants 80 80 430 -- -- -- 510
Tax benefits on issuance
of common stock for
employee benefits -- -- 1,441 -- -- -- 1,441
Currency translation
adjustment -- -- -- -- 419 -- 419
Net income -- -- -- 22,258 -- -- 22,258
------ ------- -------- -------- ------ ------ --------
Balances, December 31,
1996 16,127 $16,127 $148,520 $ 38,803 $ 403 $ -- $203,853
====== ======= ======== ======== ====== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
[Page 20 of the 1996 Annual Report to Shareholders]
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22,258 $ (2,415) $ (2,023)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 4,434 4,632 4,014
Deferred income tax expense (benefit) 470 (674) (1,434)
Employee benefits paid or payable in common stock 8,159 2,666 125
Provision for losses on long-term agreements -- 4,417 --
Minority interests 1,005 480 29
Changes in current assets and liabilities, net of effects of acquisition
of a business:
Accounts receivable (11,406) (5,450) (4,158)
Inventories (53,543) (16,987) (12,209)
Prepayments and other current assets (221) 663 1,107
Accounts payable 2,942 113 7,198
Accrued payroll and employee benefits 5,408 2,153 1,577
Accrued loss on long-term agreements (1,707) -- --
Other accrued expenses 7,077 (478) 920
Other 134 (89) 395
-------- -------- --------
Net cash used in operating activities (14,990) (10,969) (4,459)
Cash flows from investing activities:
Acquisition of a business, net of cash acquired -- -- (8,223)
Additions to property, plant and equipment (3,682) (1,914) (1,929)
Short-term investments - purchased (73,777) -- (1,228)
Short-term investments - matured 6,065 -- 8,811
Other 150 (334) (111)
-------- -------- --------
Net cash used in investing activities (71,244) (2,248) (2,680)
-------- -------- --------
Cash flows from financing activities:
Proceeds from revolving credit agreements 149,569 107,049 40,361
Payments on revolving credit agreements (168,980) (97,800) (27,865)
Proceeds from issuance of common stock 103,238 -- --
Capitalized loan fees and acquisition costs -- (54) (1,260)
Proceeds from long-term debt 174 990 --
Payments of long-term debt (128) (54) (4,754)
Book overdraft 2,345 2,014 --
Proceeds from note receivable - ESOP -- -- 2,226
Proceeds from exercise of stock purchase warrants 510 -- --
Special tax refund (Note 17) 8,097 -- --
Special tax refund dividend paid (Note 17) (8,097) -- --
Other -- -- 46
-------- -------- --------
Net cash provided by financing activities 86,728 12,145 8,754
-------- -------- --------
Effect of exchange rates on cash and cash equivalents 394 8 (16)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 888 (1,064) 1,599
Cash and cash equivalents, beginning of year 572 1,636 37
-------- -------- --------
Cash and cash equivalents, end of year $ 1,460 $ 572 $ 1,636
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
[Page 21 of the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
1. ORGANIZATION AND OPERATIONS:
Oregon Metallurgical Corporation ("OREMET") and subsidiaries (the
"Company") is one of two U.S. integrated producers and distributors of
titanium sponge, ingot, mill products and castings for use in the
aerospace, golf, industrial and military markets. Titanium Industries,
Inc. ("TI"), an 80% owned subsidiary, operates full-line titanium metal
service centers in the U.S., Canada, U.K. and Germany and produces small
diameter bar, weld wire and fine wire. As of December 31, 1996 and
December 31, 1995, the Company is 5% and 35% owned, respectively, by the
Oregon Metallurgical Corporation Employee Stock Ownership Plan (the
"ESOP").
In September 1994, the Company completed the acquisition of the net
operating assets and subsidiaries of Titanium Industries Distribution
Group from Kamyr, Inc. The acquisition cost of approximately $13,502 was
funded by $5,000 in cash, $4,002 of bank financing and $4,500 of seller
financing. The acquisition of TI was accounted for as a purchase, with
its results included in the Company's financial statements from the
acquisition date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION - The consolidated financial statements include
the accounts of OREMET, TI and another wholly owned subsidiary. All
material intercompany accounts and transactions are eliminated in
consolidation.
USE OF ESTIMATES - Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting year. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
securities with a maturity of 90 days or less at the time of purchase to
be cash equivalents.
SHORT-TERM INVESTMENTS - The Company has classified its entire investment
portfolio as available-for-sale. Available-for-sale securities are stated
at fair value with unrealized gains and losses included in shareholders'
equity. At December 31, 1996, unrealized gains and losses were not
material. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. The cost of securities sold
is based on the specific identification method.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally
of cash and cash equivalents, short-term investments and trade
receivables. The Company places its cash and cash equivalents and
short-term investments with high credit quality financial institutions
and limits the amount of credit exposure at any one financial
institution. At times, temporary cash investments may be in excess of the
Federal Deposit Insurance Corporation insurance limit. Management
believes that risk of loss on the Company's trade receivables is
significantly reduced by ongoing credit evaluations of customers'
financial condition. Generally, the Company does not require collateral.
INVENTORIES - Inventories are carried at the lower of cost or market.
Cost is determined using the weighted average cost method. Inventory
costs generally include material, labor cost and manufacturing overhead.
PROPERTY, EQUIPMENT AND DEPRECIATION - Property, plant and equipment are
recorded at historical cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets for
financial reporting purposes and accelerated methods are used for income
tax reporting purposes. The cost and accumulated depreciation applicable
to assets retired are removed from the accounts and the gain or loss on
disposition is recognized in the statement of operations.
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount or an asset may not be recoverable.
EXCESS OF COST OVER NET ASSETS ACQUIRED - Excess cost over the fair value
of net assets acquired of TI of $857 is included in other assets and is
being amortized on a straight-line basis over 15 years. Accumulated
amortization was $125 and $70 in 1996 and 1995, respectively.
INCOME TAXES - The Company uses the liability method to record deferred
tax assets and liabilities that are based on the difference between the
financial reporting and tax bases of assets and liabilities.
RETIREMENT PLANS - The Company and its subsidiaries sponsor retirement
plans for the benefit of substantially all employees. Pension costs under
the defined benefit plan are actuarially computed and include current
service costs.
FORWARD FOREIGN EXCHANGE CONTRACTS - The Company may enter into forward
foreign exchange contracts as a hedge against currency fluctuations
relating to net foreign currency transactions and commitments denominated
in foreign currencies. Gains and losses on forward contracts are deferred
and offset against foreign exchange gains or losses on the underlying
hedged items.
FOREIGN CURRENCY TRANSLATION - The Company's foreign subsidiaries'
accounts are measured using local currency as the functional currency.
Assets and liabilities are translated at the exchange rate in effect at
year end. Revenues and expenses are translated at the average rate of
exchange prevailing during the year. Translation adjustments arising from
differences in exchange rates from period to period are included in the
cumulative adjustment account in shareholders' equity, net of related
deferred income taxes.
NET INCOME (LOSS) PER SHARE - Net income (loss) per share is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist of stock
options, warrants and amounts due to be settled in shares pursuant to
OREMET's benefit plans. Common stock equivalents are computed using the
treasury stock method.
REVENUE RECOGNITION - Revenues from the sale of commercial products are
primarily recognized upon shipment. Revenues from long-term, fixed price
agreements are recognized as the product is shipped. Estimated losses at
completion of agreements are recognized and charged to income in the
period such losses are estimated.
[Page 22 of the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Continued:
ACCOUNTING STANDARDS PRONOUNCEMENTS - The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation". This Statement, which is
effective for all companies in 1996, allows, but does not require, the
recording of compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation under the provisions of Accounting Principles
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, the adoption of this Standard did not
affect the Company's results of operations, financial position or
liquidity.
RECLASSIFICATIONS - Certain amounts in the 1994 and 1995 financial
statements have been reclassified to conform with the current year's
presentation. The reclassifications do not affect previously reported
results of operations or cash flows.
3. COMMON STOCK OFFERING:
On August 26, 1996, the Company completed an offering of 4.6 million
shares of its common stock for a price of $23.75 per share. Proceeds from
the Offering, net of underwriting fees and expenses, amounted to
$103,238. The Company has used $18,037 of the proceeds to pay down its
U.S. revolving credit agreement. The balance of the proceeds will be used
to construct a new electron beam furnace, to expand the Company's
distribution business, for working capital and for other general
corporate purposes.
4. INVENTORIES:
December 31
------------------
1996 1995
---- ----
Finished goods $ 33,739 $ 18,141
Work-in-progress 34,897 19,837
Raw materials 50,917 28,032
-------- --------
Total $119,553 $ 66,010
======== ========
5. SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE:
December 31,
1996
------------
Corporate debt securities $ 32,322
Bankers' acceptances 21,493
Certificates of deposit 15,029
--------
68,844
Less cash equivalents (1,132)
--------
$ 67,712
========
At December 31, 1996, all of the Company's short-term investments had
maturities of less than one year. The fair value of investments
approximates amortized cost.
6. PROPERTY, PLANT AND EQUIPMENT:
December 31
------------------
1996 1995
---- ----
Land $ 1,189 $ 1,189
Buildings and improvements 11,531 11,455
Machinery and equipment 44,790 42,248
Integrated sponge facility 46,045 45,641
Construction in progress 1,459 846
-------- --------
105,014 101,379
Less accumulated depreciation 70,124 66,241
-------- --------
$ 34,890 $ 35,138
======== ========
[Page 23 of the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
7. PROVISION FOR LOSS ON LONG-TERM AGREEMENTS:
The Company has historically entered into long-term agreements ("LTAs")
with certain customers, primarily in the aerospace industry. The LTAs
typically obligate the Company to sell the product at a fixed price for a
two- or three-year period. As a result of projected raw materials and
processing costs being higher than those anticipated when the LTAs were
executed, the Company recorded a provision for loss on LTAs of $5,717
during the year ended December 31, 1995, of which $2,710 and $4,417
remained outstanding at December 31, 1996 and 1995, respectively.
8. INCOME TAXES:
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current provision (benefit):
Federal $ 9,386 $ (372) $ 422
State 659 155 80
Foreign 913 466 --
Deferred provision (benefit) 470 (674) (1,217)
------- ------ ------
Total tax expense (benefit) $11,428 $ (425) $ (715)
======= ====== ======
</TABLE>
The differences between the Company's income tax provision (benefit) and
federal tax provision (benefit) at statutory rates are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal provision (benefit) at statutory rates $11,790 $ (966) $ (931)
State tax provision (benefit) 2,348 (193) (179)
Change in valuation allowance (2,948) 1,138 216
Adjustment of prior-year taxes 79 (264) --
Other 159 (140) 179
------- ------ ------
Total $11,428 $ (425) $ (715)
======= ====== ======
</TABLE>
At December 31, 1996, the Company has net operating loss ("NOL")
carryforwards for state income tax purposes, which may be used to offset
future taxable income. These NOL carryforwards expire as follows:
Year
----
2007 $ 1,163
2008 7,052
2009 2,051
2010 231
-------
$10,497
=======
At December 31, 1996, the Company also had federal alternative minimum
tax ("AMT") and state tax credit carryforwards of $717 and $70,
respectively, which may be utilized to offset regular income taxes
payable in future years. The AMT credit has an indefinite carryforward
period. The state tax credits expire in 1997.
[Page 24 to the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
8. INCOME TAXES, Continued:
The components of the deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
NOL and tax credit carryforwards $ 1,213 $ 4,089
Pension, retirement and other employment
related items 2,505 1,715
Allowance for doubtful accounts 150 455
Safe harbor lease 139 215
Environmental accrual 350 350
Capitalized inventory costs 370 281
Provision for losses on long-term agreements 858 1,627
Other 730 871
Less valuation allowance -- (2,948)
------- -------
6,315 6,655
Deferred tax liabilities:
Accumulated depreciation and amortization 6,692 6,562
------- -------
Net deferred tax assets (liabilities) $ (377) $ 93
======= =======
Balance sheet classification:
Current deferred tax assets $ 4,701 $ 3,242
Long-term deferred tax liabilities (5,078) (3,149)
------- -------
Net deferred tax assets (liabilities) $ (377) $ 93
======= =======
</TABLE>
The Company recorded a valuation allowance in 1995 with respect to its
deferred tax assets for federal and state NOL and tax credit
carryforwards because of uncertainties regarding their future
realization. Realization was dependent on generating sufficient taxable
income prior to expiration of the NOL carryforwards and the reversal of
certain deferred tax credits. In 1996, all of the Company's federal NOL
carryforwards and a portion of its state NOL carryforwards were utilized.
Due to the utilization of these deferred tax assets and because future
taxable income is anticipated to be sufficient to utilize the remaining
NOL and tax credit carryforwards, the valuation allowance was eliminated.
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
---- ----
<S> <C> <C>
U.S. revolving credit agreement - $21,228
U.K. based credit facility $ 2,334 517
Subordinated loan with Kamyr, Inc. 4,500 4,500
Obligations under capital leases and other 1,163 1,117
------- -------
7,997 27,362
Less current maturities 3,785 616
------- -------
$ 4,212 $26,746
</TABLE>
[Page 25 to the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
9. LONG-TERM DEBT. Continued:
U.S. REVOLVING CREDIT AGREEMENT - The Company may borrow up to $10,000
under the terms of a revolving credit agreement with a U.S. bank at an
interest rate of prime (8.25% and 8.5% at December 31, 1996 and 1995,
respectively) plus 1%, or LIBOR (5.69% at December 31, 1996 and 6.43% at
December 31, 1995) plus 2.5%. Borrowings under the agreement are
collateralized by accounts receivable, inventories and other intangible
assets, including the Company's stock in TI. The Company must pay a
nonuse fee of .5% annually on the unused portion of the commitment. The
credit agreement matures in September 1997 and can be renewed for
one-year periods with the consent of both parties. The credit agreement
contains restrictive covenants with regard to various financial ratios
and imposes limitations on capital expenditures and dividends. Annual
cash dividends are limited to the lesser of fifty percent (50%) of net
income or $1.8 million.
U.K. BASED CREDIT FACILITY - Titanium International, Ltd. ("TIL"), a
wholly owned subsidiary of TI, has a credit facility with Midland Bank
plc, which provides for a credit facility of approximately $2,300, a
foreign exchange facility for $900 and other guarantees of approximately
$450. Aggregate borrowings which include Parent loans cannot exceed TIL's
shareholders' equity less intangible assets. The credit facility is
collateralized by the assets of TIL only. Interest is to be charged at
the rate of 1.5% over Midland Bank's base rate on amounts borrowed up to
$1,500 and 2% over Midland Bank's base rate on amounts borrowed in excess
of $1,500. The credit facility has financial covenants pertaining to net
worth and prepayment of loan to TI. In January 1997, the credit facility
was amended to increase the credit facility to approximately $3,300,
increase the foreign exchange facility to $2,000 and increase the other
guarantees to $1,000. The Bank has the option of terminating the
availability of credit at its discretion and the facility is subject to
review on May 31, 1997.
SUBORDINATED LOAN FROM KAMYR, INC. - On September 19, 1994, as part of
the Company's acquisition of TI, TI entered into a subordinated debt
agreement with the seller, Kamyr, Inc., for $4,500, interest at 8%,
payable quarterly. The initial principal payment of $300 is due March
1997, with additional quarterly installments of $350 through March 2000.
The subordinated debt agreement includes covenants relative to
shareholders' equity, the maximum amount of senior debt, relative
financial ratios and restrictions on dividends, new borrowings and
guarantees and liens. The loan is collateralized by a second lien on the
accounts receivable, inventories, and general intangibles of TI.
OTHER NOTES PAYABLE - Other notes payable principally consist of capital
lease obligations and are payable in monthly installments of $15,
including interest. A balloon payment of $264 is due in July 2002. The
loans bear interest at rates between 6.9% and 8.5%. The loans are
collateralized by certain machinery and equipment.
Aggregate contractual maturities of long-term debt approximate the
following at December 31, 1996:
1997 $ 3,785
1998 1,578
1999 1,555
2000 533
2001 136
Thereafter 410
-------
$ 7,997
=======
10. STOCK PURCHASE WARRANTS:
At December 31, 1996, warrants to purchase 120 thousand shares of common
stock were outstanding in connection with the Company's acquisition of
TI. The warrants were issued at fair market value and are exercisable at
$6.375 per share, expiring in September 2004. In May 1996, warrants to
purchase 80 thousand shares were exercised. The warrant holder is the
president of TI, who is also an officer and director of the Company.
[Page 26 to the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
11. EMPLOYEE BENEFIT PLANS:
PENSION PLANS - The Company sponsors various retirement plans for most
full-time employees. Total pension expense for 1996, 1995 and 1994 was
$1,616, $1,581 and $1,287, respectively. Pension plan benefits are based
primarily on participants' compensation and years of credited service. It
has been the Company's policy to fund all current and prior service costs
under retirement plans, and all liabilities for accrued vested and
nonvested benefits have been fully funded.
The following table sets forth the amounts recognized in the Company's
financial statements for the salaried plan:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pension costs for the year:
Service cost $ 524 $ 474 $ 522
Interest cost 951 981 859
Actual return on plan assets (1,315) (2,252) (250)
Net amortization of deferral 402 1,571 (397)
------- ------- -------
Net pension cost $ 562 $ 774 $ 734
======= ======= =======
Plan assets at fair value $13,280 $12,246 $ 9,863
------- ------- -------
Actuarial value of benefits based on employment service to date and
present pay levels:
Vested 10,405 10,036 7,976
Nonvested 445 528 300
------- ------- -------
Accumulated benefit obligation 10,850 10,564 8,276
Additional amounts related to projected
compensation increases 3,349 4,443 2,550
------- ------- -------
Projected benefit obligation 14,199 15,007 10,826
------- ------- -------
Projected benefit obligation in excess of
plan assets (919) (2,761) (963)
Unrecognized net obligation 197 237 276
Unrecognized prior service cost 137 255 182
Unrecognized net loss from experience different
from actuarial assumptions 155 1,874 76
------- ------- -------
Accrued pension liability $ (430) $ (395) $ (429)
======= ======= =======
</TABLE>
Assumptions utilized to measure net pension cost and the projected
benefit obligations are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 7.25% 7.25% 8.50%
Rate of compensation increase 4.50 4.50 4.50
Long-term rate of return on plan assets 8.00 8.00 8.00
</TABLE>
[Page 27 to the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
11. EMPLOYEE BENEFIT PLANS, Continued:
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS - The Company accrues
the cost of postretirement benefits other than pensions during the period
of employment of the salaried employees. The following table sets forth
the plan's status, reconciled with the amounts recognized in the
Company's financial statements.
The components of net periodic postretirement benefit costs are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost, benefits attributed to employee
service during the year $ 66 $ 89 $ 96
Interest cost on accumulated postretirement
benefit obligation 84 119 118
Net amortization and deferral (16) -- 15
---- ---- ----
Net periodic postretirement benefit cost $134 $208 $229
==== ==== ====
</TABLE>
The components of accrued postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 479 $ 611 $ 638
Fully eligible plan participants 202 121 140
Other active plan participants 593 1,190 770
------ ------ ------
1,274 1,922 1,548
Unrecognized gain (loss) from experience different
from actuarial assumptions 347 (359) (91)
------ ------ ------
Accrued postretirement benefit cost $1,621 $1,563 $1,457
====== ====== ======
</TABLE>
For measurement purposes, an 8.5% annual increase in the per capita cost
of postretirement medical benefits was assumed for 1996; the rate is
assumed to decrease gradually to 6% in 2001 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
affect on the amounts reported. To illustrate, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December
31, 1996 by $146, and the aggregate of the service and interest cost
components of net periodic postretirement cost for the year then ended by
$20.
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% for 1996 and 1995 and 8.5% for 1994. The
changes in the unrecognized net loss reflect the changes in the discount
rate.
THE ESOP - In 1987, the Company established The Oregon Metallurgical
Corporation Employee Stock Ownership Plan ("ESOP"), an employee stock
ownership plan covering substantially all employees of OREMET. The ESOP
borrowed $17 million from the Company to purchase approximately 6.3
million shares of common stock.
The loan obligation of the ESOP is considered unearned employee benefit
expense and, as such, is recorded as a reduction of shareholders' equity.
Both the loan obligation and the unearned benefit expense have been
reduced by loan repayments made by the ESOP. In December 1994, the note
receivable from the ESOP was fully repaid. As of December 31, 1996, the
ESOP owned approximately 5% of the outstanding common stock of the
Company. All of the common stock held in the ESOP has been allocated to
OREMET employees. The Company made no contribution to the ESOP in 1996 or
1995. The ESOP contribution expense totaled $2,382 in 1994.
EXCESS BENEFIT PLAN ("EBP") - OREMET maintains an unfunded EBP for
participants whose allocations of common stock to the ESOP are reduced as
a result of limitations imposed under federal income tax law. The Company
made no contributions to the EBP in 1996 or 1995. EBP costs were $332 in
1994. At December 31, 1996 and 1995, the Company had recorded liabilities
to the EBP of 39 thousand shares and 115 thousand shares, respectively.
DEFINED CONTRIBUTION PLANS - OREMET sponsors a domestic 401(k) retirement
savings plan for the benefit of both its union and salaried employees.
Under the provisions of the plan, OREMET will contribute one share of
stock for each day worked (subject to certain limitations) or
approximately 260 shares a year for a full-time employee. OREMET will
also contribute a matching contribution based on the profitability of the
Company. The matching contribution is limited to 3% of the participant's
compensation. OREMET's costs under the plan totaled $4,005 and $1,041 in
1996 and 1995, respectively.
[Page 28 to the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
11. EMPLOYEE BENEFIT PLANS. Continued:
TI sponsors a domestic 401(k) retirement saving plan. Under the
provisions of the plan, participants may contribute a percentage of their
compensation not to exceed 12%. TI matches the participants'
contributions up to 3%. Participants are fully vested with regard to TI's
contributions and earnings thereon after one year of service. TI's
contributions to the plan were approximately $67 in 1996 and $64 in 1995.
T.I.L. sponsors a defined contribution pension plan for all employees
over the age of 25 with one year of service. Under the plan, participants
may contribute between 17.5% to 40% of base pay depending upon their age.
Participants are fully vested and T.I.L. matches between 2% and 14% of
the employee's base pay, depending upon employee age and as long as the
employee's contributions are at least 2%. T.I.L.'s contributions for 1996
and 1995 were approximately $49 and $51, respectively.
STOCK APPRECIATION RIGHTS ("SARS") - In December of 1995, the Company
established an incentive SARs plan. At the discretion of the Board of
Directors, SARs may be granted to officers and other key employees. Upon
exercise of a SAR, the holder is entitled to receive cash equal to the
amount by which the market value of the common stock on the exercise date
exceeds the market value of the common stock on the date of grant. The
SARs become fully exercisable over a four-year vesting period measured
from the date of grant; no SARs are vested as of December 31, 1996. The
Board of Directors awarded 166.5 thousand SARs, with a grant price of
$10.25 per share, on December 14, 1995 and 187.5 thousand SARs, with a
grant price of $33.75 per share, on December 12, 1996 (fair market value
at dates of award). Unless exercised, the SARs expire ten years after the
date of grant. Total SARs compensation expense for the year ended
December 31, 1996 was $1,493.
STOCK COMPENSATION PLANS - Beginning in 1995, Oremet implemented stock
compensation plans for the benefit of both its union and salaried
employees. The employee earns one share of the Company's common stock for
every one hundred dollars earned in salaries and wages, subject to
certain limitations. Stock Compensation Plan costs were $4,082 and $1,750
in 1996 and 1995, respectively.
12. STOCK OPTION PLAN:
Effective June 11, 1996, certain eligible employees of OREMET were each
granted options to buy five hundred shares of the Company's Common Stock
(approximately 252 thousand total shares) at $30.25, the fair value of
the Company's common stock on the date of grant. Such options vest 100%
on the fourth anniversary and expire on the tenth anniversary of the date
of the grant.
The Company had adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the options
issued under the stock option plan. Had compensation cost been determined
based on the fair value at the date of grant consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per
share would not have been materially different.
Weighted
Average
Exercise
Option Price
------ --------
Granted, June 11, 1996 $252 $30.25
Forfeited 8 30.25
----
Outstanding at December 31, 1996 $244 $30.25
==== ======
13. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES - Minimum annual rental commitments at December 31,
1996, under noncancelable operating leases, principally for facilities
and equipment, are payable as follows:
Operating
Leases
---------
1997 $ 1,046
1998 733
1999 607
2000 386
2001 352
Thereafter 278
-------
Total minimum lease payments $ 3,402
=======
Total rental costs were $1,003, $951 and $533 in 1996, 1995 and 1994,
respectively.
[Page 29 of the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
13. COMMITMENTS AND CONTINGENCIES. Continued:
OTHER - At the time of the acquisition of TI, OREMET entered into an
agreement with the minority shareholder to acquire the remaining 20%
interest in TI, based upon a formula related to the book value of TI, in
annual increments of at least 15% no earlier than 1999 and no later than
2004.
ENVIRONMENTAL MATTERS - The Company is subject to federal, state and
local statutes and regulations concerning environmental matters and land
use. Although the Company believes it is in material compliance with
these laws, they are frequently modified to be more restrictive and it is
impossible to predict accurately the future effect that changes in these
laws may have on the Company. There can be no assurance that the Company
will not face costs and liabilities as a result of environmental
regulation which could have a material adverse effect on the Company, its
financial position, results of operations and liquidity.
The Company's operations pose continuing risk of environmental impacts.
The Company uses and produces substantial quantities of substances,
chemicals and compounds that have been identified as hazardous or toxic
under federal, state and local environmental and worker safety and health
laws and regulations. Consequently, the Company is subject to various
environmental laws that impose compliance obligations and can create
liability for historical releases of hazardous substances. While the
Company takes environmental, safety and health precautions appropriate
for the industry, the Company's operations pose an ongoing risk of
accidental releases of, and worker exposure to, hazardous or toxic
substances. The Company conducts its operations at industrial sites where
hazardous materials have been managed for many years in connection with
its operations, including periods before careful management of these
materials was generally believed to be necessary.
The Company has entered into a consent order in August 1994 with the
Oregon Department of Environmental Quality ("ODEQ") pursuant to which the
Company is conducting an investigation of hazardous substances in
portions of the soil and groundwater at its plant site in Albany, Oregon.
The Company anticipates that its investigation will result in a
determination that at least some remedial action is necessary for which
an accrual has been made. A neighboring property owner also is
investigating groundwater contamination at its property that has migrated
to the Company's property and for which OREMET may have legal claims to
recover a portion of its investigation costs. The Company anticipates
that a number of its production wells will have to be reconstructed in
response to concerns about migration of groundwater contamination. The
Company also has claims against its drilling contractor with respect to
the reconstruction of the wells.
In February 1995, the ODEQ modified the Company's wastewater discharge
permit for its Albany facility. The new permit imposes more stringent
discharge limits, and the Company has entered into a Mutual Agreement and
Order with the ODEQ under which the Company will achieve the more
stringent units according to a specific schedule. The Company has
identified several alternatives for meeting the new limits, the most
expensive of which would require capital expenditures of approximately
$700. The Company is working with the ODEQ to explore less expensive
alternatives.
Over the past several years, the Company has voluntarily undertaken
extensive testing of the air emissions from its Albany plant. This
testing indicates that emissions from some units may be greater than
previously recognized. The Company entered into a memorandum of
understanding with ODEQ on July 19, 1996, under which the Company will
conduct certain air quality impact analyses and may potentially install
additional emissions control equipment. In the course of this work, the
Company has determined that the matter can be better resolved through an
aggressive emissions reduction and control program that will also
accommodate expansion plans. The Company is engaged in discussions with
ODEQ to amend the memorandum to incorporate this emissions reduction
program. The Company has estimated that the capital cost of the emissions
controls will be $1,500 in 1997. The Company believes this matter will be
resolved by the end of 1997.
Based upon its engineering studies regarding the above matters, the
Company made provisions for environmental expenses in 1995, 1994 and 1993
of $0, $240 and $970, respectively, of which approximately $909 remains
at December 31, 1996. These amounts are in addition to recurring
environmental costs which are expensed as incurred and are included in
cost of sales. At the present time, management cannot reasonably predict
when all of these environmental issues will be resolved. Additionally, it
is reasonably possible that a change in the estimate will occur in the
near term.
Commencing in 1991, the Pennsylvania Department of Environmental
Regulation and the Environmental Protection Agency ("EPA") performed
periodic site inspections, including soil and water sampling, at TI's
site in Frackville, Pennsylvania, in connection with a regional
groundwater investigation of the Frackville, Pennsylvania, area. While
this investigation is ongoing, the Company has not been informed by
either agency of any pending or potentially required actions which may
arise from this investigation.
In conjunction with the Company's purchase of TI, Kamyr, Inc. has agreed
to undertake specified cleanup activities. In addition, Kamyr, Inc. has
agreed to a limited indemnification of the Company in the event damages
arise that result from conditions which were not in compliance with
environmental laws and regulations as they existed at the time the
Company purchased TI.
LEGAL PROCEEDINGS - From time to time, the Company is involved in legal
proceedings which arise in the normal course of business. The Company is
not currently involved as a defendant in any legal proceedings where the
outcome, if determined adversely, could have a material effect on the
financial position, results of operations or liquidity of the Company.
[Page 30 of the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
14. BUSINESS SEGMENTS:
The Company's operations are conducted primarily in one business segment,
the production and marketing of titanium metal and related products. In
May 1994, OREMET signed a three-year contract with Aerospatiale Societe
Nationale Industrielle for engine pylon parts for the Airbus aircraft,
and in the second half of 1994 began supplying product under the
contract. The acquisition of TI provided the Company with a service
center located in the U.K. with an established operation. In 1996, TI
opened a service center in Germany. The Company intends to utilize these
facilities to meet its customers' needs in Europe.
The Company's foreign operations (principally in Europe) are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues - unaffiliated customers $23,520 $18,882 $ 4,123
Operating profits 2,712 1,370 219
Identifiable assets at year end 17,298 11,509 10,685
</TABLE>
Export sales from the Company's United States operations (primarily to
Europe and Asia) approximated $22 million, $11 million and $6 million for
the years ended December 31, 1996, 1995 and 1994, respectively. No
individual foreign region had sales in excess of 10% of total sales
during 1996, 1995 or 1994.
15. FINANCIAL INSTRUMENTS:
FOREIGN CURRENCY CONTRACTS - The Company enters into forward foreign
exchange contracts to hedge foreign currency transactions on a continuing
basis for periods consistent with its committed exposures. The Company
does not enter into foreign currency contracts for trading or speculative
purposes. This hedging minimizes the impact of foreign exchange rate
movements on the Company's operating results. The Company's foreign
exchange contracts do not subject the Company's results of operations to
risk due to exchange rate movements because gains and losses on these
contracts generally offset losses and gains on the assets and liabilities
being hedged.
At December 31, 1996 and 1995, the Company had notional principal amounts
of approximately $790 and $490, respectively, in contracts to buy U.S.
dollars in the future, with maturities of less than eight months. Net
foreign currency transaction gains occurring for 1996 and 1995 were
approximately $29 and $121, respectively, which have been included in
cost of goods sold.
OTHER FINANCIAL INSTRUMENTS - At December 31, 1996 and 1995, the carrying
value of financial instruments classified as current assets or
liabilities approximated their fair values, based on the short-term
maturities of these instruments. Fair value is determined based on future
cash flows, discounted at market interest rates, and other appropriate
valuation methodologies. At December 31, 1996 and 1995, the fair value of
long-term debt with fixed interest terms approximated carrying value.
Both periods include long-term borrowing with variable interest terms,
for which the carrying value approximated market. The fair value of debt
is determined by obtaining quotes from financial institutions.
Exposure to market risk on foreign currency contracts results from
fluctuations in currency rates during the periods the contracts are
outstanding. The counterparties to foreign currency exchange contracts
are major financial institutions. Credit loss from counterparty
nonperformance is not anticipated.
16. ADDITIONAL CASH FLOWS STATEMENT INFORMATION:
The Company's noncash investing and financing activities and cash
payments for interest and income taxes for years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid (received) for:
Interest $2,031 $ 2,253 $ 614
Income taxes (refunds, net of payments) 3,157 9 (1,327)
Noncash investing and financing activities:
Acquisition of business,
net of cash acquired:
Working capital, other than cash $(9,630)
Property, plant and equipment (3,278)
Long-term debt assumed 185
Note payable issued to seller 4,500
-------
$(8,223)
=======
</TABLE>
[Page 31 of the 1996 Annual Report to Shareholders]
<PAGE>
(in thousands)
17. SPECIAL TAX REFUND DIVIDEND:
The Company's Board of Directors declared a special tax refund dividend
which was paid on December 20, 1996 to shareholders of record as of
November 27, 1987. The special tax refund relates to a long-standing tax
refund claim which was recently settled with the Internal Revenue
Service. The federal refund in the amount of $8,097, including interest
and net of expenses, was received by the Company on July 30, 1996. The
dividend related to the net federal refund will be $0.5227 per share. The
dividend, if any, related to the State of Oregon refund will be
determined at such time as the refund is received by the Company.
As it relates to this matter, the Company is obligated by past agreement
to act in the capacity of a conduit between the shareholders of record as
of November 17, 1987, and the Federal and State of Oregon taxing
authorities. As such, the Company has not recorded the proceeds from the
federal refund in income or shareholders' equity, nor will the Company
reflect the payment of the dividend in the consolidated statements of
shareholders' equity.
18. SHAREHOLDER RIGHTS PLAN:
In December 1996, the Company adopted a Shareholder Rights Plan (the
"Plan"). The Plan is designed to prevent a person or group from gaining
control of the Company or obtaining a position that could deter the
acquisition of control by others, without offering an adequate price to
all shareholders and to deter other abusive takeover tactics which are
not in the best interest of shareholders.
Under the Plan, each outstanding share of the Company's Common Stock
carries one right which is composed of common stock and debt. The rights
may only become exercisable under certain circumstances, including
acquisitions of the Company's Common Stock by a person or group of
persons without the prior approval of the Company. Depending on the
circumstances, if the rights become exercisable, the holder may be
entitled to purchase shares of the Company's Common Stock and receive
debt or shares of Common Stock of the acquiring person at discounted
prices. The rights at the option of the Company are redeemable at one
cent per right. Unexpired rights expire in December 2006.
19. QUARTERLY INFORMATION (Unaudited):
The following table presents the Company's unaudited consolidated
quarterly financial data for fiscal years 1996 and 1995. Although the
Company's business is not seasonal, growth rates of sales have varied
from quarter to quarter as a result of the timing of new products,
industry cyclicality, and general U.S. and international economic
conditions.
<TABLE>
<CAPTION>
Net
Income
(Loss)
Gross Net Per
Profit Income Share
Sales (Loss) (Loss) (3)
----- ------ ------ ------
<S> <C> <C> <C> <C>
1996 Quarter:
1st $ 51,309 $10,361 $ 3,345 $ 0.30
2nd 58,760 14,268 5,186 0.46
3rd 64,729 16,239 6,445 0.48
4th 62,119 16,862 7,282 0.45
-------- ------- -------
$236,917 $57,730 $22,258 $ 1.69
======== ======= ======= =======
1995 Quarter:
1st $ 30,838 $ 5,332 $ 535 $ 0.05
2nd(1) 35,125 5,291 453 0.04
3rd 41,236 4,090 (439) (0.04)
4th(1)(2) 39,654 1,138 (2,964) (0.26)
-------- ------- -------
$146,853 $15,851 $(2,415) $ (0.22)
======== ======= ======= =======
<FN>
<F1> During the second quarter of 1995, the Company reported a pre-tax
charge to income of $1,300 to reflect the impact of projected
conversion costs on long-term agreements which were in excess of
selling price.
During the fourth quarter of 1995, the Company reported a pre-tax
charge to income of $4,417 to reflect the impact of increased raw
material costs on long-term agreements.
<F2> The Company concluded the first nine months of 1995 with an effective
tax provision rate of 37.9% on income before income taxes and minority
interest of $1,434. For the fourth quarter of 1995, the Company's
effective tax benefit rate was 25.5% on a net loss before income taxes
and minority interest of $3,794. The Company's 1995 effective tax
benefit rate was 18.0%. The above change in the Company's effective tax
rate reflects the establishment of a valuation allowance on a
substantial portion of the deferred tax assets which were generated by
the Company's loss incurred during the fourth quarter of 1995.
<F3> Earnings per share are computed independently for each of the quarters
presented. The sum of the quarterly earnings per share in 1995 do not
equal the total computed for the year due to stock issued under
employee benefit plans.
</FN>
</TABLE>
[Page 32 of the 1996 Annual Report to Shareholders]
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (In Thousands, Except Employee and
Per-Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994(2) 1993 1992(1)
-------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $236,917 $146,853 $ 71,166 $ 55,351 $ 56,785
Income (loss) from operations(3) 35,080 (256) (2,494) (6,179) (5,934)
Income (loss) before cumulative
effect of changes in
accounting principles(1) 22,258 (2,415) (2,023) (4,098) (4,122)
Income (loss) per common share before
cumulative effect of changes in
accounting principles 1.69 (.22) (.18) (.38) (.38)
Weighted average common shares
and equivalents outstanding 13,167 11,219 11,001 10,839 10,754
Balance Sheet Data:
Working capital $180,714 $ 63,769 $ 49,082 $ 36,467 $ 37,296
Total Assets 267,404 133,077 111,972 83,326 85,701
Long-term debt, including
current maturities 7,997 27,362 17,177 4,750 8,100
Shareholders' equity 203,853 65,887 67,282 67,065 68,402
Other Operatinng Data:
EBITDA $ 38,509 $ 3,896 $ 1,882 $ (1,426) $ (1,352)
Cash flows provided by (used in):
Operating activities (14,990) (10,969) (4,459) 841 7,454
Investing activities (71,244) (2,248) (2,680) (1,974) (11,201)
Financing activities 86,728 12,145 8,754 (921) 2,278
------- ------- ------- ------- --------
Total 494 (1,072) 1,615 (2,054) (1,469)
======= ======= ======= ======= ========
Product Sales:
Aerospace 101,835 67,148 43,254 42,620 45,428
Non-aerospace 135,082 79,705 27,912 12,731 11,357
Order backlog at year end(4) 183,000 105,000 44,000 18,000 28,000
Product Shipments (in pounds):
Ingot 6,980 4,418 3,517 2,319 3,447
Mill Products 9,164 6,910 3,540 3,119 1,892
Active employees at year end 731 580 482 310 359
<FN>
<F1> The cumulative effect of changes in accounting principles reflects the
adoption in 1992 of Statement of Financial Accounting Standards ("SFAS") No.
109. "Accounting for Income Taxes", which resulted in the recognition of $0.6
million, or $0.05 per share of income. Simultaneously, the Company adopted SFAS
No. 106. "Employer's Accounting for Postretirement Benefits Other Than
Pensions", which resulted in the recognition of $0.7 million, or $0.06 per
share, of expense, net of tax benefits of $0.4 million. The combined effect of
adopting SFAS No.'s 109 and 106 was the recognition of $69, or $0.01 per share,
of additional expense.
<F2> Includes Titanium Industries, Inc., after its acquisition by the Company on
September 20, 1994.
<F3> Operating income (loss) includes restructuring and environmental charges of
$240 in 1994, $2,997 in 1993, and $200 in 1992. A provision for a loss on
long-term agreements of $4,417 was recorded in the fourth quarter of 1995. See
notes 7 and 13 in the Company's Financial Statements.
<F4> Order backlog is defined as firm purchase orders scheduled for delivery
during the subsequent twelve-month period (which are generally subject to
cancellation by the customer upon payment of specified charges).
</FN>
</TABLE>
[Page 33 of the 1996 Annual Report to Shareholders]
<PAGE>
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FIVE-YEAR
SUMMARY OF SELECTED FINANCIAL DATA AND THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO OF THE COMPANY. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND
EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, DEPENDENCE ON AEROSPACE, UNCERTAINTY OF EMERGING GOLF MARKET, HIGHLY
COMPETITIVE MARKET, SUBSTANTIAL EXCESS PRODUCTION CAPACITY, PLANNED SIGNIFICANT
INVESTMENT IN ELECTRON BEAM FURNACE, DEPENDENCE ON ESSENTIAL MACHINERY AND
EQUIPMENT, DEPENDENCE ON RAW MATERIALS AND SERVICES, ENVIRONMENTAL REGULATION,
AND LABOR AGREEMENTS.
OVERVIEW
Demand for the Company's products was strong in 1996. The Company reported
record sales, record production, and except for 1989, a year in which the
Company received an unusual tax refund, record net income. The U.S. Geological
Survey (USGS) reported that U.S. industry shipments of titanium mill products
increased 30% to 57 million pounds in 1996, compared to 44 million pounds in
1995. The improvement in industry shipments was the result of an increase in
demand in the commercial aerospace market and the emergence of new uses of
titanium metal, primarily in golf clubheads. The commercial aerospace market
continued to be the Company's largest market, followed by shipments to the golf
industry. International sales have increased 52%, to approximately $46 million
in 1996, compared to approximately $30 million in 1995. In 1994, international
sales approximated $10 million.
Beginning in 1993, several members of the Company's current executive management
team, including Carlos E. Aguirre, the President and Chief Executive Officer,
joined the Company from other companies within the titanium industry. The new
management implemented a plan to: (i) diversify the Company's revenue base from
a market, customer and product perspective, (ii) develop and establish a major
presence in new markets, (iii) expand the Company's distribution and service
center business and (iv) increase production levels while improving product
quality.
Aerospace-related sales represented approximately 43% of net sales in 1996,
compared to approximately 46% and 61% of net sales in 1995 and 1994,
respectively. Reported orders for new commercial aircraft have increased
significantly, particularly for wide body planes such as the Boeing 777 and the
Airbus A-330 and A-340, which use a greater percentage of titanium per plane
than narrow body aircraft. Aircraft manufacturers are reporting substantial
backlogs and are continuing to increase their build rates. The Company believes
that industry mill product shipments to the commercial aerospace market
increased by more than 5 million pounds to 25 million pounds in 1996.
The Company estimates that in 1996, industry shipments to the golf market
approximated 10 million pounds, compared to 3.5 million pounds in 1995. The
Company believes it is the market leader in shipments to the golf industry, with
shipments of 5.5 and 1.8 million pounds in 1996 and 1995, respectively. The
Company estimates that titanium producers located in the Former Soviet Union
(FSU) are supplying up to 25% of the titanium shipments to the golf club
industry. The Company expects that 1997 sales to golf clubhead producers will
approximate $15 million, compared to actual sales of approximately $40 million
in 1996. The estimated reduction in sales is due to a combination of inventory
accumulation by the golf clubhead producers and their increased efficiency in
recycling internal scrap. The Company believes that consumer demand for titanium
golf clubs is continuing to increase.
The Company has devoted significant resources to develop its presence in new
markets. In addition to golf, other new markets where the Company has also
established a major presence include armor for sale to the military and high
purity sponge for the electronics industry. The Company also developed a process
to produce titanium aluminide ingots, primarily for use by the aerospace
industry.
In 1996, the Company expanded its international network of sales and service
centers to fourteen. The Company's service centers reported record shipments and
earnings in 1996. To support the increasing demand for titanium in diverse
commercial, consumer, aerospace, and industrial markets, the Company expects to
continue to expand its distribution business geographically. On September 20,
1994, the Company completed the acquisition of Titanium Industries, Inc. ("TI")
for $13.5 million. TI operates full-line titanium metal service centers in the
U.S., U.K., Canada, and Germany, and also produces small diameter titanium bars,
weld wire and fine wire. The acquisition was accounted for as a purchase, with
the results of TI included in the Company's financial statements from the
acquisition date. TI sells its products primarily to industrial markets and to a
lesser extent, the commercial aerospace market. Historically, TI's service
centers have reported results that are more stable and less cyclical than the
Company's core manufacturing business. The acquisition of TI has enhanced the
Company's revenue diversification and its ability to identify promising new
market opportunities.
The Company's twelve-month sales order backlog has increased 74% to $183 million
as of December 31, 1996, compared to $105 million as of December 31, 1995. The
Company's sales order backlog was $44 million as of December 31, 1994. OREMET's
backlog is based on firm purchase orders scheduled for delivery
[Page 34 of the 1996 Annual Report to Shareholders]
<PAGE>
the subsequent twelve-month period. Customer orders may be subject to
cancellation by the customer upon payment of specified charges. Beginning in the
second half of 1995 and continuing to the present, the Company has experienced a
significant increase in requests for quotations as well as increased orders and
prices on accepted orders. The increase in demand is primarily a result of the
recovery in the commercial aerospace market and the growth of the golf clubhead
market. Because of the strong demand, the Company has been increasingly
selective in the new orders that it accepts.
The increase in demand for titanium products has resulted in higher prices for
certain raw materials used by the Company, including titanium scrap, titanium
sponge and alloying materials. During 1995, the Company's profitability was
negatively impacted by higher raw material costs and fixed price long-term sales
agreements with certain customers, primarily in the commercial aerospace
industry. The Company recorded a $4.4 million provision in the fourth quarter of
1995 to recognize anticipated losses on existing long-term agreements ("LTAs")
as a result of higher raw material costs. During 1996, the Company incurred
costs of $1.7 million on certain of its LTAs, reducing its accrual for future
losses to $2.7 million at December 31, 1996. Starting with the first quarter of
1996, the Company added raw material surcharges in order to more directly link
changes in raw material costs to its contracts. The Company has also instituted
price increases for certain of its long-term sales agreements which were entered
into prior to 1996. However, there can be no assurance as to the Company's
continuing ability to recover raw material cost increases. The future
profitability of the Company's fixed price LTAs is subject to change based upon
the Company's costs of production.
The strong demand for titanium products continues to challenge the Company's
production capacities. During 1996, the Company operated its sponge and melting
plants at near capacity. The Company's mill products plant operated at
approximately 70% of its capacity. The Company is implementing a capital
expansion program designed to increase capacity in various critical areas. The
cornerstone of the 1997 capital plan is the construction of an electron beam
(EB) furnace and related raw materials processing facility. The new EB plant
will have an annual melting capacity of 20 million pounds, a doubling of present
melting resources.
On August 26, 1996, the Company completed an Offering (the Offering) of 4.6
million shares of its Common Stock for a price of $23.75 per share. Proceeds
from the Offering, net of underwriting fees and expenses, amounted to $103
million. The proceeds will be used to construct a new EB furnace and raw
material processing facility, expand the Company's distribution business, and
for working capital and other general corporate purposes.
Historically, aerospace applications in both the commercial and military sectors
have accounted for a majority of U.S. titanium consumption. The aerospace
industry has been characterized by severe cyclicality, which has had a
significant impact on the sales and profitability of titanium producers,
including OREMET. The last cyclical peak for the titanium industry occurred in
the 1988-1990 period, when domestic industry mill product shipments averaged
over 50 million pounds per year. In 1991, U.S. titanium industry mill product
shipments declined by approximately 35% to 34 million pounds. This decline was
primarily due to lower demand resulting from a slump in commercial aerospace and
the curtailment or cancellation of military programs as the Cold War ended. Data
reported by the USGS indicate that industry shipments reached approximately 36
million pounds in 1993,but dropped to about 35 million pounds in 1994.
During the five years ended December 31, 1995, when the titanium industry was in
a severe downturn, the Company incurred net losses of $4.7 million, $4.2
million, $4.1 million, $2.0 million and $2.4 million in 1991, 1992, 1993, 1994
and 1995, respectively. For the years 1993 through 1995, the Company's aggregate
net losses were $8.5 million, and the combined losses of the Company and the
other major titanium producers for whom data are publicly available (RMI, IMI
plc, and Titanium Metals Corporation) were $181.3 million. Although the Company
operated profitably in 1996, continuing profitable operations will depend on
continued strength in orders from the aerospace, golf and other markets,
favorable pricing and the Company's ability to control its raw material and
other costs.
[Page 35 of the 1996 Annual Report to Shareholders]
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating items from the Company's
consolidated results of operations as a percentage of net sales for each of the
years in the five-year period ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit (loss)(1) 24.4 10.8 9.3 4.9 (1.0)
Income (loss) from operations(1) 14.8 (0.2) (3.5) (11.2) (10.4)
Net income 9.4% (1.6)% (2.8)% (7.4)% (7.4)%
- -----------------
<FN>
<F1> A provision for a loss on LTAs of $5.7 million was recorded in 1995.
Gross profit and income from operations, exclusive of this provision,
as a percentage of net sales would have been 13.8% and 2.8% in 1995,
respectively.
</FN>
</TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's unaudited consolidated quarterly
financial data for fiscal years 1996, 1995 and 1994. Although the Company's
business is not seasonal, growth rates of sales have varied from quarter to
quarter as a result of the purchase of TI in September 1994, the timing of new
products, industry cyclicality and general U.S. and international economic
conditions.
<TABLE>
<CAPTION>
1996 Quarters 1995 Quarters 1994 Quarters
----------------------------- ------------------------------- ---------------------------
First Second Third Fourth First Second(1) Third Fourth(1) First Second Third Fourth
----- ------ ----- ------ ----- --------- ----- --------- ----- ------ ----- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 51.3 $ 58.8 $64.7 $62.1 $30.8 $35.2 $41.2 $39.7 $13.3 $14.5 $17.0 $ 26.4
Gross profit 10.4 14.2 16.2 16.9 5.3 5.3 4.1 1.2 0.1 0.6 1.7 4.2
Income (loss)
from operations 5.5 9.0 9.8 10.7 1.6 1.4 0.1 (3.4) (1.7) (0.9) (0.6) 0.7
Net income (loss) 3.3 5.2 6.4 7.3 0.5 0.5 (0.4) (3.0) (1.1) (0.6) (0.4) 0.1
- -----------------
<FN>
<F1>During the second quarter of 1995, the Company reported a pre-tax charge to
income of $1.3 million to reflect the impact of projected conversion costs
on long-term agreements which were in excess of selling price. During the
fourth quarter of 1995, the Company reported a pre-tax charge to income of
$4.4 million to reflect the impact of increased raw material costs on
long-term agreements.
</FN>
</TABLE>
Net sales for the fourth quarter of 1996, decreased $2.6 million to $62.1
million, compared to net sales of $64.7 million in the third quarter of 1996.
The decrease in net sales between the two periods is primarily attributable to
production difficulties encountered in the fourth quarter which adversely
affected shipments of mill products. Additionally, due to inventory buildups,
golf club manufacturers pushed out fourth quarter deliveries.
COMPARISON OF 1996 TO 1995
NET SALES. Net sales increased $90.1 million, or 61% to $236.9 million in 1996,
compared to $146.9 million in 1995. The increase in sales was primarily driven
by increased demand and higher prices for both the Company's manufactured and
service center products. Of the $90.1 million net sales increase, $45.1 million
was the result of volume increases and $45.0 million from higher average selling
prices.
TITANIUM SPONGE. During 1996, the Company's integrated sponge facility operated
at near capacity, primarily supplying the Company's internal demand for titanium
sponge as well as sales to RMI under a long-term titanium sponge conversion
agreement. Sales of titanium sponge and sponge conversion services increased 60%
to $16.9 million from $10.6 million in 1996 compared to 1995. The 1996 increase
in sales of $6.3 million was substantially the result of increased shipments and
not an increase in the average selling price. The Company projects that it will
continue to operate its sponge facility at near capacity with substantially all
production being utilized for internal consumption and for supply to RMI
(approximately 45% of capacity in 1996). The Company is presently supplementing
its sponge production with purchases from other producers.
[Page 36 of the 1996 Annual Report to Shareholders]
<PAGE>
INGOT. Sales of ingot increased 102% to $45.1 million for 1996 compared to $22.3
million for 1995. Ingot shipments increased 58% and the average ingot price per
pound increased 28%. The Company operated its melt facilities at near capacity
during 1996. The Company produces ingot for both internal use in its mill
products division and for sale primarily to aerospace customers.
MILL PRODUCTS. The Company produces or contracts for outside production a
variety of mill products including: billet, bar, plate, sheet and engineered
parts. Mill product sales increased 89% to $88.6 million for 1996 compared to
$46.8 million for 1995. Shipments of mill products increased 33% and the average
price per pound increased 42%. Sales to producers of aerospace components and
golf clubheads are responsible for a substantial portion of the growth in mill
product sales.
CASTINGS. Sales of castings increased 38% to $10.0 million for 1996 compared to
$7.2 million for 1995. The Company is operating at a higher production rate in
1996 and is expanding its casting facilities.
DISTRIBUTION. The Company's service centers market a wide variety of mill
products including engineered parts that are manufactured by various producers.
During 1996, sales of service center products increased 31% to $70.9 million
compared to $54.5 million for 1995. The increase in sales was due to increased
shipments and favorable pricing and product mix.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1996 increased 37% to $179.2
million, compared to $131.0 million in 1995. The primary reason for the increase
in cost of sales was increased shipments. The Company's gross profit margin
increased to 24.4% for 1996 from 10.8% for 1995, as a result of higher prices
and improved production efficiencies.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES. Research, technical and
product development expenses ("RT&D") increased by $0.4 million for 1996 to $2.0
million from $1.6 million in 1995. The main focus of RT&D is to develop enhanced
production procedures, provide customers with required technical support and
develop new products and markets. RT&D works jointly on projects with customers,
research agencies and universities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased $6.2 million, or 43%, for 1996 to
$20.7 million from $14.5 million in 1995. The increase is primarily a result of
additional employees hired to support the increase in operating activity. As a
percentage of sales, SG&A decreased to 8.7% in 1996 from 9.9% in 1995.
INTEREST INCOME. The Company earned $1.6 million of interest income during 1996.
No interest income was earned in 1995. Net proceeds from the Offering have been
invested in a portfolio of short-term marketable securities. This is the primary
factor for the increase in interest income.
INTEREST EXPENSE. Interest expense decreased $0.1 million to $2.0 million in
1996 compared to 1995. In August 1996, the Company paid down its U.S. revolving
credit agreement with funds received from the Offering. As a result of the
Offering and cash generated by operations, management anticipates that interest
expense for 1997 will be less than in 1996.
PROVISION FOR INCOME TAXES. The Company reported a provision for income taxes of
$11.4 million, or an effective tax rate of 33% (on income before income taxes
and minority interests) for 1996 compared to a 1995 tax benefit of $0.4 million,
or an effective tax rate of 18%. The difference between the federal and state
combined statutory tax rate of 39.5% and the effective tax rate of 33% for 1996
is primarily due to a change in the Company's deferred tax asset valuation
allowance, reflecting the belief that the deferred tax assets will be realized
by the Company.
NET INCOME. The Company reported net income of $22.3 million, $1.69 per share,
for 1996 compared to a net loss of $2.4 million, $0.22 per share, for 1995.
COMPARISON OF 1995 AND 1994
NET SALES. Net sales increased $75.7 million, or 106% to $146.9 million in 1995,
compared to $71.2 million in 1994. 1995 represented the first complete year in
which TI results were consolidated with the Company. On a pro forma basis, as if
TI had been included in results for all of 1994, the sales increase in 1995
would have been 53%. The increase in sales was primarily driven by increased
demand and higher prices for both the Company's manufactured and service center
products. Of the $75.7 million net sales increase, $61.5 million was the result
of volume increases and $14.2 million from higher average selling prices.
TITANIUM SPONGE. Sales of titanium sponge and sponge conversion services
decreased 15% to $10.6 million in 1995, compared to $12.4 million in 1994.
Sponge shipments decreased 18% and average sponge prices per pound increased.
Sales of titanium sponge have decreased due to greater internal consumption by
the Company. During the second half of 1995, the Company's integrated sponge
facility operated at near capacity, primarily supplying the Company's internal
demand for titanium sponge and sales to RMI under a long-term titanium sponge
conversion agreement.
[Page 37 of the 1996 Annual Report to Shareholders]
<PAGE>
INGOT. Sales of ingot increased 49% to $22.3 million in 1995, compared to $15.0
million in 1994. Ingot shipments increased 26% and the average ingot price per
pound also increased 19%. The Company began operating its melt facilities at
near capacity during the second half of 1995. The increase of sales is primarily
due to higher demand from the aerospace industry.
MILL PRODUCTS. Mill product sales increased 106% to $46.8 million in 1995,
compared to $22.8 million in 1994. Shipments of mill products increased 95% and
the average price per pound increased 5%. During 1995, mill products sales
increased across all product lines. Sales to the casters of golf clubheads had a
favorable effect on 1995 mill product sales.
CASTINGS. Sales of castings increased 12% to $7.2 million in 1995, compared to
$6.4 million in 1994. During the fourth quarter of 1995, a significant
competitor of the Company discontinued its casting operations which had a
positive impact on casting orders and sales.
DISTRIBUTION. Sales of service center products were included for a full year in
1995, compared to approximately three months in 1994. During 1995, the increase
in sales was due to increased shipments and favorable pricing and product mix.
The markets served by the Company's service centers, which were entered by the
Company with the acquisition of TI, displayed strong growth during 1995.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1995 increased 103% to $131.0
million, compared to $64.5 million in 1994. TI's cost of sales were included for
a full year in 1995, compared to approximately three months in 1994. The primary
reasons for the increase in cost of sales were increased shipments coupled with
rising raw material costs. The Company's gross profit margin increased to 10.8%
in 1995 from 9.3% in 1994.
The Company recorded a provision for loss on LTAs of $4.4 million in the fourth
quarter of 1995 to cover estimated losses on LTAs with certain aerospace
customers. The provision for losses on LTAs was charged to cost of sales. The
Company's most significant unfavorable LTA expires during the third quarter of
1997. In response to the changing market conditions, the Company has negotiated
more favorable terms on many of its LTAs and has instituted raw material
surcharges.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES. RT&D increased $0.2
million to $1.6 million compared to $1.4 million in 1994. RT&D salaries and
related expenses increased in 1995 compared to 1994, reflecting an increase in
technical personnel to support the Company's long-term commitments for research,
development of new products and improvements in operating processes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $7.0 million, or
93%, in 1995 to $14.5 million from $7.5 million in 1994. The inclusion of TI for
a full year in the Company's 1995 results is the primary reason for the increase
in the Company's SG&A. In response to an increased activity level, all
departments included in the SG&A category added personnel during 1995. However,
as a percentage of sales, SG&A decreased to 9.9% in 1995 from 10.6% in 1994.
INTEREST EXPENSE. Interest expense increased by $1.5 million to $2.1 million in
1995 compared to $0.6 million in 1994. The increase in interest expense in 1995
compared to 1994 is the direct result of the purchase of TI in September 1994
and increased borrowing required to support the Company's increased operating
levels.
INCOME TAX BENEFIT. The Company's 1995 effective tax rate on the net loss before
income tax benefit and minority interests was 18%. The Company's income tax rate
varied from the normally expected statutory rate due to differences between book
and tax income for which recognition of a deferred tax asset was not considered
appropriate.
NET LOSS. The Company reported a net loss of $2.4 million, $0.22 per share, for
1995 compared to a net loss of $2.0 million, $0.18 per share, for 1994.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Net cash used in operating activities totaled $15.0 million for 1996, compared
to $11.0 million for 1995. Net cash used in operating activities totaled $4.5
million for 1994. Working capital increases required to support the sharp
increase in operating levels and the sales backlog were responsible for the most
significant portion of the cash used by the Company's operating activities for
the three-year period. The increase in the amount of cash flow used in operating
activities is a trend which began in the second quarter of 1994, consistent with
the Company's experience of increasing sales, sales order backlog and
production.
During 1996 and 1995, the Company incurred $8.2 million and $2.7 million,
respectively, in expenses relating to its Stock Compensation Plans and Savings
Plan. Liabilities arising under these plans are satisfied by issuing shares of
the Company's Common Stock. Increases in the average market value of the Common
Stock and in the number of eligible employees are the primary factors for the
1996 increase. See Note 11 to the Company's Consolidated Financial Statements.
[Page 38 of the 1996 Annual Report to Shareholders]
<PAGE>
During the fourth quarter of 1995, the Company incurred a non-cash charge to
earnings of $4.4 million to establish a provision for anticipated future losses
on fixed price LTAs. During 1996, the Company utilized $1.7 million of the
reserve to offset losses incurred on its LTA's. See Note 7 to the Company's
Consolidated Financial Statements.
Net cash used in investing activities totaled $71.2 million for 1996 compared to
$2.2 million for 1995. Net cash used in investing activities totaled $2.7
million in 1994. Of the net proceeds from the Offering, $67.7 million were
invested in short-term marketable securities. The Company additions to property,
plant and equipment were $3.7 million in 1996 and $1.9 million in 1995 and 1994.
In 1994, the Company paid $8.2 million, net of cash received of $0.8 million,
and issued debt to the seller in the amount of $4.5 million, for the purchase of
TI.
Net cash provided by financing activities totaled $86.7 million for 1996,
compared to $12.1 million for 1995. Net cash provided by financing activities
totaled $8.8 million in 1994. The Company received net proceeds of $103.2
million from the Offering (see Note 3 to the Company's Consolidated Financial
Statements). The Company used $18 million of the proceeds from the Offering to
pay down its U.S. revolving credit agreement. In July 1996, the Company received
a Federal tax refund and related interest in the amount of $8.1 million which
was subsequently paid in the form of a dividend to shareholders of record as of
November 27, 1987 (see Note 17 to the Company's Consolidated Financial
Statements). In 1995, $11.3 million was provided from net borrowings on the
Company's credit facilities and book overdraft, and $1.0 million from a capital
lease obligation.
REVIEW OF SIGNIFICANT WORKING CAPITAL ACCOUNTS
INVENTORIES. Inventories increased by $53.5 million, or 81% during 1996 to
$119.6 million, while they increased $17.0 million, or 35%, to $66.0 million at
December 31, 1995, compared to $49.0 million at December 31, 1994. In addition
to an increase in finished goods inventory, increases in raw materials and
work-in-process have been made in support of higher production levels. In
response to a growing sales backlog, the Company is continuing to raise its
production levels. The Company is also experiencing higher raw material and
conversion costs, which have increased the cost of the Company's inventory.
ACCOUNTS RECEIVABLE. Accounts receivable increased by $11.4 million, or 44% to
$37.3 million, during 1996, while they increased $5.5 million, or 27%, to $25.9
million at December 31, 1995, compared to $20.4 million as of December 31, 1994.
The increase in accounts receivable is consistent with the Company's increase in
sales volume.
BOOK OVERDRAFT. The Company had a book overdraft at December 31, 1996, 1995 and
1994 of $4.4 million, $2.0 million and $0.0 million, respectively. The book
overdraft represents Company checks which have been disbursed and are in transit
as of the end of the reporting period.
ACCOUNTS PAYABLE. Accounts payable increased by $2.9 million, or 17% during 1996
to $19.9 million, while the balances at December 31, 1995 and 1994 were $17.0
million and $16.9 million, respectively. The increase in accounts payable for
1996 is related to the timing of raw material purchases.
ACCRUED PAYROLL AND EMPLOYEE BENEFITS. Accrued payroll and employee benefits
increased $5.4 million, or 61% during 1996 to $10.7 million, while they
increased $3.7 million, or 126% to $6.7 million at December 31, 1995, compared
to $2.9 million at December 31, 1994. Accruals related to the Company's cash
bonus program and stock appreciation rights plan account for a substantial
portion of the increase.
CREDIT AGREEMENTS
The Company may borrow up to $10 million under the terms of a U.S. revolving
credit agreement with BankAmerica Business Credit, Inc. ("BABC"). The U.S.
credit agreement expires in September 1997. There is no balance outstanding
under the credit agreement as of December 31, 1996. As of December 31, 1996,
interest charged under the credit agreement was calculated based on BABC's
reference rate plus 1% or a borrowing option based on LIBOR plus 2.5%.
Subsequent to the Offering in August 1996, the Company reduced its credit line
under this agreement to $10 million from $35 million. The Company is in the
process of evaluating proposals from lending institutions for a new $60 million
credit agreement.
As of December 31, 1995, the Company was not in compliance with certain of its
financial covenants contained in its BABC credit agreement. The Company obtained
a written waiver from BABC on these matters. The U.S. credit agreement was
amended as of March 14, 1996 and May 1, 1996 to, among other things, modify the
debt to equity ratio covenant and certain other restrictive covenants and to
increase the line from $25 to $35 million. The amendments to the covenants were
needed for the Company to remain in compliance with certain financial
[Page 39 of the Annual Report to Shareholders]
<PAGE>
covenants in the U.S. credit agreement in light of increased working capital
growth. The Company is in compliance with its financial covenants as of December
31, 1996.
Titanium International Limited, a subsidiary of TI, has a short-term credit
facility with Midland Bank plc, in the U.K., permitting borrowings of
approximately $3.3 million. The U.K. credit agreement is subject to renewal on
May 31, 1997. The balance outstanding under the U.K. credit agreement as of
December 31, 1996 was $2.3 million.
CAPITAL EXPENDITURES
The Company intends to use approximately $32 million of the net proceeds from
the Offering for the construction, equipment and facility costs for a new EB
furnace and related raw materials processing facilities. The construction and
production ramp-up periods are expected to take approximately 18 months with
approximately $18 million expended in 1997 (design, procurement and construction
phases), and approximately $14 million in 1998 (construction and testing phase).
The Company intends to expend approximately $15 million of the net proceeds from
the offering to establish or purchase additional service centers.
The Company anticipates that capital expenditures during 1997, other than those
related to the EB furnace and the service center expansion, will approximate $14
million which will be provided by internally generated funds or credit
facilities. Capital expenditures required to maintain compliance with applicable
environmental regulations are included in the Company's capital expenditure plan
to the extent that they can be determined. The Company has no material open
commitments which obligate it to make future capital expenditures.
INCOME TAXES
In 1996, the Company utilized $3.5 million and $19.5 million of Federal and
State net operating loss carryforwards, respectively. The Company anticipates
that in 1997 it will fully utilize its federal alternative minimum tax (AMT)
credit carryforward of $0.7 million and its remaining State of Oregon net
operating loss carryforwards of $10.5 million. In addition to federal and State
of Oregon income taxes, the Company pays minimal franchise and income taxes in
various states and foreign jurisdictions.
ADEQUACY OF LIQUIDITY AND CAPITAL RESOURCES
The Company's access to borrowing facilities, public markets and internally
generated cash are expected to be sufficient to support the Company's operating
needs and to finance its continued growth, capital expenditures and repayment of
long-term debt obligations.
NON-U.S. OPERATIONS AND MONETARY ASSETS
Approximately 10% of the Company's net sales for 1996 and 13% of the Company's
1995 net sales were derived from its service centers in the U.K., Canada,
Germany and France. Changes in the value of non-U.S. currencies relative to the
U.S. dollar cause fluctuations in U.S. dollar financial position and operating
results. The impact of currency fluctuations on the Company were not significant
in 1996 and 1995.
IMPACT OF INFLATION
Inflation can be expected to have an effect on many of the Company's operating
costs and expenses. Due to worldwide competition in the titanium industry, the
Company may not be able to pass through such increased costs to its customers.
[Page 40 of the 1996 Annual Report to Shareholders]
<PAGE>
QUARTERLY STOCK DATA
For the year ended December 31, 1996 For the year ended December 31, 1995
High Low High Low
------------------------ ------------------------
First 22 1/8 11 First 8 1/4 6
Second 35 17 5/8 Second 9.63 6.563
Third 35 1/4 21 1/2 Third 13 1/2 9 3/8
Fourth 38 3/4 28 Fourth 12 1/2 9 1/8
[Page 41 of the 1996 Annual Report to Shareholders]
OREGON METALLURGICAL CORPORATION
EXHIBIT 21.1
Subsidiaries of
Oregon Metallurgical Corporation:
- ---------------------------------
State or Country
Name of Subsidiary in Which Organized
- ------------------ ------------------
OREMET France S.a.r.l. (1)(3) France
Titanium Industries, Inc. *(1)(3) Oregon
Titanium Wire Corporation ** (2)(4) Pennsylvania
Titanium International Limited ** (2)(3) United Kingdom
Titanium International GmbH** (3)(5) Germany
* Titanium Industries, Inc. is a majority-owned (80%) subsidiary of
Oregon Metallurgical Corporation.
** The companies are wholly-owned subsidiaries of Titanium Industries,
Inc.
(1) Created 1994
(2) Acquired 1994
(3) Operates titanium Service Centers
(4) Manufactures titanium rod and wire
(5) Began operation in February 1996
[Letterhead of Coopers & Lybrand L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Oregon Metallurgical Corporation and subsidiaries on Form S-8 (File Nos.
333-20909, 333-00167 and 33-63449) of our report dated February 4, 1997, on our
audits of the consolidated financial statements and financial statement
schedule of Oregon Metallurgical Corporation and subsidiaries as of December
31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994,
which reports are included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Eugene, Oregon
March 19, 1997
POWER OF ATTORNEY
Each of the undersigned directors of OREGON METALLURGICAL
CORPORATION, an Oregon corporation ("Company"), constitutes and appoints CARLOS
E. AGUIRRE and DENNIS P. KELLY, and each or either of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead in his capacity as a director of the
Company, to execute an annual report of the Company on Form 10-K for the fiscal
year ended December 31, 1996 ("Report"), and any and all amendments, and to file
such Report, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each or either of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, ratifying and confirming all that the attorneys-in-fact and agents, and
each or either of them, or substitute or substitutes, may lawfully do or cause
to be done by virtue of this Power of Attorney, it being understood that the
documents executed by such attorney-in-fact pursuant to this Power of Attorney
shall be in such form and shall contain such terms and conditions as such
attorney-in-fact may approve in such attorney-in-fact's discretion.
IN WITNESS WHEREOF, each of the undersigned directors of the
Company has executed this Power of Attorney as of February 28, 1997.
/s/ Howard T. Cusic Chairman, Board of Directors
- --------------------------------------
(Howard T. Cusic)
/s/ Gilbert. Bezar Director
- --------------------------------------
(Gilbert E. Bezar)
/s/ Thomas B. Boklund Director
- --------------------------------------
(Thomas B. Boklund)
/s/ Roger V. Carter Director
- --------------------------------------
(Roger V. Carter)
/s/ Nicholas P. Collins Director
- --------------------------------------
(Nicholas P. Collins)
/s/ David H. Leonard Director
- --------------------------------------
(David H. Leonard)
/s/ James S. Paddock Director
- --------------------------------------
(James S. Paddock)
/s/ James R. Pate Director
- --------------------------------------
(James R. Pate)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's report on Form 10-K for the period ended December 31, 1996, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<PERIOD-START> JAN-01-1996
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