SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
X
1934 - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-5467
VALHI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0110150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 233-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common stock New York Stock Exchange
($.01 par value per share) Pacific Stock Exchange
9.25% Liquid Yield Option New York Stock Exchange
Notes,
due October 20, 2007
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
INDICATE BY CHECK MARK IF 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 REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
X
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
AS OF FEBRUARY 28, 1998, 114,633,114 SHARES OF COMMON STOCK WERE OUTSTANDING.
THE AGGREGATE MARKET VALUE OF THE 8.6 MILLION SHARES OF VOTING STOCK HELD BY
NONAFFILIATES OF VALHI, INC. AS OF SUCH DATE APPROXIMATED $82.9 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED BY PART III IS INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE COMMISSION PURSUANT
TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE END OF THE FISCAL YEAR
COVERED BY THIS REPORT.
[INSIDE FRONT COVER]
A chart showing (i) Valhi's 57% ownership of NL Industries, Inc., (ii)
Valhi's 62% ownership of CompX International Inc. and (iii) Valhi's 58%
ownership of Waste Control Specialists LLC.
PART I
ITEM 1. BUSINESS
Valhi, Inc. (NYSE: VHI), based in Dallas, Texas, has continuing operations
through majority-owned subsidiaries in the chemicals, component products and
waste management industries. Information regarding the Company's business
segments and the operating subsidiaries conducting such businesses is set forth
below. Business and geographic segment financial information is included in
Note 2 to the Company's Consolidated Financial Statements, which information is
incorporated herein by reference.
Chemicals NL is the world's fourth-largest
NL Industries, Inc. producer of titanium dioxide
pigments ("TiO2"), which are used
for imparting whiteness,
brightness and opacity to a wide
range of products including
paints, plastics, paper, fibers
and other "quality-of-life"
products. NL had an estimated 12%
share of worldwide TiO2 sales
volume in 1997. NL has production
facilities throughout Europe and
North America.
Component Products CompX is a leading manufacturer of
CompX International Inc. ergonomic computer support
systems, precision ball bearing
slides and medium-security
mechanical locks for office
furniture and a variety of other
markets.
Waste Management Waste Control Specialists, formed
Waste Control Specialists in 1995, commenced operations for
LLC the processing, treatment, storage
and disposal of hazardous and
toxic wastes at its West Texas
facility in early 1997. Waste
Control Specialists is also
seeking authorizations for, among
other things, the processing,
treatment, storage and disposal of
low-level and mixed radioactive
wastes.
Valhi, a Delaware corporation, is the successor of the 1987 merger of LLC
Corporation and The Amalgamated Sugar Company. Contran Corporation holds,
directly or through subsidiaries, approximately 93% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held
by trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons is
Chairman of the Board, President and Chief Executive Officer of Contran and
Valhi and may be deemed to control such companies.
Discontinued operations consist of the Company's former building products
and fast food operations. See Note 18 to the Consolidated Financial Statements.
In early 1997, the Company completed the transfer of control of the refined
sugar operations previously conducted by the Company to Snake River Sugar
Company, an Oregon agricultural cooperative formed by certain sugarbeet growers.
See Note 19 to the Consolidated Financial Statements. In January 1998, NL sold
its specialty chemicals business unit. See Note 20 to the Consolidated
Financial Statements. In March 1998, CompX (i) acquired a lock competitor and
(ii) issued approximately 6 million shares of its common stock in an initial
public offering, thereby reducing the Company's ownership in CompX to 62%. See
Note 20 to the Consolidated Financial Statements.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts including, but not limited to, statements found in this
Item 1 - "Business," Item 3 - "Legal Proceedings," and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements that involve risks and uncertainties. Factors that
could cause actual future results to differ materially from those expressed in
such forward-looking statements include, but are not limited to, future supply
and demand for the Company's products (including cyclicality thereof), general
economic conditions, competitive products, customer and competitor strategies,
the impact of pricing and production decisions, environmental matters,
government regulations and possible changes therein, the ultimate resolution of
pending litigation and possible future litigation and other risks and
uncertainties discussed elsewhere herein in this Annual Report, including,
without limitation, the sections referenced above.
CHEMICALS - NL INDUSTRIES, INC.
NL Industries (NYSE: NL) is an international producer and marketer of TiO2
to customers in over 100 countries from facilities located throughout Europe and
North America. NL's TiO2 operations are conducted through its wholly-owned
subsidiary, Kronos, Inc. Kronos is the world's fourth-largest TiO2 producer,
with an estimated 12% share of worldwide TiO2 sales volume in 1997.
Approximately one-half of Kronos' 1997 sales volume was in Europe, where Kronos
is the second-largest producer of TiO2. In January 1998, NL sold its smaller
specialty chemicals business unit. See Note 20 to the Consolidated Financial
Statements. In 1997, Ti02 accounted for 85% of NL's net sales and specialty
chemicals accounted for 15%.
NL's objective is to maximize its total shareholder returns by (i) focusing
on continued cost control, (ii) acquiring additional Ti02 production capacity,
(iii) investing in certain cost effective debottlenecking projects which also
increase TiO2 production capacity and productivity and (iv) reducing outstanding
debt.
Products and operations. Titanium dioxide pigments are chemical products
used for imparting whiteness, brightness and opacity to a wide range of
products, including paints, paper, plastics, fibers and ceramics. TiO2 is
considered to be a "quality-of-life" product with demand affected by the gross
domestic product in various regions of the world.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. Following an upturn in TiO2 prices that began in the third quarter of
1993, NL's average TiO2 selling prices declined during the last half of 1995,
which decline continued during 1996 and into early in 1997. Beginning in the
second quarter of 1997, NL's average TiO2 selling prices began to increase. At
the end of 1997, NL's average TiO2 selling prices were 12% higher than year-end
1996. NL expects TiO2 selling prices will continue to increase during 1998 as
the impact of announced price increases take effect. Industry-wide demand for
TiO2 grew in 1997, and Kronos set a record for TiO2 sales volume for the second
consecutive year. Kronos' record 1997 sales volume was about 10% higher than
the previous record set in 1996 (1996 was 6% higher than 1995 sales volume).
NL's expectations as to the future prospects of the TiO2 industry and prices are
based on a number of factors beyond NL's control, including continued worldwide
growth of gross domestic product, competition in the market place, unexpected or
earlier-than-expected capacity additions and technological advancements. If
actual developments differ from NL's expectations, NL and the TiO2 industry's
future performance could be unfavorably affected.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 13% share of North American TiO2 sales volume. Consumption per capita
in the United States and Western Europe far exceeds that in other areas of the
world and these regions are expected to continue to be the largest consumers of
TiO2. A significant region for TiO2 consumption could emerge in Eastern Europe,
the Far East and China if the economies in these countries develop to the point
where quality-of-life products, including TiO2, are in greater demand. Kronos
believes that, due to its strong presence in Western Europe, it is well
positioned to participate in potential growth in consumption of Ti02 in Eastern
European.
NL believes that there are no effective substitutes for TiO2. However,
extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used in a number of Kronos' markets. Generally, extenders are used to reduce to
some extent the utilization of higher cost TiO2. The use of extenders has not
significantly changed anticipated TiO2 consumption over the past decade because
extenders generally have, to date, failed to match the performance
characteristics of TiO2. As a result, NL believes that the use of extenders
will not materially alter the growth of the TiO2 business in the foreseeable
future.
NL currently produces over 40 different TiO2 grades, sold under the Kronos
and Titanox trademarks, which provide a variety of performance properties to
meet customers' specific requirements. Major TiO2 customers include
international paint, paper and plastics manufacturers. Kronos and its
distributors and agents sell and provide technical services for its products to
over 4,000 customers with the majority of sales in Europe and North America.
Kronos and its predecessors have produced and marketed TiO2 in North
America and Europe for over 70 years. As a result, Kronos believes that it has
developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, about one-half of Kronos' 1997 TiO2 sales were to Europe, with 36%
attributable to North America and the balance to export markets. Kronos'
international operations are conducted through Kronos International, Inc.
("KII"), a German-based holding company formed in 1989 to manage and coordinate
NL's manufacturing operations in Europe and Canada.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process described below), and
the manufacture and sale of iron-based water treatment chemicals (derived from
co-products of the pigment production processes). Water treatment chemicals are
used as treatment and conditioning agents for industrial effluents and municipal
wastewater, and in the manufacture of iron pigments.
Manufacturing process, properties and raw materials. TiO2 is manufactured
by Kronos using both the chloride process and the sulfate process.
Approximately two-thirds of Kronos' current production capacity is based on its
chloride process, which generates less waste than the sulfate process. Although
most end-use applications can use pigments produced by either process, chloride
process pigments are generally preferred in certain segments of the coatings and
plastics applications, and sulfate process pigments are generally preferred for
certain paper, fibers and ceramics applications. Due to environmental factors
and customer considerations, the proportion of TiO2 industry sales represented
by chloride process pigments has increased relative to sulfate process pigments
in the past few years, and chloride process production facilities in 1997
represented almost 60% of worldwide industry capacity.
Kronos currently has four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec and, through a manufacturing
joint venture discussed below, a one-half interest in a plant in Lake Charles,
Louisiana. Kronos' principal German operating subsidiary leases the land under
its Leverkusen production facility pursuant to a lease expiring in 2050. The
Leverkusen plant, with almost one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen plant. Both the lease and supplies and services
agreement restrict NL's ability to transfer ownership or use of the Leverkusen
plant. Kronos also has a governmental concession with an unlimited term to
operate its ilmenite mine in Norway.
Kronos' TiO2 production in 1997 was a record 408,000 metric tons, compared
to 373,000 metric tons in 1996 and 393,000 metric tons in 1995. Kronos reduced
its production rates in early 1996 in response to softening demand and its high
inventory levels at the end of 1995. As demand increased during 1996 and 1997
and inventories declined, Kronos' production rates were increased to near full
capacity in late 1996 and during 1997. Following the substantial completion in
1997 of a debottlenecking project at the Leverkusen, Germany facility, Kronos
believes its current annual attainable production capacity is now approximately
420,000 metric tons, including the production capacity relating to its one-half
interest in the Louisiana plant.
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from beach sand ilmenite from Richards Bay Iron
and Titanium (Proprietary) Ltd. (South Africa) under a long-term supply contract
expiring in 2000. Natural rutile ore, another chloride feedstock, is purchased
primarily from RGC Mineral Sands Limited (Australia) under a long-term supply
contract that also expires in 2000. Raw materials purchased under these
contracts are expected to meet Kronos' chloride feedstock requirements over the
next several years. NL does not expect to encounter difficulties in obtaining
extensions to existing long-term supply contracts prior to the expiration dates
of the contracts.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of sulfate
process pigments, Kronos operates a Norwegian rock ilmenite mine which provided
all of Kronos' feedstock for its European sulfate process pigment plants in
1997. Kronos also purchases sulfate grade slag from Q.I.T. Fer et Titane Inc.
under a long-term supply contract which expires in 2002.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate for the next several years.
Kronos does not anticipate experiencing any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries where NL purchases its raw material
supplies could adversely affect the availability of such feedstock.
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Tioxide
Group, Ltd. ("Tioxide"), a wholly-owned subsidiary of Imperial Chemicals
Industries PLC ("ICI"), each own a 50%-interest in a manufacturing joint
venture. The joint venture owns and operates a chloride process TiO2 plant in
Lake Charles, Louisiana. Production from the plant is shared equally by Kronos
and Tioxide pursuant to separate offtake agreements. ICI has agreed to sell
Tioxide's non-North American operations to E.I. du Pont de Nemours & Co.
("DuPont"), subject to regulatory approval. ICI has announced it intends to
sell Tioxide's remaining North American operations, including Tioxide's 50%
interest in the joint venture, in a separate transaction. NL has advised ICI of
its interest in acquiring the other 50% of the joint venture.
A supervisory committee, composed of four members, two of whom are
appointed by each partner, directs the business and affairs of the joint
venture, including production and output decisions. Two general managers, one
appointed and compensated by each partner, manage the operations of the joint
venture acting under the direction of the supervisory committee.
The manufacturing joint venture is intended to be operated on a break-even
basis, and accordingly Kronos' transfer price for its share of the TiO2 produced
is equal to its share of the joint venture's production costs and interest
expense. Kronos' share of the production costs are reported as part of cost of
sales as the related TiO2 acquired from the joint venture is sold, and Kronos'
share of the joint venture's interest expense is reported as a component of
interest expense.
Competition. The TiO2 industry is highly competitive. During the early
1990's, TiO2 supply exceeded demand, primarily due to new chloride-process
capacity coming on-stream. Relative supply/demand relationships, which had a
favorable impact on industry-wide prices during the late 1980's, had a negative
impact during the subsequent downturn. During 1994 and the first half of 1995,
strong growth in demand improved industry capacity utilization and resulted in
increases in worldwide TiO2 prices. Kronos believes that the increased demand
during such period was partially due to customers stocking inventories. In the
second half of 1995 and first half of 1996, customers reduced inventory levels,
which reduced industry-wide demand. Demand improved during the second half of
1996 and throughout 1997, and NL's average TiO2 selling prices increased during
the last three quarters of 1997. Additional Ti02 price increases have been
announced by most major Ti02 producers, including Kronos, that are expected to
be implemented during the first half of 1998. Consequently, NL expects TiO2
prices will continue to increase in 1998. No assurance can be given that price
trends will conform to NL's expectations.
Worldwide capacity additions in the TiO2 market resulting from construction
of grassroot plants require significant capital expenditures and substantial
lead time (typically three to five years in NL's experience) for, among other
things, planning, obtaining environmental approvals and construction. No
grassroot plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors complete debottlenecking projects at
existing facilities. Based on factors described under "TiO2 products and
operations" above, NL expects that the average annual increase in industry
capacity from announced debottlenecking projects will be less than the average
annual demand growth for TiO2 during the next three to five years.
Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
grades and substantially all of Kronos' production are considered commodity
pigments with price generally being the most significant competitive factor.
During 1997, Kronos had an estimated 12% share of worldwide TiO2 sales volume,
and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.
Kronos' principal competitors are DuPont; Tioxide; Millennium Chemicals,
Inc.; Kemira Oy; Ishihara Sangyo Kaisha, Ltd; Bayer AG and Kerr-McGee
Corporation. These seven competitors have estimated individual worldwide shares
of TiO2 sales volume ranging from 4% to 23%, and an aggregate estimated 74%
share of TiO2 sales volume. DuPont has about one-half of total U.S. TiO2
production capacity and is Kronos' principal North American competitor. DuPont
has a transaction pending, described above, in which Du Pont would acquire all
of Tioxide's Ti02 business in Europe, Asia and Africa, which transaction is
expected to be completed in early 1998, subject to regulatory approval. In
January 1998 Kerr-McGee announced an agreement to acquire approximately 80% of
the European Ti02 business of Bayer.
Research and development. Kronos' expenditures for research and
development and certain technical support programs have averaged approximately
$8 million during the past three years. TiO2 research and development
activities are conducted principally at KII's Leverkusen, Germany facility.
Such activities are directed primarily towards improving both the chloride and
sulfate production processes, improving product quality and strengthening
Kronos' competitive position by developing new pigment applications.
Patents and trademarks. Patents held for products and production processes
are believed to be important to NL and to the continuing business activities of
Kronos. NL continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties. NL's major trademarks,
including Kronos and Titanox, are protected by registration in the United States
and elsewhere with respect to those products it manufactures and sells.
Customer base and seasonality. NL believes that neither its aggregate
sales nor those of any of its principal product groups are concentrated in or
materially dependent upon any single customer or small group of customers.
Neither NL's business as a whole nor that of any of its principal product groups
is seasonal to any significant extent. Due in part to the increase in paint
production in the spring to meet spring and summer painting season demand, TiO2
sales are generally higher in the second and third calendar quarters than in the
first and fourth calendar quarters.
Employees. As of December 31, 1997, NL employed approximately 2,600
persons (excluding employees of Rheox and the Louisiana joint venture), with 100
employees in the United States and 2,500 at non-U.S. sites. Hourly employees in
production facilities worldwide, including the TiO2 joint venture, are
represented by a variety of labor unions, with labor agreements having various
expiration dates. NL believes its labor relations are satisfactory.
Regulatory and environmental matters. Certain of NL's businesses are and
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws. As with other companies engaged in similar businesses,
certain past and current operations and products of NL have the potential to
cause environmental or other damage. NL has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
NL's policy is to achieve compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect NL's production, handling, use, storage, transportation, sale
or disposal of such substances as well as NL's financial position, results of
operations or liquidity.
NL's U.S. manufacturing operations (currently conducted through its Ti02
joint venture) are governed by federal environmental and worker health and
safety laws and regulations, principally the Resource Conservation and Recovery
Act, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water
Act, the Safe Drinking Water Act, the Toxic Substances Control Act, and the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
by the Superfund Amendments and Reauthorization Act ("CERCLA"), as well as the
state counterparts of these statutes. NL believes that the Louisiana Ti02 plant
owned and operated by the joint venture is in substantial compliance with
applicable requirements of these laws or compliance orders issued thereunder.
From time to time, NL facilities may be subject to environmental regulatory
enforcement under such statutes. Resolution of such matters typically involves
the establishment of compliance programs. Occasionally, resolution may result
in the payment of penalties, but to date such penalties have not involved
amounts having a material adverse effect on NL's consolidated financial
position, results of operations or liquidity.
NL's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. NL believes all of its European and
Canadian plants are in substantial compliance with applicable environmental
laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union ("EU"). Germany and Belgium, each members of the EU, follow the
initiatives of the EU; Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. Kronos believes it is in
substantial compliance with agreements reached with European environmental
authorities and with an EU directive to control the effluents produced by TiO2
production facilities.
NL has a contract with a third party to treat certain German sulfate-
process effluents. Either party may terminate the contract after giving four
years notice with regard to the Nordenham plant. After December 1998, and only
under certain circumstances, Kronos may terminate the contract after giving six
months notice with respect to treatment of effluents from the Leverkusen plant.
In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos has completed the installation
of off-gas desulfurization systems at its Norwegian and German plants at a cost
of approximately $30 million. The Louisiana manufacturing joint venture
installed a $16 million off-gas desulfurization system, and Kronos completed an
$11 million wastewater treatment chemical purification project at its
Leverkusen, Germany facility in 1996.
NL's capital expenditures related to its ongoing environmental protection
and compliance programs, including those described above, are currently expected
to approximate $5 million in each of 1998 and 1999.
NL has been named as a defendant, potentially responsible party ("PRP") or
both, pursuant to CERCLA and similar state laws in approximately 75 governmental
and private actions associated with waste disposal sites, mining locations and
facilities currently or previously owned, operated or used by NL, many of which
are on the U.S. Environmental Protection Agency's Superfund National Priorities
List or similar state lists. See Item 3 - "Legal Proceedings."
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
CompX (NYSE: CIX) is a leading manufacturer of ergonomic computer support
systems, precision ball bearing slides and medium-security mechanical locks for
office furniture and a variety of other applications. CompX's products are
principally designed for use in medium- to high-end applications, where product
design, quality and durability are critical to CompX's customers. CompX
believes that, in the North American market, it is among the largest producers
of ergonomic computer support systems for office furniture manufacturers, among
the largest producers of precision ball bearing slides and among the largest
producers of medium-security cabinet locks. In 1997, ergonomic computer support
systems, precision ball bearing slides and medium-security mechanical locks
accounted for approximately 34%, 39% and 26% of net sales, respectively.
In March 1998, CompX completed the acquisition of a vertically-integrated
manufacturer of highly engineered mechanical locks located in Illinois. Under
the terms of the agreement, CompX acquired (i) all of the outstanding stock of
Fort Lock Corporation, (ii) the net assets of Fortronics, Inc., an affiliate of
Fort Lock Corporation and (iii) Fort Lock Corporation's manufacturing building
owned by a shareholder of Fort Lock Corporation, all for aggregate cost
consideration of approximately $32.9 million (collectively the "Fort Lock
Acquisition"). See "Management's Discussions and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Strategy. CompX's strategy is to continue to develop specialty, patented
products focused on niche segments of the medium- to high-end of the office
furniture and lock markets and to continue to search for synergistic
acquisitions or product licensing to expand its product and customer base and
expand established market positions.
Products, product design and development. CompX's ergonomic computer
support systems and precision ball bearing slides are sold under the Waterloo
Furniture Components Limited name, and medium-security cabinet locks are sold
under the National Cabinet Lock name. CompX believes that its brand names are
well recognized in the industry.
Ergonomic computer support systems include adjustable computer keyboard
support arms, designed to attach to office desks to alleviate possible strains
and stress and maximize usable workspace, adjustable computer table mechanisms
which provide variable workspace heights, CPU storage devices which minimize
adverse effects of dust and moisture and a number of complementary accessories,
including ergonomic wrist rest aids, mouse pad supports and computer monitor
support arms. Precision ball bearing slides are used in such applications as
file cabinets, desk drawers, tool storage cabinets and electromechanical imaging
equipment. These include CompX's Integrated Slide Lock drawer slides in which a
file cabinet manufacturer can reduce the possibility of multiple drawers being
opened at the same time, and the adjustable Ball Lock which provides heavily-
filled drawers, such as auto mechanic tool boxes, less risk of opening while in
movement. Cabinet locks are used in applications such as vending machines,
computer, gaming machines, parking meters, electrical circuit panels and
transportation equipment as well as office and institutional furniture.
CompX believes its ability to provide customized engineering to respond to
specific customer application requirements provides it a competitive advantage,
especially in middle- to high-end applications. A dedicated and knowledgeable
engineering and marketing staff continually collaborates with CompX's customers
to identify and solve production and marketing issues. CompX's commitment to
precision design and engineering to specific customer tolerances is a key
element to its ability to serve effectively the niche markets for its products.
CompX has 25 full time engineers on staff and expends approximately $3 million
annually for product engineering, design and development to enhance and expand
product capabilities.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a specialized sales
force. The majority of CompX's sales is to OEMs, while the balance represents
standardized products sold through distribution channels.
Sales to large OEM customers are made through the efforts of factory-based
sales and marketing professionals and engineers working in concert with salaried
field salespeople and independent manufacturer's representatives. Manufacturers'
representatives are selected based on special skills in certain markets or with
current or potential customers. Cabinet locks are sold by a separate network of
company-employed salespeople and manufacturers' representatives as well as
factory-based national account managers.
A significant portion of the CompX's cabinet lock sales and a growing
portion of ergonomic computer support systems and precision ball bearing slides
sales are made through hardware component distributors. CompX also has a
significant market share of cabinet lock sales to the locksmith distribution
channel. CompX supports its distributor sales with a line of standardized
products used by the largest segments of the marketplace. These products are
packaged and merchandised for easy availability and handling by distributors and
the end user. Based on CompX's successful STOCK LOCKS inventory program,
similar programs have been implemented for distributor sales of ergonomic
computer support systems and to some extent precision ball bearing slides.
Since their addition to CompX's distributor product line in 1992, sales of these
products to the distributor market have grown to represent approximately 10% of
combined ergonomic computer support systems and precision ball bearing slides
net sales to the United States.
To afford a competitive advantage to CompX as well as to customers,
ergonomic computer support system and precision ball bearing slides are
delivered primarily by means of a company-owned tractor/trailer fleet. This
satellite-monitored fleet improves the timely and economic delivery of products
to customers. Another important economic advantage to CompX's customers of an
in-house trucking fleet is that it allows the shipment of many products in
returnable metal baskets (in lieu of corrugated paper cartons), which avoids
both the environmental and economic burden of disposal.
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its component products
operations. The ten largest customers accounted for about one-third of
component products sales in each of the past three years, with the largest
customer less than 10% in each year.
Manufacturing and operations. CompX owns and operates three manufacturing
facilities in North America (two in Kirchener, Ontario, Canada and one in
Mauldin, South Carolina). Ergonomic products and precision ball bearing slides
are manufactured in the two Canadian facilities, and cabinet locks are
manufactured in the South Carolina facility. CompX also leases a small
distribution center in California. One of the Canadian facilities and the South
Carolina facility are ISO-9001 registered. ISO-9001 registration of the other
Canadian facility is anticipated in 1998. The Company believes that all its
facilities are well maintained and satisfactory for their intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components,
including zinc castings, are the principal raw materials used in the manufacture
of medium-security cabinet locks. These raw materials are purchased from
several suppliers and readily available from numerous sources.
CompX occasionally enters into raw material arrangements to mitigate the
short-term impact of future increases in raw material costs. While these
arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices provided the specified minimum monthly purchase quantities are met. CompX
currently anticipates entering into such arrangements for zinc, coiled steel and
plastic resins for 1998 and does not anticipate significant changes in cost of
these materials from their current levels. Materials purchased on the spot
market are sometimes subject to unanticipated and sudden price increases. Due to
the competitive nature of the markets served by CompX's products, it is often
difficult to recover such increases in raw material costs through increased
product selling prices and consequently overall operating margins can be
affected by such raw material cost pressures.
Competition and customer base. The office furniture and cabinet lock
markets are highly competitive. CompX competes primarily on the basis of
product design, including ergonomic and aesthetic factors, product quality and
durability, price (primarily in the middle and budget segments), on-time
delivery and service and technical support. CompX focuses its efforts on the
middle- and high-end segments of the market, where product design, quality and
durability are placed at a premium. The cabinet lock market is highly
fragmented with a number of small- to medium-sized manufacturers that supply the
market.
Ergonomic computer support systems and precision ball bearing slides are
sold primarily to the office furniture manufacturing industry. Approximately
30% of cabinet lock sales are made through CompX's Stock Locks distribution
program, a program believed to offer a competitive advantage because delivery is
generally made within 48 hours. Most remaining cabinet lock sales are made
through OEMs.
Major competitors include Weber Knapp (ergonomic computer support systems),
Accuride and Knape & Vogt (precision ball bearing slides) and Chicago Lock and
Hudson Lock (cabinet locks). CompX also competes with a variety of relatively
small cabinet lock competitors, which makes significant price increases
difficult. Certain of CompX's competitors may have greater financial,
marketing, manufacturing and technical resources than those of CompX. Although
CompX believes that it has been able to compete successfully in its markets to
date, there can be no assurance that it will be able to continue to do so in the
future.
Patents and trademarks. CompX holds a number of patents relating to its
component products operations, none of which by itself is considered
significant, and owns a number of trademarks, including National Cabinet Lock,
STOCK LOCKS, Waterloo Furniture Components Limited and Fort Lock Corp., which
CompX believes are well recognized in the component products industry.
Regulatory and environmental matters. CompX's operations are subject to
federal, state, local and foreign laws and regulations relating to the use,
storage, handling, generation, transportation, treatment, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances, materials and wastes. CompX believes that it is in substantial
compliance with all such laws and regulations. The costs of maintaining
compliance with such laws and regulations have not significantly impacted CompX
to date, and CompX has no significant planned costs or expenses relating to such
matters. There can be no assurance, however, that compliance with future such
laws and regulations will not require CompX to incur significant additional
expenditures, or that such additional costs would not have a material adverse
effect on CompX's results of operations, financial condition or liquidity.
Employees. As of December 31, 1997, CompX employed approximately 950
employees, including 270 in the United States and 680 in Canada. Approximately
80% of CompX's employees in Canada are represented by the United Steel Workers
of America labor union. CompX's collective bargaining agreement with such union
expires in January 2000. CompX believes that its labor relations are
satisfactory.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC
Waste Control Specialists LLC, formed in November 1995, completed
construction in early 1997 of the initial phase of its facility in West Texas
for the processing, treatment, storage and disposal of certain hazardous and
toxic wastes, and the first wastes were received for disposal in February 1997.
Valhi initially contributed $25 million to Waste Control Specialists at various
dates through early 1997 for a 50% membership interest, which funds were used
primarily to fund construction of the facility. The other owner (an entity
controlled by the Chief Executive Officer of Waste Control Specialists)
contributed certain assets, primarily land and operating permits for the
facility site, and Waste Control Specialists also assumed certain indebtedness
of the other owner. In October 1997, Valhi contributed an additional $10
million to Waste Control Specialists' equity, thereby increasing its membership
interest to 58%.
Facility, operations, services and customers. Waste Control Specialists
has been issued permits by the Texas Natural Resource Conservation Commission
("TNRCC") and the U.S. EPA to accept hazardous and toxic wastes governed by the
Resource Conservation and Recovery Act ("RCRA") and the Toxic Substances Control
Act ("TSCA"). The ten-year RCRA and TSCA permits initially expire in 2004, but
are subject to renewal by the TNRCC assuming Waste Control Specialists remains
in compliance with the provisions of the permits. While there can be no
assurance, Waste Control Specialists believes it will be able to obtain
extensions to continue operating the facility for the foreseeable future.
In November 1997, the Texas Department of Health ("TDH") issued a license
to Waste Control Specialists for the treatment and storage, but not disposal, of
low-level and mixed radioactive wastes. The current provisions of the license
enable Waste Control Specialists to accept such wastes for treatment and storage
primarily from the Department of Energy ("DOE") and other governmental agencies.
Waste Control Specialists accepted the first shipments of such wastes in
February 1998. Waste Control Specialists has also been issued a permit by the
TNRCC to establish a research, development and demonstration facility in which
third parties could use the facility to develop and demonstrate new technologies
in the waste management industry, including possibly those involving low-level
and mixed radioactive wastes. Waste Control Specialists is also seeking
additional authorizations to accept wastes regulated under various other
environmental laws and regulations, including seeking authorization for the
disposal of low-level and mixed radioactive wastes. There can be no assurance
that any such additional permits or authorizations will be obtained.
The facility is located on a 1,338 acre site in West Texas owned by Waste
Control Specialists. The 1,338 acres are permitted for 11.3 million cubic yards
of airspace landfill capacity for the disposal of RCRA and TSCA wastes.
Following the initial phase of the construction, Waste Control Specialists has
approximately 100,000 cubic yards of airspace landfill capacity in which
customers' wastes can be disposed. As part of its current permits, Waste
Control Specialists has the authorization to construct separate "condominium"
landfills, in which each condominium cell is dedicated to an individual
customer's waste materials. Waste Control Specialists owns approximately 15,000
additional acres of land surrounding the permitted site, a small portion of
which is located in New Mexico. This presently undeveloped additional acreage
is available for future expansion assuming appropriate permits could be
obtained.
The 1,338 acre facility site has, in Waste Control Specialists' opinion,
superior geological characteristics which make it an environmentally-desirable
location. The site is located in a relatively remote and arid section of West
Texas. The ground is composed of triassic red bed clay for which the
possibility of leakage into any underground water table is considered highly
remote.
While the West Texas facility operates as a final repository for wastes
that cannot be further reclaimed and recycled, it also serves as a staging and
processing location for material that requires other forms of treatment prior to
final disposal as mandated by the U.S. EPA or other regulatory bodies. The
facility, as constructed, provides for waste treatment/stabilization, warehouse
storage, treatment facilities for hazardous, toxic and dioxin wastes, drum to
bulk, and bulk to drum materials handling and repackaging capabilities. The
Company policy is to conduct these operations in compliance with the current
RCRA and TSCA permits. Treatment operations involve processing wastes through
one or more thermal, chemical or other treatment methods, depending upon the
particular waste being disposed and regulatory and customer requirements.
Thermal treatment uses a thermal destruction technology as the primary mechanism
for waste destruction. Physical treatment methods include distillation,
evaporation and separation, all of which result in the separation or removal of
solid materials from liquids. Chemical treatment uses chemical oxidation and
reduction, chemical precipitation of heavy metals, hydrolysis and neutralization
of acid and alkaline wastes, and basically results in the transformation of
wastes into inert materials through one or more chemical processes. Certain of
such treatment operations may involve technology which Waste Control Specialists
may acquire or license from third parties.
Once treated and stabilized, wastes are either (i) placed in the landfill
disposal site, (ii) stored onsite in drums or other specialized containers or
(iii) shipped to third-party facilities for final disposition. Only wastes
which meet certain specified regulatory requirements can be placed in the
landfill for disposal, which landfill is fully-lined and includes a leachate
collection system.
Waste Control Specialists takes delivery of wastes collected from customers
and transported on behalf of customers, via rail or highway, by independent
contractors to the West Texas site. Such transportation is subject to
regulations governing the transportation of hazardous wastes issued by the U.S.
Department of Transportation. Waste Control Specialists also leases a facility
in Wichita Falls, Texas, which can be used as a transfer station in routing
wastes to the West Texas facility.
In the U.S., the major federal statutes governing management, and
responsibility for clean-up, of hazardous and toxic wastes include RCRA, TSCA
and CERCLA. Waste Control Specialists' business is heavily dependent upon the
extent to which regulations promulgated under these or other similar statutes
and their enforcement require wastes to be managed and disposed of at facilities
of the type constructed by Waste Control Specialists.
Waste Control Specialists' target customers are industrial companies,
including chemical, aerospace and electronics businesses and governmental
agencies, including the DOE, which generate hazardous and other wastes. A
majority of the customers are expected to be located in the southwest United
States, although customers outside a 500-mile radius can be handled via rail
lines. Waste Control Specialists employs a salesforce to market its services to
potential customers. The DOE could become a significant customer if Waste
Control Specialists is successful in obtaining, in addition to the current
permits for treatment and storage, permits for the disposal of low-level and
mixed radioactive waste.
Waste Control Specialists also intends to enter into partnership or other
joint venture arrangements with other entities in the waste management industry
to assist Waste Control Specialists in research and development and other
aspects of customer service.
Competition. The hazardous waste industry (other than low-level and mixed
radioactive waste) currently has excess industry capacity caused by a number of
factors, including a relative decline in the number of environmental remediation
projects generating hazardous wastes and efforts on the part of generators to
reduce the volume of waste and/or manage it onsite at their facilities. These
factors have led to reduced demand and increased price pressure for non-
radioactive hazardous waste management services. Consequently, Waste Control
Specialists believes its long-term future potential in the waste management
industry is significantly dependent upon its ability to obtain permits for low-
level and mixed radioactive wastes.
Competition within the hazardous waste industry is diverse. Competition is
based primarily on pricing and customer service. Price competition is expected
to be intense with respect to RCRA and TSCA-related wastes. Principal
competitors are Chemical Waste Management (a wholly-owned subsidiary of WMX
Technologies, Inc.), Laidlaw, Inc., American Ecology Corporation, U.S.
Pollution Control, Inc. and Envirosafe Services, Inc. These competitors are
well-established and have significantly greater resources than Waste Control
Specialists, which could be important competitive factors. However, Waste
Control Specialists believes it may have certain competitive advantages,
including its environmentally-desirable location, broad level of local community
support, a public transportation network leading to the facility and capability
for future site expansion.
Employees. At December 31, 1997, Waste Control Specialists employed
approximately 50 persons.
Regulatory and environmental matters. While the waste management industry
has benefited from increased governmental regulation, the industry itself has
become subject to extensive and evolving regulation by federal, state and local
authorities. The regulatory process requires businesses in the waste management
industry to obtain and retain numerous operating permits covering various
aspects of their operations, any of which could be subject to revocation,
modification or denial. Regulations also allow public participation in the
permitting process. Individuals as well as companies may oppose the grant of
permits. In addition, governmental policies are by their nature subject to
change and the exercise of broad discretion by regulators, and it is possible
that Waste Control Specialists' ability to obtain any desired applicable permits
on a timely basis, and to retain those permits, could in the future be impaired.
The loss of any individual permit could have a significant impact on Waste
Control Specialists' financial condition, results of operations and liquidity,
especially because Waste Control Specialists owns only one disposal site. For
example, adverse decisions by governmental authorities on permit applications
submitted by Waste Control Specialists could result in the abandonment of
projects, premature closing of a facility or operating restrictions. Waste
Control Specialists' ten-year RCRA and TSCA permits expire in 2004, although
such permits are subject to renewal if Waste Control Specialists is in
compliance with the required operating provisions of the permits.
Federal, state and local authorities have, from time to time, proposed or
adopted other types of laws and regulations with respect to the waste management
industry, including laws and regulations restricting or banning the interstate
or intrastate shipment of certain wastes, imposing higher taxes on out-of-state
waste shipments compared to in-state shipments, reclassifying certain categories
of hazardous wastes as non-hazardous and regulating disposal facilities as
public utilities. Certain states have issued regulations which attempt to
require that all waste generated within that particular state must be sent to
disposal sites within that state. The U.S. Congress has also, from time to
time, considered legislation which would enable or facilitate such bans,
restrictions, taxes and regulations. Due to the complex nature of the waste
management industry regulation, implementation of existing or future laws and
regulations by different levels of government could be inconsistent and
difficult to foresee. Waste Control Specialists will attempt to monitor and
anticipate regulatory, political and legal developments which affect the waste
management industry, but there can be no assurance that Waste Control
Specialists will be able to do so. Nor can Waste Control Specialists predict
the extent to which legislation or regulations that may be enacted, or any
failure of legislation or regulations to be enacted, may affect its operations
in the future.
The demand for certain hazardous waste services expected to be provided by
Waste Control Specialists is dependent in large part upon the existence and
enforcement of federal, state and local environmental laws and regulations
governing the discharge of hazardous wastes into the environment. The waste
management industry would be adversely affected to the extent such laws or
regulations are amended or repealed or their enforcement is lessened.
Because of the high degree of public awareness of environmental issues,
companies in the waste management business may be, in the normal course of their
business, subject to judicial and administrative proceedings. Governmental
agencies may seek to impose fines or revoke, deny renewal of, or modify any
applicable operating permits or licenses. In addition, private parties and
special interest groups could bring actions against Waste Control Specialists
alleging, among other things, violation of operating permits.
OTHER
Foreign operations. The Company has substantial operations and assets
located outside the United States, principally chemicals operations in Germany,
Belgium, Norway and the United Kingdom and chemicals and component products
operations in Canada. See Note 2 to the Consolidated Financial Statements.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CompX's Canadian component products subsidiary has, from time to time,
entered into forward currency contracts to mitigate exchange rate fluctuation
risk for a portion of its future sales denominated in various currencies, and
the Company has in the past used currency forward contracts to fix the dollar
equivalent of specific commitments. Otherwise, the Company does not generally
engage in currency derivative transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulation in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
17 to the Consolidated Financial Statements under the captions "Legal
proceedings -- lead pigment litigation and -- Environmental matters and
litigation" is incorporated herein by reference.
Discontinued operations. See Note 18 to the Consolidated Financial
Statements.
Acquisition and restructuring activities. The Company routinely compares
its liquidity requirements and alternative uses of capital against the estimated
future cash flows to be received from its subsidiaries and unconsolidated
affiliates, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, business units, marketable securities or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future. Nee Notes 16 and 20 to the Consolidated Financial
Statements.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage, and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.
ITEM 2. PROPERTIES
Valhi leases approximately 34,000 square feet of office space for its
principal executive offices in a building located at 5430 LBJ Freeway, Dallas,
Texas, 75240-2697.
The principal properties used in the operations of the Company, including
certain risks and uncertainties related thereto, are described in the applicable
business sections of Item 1 - "Business." The Company believes that its
facilities are generally adequate and suitable for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 17 to the Consolidated Financial Statements under the
caption "Legal proceedings -- Other litigation," which information is
incorporated herein by reference.
Lead pigment litigation. NL was formerly involved in the manufacture of
lead pigments for use in paint and lead-based paint. NL has been named as a
defendant or third party defendant in various legal proceedings alleging that NL
and other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. NL is vigorously defending
such litigation. Considering NL's previous involvement in the lead pigment and
lead-based paint businesses, there can be no assurance that additional
litigation, similar to that described below, will not be filed. In addition,
various legislation and administrative regulations have, from time to time, been
enacted or proposed that seek to (i) impose various obligations on present and
former manufacturers of lead pigment and lead-based paint with respect to
asserted health concerns associated with the use of such products and (ii)
effectively overturn court decisions in which NL and other pigment manufacturers
have been successful. Examples of such proposed legislation include bills which
would permit civil liability for damages on the basis of market share, rather
than requiring plantiffs to prove that the defendant's product resulted in the
alleged damage. While no legislation or regulations have been enacted to date
which are expected to have a material adverse effect on NL's consolidated
financial position, results of operations or liquidity, the imposition of market
share liability could have such an effect. NL has not accrued any amounts for
the pending lead pigment and lead-based paint litigation. There is no assurance
that NL will not incur future liability in respect of this litigation in view of
the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, NL believes that the pending lead pigment and lead-
based paint litigation is without merit. Liability, if any, that may result is
not currently reasonably capable of estimation.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against NL, other
alleged manufacturers of lead pigment (together with NL, the "pigment
manufacturers") and the Lead Industries Association (the "LIA") in 14 actions
commenced by residents of HANO units seeking compensatory and punitive damages
for injuries allegedly caused by lead pigment. The actions, which were in the
Civil District Court for the Parish of Orleans, State of Louisiana, were
dismissed by the district court in 1990. Subsequently, HANO agreed to
consolidate all the cases and appealed. In March 1992, the Louisiana Court of
Appeals, Fourth Circuit, dismissed HANO's appeal as untimely with respect to
three of these cases. With respect to the other cases included in the appeal,
the court of appeals reversed the lower court decision dismissing the cases.
These cases were remanded to the District Court for further proceedings. In
November 1994, the District Court granted defendants' motion for summary
judgment in one of the remaining cases and in June 1995 the District Court
granted defendants' motion for summary judgment in several of the remaining
cases. After such grant, only two cases remained pending (Hall v. HANO, et al.,
No. 89-3552, and Allen v. HANO, et al., No. 89-427, Civil District Court for the
Parish of Orleans, State of Louisiana), both of which have been inactive since
1992.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et
al., No. 89-4617). In December 1991, the court granted the defendants' motion
to dismiss claims alleging negligence and strict liability and denied the
remainder of the motion. In January 1992, defendants appealed the denial. NL
has answered the remaining portions of the complaint denying all allegations of
wrongdoing. In May 1993, the Appellate Division of the Supreme Court affirmed
the denial of the motion to dismiss plaintiffs' fraud, restitution and
indemnification claims. In May 1994, the trial court granted the defendants'
motion to dismiss the plaintiffs' restitution and indemnification claims, the
plaintiffs appealed, and in June 1996 the appeals court reversed the trial
court's dismissal of the restitution and indemnification claims, reinstating
those claims. Defendants' motion for summary judgment on the remaining fraud
claim was denied in August 1995, which denial was affirmed by the Appellate
Division of the Supreme Court in July 1997. In February 1996, the court denied
the defendants motion for summary judgment on the basis that the fraud claim was
time-barred, and defendants have appealed. Discovery is proceeding.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The amended complaint identifies 18 other defendants who allegedly manufactured
lead products or lead-based paint, and asserts causes of action under theories
of strict liability, negligence per se, negligence, breach of express and
implied warranty, fraud, nuisance, restitution, and negligent infliction of
emotional distress. The complaint asserts several theories of liability
including joint and several, market share, enterprise and alternative liability.
In October 1992, NL and the other defendants moved to dismiss the complaint with
prejudice. In July 1993, the court dismissed the complaint. In December 1994,
the Ohio Court of Appeals reversed the trial court dismissal and remanded the
case to the trial court. In July 1996, the trial court granted defendants'
motion to dismiss the property damage and enterprise liability claims, but
denied the remainder of the motion. Discovery is proceeding with respect to
class certification.
In November 1993, NL was served with a complaint in Brenner, et al. v.
American Cyanamid, et al. (No. 12596-93), Supreme Court, State of New York, Erie
County alleging injuries to two children purportedly caused by lead pigment.
The complaint seeks $24 million in compensatory and $10 million in punitive
damages for alleged negligent failure to warn, strict liability, fraud and
misrepresentation, concert of action, civil conspiracy, enterprise liability,
market share liability, and alternative liability. In January 1994, NL answered
the complaint, denying liability. Discovery is proceeding.
In January 1995, NL was served with complaints in Wright (Alvin) and Wright
(Allen) v. Lead Industries, et. al., (Nos. 94-363042 and 363043), Circuit Court,
Baltimore City, Maryland. Plaintiffs are two brothers (one deceased) who allege
injuries due to exposure to lead pigment. The complaints, as amended in April
1995, seek more than $100 million in compensatory and punitive damages for
alleged strict liability, negligence, conspiracy, fraud and unfair and deceptive
trade practices claims. In July 1995, the trial court granted, in part, the
defendants' motion to dismiss, and dismissed the plaintiffs' fraud and unfair
and deceptive trade practices claims. In June 1996 the trial court granted
defendants' motion for summary judgment on plaintiffs' conspiracy claim, and
dismissed NL and certain other defendants from the cases. The court granted
summary judgment in favor of the remaining defendants in September 1996, the
plaintiffs appealed as to all defendants, and in October 1997 the Maryland Court
of Appeals affirmed the summary judgment ruling in defendants' favor.
Plaintiffs did not seek further review of the dismissal of the conspiracy claims
against NL and other defendants. Plaintiffs' request for review of the
affirmance of the dismissal of the remaining defendants was denied by the
Maryland Court of Appeals in February 1998.
In January 1996, NL was served with a complaint on behalf of individual
intervenors in German, et al. v. Federal Home Loan Mortgage Corp., et. al. (U.S.
District Court, Southern District of New York, Civil Action No. 93 Civ. 6941
(RWS)). This alleged class action lawsuit had originally been brought against
the City of New York and other landlord defendants. The intervenors' complaint
alleges claims against NL and other former manufacturers of lead pigment for
medical monitoring, property abatement and other injunctive relief, based on
various causes of action, including negligent product design, negligent failure
to warn, strict liability, fraud and misrepresentation, concert of action, civil
conspiracy, enterprise liability, market share liability, breach of express and
implied warranties, and nuisance. The intervenors purport to represent a class
of children and pregnant women who reside in New York City. In May 1996, NL and
the other defendants filed motions to dismiss the intervenors complaint. In May
1997, plaintiffs moved for class certification and defendants moved for summary
judgment. In June 1997, the court stayed all further activity in the case
pending reconsideration of its 1995 decision permitting filing of the complaint
against the manufacturer defendants and joinder of the new complaint with the
pre-existing complaint against New York City and other landlords.
In April 1996, NL was served with a complaint filed in New York state court
which seeks compensatory and punitive damages for personal injury purportedly
caused by lead paint and alleges causes of action against NL and other former
lead pigment manufacturers and the LIA for negligence, strict products
liability, fraud, concert of action, civil conspiracy, enterprise liability,
market share liability and alternative liability (Gates v. American Cyanamid
Co., et al. - I1996-2114). The complaint also asserts causes of action against
the landlords of the apartments in which plaintiff has lived since 1977. In
July 1996, NL filed an answer denying plaintiff's allegations of wrongdoing and
liability. In November 1997, plaintiffs dismissed this case with prejudice as
to all defendants.
In April 1997, NL was served with a complaint in Parker v. NL Industries,
Inc., et al. (Circuit Court, Baltimore City, Maryland, No. 97085060 CC915).
Plaintiff, now an adult, and his wife seek compensatory and punitive damages
from NL, another former manufacturer of lead paint and a local paint retailer,
based on claims on negligence, strict liability and fraud for plaintiff's
alleged ingestion of lead paint as a child. In May 1997, NL removed the case to
federal court. In June 1997, plaintiff moved to remand to state court and NL
answered the complaint, denying liability. In February 1998, the Court
dismissed the fraud claim. Trial is scheduled to begin in July 1998.
In January 1998, NL was served with an amended complaint in Adams v. NL
Industries, Inc., et al., (No. A9701785), Court of Common Pleas, Hamilton
County, Ohio, alleging injury to a minor arising out of exposure to lead and
seeking compensatory and punitive damages from NL and other former manufacturers
of lead products and the LIA based on claims of negligence, strict liability,
breach of warranty, failure to warn and nuisance. The amended complaint also
asserts various claims against plaintiff's landlord. In February 1998, NL filed
a motion to dismiss the action of procedural grounds. In March 1998, plaintiffs
informed the Court that they intend to dismiss the complaint.
NL believes that the foregoing lead pigment actions are without merit and
intends to continue to deny all allegations of wrongdoing and liability and to
defend such actions vigorously.
NL has filed actions seeking declaratory judgment and other relief against
various insurance carriers with respect to costs of defense and indemnity
coverage for certain of its environmental and lead pigment litigation. NL
Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124, -2125
(HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs, filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in NL's favor. In July 1991, the court granted NL's motion for summary judgment
and ordered Commercial Union to pay NL's reasonable defense costs for such
cases. In June 1992, NL filed an amended complaint in the United States
District Court for the District of New Jersey against Commercial Union seeking
to recover costs incurred in defending four additional lead pigment cases which
have since been resolved in NL's favor. In August 1993, the court granted NL's
motion for summary judgment and ordered Commercial Union to pay the reasonable
costs of defending those cases. In July 1994, the court entered judgment on the
order requiring Commercial Union to pay previously-incurred NL costs in
defending those cases. In September 1995, the U.S. Court of Appeals for the
Third Circuit reversed and remanded for further consideration the decision by
the trial court that Commercial Union was obligated to pay the Company's
reasonable defense costs in certain of the lead pigment cases. The trial court
made its decision applying New Jersey law; the Court of Appeals concluded that
New York law, and not New Jersey law, applied and remanded the case to the trial
court for a determination under New York law. On remand from the Court of
Appeals, the trial court in April 1996 granted NL's motion for summary judgment,
finding that Commercial Union had a duty to defend NL in the four lead paint
cases which are the subject of NL's second amended complaint. The court also
issued a partial ruling on Commercial Union's motion for summary judgment in
which it sought allocation of defense costs and contribution from NL and two
other insurance carriers in connection with three lead paint actions on which
the court had granted NL summary judgment in 1991. The court ruled that
Commercial Union is entitled to receive contribution from NL and the two
carriers, but reserved ruling with respect to the relative contributions to be
made by each of the parties, including contributions by NL that may be required
with respect to periods in which NL was self-insured and contributions from one
carrier which were reinsured by a former subsidiary of NL, the reinsurance costs
of which NL may ultimately be required to bear. In June 1997, NL reached a
settlement in principle regarding allocation of defense costs in the lead
pigment cases in which reimbursement of defense costs had been sought. Other
than granting motions for summary judgment brought by two excess liability
insurance carriers, which contended their policies contained unique pollution
exclusion language, and certain summary judgment motions regarding policy
periods, the Court has not made any final rulings on defense costs or indemnity
coverage with respect to NL's pending environmental litigation. Nor has the
Court made any final ruling on indemnity coverage in the lead pigment
litigation. No trial dates have been set. Other than ruling to date, the issue
of whether insurance coverage for defense costs or indemnity or both will be
found to exist depends upon a variety of factors, and there can be no assurance
that such insurance coverage will exist in other cases. NL has not considered
any potential insurance recoveries for lead pigment or environmental litigation
in determining related accruals.
Environmental matters and litigation. NL has been named as a defendant,
PRP, or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
or its subsidiaries, or their predecessors, many of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage and/or damages for injury to natural resources. Certain of
these proceedings involve claims for substantial amounts. Although NL may be
jointly and severally liable for such costs, in most cases, it is only one of a
number of PRPs who are also jointly and severally liable.
The extent of CERCLA liability cannot be determined until the Remedial
Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA issues a
record of decision and costs are allocated among PRPs. The extent of liability
under analogous state cleanup statutes and for common law equivalents are
subject to similar uncertainties. NL believes it has provided adequate accruals
for reasonably estimable costs for CERCLA matters and other environmental
liabilities. At December 31, 1997, NL had accrued $135 million with respect to
those environmental matters which are reasonably estimable. NL determines the
amount of accrual on a quarterly basis by analyzing and estimating the range of
possible costs to NL. Such costs include, among other things, remedial
investigations, monitoring, studies, clean-up, removal and remediation. In the
first quarter of 1997, NL's accrual was increased to include legal fees and
other costs of managing and monitoring certain environmental remediation sites
as required by the adoption of the AICPA's Statement of Position 96-1. See Note
17 to the Consolidated Financial Statements. It is not possible to estimate the
range of costs for certain sites. NL has estimated that the upper end of the
range of reasonably possible costs to NL for sites for which it is possible to
estimate costs is approximately $175 million. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs, or
a determination that NL is potentially responsible for the release of hazardous
substances at other sites could result in expenditures in excess of amounts
currently estimated by NL to be required for such matters. Further, there can
be no assurance that additional environmental matters will not arise in the
future. More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below.
In July 1991, the United States filed an action in the U.S. District Court
for the Southern District of Illinois against NL and others (United States of
America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to
the Granite City, Illinois lead smelter formerly owned by NL. The complaint
seeks injunctive relief to compel the defendants to comply with an
administrative order issued pursuant to CERCLA, and fines and treble damages for
the alleged failure to comply with the order. NL and the other parties did not
comply with the order, believing that the remedy selected by the U.S. EPA was
invalid, arbitrary, capricious and not in accordance with law. The complaint
also seeks recovery of past costs and a declaration that the defendants are
liable for future costs. Although the action was filed against NL and ten other
defendants, there are 330 other PRPs who have been notified by the U.S. EPA.
Some of those notified were also respondents to the administrative order. In
February 1992, the court entered a case management order directing that the
remedy issues be tried before the liability aspects are presented. In September
1995, the U.S. EPA released its decision selecting cleanup remedies for the
Granite City site. NL is presently challenging portions of the U.S. EPA's
selection of the remedy. In September 1997, the U.S. EPA informed NL that the
past and future cleanup costs were estimated to total approximately $63.5
million. There is currently no allocation among the PRPs for these costs.
At the Pedricktown, New Jersey lead smelter formerly owned by NL, the U.S.
EPA has divided the site into two operable units. Operable unit one covers
contaminated ground water, surface water, soils and stream sediments. In July
1994, the U.S. EPA issued the Record of Decision for operable unit one. The
U.S. EPA estimates the cost to complete operable unit one is $18.7 million. In
May 1996, certain PRPs, but not NL, entered into an administrative consent order
with the U.S. EPA to perform the remedial phase of operable unit one. In
January 1998, NL and the other PRPs were informed that U.S. EPA would begin
negotiations in 1998 with respect to performance of the remedial action phase of
operable unit one. In addition, the U.S. EPA has indicated that it has incurred
approximately $6.2 million in past costs. The U.S. EPA issued an order with
respect to operable unit two in March 1992 to NL and 30 other PRPs directing
immediate removal activities including the cleanup of waste, surface water and
building surfaces. NL has complied with the order, and the work with respect to
operable unit two is completed. NL has paid approximately 50% of operable unit
two costs, or $2.5 million.
Having completed the RIFS at NL's former Portland, Oregon lead smelter
site, NL conducted predesign studies to explore the viability of the U.S. EPA's
selected remedy pursuant to a June 1989 consent decree captioned U.S. v. NL
Industries, Inc., Civ. No. 89-408, United States District Court for the District
of Oregon. Subsequent to the completion of the predesign studies, the U.S. EPA
issued notices of potential liability to approximately 20 PRPs, including NL,
directing them to perform the remedy, which was initially estimated to cost
approximately $17 million, exclusive of administrative and overhead costs and
any additional costs, for the disposition of recycled materials from the site.
In January 1992, the U.S. EPA issued unilateral administrative orders to NL and
six other PRPs directing the performance of the remedy. NL and the other PRPs
commenced performance of the remedy. In August 1994, the U.S. EPA authorized NL
and other PRPs to cease performing most aspects of the selected remedy. In May
1997, the U.S. EPA issued an Amended Records of Decision ("ARDs") for the soils
operable unit changing portions of the remedy. The ARDs require construction of
an onsite containment facility estimated to cost between $10.5 million and $12
million, including capital costs and operating and maintenance costs. NL and
certain other PRPs have entered into a consent decree to perform the remedial
action in the ARD. In November 1991, Gould, Inc., the current owner of the
site, filed an action, Gould Inc. v. NL Industries, Inc., No. 91-1091, United
States District Court for the District of Oregon, against NL for damages for
alleged fraud in the sale of the smelter, rescission of the sale, past CERCLA
response costs and a declaratory judgment allocating future response costs and
punitive damages. In February 1998, NL and the other defendants reached an
agreement in principle to settle the litigation pursuant to which NL agreed to
pay a portion of future costs, which are estimated to be within previously-
accrued amounts.
NL and other PRPs entered into an administrative consent order with the
U.S. EPA requiring the performance of a RIFS at two sites in Cherokee County,
Kansas, where NL and others formerly mined lead and zinc. A former NL
subsidiary mined at the Baxter Springs subsite, where it is the largest viable
PRP. In August 1997, the U.S. EPA issued its record of decision for the Baxter
Springs and Treece subsites. The U.S. EPA has estimated the selected remedy
will cost an aggregate of approximately $7.1 million for both subsites ($5.4
million for the Baxter Springs subsite). In addition, in March 1998 the U.S.
EPA notified NL that it may be a PRP in three additional subsites in Cherokee
County.
In January 1989, the State of Illinois brought an action against NL and
several other subsequent owners and operators of a former NL facility in
Chicago, Illinois (People of the State of Illinois v. NL Industries, et al., No.
88-CH-11618, Circuit Court, Cook County). The complaint seeks recovery of $2.3
million of cleanup costs expended by the Illinois Environmental Protection
Agency, plus penalties and treble damages. In October 1992, the Supreme Court
of Illinois reversed the Appellate Division, which had affirmed the trial
court's earlier dismissal of the complaint, and remanded the case for further
proceedings. In December 1993, the trial court denied the State's petition to
reinstate the complaint, and dismissed the case with prejudice. In November
1996, the appeals court reversed the dismissal. In August 1997, the trial court
dismissed the case and the state has appealed. The U.S. EPA has issued an order
to NL to perform a removal action at the site, and NL is complying with the
order.
Residents in the vicinity of NL's former Philadelphia lead chemicals plant
commenced a class action allegedly comprised of over 7,500 individuals seeking
medical monitoring and damages allegedly caused by emissions from the plant.
Wagner, et al v. Anzon and NL Industries, Inc., No. 87-4420, Court of Common
Pleas, Philadelphia County. The complaint sought compensatory and punitive
damages from NL and the current owner of the plant, and alleged causes of action
for, among other things, negligence, strict liability, and nuisance. A class
was certified to include persons who resided, owned or rented property, or who
work or have worked within up to approximately three-quarters of a mile from the
plant from 1960 through the present. NL answered the complaint, denying
liability. In December 1994, the jury returned a verdict in favor of NL.
Plaintiffs appealed, and in September 1996 the Superior Court of Pennsylvania
affirmed the jury verdict in favor of NL. In December 1996, plaintiffs filed a
petition for allowance of appeal to the Pennsylvania Supreme Court. Plaintiff's
petition was declined. Residents also filed consolidated actions in the United
States District Court for the Eastern District of Pennsylvania, Shinozaki v.
Anzon, Inc. and Wagner and Antczak v. Anzon and NL Industries, Inc., Nos. 87-
3441, 87-3502, 87-4137 and 87-5150. The consolidated action is a putative class
action seeking CERCLA response costs, including cleanup and medical monitoring,
declaratory and injunctive relief and civil penalties for alleged violations of
the Resource Conservation and Recovery Act ("RCRA"), and also asserting pendent
common law claims for strict liability, trespass, nuisance and punitive damages.
The court dismissed the common law claims without prejudice, dismissed two of
the three RCRA claims as against NL with prejudice, and stayed the case pending
the outcome of the state court litigation.
In July 1991, a complaint was filed in the United States District Court for
the Central District of California, United States of America v. Peter Gull and
NL Industries, Inc., Civ. No. 91-4098, seeking recovery of $2 million in costs
incurred by the United States in response to the alleged release of hazardous
substances into the environment from a facility located in Norco, California,
treble damages and $1.75 million in penalties for NL's alleged failure to comply
with the U.S. EPA's administrative order No. 88-13. The order, which alleged
that NL arranged for the treatment or disposal of materials at the Norco site,
directed the immediate removal of hazardous substances from the site. NL
carried out a portion of the remedy at the Norco site, but did not complete the
ordered activities because it believed they were in conflict with California
law. The court ruled that NL was liable for approximately $2.7 million in
response costs plus approximately $3.6 million in penalties for failure to
comply with the administrative order. In April 1994, the court entered final
judgment in this matter directing NL to pay $6.3 million plus interest. Both NL
and the government have appealed. In February 1998, the parties reached an
agreement in principle to settle the matter within previously-accrued amounts.
At a municipal and industrial waste disposal site in Batavia, New York, NL
and 50 others have been identified as PRPs. The U.S. EPA has divided the site
into two operable units. Pursuant to an administrative consent order entered
into with the U.S. EPA, NL conducted a RIFS for operable unit one, the closure
of the industrial waste disposal section of the landfill. NL's RIFS costs to
date are approximately $2 million. In June 1995, the U.S. EPA issued the record
of decision for operable unit one, which is estimated by the U.S. EPA to cost
approximately $12.3 million. In September 1995, the U.S. EPA and certain PRPs
(including NL), entered into an administrative order on consent for the remedial
design phase of the remedy for operable unit one and the design phase is
proceeding. NL and other PRPs entered into an interim cost sharing arrangement
for this phase of the work. NL and the other PRPs have completed the work
comprising operable unit two (the extension of the municipal water supply), with
the exception of annual operation and maintenance. The U.S. EPA has also
demanded approximately $.9 million in past costs from the PRPs.
See also Item 1 - "Business - Chemicals - Regulatory and environmental
matters."
In addition to amounts accrued by NL for environmental matters, at December
31, 1997, the Company also had approximately $5 million accrued for the
estimated cost to complete environmental remediation efforts at certain of its
former facilities. Costs for future environmental remediation efforts are not
discounted to their present value, and no recoveries for remediation costs from
third parties have been recognized. Such accruals will be adjusted, if
necessary, as further information becomes available or as circumstances change.
No assurance can be given that the actual costs will not exceed accrued amounts.
At one of such facilities, the Company has been named as a PRP pursuant to
CERCLA at a Superfund site in Indiana. The Company has also undertaken a
voluntary cleanup program approved by state authorities at another Indiana site.
The total estimated cost for cleanup and remediation at the Indiana Superfund
site is $40 million, of which the Company's share is currently estimated to be
approximately $2 million. The Company's estimated cost to complete the
voluntary cleanup program at the other Indiana site, which involves both surface
and groundwater remediation, is relatively nominal. The Company believes it has
adequately provided accruals for reasonably estimable costs for CERCLA matters
and other environmental liabilities for all of such non-NL former facilities.
The imposition of more stringent standards or requirements under environmental
laws or regulations, new developments or changes respecting site cleanup costs
or allocation of such costs among PRPs or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites
could result in expenditures in excess of amounts currently estimated by the
Company to be required for such matters. Furthermore, there can be no assurance
that additional environmental matters related to current or former operations
will not arise in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Valhi's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: VHI). As of February 28, 1998, there were approximately
5,000 holders of record of Valhi common stock. The following table sets forth
the high and low sales prices for Valhi common stock for the years indicated,
according to the New York Stock Exchange Composite Tape, and dividends paid
during such periods. On February 27, 1998 the closing price of Valhi common
stock according to the NYSE Composite Tape was $9.63.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW PAID
<S> <C> <C> <C>
Year ended December 31, 1996
First Quarter $ 7 3/4 $6 1/8 $.05
Second Quarter 7 3/8 5 7/8 .05
Third Quarter 7 6 .05
Fourth Quarter 6 5/8 5 7/8 .05
Year ended December 31, 1997
First Quarter $ 8 1/4 $6 3/8 $.05
Second Quarter 8 3/4 8 1/8 .05
Third Quarter 9 1/8 8 3/16 .05
Fourth Quarter 11 1/16 9 1/16 .05
</TABLE>
Valhi's regular quarterly dividend is currently $.05 per share.
Declaration and payment of future dividends and the amount thereof will be
dependent upon the Company's results of operations, financial condition, cash
requirements for its businesses, contractual requirements and restrictions and
other factors deemed relevant by the Board of Directors. There are currently no
contractual restrictions on the ability of Valhi to declare or pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals $ - $ - $1,023.9
Component products 64.4 70.0 80.2
$ 64.4 $ 70.0 $1,104.1
Operating income:
Chemicals $ - $ - $ 178.5
Component products 17.5 20.9 19.9
$ 17.5 $ 20.9 $ 198.4
Equity in Waste Control $ (.5)
Specialists
Equity in Amalgamated Sugar $ 19.6 $ 13.9 $ 8.9
Company
Equity in NL prior to
consolidation:
Operations $ (52.4) $ (25.1)
Provision for market value (84.0) -
impairment
$(136.4) $ (25.1)
Income (loss) from $ (79.1) $ (3.0) $ 54.9
continuing operations
Discontinued operations 15.0 14.6 13.6
Extraordinary items (15.4) - -
Cumulative effect of change
in .4 - -
accounting principles
Net income (loss) $ (79.1) $ 11.6 $ 68.5
BASIC EARNINGS PER SHARE DATA:
Income (loss) from $ (.69) $ (.03) $ .48
continuing operations
Net income (loss) $ (.69) $ .10 $ .60
Cash dividends $ .05 $ .08 $ .12
Weighted average common
shares 114.1 114.3 114.4
outstanding
BALANCE SHEET DATA (at year
end):
Total assets $ 903.9 $2,480.7 $2,572.2
Long-term debt 302.5 1,086.7 1,084.3
Stockholders' equity 207.5 198.4 274.3
</TABLE>
[FN]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997
(IN MILLIONS, EXCEPT
PER SHARE DATA)
s> <C> <C>
TATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals $ 986.1 $ 984.4
Component products 88.7 108.7
$1,074.8 $1,093.1
Operating income:
Chemicals $ 92.0 $ 106.7
Component products 22.1 28.3
$ 114.1 $ 135.0
Equity in Waste Control $ (6.4) $ (12.7)
Specialists
Equity in Amalgamated Sugar $ 10.0
Company
Equity in NL prior to
consolidation:
Operations
Provision for market value
impairment
Income (loss) from continuing $ - $ 27.1
operations
Discontinued operations 42.0 33.6
Extraordinary items - (4.3)
Cumulative effect of change in
accounting principles - -
Net income (loss) $ 42.0 $ 56.4
ASIC EARNINGS PER SHARE DATA:
Income (loss) from continuing $ - $ .24
operations
Net income (loss) $ .37 $ .49
Cash dividends $ .20 $ .20
Weighted average common shares
outstanding 114.6 115.0
ALANCE SHEET DATA (at year end):
Total assets $2,145.0 $2,178.1
Long-term debt 844.5 1,008.1
Stockholders' equity 303.9 384.9
</TABLE>
[FN]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
The Company reported income from continuing operations of $27.1 million, or
.24 per basic share, in 1997 compared to income from continuing operations of
$.1 million, or nil per basic share, in 1996. Contributing to the improvement
in results in 1997 include (i) securities transaction gains of $48.9 million
resulting primarily from the disposition of shares of Dresser Industries common
stock held by the Company when certain holders of the Company's LYONs debt
obligation exercised their right to exchange such LYONs for the Dresser shares
(see Notes 6 and 10 to the Consolidated Financial Statements) and (ii) higher
operating income at NL Industries due in part to higher sales and production
volumes for TiO2. The Company's results in 1997 also include a $30 million
noncash pre-tax charge associated with the adoption of a new accounting standard
regarding accounting for environmental remediation liabilities at NL. See Note
17 to the Consolidated Financial Statements.
As discussed in Note 20 to the Consolidated Financial Statements, in
January 1998 NL completed the disposition of its specialty chemicals business
unit. The Company will report a gain on disposal of this business unit in the
first quarter of 1998. Also as discussed in Note 20 to the Consolidated
Financial Statements, in March 1998 CompX completed an initial public offering
of shares of its common stock which reduced the Company's ownership interest in
CompX to 62%. The Company will report a gain on reduction in interest in
subsidiary in the first quarter of 1998. Due in part to these gains, the
Company currently expects its income from continuing operations in 1998 will be
higher than that of 1997.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts, including, but not limited to, statements found in
Item 1 - "Business" and Item 3 - "Legal Proceedings" as well as in this Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that involve a number of risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward-looking statements include, but
are not limited to, future supply and demand for the Company's products
(including cyclicality thereof), general economic conditions, competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, environmental matters, government
regulations and possible changes therein, the ultimate resolution of pending
litigation and possible future litigation and other risks and uncertainties as
discussed elsewhere herein including, without limitation, the sections
referenced above.
CHEMICALS
Selling prices for TiO2, NL's principal product, were generally increasing
during 1997. NL's TiO2 operations are conducted through Kronos while its
specialty chemicals operations are conducted through Rheox. As discussed above,
in January 1998 NL completed the disposition of its specialty chemicals business
unit.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, % CHANGE
1995 1996 1997 1995-19961996-1997
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Kronos $ 894.1 $851.2 $837.2 - 5% - 2%
Rheox 129.8 134.9 147.2 + 4% + 9%
$1,023.9 $986.1 $984.4 - 4% - 0%
Operating income
(*):
Kronos $ 141.6 $ 51.9 $ 63.7 -63% +23%
Rheox 36.9 40.1 43.0 + 9% + 7%
$ 178.5 $ 92.0 $106.7 -48% +16%
Operating income
margins:
Kronos 16% 6% 8%
Rheox 28% 30% 29%
TiO2 data:
Sales volume
(thousands of
metric tons) 366 388 427 + 6% +10%
Average price
index
(1983=100) 152 139 133 - 9% - 4%
</TABLE>
[FN]
(*)Operating income is stated net of amortization of Valhi's purchase
accounting adjustments made in conjunction with the acquisitions of its
interest in NL, which adjustments result in additional depreciation,
depletion and amortization expense beyond amounts separately reported by NL.
Such additional non-cash expenses reduce chemicals operating income, as
reported by Valhi, by approximately $21 million annually as compared to
amounts separately reported by NL (approximately $19 million related to TiO2
and approximately $2 million related to specialty chemicals).
Kronos' operating income increased in 1997 compared to 1996 due primarily
to the net effects of record TiO2 sales and production volumes, income resulting
from refunds of German franchise taxes and slightly lower average TiO2 selling
prices. While Kronos' average TiO2 selling prices, in billing currency terms,
were 4% lower in 1997 compared to 1996, selling prices were generally increasing
throughout the year, and selling prices at the end of 1997 were approximately
12% higher than at the end of 1996 and 7% higher than the average for 1997.
Kronos' average Ti02 selling prices in the fourth quarter of 1997 were 10%
higher than the fourth quarter of 1996 and 5% higher than the third quarter of
1997. NL expects further increases in TiO2 selling prices in 1998 as the impact
of previously-announced price increases take effect. Kronos achieved record
TiO2 sales volumes in 1997, reflecting continued strong demand, particularly in
Europe, and Kronos' 1997 sales volumes increased 10% to a record 427,000 metric
tons compared with the previous record TiO2 sales volume set in 1996.
Approximately one-half of Kronos' 1997 TiO2 sales, by volume, were attributable
to markets in Europe, with 36% attributable to North America and the balance to
export markets (including 5% to Asian markets). Kronos' Ti02 production
facilities were operating at full capacity in 1997.
Kronos' operating income in 1997 includes income of $12.9 million related
to refunds of German franchise taxes related to prior years, including interest.
The German tax authorities were required to remit the refunds based on (i)
recent German court decisions which resulted in a reduction of the base upon
which the German franchise taxes were computed and (ii) prior agreements between
Kronos and the German tax authorities regarding payment of disputed taxes.
Kronos' operating income in 1997 also includes a $2.7 million gain from the
disposal of certain surplus assets.
Kronos' TiO2 operating income declined in 1996 compared with 1995 primarily
due to lower average selling prices, partially offset by higher sales volume.
In billing currency terms, average TiO2 selling prices in 1996 were 9% lower
than 1995. TiO2 selling prices began declining in the last half of 1995, and
selling prices at the end of 1996 were 17% lower than at the end of 1995 and 8%
below the average for 1996. While TiO2 prices declined in 1996, industry wide
demand for TiO2 grew, as Kronos' TiO2 sales volume increased 6% in 1996 to a
record 388,000 metric tons, with improved sales volumes worldwide. Sales
volumes in the second half of 1996 were 16% higher than the same period in 1995.
In response to softening demand in the first half of 1996 and its high inventory
levels at the end of 1995, Kronos curtailed production rates in early 1996. As
demand increased during the last half of 1996 and inventories returned to more-
normal levels, Kronos' production rates were increased to near full capacity in
late 1996 and the average capacity utilization was 95% for the year.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. The average TiO2 selling price index (using 1983 = 100) of 133 in 1997
was 4% lower than the 1996 index of 139 (1996 was 9% lower than the 1995 index
of 152). In comparison, the 1997 index was 24% below the 1990 price index of
175 and 5% higher than the 1993 price index of 127. Many factors influence TiO2
pricing levels, including industry capacity, worldwide demand growth and
customer inventory levels and purchasing decisions.
NL expects its TiO2 operating income and margins will continue to improve
in 1998 compared to 1997 due in part to expected higher average selling prices,
as the impact of announced price increases take effect. NL expects demand for
TiO2 to increase in 1998, although NL's 1998 sales volume is expected to be
slightly lower than 1997 as a result of Kronos' lower inventory levels at the
beginning of the year. The continued growth in demand should result in
improvement in average selling prices for TiO2 over the longer run.
Rheox's sales and operating income increased in 1997 compared to 1996 due
to higher sales and production volumes. Rheox's 1996 operating results include
a $2.7 million gain related to the reduction of certain U.S. employee pension
benefits.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway, the United Kingdom and Canada). A
significant amount of NL's sales generated from its non-U.S. operations are
denominated in currencies other than the U.S. dollar (67% in 1997), primarily
major European currencies and the Canadian dollar. Consequently, the translated
U.S. dollar value of NL's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or adversely impact
reported earnings and affect the comparability of period to period operating
results. In addition, a portion of NL's sales generated from its non-U.S.
operations are denominated in the U.S. dollar, and exchange rate fluctuations do
not impact the reported amount of such net sales. Certain raw materials,
primarily titanium-containing feedstocks, are purchased in U.S. dollars, while
labor and other production costs are denominated primarily in the local
currencies. Fluctuations in the value of the U.S. dollar relative to other
currencies decreased 1997 sales by $58 million compared to 1996, and decreased
1996 sales by $14 million compared to 1995. Fluctuations in the value of the
U.S. dollar relative to other currencies similarly impacted NL's foreign
currency-denominated operating expenses, and the net impact of currency exchange
rate fluctuations on NL's operating income comparisons has not been significant
during the past three years.
COMPONENT PRODUCTS
YEARS ENDED DECEMBER % CHANGE
31,
1995 1996 1997 1995-96 1996-97
(IN MILLIONS)
Net sales $80.2 $88.7 $108.7 +11% +22%
Operating income 19.9 22.1 28.3 +11% +28%
Operating income 25% 25% 26%
margin
CompX reported new records for sales and operating income in each of the
past three years. Sales and operating income increased in both 1997 and 1996
compared with the respective prior year due primarily to higher volumes in all
three major product lines (ergonomic computer support systems, precision ball
bearing slides and cabinet locks). Both computer support systems and precision
ball bearing slides reported new highs in sales for each of the past three
years. Net sales of precision ball bearing slides increased 26% in 1997
compared with 1996, while sales of ergonomic computer support systems were up
24% and cabinet lock sales increased 16%. Also contributing to higher cabinet
lock sales in 1997 were slightly higher average selling prices due to certain
price increases instituted at the beginning of 1997. In 1996, sales of precision
ball bearing slides increased 18% compared with 1995 and computer support
systems sales increased 14%. Lock volumes from a government contract completed
in early 1995 were only partially replaced, and consequently cabinet lock sales
declined about 5% in 1996 compared with 1995.
Operating income margins improved in 1997 due in part to the elimination of
certain unprofitable or low-margin product lines acquired in 1995 (which product
lines negatively impacted operating income margins in 1996) and increased sales
of higher margin ergonomic computer support systems and precision ball bearing
drawer slides. These improvements were partially offset by higher raw material
prices, primarily steel. Beginning in August 1997 the Company's steel prices
have increased approximately 4% per pound, resulting in an overall increase in
the Company's steel raw material cost of approximately 2% in 1997 compared to
1996.
In March 1998, concurrent with completion of the initial public offering of
shares of its common stock, CompX awarded certain shares of its common stock to
certain of its officers and directors. CompX will value such shares at the
public offering price. CompX will recognize a $3.3 million pre-tax charge in
the first quarter of 1998 related to the issuance of such shares.
In March 1998, CompX completed the Fort Lock Acquisition. On a pro forma
basis, assuming the Fort Lock Acquisition and the award of certain shares of
CompX common stock to certain officers and directors of CompX discussed above
had both occurred on January 1, 1997, CompX's net sales in 1997 would have been
$137.9 million, and its operating income in 1997 would have been $28.2 million.
About three-fourths of CompX's net sales are generated by its Canadian
operations. About 60% of these Canadian-produced sales are denominated in U.S.
dollars while substantially all of the related costs are incurred in Canadian
dollars. Consequently, relative changes in the U.S. dollar/Canadian dollar
exchange rate affect operating results. Since U.S. dollar/Canadian dollar
exchange rates have not fluctuated significantly since 1993, the impact on
operating income of fluctuations in the value of the U.S. dollar relative to the
Canadian dollar since 1993 has not been material.
WASTE MANAGEMENT
Waste Control Specialists LLC, formed in November 1995, was constructing
its West Texas facility during 1995 and 1996. Waste Control Specialists
reported losses of $.5 million during the last two months of 1995, $6.4 million
in 1996 and $12.7 million in 1997. Waste Control Specialists commenced
operations in February 1997, and net sales in 1997 were approximately $3.4
million. Waste Control Specialists' loss was higher in 1997 compared to 1996
due principally to start-up expenses associated with its new facility for the
treatment, storage and disposal of hazardous and toxic wastes, as well as larger
expenditures in conjunction with its on-going pursuit of permits for the
treatment, storage and disposal of low-level and mixed radioactive wastes.
Valhi is entitled to a 20% cumulative preferential return on its initial
$25 million investment in Waste Control Specialists after which earnings are
generally split in accordance with the membership interest ratios. The
liabilities assumed by Waste Control Specialists exceeded the carrying value of
the assets contributed by the other owner by approximately $3 million.
Accordingly, all of Waste Control Specialists' income or loss will accrue to
Valhi until Waste Control Specialists reports positive equity attributable to
the other owner.
In November 1997, Waste Control Specialists was issued a license by the TDH
for the treatment and storage (but not disposal) of low-level and mixed
radioactive wastes. The current provisions of the license generally enable
Waste Control Specialists to accept low-level and mixed radioactive wastes for
treatment and storage primarily from the DOE and other governmental agencies.
Waste Control Specialists accepted its first shipments of such wastes in
February 1998. See also Note 17 to the Consolidated Financial Statements.
GENERAL CORPORATE AND OTHER ITEMS
General corporate. Securities earnings increased in 1997 due to
distributions received from The Amalgamated Sugar Company LLC, which are
reported as dividend income, as well as a higher level of funds available for
investment, including interest income earned on debt financing Valhi provided to
Snake River Sugar Company and Snake River Farms II in early 1997 and funds
generated from the disposal of discontinued operations. See Notes 18 and 19 to
the Consolidated Financial Statements. Securities earnings in 1997 also include
aggregate securities transaction gains of $46.3 million related to the
disposition of a portion of the shares of Dresser Industries common stock held
by the Company when certain holders of the Company's LYONs debt obligation
exercised their right to exchange their LYONs for such Dresser shares. See
Notes 6 and 10 to the Consolidated Financial Statements. Any additional
exchanges in 1998 or beyond would similarly result in additional securities
transaction gains. Absent significant additional LYONs exchanges in 1998, the
Company currently expects securities earnings in 1998 to be lower than in 1997.
Net general corporate expenses increased in 1997 due primarily to NL's $30
million pre-tax charge related to adoption of a new accounting standard
regarding environmental remediation liabilities. See Note 17 to the
Consolidated Financial Statements. Net general corporate expenses in 1997 also
include $1.5 million of expenses related to the Amalgamated Sugar Company
LLC/Snake River Sugar Company transactions. Net general corporate expenses in
1996 were lower than in 1995 due primarily to lower provisions for environmental
remediation costs as well as the effect of a $2.8 million litigation settlement
gain and a $2.3 million gain on disposition of a surplus grain facility in 1996.
Because NL's $30 million pre-tax charge constitutes about one-half of the
Company's aggregate net general corporate expenses in 1997, the Company
currently expects net general corporate expenses in 1998 will be lower than in
1997.
Interest expense. Interest expense increased in 1997 compared to 1996 due
primarily to Valhi's $250 million in loans from Snake River Sugar Company. See
Note 10 to the Consolidated Financial Statements. Interest expense declined in
1996 compared to 1995 due primarily to lower average variable interest rates,
principally NL's DM-denominated debt, partially offset by higher average levels
of such debt. The Company currently expects interest expense will be lower in
1998 as compared to 1997 due primarily to a lower average level of outstanding
indebtedness (primarily Valhi's LYONs, the Valcor Senior Notes and indebtedness
related to NL's specialty chemicals operations which was repaid in January
1998).
At December 31, 1997, approximately $761 million of consolidated
indebtedness, principally publicly-traded debt, bears interest at fixed interest
rates averaging 11%. The weighted average interest rate on $338 million of
outstanding variable rate borrowings at December 31, 1997 was 6.8% compared to
an average of 5.3% on outstanding variable rate borrowing at December 31, 1996
and 6.4% on outstanding variable rate borrowings at December 31, 1995. The
weighted average interest rate on outstanding variable rate borrowings increased
from December 31, 1996 to December 31, 1997 due primarily to NL's January 1997
refinancing of certain indebtedness discussed below, in which NL refinanced
Rheox's term loan and used the net cash proceeds, along with other available
funds, to prepay a portion of Kronos' DM credit facility. The overall interest
rate on the Rheox term loan is higher than the overall interest rate on the DM
credit facility, and the DM LIBOR interest rate margin on outstanding borrowings
under the DM credit facility was increased in conjunction with the January 1997
prepayment.
NL has significant DM-denominated variable interest rate borrowings and,
accordingly, NL's interest expense is also subject to currency fluctuations.
Periodic cash interest payments are not required on Valhi's 9.25% deferred
coupon LYONs, and NL's 13% Discount Notes do not require periodic cash interest
payments until April 1999. As a result, current cash interest expense payments
are lower than accrual basis interest expense.
Minority interest. Minority interest in earnings in 1996 consisted
principally of NL dividends paid to stockholders other than Valhi. NL's Board
of Directors suspended quarterly dividends in the fourth quarter of 1996.
Because NL did not pay dividends in 1995 or 1997, all of NL's net income in such
years accrued to Valhi for financial reporting purposes. Minority interest in
earnings in 1995 and 1997 relates to certain partially-owned foreign
subsidiaries of NL, certain of which minority interest was purchased by Rheox in
early 1996. At December 31, 1997, NL separately reported a shareholders'
deficit of approximately $222 million and, as a result, no minority interest in
NL Industries is recorded in the Company's consolidated balance sheet. Until
such time as NL reports positive shareholders' equity in its separate financial
statements, all of NL's undistributed earnings accrues to the Company for
financial reporting purposes. As a result of NL's sale of its specialty
chemicals business unit in January 1998, NL expects to begin reporting positive
stockholder's equity starting in the first quarter of 1998. Consequently, the
Company expects to begin reporting minority interest in NL's earnings in 1998.
Also, the Company will begin to report minority interest in CompX's earnings in
1998 as a result of the March 1998 public offering of shares of CompX's common
stock which reduced the Company's ownership of CompX to 62%.
PROVISION FOR INCOME TAXES
The principal reasons for the difference between the Company's effective
income tax rates and the U.S. federal statutory income tax rates are explained
in Note 14 to the Consolidated Financial Statements. Income tax rates vary by
jurisdiction (country and/or state), and relative changes in the geographic mix
of the Company's pre-tax earnings can result in fluctuations in the effective
income tax rate. As discussed in Note 19 to the Consolidated Financial
Statements, The Amalgamated Sugar Company's results of operations in 1995 and
1996 are presented on the equity method. Amalgamated is a member of the
consolidated U.S. tax group of which Valhi and Contran are members, and
consequently the Company did not provide any incremental income taxes related to
such earnings. Certain subsidiaries, including NL, are not members of the
consolidated U.S. tax group and the Company does provide incremental income
taxes on such earnings. Both of these factors impact the Company's overall
effective tax rate.
The provision for income taxes in 1995 includes net deferred income tax
benefits resulting from changes in the U.S./Canada income tax treaty and the
reduction of NL's deferred income tax valuation allowance to recognize the
future benefit of certain tax credits. In 1996 and 1997, the geographic mix of
pre-tax income included losses in certain of NL's tax jurisdictions for which no
current refund was available and for which recognition of a deferred tax asset
was not considered appropriate. All of these factors also impacted the
Company's overall effective tax rate. See Note 14 to the Consolidated Financial
Statements.
EQUITY IN EARNINGS OF AMALGAMATED
As discussed in Note 19 to the Consolidated Financial Statements, The
Amalgamated Sugar Company's results of operations are presented on the equity
method during 1995 and 1996. Amalgamated's sales, operating income and net
earnings for each of such years are presented in Note 19 to the Consolidated
Financial Statements. Beginning in 1997, the Company commenced reporting
distributions received from The Amalgamated Sugar Company LLC as dividend
income.
Average sugar selling prices in 1996 were 6% higher than in 1995.
Reflecting a smaller crop size, refined sugar sales volume in 1996 (15.9 million
cwt) decreased 13% from the record levels of 1995. An increased extraction rate
in 1996, in part due to the implementation of certain recently-completed
productivity improvement capital projects, along with a higher sugar content of
the beets resulted in a lower beet cost per hundredweight ("cwt") of sugar
produced, lower aggregate sugar processing costs and improved FIFO-based
earnings in 1996 compared to 1995.
Sugarbeet purchase cost is the largest cost component of producing refined
sugar and the price paid for sugarbeets is, under the terms of contracts with
the sugarbeet growers, a function of the average selling price of Amalgamated's
refined sugar. As a result, changes in sugar selling prices impact sugarbeet
purchase costs as well as revenues and serve as a partial hedge against changing
prices. However, the impact of related LIFO inventory adjustments can
significantly affect operating income and margin comparisons relative to FIFO
basis comparisons.
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM
See Notes 18 and 1, respectively, to the Consolidated Financial Statements.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, certain computer programs that
have date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000 (the "Year 2000 Issue"). This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities.
NL has completed the process of evaluating the modifications to critical
software required to mitigate the Year 2000 Issue. NL is in the process of
communicating with its significant customers and suppliers to determine the
extent to which NL is vulnerable if those third parties fail to minimize their
own Year 2000 Issue. NL is utilizing both internal and external resources to
reprogram or replace and test its software and expects to substantially complete
all requirements in the first quarter of 1999. However, if such modifications
are not made, or are not completed timely, the Year 2000 Issue could have a
material adverse impact on NL's operations. In addition, there can be no
assurance that the systems of other companies on which NL's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with NL's systems, would not have a material
adverse effect on NL. NL's estimate of the costs to complete modifications to
critical software to address the Year 2000 Issue is not significant.
CompX has recently installed information systems upgrades for both its U.S.
and Canadian facilities which contained, among many other features, software
compatibility with the Year 2000 Issue. CompX does not currently anticipate
spending significant additional funds to address software compatibility with the
Year 2000 Issue with respect to its own internal systems. CompX intends to
initiate formal communications with its significant suppliers and large
customers to determine the extent to which CompX may be vulnerable if those
third parties fail to eliminate their own Year 2000 Issue. There can be no
assurance that the systems of other companies on which CompX's systems rely will
be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with CompX's systems, would not have a material
adverse effect on CompX. Because CompX has not completed the evaluation of its
Year 2000 Issue with respect to such third parties, it is not able to quantify
the costs that CompX may incur with respect to the Year 2000 Issue of such third
parties.
Waste Control Specialists' information system is currently not Year 2000
compliant. However, Waste Control Specialists is in the process of obtaining a
complete new information system which is expected to, among other things, be
Year 2000 compliant. The cost of such new information system is not yet known.
Valhi's corporate information systems are Year 2000 compliant.
The dates on which these plans to complete any necessary Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES:
CONSOLIDATED CASH FLOWS
Operating activities. Cash provided by operating activities before changes
in assets and liabilities was $116 million in 1995, $77 million in 1996 and $87
million in 1997. Changes in assets and liabilities result primarily from the
timing of production, sales and purchases. Under the terms of the Internal
Revenue Code and similar state regulations regarding the timing of estimated tax
payments, the Company was not required to pay income taxes (approximately $39
million) related to Medite's 1996 asset sales of its timber and timberlands and
Irish MDF subsidiary to such tax authorities until 1997. At that time, the
payment of such cash income taxes was shown as a reduction in cash flows from
operating activities even though the pre-tax proceeds from disposition of such
assets are shown as part of cash flows from investing activities. Similarly,
cash income taxes related to both Medite's February 1997 sale of the Oregon MDF
facility (approximately $10 million) and the April 1997 disposition of Sybra's
fast food operations (approximately $4 million) are also shown as a reduction in
cash flows from operating activities in 1997 eventhough the pre-tax proceeds
from such dispositions are also shown as part of cash flows from investing
activities in 1997. Cash flows from operating activities comparisons are also
impacted by relative changes in the Company's portfolio of marketable trading
securities. Changes in such portfolio generated approximately $51 million of
cash in 1995. Noncash interest expense consists of amortization of original
issue discount on certain Valhi and NL indebtedness and amortization of deferred
financing costs.
Investing activities. Capital expenditures are disclosed by business
segment in Note 2 to the Consolidated Financial Statements.
At December 31, 1997, the estimated cost to complete capital projects in
process approximated $4 million, all which relate to NL's Ti02 facility. NL's
and CompX's aggregate capital expenditures for 1998 are expected to approximate
the $37 million spent in 1997. Capital expenditures in 1998 are expected to be
financed primarily from operations or existing cash resources and credit
facilities.
During 1997, Valhi (i) loaned $180 million to Snake River Sugar Company and
$12.1 million to Snake River Farms II, (ii) collected $112.1 million principal
amount on such loans, (iii) received an $11.5 million pre-closing dividend from
Amalgamated, (iv) contributed $13 million in capital contributions to Waste
Control Specialists, (v) loaned a net $4 million to Waste Control Specialists
pursuant to a $10 million revolving facility due December 1998 and (vi)
purchased $6 million of certain marketable securities and $14 million of
additional shares of NL common stock.
During 1996, Valhi purchased $15 million of NL common stock, Rheox acquired
the minority interest of certain of its non-U.S. subsidiaries for $5 million and
Valhi contributed $17 million to Waste Control Specialists. During 1995, CompX
International purchased the assets of a Canadian workstation/drawer slide
competitor for an aggregate of $6 million, Valhi purchased $13 million of NL
common stock and Valhi invested $5 million in Waste Control Specialists.
Financing activities. Changes in indebtedness in 1997 include $250 million
borrowed from Snake River Sugar Company, the impact of NL's refinancing of its
Rheox term loan and prepayment of a portion of NL's DM credit facility, the
impact of Valhi LYON holders exchanging their LYONs debt obligation for shares
of Dresser Industries common stock held by the Company and the Valcor Senior
Notes purchased pursuant to the tender offers completed in April and September
1997, all as discussed below.
Net borrowings in 1996 include (i) DM 144 million ($96 million when
borrowed) under NL's DM credit facility used primarily to both fund NL's
operations and fund the German income tax settlement payments discussed below
and (ii) $13 million under Valhi short-term credit facilities. Repayments of
indebtedness in 1996 include scheduled principal payments on NL term loans. Net
repayments of indebtedness in 1995 relate primarily to (i) $39 million of net
short-term borrowings under NL DM-denominated short-term credit lines and (ii)
principal repayments under NL term loans, including a $10 million prepayment
under Rheox's term loan.
At December 31, 1997, unused credit available under existing credit
facilities approximated $99 million (exclusive of amounts available to Rheox
under its revolving bank credit facility, which was terminated in January 1998
upon the sale of substantially all of its assets).
CHEMICALS - NL INDUSTRIES
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. Excluding Rheox's specialty chemicals operations, NL generated $82
million in cash flows from operating activities before changes in assets and
liabilities in 1995, $34 million in 1996 and $38 million in 1997. Relative
changes in NL's inventories, receivables and payables (excluding the effect of
foreign currency translation), including relative changes in NL's portfolio of
marketable trading securities, consumed $28 million of net cash in 1995 and $39
million of net cash in 1996, and generated $20 million of net cash in 1997.
Average TiO2 selling prices began a downward trend in the last half of
1995, and TiO2 prices continued to decline throughout 1996 and the first quarter
of 1997. While NL's average TiO2 prices began to increase during the second
quarter of 1997 and continued to increase throughout the remainder of 1997, NL's
average TiO2 selling price in calendar 1997 was 4% lower than the calendar 1996
average. NL expects TiO2 prices will continue to increase during 1998 as the
impact of previously-announced price increases take effect. However, no
assurance can be given that price trends will conform to NL's expectations and
future cash flows could be adversely affected should prices trend downward. In
order to improve its near-term liquidity, NL refinanced Rheox's bank credit
facility in January 1997, obtaining a net $125 million of new long-term
financing, and used the net cash proceeds, along with other available funds, to
prepay a portion of the DM credit facility. In addition, NL and its lenders
modified certain financial covenants of the DM credit facility, and NL
guaranteed the facility. As a result of the January 1997 refinancing and
prepayment, NL's aggregate scheduled debt payments for 1997 and 1998 decreased
by $103 million ($64 million in 1997 and $39 million in 1998), and NL's total
debt was reduced by $28 million.
In January 1998, NL completed the disposition of its specialty chemicals
business unit conducted by Rheox for $465 million cash consideration, including
$20 million attributable to a five-year agreement by NL not to compete in the
rheological products business. A portion of the net proceeds were used to
prepay and terminate Rheox's bank credit facility. The remaining net proceeds
of approximately $280 million are available for NL's general corporate purposes,
subject to compliance with the terms of the indentures governing its publicly-
traded debt. NL intends to use the remaining net proceeds to invest in
additional TiO2 production capacity and to reduce its debt. In this regard, NL
has advised ICI of its interest in acquiring the portion of the Ti02
manufacturing joint venture NL does not currently own, and NL intends to prepay
its joint venture term loan in March 1998. Under the terms of such indentures,
NL is required to make an offer to purchase a pro rata portion of such notes, at
par value for the 11.75% Notes and at accreted value for the 13% Discount Notes,
to the extent that a specified amount of these net proceeds are not used to
either permanently paydown certain indebtedness of NL or its subsidiaries or
invest in additional productive assets (including additional Ti02 production
capacity), both as defined in the indentures, within nine months of the
disposition. The 13% Discount Notes can first be redeemed, at the option of NL,
in October 1998 at a price of 106% of their principal amount. NL may elect to
redeem the 13% Discount Notes depending on market conditions, availability of
resources and other factors it deems relevant. NL may acquire the 11.75% Notes
or 13% Discount Notes in the open market.
Based upon NL's expectations for the TiO2 industry and anticipated demands
on NL's cash resources as discussed herein, NL expects to have sufficient
liquidity to meet its near-term obligations including operations, capital
expenditures and debt service. To the extent that actual developments differ
from NL's expectations, NL's liquidity could be adversely affected.
NL's capital expenditures during the past three years aggregated $162
million, including $58 million ($6 million in 1997) for NL's ongoing
environmental protection and compliance programs, including German and Norwegian
off-gas desulfurization systems. NL's estimated 1998 capital expenditures are
$30 million and include $5 million in the area of environmental protection and
compliance, primarily related to the off-gas desulfurization and water treatment
chemical purification systems. NL spent $34 million in 1995 through 1997 ($7
million in 1997) in capital expenditures related to a debottlenecking project at
its Leverkusen, Germany chloride process TiO2 facility that increased NL's
worldwide annual attainable TiO2 production capacity to about 420,000 metric
tons. The capital expenditures of the TiO2 manufacturing joint venture are not
included in NL's capital expenditures.
At December 31, 1997, NL had cash and cash equivalents of $106 million (45%
held by non-U.S. subsidiaries) and had $84 million available for borrowing under
existing non-U.S. credit facilities. The terms of intercompany notes from KII
payable to NL mirror the terms of NL's publicly-traded debt and are designed to
facilitate the flow of funds from NL's subsidiaries to service such
indebtedness. At December 31, 1997, NL had complied with all financial
covenants governing its debt agreements.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies. NL has previously reached an
agreement with the German tax authorities, and paid certain tax deficiencies of
approximately DM 44 million ($28 million when paid), including interest, which
resolved certain significant tax contingencies for years through 1990. During
1997, NL reached a tentative agreement with the German tax authorities regarding
the years 1991 through 1994, and NL expects to pay DM 9 million ($5 million)
during 1998 in settlement of certain tax issues. Certain other significant
German tax contingencies remain outstanding for the years 1990 through 1996 and
will continue to be litigated. With respect to these contingencies, NL has
received certain tax assessments aggregating DM 119 million ($66 million),
including non-income tax related items and interest, for the years through 1996.
NL expects to receive tax assessments for an additional DM 20 million ($11
million), including non-income tax related items and interest, for 1991 through
1994. No payments of tax or interest deficiencies related to these assessments
are expected to be required until the litigation is resolved. A 1997 German tax
court proceeding involving a tax issue substantially the same as that involved
in NL's primary remaining German tax contingency was decided in favor of the
taxpayer. The German tax authorities have appealed the decision to the German
Supreme Court; NL believes that the decision by the German Supreme Court will be
rendered within two years and will become a legal precedent which will likely
determine the outcome of NL's primary dispute with the German tax authorities
which aggregates DM 121 million. Although NL believes that it will ultimately
prevail in the litigation, NL has granted a DM 94 million ($53 million at
December 31, 1997) lien on its Nordenham, Germany TiO2 plant in favor of the
City of Leverkusen, and a DM 5 million ($3 million at December 31, 1997) lien in
favor of the German tax authorities.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1997) relating to 1994. NL has appealed this assessment and expects to
litigate this issue.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has adequately provided accruals for additional taxes and
related interest expense which may ultimately result from all such examinations
and believes that the ultimate disposition of such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
At December 31, 1997, NL had recorded net deferred tax liabilities of $132
million. NL, which is not a member of the Contran Tax Group, operates in
numerous tax jurisdictions, in certain of which it has temporary differences
that net to deferred tax assets (before valuation allowance). NL has provided a
deferred tax valuation allowance of $189 million at December 31, 1997,
principally related to the U.S. and Germany, offsetting deferred tax assets
which NL believes do not currently meet the "more-likely-than-not" recognition
criteria.
In addition to the chemicals businesses conducted through Kronos and Rheox,
NL also has certain interests and associated liabilities relating to certain
discontinued or divested businesses.
NL has been named as a defendant, PRP, or both, in a number of legal
proceedings associated with environmental matters, including waste disposal
sites, mining locations and facilities currently or previously owned, operated
or used by NL, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. On a quarterly basis, NL evaluates the
potential range of its liability at sites where it has been named as a PRP or
defendant. NL believes it has provided adequate accruals ($135 million at
December 31, 1997) for reasonably estimable costs of such matters, but NL's
ultimate liability may be affected by a number of factors, including changes in
remedial alternatives and costs and the allocation of such costs among PRPs.
See Note 17 to the Consolidated Financial Statements. It is not possible to
estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to NL for sites for which it is possible to estimate
costs is approximately $175 million. NL's estimates of such liabilities have
not been discounted to present value, and NL has not recognized any potential
insurance recoveries. No assurance can be given that actual costs will not
exceed accrued amounts or the upper end of the range for sites for which
estimates have been made and no assurance can be given that costs will not be
incurred with respect to sites as to which no estimate presently can be made.
NL is also a defendant in a number of legal proceedings seeking damages for
personal injury and property damage arising from the sale of lead pigments and
lead-based paints. NL has not accrued any amounts for the pending lead pigment
and lead-based paint litigation. There is no assurance that NL will not incur
future liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, NL believes that the pending lead pigment and lead-based paint litigation
is without merit. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations
have, from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which NL and other
pigment manufacturers have been successful. NL currently believes the
disposition of all claims and disputes, individually or in the aggregate, should
not have a material adverse effect on its consolidated financial position,
results of operations or liquidity. There can be no assurance that additional
matters of these types will not arise in the future. See Item 3 - "Legal
Proceedings" and Note 17 to the Consolidated Financial Statements.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its capital resources, debt service and capital expenditure requirements
and estimated future operating cash flows. As a result of this process, NL has
in the past and may in the future seek to reduce, refinance, repurchase or
restructure indebtedness, raise additional capital, issue additional securities,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals industry. In the event
of any such transaction, NL may consider using its available cash, issuing its
equity securities or refinancing or increasing its indebtedness to the extent
permitted by the agreements governing NL's existing debt. In this regard, the
Indentures governing NL's publicly-traded debt contain provisions which limit
the ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
As discussed in "Results of Operations - Chemicals," NL has substantial
operations located outside the United States for which the functional currency
is not the U.S. dollar. As a result, the reported amount of NL's assets and
liabilities related to its non-U.S. operations, and therefore NL's consolidated
net assets, will fluctuate based upon changes in currency exchange rates. The
carrying value of NL's net investment in its German operations is a net
liability due principally to its DM bank credit facility, while its net
investment in its other non-U.S. operations are net assets.
COMPONENT PRODUCTS - COMPX INTERNATIONAL
In February 1998, CompX entered into a new $100 million revolving senior
credit facility and used a portion of the net proceeds to repay a $50 million
demand note to Valcor which CompX had distributed to Valcor in December 1997.
The new credit facility is unsecured and is due in 2003. Borrowings are
available for CompX's general corporate purposes, including potential
acquisitions. The new credit facility contains provisions which, among other
things, require the maintenance of minimum levels of net worth, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. In March 1998, CompX completed the Fort Lock
Acquisition for approximately $33 million cash consideration, using available
cash on hand and $25 million of borrowings under the new credit facility.
In March 1998, CompX completed an initial public offering of shares of its
common stock. The net proceeds to CompX were approximately $111 million. $75
million of the net proceeds were used to completely repay the outstanding
balance of CompX's new $100 million credit facility discussed above. CompX
believes that the net proceeds to CompX from the offering, after repayment of
borrowings under the new credit facility, together with cash generated from
operations and borrowing availability under the new credit facility will be
sufficient to meet CompX's liquidity needs for working capital, capital
expenditures, debt service and future acquisitions for the foreseeable future.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS
Waste Control Specialists capital expenditures from its November 1995
formation through 1997 approximated $21 million. Such capital expenditures,
along with its development stage operating losses, were funded primarily from
Valhi's $35 million of capital contributions ($5 million in 1995, $17 million in
1996 and the remaining $13 million in 1997) as well as certain debt financing
provided to Waste Control Specialists by Valhi. See Note 8 to the Consolidated
Financial Statements.
OTHER
Condensed cash flow data related to discontinued operations (Medite and
Sybra) and Amalgamated is presented in Notes 18 and 19, respectively, to the
Consolidated Financial Statements.
Medite and Valcor have made certain representations and warranties to the
respective purchasers of Medite's and Sybra's assets concerning, among other
things, the assets sold. Such representations are customary in transactions of
these types. Medite has agreed to indemnify the three purchasers of its assets
for up to an aggregate of $6.5 million, and Valcor has agreed to indemnify the
purchaser of Sybra's assets and the purchaser of Sybra's common stock for up to
an aggregate of $4 million, for certain breaches of these representations and
warranties. Valhi agreed to guarantee Medite's indemnification obligations.
The Company does not currently expect to be required to perform under any of
these indemnification obligations.
At December 31, 1997, assets held for sale, recorded at estimated net
realizable value and included in other assets, consist principally of land from
former Medite facilities. The salvageable property and equipment from Medite's
stud and veneer facilities were sold in 1997 for amounts approximating the
previously-estimated net realizable value.
GENERAL CORPORATE - VALHI
Valhi's operations are conducted primarily through subsidiaries and
affiliates (NL Industries, CompX and Waste Control Specialists). Accordingly,
Valhi's long-term ability to meet its parent company level corporate obligations
is dependent in large measure on the receipt of dividends or other distributions
from its subsidiaries. NL, which paid dividends in the first three quarters of
1996, suspended its dividend in the fourth quarter. Suspension of NL's dividend
is not expected to materially adversely impact Valhi's financial position or
liquidity. Various credit agreements to which certain subsidiaries are parties
contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions have not
significantly impacted Valhi's ability to service its parent company level
obligations. In September 1997, the Indenture governing Valcor's Senior Notes
was amended which, among other things, removed restrictions which had limited
the ability of Valcor to pay dividends to Valhi, as discussed below. Valhi has
not guaranteed any indebtedness of its subsidiaries. At December 31, 1997,
Valhi had $235 million of parent level cash and cash equivalents, including $105
million held by Valcor which could be distributed to Valhi.
Valhi's LYONs do not require current cash debt service. At December 31,
1997, Valhi held 3.1 million shares of Dresser common stock, which shares are
held in escrow for the benefit of holders of the LYONs. The LYONs are
exchangeable at any time, at the option of the holder, for the Dresser shares
owned by Valhi. Exchanges of LYONs for Dresser stock result in the Company
reporting income related to the disposition of the Dresser stock for both
financial reporting and income tax purposes, although no cash proceeds are
generated by such exchanges. See Notes 6 and 10 to the Consolidated Financial
Statements. Valhi's potential cash income tax liability that would have been
triggered at December 31, 1997, assuming exchanges of all of the outstanding
LYONs for Dresser stock at such date, was approximately $24.5 million. Valhi
continues to receive regular quarterly Dresser dividends (currently $.19 per
share) on the escrowed shares. At December 31, 1997, the LYONs had an accreted
value equivalent to approximately $28.50 per Dresser share, and the market price
of the Dresser common stock was $41.94 per share. The LYONS were redeemable at
the option of the LYON holder in October 1997, and holders representing only a
nominal amount of LYONs exercised their right to redeem their LYONs for an
amount of cash equal to the accreted LYONs obligation. The December 31, 1997
market price of Dresser common stock is equal to the equivalent accreted LYONs
obligation in March 2002. Because the LYONS were redeemable at the option of
the LYON holder in October 1997, the LYONS were classified as a current
liability and the Dresser shares are classified as a current asset at December
31, 1996. Both the LYONs debt obligation and the Dresser shares are classified
as noncurrent at December 31, 1997.
In January 1997, Valcor purchased $3.8 million principal amount of its
Senior Notes in open market transactions, substantially all at par value. In
April 1997, Valcor purchased $27.6 million principal amount of its Senior Notes
at par value pursuant to a tender offer. In September 1997, Valcor (i)
completed a consent solicitation whereby holders approved certain amendments to
the Valcor Senior Note Indenture which removed the restrictions which limited
the ability of Valcor and its subsidiaries to, among other things, incur debt,
pay dividends, create liens and enter into transactions or co-invest with
affiliates and (ii) purchased $66.2 million principal amount of its Senior Notes
for $1,057.50 per $1,000 principal amount pursuant to a subsequent tender offer.
Valcor paid an aggregate of $685,000 for consent fees in the solicitation.
Following these transactions, $2.4 million principal amount of Valcor Senior
Notes remains outstanding. Funds for these repurchases of Valcor Senior Notes
were provided primarily from the proceeds from the disposition of Medite and
Sybra. The remaining after-tax proceeds from such dispositions, net of
repayments of Medite's and Sybra's bank debt, are available for Valhi's general
corporate purposes.
During 1995, 1996 and 1997, Valhi purchased an additional $13 million, $15
million and $14 million, respectively, of NL common stock.
In 1997, the Company entered into a $10 million revolving credit facility
with Waste Control Specialists. Borrowings by Waste Control Specialists bear
interest at prime plus 1% and are due no later than December 31, 1998.
Valhi received approximately $73 million cash in early 1997 at the transfer
of control of its refined sugar operations to Snake River Sugar Company,
including a net $11.5 million pre-closing dividend received from Amalgamated.
As part of the transaction, Snake River made certain loans to Valhi aggregating
$250 million in January 1997. Snake River's sources of funds for its loans to
Valhi, as well as for the $14 million it contributed to The Amalgamated Sugar
Company LLC for its voting interest in the LLC, included cash capital
contributions by the grower members of Snake River and $192 million in debt
financing provided by Valhi in January 1997, of which $100 million was prepaid
in May 1997 when Snake River obtained $100 million of third-party term loan
financing. In addition, another $12 million of loans was prepaid during 1997.
After these prepayments, $80 million of loans to Snake River Sugar Company
remain outstanding. See Note 19 to the Consolidated Financial Statements.
Valhi currently expects that distributions received from the LLC, which are
dependent in part upon the future operations of the LLC, will exceed its debt
service requirements under its $250 million loans from Snake River. The cash
proceeds to Valhi from the transfer of control of Amalgamated's operations to
Snake River, including amounts to be collected in the future from Valhi's
remaining $80 million loan to Snake River, are and will be available for Valhi's
general corporate purposes.
Redemption of the Company's interest in the LLC, as discussed in Note 19 to
the Consolidated Financial Statements, would result in the Company reporting
income related to the disposition of its LLC interest for both financial
reporting and income tax purposes, although the net cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to simultaneously call its $250
million loans to Valhi. As a result, such net cash proceeds generated by
redemption of the Company's interest in the LLC could be less than the income
taxes that would become payable as a result of the disposition.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or privately-
negotiated transactions over an unspecified period of time. As of February 28,
1998, the Company had purchased approximately 72,000 shares for an aggregate of
$.7 million pursuant to such authorization.
In February 1998, Valhi entered into a new $120 million revolving credit
facility with Contran. Borrowings by Contran bear interest at the prime rate,
are collateralized by, among other things, approximately 8 million shares of
Valhi common stock held by Contran and are due in August 1998. See Note 20 to
the Consolidated Financial Statements.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the Indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units. In March 1998, Contran offered to
sell approximately 2.9 million shares of Tremont Corporation common stock to
Valhi in a privately-negotiated transaction. See Notes 16 and 20 to the
Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi's definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. See Note 16 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d)Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules listed on the
accompanying Index of Financial Statements and Schedules (see page F)
are filed as part of this Annual Report.
50%-or-less owned persons or subsidiaries not consolidated.
Consolidated financial statements of Waste Control Specialists LLC and
The Amalgamated Sugar Company are filed as part of this Annual Report
pursuant to Rule 3.09 of Regulation S-X.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
1997.
October 27, 1997 - Reported Items 5 and 7.
October 30, 1997 - Reported Items 5 and 7.
December 18, 1997 - Reported Items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. Valhi will furnish a copy of any of the exhibits listed
below upon payment of $4.00 per exhibit to cover the costs to
Valhi of furnishing the exhibits. Instruments defining the
rights of holders of long-term debt issues which do not exceed
10% of consolidated total assets will be furnished to the
Commission upon request.
Item No. Exhibit Index
3.1 Restated Articles of Incorporation of the
Registrant - incorporated by reference to
Appendix A to the definitive Prospectus/Joint
Proxy Statement of The Amalgamated Sugar
Company and LLC Corporation (File No. 1-5467)
dated February 10, 1987.
3.2 By-Laws of the Registrant as amended -
incorporated by reference to Exhibit 3.1 of
the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1992.
4.1 Form of Indenture between the Registrant and
NationsBank of Georgia, N.A., as Trustee,
governing Liquid Yield Option Notes due 2007
- incorporated by reference to Exhibit 4.1 to
a Registration Statement on Form S-2 (No. 33-
49866) filed by the Registrant.
4.2 Indenture dated October 20, 1993 governing
NL's 11 3/4% Senior Secured Notes due 2003,
including form of note, - incorporated by
reference to Exhibit 4.1 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
4.3 Indenture dated October 20, 1993 governing
NL's 13% Senior Secured Discount Notes due
2005, including form of note - incorporated
by reference to Exhibit 4.6 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.1 Form of Intercorporate Services Agreement
between the Registrant and Contran
Corporation - incorporated by reference to
Exhibit 10.1 of the Registrant's Annual
Report on Form 10-K (File No. 1-5467) for the
year ended December 31, 1992.
10.2 Intercorporate Services Agreement by and
between Contran Corporation and NL effective
as of January 1, 1997 - incorporated by
reference to Exhibit 10.2 to NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended March 31, 1997.
10.3 Asset Purchase Agreement between Medite
Corporation and Rogue Resources LLC dated
October 7, 1996 - incorporated by reference
to Exhibit 10.1 of Valcor's Quarterly Report
on Form 10-Q (File No. 33-63044) for the
quarter ended September 30, 1996.
10.4 Form of Guarantee between Valhi, Inc. and
Rogue Resources LLC - incorporated by
reference to Exhibit 10.4 of Valhi's Annual
Report on Form 10-K (File No. 1-5467) for the
year ended December 31, 1996.
10.5 Share Subscription and Redemption Agreement
among Medite Corporation, Willamette
Industries, Inc. and Medford International
Holdings dated November 4, 1996 -
incorporated by reference to Exhibit 10.1 of
Valcor's Quarterly Report on Form 10-Q (File
No. 33-63044) for the quarter ended September
30, 1996.
10.6 Form of Guarantee between Valhi, Inc. and
Willamette Industries, Inc. - incorporated by
reference to Exhibit 10.6 to Valhi's Annual
Report on Form 10-K (File No. 1-5467) for the
year ended December 31, 1996.
10.7 Asset Purchase Agreement between Medite
Corporation and SierraPine, a California
limited partnership, dated January 31, 1997 -
incorporated by reference to Exhibit 10.6 of
Valcor's Annual Report on Form 10-K (File No.
33-63044) for the year ended December 31,
1996.
10.8 Form of Guarantee between Valhi, Inc. and
SierraPine -incorporated by reference to
Exhibit 10.8 to Valhi's Annual Report on Form
10-K (File No. 1-5467) for the year ended
December 31, 1996.
10.9 Asset Purchase Agreement by and between
Sybra, Inc., Valcor, Inc. and U.S. Restaurant
Properties Master L.P. dated December 23,
1996 - incorporated by reference to Exhibit
10.7 of Valcor's Annual Report on Form 10-K
(File No. 33-63044) for the year ended
December 31, 1996.
10.10 First Amendment to the Asset Purchase
Agreement by and between Sybra, Inc., Valcor,
Inc. and U.S. Restaurant Properties Master
L.P. dated April 18, 1997 - incorporated by
reference to Exhibit 10.2 of Valcor's
Quarterly Report on Form 10-Q (File No. 33-
63044) for the quarter ended March 31, 1997.
10.11 Stock Purchase Agreement by and between
Valcor, Inc. and I.C.H. Corporation dated
February 7, 1997 - incorporated by reference
to Exhibit 10.8 of Valcor's Annual Report on
Form 10-K (File No. 33-63044) for the year
ended December 31, 1996.
10.12 First Amendment to the Stock Purchase
Agreement by and between Valcor, Inc. and
I.C.H. Corporation dated April 18, 1997 -
incorporated by reference to Exhibit 10.1 of
Valcor's Quarterly Report on Form 10-Q (File
No. 33-63044) for the quarter ended March 31,
1997.
10.13* Valhi, Inc. 1987 Stock Option - Stock
Appreciation Rights Plan, as amended -
incorporated by reference to Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994.
10.14* Valhi, Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.12 of
Valhi's Annual Report on Form 10-K (File No.
1-5467) for the year ended December 31, 1996.
10.15* Valhi, Inc. 1990 Non-Employee Director Stock
Option Plan - incorporated by reference to
Exhibit 4.1 of a Registration Statement on
Form S-8 (No. 33-41508) filed by the
Registrant.
10.16* Executive Severance Agreement effective as of
February 16, 1994 by and between Joseph S.
Compofelice (Executive Vice President of the
Registrant) and NL - incorporated by
reference to Exhibit 10.2 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1996.
10.17* 1989 Long Term Performance Incentive Plan of
NL Industries, Inc. - incorporated by
reference to Exhibit B to NL's Proxy
Statement on Schedule 14A (File No. 1-640)
for the annual meeting held on May 8, 1996.
10.18* Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries,
Inc. effective as of January 1, 1991 -
incorporated by reference to Exhibit 10.26 to
NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1992.
10.19* NL Industries, Inc. Variable Compensation
Plan - incorporated by reference to Exhibit A
of NL's Proxy Statement on Schedule 14A (File
No. 1-640) for the annual meeting held on May
8, 1996.
10.20* CompX International Inc. 1997 Long-Term
Incentive Plan - incorporated by reference to
Exhibit 10.2 to CompX's Registration
Statement on Form S-1 (File No. 333-42643).
10.21 Second Amended and Restated Loan Agreement
dated January 31, 1997 among Kronos
International, Inc., the banks set forth
therein and Hypobank International S.A., as
Agent - incorporated by reference to Exhibit
10.2 of NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31,
1996.
10.22 Formation Agreement dated January 3, 1997 (to
be effective December 31, 1996) between Snake
River Sugar Company and The Amalgamated Sugar
Company of The Amalgamated Sugar Company LLC
- incorporated by reference to Exhibit 10.19
to Valhi's Annual Report on Form 10-K (File
No. 1-5467) for the year ended December 31,
1996.
10.23 Company Agreement of The Amalgamated Sugar
Company LLC dated January 3, 1997 (to be
effective December 31, 1996) - incorporated
by reference to Exhibit 10.20 of Valhi's
Annual Report on Form 10-K (File No. 1-5467)
for the year ended December 31, 1996.
10.24 First Amendment to the Company Agreement of
The Amalgamated Sugar Company LLC dated May
14, 1997 - incorporated by reference to
Exhibit 10.1 to Valhi's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter
ended June 30, 1997.
10.25 Subordinated Promissory Note in the principal
amount of $37.5 million between Valhi, Inc.
and Snake River Sugar Company, and the
related Pledge Agreement, both dated January
3, 1997 - incorporated by reference to
Exhibit 10.21 to Valhi's Annual Report on
Form 10-K (File No. 1-5467) for the year
ended December 31, 1996.
10.26 Limited Recourse Promissory Note in the
principal amount of $212.5 million between
Valhi, Inc. and Snake River Sugar Company,
and the related Limited Recourse Pledge
Agreement, both dated January 3, 1997 -
incorporated by reference to Exhibit 10.22 to
Valhi's Annual Report on Form 10-K (File No.
1-5467) for the year ended December 31, 1996.
10.27 Subordinated Loan Agreement between Snake
River Sugar Company and Valhi, Inc., as
amended and restated effective May 14, 1997
- incorporated by reference to Exhibit 10.9
to Valhi's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended June
30, 1997.
10.28 Deposit Trust Agreement related to the
Amalgamated Collateral Trust among ASC
Holdings, Inc. and Wilmington Trust Company
dated May 14, 1997 - incorporated by
reference to Exhibit 10.2 to Valhi's
Quarterly Report on Form 10-Q (File No. 1-
5467) for the quarter ended June 30, 1997.
10.29 Pledge Agreement between the Amalgamated
Collateral Trust and Snake River Sugar
Company dated May 14, 1997 - incorporated by
reference to Exhibit 10.3 to Valhi's
Quarterly Report on Form 10-Q (File No. 1-
5467) for the quarter ended June 30, 1997.
10.30 Guarantee by the Amalgamated Collateral Trust
in favor of Snake River Sugar Company dated
May 14, 1997 - incorporated by reference to
Exhibit 10.4 to Valhi's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter
ended June 30, 1997.
10.31 Amended and Restated Pledge Agreement between
ASC Holdings, Inc. and Snake River Sugar
Company dated May 14, 1997 - incorporated by
reference to Exhibit 10.5 to Valhi's
Quarterly Report on Form 10-Q (File No. 1-
5467) for the quarter ended June 30, 1997.
10.32 Collateral Deposit Agreement among Snake
River Sugar Company, Valhi, Inc. and First
Security Bank, National Association dated May
14, 199 - incorporated by reference to
Exhibit 10.6 to Valhi's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter
ended June 30, 1997.
10.33 Voting Rights and Forbearance Agreement
among the Amalgamated Collateral Trust, ASC
Holdings, Inc. and First Security Bank,
National Association dated May 14, 1997 -
incorporated by reference to Exhibit 10.7 to
Valhi's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30,
1997.
10.34 Voting Rights and Collateral Deposit
Agreement among Snake River Sugar Company,
Valhi, Inc., and First Security Bank,
National Association dated May 14, 1997 -
incorporated by reference to Exhibit 10.8 to
Valhi's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30,
1997.
10.35 Subordination Agreement between Valhi, Inc.
and Snake River Sugar Company dated May 14,
1997 - incorporated by reference to Exhibit
10.10 to Valhi's Quarterly Report on Form 10-
Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.36 Form of Option Agreement among Snake River
Sugar Company, Valhi, Inc. and the holders of
Snake River Sugar Company's 10.9% Senior
Notes Due 2009 dated May 14, 1997 -
incorporated by reference to Exhibit 10.11 to
Valhi's Quarterly Report on Form 10-Q (File
No. 1-5467) for the quarter ended June 30,
1997.
10.37 Formation Agreement dated as of October 18,
1993 among Tioxide Americas Inc., Kronos
Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to
Exhibit 10.2 of NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
10.38 Joint Venture Agreement dated as of October
18, 1993 between Tioxide Americas Inc. and
Kronos Louisiana, Inc. - incorporated by
reference to Exhibit 10.3 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.39 Kronos Offtake Agreement dated as of October
18, 1993 by and between Kronos Louisiana,
Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.4 of
NL's Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended September 30,
1993.
10.40 Amendment No. 1 to Kronos Offtake Agreement
dated as of December 20, 1995 between Kronos
Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to
Exhibit 10.22 of NL's Annual Report on Form
10-K (File No. 1-640) for the year ended
December 31 1995.
10.41 Master Technology and Exchange Agreement
dated as of October 18, 1993 among Kronos,
Inc., Kronos Louisiana, Inc., Kronos
International, Inc., Tioxide Group Limited
and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 of
NL's Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended September 30,
1993.
10.42 Allocation Agreement dated as of October 18,
1993 between Tioxide Americas Inc., ICI
American Holdings, Inc., Kronos, Inc. and
Kronos Louisiana, Inc. - incorporated by
reference to Exhibit 10.10 to NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.43 Lease Contract dated June 21, 1952, between
Farbenfabrieken Bayer Aktiengesellschaft and
Titangesellschaft mit beschrankter Haftung
(German language version and English
translation thereof) - incorporated by
reference to Exhibit 10.14 of NL's Annual
Report on Form 10-K (File No. 1-640) for the
year ended December 31, 1985.
10.44 Agreement dated February 8, 1984 between
Bayer AG and Kronos Titan GmbH (German
language version and English translation
thereof) - incorporated by reference to
Exhibit 10.16 of NL's Annual Report on Form
10-K (File No. 1-640) for the year ended
December 31, 1985.
10.45 Contract on Supplies and Services among Bayer
AG, Kronos Titan GmbH and Kronos
International, Inc. dated June 30, 1995
(English translation from German language
document) - incorporated by reference to
Exhibit 10.1 of NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended
September 30, 1995.
10.46 Richards Bay Slag Sales Agreement dated May
1, 1995 between Richards Bay Iron and
Titanium (Proprietary) Limited and Kronos,
Inc. - incorporated by reference to Exhibit
10.17 to NL's Annual Report on Form 10-K
(File No. 1-640) for the year ended December
31, 1995.
10.47 Registration Rights Agreement dated October
30, 1991, by and between NL and Tremont -
incorporated by reference to Exhibit 4.3 of
NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1991.
10.48 Insurance Sharing Agreement, effective
January 1, 1990, by and between NL, NL
Insurance, Ltd. (an indirect subsidiary of
Tremont Corporation) and Baroid Corporation -
incorporated by reference to Exhibit 10.20 to
NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1991.
10.49 $120 Million Credit Agreement between Contran
Corporation, as borrower, and Valhi, Inc., as
lender - incorporated by reference to Exhibit
No. 7 to Amendment No. 60 to the Schedule 13D
filed by Contran and certain other persons
with respect to the Registrant's common
stock.
10.50 Asset Purchase Agreement dated as of December
29, 1997 by and among NL Industries, Inc.,
Rheox, Inc., Rheox International, Inc.,
Harrisons and Crosfield plc, Harrisons and
Crosfield (America) Inc. and Elementis
Acquisition 98, Inc. - incorporated by
reference to Exhibit 10.50 to NL's Annual
Report on Form 10-K (File No. 1-640) for the
year ended December 31, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule for the year ended
December 31, 1997.
* Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VALHI, INC.
(Registrant)
By: /s/ Harold C. Simmons
Harold C. Simmons, March 20, 1998
(President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Norman S. Edelcup /s/ Harold C. Simmons
Norman S. Edelcup, March 20, 1998 Harold C. Simmons, March 20, 1998
(Director) (Chairman of the Board, President
and Chief Executive Officer)
/s/ Kenneth R. Ferris /s/ Glenn R. Simmons
Kenneth R. Ferris, March 20, 1998 Glenn R. Simmons, March 20, 1998
(Director) (Vice Chairman of the Board)
/s/ J. Walter Tucker, Jr. /s/ Bobby D. O'Brien
J. Walter Tucker, Jr., March 20, 1998 Bobby D. O'Brien, March 20, 1998
(Director) (Vice President,
Principal Financial Officer)
/s/ Gregory M. Swalwell
Gregory M. Swalwell, March 20, 1998
(Controller,
Principal Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VALHI, INC.
(Registrant)
By:
Harold C. Simmons, March __, 1998
(President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Norman S. Edelcup, March __, 1998 Harold C. Simmons, March , 1998
(Director) (Chairman of the Board, President
and Chief Executive Officer)
Kenneth R. Ferris, March __, 1998 Glenn R. Simmons, March , 1998
(Director) (Vice Chairman of the Board)
J. Walter Tucker, Jr., March __, 1998 Bobby D. O'Brien, March , 1998
(Director) (Vice President,
Principal Financial Officer)
Gregory M. Swalwell, March , 1998
(Controller,
Principal Accounting Officer)
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(A) AND 14(D)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS PAGE
Reports of Independent Accountants F-1/F-2
Consolidated Balance Sheets - December 31, 1996 and 1997 F-3/F-4
Consolidated Statements of Income -
Years ended December 31, 1995, 1996 and 1997 F-5/F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 1995, 1996 and 1997 F-7/F-9
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1995, 1996 and 1997 F-10
Notes to Consolidated Financial Statements F-11/F-55
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule I - Condensed financial information of Registrant S-2/S-9
Schedule II - Valuation and qualifying accounts S-10/S-11
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Valhi, Inc.:
We have audited the accompanying consolidated balance sheets of Valhi, Inc.
and Subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, cash flows and stockholders' equity for each of the three
years in the period ended December 31, 1997. 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 did not audit the
financial statements of The Amalgamated Sugar Company as of December 31, 1996
and for each of the two years in the period ended December 31, 1996, which
constituted approximately 2% of consolidated assets as of December 31, 1996, and
whose 1995 and 1996 results of operations are presented on the equity method in
the accompanying consolidated statements of income. These statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion, insofar as it relates to amounts included for such company, is based
solely upon their report.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Valhi, Inc. and Subsidiaries as of
December 31, 1996 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
As discussed in Note 17 to the consolidated financial statements, in 1997
the Company changed its method of accounting for environmental remediation costs
in accordance with Statement of Position No. 96-1.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 13, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of The Amalgamated Sugar Company:
We have audited the balance sheets of The Amalgamated Sugar Company as of
December 31, 1996, and the related statements of income and shareholder's equity
and cash flows for each of the years in the two year 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 financial position of The Amalgamated Sugar
Company at December 31, 1996, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
January 31, 1997
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
1996 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 255,679 $ 360,369
Marketable securities 142,478 -
Accounts and other receivables 164,844 174,319
Receivable from affiliates 13,931 104
Inventories 251,597 204,718
Prepaid expenses 7,537 3,607
Deferred income taxes 1,597 7,541
Total current assets 837,663 750,658
Other assets:
Marketable securities 51,328 273,616
Investment in and advances to joint 196,697 192,239
ventures
Loans and notes receivable 3,240 82,556
Mining properties 36,441 30,363
Prepaid pension cost 25,313 24,111
Goodwill 258,359 256,539
Deferred income taxes 223 110
Other assets 45,479 26,267
Total other assets 617,080 885,801
Property and equipment:
Land 37,538 17,100
Buildings 189,875 145,599
Equipment 610,545 506,402
Construction in progress 15,723 3,284
853,681 672,385
Less accumulated depreciation 163,442 130,731
Net property and equipment 690,239 541,654
$2,144,982 $2,178,113
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1997
<S> <C> <C>
Current liabilities:
Notes payable $ 38,732 $ 13,968
Current maturities of long-term debt 235,648 76,854
Accounts payable 75,307 71,559
Accrued liabilities 127,935 114,721
Payable to affiliates 47,387 30,996
Income taxes 8,148 15,103
Deferred income taxes 30,523 891
Total current liabilities 563,680 324,092
Noncurrent liabilities:
Long-term debt 844,468 1,008,087
Accrued pension cost 59,215 45,641
Accrued OPEB cost 56,257 51,273
Accrued environmental costs 109,908 128,246
Deferred income taxes 178,049 207,403
Other 29,237 28,180
Total noncurrent liabilities 1,277,134 1,468,830
Minority interest in NL Industries - -
Minority interest in NL foreign subsidiaries 249 257
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 124,768 and 125,333 shares issued 1,248 1,253
Additional paid-in capital 35,258 38,355
Retained earnings 282,766 315,977
Adjustments:
Marketable securities 65,105 127,731
Currency translation (6,210) (24,440)
Pension liabilities (3,160) (2,533)
Treasury stock, at cost - 10,126 and 10,130 shar (71,088) (71,409)
Total stockholders' equity 303,919 384,934
$2,144,982 $2,178,113
</TABLE>
[FN]
Commitments and contingencies (Notes 14, 17, 18, 19 and 20)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995* 1996* 1997
<S> <C> <C> <C>
Revenues and other income:
Net sales $1,104,177 $1,074,818 $1,093,091
Other, net 29,618 41,938 124,825
1,133,795 1,116,756 1,217,916
Cost and expenses:
Cost of sales 740,492 808,248 804,438
Selling, general and 214,728 205,520 227,108
administrative
Interest 103,426 98,497 118,895
1,058,646 1,112,265 1,150,441
75,149 4,491 67,475
Equity in earnings (losses) of:
Waste Control Specialists (554) (6,407) (12,700)
Amalgamated Sugar Company 8,900 10,009 -
Income from before taxes 83,495 8,093 54,775
Provision for income taxes 27,980 1,113 27,631
Minority interest 622 6,915 43
Income from continuing 54,893 65 27,101
operations
Discontinued operations 13,622 41,981 33,550
Extraordinary item - - (4,291)
Net income $ 68,515 $ 42,046 $ 56,360
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995* 1996* 1997
<S> <C> <C> <C>
Basic earnings per common share:
Continuing operations $.48 $ - $ .24
Discontinued operations .12 .37 .29
Extraordinary item - - (.04)
$.60 $.37 $ .49
Diluted earnings per common share:
Continuing operations $.48 $ - $ .24
Discontinued operations .12 .37 .29
Extraordinary item - - (.04)
$.60 $.37 $ .49
Cash dividends per share $.12 $.20 $ .20
Shares used in the calculation of
per share amounts:
Basic earnings per common share 114,437 114,622 115,031
Dilutive impact of stock options 815 487 850
Diluted earnings per common share 115,252 115,109 115,881
</TABLE>
* Reclassified.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995* 1996* 1997
<S> <C> <C> <C>
Operating activities:
Net income $ 68,515 $ 42,046 $ 56,360
Depreciation, depletion and
amortization 62,599 63,942 62,283
Securities transaction gains (1,225) (138) (48,920)
Noncash interest expense 31,186 33,790 36,077
Change in accounting principle - - 30,000
Deferred income tax benefits (11,737) (8,936) (18,761)
Minority interest 622 6,915 43
Other, net (11,698) (14,542) (13,047)
Equity in (income) losses:
Discontinued operations (13,622) (41,981) (33,550)
Extraordinary item - - 4,291
Waste Control Specialists 554 6,407 12,700
Amalgamated Sugar Company (8,900) (10,009) -
116,294 77,494 87,476
Discontinued operations, net 26,914 37,784 (43,132)
Amalgamated Sugar Company, net 41,692 24,587 -
Change in assets and liabilities:
Accounts and other receivables (3,098) 1,532 (24,206)
Inventories (57,540) 6,739 20,269
Accounts payable and accrued
liabilities (19,060) (6,002) 12,626
Income taxes 14,977 (40,190) 17,762
Accounts with affiliates (3,079) (6,023) 26,496
Other, net 6,019 (14,706) (4,269)
Trading securities:
Sale proceeds 51,286 - -
Purchases (762) - -
Net cash provided by
operating activities 173,643 81,215 93,022
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995* 1996* 1997
<S> <C> <C> <C>
Investing activities:
Capital expenditures $(66,291) $(69,801) $ (36,725)
Purchases of:
Minority interest (13,250) (19,795) (14,222)
Marketable securities - - (6,000)
Investment in Waste Control (5,000) (17,000) (13,000)
Specialists
Purchase of business unit (5,982) - -
Proceeds from disposal of marketable
securities - - 6,875
Loans to affiliates:
Loans (62,000) (7,800) (67,625)
Collections 59,000 10,800 63,625
Other loans and notes receivable:
Loans - - (200,600)
Collections - - 119,100
Pre-close dividend from Amalgamated
Sugar Company - - 11,518
Discontinued operations, net (24,313) 159,746 91,819
Amalgamated Sugar Company, net (24,013) (13,460) -
Other, net 918 7,211 11,448
Net cash provided (used) by
investing activities (140,931) 49,901 (33,787)
Financing activities:
Indebtedness:
Borrowings 117,556 224,503 390,369
Principal payments (121,170) (169,477) (333,101)
Deferred financing costs - - (4,643)
Loans from affiliates:
Loans - 7,844 -
Repayments - (600) (7,244)
Valhi dividends (13,809) (23,057) (23,149)
Distributions to minority interest (14) (7,416) (2)
Discontinued operations, net (609) (80,545) 22,380
Amalgamated Sugar Company, net (20,208) 4,329 -
Other, net 1,153 916 4,049
Net cash provided (used) by
financing activities (37,101) (43,503) 48,659
Net increase (decrease) $ (4,389) $ 87,613 $ 107,894
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995* 1996* 1997
<S> <C> <C> <C>
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and
financing activities $ (4,389) $ 87,613 $107,894
Currency translation 4,550 (2,842) (3,204)
161 84,771 104,690
Balance at beginning of year 170,747 170,908 255,679
Balance at end of year $170,908 $255,679 $360,369
Supplemental disclosures-cash paid for:
Interest, net of amounts capitalized $ 94,244 $ 82,190 $ 87,115
Income taxes 38,672 64,544 51,264
</TABLE>
* Reclassified.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
<S> <C> <C> <C>
Balance at December 31, 1994 $1,245 $33,341 $209,071
Net income - - 68,515
Cash dividends - - (13,809)
Adjustments, net - - -
Other, net 1 1,263 -
Balance at December 31, 1995 1,246 34,604 263,777
Net income - - 42,046
Cash dividends - - (23,057)
Adjustments, net - - -
Other, net 2 654 -
Balance at December 31, 1996 1,248 35,258 282,766
Net income - - 56,360
Cash dividends - - (23,149)
Adjustments, net - - -
Other, net 5 3,097 -
Balance at December 31, 1997 $1,253 $38,355 $315,977
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIESTRANSLATIONLIABILITIES STOCK EQUITY
<S> <C> <C> <C> <C> <C>
Balance at December 31, $ 37,669 $(12,128) $ (506) $(70,268) $198,424
1994
Net income - - - - 68,515
Cash dividends - - - - (13,809)
Adjustments, net 17,960 4,698 (2,375) - 20,283
Other, net - - - (386) 878
Balance at December 31, 55,629 (7,430) (2,881) (70,654) 274,291
1995
Net income - - - - 42,046
Cash dividends - - - - (23,057)
Adjustments, net 9,476 1,220 (279) - 10,417
Other, net - - - (434) 222
Balance at December 31, 65,105 (6,210) (3,160) (71,088) 303,919
1996
Net income - - - - 56,360
Cash dividends - - - - (23,149)
Adjustments, net 62,626 (18,230) 627 - 45,023
Other, net - - - (321) 2,781
Balance at December 31, $127,731 $(24,440) $(2,533) $(71,409) $384,934
1997
</TABLE>
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization. Valhi, Inc. (NYSE: VHI) is a subsidiary of Contran
Corporation which holds, directly or through subsidiaries, approximately 93% of
Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee.
Mr. Simmons, the Chairman of the Board and Chief Executive Officer of Valhi and
Contran, may be deemed to control such companies.
Management's estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
Principles of consolidation. The consolidated financial statements include
the accounts of Valhi and its majority-owned subsidiaries (collectively, the
"Company"), except as described below. All material intercompany accounts and
balances have been eliminated. The Company did not consolidate the financial
position of its refined sugar operations conducted by The Amalgamated Sugar
Company at December 31, 1996 because control of such operations was temporary at
that date. See Note 19. The Company has not consolidated its 58%-owned
subsidiary, Waste Control Specialists, because the Company is not deemed to
control Waste Control Specialists. See Note 3. The results of the Company's
former building products and fast food operations are presented as discontinued
operations. See Note 18. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments, net of related deferred income tax effects, are
accumulated in the currency translation adjustments component of stockholders'
equity. Currency transaction gains and losses are recognized in income
currently.
Net sales. Sales are recorded when products are shipped.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. Inventory costs are generally based on average cost or the first-in,
first-out method.
Cash and cash equivalents. Cash equivalents, including restricted cash,
include bank time deposits and government and commercial notes and bills with
original maturities of three months or less. Restricted cash at December 31,
1996 and 1997 represents amounts restricted pursuant to outstanding letters of
credit and certain indebtedness agreements ($11 million and $10 million,
respectively).
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices or
as otherwise disclosed. Unrealized gains and losses on trading securities are
recognized in income currently. Unrealized gains and losses on available-for-
sale securities are accumulated in the marketable securities adjustment
component of stockholders' equity, net of related deferred income taxes.
Realized gains and losses are based upon the specific identification of the
securities sold.
Investment in joint ventures. Investments in more than 20%-owned but less
than majority-owned companies, as well as the Company's investment in Waste
Control Specialists, are accounted for by the equity method. Differences
between the cost of each investment and the Company's pro rata share of the
entity's separately-reported net assets, if any, are allocated among the assets
and liabilities of the entity based upon estimated relative fair values. Such
differences, which were not material at December 31, 1997, are charged or
credited to income as the entities depreciate, amortize or dispose of the
related net assets.
Mining properties. Mining properties are stated at cost less accumulated
depletion. Depletion is computed primarily by the unit-of-production method.
Intangible assets and amortization. Goodwill, representing the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method, is amortized by the straight-line method
over not more than 40 years (weighted average remaining life of 28.5 years at
December 31, 1997) and is stated net of accumulated amortization of $25.8
million at December 31, 1997 (1996 - $18.1 million). At December 31, 1997, all
goodwill relates to NL Industries. The Company's criteria for evaluating the
recoverability of goodwill includes consideration of the fair value of the
applicable subsidiary. At December 31, 1997, the quoted market price of NL
common stock ($13.63 per share) was in excess of the Company's net investment in
NL at that date ($3.83 per NL share held).
Other intangible assets are amortized by the straight-line method over the
periods (10 to 20 years) expected to be benefited and are stated net of
accumulated amortization of $8.1 million at December 31, 1997 (1996 - $15.2
million).
Property, equipment and depreciation. Property and equipment are stated at
cost. Maintenance, repairs and minor renewals are expensed; major improvements
are capitalized. Interest costs related to major long-term capital projects are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments and comprising
continuing operations were $1 million in 1995 and $2 million in each of 1996 and
1997.
Depreciation is computed principally by the straight-line and unit-of-
production methods over the estimated useful lives of ten to 40 years for
buildings and three to 20 years for equipment.
Long-term debt. Long-term debt is stated net of unamortized original issue
discount ("OID"). OID is amortized over the period during which interest is not
paid and deferred financing costs are amortized over the term of the applicable
issue, both by the interest method. Capital lease obligations are stated net of
imputed interest.
Interest rate swaps and contracts. The Company will periodically use
interest rate swaps and other types of contracts (such as caps and floors) to
manage interest rate risk with respect to financial assets or liabilities. The
Company does not enter into these contracts for speculative purposes. Income or
expense on swaps and contracts designated as hedges of assets or liabilities is
recorded as an adjustment to interest income or expense. If the swap or
contract is terminated, the resulting gain or loss is deferred and amortized
over the remaining life of the underlying asset or liability. If the hedged
instrument is disposed of, the swap or contract agreement is marked to market
with any resulting gain or loss included with the gain or loss from the
disposition. Any cost associated with the swap or contract is deferred and
amortized over the term of the agreement.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated United States federal income tax group (the "Contran Tax
Group"). The policy for intercompany allocation of federal income taxes provides
that subsidiaries included in the Contran Tax Group compute the provision for
income taxes on a separate company basis. Subsidiaries make payments to or
receive payments from Contran in the amounts they would have paid to or received
from the Internal Revenue Service had they not been members of the Contran Tax
Group. The separate company provisions and payments are computed using the tax
elections made by Contran. NL is a separate U.S. taxpayer and is not a member
of the Contran Tax Group. Waste Control Specialists LLC is treated as a
partnership for federal income tax purposes.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates not included in the
Contran Tax Group. The Company periodically evaluates its deferred tax assets
and adjusts any related valuation allowance based on the estimate of the amount
of such deferred tax assets which the Company believes does not meet the "more-
likely-than-not" recognition criteria.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of shares of
outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive aggregated
approximately 2.1 million in each of the past three years.
New accounting principles not yet adopted. The Company will adopt
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, in the first quarter of 1998. Upon adoption of SFAS No.
130, the Company will present a new Consolidated Statement of Comprehensive
Income which will report all changes in the Company's stockholders' equity other
than transactions with stockholders. Comprehensive income pursuant to SFAS No.
130 would include the Company's consolidated net income, as reported in the
Consolidated Statement of Income, plus the net changes in the marketable
securities, foreign currency translation and pension liabilities components of
stockholders' equity.
The Company will adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, no later than the fourth quarter of 1998.
SFAS No. 131 will supersede the business segment disclosure requirements
currently in effect under SFAS No. 14. SFAS No. 131, among other things,
establishes standards regarding the information a company is required to
disclose about its operating segments. SFAS No. 131 also provides guidance
regarding what constitutes a reportable operating segment. The Company expects
to have two operating segments pursuant to SFAS No. 131, the same two segments
currently in effect under SFAS No. 14. Accordingly, segment disclosures
pursuant to SFAS No. 131 are not expected to be materially different from the
current disclosures pursuant to SFAS No. 14.
The Company will adopt the disclosure requirements of SFAS No. 132,
Employer's Disclosures about Pensions and Other Postretirement Benefits, in the
fourth quarter of 1998. SFAS No. 132 revises disclosure requirements for such
pension and postretirement benefit plans to, among other things, standardize
certain disclosures and eliminate certain other disclosures no longer deemed
useful. SFAS No. 132 does not change the measurement or recognition criteria
for such plans.
Extraordinary item. The extraordinary loss, stated net of allocable income
tax benefit, relates to the write-off of unamortized deferred financing costs
and premiums paid in connection with the early retirement of $93.8 million
principal amount of Valcor's Senior Notes in connection with the tender offers
completed in April 1997 and September 1997. See Note 10.
Other. Advertising costs related to the Company's consolidated business
segments and charged to continuing operations, expensed as incurred, aggregated
$2.5 million in each of 1995 and 1996 and $2.4 million in 1997.
Research and development costs related to the Company's consolidated
business segments and charged to continuing operations, expensed as incurred,
were $11 million in each of 1995 and 1996 and $10 million in 1997.
Deferred technology fee income was amortized by the straight-line method
over three years through October 1996.
The Company accounts for stock-based employee compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and its various interpretations. Under APBO No. 25, no compensation
cost is generally recognized for fixed stock options in which the exercise price
is not less than the market price on the grant date. Compensation cost
recognized by the Company in accordance with APBO No. 25 has not been
significant in any of the past three years.
Accounting and funding policies for retirement and postretirement benefits
other than pensions ("OPEB") plans are described in Note 15, and accounting
policies for environmental remediation costs are described in Note 17.
NOTE 2 - BUSINESS AND GEOGRAPHIC SEGMENTS:
% OWNED AT
BUSINESS SEGMENT PRINCIPAL ENTITIES DECEMBER 31, 1997
Chemicals NL Industries, Inc. 57%
Component products CompX International Inc. 100%
Waste management* Waste Control Specialists LLC 58%
* Unconsolidated equity affiliate
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Chemicals $1,023.9 $ 986.1 $ 984.4
Component products 80.2 88.7 108.7
$1,104.1 $1,074.8 $1,093.1
Operating income:
Chemicals $ 178.5 $ 92.0 $ 106.7
Component products
198.4 114.1 135.0
General corporate items:
Securities earnings 14.4 10.9 109.1
General expenses and other, net (34.3) (22.0) (57.8)
Interest expense (103.4) (98.5) (118.9)
75.1 4.5 67.4
Equity in:
Waste Control Specialists (.5) (6.4) (12.7)
Amalgamated Sugar Company 8.9 10.0 -
Income from continuing
operations before taxes
$ 83.5 $ 8.1 $ 54.7
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation, depletion and
amortization:
Chemicals $ 60.0 $ 60.9 $ 58.9
Component products 2.2 2.5 2.8
Corporate
$ 62.6 $ 63.9 $ 62.3
Capital expenditures:
Chemicals $ 64.2 $ 66.9 $ 30.5
Component products 2.0 2.3 5.5
Corporate .1 .6 .7
$ 66.3 $ 69.8 $ 36.7
Geographic segments
Net sales - point of origin:
United States $ 361.7 $ 371.1 $ 402.0
Europe 703.2 653.8 645.9
Canada 197.4 205.1 225.8
Eliminations (158.2) (155.2) (180.6)
$1,104.1 $1,074.8 $1,093.1
Net sales - point of destination:
United States $ 314.3 $ 331.2 $ 359.0
Europe 581.2 524.4 496.0
Canada 83.3 84.2 99.3
Far East and other 125.3 135.0 138.8
$1,104.1 $1,074.8 $1,093.1
Operating income:
United States $ 80.9 $ 76.2 $ 56.0
Europe 85.0 10.0 43.8
Canada 32.5 27.9 35.2
$ 198.4 $ 114.1 $ 135.0
</TABLE>
<TABLE>
<CAPTION>
Identifiable assets DECEMBER 31,
1996 1997
(IN MILLIONS)
<S> <C> <C>
Business segments:
Chemicals $1,576.5 $1,447.0
Component products 48.4 63.8
Waste management 15.2 19.5
Building products 44.2 -
Fast food 75.6 -
1,759.9 1,530.3
Corporate and eliminations 385.1 647.8
$2,145.0 $2,178.1
Geographic segments:
United States $ 506.5 $ 420.7
Europe 1,039.8 894.2
Canada 213.6 215.4
1,759.9 1,530.3
Corporate and eliminations 385.1 647.8
$2,145.0 $2,178.1
</TABLE>
NL's chemicals operations are conducted through its subsidiaries Kronos,
Inc. (titanium dioxide pigments or "TiO2") and Rheox, Inc. (specialty
chemicals). In January 1998, NL completed the disposition of substantially all
of the net assets of its specialty chemicals business unit. See Note 20. The
Company's component products subsidiary (CompX) is owned by Valcor, Inc., a
wholly-owned subsidiary of Valhi. In March 1998, CompX completed an initial
public offering of shares of its common stock which, along with the award of
certain shares of CompX common stock to certain officers and directors of CompX,
reduced the Company's ownership interest in CompX to 62%. See Note 20. Both NL
(NYSE: NL) and CompX (NYSE: CIX) file periodic reports pursuant to the
Securities Exchange Act of 1934, as amended.
Capital expenditures exclude amounts attributable to business units acquired
in business combinations accounted for by the purchase method. See Note 3.
Corporate assets consist principally of cash, cash equivalents, marketable
securities and loans to third parties. At December 31, 1997, approximately 6%
of corporate assets were held by NL (1996 - 11%). Valhi has a wholly-owned
captive insurance company ("Valmont") registered in Vermont. Valmont's
operations, which are not significant, are included in general expenses and
other, net.
At December 31, 1997, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $606 million.
NOTE 3 - BUSINESS COMBINATIONS:
NL Industries, Inc. (NYSE: NL). At the beginning of 1995, Valhi held 51%
of NL's outstanding common stock. During 1995, 1996 and 1997, the Company
purchased additional NL shares in market transactions for an aggregate of
approximately $42 million and increased its ownership of NL to 57% at December
31, 1997. The Company accounted for such increase in its interest in NL by the
purchase method (step acquisition). NL's separate financial statements reflect
a stockholders' deficit of approximately $222 million at December 31, 1997 and,
accordingly, no minority interest in NL is reported in the Company's
consolidated balance sheet. Until such time as NL reports positive
stockholders' equity, all undistributed income or loss and other undistributed
changes in NL's reported stockholders' equity will accrue to the Company for
financial reporting purposes. Minority interest in earnings in 1996 consists
principally of NL dividends paid to NL stockholders other than Valhi. Following
NL's January 1998 gain from the sale of substantially all of the net assets of
its specialty chemicals business unit, NL expects to report positive
stockholders' equity, and consequently the Company expects to resume reporting
minority interest in NL's earnings beginning in 1998.
Waste Control Specialists LLC. In November 1995, Valhi acquired a 50%
interest in newly-formed Waste Control Specialists LLC. See Note 8. Valhi
committed to contribute $25 million to Waste Control Specialists for its 50%
interest ($5 million in 1995, $17 million in 1996 and the remaining $3 million
in 1997). The other owner contributed certain assets, primarily land and
certain operating permits for the facility site, and Waste Control Specialists
also assumed certain indebtedness of the other owner. The other owner of Waste
Control Specialists, KNB Holdings, Ltd., is controlled by an individual who has
been granted duties of chief executive officer of Waste Control Specialists
under an employment agreement effective through at least 2000. Such individual
has the ability to establish management policies and procedures, and has the
authority to make routine operating decisions, for Waste Control Specialists.
Valhi accounts for its interest in Waste Control Specialists by the equity
method.
In October 1997, Valhi contributed an additional $10 million to Waste
Control Specialists' equity, thereby increasing its membership interest from 50%
to 58%. Approximately $8 million of such equity contribution was used by Waste
Control Specialists to reduce the then-outstanding balance of its revolving
borrowings from the Company. See Note 8. However, the rights granted to the
owner of the remaining 42% membership interest under the employment agreement
discussed above overcome the Company's presumption of control at the new 58%
membership interest level, and the Company continues to account for its interest
in Waste Control Specialists by the equity method. Valhi holds an option,
granted in March 1997, to make an additional $2.5 million equity contribution
which, if contributed, would increase its membership interest in Waste Control
Specialists to 60%.
Valhi is entitled to a 20% cumulative preferential return on its initial
$25 million investment, after which earnings are generally split in accordance
with ownership interests. The liabilities of the other owner assumed by Waste
Control Specialists in 1995 exceeded the carrying value of the assets
contributed. Accordingly, all of Waste Control Specialists' net income or loss
will accrue to the Company for financial reporting purposes until Waste Control
Specialists reports positive equity attributable to the other owner.
Other. In 1995, CompX's Canadian subsidiary purchased certain assets,
principally property, equipment and inventory, of a Canadian competitor for
approximately $6 million cash. In March 1998, CompX completed the acquisition of
a lock competitor for approximately $33 million cash consideration. See Note
20.
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Raw materials:
Chemicals $ 43,284 $ 45,844
Component products 2,556 2,057
Building products 4,306 -
Fast food 1,406 -
51,552 47,901
In process products:
Chemicals 10,356 8,018
Component products 4,974 5,193
Building products 83 -
15,413 13,211
Finished products:
Chemicals 142,956 108,292
Component products 3,300 3,775
Building products 1,096 -
147,352 112,067
Supplies 37,280 31,539
$251,597 $204,718
</TABLE>
NOTE 5 - ACCOUNTS AND OTHER RECEIVABLES:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable $157,089 $161,908
Notes receivable 1,500 9,627
Accrued interest 928 3,982
Refundable income taxes 9,414 1,941
Allowance for doubtful accounts (4,087) (3,139)
$164,844 $174,319
NOTE 6 - MARKETABLE SECURITIES:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Current asset (available-for-sale) -
Dresser Industries common stock $142,478 $ -
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $ 34,070 $170,000
Dresser Industries common stock - 87,823
Other common securities 17,258 15,793
$ 51,328 $273,616
</TABLE>
At December 31, 1997, Valhi held 3.1 million shares of Dresser common
stock (aggregate cost of $25 million) with a quoted market price of $41.94 per
share, or an aggregate market value of $129 million (1996: 5.5 million Dresser
shares at a cost of $44 million with a quoted market price of $31 per share, or
an aggregate market value of $169 million). Valhi's LYONs are exchangeable at
any time, at the option of the LYON holder, for such Dresser shares, and the
carrying value of the Dresser stock is limited to the accreted LYONs obligation.
The Dresser shares are held in escrow for the benefit of holders of the LYONs.
Valhi receives the regular quarterly dividend on the escrowed Dresser shares.
During 1996 and 1997, certain LYON holders exchanged their LYONs for 8,700 and
2.4 million Dresser shares, respectively. The Dresser stock was classified as a
current asset at December 31, 1996 because the LYONs, which were redeemable at
the option of the holder in October 1997, were classified as a current liability
at such date. Both the LYONs and the Dresser stock are classified as noncurrent
at December 31, 1997. See Note 10. Dresser is a supplier of products, services
and project management for hydrocarbon energy-related activities utilized
primarily in the oil and gas industry. Dresser (NYSE: DI) files periodic
reports with the Securities and Exchange Commission.
The Company's investment in The Amalgamated Sugar Company LLC (cost - $34
million) is discussed in Note 19. The aggregate cost of other available-for-
sale securities (primarily common stocks) is approximately $11 million at
December 31, 1997 (December 31, 1996 - $16 million).
NOTE 7 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Loans and notes receivable:
Snake River Sugar Company $ - $80,000
Other 4,740 12,183
4,740 92,183
Less current portion 1,500 9,627
Noncurrent portion $ 3,240 $82,556
Other assets:
Deferred financing costs $15,273 $11,646
Intangible assets 19,215 4,487
Other 10,991 10,134
$45,479 $26,267
</TABLE>
Loans to Snake River Sugar Company are discussed in Note 19. At December
31, 1997, other loans and notes receivable include a $1.5 million loan to the
other owner of Waste Control Specialists which is collateralized by such owner's
interest in Waste Control Specialists.
NOTE 8 - INVESTMENT IN JOINT VENTURES:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Investments in:
Ti02 manufacturing joint venture $179,195 $170,830
Waste Control Specialists LLC 15,218 15,518
Other 2,284 1,891
196,697 188,239
Loan to Waste Control Specialists LLC - 4,000
$196,697 $192,239
</TABLE>
TiO2 manufacturing joint venture. A Kronos TiO2 subsidiary (Kronos
Louisiana, Inc., or "KLA") and Tioxide Group, Ltd. ("Tioxide"), a wholly-owned
subsidiary of Imperial Chemicals Industries PLC ("ICI"), are equal owners of a
manufacturing joint venture (Louisiana Pigment Company, L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. ICI has agreed to sell its
Tioxide's non-North American operations to E.I. du Pont de Nemours & Co.,
subject to regulatory approval. ICI has announced it intends to sell Tioxide's
remaining North American operations, including Tioxide's 50% interest in the
joint venture, in a separate transaction. NL has advised ICI of its interest in
acquiring the other half of the joint venture it does not currently own. LPC
has long-term debt which is collateralized by the partnership interests of the
partners and substantially all joint venture assets. The long-term debt
consists of two tranches, one attributable to each partner, and each tranche is
serviced through (i) the purchase of the plant's TiO2 output in equal quantities
by the partners and (ii) cash capital contributions. KLA is required to
purchase one-half of the TiO2 produced by LPC. Kronos' tranche of LPC's debt is
reflected as outstanding indebtedness of the Company because Kronos has
guaranteed the purchase obligation relative to the debt service of such tranche.
See Note 10. The manufacturing joint venture is intended to be operated on a
break-even basis and, accordingly, Kronos' acquisition transfer price for its
share of the TiO2 produced is equal to its share of the joint venture's
production costs and interest expense. Kronos' share of the production costs is
reported as TiO2 cost of sales while Kronos' share of joint venture interest
expense is reported as a component of interest expense. Summary income
statements and balance sheets of the TiO2 joint venture are shown below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues and other income:
Kronos $ 76,365 $ 74,916 $ 82,171
Tioxide 75,241 73,774 80,512
Interest income 653 518 636
152,259 149,208 163,319
Cost and expenses:
Cost of sales 140,103 140,361 156,811
General and administrative 385 377 355
Interest 11,771 8,470 6,153
152,259 149,208 163,319
Net income $ - $ - $ -
</TABLE>
<TABLE>
DECEMBER 31,
1996 1997
ASSETS (IN THOUSANDS)
<S> <C> <C>
Current assets $ 47,861 $ 41,602
Other assets 1,224 764
Property and equipment, net 325,617 309,989
$374,702 $352,355
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche $ 57,858 $ 42,429
Tioxide tranche 16,800 7,200
Note payable to Tioxide 21,000 9,000
Other liabilities, primarily current 14,084 8,466
109,742 67,095
Partners' equity 264,960 285,260
$374,702 $352,355
</TABLE>
Waste Control Specialists LLC. Waste Control Specialists, formed in
November 1995, completed construction in early 1997 of the initial phase of its
facility in West Texas for the processing, treatment, storage and disposal of
certain hazardous and toxic wastes. Waste Control Specialists has been issued
permits by the Texas Natural Resource Conservation Commission and the U.S.
Environmental Protection Agency covering acceptance of wastes governed by the
Resource Conservation Recovery Act ("RCRA") and the Toxic Substances Control Act
("TSCA"), and received its first wastes for disposal in February 1997. Waste
Control Specialists is also seeking permits for, among other things, the
processing, treatment, storage and disposal of low-level and mixed-level
radioactive wastes.
Waste Control Specialists reported net losses of $.5 million during the
last two months of 1995, $6.4 million for 1996 and $12.7 million in 1997, all of
which accrued to Valhi for financial reporting purposes. See Note 3. At
December 31, 1997, total assets were $26 million and total Members' equity was
$12.6 million (1996 - $19.1 million and $12.0 million, respectively.) Waste
Control Specialists' assets consist principally of property and equipment
related to the West Texas facility, and its liabilities consist principally of
indebtedness, including $4 million owed to the Company at December 31, 1997.
In 1997, the Company entered into a $10 million revolving credit facility
with Waste Control Specialists. Borrowings by Waste Control Specialists bear
interest at prime plus 1% (9.5% at December 31, 1997) and are due no later than
December 31, 1998.
NOTE 9 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Current:
Employee benefits $ 47,331 $ 44,457
Environmental costs 6,126 11,118
Interest 11,157 7,019
Plant closure costs 7,669 3,289
Miscellaneous taxes 5,262 571
Other 50,390 48,267
$127,935 $114,721
Noncurrent:
Insurance claims and expenses $ 13,380 $ 13,674
Employee benefits 12,050 11,490
Deferred income - 1,480
Other 3,807 1,536
$ 29,237 $ 28,180
</TABLE>
NOTE 10 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Notes payable:
Kronos - bank credit agreements (DM 40,000
and $ 25,732
DM 25,000)
$ 13,968
Valhi - bank credit agreement 13,000 -
$ 38,732 $ 13,968
Long-term debt:
Valhi:
Liquid Yield Option NotesTM ("LYONsTM") $ 142,478 $ 87,823
Snake River Sugar Company - 250,000
Valcor Senior Notes 98,910 2,431
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 149,756 169,857
Deutsche mark bank credit facility (DM
539,971 347,362 161,085
and DM 288,322)
Joint venture term loan 57,858 42,429
Rheox bank credit facility 14,659 117,500
Other 9,411 3,282
829,046 744,153
Other:
Medite term loan 3,727 -
Sybra bank credit agreement 1,081 -
Sybra capital leases 4,540 -
Other 334 534
9,682 534
1,080,116 1,084,941
Less current maturities 235,648 76,854
$ 844,468 $1,008,087
</TABLE>
Valhi. The zero coupon Senior Secured LYONs, $213 million principal amount
at maturity in October 2007 outstanding at December 31, 1997, were issued with
significant OID to represent a yield to maturity of 9.25%. No periodic interest
payments are required. Each $1,000 in principal amount at maturity of the LYONs
is exchangeable, at any time, for 14.4308 shares of Dresser common stock held by
Valhi. The LYONs are secured by such Dresser shares held by Valhi. See Note 6.
During 1996 and 1997, holders representing $600,000 and $165.3 million principal
amount at maturity, respectively, of LYONs exchanged such LYONs for Dresser
shares. The LYONs are redeemable, at the option of the holder, in October 2002
at $636.27 per $1,000 principal amount (the issue price plus accrued OID through
such purchase dates). Such redemptions may be paid, at Valhi's option, in cash,
Dresser common stock, or a combination thereof. The LYONs were also redeemable
at the option of the holder in October 1997 at $404.84 per $1,000 principal
amount at maturity and, accordingly, the LYONs were classified as a current
liability at December 31, 1996. Holders representing only a nominal amount of
LYONs exercised their right to redeem the LYONs in October 1997 for an amount of
cash equal to the accreted LYONs obligation at such date. The LYONs are
redeemable, at any time, at Valhi's option for cash equal to the issue price
plus accrued OID through the redemption date. At December 31, 1996 and 1997,
the net carrying value of the LYONs per $1,000 principal amount at maturity was
$376 and $412, respectively, and the quoted market price was $451 and $580,
respectively.
Valhi has a $15 million revolving bank credit facility which matures in
March 1998, generally bears interest at LIBOR plus 1.5% and is collateralized by
4.8 million shares of NL common stock held by Valhi. Borrowings under this
facility can only be used to fund purchases of additional shares of NL common
stock. The agreement limits additional indebtedness of Valhi and contains other
provisions customary in lending transactions of this type. At December 31, 1997,
the full amount of this facility was available for borrowing.
Valhi's loans from Snake River Sugar Company are discussed in Note 19.
NL Industries. NL's $250 million principal amount of 11.75% Senior Secured
Notes due 2003 and $188 million principal amount at maturity ($100 million
proceeds at issuance) of 13% Senior Secured Discount Notes due 2005
(collectively, the "NL Notes") are collateralized by a series of intercompany
notes from Kronos International, Inc. ("KII"), a wholly-owned subsidiary of
Kronos, to NL, the terms of which mirror those of the respective NL Notes (the
"NL Mirror Notes"). The 11.75% Notes are also collateralized by a first
priority lien on the stock of Kronos and a second priority lien on the stock of
Rheox. In the event of foreclosure, the NL Note holders would have access to
the consolidated assets, earnings and equity of NL and NL believes the
collateralization of the NL Notes, as described above, is the functional
economic equivalent to a full, unconditional and joint and several guarantee by
Kronos and Rheox.
The 11.75% Notes and the 13% Discount Notes are redeemable, at NL's option,
after October 2000 and October 1998, respectively, at redemption prices starting
at 101.5% and declining to 100% (after October 2001) of the principal amount for
the 11.75% Notes and starting at 106% and declining to 100% (after October 2001)
of the accreted value of the 13% Discount Notes. In the event of an NL change
of control, as defined, NL would be required to make an offer to purchase the NL
Notes at 101% of the principal amount of the 11.75% Notes and 101% of the
accreted value of the 13% Discount Notes. The NL Notes are issued pursuant to
indentures which contain a number of covenants and restrictions which, among
other things, restrict the ability of NL and its subsidiaries to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. The 13% Discount Notes
do not require semi-annual cash interest payments until April 1999. At December
31, 1996 and 1997, the net carrying value of the 13% Discount Notes per $1,000
principal amount of maturity was $799 and $906, respectively, (quoted market
price - $863 and $996, respectively) and the quoted market price of the 11.75%
Notes was $1,061 and $1,111, respectively, per $1,000 principal amount. See
Note 20.
At December 31, 1997, the DM bank credit facility consists of a DM 188
million term loan and a DM 230 million revolver (DM 100 million outstanding).
The term loan is due in 1998 and 1999, and the revolver is due in 2000.
Borrowings bear interest at DM LIBOR plus 2.75% (6.3% at December 31, 1997), are
collateralized by the stock of certain KII subsidiaries as well as certain
Canadian and German assets. In addition, NL has guaranteed the facility. The
interest rate on outstanding borrowings at December 31, 1996, when a lower DM
LIBOR margin was in effect, was 4.8%. In accordance with the provisions of the
DM credit agreement and as a result of higher than expected operating income for
1997 of NL's international operations, NL will prepay, in March 1998, DM 81
million ($45 million at December 31, 1997) of the term loan, of which DM 49
million will satisfy the September 1998 scheduled term loan payment and DM 32
million will reduce the March 1999 scheduled term loan payment.
Borrowings under KLA's tranche of the joint venture term loan bear interest
at LIBOR plus 1.625% (7.2% and 7.4% at December 31, 1996 and 1997, respectively)
and are repayable in quarterly installments through September 2000. See Notes 8
and 20.
At December 31, 1997, Rheox's bank credit facility consisted of a $117.5
million term loan due in quarterly installments through January 2004 and a $25
million revolver (nil outstanding) due no later than January 2004. Borrowings
bear interest at LIBOR plus a margin of .75% to 1.75%, depending upon the level
of a certain Rheox financial ratio (7.3% at December 31, 1997, inclusive of the
margin), and are collateralized principally by the stock of Rheox and its U.S.
subsidiaries. The interest rate on outstanding prime-rate borrowings under a
prior Rheox bank credit facility at December 31, 1996 was 9.8%. NL used a
portion of the net proceeds from the January 1998 sale of substantially all of
Rheox's net assets to prepay and terminate this credit facility. See Note 20.
In 1997, Rheox entered into interest rate collar agreements which
effectively set minimum and maximum U.S. LIBOR interest rates of 5.25% and 8%,
respectively, on $50 million principal amount of the variable-rate bank term
loan through May 2001. Rheox is exposed to interest rate risk in the event of
nonperformance by the other parties to the agreements, although Rheox does not
anticipate nonperformance by such parties. At December 31, 1997, the estimated
fair value of such collar agreements was a nominal liability. Such fair value
represents the amount Rheox would pay if it terminated the collar agreements at
that date, and is based upon quotes obtained from the counter party financial
institutions. These interest rate collar agreements were terminated in 1998
concurrent with the termination of the underlying credit facility.
Notes payable consists of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 3.7% to 3.9% (1996 - 3.2% to
3.7%).
Valcor. Valcor's unsecured 9 5/8% Senior Notes Due November 2003 are
redeemable at the Company's option beginning November 1998, initially at
104.813% of principal amount declining to 100% after November 2000. At December
31, 1996 and 1997, the quoted market price of the Valcor Notes was $990 and
$1,037 per $1,000 principal amount, respectively.
In January 1997, Valcor purchased $3.8 million principal amount of its
Senior Notes in open market transactions, substantially all at par value. In
April 1997, Valcor purchased $27.6 million principal amount of its Senior Notes
at par value pursuant to a tender offer. In September 1997, Valcor (i)
completed a consent solicitation whereby holders approved certain amendments to
the Valcor Senior Note Indenture which removed the restrictions which limited
the ability of Valcor and its subsidiaries to, among other things, incur debt,
pay dividends, create liens and enter into transactions or co-invest with
affiliates and (ii) purchased $66.2 million principal amount of its Senior Notes
for $1,057.50 per $1,000 principal amount pursuant to a subsequent tender offer.
Valcor paid an aggregate of $685,000 for consent fees in the solicitation.
Following these transactions, $2.4 million principal amount of Valcor Senior
Notes remains outstanding. Funds for these repurchases of Valcor Senior Notes
were provided primarily from the proceeds from the disposition of Medite and
Sybra. See Note 18.
Other. Medite's term loan was assumed by the purchaser of its Oregon
medium density fiberboard facility in February 1997. Sybra's bank indebtedness
was repaid and terminated in April 1997 immediately prior to Valcor's sale of
Sybra's common stock, and the purchaser of Sybra's common stock assumed Sybra's
capital lease obligations. See Note 18.
In February 1998, CompX obtained a new $100 million unsecured revolving
bank credit facility. See Note 20.
Aggregate maturities of long-term debt at December 31, 1997
<TABLE>
<CAPTION>
Years ending December 31, AMOUNT
(IN THOUSANDS)
<S> <C>
1998 $ 76,854
1999 91,840
2000 83,033
2001 22,990
2002 160,593
2003 and thereafter 715,040
1,150,350
Less unamortized OID on:
Valhi LYONs (47,766)
NL Senior Secured Discount Notes (17,643)
$1,084,941
</TABLE>
The LYONs are reflected in the above table as due October 2002, the next
date they are redeemable at the option of the holder, at the aggregate
redemption price on such date of $135.6 million ($636.27 per $1,000 principal
amount at maturity in October 2007).
Other. In addition to the NL Notes discussed above, other credit agreements
typically require the respective subsidiary to maintain minimum levels of
equity, require the maintenance of certain financial ratios, limit dividends and
additional indebtedness and contain other provisions and restrictive covenants
customary in lending transactions of this type. At December 31, 1997, the
restricted net assets of consolidated subsidiaries approximated $112 million.
NOTE 11 - OTHER INCOME:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Securities earnings:
Dividends and interest $12,981 $10,738 $ 60,206
Securities transactions 1,225 138 48,920
14,206 10,876 109,126
Litigation settlement gains, net - 2,756 -
Technology fee income 10,660 8,743 -
Currency transactions, net 586 5,774 5,726
Pension and OPEB curtailment gains - 5,900 -
Disposal of property and equipment (2,695) 4 1,546
Other, net 6,861 7,885 8,427
$29,618 $41,938 $124,825
</TABLE>
Interest and dividend income in 1997 includes $25.4 million of distributions
received from The Amalgamated Sugar Company LLC. See Note 19. Securities
transactions in both 1996 and 1997 relate principally to dispositions of a
portion of the shares of Dresser Industries common stock held by the Company
when certain holders of the Company's LYONs debt obligation exercised their
right to exchange their LYONs for such Dresser shares. See Notes 6 and 10. The
litigation settlement gains relate to settlement of certain litigation in which
NL was a plaintiff, and the pension and OPEB curtailment gains resulted from
NL's 1996 reduction of certain U.S. and Canadian, respectively, employee
benefits.
NOTE 12 - STOCKHOLDERS' EQUITY:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ISSUED TREASURY OUTSTANDING
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1994 124,475 (10,077) 114,398
Issued 158 - 158
Other - (26) (26)
Balance at December 31, 1995 124,633 (10,103) 114,530
Issued 135 - 135
Other - (23) (23)
Balance at December 31, 1996 124,768 (10,126) 114,642
Issued 565 - 565
Other - (4) (4)
Balance at December 31, 1997 125,333 (10,130) 115,203
</TABLE>
Treasury stock includes the Company's proportional interest in 1.2 million
Valhi shares held by NL. Under Delaware Corporation Law, all shares held by a
majority-owned company are considered to be treasury stock. As a result, shares
outstanding for financial reporting purposes differ from those outstanding for
legal purposes.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or privately-
negotiated transactions over an unspecified period of time. As of February 28,
1998, the Company had purchased approximately 72,000 shares for an aggregate of
$.7 million pursuant to such authorization.
Options and restricted stock. Valhi has an incentive stock option plan that
provides for the discretionary grant of qualified incentive stock options,
nonqualified stock options, restricted common stock and stock appreciation
rights. Up to five million shares of Valhi common stock may be issued pursuant
to this plan. Options are granted at a price not less than 85% of fair market
value on the date of grant, generally vest ratably over a five-year period
beginning one year from the date of grant and expire 10 years from the date of
grant. Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No stock appreciation rights have been granted.
Outstanding options at December 31, 1997 expire at various dates through
2007, with a weighted-average remaining life of 6.5 years. At December 31,
1997, options to purchase 1.3 million Valhi shares were exercisable at prices
ranging from $4.76 to $14.66 per share, or an aggregate amount payable upon
exercise of $8 million. Of such exercisable options, 1 million options are
exercisable at various dates through 2006 at prices lower than the December 31,
1997 market price of $9.44 per share for an aggregate amount payable upon
exercise of $5.4 million. At December 31, 1997, options to purchase 581,000
shares are scheduled to become exercisable in 1998, and an aggregate of 5
million shares were available for future grants. During 1995, the exercise price
of all options outstanding at December 31, 1994 was reduced by amounts ranging
from $.24 to $.34 per share as a result of the Company's distribution to its
stockholders of shares of Tremont Corporation.
The following table sets forth changes in outstanding options during the
past three years under all option plans in effect during such periods.
<TABLE>
<CAPTION>
AMOUNT
EXERCISE PAYABLE
PRICE PER UPON
SHARES SHARE EXERCISE
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Outstanding at December 31, 1994 5,336 $5.00-15.00 $ 39,664
Adjustment for Tremont Distribution - (.24 - (1,603)
.34)
Granted 103 7.75- 8.00 822
Exercised (158) 4.76- 7.75 (873)
Canceled (69) 4.76-14.66 (745)
Outstanding at December 31, 1995 5,212 4.76-14.66 37,265
Granted 295 6.38 1,881
Exercised (135) 4.76-5.72 (653)
Canceled (44) 5.48-14.66 (423)
Outstanding at December 31, 1996 5,328 4.76-14.66 38,070
Granted 885 6.38 5,646
Exercised (565) 4.76- 8.16 (3,027)
Canceled (2,937) 4.76-14.66 (23,035)
Outstanding at December 31, 1997 2,711 $4.76-14.66 $ 17,654
</TABLE>
NL maintains incentive stock option plans that provide for the
discretionary grant of NL restricted common stock, stock options and stock
appreciation rights. At December 31, 1997, there were an aggregate of 2.8
million options outstanding to purchase NL common stock at prices ranging from
$4.81 per share to $24.19 per share (aggregate amount payable to NL upon
exercise - $34.8 million). At December 31, 1997, options to purchase 1.4
million NL shares were exercisable at prices lower than the December 31, 1997
quoted market price of $13.63 per NL share. The aggregate number of outstanding
options to purchase NL common stock at December 31, 1997 represented
approximately 5% of NL's outstanding common shares at that date. In March 1998,
CompX granted options to purchase 440,000 shares of its common stock at the
initial public offering price to the public of $20 per share.
Had the Company and NL each elected to account for stock-based employee
compensation for all awards granted after 1994 in accordance with the fair value
based accounting method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the impact on the Company's reported income from continuing
operations and related per share amounts for 1995, 1996 and 1997 would not be
material.
NOTE 13 - FINANCIAL INSTRUMENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents $255.7 $255.7 $360.4 $ 360.4
Marketable securities (available-for $159.7 $186.6 $273.6 $ 314.8
sale)
Loans to Snake River Sugar Company $ - $ - $ 80.0 $ 84.0
Notes payable and long-term debt
(excluding
capitalized leases):
Publicly-traded fixed rate debt:
Valhi LYONs $142.5 $170.8 $ 87.8 $ 123.6
NL Senior Secured Notes 250.0 265.2 250.0 277.9
NL Senior Secured Discount Notes 149.8 161.9 169.9 186.7
Valcor Senior Notes 98.9 97.9 2.4 2.5
Snake River Sugar Company loans - - 250.0 250.0
Other fixed-rate debt 3.9 4.0 - -
Variable rate debt 469.2 469.2 338.3 338.3
Minority interest in NL common stock $ - $246.9 $ - $ 297.4
Valhi common stockholders' equity $303.9 $730.8 $384.9 $1,087.2
</TABLE>
Fair values of publicly-traded marketable securities are based upon quoted
market prices. The fair value of the Company's investment in The Amalgamated
Sugar Company LLC is based upon the $250 million redemption price of such
investment, less the $80 million outstanding balance of the Company's loan to
Snake River Sugar Company. The fair value of the Company's fixed-rate loans to
Snake River Sugar Company is based upon relative changes in market interest
rates since the interest rates were fixed. See Notes 6, 10 and 19.
Fair values of publicly-traded debt are based upon quoted market prices.
The fair value of Valhi's fixed-rate nonrecourse loans from Snake River Sugar
Company have been estimated based on the $250 million redemption price of
Valhi's investment in the Amalgamated Sugar Company LLC, which investment
collateralizes such nonrecourse loans. See Note 19. Fair values of other fixed
rate debt have been estimated based upon relative changes in the Company's
variable borrowing rates since the dates the interest rates were fixed. Fair
values of variable interest rate debt are deemed to approximate book value.
The fair value of the 43% minority interest in NL Industries and of Valhi's
common stockholders' equity are based upon quoted market prices for NL common
stock (1996 - $10.88 per share; 1997 - $13.63 per share) and Valhi common stock
(1996 - $6.38 per share; 1997 - $9.44 per share).
NOTE 14 - INCOME TAXES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Components of pre-tax income:
United States:
Contran Tax Group $(16.5) $(22.5) $ 49.5
NL Tax Group 41.8 49.0 16.9
Equity in Amalgamated 8.9 10.0 -
34.2 36.5 66.4
Non-U.S. subsidiaries 49.3 (28.4) (11.6)
$ 83.5 $ 8.1 $ 54.8
Expected tax expense, at U.S. federal
statutory income tax rate of 35% $ 29.2 $ 2.8 $ 19.2
Non-U.S. tax rates (7.5) (.6) (.8)
Incremental U.S. tax and rate
differences
on equity in earnings of non-tax grou 19.7 (5.3) (5.1)
companies
U.S. state income taxes, net 1.2 (.2) 2.8
Change in NL's deferred income
tax valuation allowance (9.6) 3.0 8.7
No tax benefit for goodwill 2.9 3.1 3.2
amortization
Rate change adjustment of deferred (7.6) - -
taxes
Other, net (.3) (1.7) (.4)
$ 28.0 $ 1.1 $ 27.6
Components of income tax expense:
Currently payable:
U.S. federal and state $ (5.7) $ (3.7) $ 21.2
Non-U.S. 45.4 13.7 25.2
39.7 10.0 46.4
Deferred income taxes:
U.S. federal and state 12.6 (12.5) (7.5)
Non-U.S. (24.3) 3.6 (11.3)
(11.7) (8.9) (18.8)
$ 28.0 $ 1.1 $ 27.6
Comprehensive provision (benefit) for
income taxes allocable to:
Continuing operations $ 28.0 $ 1.1 $ 27.6
Discontinued operations 8.3 25.1 14.2
Extraordinary item - - (2.3)
Stockholders' equity, principally
deferred taxes allocable to
adjustments 10.7 6.6 33.5
components
$ 47.0 $ 32.8 $ 73.0
</TABLE>
The components of the net deferred tax liability at December 31, 1996 and
1997, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. All of the deferred tax
valuation allowance relates to NL tax jurisdictions, principally the U.S. and
Germany.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which NL believes do not meet
the "more-likely-than-not" recognition
criteria $ - $ 3.0 $ 8.7
Change in estimate of the future tax
benefit
of certain tax credits which NL believes
satisfies the "more-likely-than-not" (9.6) - -
recognition criteria
Foreign currency translation 6.5 (5.9) (12.3)
Offset to the increase in gross deferred
income tax assets resulting from
recharacterization of certain tax
attributes due primarily to changes in
certain tax return election 34.2 - -
Offset to the change in gross deferred
income tax assets due to dual residency
status of a NL subsidiary and
redetermination of certain U.S. tax
attributes - 14.5 (14.9)
$31.1 $11.6 $(18.5)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
ASSETS LIABILITIES ASSETS LIABILITIES
(IN MILLIONS)
<S> <C> <C> <C> <C>
Tax effect of temporary differences
related to:
Inventories $ 4.1 $ (6.1) $ 4.2 $ (2.8)
Marketable securities - (34.1) - (87.9)
Natural resource properties - (6.6) - (6.1)
Property and equipment .5 (172.6) - (153.8)
Accrued OPEB cost 21.5 - 19.8 -
Accrued environmental liabilities an
other deductible differences 97.3 - 102.3 -
Other taxable differences - (144.1) - (116.7)
Investments in subsidiaries and
affiliates not 53.1 (18.1) 78.8 (17.6)
members of the Contran Tax Group
Tax loss and tax credit carryforward 205.5 - 167.7 -
Valuation allowance (207.1) - (188.6) -
Adjusted gross deferred tax assets 174.9 (381.6) 184.2 (384.9)
(liabilities)
Netting of items by tax jurisdiction (173.1) 173.1 (176.6) 176.6
1.8 (208.5) 7.6 (208.3)
Less net current deferred tax asset 1.6 (30.5) 7.5 (.9)
(liability)
Net noncurrent deferred tax asset $ .2 $(178.0) $ .1 $(207.4)
(liability)
</TABLE>
Certain U.S. and non-U.S. income tax returns of the Contran Tax Group
(including non-U.S. subsidiaries thereof) are being examined and tax authorities
have or may propose tax deficiencies. The Company believes that it has
adequately provided accruals for additional income taxes and related interest
expense which may ultimately result from such examinations and believes that the
ultimate disposition of all such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies. NL has previously reached an
agreement with the German tax authorities, and paid certain tax deficiencies of
approximately DM 44 million ($28 million when paid), including interest, which
resolved certain significant tax contingencies for years through 1990. During
1997, NL reached a tentative agreement with the German tax authorities regarding
the years 1991 through 1994, and NL expects to pay DM 9 million ($5 million)
during 1998 in settlement of certain tax issues. Certain other significant
German tax contingencies remain outstanding for the years 1990 through 1996 and
will continue to be litigated. With respect to these contingencies, NL has
received certain tax assessments aggregating DM 119 million ($66 million),
including non-income tax related items and interest, for the years through 1996.
NL expects to receive tax assessments for an additional DM 20 million ($11
million), including non-income tax related items and interest, for 1991 through
1994. No payments of tax or interest deficiencies related to these assessments
are expected to be required until the litigation is resolved. A 1997 German tax
court proceeding involving a tax issue substantially the same as that involved
in NL's primary remaining German tax contingency was decided in favor of the
taxpayer. The German tax authorities have appealed the decision to the German
Supreme Court; NL believes that the decision by the German Supreme Court will be
rendered within two years and will become a legal precedent which will likely
determine the outcome of NL's primary dispute with the German tax authorities
which aggregates DM 121 million. Although NL believes that it will ultimately
prevail in the litigation, NL has granted a DM 94 million ($53 million at
December 31, 1997) lien on its Nordenham, Germany TiO2 plant in favor of the
City of Leverkusen, and a DM 5 million ($3 million at December 31, 1997) lien on
the same facility in favor of the German federal tax authorities.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1997) relating to 1994. NL has appealed this assessment and expects to
litigate this issue.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has adequately provided accruals for additional taxes and
related interest expense which may ultimately result from all such examinations
and believes that the ultimate disposition of such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
NL utilized foreign tax credit carryforwards of $11 million in 1995, $2
million in 1996 and $5 million in 1997, and utilized U.S. net operating loss
carryforwards of $8 million in 1995 and $26 million in 1997, to reduce its
current year U.S. federal income tax expense. At December 31, 1997, for U.S.
federal income tax purposes, NL had approximately $19 million of foreign tax
credit carryforwards expiring during (1998 through 2001) and approximately $12
million of alternative minimum tax credit carryforwards with no expiration date.
NL also had approximately $350 million of income tax loss carryforwards in
Germany with no expiration date.
NOTE 15 - EMPLOYEE BENEFIT PLANS:
Defined contribution plans. A majority of the Company's full-time U.S.
employees are eligible to participate in various defined contribution pension
plans with Company contributions based on matching or other formulas. Defined
contribution plan expense related to the Company's consolidated business
segments and charged to continuing operations approximated $2.2 million in each
of 1995 and 1996 and $2.4 million in 1997.
Defined benefit plans. The Company maintains various defined benefit
pension plans covering substantially all full-time employees. Defined pension
benefits are generally based on years of service and compensation under fixed
dollar, final pay or career average formulas and the related expenses are based
on independent actuarial valuations. The funding policies for U.S. defined
benefit plans are to contribute amounts satisfying funding requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Non-U.S.
defined benefit plans are funded in accordance with applicable statutory
requirements. Medite maintained a defined benefit pension plan covering
substantially all of its full-time Irish employees, which plan was assumed by
the purchaser upon sale of Medite's Irish subsidiary in November 1996. Medite
maintains a plan covering its U.S. employees, and substantially all remaining
employees ceased to accrue benefits in 1997 upon the sale of Medite's Oregon MDF
and timber conversion facilities. See Note 18. Variances from actuarially
assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods. A one
percentage point decrease in the discount rate would increase the aggregate
actuarial present value of accumulated benefit obligations at December 31, 1997
by approximately $38 million.
The rates used in determining the actuarial present value of benefit
obligations are presented in the table below.
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Discount rate 7.5%-8.5% 6.5%-8.5% 6% - 8.5%
Rate of increase in future
compensation levels 3.5%-6% 3.5%-6% 3% - 6%
Long-term rate of return on assets 7.5%-10% 7% -10% 6% - 10%
</TABLE>
Plan assets are primarily investments in U.S. and non-U.S. corporate equity
and debt securities, short-term investments, mutual funds and group annuity
contracts. A nominal amount of the aggregate plan assets at December 31, 1996
and 1997 consists of units in a combined investment fund for employee benefit
plans sponsored by Valhi and its affiliates, including Contran and certain
Contran affiliates. Assets of the combined investment fund are primarily
investments in corporate equity and debt securities, short-term cash investments
and notes collateralized by residential and commercial real estate.
The funded status of the Company's defined benefit pension plans and the
components of net periodic defined benefit pension cost are set forth below.
Approximately 75% of the unfunded amounts of plans for which plan assets are
less than the accumulated benefit obligation at December 31, 1997 relate to
certain of NL's non-U.S. plans, and substantially all of the remainder relates
to certain of NL's U.S. plans. Net periodic pension cost related to the
Company's consolidated business segments and charged to continuing operations is
presented in the table below. Net periodic pension cost related to
Amalgamated's plans approximated $2 million in each of 1995 and 1996, and net
periodic pension cost related to Medite's plans, included in discontinued
operations, was not material in any of the past three years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic pension cost:
Service cost benefits $ 4,457 $ 3,642 $ 4,440
Interest cost on PBO 18,008 16,795 16,695
Actual return on plan assets (16,943) (16,700) (19,786)
Net amortization and deferral (2,208) 219 2,837
$ 3,314 $ 3,956 $ 4,186
</TABLE>
<TABLE>
<CAPTION>
PLAN ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED PLAN ASSETS
BENEFITS
1996 1997 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $48,953 $51,474 $191,939 $184,299
Nonvested benefits 4,075 4,483 9,966 8,448
Accumulated benefit obligations 53,028 55,957 201,905 192,747
Effect of projected salary increases 7,598 6,691 26,311 22,836
Projected benefit obligations 60,626 62,648 228,216 215,583
("PBO")
Plan assets at fair value 78,511 73,446 149,660 151,721
Plan assets over (under) PBO 17,885 10,798 (78,556) (63,862)
Unrecognized net loss from experience
different 3,567 9,778 11,997
from actuarial assumptions
Unrecognized prior service cost, net 3,838 3,799 791 715
Unrecognized net obligations (assets)
being amortized (469) (527) 1,537
over periods of 9 to 18 years
Adjustment to recognize minimum
liability
Total prepaid (accrued) pension cost 24,821 23,848 (65,270) (53,958)
Current portion and reclassification, 492 263 6,055 8,317
net
Noncurrent prepaid (accrued) $25,313 $24,111 $(59,215) $(45,641)
pension cost
</TABLE>
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. Medical claims are funded as incurred, net of any contributions by
the retirees. Under plans currently in effect, some currently active employees
of NL may become eligible for postretirement health care benefits if they reach
retirement age while working for the applicable subsidiary. At December 31,
1996 and 1997, substantially all of the Company's aggregate accrued OPEB cost
relates to NL. In 1989, NL began phasing out OPEB benefits for currently active
U.S. employees over a ten-year period. The majority of NL retirees are required
to contribute a portion of the cost of their benefits. Health care benefits for
certain current and future NL retirees are reduced at age 65.
The rates used in determining the actuarial present value of benefit
obligations are presented in the table below. At December 31, 1997, the
expected rate of increase in future health care costs is 7% in 1998, gradually
declining to 5% in 2000 and thereafter.
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7%
Rate of increase in future
compensation levels 4%-4.5% 6% 6%
Long-term rate of return on 9% 9% 9%
assets
</TABLE>
The components of the periodic OPEB cost and accumulated OPEB obligation are
set forth below. Variances from actuarially-assumed rates will result in
additional increases or decreases in accumulated OPEB obligations, net periodic
OPEB cost and funding requirements in future periods. If the health care cost
trend rate was increased by one percentage point for each year, OPEB expense
would have increased $100,000 in 1997, and the actuarial present value of
accumulated OPEB obligations at December 31, 1997 would have increased $1.2
million. A one percentage point decrease in the discount rate would increase
the aggregate actuarial present value of accumulated benefit obligations at
December 31, 1997 by approximately $3 million. Net periodic OPEB cost related
to the Company's consolidated business segments and charged to continuing
operations is presented in the table below. Net periodic OPEB cost related to
Amalgamated approximated $1.5 million in each of 1995 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated OPEB
obligations:
Retiree benefits $41,826 $34,231
Other fully eligible active plan participants 865 824
Other active plan participants 2,394 2,264
45,085 37,319
Plan assets at fair value 6,689 6,527
38,396 30,792
Unrecognized net gain from experience different
from actuarial assumptions 7,096 11,719
Unrecognized prior service credit 16,259 14,171
Total accrued OPEB cost 61,751 56,682
Less current portion 5,494 5,409
Noncurrent accrued OPEB cost $56,257 $51,273
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Net periodic OPEB cost:
Service cost benefits $ 101 $ 112 $ 105
Interest cost on accumulated
OPEB obligation 4,415 3,995 3,166
Actual return on plan assets (637) (596) (584)
Net amortization and deferral (1,870) (1,473) (2,413)
$ 2,009 $ 2,038 $ 274
</TABLE>
NOTE 16 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (a) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran and related entities consider, review and evaluate such transactions.
Depending upon the business, tax and other objectives then relevant, it is
possible that the Company might be a party to one or more such transactions in
the future. See Note 20.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Receivables from and payables to affiliates are summarized in the table
below.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Receivables from affiliates:
Net dividend receivable from Amalgamated $11,518 $ -
Other 2,413 104
$13,931 $ 104
Payables to affiliates:
Income taxes payable to Contran $29,633 $19,472
Demand loan from Contran 7,244 -
Tremont Corporation 3,529 3,354
Louisiana Pigment Company 6,677 8,513
Other, net 304 (343)
$47,387 $30,996
</TABLE>
Amounts receivable from Amalgamated were collected in January 1997. See
Note 19. Payables to Louisiana Pigment Company are primarily for the purchase
of TiO2 (see Note 8), and amounts payable to Tremont Corporation relate to NL's
Insurance Sharing Agreement discussed below.
Loans are made between the Company and related parties, including Contran,
pursuant to term and demand notes, principally for cash management purposes.
Related party loans generally bear interest at rates related to credit
agreements with unrelated parties. Interest income on loans to related parties
was $1.1 million in 1995, $101,000 in 1996 and $1.4 million in 1997; related
party interest expense was nominal in each of the past three years. See Note
20.
Under the terms of Intercorporate Services Agreements ("ISAs") with Contran,
Contran provides certain management, administrative and aircraft maintenance
services to the Company, and the Company provides various administrative and
other services to Contran, on a fee basis. The net ISA fees charged by Contran
to the Company (including amounts charged to NL) were approximately $500,000 in
each of 1995, 1996 and 1997. Purchases in the ordinary course of business from
the unconsolidated TiO2 manufacturing joint venture are disclosed in Note 8.
Other charges from corporate related parties for services provided in the
ordinary course of business were less than $250,000 in each of the past three
years. Such charges are principally pass-through in nature and, in the
Company's opinion, are not materially different from those that would have been
incurred on a stand-alone basis. The Company has established a policy whereby
the Board of Directors will consider the payment of additional management fees
to Contran for certain financial advisory and other services provided by Contran
beyond the scope of the ISAs. No such payments were made in the past three
years.
NL and a wholly-owned insurance subsidiary of Tremont that was a subsidiary
of NL prior to 1988 ("NLI Insurance"), are parties to an Insurance Sharing
Agreement with respect to certain loss payments and reserves established by NLI
Insurance that (i) arise out of claims against other entities for which NL is
responsible and (ii) are subject to payment by NLI Insurance under certain
reinsurance contracts. Also, NLI Insurance will credit NL with respect to
certain underwriting profits or credit recoveries that NLI Insurance receives
from independent reinsurers that relate to retained liabilities.
COAM Company is a partnership, formed prior to 1993, which has sponsored
research agreements with the University of Texas Southwestern Medical Center at
Dallas (the "University") to develop and commercially market a safe and
effective treatment for arthritis (the "Arthritis Research Agreement") and to
develop and commercially market patents and technology resulting from a cancer
research program (the "Cancer Research Agreement"). At December 31, 1997, COAM
partners are Contran, Valhi and another Contran subsidiary. Harold C. Simmons
is the manager of COAM. The Arthritis Research Agreement, as amended, provides
for payments by COAM of up to $5 million over the next seven years and the
Cancer Research Agreement, as amended, provides for funds of up to $15.1 million
over the next 13 years. Funding requirements pursuant to the Arthritis and
Cancer Research Agreements are without recourse to the COAM partners and the
partnership agreement provides that no partner shall be required to make capital
contributions. Capital contributions are expensed as paid. The Company's
contributions to COAM were nil in each of 1995, 1996 and 1997. The Company
currently expects to make capital contributions to COAM of approximately $2
million in 1998.
A wholly-owned subsidiary of the Company has agreed to provide certain
research, laboratory and quality control services to The Amalgamated Sugar
Company LLC. The agreement also grants The Amalgamated Sugar Company LLC a non-
exclusive, perpetual royalty-free license to use all currently existing or
hereafter developed technology which is applicable to sugar operations and
provides for certain royalties to The Amalgamated Sugar Company from future
sales or licenses of the subsidiary's technology. Research and development
services charged to The Amalgamated Sugar Company LLC was $810,000 in 1997. The
Amalgamated Sugar Company LLC has also agreed to provide certain administrative
services to the subsidiary, and the cost of such services is netted against the
agreed-upon research and development services fee.
NOTE 17 - COMMITMENTS AND CONTINGENCIES:
Legal proceedings
Lead pigment litigation. Since 1987, NL, other past manufacturers of lead
pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury and property damage allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
large United States cities or their public housing authorities and certain
others have been asserted as class actions. These legal proceedings seek
recovery under a variety of theories, including negligent product design,
failure to warn, breach of warranty, conspiracy/concert of action, enterprise
liability, market share liability, intentional tort, and fraud and
misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Most of these legal proceedings
are in various pre-trial stages; several are on appeal.
NL believes these actions are without merit, intends to continue to deny all
allegations of wrongdoing and liability and to defend all actions vigorously.
NL has not accrued any amounts for the pending lead pigment and lead-based paint
litigation. Considering NL's previous involvement in the lead and lead pigment
businesses, there can be no assurance that additional litigation similar to that
currently pending will not be filed.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
The Company's policy is to comply with environmental laws and regulations at all
of its plants and to continually strive to improve environmental performance in
association with applicable industry initiatives. The Company believes that its
operations are in substantial compliance with applicable requirements of
environmental laws. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. Recoveries of remediation costs from other parties, if
any, are recognized as assets when their receipt is deemed probable. At
December 31, 1996 and 1997, no assets for recoveries have been recognized.
The Company adopted the recognition requirements of Statement of Position
("SOP") No. 96-1, Environmental Remediation Liabilities, in the first quarter of
1997. The new rule, among other things, expands the types of costs that must be
considered in determining environmental remediation accruals. As a result of
adopting the new SOP, the Company recognized a noncash pre-tax charge of $30
million ($19.5 million, or $.17 per share, net-of-tax) related to environmental
matters at NL, which is comprised primarily of estimated future undiscounted
expenditures (principally legal and professional fees) associated with managing
and monitoring existing environmental remediation sites. Previously, such
expenditures were expensed as incurred.
Some of NL's current and former facilities, including several divested
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or of investigations arising under
federal and state environmental laws. Additionally, in connection with past
disposal practices, NL has been named a potentially responsible party ("PRP")
pursuant to CERCLA in approximately 75 governmental and private actions
associated with hazardous waste sites and former mining locations, some of which
are on the U.S. EPA's Superfund National Priorities List. These actions seek
cleanup costs and/or damages for personal injury or property damage and/or
damages for injury to natural resources. While NL may be jointly and severally
liable for such costs, in most cases, it is only one of a number of PRPs who are
also jointly and severally liable. In addition, NL is a party to a number of
lawsuits filed in various jurisdictions alleging CERCLA or other environmental
claims. At December 31, 1997, NL had accrued $135 million with respect to those
environmental matters which are reasonably estimable. It is not possible to
estimate the range of costs for certain sites. The upper end of range of
reasonably possible costs to NL for sites for which it is possible to estimate
costs is approximately $175 million. No assurance can be given that actual
costs will not exceed accrued amounts or the upper end of the range for sites
for which estimates have been made, and no assurance can be given that costs
will not be incurred with respect to sites as to which no estimate presently can
be made. The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that NL
is potentially responsible for the release of hazardous substances at other
sites, could result in expenditures in excess of amounts currently estimated by
NL to be required for such matters. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Certain other information relating to regulatory and environmental matters
pertaining to NL is included in Item 1 - "Business - Chemicals" of this Annual
Report on Form 10-K.
At December 31, 1997, Medite has accrued approximately $3 million for the
estimated cost to complete environmental remediation efforts at certain of its
current and former facilities. Costs for future environmental remediation
efforts are not discounted to their present value, and no recoveries for
remediation costs from third parties have been recognized. Such accruals will
be adjusted, if necessary, as further information becomes available or as
circumstances change. No assurance can be given that the actual costs will not
exceed accrued amounts. None of these facilities are the subject of any
litigation, administrative proceeding or investigation.
The Company has also accrued approximately $2 million at December 31, 1997
in respect of other environmental cleanup matters, principally related to one
Superfund site in Indiana where the Company, as a result of former operations,
has been named as a PRP. Such accrual does not reflect any amounts which the
Company could potentially recover from insurers or other third parties and is
near the upper end of the range of the Company's estimate of reasonably possible
costs for such matters. The imposition of more strict standards or requirements
under environmental laws or regulations, new developments or changes in site
cleanup costs or allocations of such costs could result in expenditures in
excess of amounts currently estimated to be required for such matters.
Other litigation. In November 1992, a complaint was filed in the U.S.
District Court for the District of Utah against Valhi, Amalgamated and the
Amalgamated Retirement Plan Committee (American Federation of Grain Millers
International, et al. v. Valhi, Inc. et al., No. 29-NC-129J). The complaint, a
purported class action on behalf of certain current and retired hourly employees
of Amalgamated, alleges, among other things, that the defendants breached their
fiduciary duties under ERISA by amending certain provisions of a retirement plan
for hourly employees maintained by Amalgamated to permit the reversion of excess
plan assets to Amalgamated in 1986. The complaint seeks a variety of remedies,
including, among other things, orders requiring a return of all reverted funds
(alleged to be in excess of $8 million) and any profits earned thereon, a
distribution of such funds to the plan participants, retirees and their
beneficiaries and enhancement of the benefits under the plan, and an award of
costs and expenses, including attorney fees. In January 1996, the Court granted
the Company's motion for summary judgment with respect to certain counts and
denied the Company's motion for summary judgment with respect to other counts.
The court also granted plaintiffs' permission to amend their complaint to
include new allegations. Plaintiffs subsequently amended their complaint, and a
hearing was held in September 1996 on defendants motion for partial summary
judgment to dismiss the new counts. The Company believes it has adequately
accrued for the estimated effect of the ultimate resolution of this matter.
In November 1991, a purported derivative complaint was filed in the Court
of Chancery of the State of Delaware, New Castle County (Alan Russell Kahn v.
Tremont Corporation, et al., No. 12339), in connection with Tremont's agreement
to purchase 7.8 million NL common shares from Valhi. In addition to Tremont,
the complaint names as defendants the members of Tremont's board of directors
and Valhi. The complaint alleges, among other things, that Tremont's purchase
of the NL shares constitutes a waste of Tremont's assets and that Tremont's
board of directors breached their fiduciary duties to Tremont's public
stockholders and seeks, among other things, to rescind Tremont's consummation of
the purchase of the NL shares and award damages to Tremont for injuries
allegedly suffered as a result of the defendants' wrongful conduct. In March
1996, the court ruled in favor of the defendants, including Valhi, and concluded
that Tremont's purchase did not constitute an overreaching of Tremont by the
controlling shareholder (Valhi), that Tremont's purchase price for the NL shares
was fair and that in all other respects the transaction was fair to Tremont. In
June 1996, the plaintiffs filed an appeal, with the Delaware Supreme Court. A
hearing before a three-judge panel of the Supreme Court was held in December
1996, and an en banc hearing before the full Supreme Court was held in February
1997. In June 1997, the full Supreme Court reversed and remanded to the lower
court for further proceedings the trial court ruling in favor of the defendants.
Oral arguments upon remand were heard in October 1997, and the judge requested
additional testimony. In March 1998, Valhi reached an agreement to settle this
matter. Under the stipulation of settlement, in which the defendants denied any
wrongdoing, Valhi would transfer to Tremont 1.2 million shares of NL common
stock held by Valhi, subject to adjustment based upon the market price of NL
shares at the time of closing, up to a maximum of 1.4 million NL shares and a
minimum of 1 million NL shares. Valhi may, at its option, transfer cash or cash
equivalents in lieu of all or a portion of such NL shares based on the market
price of NL common stock on the time of transfer. The settlement is subject to,
among other things, approval by the court and, if approved, is expected to close
in the second or third quarter of 1998. There can be no assurance that any such
settlement will become effective. The Company has made no provision for any
such settlement at December 31, 1997. At December 31, 1997, the net carrying
value of the Company's investment in NL was $3.83 per NL share held, and the
market price of NL common stock was $13.63 per share.
In July 1996, Medite filed a complaint in U.S. District Court in New Mexico
(Medite Corporation v. Public Service Company of New Mexico, CIV 96-0929LH)
regarding termination of the electricity supply contract for its New Mexico MDF
facility permanently closed in May 1996. The complaint seeks, among other
things, to declare the contract terminated under New Mexico common law and/or
the force majeure provisions of the agreement. Defendant filed a motion to
dismiss, and also filed a counterclaim demanding that Medite pay an
approximately $5 million termination penalty contained in the contract. Medite
does not believe the termination penalty clause applies due to, among other
things, the force majeure provisions of the contract. Discovery has been
completed, and a trial is currently expected to begin in the spring of 1998.
The Company does not expect the resolution of this matter to have a material
adverse impact on its consolidated results of operations, financial position or
liquidity.
In November 1995, a complaint was filed against Medite in the U.S. District
Court for the Western District of Oklahoma (Midgard Corporation v. Medite of New
Mexico, Inc., et al., CIV 95-1807-A) alleging, among other things, that Medite
breached Midgard's purportedly exclusive territorial supply contract by
purchasing certain raw materials from a third party located in Oklahoma City.
The complaint seeks, among other things, $4 million in compensatory damages and
$100 million in punitive damages. Medite has answered the complaint denying
liability. A trial was held in the summer of 1997, and in September 1997 the
jury awarded damages to the plaintiff of approximately $1.6 million. Medite has
appealed the ruling. The Company believes the complaint is without merit,
intends to defend the action vigorously and does not expect the resolution of
this matter to have a material adverse impact on its consolidated results of
operations, financial position or liquidity.
In September 1996, a complaint was filed in the Superior Court of New
Jersey, Bergen County, Chancery Division (Frank D. Seinfeld v. Harold C.
Simmons, et al., No. C-336-96) against Valhi, NL and certain current and former
members of NL's board of directors. The complaint, a derivative action on
behalf of NL, alleges, among other things, that NL's August 1991 "Dutch auction"
tender offer was an unfair and wasteful expenditure of NL's funds. The
complaint seeks, among other things, to rescind NL's purchase of approximately
10.9 million shares of its common stock from Valhi pursuant to the Dutch
auction, and the plaintiff has stated that damages sought are $149 million. The
Company and the other defendants have answered the complaint and have denied all
allegations of wrongdoing. In March 1998, Valhi reached an agreement to settle
this matter. Under the stipulation of settlement, in which the defendants
denied any wrongdoing, Valhi would transfer to NL 750,000 shares of NL common
stock held by Valhi, subject to adjustment based upon the market price of NL
shares at the time of closing, up to a maximum of 825,000 NL shares and a
minimum of 675,000 NL shares. Valhi may, at its option, transfer cash or cash
equivalents in lieu of all or a portion of such NL shares based on the market
price of NL common stock on the time of transfer. The settlement is subject to,
among other things, approval by the court and, if approved, is expected to close
in the second or third quarter of 1998. There can be no assurance that any such
settlement will become effective. The Company has made no provision for any
such settlement at December 31, 1997. At December 31, 1997, the net carrying
value of the Company's investment in NL was $3.83 per NL share held, and the
market price of NL common stock was $13.63 per share.
NL has been named as a defendant in various lawsuits alleging personal
injuries as a result of exposure to asbestos in connection with formerly-owned
operations. Various of these actions remain pending. Discovery is proceeding
in one such case, In re: Monongalia Mass II, (Circuit Court of Monongalia
County, West Virginia Nos. 93-C-362, et al.), involving approximately 3,100
plaintiffs. NL intends to defend these matters vigorously. NL has reached an
agreement to settle this case.
In July 1995, twelve plaintiffs brought an action against NL and various
other defendants, Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court
of Putnam County, West Virginia, No. 95-C-261). Plaintiffs allege that they
were employed by demolition and disposal contractors, and claim that as a result
of the defendants' negligence they were exposed to asbestos during demolition
and disposal of materials from the defendants' premises in West Virginia.
Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive damages totaling $55.5 million. NL has filed an answer
denying plaintiffs' allegations. An agreement has been reached settling this
matter, with NL being indemnified by another party.
In March 1997, NL was served with a complaint filed in the Fifth Judicial
District Court of Cass County, Texas (Ernest Hughes, et al. v. Owens-Corning
Fiberglass Corporation, et al., No. 97-C-051) on behalf of approximately 4,000
plaintiffs and their spouses alleging injury due to exposure to asbestos, and
seeking compensatory and punitive damages. NL has filed an answer denying the
material allegations. The case has been stayed, and the plaintiffs are refiling
their cases in Ohio. NL is also a defendant in approximately 1,000 additional
asbestos cases pending in Ohio, the first of which is scheduled for trial in the
third quarter of 1998.
In October 1997, a complaint was filed against Medite Corporation in the
U.S. District Court for the District of Oregon (Rogue Resources LLC v. Medite
Corporation, No. CV97-1549) alleging breach of contract in connection with
Medite's 1996 sale of its timber and timberlands to Rogue Resources. The
complaint seeks damages of approximately $615,000 plus plaintiff's costs,
attorney fees and litigation expenses. Medite has answered the complaint,
denying any liability. Medite believes the complaint is without merit, intends
to defend the action vigorously and does not expect the resolution of this
matter to have a material adverse impact on its consolidated financial position,
results of operations or cash flows.
At the DOE's request, Waste Control Specialists previously submitted a
proposal to the DOE for the disposal at its West Texas facility of DOE-generated
low-level and mixed-level radioactive wastes. Currently, the DOE only has one
off-site source for disposal of such wastes at a competitor's facility in Utah.
After several months of discussions, the DOE rejected Waste Control
Specialists's proposal. Waste Control Specialists believed the DOE acted
arbitrarily and capriciously and not in accordance with applicable law when it
rejected such proposal, and in response filed a lawsuit in federal court against
the DOE (Waste Control Specialists LLC v. United States Department of Energy, et
al., U.S. District Court for the Northern District of Texas, Civil Action No. 7-
97CV-202-X). The complaint seeks, among other things, (i) a preliminary
injunction to enjoin the DOE during the pendency of the proceedings from
refusing to accept any bid by Waste Control Specialists or to award any contract
to Waste Control Specialists for the disposal of DOE-generated low-level and
mixed-level radioactive wastes on the grounds that Waste Control Specialists is
not legally authorized to receive such wastes, (ii) a declatory judgment that
Waste Control Specialists's proposal is authorized by applicable law and (iii) a
remand of Waste Control Specialists's proposal back to the DOE for the DOE's
reconsideration. In October 1997, the court granted plaintiff a preliminary
injunction against the defendants which, among other things, stipulates that
during the pendency of the proceedings the DOE is enjoined from denying any bid
from Waste Control Specialists or from awarding any contract to Waste Control
Specialists for the disposal of DOE-generated low-level and mixed radioactive
waste on the grounds that (i) Waste Control Specialists is not or cannot be
licensed by the state of Texas for the disposal of such wastes or (ii) Waste
Control Specialists is not licensed by the Nuclear Regulatory Commission for the
disposal of such wastes. The DOE has appealed the ruling to the U.S. Court of
Appeals for the Fifth Circuit.
In January 1998, a complaint was filed by a former employee of Waste
Control Specialists in the 125th Judicial District Court for the State of Texas
against Waste Control Specialists (Kenneth F. Jackson v. Waste Control
Specialists LLC, et al., No. 98-01213) seeking, among other things, damages not
in excess of $3 million for the defendants' alleged breach of plaintiff's
employment contract. Waste Control Specialists believes the complaint is
without merit, intends to defend the action vigorously and will answer the
complaint denying all liability.
In addition to the litigation described above, the Company is also involved
in various other environmental, contractual, product liability and other claims
and disputes incidental to its present and former businesses. The Company
currently believes that the disposition of all claims and disputes, individually
or in the aggregate, should not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for approximately
85% to 90% of NL's sales in each of the past three years. TiO2 is sold to the
paint, paper and plastics industries, which are generally considered "quality-
of-life" markets whose demand for TiO2 is influenced by the relative economic
well-being of the various geographic regions. TiO2 is sold to over 4,000
customers, none of which represents a significant portion of NL's sales. In
each of the past three years, approximately one-half of NL's TiO2 sales volume
were to Europe with approximately one-third attributable to North America.
Component products are sold primarily to original equipment manufacturers in
the U.S. and Canada. In each of the past three years, the ten largest customers
accounted for approximately one-third of component products sales with at least
five of such customers in each year located in the U.S.
At December 31, 1997, consolidated cash and cash equivalents includes $53
million invested in U.S. Treasury securities purchased under short-term
agreements to resell (1996 - $53 million), of which $45 million are held in
trust for the Company by a single U.S. bank (1996 - $53 million). In addition,
at December 31, 1997, consolidated cash and cash equivalents included
approximately $239 million invested in A1 or P1-grade commercial paper issued by
various third parties having a maturity of three months or less (1996 - $120
million).
Operating leases. Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, with approximately one-third of Kronos'
current TiO2 production capacity, is located within the lessor's extensive
manufacturing complex, and Kronos is the only unrelated party so situated.
Under a separate supplies and services agreement expiring in 2011, the lessor
provides some raw materials, auxiliary and operating materials and utilities
services necessary to operate the Leverkusen facility. Both the lease and the
supplies and services agreements restrict NL's ability to transfer ownership or
use of the Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Most of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases.
Net rent expense related to the Company's consolidated business segments
charged to continuing operations approximated $10 million in 1995 and $13
million in each of 1996 and 1997. At December 31, 1997, future minimum payments
under noncancellable operating leases having an initial or remaining term of
more than one year were as follows:
<TABLE>
<CAPTION>
Years ending December 31, AMOUNT
(IN THOUSANDS)
<S> <C>
1998 $ 4,513
1999 2,736
2000 1,546
2001 1,260
2002 1,093
2003 and thereafter 18,695
$29,843
</TABLE>
Capital expenditures. At December 31, 1997 the estimated cost to complete
capital projects in process approximated $4 million, all of which relates to
NL's TiO2 facilities.
TiO2 raw material supply contract. NL has long-term supply contracts that
provide for NL's chloride-process TiO2 feedstock requirements through 2000. The
agreements require NL to purchase certain minimum quantities of feedstock with
average minimum annual purchase commitments aggregating approximately $101
million.
Royalties. Royalty expense, which relate principally to the volume of
certain Canadian-produced component products sold in the United States, was
$622,000 in 1995, $601,000 in 1996 and $849,000 in 1997.
Valhi share purchase plan. In January 1998, the Company's board of
directors authorized the Company to purchase up to 2 million shares of its
common stock in open market or privately-negotiated transactions over an
unspecified period of time. See Note 20.
NOTE 18 - DISCONTINUED OPERATIONS:
Discontinued operations are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Medite Corporation $10,607 $37,819 $13,804
Sybra, Inc. 3,015 4,162 19,746
$13,622 $41,981 $33,550
</TABLE>
Medite. In October 1996, Medite Corporation sold its timber and
timberlands for approximately $118 million cash consideration, of which
approximately $53 million of the cash proceeds were used to pay off and
terminate Medite's U.S. bank credit facilities. In November 1996 Medite sold its
Irish medium density fiberboard ("MDF") subsidiary for approximately $61.5
million cash consideration plus the assumption of approximately $21 million of
Irish bank debt. In February 1997, Medite sold its Oregon MDF facility for
approximately $36 million cash consideration (before fees and expenses) plus the
assumption of approximately $3.7 million of Medite indebtedness. Medite's
smaller stud lumber and veneer facilities were closed and sold in 1997 for
aggregate cash consideration approximating previously-estimated net realizable
value. Accordingly, the accompanying financial statements present the results
of operations of Medite's building products business segment as discontinued
operations for all periods presented.
As is customary in transactions of these types, Medite has made certain
representations and warranties to the respective purchasers concerning, among
other things, the assets sold. Medite has agreed to indemnify the three
purchasers for up to an aggregate of $6.5 million for certain breaches of these
representations and warranties. As part of the transactions, Valhi has agreed
to guarantee Medite's indemnification obligations. The Company does not
currently expect to be required to perform under any of these indemnification
obligations. See Note 17.
Medite's 1996 results include a $24 million pre-tax charge for the
estimated costs of permanently closing its New Mexico MDF plant, and a $13
million pre-tax charge for the estimated costs of permanently closing its two
Oregon timber conversion facilities. Approximately $26 million of such charges
represented non-cash costs, most of which related to the net carrying value of
property and equipment in excess of estimated net realizable value. These non-
cash costs were deemed utilized upon adoption of the respective closure plans.
Approximately $11 million of the charge represents workforce, environmental and
other estimated cash costs associated with the closure of the facilities, of
which approximately $7 million had been paid at December 31, 1997 (approximately
$3 million paid at December 31, 1996). Substantially all of the building and
equipment from the New Mexico facility and the two small Oregon timber
conversion facilities have been sold for cash consideration approximating the
previously-estimated net realizable value.
Condensed income statement data for Medite is presented below. The $24
million pre-tax New Mexico MDF plant charge is included in Medite's operating
income for 1996 because the decision to close the New Mexico MDF facility
occurred prior to the decision to permanently dispose of the entire business
segment. The aggregate net gain on disposal in 1996 includes the $13 million
charge associated with the closure of the two Oregon timber conversion
facilities, and a nominal charge associated with a curtailment of its U.S.
defined benefit plan. The gain on disposal in 1997 relates to the sale of the
Oregon MDF facility. Interest expense included in discontinued operations
represents interest on indebtedness of Medite and its subsidiaries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Operations of Medite:
Net sales $200.0 $171.1 $24.1
Operating income (loss) $ 25.2 $ (7.9) $ 1.5
Interest expense and other, net (8.2) (6.7) (.4)
Pre-tax income (loss) 17.0 (14.6) 1.1
Income tax expense (benefit) 6.4 (4.1) .5
10.6 (10.5) .6
Net gain on disposal:
Pre-tax gain - 75.1 22.3
Income tax expense - 26.8 9.1
- 48.3 13.2
$ 10.6 $ 37.8 $13.8
</TABLE>
A condensed balance sheet for Medite at December 31, 1996, included in the
Company's consolidated balance sheet, is presented below.
<TABLE>
<CAPTION>
AMOUNT
(IN MILLIONS)
<S> <C>
Current assets $21.2
Property and equipment, net 18.2
Property held for sale and other assets 4.8
$44.2
Current liabilities $17.6
Long-term debt 3.7
Deferred income taxes 1.6
Other liabilities 3.0
Stockholder's equity (*) 18.3
$44.2
* Eliminated in consolidation.
</TABLE>
At December 31, 1997, only a nominal amount of assets and liabilities
related to Medite remain.
Condensed cash flow data for Medite (excluding dividends paid to and
intercompany loans with Valcor) is presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities $ 18.5 $ 24.9 $(42.1)
Cash flows from investing activities:
Capital expenditures (12.3) (13.3) -
Proceeds from disposal of business units - 179.1 38.3
Other, net (.2) .1 (.4)
(12.5) 165.9 37.9
Cash flows from financing activities:
Indebtedness, net (13.8) (64.0) -
Other, net 2.9 - -
(10.9) (64.0) -
$ (4.9) $126.8 $ (4.2)
</TABLE>
Sybra. In April 1997, the Company completed the disposition of its fast
food operations conducted by Sybra. The disposition was accomplished in two
separate, simultaneous transactions. The first transaction involved the sale of
certain restaurant real estate owned by Sybra for $45 million cash
consideration. Substantially all of the net-of-tax proceeds from this
transaction were distributed to Valcor. The second transaction involved
Valcor's sale of 100% of the common stock of Sybra for $14 million cash
consideration plus the repayment by the purchaser of approximately $23.8 million
of Sybra's intercompany indebtedness owed to Valcor. Under certain conditions,
the purchaser of Sybra's common stock is obligated to pay additional contingent
consideration of approximately $2 million to Valcor in the future. Accordingly,
the accompanying financial statements present the results of operations of
Sybra's fast food operations as discontinued operations for all periods
presented.
As is customary in transactions of these types, Valcor made certain
representations and warranties to the purchaser of Sybra's assets and Sybra's
common stock concerning, among other things, the assets sold. Valcor has agreed
to indemnify the two purchasers for up to an aggregate of $4 million for certain
breaches of these representations and warranties. The Company does not
currently expect to be required to perform under any of these indemnification
obligations.
Condensed income statement data for Sybra through the date of disposal, and
a condensed balance sheet for Sybra at December 31, 1996 included in the
Company's consolidated balance sheet, are presented below. Interest expense
represents interest on indebtedness of Sybra. The gain on disposal includes
both Sybra's sale of its restaurant real estate and Valcor's sale of Sybra's
common stock. The provision for income taxes applicable to the pre-tax gain on
disposal varies from the 35% federal statutory rate due principally to the
excess of tax basis over book basis of the common stock of Sybra sold for which
no deferred income tax benefit was previously recognized.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C>
Operations of Sybra:
Net sales $115.4 $116.0 $37.9
Operating income $ 7.5 $ 8.9 $ 1.7
Interest expense and other, net (2.6) (2.3) (.6)
Pre-tax income 4.9 6.6 1.1
Income tax expense 1.9 2.4 .5
3.0 4.2 .6
Net gain on disposal:
Pre-tax gain - - 23.2
Income tax expense - - 4.1
- - 19.1
$ 3.0 $ 4.2 $19.7
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
(IN MILLIONS)
<S> <C>
Current assets $ 6.0
Intangible assets 16.0
Property and equipment, net 53.6
$75.6
Current liabilities $14.4
Long-term debt 4.7
Loan payable to Valcor (*) 20.0
Other liabilities 1.4
Stockholder's equity (*) 35.1
$75.6
</TABLE>
(*) Eliminated in consolidation
Condensed cash flow data for Sybra through the date of disposal (excluding
dividends paid to and intercompany loans with Valcor, but including the net
proceeds from Valcor's sale of Sybra's common stock) is presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating $ 8.5 $ 12.9 $(1.1)
activities
Cash flows from investing
activities:
Capital expenditures (12.0) (6.1) (1.8)
Proceeds on disposal of assets - - 55.3
Other, net .2 (.1) .4
(11.8) (6.2) 53.9
Cash flows from financing
activities -
10.3 (16.5) 22.4
Indebtedness, net
$ 7.0 $ (9.8) $75.2
</TABLE>
NOTE 19 - TRANSFER OF CONTROL OF THE AMALGAMATED SUGAR COMPANY:
On January 3, 1997, the Company completed the transfer of control of the
refined sugar operations previously conducted by the Company's wholly-owned
subsidiary, The Amalgamated Sugar Company, to Snake River Sugar Company, an
Oregon agricultural cooperative formed by certain sugarbeet growers in
Amalgamated's areas of operations. Pursuant to the transaction, Amalgamated
contributed substantially all of its net assets to the Amalgamated Sugar Company
LLC, a limited liability company controlled by Snake River, on a tax-deferred
basis in exchange for a non-voting ownership interest in the LLC. The Company
received approximately $11.5 million net of pre-closing cash dividends from
Amalgamated in 1997.
Also as part of the transaction, Snake River made certain loans to Valhi
aggregating $250 million in January 1997. These loans bear interest at a
weighted average fixed interest rate of 9.4%, are collateralized by the
Company's interest in the LLC and are due in January 2027. Currently, these
loans are nonrecourse to Valhi. See Note 10. Under certain conditions, up to
$37.5 million of such loans may become recourse to Valhi.
In connection with the transaction, Valhi provided $180 million of loans to
Snake River in January 1997 (the "Snake River Loan"), of which $100 million was
prepaid in May 1997 when Snake River obtained an equal amount of third-party
term loan financing. Valhi's remaining $80 million loan to Snake River is
unsecured, is subordinate to Snake River's third-party term loan and bears
interest at a fixed rate of 10.99% through 1998 and 12.99% for 1999 through
2010, with all principal due in 2010. Covenants contained in Snake River's
third-party term loan allow Snake River to generally pay $400,000 to Valhi for
monthly installments for debt service on the Snake River Loan, and also allow
for an additional annual payment on the Snake River Loan based on Snake River's
excess cash flow, as defined. Under certain conditions, Valhi is required to
pledge $5 million in cash equivalents or marketable securities to collateralize
Snake River's third-party term loan as a condition to permit continued repayment
of the Snake River Loan. Also in connection with the transaction, Valhi
provided a $12 million loan to Snake River Farms II, a subsidiary of Snake
River, in connection with the transaction. This loan was fully repaid in 1997.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year, with a preferential 95% going to the
Company. Under certain conditions, the Company is entitled to receive
additional cash distributions from the LLC. In addition, the Company may, at
its option, require the LLC to redeem the Company's interest in the LLC
beginning in 2010, and the LLC has the right to redeem the Company's interest in
the LLC beginning in 2027. The redemption price is generally $250 million plus
the amount of certain undistributed income allocable to the Company. In the
event the Company requires the LLC to redeem the Company's interest in the LLC,
Snake River has the right to accelerate the maturity of and call Valhi's $250
million loans from Snake River, and under the terms of the LLC Company
Agreement, Snake River would contribute to the LLC the cash received from
calling such loans to satisfy all or a substantial portion of the redemption
price.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC, via election of a majority of
the members of the LLC's Management Committee, in the event the Company's
cumulative "base distributions" from the LLC, as defined, become $10 million in
arrears and no default exists under Valhi's $250 million loans from Snake River.
Once any such arrearages have been paid, the Company ceases to have any
representation on the Management Committee. As a condition to exercising
temporary control, Valhi is required to effectively pledge funds in amounts up
to the next three years of debt service of Snake River's third-party term loan
until either (i) Snake River's third-party term loan has been completely repaid
or (ii) no default exists under the third-party term loan and Valhi has
relinquished its temporary control of the LLC.
Because the Company no longer controls the operations contributed to the
LLC, the Company ceased consolidating the net assets, results of operations and
cash flows of such business effective December 31, 1996. At December 31, 1996,
the Company reported the net assets contributed to the LLC at cost. Beginning
in 1997, the Company commenced reporting the cash distributions received from
the LLC (approximately $25.4 million in 1997) as dividend income. The amount of
such future distributions is dependent upon, among other things, the future
performance of the LLC's operations. For comparative purposes, Amalgamated's
1995 and 1996 results of operations and cash flows are reported by the equity
method. Because the Company receives preferential distributions from the LLC
and has the right to require the LLC to redeem its interest in the LLC for a
fixed and determinable amount beginning at a fixed and determinable date, the
Company has classified its investment in the LLC as an available-for-sale
marketable security carried at estimated fair value starting in 1997. See Note
6. In determining the estimated fair value of the Company's interest in the
LLC, the Company considers, among other things, the outstanding balance of the
Company's loans to Snake River and the outstanding balance of the Company's
loans from Snake River.
Condensed income statement data for Amalgamated for 1995 and 1996 is
presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996
(IN MILLIONS)
<S> <C> <C>
Net sales:
Refined sugar $492.6 $455.7
By-products and other 48.7 38.3
$541.3 $494.0
Operating income:
FIFO basis $ 26.0 $ 39.3
LIFO adjustment .8 (15.5)
26.8 23.8
General corporate items, net .3 -
Interest expense (13.4) (8.6)
13.7 15.2
Income tax expense 4.8 5.2
Net income $ 8.9 $ 10.0
</TABLE>
Condensed cash flow data for Amalgamated (excluding dividends paid to and
intercompany loans with Valhi) is presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996
(IN MILLIONS)
<S> <C> <C>
Cash flows from operating activities $ 41.7 $ 24.6
Cash flows from investing activities:
Capital expenditures (24.0) (13.7)
Other, net - .2
(24.0) (13.5)
Cash flows from financing activities -
Indebtedness, net (20.2) 4.3
$ (2.5) $ 15.4
</TABLE>
NOTE 20 - SUBSEQUENT EVENTS:
NL. In January 1998, NL completed the disposition of its specialty
chemicals business unit conducted by Rheox for $465 million cash consideration,
including $20 million attributable to a five-year agreement by NL not to compete
in the rheological products business. A portion of the net proceeds were used
to prepay and terminate Rheox's bank credit facility. The remaining net
proceeds are available for NL's general corporate purposes as permitted by the
indentures governing the NL Notes described in Note 10. Under the terms of the
indentures, NL is required to make an offer to purchase a pro rata portion of
the NL Notes, at par value for the 11.75% Notes and at accreted value for the
13% Discount Notes, to the extent that a specified amount of these net proceeds
are not used to either permanently paydown certain indebtedness of NL or its
subsidiaries or invest in additional productive assets, both as defined in the
indentures, within nine months of the disposition. In this regard, NL has
advised ICI of its interest in acquiring the portion of the Ti02 manufacturing
joint venture NL does not currently own, and NL intends to prepay KLA's tranche
of the joint venture term loan in March 1998. The Company will report an pre-
tax gain on the disposal of this business unit in the first quarter of 1998.
The 13% Discount Notes can first be redeemed, at the option of NL, in October
1998 at a price of 106% of their principal amount. NL may elect to redeem the
13% Discount Notes depending on market conditions, availability of resources and
other factors. NL may acquire the 11.75% Notes or 13% Discount Notes in the
open market.
CompX. In February 1998, CompX entered into a new $100 million unsecured
revolving bank credit facility. Borrowings under the new facility bear interest
at LIBOR plus a margin ranging from .30% to 1.025%, depending upon the level of
a certain CompX financial ratio and are due in 2003. In February, CompX
borrowed $50 million under the new facility to repay certain intercompany
indebtedness owed to Valcor. In March 1998, CompX purchased a U.S. lock
competitor for approximately $33 million cash, using available cash on hand and
$25 million of borrowings under its new bank credit facility.
In March 1998, CompX completed an initial public offering of shares of its
common stock for net proceeds to CompX of approximately $111 million. Such net
proceeds are available for CompX's general corporate purposes. CompX used a
majority of such net proceeds to repay outstanding borrowings under its new bank
credit facility. As a result of the public offering of shares of CompX common
stock and the award of certain shares of CompX common stock to certain officers
and directors of CompX, the Company's ownership interest in CompX was reduced to
62%. The Company will report a gain on reduction in interest in CompX in the
first quarter of 1998.
Other. In February 1998, Valhi entered into a $120 million revolving
credit facility with Contran. Borrowings by Contran bear interest at the prime
rate and are collateralized by substantially all of Contran's assets, including
8 million Valhi shares held by Contran and shares in certain other Contran
subsidiaries which, in the aggregate, hold a controlling interest in Valhi. The
facility matures no later than August 10, 1998. Through February 1998, $102.4
million had been borrowed pursuant to this facility. Approximately $25 million
of such borrowings repaid certain demand loans owed by Contran which was
collateralized by Contran's borrowing availability under a third-party credit
facility. Such third-party credit facility was terminated by Contran in
February 1998 in order to, among other things, allow Contran to pledge certain
of the collateral to Valhi described above. Contran has used substantially all
of the remaining amount borrowed from Valhi to fund the settlement of a lawsuit
that had unsuccessfully sought to remove Mr. Simmons as trustee of two of the
family trusts described in Note 1.
In March 1998, Contran offered to sell approximately 2.9 million shares of
Tremont Corporation common stock held by Contran and certain of its subsidiaries
to Valhi in a privately-negotiated transaction. Such shares represent
approximately 44% of Tremont's outstanding common stock. Valhi's board of
directors has formed a special committee comprised of two of its members who
are not officers of affiliated companies and has authorized such special
committee to review and act on the proposal. The Company understands such
directors will retain their own legal and financial advisors, and such directors
will act on behalf of Valhi to negotiate mutually acceptable terms and
conditions of the sale. Contran has advised the Company that it intends to
first utilize the proceeds resulting from the proposed transaction, if
consummated, to repay the outstanding balance under the $120 million revolving
credit facility. There can be no assurance that any such transaction will be
completed. At December 31, 1997, the quoted market price of Tremont's common
stock was $52.25 per share.
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Net sales $261.6 $284.9 $270.3 $258.0
Operating income 41.0 35.8 19.5 17.8
Income (loss) from
continuing $ 8.6 $ 5.5 $ (7.8) $ (6.2)
operations
Discontinued operations (14.3) 3.3 2.9 50.1
Net income (loss) $ (5.7) $ 8.8 $ (4.9) $ 43.9
Basic earnings per common
share:
Continuing operations $ .07 $ .05 $ (.07) $(.05)
Discontinued operations (.12) .03 .03 .43
Net income (loss) $ (.05) $ .08 $ (.04) $ .38
YEAR ENDED DECEMBER 31, 1997
Net sales $265.3 $280.2 $275.3 $272.3
Operating income 19.8 30.8 39.0 45.4
Income (loss) from
continuing $(23.1) $ 2.6 $ 8.4 $ 39.2
operations
Discontinued operations 15.6 19.8 (.9) (.9)
Extraordinary item - (.4) (3.9) -
Net income (loss) $ (7.5) $ 22.0 $ 3.6 $ 38.3
Basic earnings per common
share:
Continuing operations $ (.20) $ .02 $ .07 $ .34
Discontinued operations .13 .17 (.01) (.01)
Extraordinary item - - (.03) -
Net income (loss) $ (.07) $ .19 $ .03 $ .33
</TABLE>
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Valhi, Inc.:
Our report on the consolidated financial statements of Valhi, Inc. and
Subsidiaries as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997, which report is based in part upon the
reports of other auditors, is herein included on this Annual Report on Form 10-
K. As discussed in Note 17 to the consolidated financial statements, in 1997
the Company changed its method of accounting for environmental remediation costs
in accordance with Statement of Position No. 96-1. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page F-1 of this Annual Report on
Form 10-K. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, based upon our audits and the reports of other auditors, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 13, 1998
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
<S> <S> <S>
Current assets:
Cash and cash equivalents $ 5,510 $129,686
Marketable securities 142,478 -
Net dividend receivable from Amalgamated 11,518 -
Accounts and notes receivable 1,522 8,744
Receivables from subsidiaries and 3,414 104
affiliates
Deferred income taxes - 1,315
Other 1,377 292
Total current assets 165,819 140,141
Other assets:
Marketable securities 35,171 267,540
Investment in subsidiaries and affiliates 258,660 272,447
Loans receivable - 80,000
Deferred income taxes 48,595 -
Other assets 3,971 2,408
Property and equipment, net 3,064 3,272
Total other assets 349,461 625,667
$515,280 $765,808
Current liabilities:
Current long-term debt $155,478 $ -
Accounts payable and accrued liabilities 10,268 6,023
Demand loan from affiliates 7,244 -
Other payables to subsidiaries and 151 17,999
affiliates
Income taxes 1,414 1,414
Deferred income taxes 32,461 -
Total current liabilities 207,016 25,436
Noncurrent liabilities:
Long-term debt - 337,823
Deferred income taxes - 11,249
Other 4,345 6,366
Total noncurrent liabilities 4,345 355,438
Stockholders' equity 303,919 384,934
$515,280 $765,808
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Revenues and other income:
Securities transaction gains $ 50 $ 138 $ 46,263
Interest and dividend income 5,632 4,158 49,711
Other, net 343 4,623 2,062
6,025 8,919 98,036
Costs and expenses:
General and administrative 6,845 9,012 9,115
Interest 11,892 13,579 36,057
Other, net 231 (59) (379)
18,968 22,532 44,793
(12,943) (13,613) 53,243
Equity in subsidiaries and affiliates 83,809 (1,137) (20,540)
Income (loss) before income taxes 70,866 (14,750) 32,703
Income taxes (benefit) 15,973 (14,815) 5,602
Income from continuing operations 54,893 65 27,101
Discontinued operations 13,622 41,981 33,550
Extraordinary item - - (4,291)
Net income $ 68,515 $ 42,046 $ 56,360
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 68,515 $ 42,046 $ 56,360
Securities transaction gains (50) (138) (46,263)
Noncash interest expense 11,421 12,492 12,407
Deferred income taxes 23,153 (6,163) (6,818)
Equity in subsidiaries &
affiliates:
Continuing operations (83,809) 1,137 20,540
Discontinued operations (13,622) (41,981) (33,550)
Extraordinary item - - 4,291
Dividends from subsidiaries
and affiliates 8,298 25,764 -
Other, net 2,421 (1,773) 535
16,327 31,384 7,502
Net change in assets and (7,044) (7,374) 13,792
liabilities
Net sales of trading securities 24,184 - -
Net cash provided by
operating activities 33,467 24,010 21,294
Cash flows from investing
activities:
Purchases of NL common stock (13,250) (14,627) (14,222)
Purchases of marketable - - (6,000)
securities
Capital contributions to
subsidiaries (10,000) (17,000) (13,000)
and affiliates
Loans to subsidiaries and
affiliates:
Loans (132,000) (10,800) (67,625)
Collections 129,000 13,800 63,625
Other loans and notes receivable
Loans - - (200,600)
Collections - - 119,100
Pre-close dividend from - - 11,518
Amalgamated
Other, net (1,164) 3,875 455
Net cash used by
investing activities (27,414) (24,752) (106,749)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash flows from financing
activities:
Indebtedness:
Borrowings $ 60,000 $ 127,000 $250,000
Principal payments (60,000) (114,000) (13,000)
Loans from affiliates:
Loans - 7,844 -
Repayments - (600) (7,244)
Dividends (13,809) (23,057) (23,149)
Other, net 875 654 3,024
Net cash provided (used) by
financing activities (12,934) (2,159) 209,631
Cash and cash equivalents:
Net increase (decrease) (6,881) (2,901) 124,176
Balance at beginning of year 15,292 8,411 5,510
Balance at end of year $ 8,411 $ 5,510 $129,686
Supplemental disclosures-cash pai
for:
Interest $ 470 $ 2,270 $ 23,650
Income taxes (received) (4,154) (3,121) (6,532)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE 1 - BASIS OF PRESENTATION:
The Consolidated Financial Statements of Valhi, Inc. and Subsidiaries are
incorporated herein by reference.
NOTE 2 - MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
DECEMBER
31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Current asset (available-for-sale):
Dresser Industries common stock $142,478$ -
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $ 34,070$170,000
Dresser Industries common stock - 87,823
Other 1,101 9,717
$ 35,171$267,540
</TABLE>
NOTE 3 - INVESTMENT IN AND ADVANCES TO SUBSIDIARIES AND AFFILIATES:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Investment in:
NL Industries $147,962$112,196
Valcor 95,480 140,733
Waste Control Specialists LLC 15,218 15,518
258,660 268,447
Loan to Waste Control Specialists LLC - 4,000
$258,660$272,447
</TABLE>
NOTE 4 - EQUITY IN EARNINGS OF SUBSIDIARIES AND AFFILIATES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations:
NL Industries $69,539 $(12,592)$(25,726)
Valcor 5,924 7,853 17,886
Waste Control Specialists (554) (6,407) (12,700)
Amalgamated 8,900 10,009 -
$83,809 $ (1,137)$(20,540)
Discontinued operation - Valcor $13,622 $ 41,981 $ 33,550
Extraordinary item - Valcor $ - $ - $ (4,291)
</TABLE>
NOTE 5 - DIVIDENDS FROM SUBSIDIARIES AND AFFILIATES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Amalgamated $ - $17,000 $ -
Valcor 8,298 383 -
NL Industries - 8,381 -
Waste Control Specialists - - -
$8,298 $25,764 $ -
</TABLE>
NOTE 6 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
LYONs $142,478$ 87,823
Snake River Sugar Company - 250,000
Bank debt 13,000 -
155,478 337,823
Less current portion 155,478 -
$ - $337,823
The zero coupon Senior Secured LYONs, $213 million principal amount at maturity in October 2007 outstanding at December 31,
1997, were issued with significant OID to represent a yield to maturity of 9.25%. No periodic interest payments are required. Each
$1,000 in principal amount at maturity of the LYONs is exchangeable, at any time, for 14.4308 shares of Dresser common stock held by
Valhi. The LYONs are secured by such Dresser shares held by Valhi, which shares are held in escrow for the benefit of holders of
the LYONs. Valhi receives the regular quarterly dividend on the escrowed Dresser shares. During 1996 and 1997, holders
representing $600,000 and $165.3 million principal amount at maturity, respectively, of LYONs exchanged such LYONs for Dresser
shares. The LYONs are redeemable, at the option of the holder, in October 2002, at $636.27 per $1,000 principal amount (the issue
price plus accrued OID through such purchase dates), or an aggregated $135.6 million based on the number of LYONs outstanding at
December 31, 1997. Such redemptions may be paid, at Valhi's option, in cash, Dresser common stock, or a combination thereof. The
LYONs were also redeemable at the option of the holder in October 1997 at $404.84 per $1,000 principal amount at maturity and,
accordingly, the LYONs were classified as a current liability at December 31, 1996. Holders representing only a nominal amount of
LYONs exercised their right to redeem the LYONs in October 1997 for an amount of cash equal to the accreted LYONs obligation at such
date. The LYONs are redeemable, at any time, at Valhi's option for cash equal to the issue price plus accrued OID through the
redemption date.
Valhi has a $15 million revolving bank credit facility which matures in March 1998, generally bears interest at LIBOR plus 1.5%
and is collateralized by 4.8 million shares of NL common stock held by Valhi. Borrowings under this facility can only be used to
fund purchases of additional shares of NL common stock. The agreement limits additional indebtedness of Valhi and contains other
provisions customary in lending transactions of this type. At December 31, 1997, the full amount of this facility was available for
borrowing.
Valhi's $250 million in loans from Snake River bear interest at a weighted average fixed interest rate of 9.4%, are
collateralized by the Company's interest in The Amalgamated Sugar Company LLC and are due in January 2027. Currently, these loans
are nonrecourse to Valhi. Under certain conditions, up to $37.5 million of such loans may become recourse to Valhi.
NOTE 7 - INCOME TAXES:
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1995 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit)
attributable
to continuing operations:
Currently payable (refundable) $(7,180) $ (8,652)$ 12,420
Deferred income taxes 23,153 (6,163) (6,818)
$15,973 $(14,815)$ 5,602
Cash received for income taxes, net:
Received from subsidiaries $ 8,828 $ 7,119 $ 42,467
Paid to Contran (4,623) (3,445) (35,620)
Paid to tax authorities, net (51) (553) (315)
$ 4,154 $ 3,121 $ 6,532
</TABLE>
Waste Control Specialists LLC is treated as a partnership for federal income
tax purposes. NL is a separate U.S. taxpayer and is not a member of the Contran
Tax Group.
<TABLE>
<CAPTION>
DEFERRED TAX
ASSET
(LIABILITY)
DECEMBER 31,
(IN THOUSANDS)
<S> <C> <C>
Components of the net deferred tax asset
(liability):
Tax effect of temporary differences related
to:
Marketable securities $(35,659)$(86,536)
Investment in subsidiaries and affiliates
not 52,962 78,169
members of the Contran Tax Group
Accrued liabilities and other deductible 7,282 4,596
differences
Other taxable differences (8,451) (6,163)
$ 16,134 $ (9,934)
Current deferred tax asset (liability) $(32,461)$ 1,315
Noncurrent deferred tax asset (liability) 48,595 (11,249)
$ 16,134 $ (9,934)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful $ 4,434 $ 665 $ (294)
accounts
Amortization of intangibles
Goodwill $ 1,180 $ 8,172 $ -
Franchise fees and other 7,371 4,549 (453)
$ 8,551 $12,721 $ (453)
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful $ 4,972 $ 1,860 $(1,987)
accounts
Amortization of intangibles
Goodwill $ 9,352 $ 8,779 $ -
Franchise fees and other 11,459 4,447 (372)
$ 20,811 $13,226 $ (372)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
CURRENCY AT END
DESCRIPTION TRANSLATION OTHER(A) OF YEAR
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful $ 167 $ - $ 4,972
accounts
Amortization of intangibles
Goodwill $ - $ - $ 9,352
Franchise fees and other (8) - 11,459
$ (8) $ - $ 20,811
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful $ (169) $ (589) $ 4,087
accounts
Amortization of intangibles
Goodwill $ - $ - $ 18,131
Franchise fees and other (332) - 15,202
$ (332) $ - $ 33,333
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful $ 4,087 $ 547 $(1,281)
accounts
Amortization of intangibles
Goodwill $ 18,131 $ 9,226 $ -
Franchise fees and other 15,202 3,278 (153)
$ 33,333 $12,504 $ (153)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
CURRENCY AT END
DESCRIPTION TRANSLATION OTHER(A) OF YEAR
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful $ (214) $ - $ 3,139
accounts
Amortization of intangibles
Goodwill $ - $ (1,571)$ 25,786
Franchise fees and other (829) (9,390) 8,108
$ (829) $(10,961)$ 33,894
</TABLE>
(a)1996 - Elimination of amounts attributable to (i) the Amalgamated Sugar
Company, which ceased to be consolidated at December 31, 1996 and
(ii) Medite's Irish subsidiary, which was sold in 1996.
1997 - Elimination of amounts attributable to operations sold in 1997.
WASTE CONTROL SPECIALISTS LLC
FINANCIAL STATEMENTS
DECEMBER 31, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members and Management Committee of Waste Control Specialists LLC:
We have audited the accompanying balance sheets of Waste Control Specialists
LLC as of December 31, 1996 and 1997, and the related statements of operations,
members' equity and cash flows for the period from inception to December 31,
1996 and for each of the years in the two-year period ended December 31, 1997.
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 financial position of Waste Control Specialists
LLC as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for the period from inception to December 31, 1995 and for each of
the years in the two-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 20, 1998
WASTE CONTROL SPECIALISTS LLC
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1996 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 545 $ 265
Trade accounts receivable - 970
Receivable from officer 250 -
Prepaid insurance 144 170
Other 66 45
Total current assets 1,005 1,450
Other assets:
Landfill and other operating permits, net 1,841 2,279
Organization costs, net 153 113
Restricted deposits and other 561 7
2,555 2,399
Property and equipment:
Land 2,134 2,134
Buildings 255 256
Treatment, storage and disposal facility - 18,837
Machinery and equipment 288 678
Construction in progress 12,912 1,507
15,589 23,412
Less accumulated depreciation 41 1,217
Net property and equipment 15,548 22,195
$19,108 $26,044
</TABLE>
WASTE CONTROL SPECIALISTS LLC
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY
1996 1997
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 300 $ 489
Loan from member - 4,000
Accounts payable and accrued liabilities 1,360 3,866
Accrued payroll and payroll taxes 408 151
Accrued interest - 119
Total current liabilities 2,068 8,625
Noncurrent liabilities:
Long-term debt 5,015 4,727
Accrued closure and post-closure costs - 55
5,015 4,782
Members' equity 12,025 12,637
$19,108 $26,044
</TABLE>
Commitments and contingencies (Notes 2 and 6).
WASTE CONTROL SPECIALISTS LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 8, 1995
(INCEPTION) TO
DECEMBER 31,
YEARS ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Revenues:
Net sales $ - $ - $ 3,410
Interest and other 17 277 105
17 277 3,515
Costs and expenses:
Facility operating -
expenses 4
Selling -
2
General and - - 2,261
administrative
Licensing and 20 1,719 5,159
permitting
Startup 445 4,371 -
Interest 106 594 1,087
571 6,684 15,903
Net loss $(554) $(6,407) $(12,388)
</TABLE>
WASTE CONTROL SPECIALISTS LLC
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM NOVEMBER 8, 1995 (INCEPTION)
TO DECEMBER 31, 1995
AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACH KNB TOTAL
<S> <C> <C> <C>
Contributions:
Cash $ 5,000 $ - $5,000
Noncash - (3,014) (3,014)
Net loss (554) (554)
Members' equity (deficit) at
December 31, 1995 4,446 (3,014) 1,432
Cash contributions 17,000 - 17,000
Net loss (6,407) - (6,407)
Members' equity (deficit) at
December 31, 1996 15,039 (3,014) 12,025
Cash contributions 13,000 - 13,000
Net loss (12,388) - (12,388)
Members' equity (deficit) at
December 31, 1997 $ 15,651 $(3,014) $ 12,637
</TABLE>
WASTE CONTROL SPECIALISTS LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 8,
1995
(INCEPTION) YEARS ENDED
TO DECEMBER 31,
DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (554) $ (6,407) $(12,388)
Depreciation and amortization 9
Changes in assets and
liabilities:
Trade account receivables - - (970)
Other current assets (28) (187) (5)
Accounts payable and
accrued (358) 800 1,614
expenses
Other noncurrent - - 55
liabilities
Net cash used by
operating (931) (5,714) (10,341)
activities
Cash flows from investing
activities:
Capital expenditures (153) (12,238) (7,068)
Permitting and other, net - (1,485) 228
Net cash used by
investing (153) (13,723) (6,840)
activities
</TABLE>
WASTE CONTROL SPECIALISTS LLC
STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 8,
1995
(INCEPTION) YEARS ENDED
TO DECEMBER 31,
DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Cash flows from financing
activities:
Capital contribution received $ 5,000 $ 17,000 $ 13,000
Long-term debt:
Additions - - 190
Repayments (467) (267) (289)
Loans from members:
Additions - - 12,000
Repayments (100) (100) (8,000)
Net cash provided by
financing 4,433 16,633 16,901
activities
Net increase (decrease) in 3,349 (2,804) (280)
cash
Cash and cash equivalents at
beginning
of period
Cash and cash equivalents at
end $ 3,349 $ 545 $ 265
of period
Supplemental disclosures:
Cash paid for interest $ 106 $ 594 $ 968
Noncash assets contributed
by
a Member, net of $(3,014) $ - $ -
liabilities
assumed
</TABLE>
WASTE CONTROL SPECIALISTS LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Waste Control Specialists LLC ("the Company") is a Delaware limited
liability company formed in November 1995. In early 1997, the Company completed
construction of the initial phase of a waste disposal facility in West Texas for
the processing, treatment, storage and disposal of certain hazardous and toxic
wastes. The Company has been issued permits by the Texas Natural Resource
Conservation Commission ("TNRCC") and the U.S. Environmental Protection Agency
("U.S. EPA") to accept wastes governed by the Resource Conservation and Recovery
Act ("RCRA") and the Toxic Substances Control Act ("TSCA"). In November 1997,
the Company was issued a license by the Texas Department of Health for the
treatment and storage (but not disposal) of low-level and mixed radioactive
wastes. The current provisions of the license generally enable the Company to
accept low-level and mixed radioactive wastes for treatment and storage from the
Department of Energy ("DOE"). No such wastes have been received by the Company
through December 31, 1997. See Note 6. The Company is also seeking other
permits for the processing, treatment, storage and disposal of low-level and
mixed-level radioactive wastes.
Prior to October 1997, the Company was equally owned by Andrews County
Holdings, Inc. ("ACH") and KNB Holdings, Ltd. ("KNB"). ACH, a Delaware
corporation, is a wholly-owned subsidiary of Valhi, Inc. (NYSE: VHI). KNB, a
Texas limited partnership, is controlled by Kenneth N. Bigham, Chief Executive
Officer of the Company, as general partner of KNB. In October 1997, ACH
increased its membership interest to 58% and KNB's membership interest was
reduced to 42%. ACH holds an option, granted in March 1997, to make an
additional $2.5 million capital contribution which, if contributed, would
increase ACH's membership interest to 60%. Collectively, ACH and KNB are
referred to as "Members" of the Company. See Notes 3 and 6.
Contran Corporation owns, directly or indirectly, approximately 93% of
Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee.
Mr. Simmons, the Chairman of the Board and Chief Executive Officer of each of
Valhi and Contran, may be deemed to control each of Contran and Valhi.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Management estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
Cash and cash equivalents. Cash equivalents include bank time deposits with
maturities of three months or less.
Organizational costs. Capitalized organizational costs are amortized by the
straight-line method over five years and are stated net of accumulated
amortization of $47,000 and $87,000 at December 31, 1996 and 1997, respectively.
Property and equipment. Property and equipment are stated at cost.
Maintenance, repairs and minor renewals are expensed; major improvements are
capitalized. Preparation costs for landfill disposal cells, including costs
relating to excavation and grading and the design and construction of liner and
leachate collection systems, are capitalized as a component of property and
equipment.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to 40 years for buildings and three to 20 years
for machinery and equipment. Landfill disposal cell costs are amortized by the
straight-line method as the airspace is consumed.
Operating permits. Direct costs related to the acquisition of operating
permits are capitalized and are amortized by the straight-line method over a
period beginning when the permit is operational and ending on the initial
expiration date of the permits. Such costs are stated net of accumulated
amortization of $137,000 at December 31, 1997. The respective permits are
generally subject to renewal at the option of the issuing governmental agency.
Revenue recognition. The Company recognizes revenue from services when
the services are performed.
Closure and post-closure liabilities. The Company provides for estimated
closure and post-closure monitoring costs over the operating life of disposal
site. Such costs are estimated based upon technical requirements of applicable
federal or state regulations, and include such items as final cap and cover of
the site and groundwater monitoring. The cost estimates in current dollars are
inflated at 3% per year until the expected time of payment, and such cost
estimates are charged to operations ratably as the landfill disposal airspace is
consumed. The costs are not discounted to present value. These estimates are
subsequently revised as deemed necessary as additional information becomes
available. The current estimate of the aggregate closure and post-closure
monitoring costs for the current phase of the facility is approximately $6
million.
Income taxes. The Company, a limited liability company, is not a federal
tax paying entity. Income and losses of the Company are included in the federal
income tax returns of the Members and any resulting income taxes are the
responsibility of the Members.
NOTE 3 - SUMMARY OF SIGNIFICANT MEMBER AGREEMENTS:
Significant agreements entered into by the Company and its Members are
summarized below. See Note 5 for other related party agreements transactions.
Formation Agreement. ACH agreed to contribute $25 million in cash (the
"ACH Initial Capital Contribution") to the Company at various dates through 1997
in return for its initial 50% Membership Interest in the Company. ACH
contributed $5 million in 1995, $17 million in 1996 and the remaining $3 million
in January 1997 pursuant to the ACH Initial Capital Contribution. In October
1997, ACH contributed an additional $10 million to the Company's equity, thereby
increasing its membership interest to 58% and reducing KNB's membership interest
to 42%. Approximately $8 million of such contribution was used to reduce the
outstanding balance of the Company's revolving loan from ACH. See Note 4.
KNB contributed certain assets, principally all of the outstanding common
stock of Waste Control Specialists, Inc. ("WCSI") and approximately 16,073 acres
of land including the 1,338 acre facility site, for its initial 50% Membership
Interest. In addition, the Company assumed certain liabilities of Mr. Bigham,
principally bank indebtedness aggregating $6.1 million. The net assets of WCSI
consisted primarily of the land for the facility site and operating permits
issued by the TNRCC and U.S. EPA covering acceptance of wastes governed by RCRA
and TSCA. WCSI was subsequently merged into the Company.
The assets contributed by KNB were recorded by the Company at predecessor
carryover basis of $3.1 million (net liability of $3 million including the
carryover basis of $6.1 million of debt of Mr. Bigham assumed).
Company Agreement. The Company's business is to conduct a broad array of
waste management services at the West Texas facility, including the treatment,
storage and/or disposal of wastes and other materials regulated under RCRA and
TSCA.
The business and affairs of the Company are directed by the Members through
a five-member Management Committee, of which ACH appoints three members and KNB
appoints two members. The Chief Executive Officer is given the authority to
manage the Company's affairs in accordance with the Annual Operating Plan
approved by the Management Committee. Among other things, most capital
expenditures, contracts which obligate the Company to pay for or provide
services valued at more than $1 million, transactions outside the ordinary
course of business and distributions to Members (except for required
distributions) must be approved by the Management Committee.
The Members themselves, by majority vote (one vote per Member), must approve
certain transactions including (i) the sale or disposition of all or
substantially all of the Company's assets pursuant to a sale or merger, (ii)
engaging the Company in any business other than the environmental waste business
and (iii) most related party transactions. No Member is obligated to loan,
invest or otherwise provide any funds or property to the Company unless a
majority of the Members agree.
ACH is generally entitled to a preferential distribution (the "ACH
Preferential Distribution") equal to 20% per annum of the ACH Initial Capital
Contribution. Distributions to Members of Distributable Cash, as defined, shall
generally (i) first be paid to ACH up to the ACH Preferential distribution and
(ii) second split ratably among the Members based upon their Membership
Interest. ACH is also generally entitled to a preferential return of the ACH
Initial Capital Contribution in the event of the liquidation and winding up of
the Company.
For federal income tax purposes, the net profits and losses of the Company
are generally allocated (i) first in an amount up to the Distributable Cash paid
to Members, as discussed above, and (ii) second ratably among the Members based
on their respective Membership Interest. Generally, to the extent a Member has
a negative capital account for federal income tax purposes, such Member shall
not be allocated any net losses.
Members are generally given a right of first refusal or participation rights
in the event a Member wishes to sell all or a portion of his Membership
Interest. Following any initial public offering of ownership interests in the
Company, each Member may exercise up to two additional demand registrations,
subject to certain conditions.
Consulting Agreement. The Company agreed to assume the obligations of WCSI
under a consulting agreement entered into in October 1995. See Note 6.
NOTE 4 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Third party indebtedness:
Bank term loan $5,315 $5,046
Demand note payable to bank (11%) - 170
5,315 5,216
Less current portion 300 489
$5,015 $4,727
Loan from ACH $ - $4,000
</TABLE>
Approximately $450,000 of bank indebtedness assumed by the Company at
formation was repaid in November 1995. The bank term loan is repayable through
December 1999 ($319,000 in 1998 and $4,727,000 in 1999), with interest at the
greater of (i) prime plus 3.75% or (ii) 12% (12% at December 31, 1996 and 1997)
and collateralized by substantially all of the Company's assets. The term loan
agreement contains provisions and restrictive covenants customary in lending
transactions of this type.
In March 1997, the Company entered into an unsecured $10 million revolving
credit facility with ACH. Borrowings bear interest at prime plus 1% (9.5% at
December 31, 1997) and are due no later than December 31, 1998.
The fair value of indebtedness at December 31, 1996 and 1997 is assumed to
approximate its book value.
NOTE 5 - RELATED PARTY TRANSACTIONS:
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Certain significant agreements were entered into in conjunction with
formation of the Company. See Note 3.
Mr. Bigham, a member of the Management Committee and the general partner of
KNB, was appointed Chief Executive Officer of the Company pursuant to a
employment agreement effective through at least 2000.
The Company agreed to reimburse ACH and KNB an aggregate of $100,000 each
for costs incurred by the respective Member in connection with formation of the
Company. Such costs have been capitalized as organizational costs. See Note 2.
The Company has entered into a five-year lease for its corporate office
facility with an entity controlled by Mr. Bigham at a rate of $42,000 per year.
Rent expense related to this lease was $6,000 in 1995, $42,000 in each of 1996
and 1997.
Loans to officers at December 31, 1996 consists of a 6.02% demand note
receivable from Mr. Bigham. Interest income on such loan was nominal in both
1996 and 1997. This loan was repaid in February 1997 using a portion of the
proceeds of a $1.5 million loan made by Valhi to Mr. Bigham, which loan is
collateralized by Mr. Bigham's interest in the Company.
In March 1997, the Company entered into a $10 million revolving credit
facility with ACH. Borrowings bear interest at prime plus 1% and are due
December 31, 1998. See Note 4.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
Environmental. The Company's current waste management operations currently
involve wastes and other materials regulated under RCRA and TSCA. The Company
has and is seeking other operating permits to accept wastes, including low-level
radioactive or mixed wastes, regulated under other environmental laws and
regulations. The Company expects, in the normal course of its business, to
expend funds for environmental protection and remediation; however its business
is based upon compliance with environmental laws and regulations, and its
services are expected to be priced accordingly. While the nature of the
Company's operations may subject the Company to lawsuits, proceedings or
governmental investigations related to environmental matters, the Company is
currently not aware of any threatened or pending matters concerning
environmental compliance.
Litigation. At the DOE's request, the Company previously submitted a
proposal to the DOE for the disposal at its West Texas facility of DOE-generated
low-level and mixed radioactive wastes. Currently, the DOE only has one off-
site source for disposal of such wastes at a competitor's facility in Utah.
After several months of discussions, the DOE rejected the Company's proposal.
The Company believed the DOE acted arbitrarily and capriciously and not in
accordance with applicable law when it rejected such proposal, and in response
filed a lawsuit in federal court against the DOE (Waste Control Specialists LLC
v. United States Department of Energy, et al., U.S. District Court for the
Northern District of Texas, Civil Action No. 7-97CV-202-X). The complaint
seeks, among other things, (i) a preliminary injunction to enjoin the DOE during
the pendency of the proceedings from refusing to accept any bid by the Company
or to award any contract to the Company for the disposal of DOE-generated low-
level and mixed radioactive wastes on the grounds that the Company is not
legally authorized to receive such wastes, (ii) a declatory judgment that the
Company's proposal is authorized by applicable law and (iii) a remand of the
Company's proposal back to the DOE for the DOE's reconsideration. In October
1997, the court granted the Company a preliminary injunction against the
defendants which, among other things, stipulates that during the pendency of the
proceedings the DOE is enjoined from denying any bid from the Company or from
denying an award of any contract to the Company for the disposal of DOE-
generated low-level and mixed radioactive waste on the grounds that (i) the
Company is not or cannot be licensed by the state of Texas for the disposal of
such wastes or (ii) the Company is not licensed by the Nuclear Regulatory
Commission for the disposal of such wastes. The DOE has appealed the ruling to
the U.S. Court of Appeals for the Fifth Circuit.
In January 1998, a complaint was filed by a former employee of the Company
in the 125th Judicial District Court for the State of Texas against the Company
(Kenneth F. Jackson v. Waste Control Specialists LLC, et al., No. 98-01213)
seeking, among other things, damages not in excess of $3 million for the
defendants' alleged breach of plaintiff's employment contract. The Company
believes the complaint is without merit, intends to defend the action vigorously
and will answer the complaint denying all liability.
In addition to the complaint described above, the Company is involved in
various other claims and disputes incidental to its business. The Company
currently believes the disposition of all such claims and disputes, individually
and in the aggregate, will not have a material adverse effect on its financial
position, results of operations or liquidity.
Concentrations of credit risk. At December 31, 1996 and 1997, substantially
all of the Company's cash and cash equivalents were held by a single U.S. bank.
Consulting agreement. Under the terms of an agreement entered into in
October 1995 by WCSI and assumed by the Company at formation, the Company has
agreed to pay an independent consultant up to an aggregate of $18.4 million for
performing services as a governmental relations representative and consultant.
Such fees are based on variable rates of not more than 2% of the revenue
generated and will be payable only when the Company receives revenues pursuant
to contracts for the disposal of low-level radioactive or mixed wastes generated
by, or under the supervision or control of, the U.S. federal government. The
agreement currently provides for a security interest in the facility under
construction in West Texas to collateralize the Company's obligation under the
agreement when the obligation becomes payable.
Bonus program. The Company has adopted a bonus program whereby up to $5.6
million may be paid to certain employees of the Company, excluding Mr. Bigham,
if certain operating and permitting targets are met within specified time
periods. A payment of $1.4 million is payable if qualifying operating permits
for the treatment and storage of low-level radioactive wastes are received
before January 2000, $1.4 million is payable if qualifying operating permits for
the disposal of low-level radioactive wastes are received before January 2000,
and $2.8 million is payable if the Company achieves specified sales and
operating profit targets by the end of 1999. If paid, bonuses with respect to
the receipt of permits for low-level radioactive waste treatment and storage or
disposal will be capitalized as part of the cost of the permit. Bonuses with
respect to the sales and operating profit targets will be accrued through 1999
beginning when it becomes probable that such bonuses will be paid. At December
31, 1997, no amounts have been accrued or paid with respect to such bonuses.
02/20/98
MC
THE AMALGAMATED SUGAR COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
WITH
INDEPENDENT AUDITORS' REPORT THEREON
INDEPENDENT AUDITORS' REPORT
To the Shareholder of The Amalgamated Sugar Company:
We have audited the accompanying balance sheets of The Amalgamated Sugar
Company as of December 31, 1996, and the related statements of income and
shareholder's equity and cash flows for each of the years in the two year 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 financial position of The Amalgamated Sugar
Company at December 31, 1996, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
January 31, 1997
THE AMALGAMATED SUGAR COMPANY
BALANCE SHEETS
December 31, 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996
<S> <C>
Current assets:
Cash and cash equivalents $ 2,002
Accounts and notes receivable 38,626
Inventories 233,713
Prepaid expenses 1,079
Total current assets 275,420
Other assets 27
Property and equipment:
Land 2,628
Buildings 11,732
Equipment 262,720
Construction in progress 256
277,336
Less accumulated depreciation 170,922
Net property and equipment 106,414
$381,861
</TABLE>
THE AMALGAMATED SUGAR COMPANY
BALANCE SHEETS (CONTINUED)
December 31, 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY 1996
<S> <C>
Current liabilities:
Notes payable $119,014
Current maturities of long-term debt 8,000
Dividends payable 13,000
Accounts payable and accrued liabilities 183,551
Income taxes 493
Deferred income taxes 2,212
Total current liabilities 326,270
Noncurrent liabilities:
Long-term debt 8,000
Accrued OPEB cost 18,319
Deferred income taxes 3,855
Other 1,168
Total noncurrent liabilities 31,342
Shareholder's equity:
Common stock, $1 par value; 100,000 shares
authorized; 1,000 shares issued and outstanding 1
Additional paid-in capital 22,000
Retained earnings 2,248
Total shareholder's equity 24,249
$381,861
</TABLE>
Commitments and contingencies (Note 11).
THE AMALGAMATED SUGAR COMPANY
STATEMENTS OF INCOME AND SHAREHOLDER'S EQUITY
Years ended December 31, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Revenues and other income:
Net sales $541,303 $493,996
Interest and other 3,316 1,857
544,619 495,853
Costs and expenses:
Cost of sales 420,260 378,643
Selling, general and administrative 97,272 93,359
Interest 13,371 8,611
530,903 480,613
Income before income taxes 13,716 15,240
Provision for income taxes 4,816 5,231
Net income 8,900 10,009
Shareholder's equity at beginning of year 32,997 44,240
Capital contribution 5,000 -
Dividends paid in:
Cash - (17,000)
Stock of subsidiary (2,657) -
Dividends accrued - (13,000)
Shareholder's equity at end of year $ 44,240 $ 24,249
</TABLE>
THE AMALGAMATED SUGAR COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,900 $ 10,009
Depreciation 13,828 14,995
Deferred income taxes 426 (578)
Other, net (937) 1,227
22,217 25,653
Change in assets and liabilities:
Accounts and notes receivable (9,347) 6,101
Inventories 51,619 (4,289)
Accounts payable and accrued
liabilities (25,114) 1,274
Other, net 2,317 (4,152)
Net cash provided by operating
activities 41,692 24,587
Cash flows from investing activities:
Capital expenditures (24,036) (13,679)
Other, net 23 219
Net cash used by investing
activities (24,013) (13,460)
Cash flows from financing activities:
Notes payable, long-term debt and
loans from Valhi:
Additions 651,928 648,911
Principal payments (672,136) (644,582)
Capital transactions 5,000 -
Cash dividends - (17,000)
Net cash provided (used) by
financing activities (15,208) (12,671)
Net increase (decrease) in cash $ 2,471 $ (1,544)
</TABLE>
THE AMALGAMATED SUGAR COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Cash and cash equivalents:
Net increase (decrease) $ 2,471 $ (1,544)
Balance at beginning of year 1,075 3,546
Balance at end of year $ 3,546 $ 2,002
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 13,073 $ 9,205
Income taxes 2,623 6,631
</TABLE>
THE AMALGAMATED SUGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization:
The Amalgamated Sugar Company (the "Company"), a Utah corporation and an
indirect wholly-owned subsidiary of Valhi, Inc. (NYSE: VHI), is engaged in the
production and sale of refined sugar and by-products from sugarbeets. Contran
Corporation holds, directly or through subsidiaries, approximately 91% of
Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of the children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr.
Simmons, the Chairman of the Board of each of Amalgamated, Valhi and Contran,
may be deemed to control each of such companies.
Effective December 1, 1995, Amalgamated contributed certain assets that
were primarily used in research and development activities to a newly formed,
wholly-owned subsidiary, Amalgamated Research Inc. and distributed all of the
outstanding stock of Amalgamated Research to its parent. Such dividend was
recorded at net carrying value.
Subsequent to December 31, 1996, the Company contributed substantially all
of its net assets to The Amalgamated Sugar Company LLC. See Note 13.
Note 2 - Summary of significant accounting policies:
Management's estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
Cash and cash equivalents. Cash equivalents include temporary cash
investments with original maturities of three months or less.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. The last-in, first-out method is used to determine the cost of
refined sugar, sugarbeets and by-products, and the average-cost method is used
to determine the cost of supplies.
Under the terms of its contracts with sugarbeet growers, the Company's cost
of sugarbeets is based on average sugar sales prices during the beet crop
purchase contract year, which begins in October and ends the following
September. Any differences between the sugarbeet cost estimated at the end of
the fiscal year and the amount ultimately paid is an element of cost of sales in
the succeeding year.
Property, equipment and depreciation. Property and equipment are stated at
cost. Maintenance, repairs and minor renewals are expensed; major improvements
capitalized. Interest costs related to major, long-term capital projects
capitalized as a component of construction costs were $360,000 in 1995 and nil
in 1996.
Depreciation is computed primarily on the straight-line method over the
estimated useful lives of 20 to 40 years for buildings and five to 20 years for
equipment.
Income taxes. Valhi and Amalgamated are members of Contran's consolidated
United States federal income tax group (the "Contran Tax Group"). The policy
for intercompany allocation of federal income taxes provides that subsidiaries
included in the Contran Tax Group compute the provision for federal income taxes
on a separate company basis. Subsidiaries of Valhi make payments to, or receive
payments from, Valhi in the amount they would have paid to or received from the
Internal Revenue Service had they not been members of the Contran Tax Group.
The separate company provisions and payments are computed using the tax
elections made by Contran.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities.
Other. Sales are recorded when products are shipped.
Accounting and funding policies for retirement plans and for postretirement
benefits other than pensions ("OPEB") are described in Note 9.
Note 3 - Operations:
The Company's operations consist of one business and geographic segment, the
production of refined sugar from sugarbeets in the United States.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1995 1996
<S> (IN THOUSANDS)
Net sales: <C> <C>
Refined sugar $492,564 $455,717
By-products and other 48,739 38,279
$541,303 $493,996
Operating income:
FIFO basis $ 26,057 $ 39,285
LIFO adjustment 772 (15,437)
Operating income 26,829 23,848
General corporate items, net 258 3
Interest expense (13,371) (8,611)
Income before income taxes $ 13,716 $ 15,240
</TABLE>
Export sales were $21,067,000 in 1995 and $14,885,000 in 1996.
Note 4 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN
THOUSANDS)
<S> <C>
Notes payable:
United States Government loans $ 69,014
Bank credit agreements 50,000
$119,014
Long-term debt:
Bank term loan $ 16,000
Less current maturities 8,000
$ 8,000
</TABLE>
The Government loans are made under the sugar price support loan program,
which program currently extends through the 2002 crop year ending September 30,
2003. These short-term loans have historically been nonrecourse and will
continue to be nonrecourse if foreign sugar import quotas exceed a specific
level. At December 31, 1996, all outstanding Government loans are nonrecourse,
and such Government loans will continue to be nonrecourse throughout the
remainder of the current crop year which ends September 30, 1997. These loans
are collateralized by refined sugar inventories and payable at the earlier of
the date the refined sugar is sold or upon maturity. At December 31, 1996, the
weighted average interest rate on Government loans was 6.5%.
The Company's principal bank credit agreement (the "Sugar Credit Agreement")
provides for a revolving credit facility in varying amounts up to $80 million,
with advances limited to formula-determined amounts of accounts receivable and
inventories, and a term loan. Borrowings under the revolving credit facility
bear interest, at the Company's option, at the prime rate or LIBOR plus 1.25%
and mature not later than September 30, 1998. The term loan bears interest, at
the Company's option, at the prime rate plus .25% or LIBOR plus 1.5%, and
matures in annual installments of $8 million through July 1998. The Sugar
Credit Agreement may be terminated by the lenders in the event the sugar price
support loan program is abolished or is materially and adversely modified. The
Company also has a $5 million unsecured line of credit with the agent bank for
the Sugar Credit Agreement (nil outstanding at December 31, 1996). At December
31, 1996, the weighted average interest rate on outstanding bank borrowings was
8.3%. See Note 13.
At December 31, 1996, unused credit available to the Company under its bank
credit agreements and the sugar price support loan program aggregated
approximately $20 million.
The Sugar Credit Agreement (i) requires the Company to maintain minimum
levels of tangible net worth, earnings and net cash flow, as defined, (ii)
limits dividend payments and additional indebtedness, (iii) is collateralized by
substantially all of the Company's assets and (iv) contains other provisions and
restrictive covenants customary in lending transactions of this type. At
December 31, 1996, there was no dividend availability under the existing Sugar
Credit Agreement. See Note 13.
Note 5 - Inventories:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN
THOUSANDS)
<S> <C>
Sugarbeets $ 46,864
In process sugar 66,375
Refined sugar and by-products 89,636
Supplies 30,838
$233,713
</TABLE>
Had the Company used the first-in, first-out method of accounting for the
cost of sugar, sugarbeets and by-products, the net carrying value of inventories
would have increased by approximately $47.2 million at December 31, 1996.
Note 6 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN
THOUSANDS)
<S> <C>
Accounts payable:
Sugarbeets $ 83,391
Other 58,588
141,979
Payable to affiliates 937
Accrued liabilities:
Sugar processing costs 25,538
Employee benefits 9,710
Interest 1,064
Other 4,323
40,635
$183,551
</TABLE>
Note 7 - Income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1995 1996
(IN THOUSANDS)
<S> <C> <C>
Expected tax expense, at federal statutory
income tax rate of 35% $ 4,801 $ 5,334
State income taxes, net 170 247
Other, net (155) (350)
$ 4,816 $ 5,231
Provision for income taxes:
Currently payable:
Federal $ 3,928 $ 5,107
State 462 702
4,390 5,809
Deferred income taxes (benefit) 426 (578)
$ 4,816 $ 5,231
</TABLE>
<TABLE>
DECEMBER 31,
1996
(IN
THOUSANDS)
<S> <C>
Components of the net deferred tax benefit
(liability):
Tax effect of temporary differences relating to:
Inventories $ (7,163)
Property and equipment (10,594)
Accrued OPEB cost 7,514
Accrued liabilities and other 4,176
Net liability $ (6,067)
Net balance comprised of:
Gross deferred tax assets $ 11,690
Gross deferred tax liabilities (17,757)
Net liability $ (6,067)
Current liability $ (2,212)
Noncurrent liability (3,855)
$ (6,067)
</TABLE>
Note 8 - Accounts and notes receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN THOUSANDS)
<S> <C>
Accounts receivable $37,286
Notes receivable from sugarbeet growers 651
Allowance for doubtful accounts (89)
37,848
Receivable from affiliates 778
$38,626
</TABLE>
Note 9 - Employee benefit plans:
Defined contribution plan. Substantially all of the Company's full time
employees are eligible to participate in a contributory savings plan with
partial matching Company contributions. Defined contribution plan expense was
$583,000 in 1995 and $588,000 in 1996.
Company-sponsored defined benefit pension plans. The Company maintains
defined benefit pension plans covering substantially all full-time employees.
Benefits are based on years of service and average compensation and the related
expenses are based on independent actuarial valuations. The Company's funding
policy is to contribute amounts equal to or exceeding the amounts required by
the funding requirements of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). The plans' assets at December 31, 1996 consist
principally of units in a combined investment fund for employee benefit plans
sponsored by Valhi and its affiliates.
The rates used in determining the actuarial present value of the projected
benefit obligations were (i) discount rate - 7.5%, (ii) expected long-term rate
of return on assets - 10% and (iii) increase in future compensation levels - 4%
to 4.5%. Variances from actuarially assumed rates will result in increases or
decreases in pension liabilities, pension expense and funding requirements in
future periods. A one percentage point decrease in the discount rate would
increase the actuarial present value of the accumulated benefit obligations at
December 31, 1996 by approximately $4.0 million.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN
THOUSANDS)
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits obligations $25,559
Nonvested benefits 3,879
Accumulated benefit obligations 29,438
Effect of projected future salary increases 10,352
Projected benefit obligations ("PBO") 39,790
Plan assets at fair value 38,187
Plan assets less than PBO (1,603)
Unrecognized net loss from experience different
from 3,180
actuarial assumptions
Unrecognized prior service cost 223
Unrecognized net obligations being amortized over
15 years
428
Net pension asset $ 2,228
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1995 1996
(IN THOUSANDS)
<S> <C> <C>
Net periodic pension cost:
Service cost benefits earned $ 1,612 $ 2,149
Interest cost on PBO 2,249 2,663
Actual loss (return) on plan assets (4,734) (6,407)
Net amortization and deferral 2,467 3,728
$ 1,594 $ 2,133
</TABLE>
Postretirement benefits other than pensions. The Company currently provides
certain life insurance and health care benefits to eligible retirees.
Substantially all retirees contribute to the cost of their benefits. Certain
current and all future retirees either cease to be eligible for health care
benefits at age 65 or are thereafter eligible only for limited benefits.
The rates used in determining the actuarial present value of the accumulated
OPEB obligations were (i) discount rate - 7.5%, (ii) rate of annual increases in
future compensation levels - 4% to 5% in 1996 and (iii) rate of increase in
future health care costs - 10.8% for 1997, gradually declining to approximately
5.8% in 2017 and thereafter. If the health care cost trend rate was increased
by one percentage point for each year, OPEB expense would have increased
approximately $187,000 in 1996, and the actuarial present value of accumulated
OPEB obligations at December 31, 1996 would have increased approximately $1.6
million. In addition, a one percentage point decrease in the discount rate
would increase the actuarial present value of the accumulated OPEB obligations
at December 31, 1996 by approximately $1.6 million.
<TABLE>
<CAPTION>
DECEMBER 31,
1996
(IN
THOUSANDS)
<S> <C>
Actuarial present value of accumulated OPEB
obligations:
Retiree benefits $ 6,625
Other fully eligible active plan participants 3,744
Other active plan participants 6,025
16,394
Unrecognized net gain from experience different
from actuarial assumptions 2,874
Total accrued OPEB cost 19,268
Less current portion 949
Noncurrent accrued OPEB cost $18,319
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1995 1996
(IN THOUSANDS)
<S> <C> <C>
Net periodic OPEB cost:
Service cost $ 447 $ 539
Interest cost 1,171 1,137
Net amortization and deferral (181) (121)
$1,437 $1,555
</TABLE>
Multiemployer pension plans. A small minority of employees are covered by
union-sponsored, collectively-bargained multiemployer defined benefit pension
plans. Contributions to multiemployer plans are based upon collective
bargaining agreements and were $55,000 in 1995 and $56,000 in 1996. The
multiemployer plans' administrators have estimated that the Company's share of
the unfunded benefit obligation of such plans was insignificant at December 31,
1995 (the most recent information available to the Company).
Note 10 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See
Note 1. It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Loans are made between the Company and Valhi with interest at rates related
to the Company's other credit arrangements. Such loans reprice with changes in
market interest rates and book value is deemed to approximate fair value.
Interest expense on loans from Valhi was $417,000 in 1995 and $17,000 in 1996.
Under the terms of an Intercorporate Service Agreement with Valhi, Valhi
performs certain management, financial and administrative services for the
Company on a fee basis. Fees pursuant to this agreement were $260,000 in 1995
and $220,000 in 1996.
Certain employees of the Company have been awarded shares of restricted
Valhi common stock and/or granted options to purchase Valhi common stock under
the terms of Valhi's stock option plans. The Company will pay Valhi the
aggregate difference between the option price and the market value of Valhi's
common stock on the exercise date of such options. For financial reporting
purposes, the Company accounts for the related expense (credit) of $(68,000) in
1995 and $5,000 in 1996 in a manner similar to accounting for stock appreciation
rights. At December 31, 1996, employees of the Company held options to purchase
272,000 Valhi shares at prices ranging from $4.76 to $14.66 per share (149,000
shares at prices less than the December 31, 1996 quoted market price of $6.375
per share).
Restricted stock is forfeitable unless certain periods of employment are
completed. The Company pays Valhi the market value of the restricted shares on
the dates the restrictions expire, and accrues the related expense over the
restriction period. Expense related to restricted stock was $58,000 in 1995 and
$19,000 in 1996. At December 31, 1996, there was no restricted stock held for
employees of the Company.
Effective December 1, 1995, Amalgamated entered into a renewable, one-year
agreement to provide administrative services to Amalgamated Research for an
annual fee of $288,000 and a ten-year Service and Sharing Agreement whereby
Amalgamated Research will provide certain research, laboratory and quality
control services to Amalgamated for a fee of $1,659,000 per year to be adjusted
annually based on a composite index. The Sharing Agreement also (i) grants
Amalgamated a non-exclusive, perpetual royalty-free license to use currently
existing or hereafter developed technology applicable to sugar operations and
(ii) provides for certain royalties to Amalgamated from future sales or licenses
of Amalgamated Research's technology. Aggregate net expense under these
agreements was $215,000 in 1995 and $1,532,000 in 1996. See Note 13.
Amalgamated also leases its corporate office facility from Amalgamated
Research for annual rentals of $256,000 through the year 2000. The office lease
can be extended for up to ten additional years at the then prevailing market
rental rates.
Charges (revenues) from other related parties for services provided in the
ordinary course of business aggregated ($48,000) in 1995 and $101,000 in 1996.
Note 11 - Commitments and contingencies:
Legal proceedings. In November 1992, a complaint was filed in the United
States District Court for the District of Utah against Valhi, Amalgamated and
the Amalgamated Retirement Plan Committee (American Federation of Grain Millers
International, et al. v. Valhi, Inc. et al., No. 29-NC-129J). The complaint, a
purported class action on behalf of certain current and retired hourly employees
of Amalgamated, alleges, among other things, that the defendants breached their
fiduciary duties under ERISA by amending certain provisions of a retirement plan
for hourly employees maintained by Amalgamated to permit the reversion of excess
plan assets to Amalgamated in 1986. The complaint seeks a variety of remedies,
including, among other things, orders requiring a return of all reverted funds
(alleged to be in excess of $8 million) and any profits earned thereon, a
distribution of such funds to the plan participants, retirees and their
beneficiaries and enhancement of the benefits under the plan, and an award of
costs and expenses, including attorney fees. In January 1996, the court granted
the Company's motion for summary judgment with respect to certain counts and
denied the Company's motion for summary judgment with respect to other counts.
The court also granted plaintiffs permission to amend their complaint to include
new allegations. The plaintiffs subsequently amended their complaint and, in
June 1996, the Company made a motion for summary judgment on the new
allegations. In September 1996, the court heard the defendants' motion. The
parties are awaiting a decision on the motion. See Note 13.
The Company is also involved in routine legal proceedings incidental to its
normal business activities and environmental related matters. The Company
believes the disposition of all such proceedings, individually or in the
aggregate, including Grain Millers, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Concentration of credit risks. The Company sells sugar primarily in the
North Central and Intermountain Northwest regions of the United States. The
Company does not believe it is dependent upon one or a few customers; however,
major food processors are substantial customers and represent an important
portion of sales. The Company's ten largest customers account for approximately
one-third of sales with the largest single customer accounting for approximately
4% to 5% of sales in each of the past two years. The ten major customers
accounted for 41% of accounts receivable at December 31, 1996.
At December 31, 1996, substantially all of the Company's cash and cash
equivalents was on deposit with three U.S. banks.
Capital expenditures. At December 31, 1996, the estimated cost to complete
approved capital projects in process was approximately $650,000.
Note 12 - Other items:
The fair value of all financial instruments is deemed to approximate
carrying value as they reprice with changes in market interest rates and/or have
short terms to maturity.
Research and development costs, expensed as incurred, were $823,000 in 1995
and $1,517,000 in 1996. Advertising costs, expensed as incurred, were $365,000
in 1995 and $125,000 in 1996.
Rent expense under operating leases, principally for facilities, was
$350,000 in 1995 and $603,000 in 1996. At December 31, 1996, commitments for
future minimum rentals under noncancellable operating leases consist principally
of the office lease with Amalgamated Research. See Note 10.
Note 13 - Subsequent events:
On January 3, 1997, Amalgamated completed the transfer of control of
substantially all of its operations to Snake River Sugar Company, an Oregon
agricultural cooperative formed by the farmers in Amalgamated's areas of
operations. Pursuant to the transaction, Amalgamated contributed substantially
all of its net assets to the Amalgamated Sugar Company LLC (the "LLC"), a
limited liability company controlled by Snake River, on a tax-deferred basis, in
exchange for a non-voting ownership interest in the LLC. Also, as part of the
transaction, Snake River loaned Valhi $250 million and Valhi provided certain
debt financing for the transaction both to Snake River and a related entity.
Valhi's loans from Snake River are collateralized by Amalgamated's interest in
the LLC.
Amalgamated may, at its option, require the LLC to redeem its interest in
the LLC beginning in January 2002, and the LLC has the right to redeem
Amalgamated's interest beginning in January 2027. In addition, beginning in
January 2002 Amalgamated has the right to require Snake River to purchase its
interest in the LLC. The redemption/purchase price is generally $250 million
plus the amount of any deferrals of cash distributions from the LLC discussed
below. In the event Amalgamated either requires the LLC to redeem its LLC
interest or requires Snake River to purchase its LLC interest, Snake River has
the right to accelerate the maturity and call the loans made to Valhi in
connection with the transaction. If Amalgamated requires the LLC to redeem its
LLC interest, then Snake River is required, under the terms of the LLC Company
Agreement, to contribute to the LLC the cash received from calling the Valhi
loans.
The LLC Company Agreement provides that, among other things, Amalgamated is
entitled to receive certain distributions of Distributable Cash, as defined,
from the LLC. Amalgamated and Snake River share in any Distributable Cash up to
an aggregate of $26.7 million per year, with 95% going to Amalgamated and 5%
going to Snake River. This $26.7 million distribution is referred to as the
LLC's "base distribution." Amalgamated generally is entitled to receive 5% (10%
after 2002) of any Distributable Cash above this base distribution amount, with
additional Distributable Cash potentially being received through 2002 if certain
Distributable Cash levels are reached. The Company's share of any Distributable
Cash above the base distribution will be deferred and instead paid to Snake
River until Snake River's loans from Valhi are completely repaid.
As part of the formation of the LLC, the LLC terminated the existing $80
million Sugar Credit Agreement and replaced it with a new $100 million facility
collateralized by the LLC's working capital assets and one of the LLC's four
processing facilities. In addition, the LLC prepaid the remaining $16 million
outstanding balance of the bank term loan, primarily with the $14 million cash
contribution to the LLC by Snake River for its voting interest in the LLC.
The Company's net assets contributed to the LLC include the rights and
obligations associated with the agreements between the Company and Amalgamated
Research discussed in Note 10. However, the LLC did not assume any obligation
arising out of the American Federation of Grain Millers International case
discussed in Note 11.
In December 1996, Amalgamated declared, and in January 1997 paid, $13
million in pre-closing cash dividends to Valhi.
01/31/97
MC
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
% of
Voting
Jurisdiction Securities
of Held at
Incorporation December
Name of Corporation or 31,
Organizatio 1997
n (2)
Amcorp, Inc. Delaware 100%
ASC Holdings, Inc. Utah 100
Amalgamated Research, Inc. Idaho 100
Valcor, Inc. Delaware 100
Medite Corporation Delaware 100
CompX International Inc. Delaware 100
Waterloo Furniture Components Canada 100
Limited
Other wholly-owned
Valmont Insurance Company Vermont 100
New England Insurance Services Vermont 100
Company Delaware 100
Impex Realty Holding, Inc.
NL Industries, Inc. (1) New Jersey 57
Andrews County Holdings, Inc. Delaware 100
Waste Control Specialists LLC Delaware 58
Greenhill Technologies Inc. Delaware 50
Tecsafe LLC Delaware 50
(1)Subsidiaries of NL are incorporated by reference to Exhibit 21.1 of NL's
Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-
640).
(2)Held by the Registrant or the indicated subsidiary of the Registrant.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Valhi, Inc.'s (i)
Registration Statement (Form S-8 Nos. 33-53633, 33-48146, 33-41507 and 33-21758)
and related Prospectus pertaining to the Valhi, Inc. 1987 Incentive Stock Option
- - Stock Appreciation Rights Plan and (ii) Registration Statement (Form S-8 No.
33-41508) and related Prospectus pertaining to the Valhi, Inc. 1990 Non-Employee
Director Stock Option Plan, of our report dated March 13, 1998, on our audits of
the consolidated financial statements and financial statement schedules of
Valhi, Inc. and Subsidiaries included in this Annual Report on Form 10-K for the
year ended December 31, 1997.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 20, 1998
Exhibit 23.3
Consent of Independent Public Accountants
We consent to the incorporation by reference in Valhi, Inc.'s Registration
Statement (Form S-8) pertaining to the Valhi, Inc. Long-term Incentive Plan of
our report dated January 31, 1997 relating to the financial statements of The
Amalgamated Sugar Company as of December 31, 1996 and for each of the two years
in the period ended December 31, 1996 included in Valhi's Annual Report on Form
10-K for the year ended December 31, 1997.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY RERERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 360,369
<SECURITIES> 0
<RECEIVABLES> 171,535
<ALLOWANCES> 3,139
<INVENTORY> 204,718
<CURRENT-ASSETS> 750,658
<PP&E> 672,385
<DEPRECIATION> 130,731
<TOTAL-ASSETS> 2,178,113
<CURRENT-LIABILITIES> 324,092
<BONDS> 1,008,087
0
0
<COMMON> 1,253
<OTHER-SE> 383,681
<TOTAL-LIABILITY-AND-EQUITY> 2,178,113
<SALES> 1,093,091
<TOTAL-REVENUES> 1,093,091
<CGS> 804,438
<TOTAL-COSTS> 804,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 547
<INTEREST-EXPENSE> 118,895
<INCOME-PRETAX> 54,775
<INCOME-TAX> 27,631
<INCOME-CONTINUING> 27,101
<DISCONTINUED> 33,550
<EXTRAORDINARY> (4,291)
<CHANGES> 0
<NET-INCOME> 56,360
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
