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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10319
RMI TITANIUM COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-0875005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices)
(330) 544-7700
(Registrant's telephone number, including area code)
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 __
At May 1, 1998, 20,510,752 shares of common stock of the registrant were
outstanding.
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RMI TITANIUM COMPANY
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Introduction to Consolidated Financial Statements...... 2
Consolidated Statement of Income....................... 3
Consolidated Balance Sheet............................. 4
Consolidated Statement of Cash Flows................... 5
Consolidated Statement of Shareholders' Equity......... 6
Selected Notes to Consolidated Financial Statements.... 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................. 9
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 14
Signatures.................................................. 15
</TABLE>
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PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
RMI Titanium Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial information
presented reflects all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The results for the
interim periods are not necessarily indicative of the results to be expected for
the year.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
-----------------
1998 1997
---- ----
<S> <C> <C>
Sales....................................................... $89,039 $73,708
Operating costs:
Cost of Sales............................................... 63,521 57,932
Selling, general and administrative expenses................ 4,006 2,726
Research, technical and product development expenses........ 847 704
------- -------
Total operating costs.................................. 68,374 61,362
------- -------
Operating income............................................ 20,665 12,346
Other income-net............................................ 542 165
Interest expense............................................ 54 33
------- -------
Income before income taxes.................................. 21,153 12,478
Provision for income taxes (Note 3)......................... 6,100 1,560
------- -------
Net income.................................................. $15,053 $10,918
======= =======
Net income per common share:
Primary..................................................... $ 0.73 $ 0.54
======= =======
Diluted..................................................... $ 0.73 $ 0.52
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
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RMI TITANIUM COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41,059 $ 30,211
Receivables -- less allowance for doubtful accounts of
$1,084 and $1,064...................................... 69,807 70,898
Inventories............................................... 128,220 120,732
Deferred tax asset........................................ 1,211 4,811
Other current assets...................................... 5,873 5,903
-------- --------
Total current assets................................... 246,170 232,555
Property, plant and equipment, net of accumulated
depreciation........................................... 47,059 43,034
Noncurrent deferred tax asset............................. 5,157 5,157
Other noncurrent assets................................... 10,430 10,563
-------- --------
Total assets........................................... $308,816 $291,309
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 20,292 $ 25,346
Accrued wages and other employee costs.................... 9,229 8,024
Other accrued liabilities................................. 20,693 14,361
-------- --------
Total current liabilities.............................. 50,214 47,731
Long-term debt.............................................. -- --
Accrued postretirement benefit cost......................... 19,376 19,376
Other noncurrent liabilities................................ 2,850 3,029
-------- --------
Total liabilities...................................... 72,440 70,136
-------- --------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized; no shares outstanding...................... -- --
Common Stock, $0.01 par value, 30,000,000 shares
authorized; 21,088,053 and 21,022,253 shares issued.... 210 210
Additional paid-in capital................................ 237,970 236,970
Retained earnings (deficit)............................... 3,371 (11,682)
Deferred compensation..................................... (1,913) (1,100)
Treasury Common Stock at cost 577,301 and 575,485
shares................................................. (3,262) (3,225)
-------- --------
Total shareholders' equity.................................. 236,376 221,173
-------- --------
Total liabilities and shareholders' equity............. $308,816 $291,309
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1998 1997
---- ----
<S> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net income.................................................. $15,053 $10,918
Adjustment for items not affecting funds from operations:
Depreciation.............................................. 1,320 1,259
Deferred taxes............................................ 3,600 1,560
Other-net................................................. 106 122
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20,079 13,859
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CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables................................................. 1,091 (7,482)
Inventories................................................. (7,488) (2,068)
Accounts payable............................................ (5,054) 1,943
Other liabilities........................................... 7,358 1,821
Other assets................................................ 163 200
------- -------
(3,930) (5,586)
------- -------
Cash from operating activities......................... 16,149 8,273
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,345) (636)
------- -------
Cash used in investing activities...................... (5,345) (636)
------- -------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock................ 81 221
Debt repayments........................................... -- (2,930)
Treasury Common Stock purchased........................... (37) (147)
------- -------
Cash from (used in) from financing activities............. 44 (2,856)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 10,848 4,781
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ $30,211 $ 5,944
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $41,059 $10,725
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest (net of amounts capitalized).................. $ 10 $ 21
Income taxes........................................... $ 0 $ 130
Noncash financing activities:
Issuance of restricted stock........................... $ 919 $ 832
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDT'L. RETAINED TREASURY EXCESS
SHARES COMMON DEFERRED PAID-IN EARNINGS COMMON MINIMUM
OUTSTANDING STOCK COMPENSATION CAPITAL (DEFICIT) STOCK PENSION LIABILITY
----------- ------ ------------ -------- --------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996.................... 20,290,550 $208 $ (557) $234,958 $(71,767) $(3,078) $(1,028)
Shares issued for
Directors'
Compensation.............. 3,346 -- -- 87 -- -- --
Shares issued for
Restricted Stock Award
Plans................... 34,950 -- (832) 832 -- -- --
Compensation expense
recognized.............. -- -- 289 -- -- -- --
Treasury Common Stock
purchased at cost....... (7,287) -- -- -- -- (147) --
Shares issued from
exercise of employee
stock options........... 125,209 2 -- 1,093 -- -- --
Net income................ -- -- -- -- 60,085 -- --
Excess minimum pension
liability............... -- -- -- -- -- -- 1,028
---------- ---- ------- -------- -------- ------- -------
Balance at December 31,
1997.................... 20,446,768 $210 $(1,100) $236,970 $(11,682) $(3,225) $ --
Shares issued for
Directors'
Compensation.............. -- -- -- -- -- -- --
Shares issued for
Restricted Stock Award
Plans................... 45,125 -- (919) 919 -- -- --
Compensation expense
recognized.............. -- -- 106 -- -- -- --
Treasury Common Stock
purchased at cost....... (1,816) -- -- -- -- (37) --
Shares issued from
exercise of employee
stock options........... 20,675 -- -- 81 -- -- --
Net income................ -- -- -- -- 15,053 -- --
Excess minimum pension
liability............... -- -- -- -- -- -- --
---------- ---- ------- -------- -------- ------- -------
Balance at March 31,
1998.................... 20,510,752 $210 $(1,913) $237,970 $ 3,371 $(3,262) --
========== ==== ======= ======== ======== ======= =======
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
Balance at December 31,
1996.................... $ --
Shares issued for
Directors'
Compensation.............. --
Shares issued for
Restricted Stock Award
Plans................... --
Compensation expense
recognized.............. --
Treasury Common Stock
purchased at cost....... --
Shares issued from
exercise of employee
stock options........... --
Net income................ 60,085
Excess minimum pension
liability............... 1,028
-------
Balance at December 31,
1997.................... 61,113
=======
Shares issued for
Directors'
Compensation.............. --
Shares issued for
Restricted Stock Award
Plans................... --
Compensation expense
recognized.............. --
Treasury Common Stock
purchased at cost....... --
Shares issued from
exercise of employee
stock options........... --
Net income................ 15,053
Excess minimum pension
liability............... --
-------
Balance at March 31,
1998.................... $15,053
=======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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<PAGE> 8
RMI TITANIUM COMPANY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--GENERAL
The consolidated financial statements include the accounts of RMI Titanium
Company and its majority owned subsidiaries. All significant intercompany
transactions are eliminated. The Company's operations are conducted in one
business segment, the production and marketing of titanium metal and related
products.
On July 3, 1997, the Company acquired 90% of the common stock of Galt
Alloys, Inc., a manufacturer of ferrotitanium and a producer and worldwide
distributor of specialty alloys to ferrous and nonferrous customers. RMI's
investment in Galt amounts to an initial cash investment of $3 million and an
agreement to invest up to an additional $17 million to finance a major expansion
program at Galt, which is expected to be completed in the next 12 months.
Results of Galt's operations are consolidated with RMI as of the acquisition
date.
NOTE 2--ORGANIZATION
The Company is a successor to entities that have been operating in the
titanium industry since 1958. In 1990, USX Corporation ("USX") and Quantum
Chemical Corporation ("Quantum") transferred their entire ownership interest in
the Company's immediate predecessor, RMI Company, an Ohio general partnership,
to the Company in exchange for shares of the Company's Common Stock (the
"Reorganization"). Quantum then sold its shares to the public. USX retained
ownership of its shares. At March 31, 1998 approximately 27% of the outstanding
common stock was owned by USX.
In November, 1996, USX Corporation completed a public offering of its notes
exchangeable February, 2000, for 5,483,600 shares of RMI Common Stock, owned by
USX (or for an equivalent amount of cash at USX's option). Such shares represent
all of the RMI Common Stock owned by USX.
NOTE 3--INCOME TAXES
In the three month periods ended March 31, 1998 and 1997 the Company
recorded an income tax provision of $6.1 million and $1.6 million, respectively.
The effective tax rate for the three months ended March 31, 1998 and 1997 was
approximately 29 percent and 12 percent, respectively. The difference between
the statutory federal tax rate of 35 percent and the effective tax rate is
principally due to adjustments to the deferred tax asset valuation allowance
which existed at December 31 1997 and 1996 as it related to expected current
year results. Because of available net operating loss carryforwards, the amount
of current taxes expected to be paid in 1998 will be well below the level which
could be expected by applying the statutory federal tax rate of 35% to pretax
income.
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes," requires a valuation allowance when it is "more
likely than not" that some portion or all of the deferred tax assets will not be
realized. It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years." The ultimate realization of this deferred
income tax asset depends upon the Company's ability to generate sufficient
taxable income prior to the expiration of its loss carryforwards. The Company
has evaluated the available evidence supporting the realization of future
taxable income and, based upon that evaluation, believes it is more likely than
not at this time that a portion of its deferred tax assets will be realized. The
remaining valuation allowance was retained in light of the requirement in SFAS
No. 109 to give weight to objective evidence such as recent losses and the
historical titanium industry business cycle.
When preparing future periods' interim and annual financial statements, the
Company will periodically evaluate its strategic and business plans, in light of
evolving business conditions, and the valuation allowance will be adjusted for
changes in future income expectations resulting from that process.
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NOTE 4--CONTINGENCIES
In the ordinary course of business, the Company is subject to environmental
laws and regulations concerning the production, handling, storage,
transportation, emission, and disposal of waste materials and is also subject to
other federal and state laws and regulations regarding health and safety
matters. These laws and regulations are constantly evolving, and it is not
currently possible to predict accurately the ultimate effect these laws and
regulations will have on the Company in the future.
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Field Brooks Superfund Site. Given the status of the proceedings with respect to
these sites, ultimate investigative and remediation costs cannot presently be
accurately predicted, but could, in the aggregate, be material. Based on the
information available regarding the current ranges of estimated remediation
costs at currently active sites, and what the Company believes will be its
ultimate share of such costs, provisions for environmental-related costs have
been recorded. These provisions are in addition to amounts which have previously
been accrued for the Company's share of environmental study costs.
With regard to the Fields Brook Superfund Site, the Company, together with
31 other companies, has been identified by the EPA as a potentially responsible
party ("PRP") under Comprehensive Environmental Response, Compensation Liability
Act ("CERCLA") with respect to a superfund site defined as the Fields Brook
Watershed in Ashtabula, Ohio, which includes the Company's now closed Ashtabula
facilities. The EPA's 1986 estimate of the cost of remediation of the Fields
Brook operable sediment unit was $48 million. Recent studies, together with
improved remediation technology and redefined cleanup standards have resulted in
a more recent estimate of the remediation cost of approximately $25 million. The
actual cost of remediation may vary from the estimate depending upon any number
of factors.
The EPA, beginning in March 1989, ordered 22 of the PRPs to conduct a
design phase study for the sediment operable unit and a source control study.
These studies are nearly complete. The Company, working cooperatively with
fourteen others in accordance with two separate agreements, is complying with
the order. The Company has accrued and has been paying its portion of the cost
of such compliance. It is anticipated that the studies will be completed no
earlier than mid 1998. Actual cleanup will not commence prior to 1999. The
Company's share of the study costs has been established at 9.95%. In June, 1995,
the Company and twelve others entered into a Phase 2 (actual cleanup) allocation
agreement which assigns 9.44% of the cost to RMI. However, the actual percentage
may be more or less based on contributions from other parties which are not
currently participating in the Phase 2 allocation agreement.
At March 31, 1998, the amount accrued for future environmental-related
costs was $2.9 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $3.9 million to $6.7 million, in the
aggregate. The amount accrued is net of expected contributions from third
parties (which does not include any amounts from insurers) of approximately $2.1
million, which the Company believes are probable. The Company has been receiving
contributions from such third parties for a number of years as partial
reimbursement for costs incurred by the Company. As these proceedings continue
toward final resolution, amounts in excess of those already provided may be
necessary to discharge the Company from its obligations for these projects.
The ultimate resolution of these foregoing contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements. However, management believes that the Company will remain a viable
and competitive enterprise even though it is possible that these matters could
be resolved unfavorably.
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NOTE 5--INVENTORIES:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
MARCH 31, 1998
(UNAUDITED) DECEMBER 31, 1997
----------- -----------------
<S> <C> <C>
Raw material and supplies............................... $ 62,284 $ 55,542
Work-in-process and finished goods...................... 96,208 95,462
Adjustments to LIFO values.............................. (30,272) (30,272)
-------- --------
$128,220 $120,732
======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Selected Notes to
Consolidated Financial Statements. The following information contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are subject to the safe harbor created by
that Act. Such forward-looking statements include, without limitation,
statements regarding the future availability and prices of raw materials, the
competitiveness of the titanium industry, demand for the Company's products, the
historic cyclicality of the titanium and aerospace industries, uncertain defense
spending, long-term supply agreements, the ultimate determination of pending
trade petitions, global economic conditions, the Company's order backlog and the
conversion of that backlog into revenue and other statements contained herein
that are not historical facts. Because such forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. These and other risk factors are set forth below in
the "Outlook" section, as well as being described in the Company's other filings
with the Securities and Exchange Commission ("SEC") over the last 12 months,
copies of which are available from the SEC or may be obtained upon request from
the Company.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES
Net sales increased to $89.0 million, or 21% for the three months ended
March 31, 1998 compared to net sales of $73.7 million in the corresponding 1997
period. This sales increase is due primarily to increased average selling prices
for titanium mill products, and a shift in product mix to more value added
products such as sheet and plate, and away from commodity type products such as
billet and bloom. Shipments of titanium mill products in the first quarter of
1998 amounted to 4.9 million pounds compared to 4.8 million pounds in the first
quarter of 1997. Average selling prices on mill products in the first quarter of
1998 increased by approximately 10% to $15.06 per pound from $13.75 per pound in
the first quarter of 1997. Pricing on incoming orders for titanium mill products
continues to show improvement.
GROSS PROFIT
Gross profit amounted to $25.5 million, or 28.7% of sales for the quarter
ended March 31, 1998 compared to a gross profit of $15.8 million or 21.4% of
sales for the comparable 1997 period. This improvement results primarily from
increased profit margins on titanium mill products resulting from higher average
selling prices and a more favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $4.0 million for
the quarter ended March 31, 1998 compared to $2.7 million for the same quarter
in 1997. Research, technical and product development expenses amounted to $0.8
million in the first quarter of 1998 compared to $0.7 million in the first
quarter of 1997. The increase in selling, general and administrative expenses is
due primarily to increased levels of business activity and the acquisition of
Galt Alloys, Inc. Selling, general and administrative expenses together
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with research, technical and product development expenses amounted to
approximately 5.5% of sales in the first quarter of 1998 compared to 4.7% of
sales in the comparable 1997 period.
OPERATING INCOME
Operating income for the three months ended March 31, 1998 amounted to
$20.7 million, or 23.2% of sales compared to $12.3 million or 16.7% of sales in
the same period of 1997. This improvement results primarily from significant
increases in profit margins on mill products.
INCOME TAXES
In the first quarter of 1998, the Company recorded an income tax provision
of $6.1 million compared to a provision of $1.6 million in the first quarter of
1997. The effective federal tax rate for the first quarter of 1998 was
approximately 29%. The effective tax rate in the first quarter of 1997 was
approximately 12%. The difference between the statutory tax rate of 35% and the
effective tax rate for both the first quarter of 1998 and 1997 is principally
due to adjustments to the deferred tax asset valuation allowance which existed
at the preceding December 31 as it related to expected current year results.
Because of the availability of net operating loss carryforwards to offset
current taxable income, the amount of current taxes expected to be paid in 1998
will be well below the amount which could be expected by applying the statutory
federal tax rate of 35% to pretax income. See "Income Tax Considerations" and
"SFAS No. 109 Effects" below.
NET INCOME
Net income for the quarter ended March 31, 1998 amounted to $15.1 million
or 17% of sales compared to $10.9 million, or 14.8% of sales in the comparable
1997 period.
OUTLOOK
During the last three years, and continuing into 1998, the U.S. titanium
industry has experienced a significant increase in demand and pricing for
titanium mill products. This increase in demand has resulted primarily from an
unprecedented increase in demand from the commercial aerospace markets. During
the 1995-1997 period, most commercial airlines have reported stronger operating
profits. In order to meet increasing passenger load demands and the need to
replace older, less efficient aircraft, commercial airlines have been placing
orders for new and replacement aircraft at near record levels, and the leading
manufacturers of commercial aircraft have announced increased build and delivery
rates for certain aircraft. However, changing global or industry economic
conditions could cause the commercial airline industry or the aircraft
manufacturers to re-evaluate aircraft orders, thus affecting aircraft build
rates and the related demand for titanium mill products. RMI can give no
assurances as to the extent or duration of the increased demand in the
commercial aerospace market or the extent to which such recovery will result in
additional demand for titanium products.
On February 2, 1998, RMI entered into an agreement with Boeing Commercial
Airplane Group whereby RMI will supply Boeing and its family of commercial
suppliers with up to 4.5 million pounds of titanium products annually. The
agreement, beginning in 1999, will have an initial term of five years and,
subject to review by the parties in the fourth year, could be extended for an
additional five years. Under the accord, Boeing will receive firm prices in
exchange for RMI receiving a minimum volume commitment of 3.25 million pounds
per year, or approximately 50% of its current supply levels.
RMI has also been selected by military aircraft producers Boeing and
Northrop as the principal supplier of titanium alloy plate and alloy sheet
including just-in-time, cut-to-size products, for the C-17 Transport, F-15 Eagle
and the F/A-18 Hornet programs. The Hornet program includes the new E/F version
which utilizes considerably more titanium than earlier C/D models. The agreement
will begin with May 1999 requirements and runs through April 2001.
In another accord, RMI, through its French affiliate, Reamet, has been
chosen by Aerospatiale as the major supplier of the titanium flat rolled
products required for its Airbus programs beginning in 1999 and
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<PAGE> 12
extending through 2001. Requirements are principally for flat-rolled products,
including value added cut-to-size shapes.
The Company's total order backlog as of March 31, 1998 was approximately
$388 million, compared to $383 million at December 31, 1997.
Beginning in the second half of 1995 and continuing into 1998, the Company
has experienced a significant increase in the volume of incoming orders at
improving prices. The Company estimates that as of March 31, 1998, orders for
substantially all of its anticipated 1998 shipments have been booked or shipped
at average prices greater than its 1997 average realized mill product selling
price of $14.23 per pound. The Company's average realized mill product selling
price increased to $15.06 per pound in the first three months of 1998 compared
to $13.75 per pound in the first three months of 1997. The Company is currently
booking orders for titanium mill products for delivery in the first half of
1999. The increase in demand has been driven primarily by increased demand from
the commercial aerospace market.
Assuming a continuing robust aerospace market, RMI expects to continue as a
significant participant in the aerospace markets, and together with its new
market development efforts and expected growth in nonaerosapce application for
titanium believes, but cannot guarantee, it will be able to replace the reduced
Boeing supply community business. However, because of the titanium industry's
long-term supply and pricing arrangements with Boeing and others, aerospace
customers have become more resistant to significant price increases. While
higher average selling prices are anticipated for 1998, the Company does not
anticipate that the rate of pricing improvements in recent years can be
sustained indefinitely.
The increase in demand for titanium products has put upward pressure on
prices for certain raw materials used by the Company. Prices for the Company's
1998 titanium sponge requirements have been set under long-term supply contracts
and short-term arrangements. In the aggregate, the Company expects average
prices for titanium sponge purchases in 1998 will approximate 1997 levels. Due
to the increase in demand for titanium mill products, overall demand for
titanium scrap, which accounts for approximately 40% of the Company's raw
material requirements has also increased. Increased scrap generation by
fabricators could increase supplies and thereby put downward pressure on future
scrap prices; however, there is no certainty that supplies will increase or be
offset by other factors. Prices of certain alloying agents have also increased
as a result of increased demand. The Company has announced increased prices and
the implementation of metallic surcharges to recover increased raw material
costs, although there can be no assurances that the Company will continue to be
able to recover these costs.
The Company anticipates that, due to a three-week outage at its rolling
mill in April, second quarter 1998 shipments of plate and sheet will be reduced
by approximately 400,000 pounds impacting second quarter earnings. The shipments
are expected to be made up in the third and fourth quarters and, therefore, are
not expected to have an impact on 1998 annual earnings.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $16.1 million in the first
three months of 1998 compared to $8.3 million in the first three months of 1997.
The change in net cash flows from operating activities in the first three months
of 1998, compared to the comparable 1997 period was due primarily to
significantly improved results of operations. Working capital amounted to $196.0
million at March 31, 1998, compared to $184.8 million at December 31, 1997. The
increase in working capital results primarily from increases in cash and
inventory partially offset by increases in current liabilities. The Company's
working capital ratio was 4.9 to 1 at March 31, 1998.
During the first three months of 1998 and the comparable 1997 period, the
Company's cash flow requirements for capital expenditures were funded by cash
provided from operating activities.
The Company anticipates that it will be able to fund its 1998 working
capital requirements and its capital expenditures from funds generated by
operations. The Company's long-term liquidity requirements, including capital
expenditures, are expected to be financed by a combination of internally
generated funds, borrowings and other sources of external financing if needed.
11
<PAGE> 13
The Company is currently negotiating a new credit agreement to replace its
current $50 million unsecured revolving credit facility which matures April 14,
1999. There are currently no borrowings outstanding under the facility. An
agreement is expected to be in place by the end of the second quarter 1998.
INCOME TAX CONSIDERATIONS
SECTION 382 LIMITATION. At December 31, 1997, the Company had net operating
loss carryforwards of approximately $43 million available to reduce federal
taxable income through 2006. If an "ownership change" were to occur, the
utilization of net operating loss carryforwards would be subject to an annual
limitation. Generally, an ownership change occurs with respect to a corporation
if shareholders who own, directly or indirectly, 5% or more of the capital stock
of the corporation increase their aggregate percentage ownership of such stock
by more than 50 percentage points over the lowest percentage of such stock owned
by such shareholders at any time during a prescribed testing period. An
ownership change could result from equity transactions such as exercises of
stock options, purchases or sales of Common Stock by certain stockholders,
including USX and other issuances of Common Stock by the Company. If the annual
limitation were to apply, the amount of the limitation would generally equal the
product of (i) the fair market value of the Company's equity immediately prior
to the ownership change, with certain adjustments, including a possible
adjustment to exclude certain capital contributions made in the two years
preceding the date of the ownership change, and (ii) a long-term tax exempt bond
rate of return published monthly by the Internal Revenue Service. Should the
annual limitation apply, the Company believes that it would not materially
affect the potential use of the net operating loss carryforwards to reduce any
future income tax liabilities over time; however, it is possible that the
Company's results in a particular year could exceed the annual limitation, in
which case such excess would not be reduced by the net operating loss
carryforward and the Company's tax liability would be correspondingly higher.
SFAS NO. 109. EFFECTS. SFAS 109 requires a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. It further states that forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred income tax assets depends on the Company's ability to
generate sufficient taxable income in the future.
When preparing future periods' interim and annual financial statements, the
Company will periodically evaluate its strategic and business plans, in light of
evolving business conditions, and the valuation allowance will be adjusted for
future income expectations resulting from that process, to the extent different
from those inherent in the current valuation allowance. In making an assessment
of realizability at March 31, 1998, the Company considered a number of factors
including the improved profitability in 1998 as a result of increased sales,
product pricing and gross margins, when compared to expectations inherent in the
December 31, 1997 valuation allowance. Accordingly, the valuation allowance was
adjusted for the difference between such revised future income expectations and
those inherent in the valuation allowance at December 31, 1997.
At December 31, 1997, approximately $16 million of the available net
operating loss carryforwards had not yet been recognized for SFAS 109 purposes.
If the Company were to achieve operating results in 1998 similar to those
achieved in 1997, the remaining valuation allowance relating to net operating
loss carryforwards would be recognized in the effective rate calculation for the
year, resulting in an effective book tax rate below the statutory federal rate
of 35%, but somewhat higher than the 1997 effective rate of 10.3%. Should this
occur, the entire amount of the Company's net operating loss carryforwards will
be utilized for SFAS 109 purposes in 1998.
For federal income tax return purpose, the amount of remaining net
operating loss carryforwards at December 31, 1997 amounted to approximately $43
million, which are available to offset future taxable income. If the Company
were to generate sufficient taxable income, the currently available net
operating loss carryforwards could be fully utilized in 1998. Because of the
availability of these net operating loss carryforwards to offset taxable income,
the Company estimates that actual cash payments for federal income taxes in 1998
will be well below the level which could be expected by applying the statutory
federal tax rate of 35% to pretax income.
12
<PAGE> 14
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations as well as
various health and safety laws and regulations that are subject to frequent
modifications and revisions. While the costs of compliance for these matters
have not had a material adverse impact on RMI in the past, it is impossible to
predict accurately the ultimate effect these changing laws and regulations may
have on the Company in the future.
At March 31, 1998, the amount accrued for future environment-related costs
was $2.9 million. Based on available information, RMI believes its share of
potential environmental-related costs, before expected contributions from third
parties, is in a range from $3.9 million to $6.7 million, in the aggregate. The
amount accrued is net of expected contributions from third parties (which does
not include any amounts from insurers) of approximately $2.1 million, which the
Company believes are probable. The Company has received contributions from such
third parties for a number of years as partial reimbursement for costs incurred
by the Company. As these proceedings continue toward final resolution, amounts
in excess of those already provided may be necessary to discharge the Company
from its obligations for these projects.
The ultimate resolution of these environmental matters could individually,
or in the aggregate, be material to the consolidated financial statements.
However, management believes that the Company will remain a viable and
competitive enterprise even though it is possible that these matters could be
resolved unfavorably.
CAPITAL EXPENDITURES
Gross capital expenditures the first three months of 1998 and 1997 amounted
to $5.3 and $0.6 million, respectively. The Company has anticipated capital
spending of approximately $35 to $40 million in 1998. RMI anticipates that
current capital spending plans can be funded using cash provided from internally
generated sources. New Accounting Standards
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. The Company adopted the
provisions of SFAS No. 130 in its consolidated financial statements for the
three months ending March 31, 1998. SFAS No. 131 requires certain disclosures
about segment information in interim and annual financial statements and related
information about products and services, geographic areas and major customers.
The Company must adopt the provisions of SFAS No. 131 for its consolidated
financial statements for the year ending December 31, 1998.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
application software to ensure the Company is Year 2000 compliant. In addition,
the Company is monitoring the compliance efforts of entities with which it
interacts. The Company estimates that approximately 90% of its internally
developed proprietary software has been modified to make it Year 2000 compliant.
While it is not possible at present to accurately estimate the incremental cost
of this effort, the Company does not anticipate it will have a material impact
on the long-term results of operations, liquidity or consolidated financial
position of the Company. This discussion of RMI's efforts and management's
expectations relating to the effect of Year 2000 compliance on operating results
are forward looking statements. RMI's ability to achieve Year 2000 compliance
and the level of incremental costs associated therewith could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, vendors' ability to modify proprietary software and
unanticipated problems identified in the ongoing compliance review. In addition,
RMI has limited or no control over the actions of proprietary software vendors
and other entities with which it interacts. Therefore, Year 2000 compliance
problems experienced by these entities could adversely affect the results of the
Company.
13
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held on April 24, 1998. In
connection with the meeting, proxies were solicited pursuant to the Securities
Exchange Act. The following are the voting results on proposals considered and
voted upon at the meeting, all of which were described in the proxy statement.
1. All nominees for directors listed in the proxy statement were elected.
Listed below are the names of each director elected, together with their
individual vote totals.
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
---------- ---------
<S> <C> <C>
Craig R. Andersson................................... 16,274,540 2,183,269
Neil A. Armstrong.................................... 16,273,933 2,183,876
Daniel I. Booker..................................... 16,299,653 2,158,174
Ronald L. Gallatin................................... 16,298,719 2,159,090
Charles C. Gedeon.................................... 16,272,610 2,185,199
Robert M. Hernandez.................................. 16,067,088 2,390,721
Dana J. Johnson...................................... 16,288,828 2,168,981
John H. Odle......................................... 16,275,385 2,182,424
Timothy G. Rupert.................................... 16,274,585 2,183,224
Wesley W. von Schack................................. 16,298,933 2,158,876
</TABLE>
2. Price Waterhouse LLP was elected as independent accountants for 1998:
For, 16,544,987; against 17,597; abstained; 1,895,225.
3. Proposal to amend the Company's Articles of Incorporation to increase
the authorized number of Common Shares from 30,000,000 to 80,000,000. A
2/3 majority of all outstanding shares eligible to vote was required to
amend the Articles of Incorporation. 12,669,653 shares (62% of the
outstanding shares) voted for and 5,100,028 shares (25% of the
outstanding shares) voted against the proposal. 2,710,000 shares
abstained from voting or were not voted. The required 2/3 majority was
not obtained and the proposal was not approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Articles of Incorporation of the Company, as amended June 9, 1997,
incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated June 10, 1997.
3.2 Amended Code of Regulations of the Company, incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.1 Employment agreement, dated March 6, 1998 between the Company and
Lawrence W. Jacobs, filed herewith.
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed for the quarter ended March 31,
1998.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RMI TITANIUM COMPANY
--------------------------------------
(Registrant)
Date: May 8, 1998
By: /s/ T. G. RUPERT
------------------------------------
T. G. Rupert
Executive Vice President & Chief
Financial Officer
15
<PAGE> 1
EXHIBIT 10.1
March 6, 1998
Mr. Lawrence W. Jacobs
32 Fox Pointe Drive
Pittsburgh, PA 15238
Dear Mr. Jacobs:
This Letter Agreement sets forth the basis upon which I have been authorized by
the Board of Directors of RMI Titanium Company ("Company") to employ you in the
executive officer position described in Paragraph 1 below for the Employment
Period (as hereinafter defined). The "Employment Period" shall initially be the
period May 1, 1998 through April 30, 2001; provided, however, that on May 1,
2001 and each May 1 thereafter, the Employment Period shall automatically be
extended for one additional year unless, not later than the immediately
preceding January 1, either you or the Company shall have given written notice
to the other that you or it does not wish to extend the Employment Period; and
provided further that the Employment Period shall terminate automatically when
you attain age sixty-five (65). In the event this Letter Agreement is terminated
for any reason other than your death, your obligations as set forth in Paragraph
9 shall survive and be enforceable notwithstanding such termination.
1. During the Employment Period, you will serve as Vice President &
Treasurer of the Company (or on any other executive officer position
within the Company to which you may hereafter be elected by the
Company's Board of Directors), performing all duties and functions
appropriate to that office, as well as such additional duties as the
Company's Executive Vice President & Chief Financial Officer or Board of
Directors may, from time to time, assign to you. During the Employment
Period, you will devote your full time and best efforts to the
performance of all such duties.
2. During the Employment Period, the Company will pay you, in equal monthly
installments, as compensation for your services an annual salary of
$100,000.00. This annual salary may be increased from time to time in
the sole discretion of the Company, but may only be decreased by the
Company with your written consent. Such annual salary, whether increased
or decreased, shall constitute your "Base Salary". In addition, you may
be awarded such bonuses as the Board of Directors of the Company
determines to be appropriate under the Company's Annual Incentive
Compensation Plan or any successor bonus plan. You will also be eligible
to participate in the Company's 1995 Stock Plan, or any successor stock
plan.
3. In the event of your death during the Employment Period, your right to
all compensation under this Letter Agreement allocable to days
subsequent to your death shall terminate and no further payments shall
be due to you, your personal representative, or your estate, except for
that portion, if any, of your Base Salary that is accrued and unpaid
upon the date of your death.
4. In the event you become physically or mentally disabled, in the sole
judgment of physicians selected by the Company's Board of Directors,
such that you cannot perform the duties and functions contracted for
pursuant to this Letter Agreement, and should such disability continue
for at least 180 consecutive days (or in the judgment of such
physicians, be likely to continue for at least 180 consecutive days),
the Company may terminate your employment upon written notice to you. If
your employment is terminated because of physical or mental disability,
your right to all compensation under this Letter Agreement allocable to
days subsequent to such termination shall terminate and no further
payments shall be due to you, your personal representative, or your
estate, except for that portion, if any, of your Base Salary that is
accrued and unpaid upon the date of termination.
5. The Company may, upon written notice to you fixing the date of
termination, terminate your services during the Employment Period for
Cause, (as Cause is defined in Paragraph 7(c) below). In such event,
your right to receive continued compensation under this Letter Agreement
will terminate and no further installments will be paid to you, except
for that portion, if any, of your Base Salary that is accrued and unpaid
upon the date of termination.
17
<PAGE> 2
6. In addition to your annual Base Salary as set forth in Paragraph 2
above, you will be entitled in each calendar year to a vacation with pay
in accordance with the vacation policies of the Company. You will also
be entitled to: (1) participate in all of the Company's existing and
future employee benefit programs applicable to officers of the Company
in accordance with the terms of such benefit program plan documents; (2)
receive one comprehensive physical examination, at Company expense, in
each calendar year, such examination to be conducted by the Cleveland
Clinic or comparable facility and provided in accordance with terms and
conditions comparable to those applicable to medical examinations for
USX executive officers; and (3) tax preparation and financial planning
advice under terms and conditions comparable to those applicable to USX
executive management.
7. Change of Control Provisions
(a) For purposes of this Letter Agreement, a "Change in Control" of the
Company shall mean a change in control of a nature that would be
required to be reported by it in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), whether or not the Company
is then subject to such reporting requirement; provided, that,
without limitation, such a change in control shall be deemed to have
occurred if:
(1) Any person (within the meaning of that term as used in Sections
13(d) and 14(d) of the Exchange Act (a "Person") is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing twenty percent (20%) or more of the combined
voting power of the Company's then outstanding voting securities;
provided, however, that for purposes of this Agreement the term
"Person" shall not include (i) the Company or any of its
majority-owned subsidiaries, (ii) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company
or any of its subsidiaries, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or
(iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions
as their ownership of stock of the Company, (v) USX Corporation;
or
(2) The following individuals cease for any reason to constitute a
majority of the number of directors then serving on the Board of
Directors of the Company; individuals who, on the date hereof,
are serving as directors on the Board and any new director (other
than a director whose initial assumption of office is in
connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to
the election of directors of the Company) whose appointment or
election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds ( 2/3)
of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomination
for election was previously so approved, or
(3) There is consummated a merger or consolidation of the Company or
a subsidiary thereof with any other corporation, other than a
merger or consolidation which would result in the holders of the
voting securities of the Company outstanding immediately prior
thereto holding securities which represent immediately after such
merger or consolidation at least 50% of the combined voting power
of the voting securities of the entity surviving the merger or
consolidation, (or the parent of such surviving entity) or the
shareholders of the Company approve a plan of complete
liquidation of the Company, or there is consummated the sale or
other disposition of all or substantially all of the
Corporation's assets.
(b) If any of the events described above constituting a Change in
Control of the Company shall have occurred, you shall be entitled to
the benefits provided in Paragraph 7(f) hereof upon the termination
of your employment during the term of this Letter Agreement unless
such termination is (i) because of your death or disability, (ii) by
the Company for Cause, (iii) by you other than for Good Reason, or
(iv) on or after the date that you attain age sixty-five (65). In
the event your employment with the Company is terminated for any
reason prior to the
18
<PAGE> 3
occurrence of a Change in Control, you shall not be entitled to any
benefits under this Paragraph 7; provided, however, that if your
employment is terminated prior to a Change in Control without Cause
at the direction of a person who has entered into an agreement with
the Company, the consummation of which will constitute a Change in
Control, your employment shall be deemed to have terminated following
a Change in Control. Your entitlement to benefits under any of the
Company's retirement plans will not adversely affect your rights to
receive payments hereunder.
(c) Termination by the Company of your employment for "Cause" shall mean
termination upon (i) the willful and continued failure by you to
substantially perform your duties with the Company (other than any
such failure resulting from termination by you for Good Reason),
after a demand for substantial performance is delivered to you that
specifically identifies the manner in which the Company believes
that you have not substantially performed your duties, and you have
failed to resume substantial performance of your duties on a
continuous basis within fourteen (14) days of receiving such demand,
(ii) the willful engaging by you in conduct which is demonstrably
and materially injurious to the Company, monetarily or otherwise or
(iii) your conviction of any felony or conviction of a misdemeanor
which impairs your ability substantially to perform your duties with
the Company. For purposes of this paragraph, no act, or failure to
act, on your part shall be deemed "willful" unless done, or omitted
to be done, by you not in good faith and without reasonable belief
that your action or omission was in the best interest of the
Company.
(d) For purposes of this Letter Agreement, "Good Reason" shall mean,
without your express written consent, the occurrence after a Change
in Control of the Company of any one or more of the following:
(1) The assignment to you of duties inconsistent with your position
immediately prior to the Change in Control;
(2) A reduction or alteration in the nature of your position, duties,
status or responsibilities from those in effect immediately prior
to the Change in Control;
(3) The failure by the Company to continue in effect any of the
Company's employee benefit plans, programs, policies, practices
or arrangements in which you participate (or substantially
equivalent successor or replacement employee benefit plans,
programs, policies, practices or arrangements) or the failure by
the Company to continue your participation therein on
substantially the same basis, both in terms of the amount of
benefits provided and the level of your participation relative to
other participants, as existed immediately prior to the Change in
Control;
(4) The failure of the Company to obtain a satisfactory agreement
from any successor to the Company to assume and agree to perform
this Letter Agreement;
(5) Any purported termination by the Company of your employment that
is not effected pursuant to a Notice of Termination satisfying
the requirements of Subparagraph (e) below, and for purposes of
this Letter Agreement, no such purported termination shall be
effective; and
(6) The Company's requiring you to be based at a location in excess
of fifty (50) miles from the location where you are based
immediately prior to the Change in Control.
(e) Any termination by the Company for Cause or by you for Good Reason
shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Letter Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate the
specific termination provision in this Letter Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of your employment under
the provision so indicated.
19
<PAGE> 4
(f) Following a Change in Control of the Company, as defined above, upon
termination of your employment you shall be entitled to the
following benefits:
(1) If your employment shall be terminated by the Company for Cause
or by you other than for Good Reason, the Company shall pay you
your full Base Salary through the date of termination at the rate
in effect at the time Notice of Termination is given, plus all
other amounts to which you are entitled under any compensation
plan of the Company at the time such payments are due, and the
Company shall have no further obligations to you under this
Agreement.
(2) If your employment terminates by reason of your death or
disability, your benefits shall be determined in accordance with
Paragraphs 3 and 4 of this Letter Agreement and the Company's
retirement, survivor's benefits, insurance and other applicable
programs and plans, then in effect.
(3) If your employment by the Company shall be terminated (i) by the
Company other than for Cause, your death or disability, or (ii)
by you for Good Reason, you shall be entitled to the benefits
(the "Severance Payments") provided in Paragraphs 7(f)(3), (i),
(ii), (iii), (iv) and (v) following, which Severance Payments
shall be in lieu of and cancel any further rights you have to
receive any Base Salary that would be otherwise due under
Paragraph 2 of this Letter Agreement:
(i) The Company shall pay you your full Base Salary through the
date of termination at the rate in effect at the time
Notice of Termination is given;
(ii) The Company will pay as severance benefits to you, not
later than the fifth day following the date of termination,
a lump sum severance payment (the "Severance Payment")
equal to the product of (1) a fraction, the numerator of
which is equal to the lesser of (x) twenty-four (24) or (y)
the number of full and partial months existing between the
date of termination and your sixty-fifth (65th) birthday
and the denominator of which is equal to twelve (12), and
(2) the sum of (x) your annual Base Salary in effect
immediately prior to the occurrence of the circumstances
giving rise to such termination, and (y) the amount, if
any, of the arithmetic average of the annual bonuses
awarded to you under any annual bonus plan of the Company
calculated using the two (2) years immediately preceding
date of termination;
(iii) The Options previously issued to you under any option or
incentive plan of the Company to purchase shares of Common
Stock of the Company (Option Shares), as well as any
previously unvested shares of Restricted Stock granted to
you, shall irrevocably vest upon any such termination and
the stock options for such Option Shares shall become
thereafter uncancellable by the Company;
(iv) In the event that you become entitled to the Severance
Payments, if any of the Severance Payments or other portion
of the Total Payments (as defined below) will be subject to
the tax (the "Excise Tax") imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), the
Company shall pay to you at the time specified below, an
additional amount (the "Gross-Up Payment") such that the net
amount retained by you, after deduction of (1) any Excise
Tax on the Severance Payments and such other Total Payments,
and (2) any federal, state and local income tax, FICA-Health
Insurance tax, and Excise Tax upon the payment provided for
by this paragraph, shall be equal to the Severance Payments
and such other total Payments. For purposes of determining
whether any of the payments will be subject to the Excise
Tax and the amount of such Excise Tax, (1) any other
payments or benefits received or to be received by you in
connection with a Change in Control of the Company or your
termination of employment whether pursuant to the terms of
this Letter Agreement or any other plan, arrangement or
agreement with the
20
<PAGE> 5
Company, any person whose actions result in a Change of
Control of the Company or any person affiliated with the
Company or such person (together with the Severance Payment,
the "Total Payments") shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning
of Section 280G(b)(1) shall be treated as subject to the
Excise Tax, except to the extent that in the opinion of tax
counsel selected by the Company's independent auditors and
acceptable by you such other payments or benefits (in whole
or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within
the meaning of Section 280G(b)(4) of the Code in excess of
the base amount within the meaning of Section 280G(b)(3) of
the Code, or are otherwise not subject to the Excise Tax, (2)
the amount of the Total Payments which shall be treated as
subject to the Excise Tax shall be equal to the lesser of (A)
the total amount of the Total Payments or (B) the amount of
excess parachute payments within the meaning of Section
280G(b)(1) (after applying clause (1), above), and (3) the
value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent
auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code. For purposes of determining
the amount of the Gross-Up Payment, you shall be deemed to
pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income
taxes at the highest marginal rate of taxation in the state
and locality of your residence on the date of termination,
net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local
taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount taken into account
hereunder at the time of termination of your employment, you
shall repay to the Company at the time that the amount of
such reduction in Excise Tax is finally determined the
portion of the Gross-Up Payment attributable to such
reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal and state and
local income tax imposed on the Gross-Up Payment being repaid
by you if such repayment results in a reduction in Excise Tax
and/or a federal and state and local income tax deduction)
plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. In the event
that the Excise Tax is determined to exceed the amount taken
into account hereunder at the time of the termination of your
employment (including by reason of any payment the existence
or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall make an additional
Gross-Up Payment in respect of such excess (plus any interest
payable with respect to such excess) at the time that the
amount of such excess is finally determined.
The payments provided for in the paragraph above shall be
made not later than the fifth day following the date of
termination; provided, however, that if the amounts of such
payments cannot be finally determined on or before such day,
the Company shall pay to you on such day an estimate as
determined in good faith by the Company of the minimum amount
of such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth day
after the date of termination. In the event that the amount
of the estimated payments exceeds the amount subsequently
determined to have been due, such excess shall constitute a
loan by the Company to you payable on the fifth day after
demand by the Company (together with interest at the rate
provided in Section 1274(b)(2)(B) of the Code);
21
<PAGE> 6
(v) The Company shall also pay to you all legal fees and expenses
incurred by you as a result of such termination of employment
(including all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to
obtain or enforce any right or benefit provided by this
Letter Agreement or in connection with any tax audit or
proceeding to the extent attributable to the application of
Section 4999 of the Code to any payment or benefit provided
hereunder); and
(vi) For a twenty-four (24) month period after date of
termination, the Company will arrange to provide you at the
Company's expense with life, disability, accident and health
insurance benefits substantially similar to those which you
were receiving immediately prior to the Notice of
Termination; but benefits otherwise receivable by you
pursuant to this paragraph shall be reduced to the extent
comparable benefits are actually received by you during the
twenty-four (24) month period following your termination,
and any such benefits actually received by you shall be
reported to the Company.
(h) You shall not be required to mitigate the amount of any Severance
Payments provided for in this Paragraph 7 by seeking other
employment or otherwise, nor, except as provided in Paragraph (vi)
above, shall the amount of any payment or benefit provided for in
this Paragraph 7 be reduced by any compensation or benefit earned by
you as the result of employment by another employer after the date
of termination, or otherwise.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Company or of any division or subsidiary thereof employing
you to expressly assume and agree to perform this Letter
Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any
such succession shall be a breach of this Letter Agreement
and shall entitle you to compensation from the Company in the
same amount and on the same terms as you would be entitled
hereunder if you terminate your employment for Good Reason.
8. This Letter Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be
payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Letter Agreement, to your
devisee, legatee or other designee or, if there is not such
designee, to your estate.
9. As additional consideration for the compensation and benefits
provided to you pursuant to this Letter Agreement, you agree that
you will not, for a period of twenty-four (24) months after the
end of the Employment Period, or the termination of your
employment with the Company (whichever first occurs), directly or
indirectly, compete with, engage in the same business as, be
employed by, act a consultant to, or be a director, officer,
employee, owner or partner, or otherwise participate in or assist
(including, without limitation, by soliciting customers for, or
individuals to provide services to), any business or organization
which competes with the Company; provided, that this restriction
shall not apply if you terminate your employment with the Company
for Good Reason after a Change in Control of the Company. For
purposes of this Paragraph 9, you will not be deemed to have
breached your commitment merely because you own, directly or
indirectly, not more than one percent (1%) of the outstanding
common stock of such a corporation if, at the time you acquire
such stock, such stock is listed on a national securities
exchange or is regularly traded in the over-the-counter market by
a member of either a national securities exchange or the National
Association of Securities Dealers, Inc. In order to protect the
interest of the
22
<PAGE> 7
Company, you will also maintain in strict confidence and not
disclose to any other person or entity any information received
from any source in the Company or developed by you in the course
of performing your duties for the Company. This obligation shall
not extend to: (a) anything you can establish as known to you from
a source outside the Company, (b) anything which has been
published or becomes published hereafter other than by you, or (c)
anything which you receive from a non-Company source without
restriction on its disclosure. Should you breach or threaten to
breach the commitments in this Paragraph 9, and in recognition of
the fact that the Company would not under such circumstances be
adequately compensated by money damages, the Company shall be
entitled, in addition to any other rights and remedies available
to it, to an injunction restraining you from such breach. Further,
you acknowledge and agree that the provisions of this Paragraph 9
are necessary, reasonable, and proportionate to protect the
Company during such non-competition period.
10. The validity, interpretation, construction and performance of
this Letter Agreement shall be governed by the laws of the State
of Ohio.
If the provisions of this Letter Agreement are acceptable to you, please sign
one original copy of this Letter Agreement and return it to me. You may retain
the second signed original for your files.
Very truly yours,
RMI TITANIUM COMPANY
By:
--------------------------------------------------------
Timothy G. Rupert
Executive Vice President &
Chief Financial Officer
CONFIRMED:
Date:
--------------------------------------
- ---------------------------------------------
LAWRENCE W. JACOBS
23
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