SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999 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
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON APRIL 30, 1999: 114,506,014.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998
and March 31, 1999 3-4
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1999 5-6
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 1998 and 1999 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 1999 8
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1999 9-10
Notes to Consolidated Financial Statements 11-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 38
Item 6. Exhibits and Reports on Form 8-K. 38
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
1998 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 224,572 $ 176,213
Accounts and other receivables 167,660 192,757
Refundable income taxes 16,443 15,357
Receivable from affiliates 11,890 17,436
Inventories 246,338 235,657
Prepaid expenses 3,723 5,847
Deferred income taxes 4,836 5,443
Total current assets 675,462 648,710
Other assets:
Marketable securities 265,567 267,386
Investment in and advances to affiliates 370,654 359,764
Loans and notes receivable 82,290 81,939
Mining properties 15,581 14,558
Prepaid pension cost 24,190 24,253
Goodwill 259,336 270,812
Deferred income taxes - 2,619
Other 21,737 19,910
Total other assets 1,039,355 1,041,241
Property and equipment:
Land 16,364 17,741
Buildings 150,879 154,838
Equipment 511,042 499,657
Construction in progress 7,918 13,614
686,203 685,850
Less accumulated depreciation 158,867 160,053
Net property and equipment 527,336 525,797
$2,242,153 $2,215,748
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, MARCH 31,
1998 1999
<S>
Current liabilities: <C> <C>
Notes payable $ 36,391 $ 33,293
Current maturities of long-term debt 65,448 42,115
Accounts payable 67,592 56,996
Accrued liabilities 148,838 158,381
Payable to affiliates 20,137 29,216
Income taxes 12,943 8,743
Deferred income taxes 1,237 1,906
Total current liabilities 352,586 330,650
Noncurrent liabilities:
Long-term debt 630,554 662,174
Accrued pension costs 44,929 47,850
Accrued OPEB costs 41,981 41,076
Accrued environmental costs 83,922 72,173
Deferred income taxes 353,717 341,448
Other 44,220 45,658
Total noncurrent liabilities 1,199,323 1,210,379
Minority interest 111,722 111,233
Stockholders' equity:
Common stock 1,255 1,255
Additional paid-in capital 42,789 42,917
Retained earnings 512,468 509,047
Accumulated other comprehensive income:
Marketable securities 122,826 124,593
Currency translation (22,712) (32,654)
Pension liabilities (2,845) (6,413)
Treasury stock (75,259) (75,259)
Total stockholders' equity 578,522 563,486
$2,242,153 $2,215,748
</TABLE>
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
<S>
Revenues and other income: <C> <C>
Net sales $267,388 $256,774
Gain on:
Disposal of business unit 330,217 -
Reduction in interest in CompX 67,902 -
Other, net 20,628 16,087
686,135 272,861
Costs and expenses:
Cost of sales 187,579 188,515
Selling, general and administrative 49,177 44,612
Interest 25,450 18,411
262,206 251,538
423,929 21,323
Equity in earnings of:
Tremont Corporation - (701)
Waste Control Specialists (3,171) (5,224)
Income before income taxes 420,758 15,398
Provision for income taxes 181,641 5,111
Minority interest in after-tax earnings 34,450 7,924
Income before extraordinary item 204,667 2,363
Extraordinary item (1,269) -
Net income $203,398 $ 2,363
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
<S>
<C> <C>
Basic earnings per common share:
Income before extraordinary item $ 1.78 $ .02
Extraordinary item (.01) -
Net income $ 1.77 $ .02
Diluted earnings per share:
Income before extraordinary item $ 1.76 $ .02
Extraordinary item (.01) -
Net income $ 1.75 $ .02
Cash dividends per share $ .05 $ .05
Shares used in the calculation of per share
amounts:
Basic earnings per common share 115,135 114,982
Dilutive impact of outstanding stock options 969 1,202
Diluted earnings per share 116,104 116,184
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S>
<C> <C>
Net income $203,398 $ 2,363
Other comprehensive income, net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period 2,706 1,784
Less reclassification for gains included
in net income
(79) (17)
2,627 1,767
Currency translation adjustment (517) (9,942)
Pension liabilities adjustment 1,013 (3,568)
Total other comprehensive income, net 3,123 (11,743)
Comprehensive income (loss) $206,521 $ (9,380)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
<S> <C> <C> <C>
Balance at December 31, 1998 $1,255 $42,789 $512,468
Net income - - 2,363
Dividends - - (5,784)
Other comprehensive income, net - - -
Other, net - 128 -
Balance at March 31, 1999 $1,255 $42,917 $509,047
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE
INCOME TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIES TRANSLATION LIABILITIES STOCK EQUITY
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 $122,826 $(22,712) $(2,845) $(75,259) $578,522
Net income - - - - 2,363
Dividends - - - - (5,784)
Other comprehensive
income, net 1,767 (9,942) (3,568) - (11,743)
Other, net - - -
Balance at
March 31, 1999
$124,593 $(32,654) $(6,413) $(75,259) $563,486
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 203,398 $ 2,363
Depreciation, depletion and amortization 14,385 16,157
Gain on:
Disposal of business unit (330,217) -
Reduction in interest in CompX (67,902) -
Noncash interest expense 7,931 2,457
Deferred income taxes 95,402 4,120
Minority interest 34,450 7,924
Other, net (2,285) (2,569)
Equity in:
Tremont Corporation - 701
Waste Control Specialists 3,171 5,224
Distributions from:
Manufacturing joint venture - 6,500
Tremont Corporation - 216
(41,667) 43,093
Change in assets and liabilities:
Accounts and other receivables (37,047) (26,321)
Inventories 1,315 8,215
Accounts payable and accrued liabilities (96) (15,068)
Accounts with affiliates (20,781) (6,847)
Income taxes 71,290 (2,348)
Other, net 26,003 (3,318)
Net cash used by operating activities (983) (2,594)
Cash flows from investing activities:
Capital expenditures (4,027) (13,416)
Purchases of:
Business unit (33,053) (52,110)
NL common stock (7,955) -
CompX common stock - (624)
Marketable securities (9,200) -
Investment in Waste Control Specialists - (10,000)
Proceeds from disposal of business unit 435,080 -
Loans to affiliates:
Loans (114,550) -
Collections 9,550 6,000
Other, net 94 2,153
Net cash provided (used) by investing
activities (67,997)
275,939
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings $ 30,491 $ 76,271
Principal payments (216,111) (60,791)
Deferred financing costs paid (220) -
Loans from affiliate:
Loans - 17,300
Repayments - (6,800)
Valhi dividends paid (5,792) (5,784)
Distributions to minority interest - (759)
Proceeds from issuance of CompX common stock 110,378 -
Common stock reacquired (2,301) -
Other, net 664 247
Net cash provided (used) by financing
activities 19,684
(82,891)
Cash and cash equivalents - net change from:
Operating, investing and financing activities 192,065 (50,907)
Currency translation (495) (1,609)
Business units acquired - 4,157
Business unit sold (7,630) -
Cash and equivalents at beginning of period 360,369 224,572
Cash and equivalents at end of period $ 544,309 $176,213
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 10,957 $ 8,385
Income taxes, net 29,807 9,264
Business unit acquired - net assets consolidated:
Cash and cash equivalents $ - $ 4,157
Goodwill and other intangible assets 23,080 14,826
Other non-cash assets 17,782 52,799
Liabilities (7,809) (19,672)
Cash paid $ 33,053 $ 52,110
</TABLE>
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1998 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1999 and the consolidated statements of
income, comprehensive income (loss), stockholders' equity and cash flows for the
interim periods ended March 31, 1998 and 1999 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has been condensed or omitted.
The accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998 (the "1998 Annual Report").
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.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 1998 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held either by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee, or by Mr. Simmons directly. Mr. Simmons, the Chairman of the
Board and Chief Executive Officer of Valhi and Contran, may be deemed to control
such companies.
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, no later
than the first quarter of 2000. Under SFAS No. 133, all derivatives will be
recognized as either assets or liabilities and measured at fair value. The
accounting for changes in fair value of derivatives will depend upon the
intended use of the derivative. The impact on the Company of adopting SFAS No.
133, if any, has not yet been determined but will be dependent upon the extent
to which the Company is a party to derivative contracts or hedging activities
covered by SFAS No. 133 at the time of adoption.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
% OWNED
OPERATIONS PRINCIPAL ENTITIES AT MARCH 31, 1999
Chemicals NL Industries, Inc. 58%*
Component products CompX International Inc. 64%
Titanium metals Tremont Corporation 48%*
Waste management Waste Control Specialists 69%
* Tremont owns an additional 20% of NL.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
(IN MILLIONS)
<S> <C> <C>
Net sales:
Chemicals $235.3 $201.6
Component products 32.1 55.2
Total net sales $267.4 $256.8
Operating income:
Chemicals $ 37.4 $ 26.0
Component products 4.3 9.5
Total operating income 41.7 35.5
Gain on:
Disposal of business unit 330.2 -
Reduction in interest in CompX 67.9 -
General corporate items:
Interest and dividend income 17.2 10.6
Securities transactions .1 -
Expenses, net (7.8) (6.4)
Interest expense (25.4) (18.4)
423.9 21.3
Equity in:
Tremont Corporation - (.7)
Waste Control Specialists (3.2) (5.2)
Income before income taxes $420.7 $ 15.4
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
DEPRECIATION,
DEPLETION AND CAPITAL
AMORTIZATION EXPENDITURES
1998 1999 1998 1999
(IN MILLIONS)
<S> <C> <C> <C> <C>
Chemicals $13.3 $13.6 $2.4 $ 5.0
Component products 1.0 2.4 1.6 5.5
Other .1 .2 - 2.9
$14.4 $16.2 $4.0 $13.4
</TABLE>
In January 1999, CompX acquired Thomas Regout Holding N.V., a producer of
precision ball bearing slides, for NLG 98 million ($52 million) cash
consideration. During the first quarter of 1999, Valhi purchased 30,000 shares
of CompX common stock in market transactions for an aggregate of $624,000.
The Company has not consolidated its majority-owned subsidiary, Waste
Control Specialists, because the Company is not deemed to control Waste Control
Specialists. In February 1999, Valhi contributed $10 million to Waste Control
Specialists' equity, thereby increasing its membership interest from 64% to 69%.
Approximately $6 million of such equity contribution was used by Waste Control
Specialists to reduce the outstanding balance of its revolving borrowings from
the Company. The Company also holds an option to make an additional $10 million
equity contribution to Waste Control Specialists which, if contributed, would
increase its membership interest to 75%.
Each of NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and Tremont's
39%-owned affiliate Titanium Metals Corporation ("TIMET," NYSE: TIE) file
periodic reports pursuant to the Securities Exchange Act of 1934, as amended.
NOTE 3 - MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Halliburton Company common stock 79,710 85,978
Other securities 15,857 11,408
$265,567 $267,386
</TABLE>
At March 31, 1999, Valhi held 2.7 million shares of Halliburton common stock
(aggregate cost of $22 million) with a quoted market price of $38.50 per share,
or an aggregate market value of $104 million. Valhi's LYONs are exchangeable at
any time, at the option of the LYON holder, for such Halliburton shares, and the
carrying value of the Halliburton stock is limited to the accreted LYONs
obligation. See Note 8. See the 1998 Annual Report for a discussion of the
Company's investment in The Amalgamated Sugar Company LLC. The aggregate cost
of other available-for-sale securities (primarily common stocks) is
approximately $14 million at March 31, 1999.
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Raw materials:
Chemicals $ 46,114 $ 37,084
Component products 6,520 8,819
52,634 45,903
In process products:
Chemicals 11,530 8,547
Component products 5,748 8,267
17,278 16,814
Finished products:
Chemicals 137,000 131,712
Component products 4,634 8,494
141,634 140,206
Supplies (primarily chemicals) 34,792 32,734
$246,338 $235,657
</TABLE>
NOTE 5 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Current:
Employee benefits $ 42,665 $ 38,351
Environmental costs 46,059 55,386
Interest 7,397 14,968
Deferred income 4,353 4,967
Other 48,364 44,709
$148,838 $158,381
Noncurrent:
Insurance claims and expenses $ 15,321 $ 14,701
Employee benefits 12,523 13,091
Deferred income 13,693 12,663
Other 2,683 5,203
$ 44,220 $ 45,658
</TABLE>
NOTE 6 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Investment in affiliates:
Tremont Corporation $179,452 $176,286
TiO2 manufacturing joint venture 171,202 164,702
Waste Control Specialists LLC 10,000 14,776
360,654 355,764
Loan to Waste Control Specialists LLC 10,000 4,000
$370,654 $359,764
Loans and notes receivable:
Snake River Sugar Company $ 80,000 $ 80,000
Other 5,912 6,437
85,912 86,437
Less current portion 3,622 4,498
Noncurrent portion $ 82,290 $ 81,939
Deferred financing costs $ 5,674 $ 4,984
Intangible assets 4,923 4,307
Other 11,140 10,619
$ 21,737 $ 19,910
</TABLE>
At March 31, 1999, Valhi held 3.1 million shares of Tremont common stock
with a quoted market price of $17.63 per share, or an aggregate of $54.4
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the Company's net carrying value of
its investment in Tremont.
NOTE 7 - ACCOUNTS WITH AFFILIATES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Receivables from affiliates:
Income taxes, net $11,719 $17,364
Other 171 72
$11,890 $17,436
Payables to affiliates:
Loan from Contran $ 9,500 $20,000
Louisiana Pigment Company 8,264 7,161
Tremont Corporation 3,053 2,112
Other, net (680) (57)
$20,137 $29,216
</TABLE>
NOTE 8 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Notes payable -
Kronos - non-U.S. bank credit agreement
(DM 60,500 and DM 60,500) $ 33,293
$ 36,391
Long-term debt:
Valhi:
Snake River Sugar Company $250,000 $250,000
LYONs 84,104 85,978
334,104 335,978
NL Industries:
Senior Secured Notes 244,000 244,000
Deutsche mark bank credit facility
(DM 187,322 and DM 180,072) 112,674 99,094
Other 955 690
357,629 343,784
Other subsidiaries:
CompX bank credit facility - 20,000
Valcor Senior Notes 2,431 2,431
Other 1,838 2,096
4,269 24,527
696,002 704,289
Less current maturities 65,448 42,115
$630,554 $662,174
</TABLE>
NOTE 9 - OTHER INCOME:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Securities earnings:
Dividends and interest $ 17,172 $ 10,616
Securities transactions 122 26
17,294 10,642
Noncompete agreement income 667 1,000
Currency transactions, net 478 1,395
Other, net 2,189 3,050
$20,628 $ 16,087
</TABLE>
Dividend income in the first quarter of 1999 includes dividend distributions
from The Amalgamated Sugar Company LLC of $5.6 million (1998 first quarter -
$6.3 million).
NOTE 10 - PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
(IN MILLIONS)
<S> <C> <C>
Income before extraordinary item:
Expected tax expense $147.3 $ 5.4
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies 71.1 1.2
Change in NL's deferred income tax
valuation allowance (42.7) (1.9)
U.S. state income taxes, net 8.5 .4
No tax benefit for goodwill amortization 9.8 1.0
Non-U.S. tax rates - (.3)
Excess of tax basis over book basis of the
common stock of foreign subsidiaries sold (12.1) -
Other, net (.3) (.7)
$181.6 $ 5.1
Comprehensive provision (benefit) for income taxe
allocated to:
Income before extraordinary item $181.6 $ 5.1
Extraordinary item (1.3) -
Other comprehensive income:
Marketable securities 1.6 .4
Currency translation (.2) (4.5)
Pension liabilities .6 (2.2)
$182.3 $(1.2)
</TABLE>
NOTE 11 - MINORITY INTEREST:
The components of minority interest in net assets and income before
extraordinary item are presented in the following tables.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Minority interest in net assets:
NL Industries $ 64,268 $ 63,354
CompX 46,817 47,221
Subsidiaries of NL 633 616
Subsidiaries of CompX 4 42
$111,722 $111,233
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Minority interest in net earnings (losses) -
income before extraordinary item:
NL Industries $33,925 $ 5,835
CompX 526 2,120
Subsidiaries of NL 15 11
Subsidiaries of CompX (16) (42)
$34,450 $ 7,924
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported income before extraordinary item of $2.4 million, or
$.02 per diluted share, in the first quarter of 1999 compared to income of
$204.7 million, or $1.76 per diluted share, in the first quarter of 1998. The
1998 results of operations include gains related to the sale of NL's specialty
chemicals business unit (conducted by its wholly-owned subsidiary Rheox, Inc.)
and CompX's initial public offering aggregating $196 million, or $1.69 per
diluted share, net of income taxes and minority interest.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations," are forward-looking statements that represent management's
belief and assumptions based on currently available information. Forward-
looking statements can be identified by the use of words such as "believes,"
intends," "may," "should," "anticipates," expected" or comparable terminology,
or by discussions of strategies or trends. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Quarterly Report and those
described from time to time in, the 1998 Annual Report and the Company's other
filings with the Securities and Exchange Commission, including, but not limited
to, future supply and demand for the Company's products (including cyclicality
thereof), general global economic conditions, competitive products and
substitute products, customer and competitor strategies, the impact of pricing
and production decisions, potential difficulties in integrating completed
acquisitions, environmental matters, government regulations and possible changes
therein, the ultimate resolution of pending litigation, possible future
litigation and possible disruptions of normal business activity from Year 2000
issues. Should one or more of these risks materialize (or the consequences of
such a development worsen), or should the underlying assumptions prove
incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of new information, future
events or otherwise.
CHEMICALS
NL's titanium dioxide pigments ("TiO2") operations are conducted through
its wholly-owned subsidiary Kronos, Inc.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
1998 1999 CHANGE
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Kronos $222.6 $201.6 -9%
Rheox (sold in January 1998) 12.7 -
$235.3 $201.6 -14%
Operating income:
Kronos $ 34.7 $ 26.0 -25%
Rheox 2.7 -
$ 37.4 $ 26.0 -31%
</TABLE>
Kronos' TiO2 sales and operating income decreased in the first quarter of
1999 compared to the first quarter of 1998 due primarily to lower sales and
production volumes for TiO2, partially offset by higher average TiO2 selling
prices. NL's TiO2 sales volumes in the first quarter of 1999 were 16% lower
than the record first quarter of 1998 as worldwide demand weakened, particularly
in Europe. In response to this lower demand, NL reduced its production rates in
1999 to more closely match its sales volumes. Average TiO2 selling prices in
the first quarter of 1999 were 5% higher than the first quarter of 1998, but
were even with selling prices in the third and fourth quarters of last year. NL
expects its TiO2 operating income during the remainder of 1999 will continue to
be lower than the comparable 1998 periods due to continued lower production
volumes. Ti02 sales volumes in calendar 1999 are currently expected to
approximate calendar 1998 sales volumes. NL's outlook for TiO2 pricing for the
remainder of 1999 is uncertain.
A significant amount of NL's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, 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
increased NL's sales in the first quarter of 1999 by $4 million compared to the
first quarter of 1998. 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 was not significant.
The Company's purchase accounting adjustments made in conjunction with the
acquisitions of its interest in NL result in additional depreciation, depletion
and amortization expense beyond those 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 the disposed specialty chemicals business unit).
COMPONENT PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
1998 1999 CHANGE
(IN MILLIONS)
<S> <C> <C> <C>
Net sales $32.1 55.2 +72%
Operating income 4.3 9.5 +121%
</TABLE>
Component products sales increased in the first quarter of 1999 compared to
the same period in 1998 due primarily to sales generated by the Thomas Regout
slide operations acquired in January 1999 and sales generated by two lock
producers acquired in March and November 1998. Component products operating
income in the first quarter of 1998 included a $3.3 million non-recurring pre-
tax charge related to CompX's initial public offering. Excluding the effect of
these acquisitions and the stock award charge, net sales increased 1% and
operating income increased 4% compared to the first quarter of 1998 as an 11%
increase in sales of locking systems was offset by lower sales of ergonomic and
slide products reflecting soft demand primarily in the office furniture industry
market segment.
EQUITY AFFILIATES
Tremont Corporation. As previously reported, Valhi commenced reporting
equity in Tremont's earnings in the third quarter of 1998. The Company's equity
in Tremont's earnings differs from the amount that would be expected by applying
the Company's 48% ownership percentage to Tremont's separately-reported earnings
because of the effect of amortization of purchase accounting adjustments made in
conjunction with the Company's acquisitions of its interest in Tremont. At the
Company's current 48% ownership interest in Tremont, such non-cash amortization
reduces earnings, or increases losses, attributable to Tremont as reported by
the Company by approximately $3 million per year.
Tremont accounts for its interests in both NL and TIMET by the equity
method. In the first quarter of 1999, Tremont reported net income of $.3 million
comprised primarily of equity in net losses of TIMET ($1.2 million) and equity
in earnings of NL ($1.8 million). Tremont's equity in earnings of TIMET and NL
differs from the amounts that would be expected by applying Tremont's ownership
percentage to TIMET's and NL's separately-reported earnings because of the
effect of amortization of purchase accounting adjustments made by Tremont in
conjunction with theTremont's acquisitions of its interests in TIMET and NL.
Amortization of such basis differences generally increases earnings, or reduces
losses, attributable to TIMET as reported by Tremont, and generally reduces
earnings, or increases losses, attributable to NL as reported by Tremont.
NL's operating results are discussed above. For the first quarter of 1999,
TIMET reported net sales of $134.1 million, an operating loss of $1.4 million
and a net loss of $3.9 million compared to net sales, operating income and net
income of $187.1 million, $31.6 million and $18.3 million, respectively, in the
first quarter of 1998. TIMET's sales in the first quarter of 1999 were 28%
lower than the first quarter of last year due principally to a 23% decline in
mill products volume caused by reduced demand for both aerospace and industrial
products. Average selling prices in most product lines were lower than in the
1998 period, with changes in mix resulting in a comparable overall average
selling price. Expenses related to maintenance of TIMET's business-enterprise
SAP system and to addressing Year 2000 issues are expected to remain high for
the remainder of 1999.
The titanium metals industry has experienced reduced demand for aerospace
and industrial products due to high levels of inventories reported to be held by
customers, actual and anticipated declines in number of aircraft forecast to be
produced, especially wide-body aircraft, and continuing weakness of Asia and
other economies. Assuming demand remains at currently expected levels and does
not decrease or increase significantly during the remainder of 1999, TIMET
currently expects to report a net loss in the second, and possibly the third,
quarters of 1999, with a return to profitability currently expected no later
than the fourth quarter of 1999.
In response to the current market conditions, TIMET began to implement
certain operational changes in late 1998 to address the weakened demand. Among
other things, TIMET has permanently or temporarily closed certain manufacturing
facilities, reduced its workforce in the U.S. and Europe, renegotiated certain
supply contracts with key vendors to reduce volumes and, to some extent, prices,
reduced planned capital expenditures for the next two years and merged all of
its North American manufacturing operations into one business unit to reduce
costs. Such plan of action is designed to address current market conditions and
is proceeding on schedule with facility closures and most of the workforce
reductions already implemented. In addition, TIMET's major capital expenditure
program has been completed, with all major equipment now in production. The
business-enterprise SAP computer system is installed, and TIMET is now focusing
on using it to help improve its business processes, although benefits of the new
system will likely be modest in 1999.
TIMET also has certain long-term supply agreements with TIMET's major
aerospace customers, which are designed to limit price volatility (both up and
down) for the long-term benefit of both parties, while providing TIMET with a
solid base of aerospace sales volumes.
Valhi periodically evaluates the net carrying value of its long-term
assets, including its investment in Tremont, to determine if there has been any
decline in value below their carrying amounts that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At March 31, 1999, the NYSE price of $17.63 per Tremont share
indicated an aggregate NYSE market value of Valhi's investment in Tremont common
stock of approximately $54.4 million, or $121.9 million less than Valhi's $176.3
million net carrying value of its investment in Tremont at that date. Tremont's
NYSE stock price was $20.25 per share on April 30, 1999. The Company believes
NYSE stock prices (particularly in the case of companies such as Tremont that
have a major shareholder and are not widely followed or traded) are not
necessarily indicative of a company's enterprise value or the value that could
be realized if the company were sold. After considering what it believes to be
all relevant factors including, among other things, the NYSE market prices of
Tremont's holdings of NL and TIMET, the relatively short time period during
which Tremont's NYSE price has been less than the Company's per share net
investment in Tremont, recent trends in Tremont's market price, Tremont's (and
hence NL's and TIMET's) operating results, financial position, estimated asset
values and prospects, the Company concluded that there had been no other than
temporary decline in value of the Company's investment in Tremont below its net
carrying value at March 31, 1999.
As discussed above, Tremont's major assets are its investments in NL (TiO2)
and TIMET (titanium metals). It is possible, should the TiO2 or titanium metals
industries in general, or NL or TIMET specifically, encounter a prolonged
recessionary environment, or suffer other unforeseen adverse events, that the
value of Valhi's investment in Tremont could decline to a level which would
result in a write-down of the Company's investment in Tremont. Valhi will
continue to monitor and evaluate the value of its investment in Tremont based
on, among other things, the results of operations, financial condition,
liquidity and business outlook for Tremont, TIMET and NL. In the event Valhi
determines that any decline in value of its investment in Tremont below its net
carrying values has occurred which is other than temporary, Valhi would report
an appropriate write-down at that time.
Waste Control Specialists. Waste Control Specialists reported a loss of
$5.2 million during the first quarter of 1999 compared to a loss of $3.2 million
during the first quarter of 1998. Waste Control Specialists reported net sales
of $3.6 million in the first quarter of 1999 compared to $1.9 million in the
first quarter of 1998. Waste Control Specialists' operating loss increased in
1999 due in part to higher expenditures in connection with the pursuit of
permits covering the disposal of low-level and mixed radioactive waste.
OTHER
General corporate items. Interest and dividend income decreased in the
first quarter of 1999 compared to the first quarter of 1998 due primarily to a
lower level of funds available for investment. Dividend distributions from The
Amalgamated Sugar Company LLC are dependent in part upon the LLC's results of
operations, and the Company received $5.6 million of dividend distributions from
the LLC in the first quarter of 1999 compared to $6.3 million in the first
quarter of 1998. See Note 9 to the Consolidated Financial Statements. Based on
the LLC's current projections, the Company currently expects increased aggregate
dividend distributions from the LLC in calendar 1999 compared to calendar 1998.
Despite the higher level of LLC distributions expected to be received in 1999
compared to 1998, aggregate general corporate interest and dividend income is
expected to be lower in 1999 compared to 1998 due primarily to a lower level of
funds available for investment.
Securities transaction gains in both periods relate to the disposition of a
portion of the shares of Halliburton 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 Halliburton shares. Any additional exchanges in
1999 or beyond would similarly result in additional securities transaction
gains.
NL's previously-reported $20 million of proceeds from the disposal of its
specialty chemicals business unit related to its agreement not to compete in the
rheological products business is being recognized as a component of general
corporate income (expense) ratably over the five-year non-compete period ($.7
million and $1 million in the first quarter of 1998 and 1999, respectively).
See Note 9 to the Consolidated Financial Statements.
Interest expense. Interest expense decreased in the first quarter of 1999
compared to the first quarter of 1998 due primarily to a lower average level of
outstanding indebtedness (primarily related to NL's Senior Secured Discount
Notes redeemed in October 1998). Interest expense is expected to continue to be
lower during the remainder of 1999 compared to the same periods in 1998.
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 rate are explained in Note 10 to the Consolidated Financial
Statements. Certain subsidiaries, including NL and, beginning in March 1998,
CompX, are not members of the consolidated U.S. tax group of which Valhi is a
member, and the Company provides incremental income taxes on such earnings. In
addition, in the first quarter of 1999, NL reduced its deferred income tax
valuation allowance by approximately $1.9 million primarily as a result of
utilization of certain tax attributes for which the benefit had not been
previously recognized under the "more-likely-than-not" recognition criteria.
Minority interest. See Note 11 to the Consolidated Financial Statements.
YEAR 2000 ISSUE
General. 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. 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. NL is in the process of evaluating and upgrading its computer systems,
both information technology ("IT") systems and non-IT systems involving embedded
chip technology, and software applications to ensure that the systems function
properly beginning January 1, 2000. To achieve its Year 2000 compliance plan,
NL is utilizing internal and external resources to identify, correct or
reprogram, and test its systems.
NL has conducted an inventory of its IT systems worldwide and is currently
testing the systems and applications that have been corrected or reprogrammed
for Year 2000 compliance. NL has completed an inventory of its non-IT systems
and is in the process of correcting or replacing date-deficient systems. The
remediation effort is well under way on all critical IT and non-IT systems, and
NL anticipates that remediation of such critical systems will be substantially
complete by June 1999. NL anticipates that remediation and testing of all
remaining systems will be complete by September 1999. Once systems undergo
remediation, they are tested for Year 2000 compliance. For critical systems,
the testing process usually involves subjecting the remediated system to a
simulated change of date from the year 1999 to the year 2000 using, in many
cases, computer resources. NL uses a number of packaged software products that
have been upgraded to a Year 2000 compliant version in the normal course of
business. Excluding the cost of these software upgrades, NL's cost of becoming
Year 2000 compliant is expected to be approximately $2 million, of which about
one-half has been spent through March 31, 1999.
NL has identified approximately 30 major computer systems and has assessed
them for Year 2000 compliance. At March 31, 1999, NL believes approximately 80%
of such systems are Year 2000 compliant. Each operating unit has responsibility
for its own conversion, in line with overall guidance and oversight provided by
a corporate-level coordinator, and the status of each of the remaining systems
will be specifically tracked and monitored.
As part of its Year 2000 compliance plan, NL has requested confirmations
from its major domestic and foreign software and hardware vendors, primary
suppliers and major customers that they are developing and implementing plans to
become, or that they have become, Year 2000 compliant. Confirmations received
by NL to-date indicate that such parties generally are in the process of
becoming Year 2000 compliant by December 31, 1999. The major software vendors
used by NL have already delivered Year 2000 compliant software. Notwithstanding
these efforts, NL's ability to affect the Year 2000 preparedness of such
vendors, suppliers and customers is limited.
NL is developing a contingency plan to deal with potential Year 2000 issues
related to business interruption that may occur on January 1, 2000 or
thereafter. NL's plan is expected to be completed in the second quarter of
1999.
Although NL expects its systems to be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs of its vendors, suppliers, and customers. NL also cannot predict
whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, NL cannot predict the impact on its consolidated financial
condition, results of operations or cash flows resulting from noncompliant Year
2000 systems that NL directly or indirectly relies upon. Should NL's Year 2000
compliance plan not be successful or be delayed beyond January 2000, or should
one or more suppliers, vendors or customers fail to adequately address their
Year 2000 issues, the consequences to NL could be far-reaching and material,
including an inability to produce TiO2 at its manufacturing facilities, which
could lead to an indeterminate amount of lost revenue. Other potential negative
consequences could include plant malfunction, impeded communications or power
supplies, or slower transaction processing and financial reporting. Although
not anticipated, the most reasonably likely worst-case scenario of failure by NL
or its key suppliers or customers to become Year 2000 compliant would be a
short-term slowdown or cessation of manufacturing operations at one or more of
its facilities and a short-term inability on the part of NL to process orders
and billings in a timely manner, and to deliver products to customers.
CompX. CompX has installed information systems upgrades for both its U.S.
and Canadian facilities which contained, among many other features, software
compatibility with the Year 2000. Excluding the cost of the information systems
upgrades, CompX's expenditure to-date to address the Year 2000 compliance have
not been significant, and CompX does not currently anticipate spending
significant additional funds to address Year 2000 compliance in the future.
As part of its Year 2000 compliance plan, CompX is seeking confirmation
from its major software and hardware vendors and primary suppliers that they are
developing and implementing plans to become, or that they have become, Year 2000
compliant. Confirmations received by CompX to-date indicate that such vendors
and suppliers generally are in the process of becoming Year 2000 compliant by
December 31, 1999. The major software vendors used by CompX have already
delivered Year 2000 compliant software. CompX plans to seek confirmation from
its major customers to ensure they are Year 2000 compliant or are developing and
implementing plans to become Year 2000 compliant. Notwithstanding these efforts,
CompX's ability to affect the Year 2000 preparedness of such vendors, suppliers
and customers is limited.
CompX is developing a contingency plan to deal with potential Year 2000
Issues related to business interruption that may occur on January 1, 2000 or
thereafter. CompX's plan is expected to be completed in the second quarter of
1999.
Although CompX expects its systems to be Year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the Year 2000
compliance programs of its vendors, suppliers, and customers. CompX also cannot
predict whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that might result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, CompX cannot predict the impact on its consolidated financial
condition, results of operations or cash flows resulting from noncompliant Year
2000 systems that CompX directly or indirectly relies upon. Should CompX's Year
2000 compliance plan not be successful or be delayed beyond January 2000, or
should one or more suppliers, vendors or customers fail to adequately address
their Year 2000 issues, the consequences to CompX could be far-reaching and
material, including an inability to produce products at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by CompX or its key suppliers or customers to become Year 2000 compliant
would be a short-term slowdown or cessation of manufacturing operations at one
or more of CompX's facilities, delays in delivering products to customers and a
short-term inability on the part of CompX to process orders and billings in a
timely manner.
TIMET. Most of TIMET's information systems have been replaced in
connection with the implementation of its business-enterprise SAP system. The
initial implementation of SAP has been completed. The cost of the new system,
including related equipment and networks, aggregated $50 million during 1997 and
1998 ($41 million capital; $9 million expense).
TIMET, with the help of outside specialists and consultants (i) has
substantially completed an initial assessment of potential Year 2000 issues in
its non-information systems (e.g., its manufacturing and communication systems),
as well as in those information systems that were not replaced by the new SAP
system, (ii) is in the process of determining, prioritizing and implementing
remedial actions, including testing, and (iii) will develop contingency plans
for any critical items whose Year 2000 remediation extends beyond TIMET's June
30, 1999 target date for completion. TIMET's Year 2000 readiness varies by
location. Some of TIMET's locations have completed their internal Year 2000
readiness plans, while other locations are in the midst of remediating and
testing. At this time, most sites anticipate completing their respective Year
2000 readiness plans by the June 1999 target date. However, remediation of some
items at TIMET's Nevada production facility, and possibly other sites, could be
delayed beyond the June 1999 target date due in part to vendor release
schedules. Through March 30, 1999, TIMET has expended $3 million on these
specific non-information system Year 2000 issues, principally related to
embedded system technology, and expects to incur approximately $3 million to $4
million on such issues during the remainder of 1999. TIMET's evaluation of
potential Year 2000 exposures related to key suppliers and customers is also in
process and will continue throughout 1999. Notwithstanding these efforts,
TIMET's ability to affect the Year 2000 preparedness of such suppliers and
customers is limited.
TIMET believes its key information systems will be Year 2000 ready before
December 31, 1999. With respect to the Year 2000 readiness program related to
certain of its embedded manufacturing systems or those comparable systems of its
suppliers or customers, TIMET cannot predict whether it will find additional
problems that would result in unplanned upgrades of applications after June 1999
or even December 1999. As a result of these uncertainties, TIMET cannot predict
the impact on its consolidated financial condition, results of operations, cash
flows or operations resulting from Year 2000 failures in information on other
systems that TIMET directly or indirectly relies upon. Should TIMET's Year 2000
readiness plan not be successful or be delayed beyond December 1999, or should
one or more suppliers or customers fail to adequately address their Year 2000
issues, the consequences to TIMET could be far-reaching and material, including
an inability to produce titanium metal products at its manufacturing facilities,
which could lead to an indeterminate amount of lost revenue. Other potential
negative consequences could include impeded communications or power supplies,
slower transaction processing and financial reporting, and potential liability
to third parties. Although not anticipated, the most reasonably likely worst-
case scenario of failure by TIMET of its key suppliers or customers to become
Year 2000 ready would be a short-term slowdown or cessation of manufacturing
operations at one or more of TIMET's facilities and a short-term inability on
the part of TIMET to process orders and billings in a timely manner, and to
deliver products to customers.
Waste Control Specialists. Waste Control Specialists' recently-installed
information system is Year 2000 compliant. The cost of such new information
system was not material to Waste Control Specialists. Waste Control
Specialists is in the process of evaluating any potential Year 2000 issues with
respect to embedded chip technology associated with the equipment at its
disposal facility; however, because such facility was constructed in the past
few years, Waste Control Specialists does not expect such equipment to present
any significant Year 2000 compliance issues. Waste Control Specialists is also
in the process of contacting its major suppliers and customers to confirm they
are developing and implementing plans to become, or that they have become, Year
2000 compliant. Notwithstanding these efforts, Waste Control Specialists'
ability to affect the Year 2000 preparedness of such suppliers and customers is
limited. Waste Control Specialists expects to have its evaluation of embedded
chip technology and Year 2000 compliance issues at significant suppliers and
customers completed in the second quarter of 1999, and any required remedial
actions completed prior to the end of 1999. Assuming Waste Control Specialists
does not encounter a significant Year 2000 compliance issue with respect to the
equipment at its disposal facility, Waste Control Specialists does not expect
its costs associated with Year 2000 compliance will be material.
Although Waste Control Specialists believes its information systems and
equipment at its disposal facility will be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs at its significant suppliers and customers. As a result, Waste Control
Specialists cannot predict the impact on its financial position, results of
operations or cash flows resulting from noncompliant Year 2000 systems that
Waste Control Specialists directly or indirectly relies upon. Should Waste
Control Specialists' Year 2000 compliance program not be successful or delayed
beyond January 2000, or should one or more suppliers or customers fail to
adequately address their Year 2000 issues, the consequences to Waste Control
Specialists could be far-reaching and material, including an inability to
operate the disposal facility, which could lead to an indeterminate amount of
lost revenue. Other potential adverse consequences could include impeded
communications or power supplies or slower transaction processing and financial
reporting.
Tremont. As a holding company, Tremont does not itself have numerous
applications or systems. Tremont (i) has completed an initial assessment of
potential Year 2000 issues in its information systems, (ii) is in the process of
determining, prioritizing and implementing remedial actions, including testing,
and (iii) will develop contingency plans in the event internal or external Year
2000 issues are not resolved by Tremont's July 1999 target date for completion.
The cost for Year 2000 readiness is not expected to be material to Tremont.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by Tremont or its key service providers to become Year 2000 ready would
be a short-term inability on the part of Tremont to process banking
transactions.
Valhi. As a holding company, Valhi does not have numerous applications or
systems. Valhi believes its corporate information systems are Year 2000
compliant. However, for the reasons discussed above with respect to its
subsidiaries and affiliates, Valhi cannot predict the impact on its consolidated
financial position, results of operations or cash flows resulting from
noncompliant Year 2000 systems that Valhi, it subsidiaries and affiliates
directly or indirectly rely upon. The consequences to the Company could be far-
reaching and material, including the loss of an indeterminate amount of revenue.
Other potential negative consequences could include manufacturing equipment
malfunctions, impeded communications or power supplies or slower transaction
processing and financial reporting.
Other. The completion dates for these planned 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.
EUROPEAN MONETARY CONVERSION
Beginning January 1, 1999, 11 of the 15 members of the European Union
("EU"), including Germany, Belgium, the Netherlands and France, established
fixed conversion exchange rates between their existing sovereign currencies and
the European currency unit ("euro"). Such members adopted the euro as their
common legal currency on that date. The remaining four EU members (including
the United Kingdom) may convert their sovereign currencies to the euro at a
later date. Certain European countries, such as Norway, are not members of the
EU and their sovereign currencies will remain intact. Each national government
retained authority to establish their own tax and fiscal spending policies and
public debt levels, although such public debt will be issued in, or re-
denominated into, the euro. However, monetary policies, including money supply
and official euro interest rates, will now be established by a new European
Central Bank. Following the introduction of the euro, the participating
countries' national currencies are scheduled to remain legal tender as
denominations of the euro through January 1, 2002, although the exchange rates
between the euro and such currencies will remain fixed.
NL. NL conducts substantial operations in Europe, principally in Germany,
Belgium, the Netherlands, France and Norway. In addition, NL has a significant
amount of outstanding indebtedness denominated in the Deutsche Mark. The
national currency in which such operations are located are such operation's
functional currency. The functional currency of the German, Belgian, Dutch and
French operations will convert from their respective sovereign currencies to the
euro over a two-year period beginning in 1999. NL has assessed and evaluated
the impact of the euro conversion on its business and made the necessary system
conversions. The euro conversion may impact NL's operations including, among
other things, changes in product pricing decisions necessitated by cross-border
price transparencies. Such changes in product pricing decisions could impact
both sales prices and manufacturing costs, and consequently favorably or
unfavorably impact NL's reported results of operations, financial condition or
liquidity.
CompX. The functional currency of CompX's recently-acquired Thomas Regout
operations in the Netherlands and CompX's French lock operations will convert to
the euro from their respective national currencies over a two-year period
beginning in 1999. The euro conversion may impact CompX's operations including,
among other things, changes in product pricing decisions necessitated by cross-
border price transparencies. Such changes in product pricing decisions could
impact both selling prices and purchasing costs and, consequently, favorably or
unfavorably impact results of operations.
In 1998, CompX assessed and evaluated the impact of the euro conversion on
its business and made the necessary system conversions. Modifications of
information systems to handle euro-denominated transactions have been
implemented and were not extensive. Because of the inherent uncertainty of the
ultimate effect of the euro conversion, CompX cannot accurately predict the
impact of the euro conversion on its consolidated results of operations,
financial condition or liquidity.
TIMET. TIMET also has operations and assets located in Europe, principally
in the United Kingdom. The United Kingdom is not adopting the euro.
Approximately one-half of TIMET's European sales are denominated in currencies
other than the U.S. dollar, principally the major European currencies. The U.S.
dollar value of TIMET's foreign sales and operating costs are subject to
currency exchange rate fluctuations that can impact reported earnings and may
affect the comparability of period-to-period operating results. Certain
purchases of raw materials for TIMET's European operations, principally titanium
sponge and alloys, are denominated in U.S. dollars while labor and other
production costs are primarily denominated in local currencies. Costs
associated with modification of certain of TIMET's systems to handle euro-
denominated transactions have not been significant. TIMET does not expect the
impact of the conversion to the euro will be material.
LIQUIDITY AND CAPITAL RESOURCES:
Operating activities. Trends in cash flows from operating annual
activities (excluding the impact of significant asset dispositions and relative
changes in assets and liabilities) are generally similar to trends in the
Company's earnings. Changes in assets and liabilities generally result from the
timing of production, sales, purchases and income tax payments. In addition,
cash flows from operating activities in calendar 1998 include the impact of the
payment of cash income taxes related to the disposal of NL's specialty chemicals
business unit, even though the pre-tax proceeds from the disposal are reported
as a component of cash flows from investing activities. Noncash interest
expense consists of amortization of original issue discount on certain Valhi and
NL indebtedness and amortization of deferred financing costs.
Cash flows from investing and financing activities. Capital expenditures
are disclosed by business segment in Note 2 to the Consolidated Financial
Statements.
During the first quarter of 1999, (i) CompX acquired a precision ball
bearing slide producer for approximately $52 million using funds on hand and $20
million of borrowing under its unsecured revolving bank credit facility, (ii)
Valhi contributed an additional $10 million to Waste Control Specialists'
equity, (iii) Waste Control Specialists reduced the outstanding balance of its
revolving credit facility with Valhi by $6 million and (iv) Valhi purchased $.6
million of additional shares of CompX common stock.
Net repayments of indebtedness in the first quarter of 1999 include (i)
NL's repayment in full of the remaining DM 107 million outstanding under the
term loan portion of its DM credit facility ($60 million when repaid) using
funds on hand and a DM 100 million increase in the revolver portion of the DM
facility ($56 million when borrowed) and (ii) CompX's $20 million of borrowing
under its revolving bank credit facility.
At March 31, 1999, unused credit available under existing credit facilities
approximated $171 million, which was comprised of $80 million available to CompX
under its unsecured revolving senior credit facility, $41 million available to
NL under non-U.S. credit facilities and $50 million available to Valhi.
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. 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.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income tax
related items and interest. In the third quarter of 1998, NL received a DM 14
million ($8 million when received) refund of previously-paid German dividend
withholding taxes. The German tax authorities were required to refund such
amounts based on a 1998 German Supreme Court decision in favor of another
taxpayer. No further withholding tax refunds are expected.
Certain other significant German tax contingencies aggregating an estimated
DM 188 million ($103 million at March 31, 1999) through 1998 remain outstanding
and are in litigation. One primary issue relates to disputed amounts
aggregating DM 181 million ($100 million) for the years through 1998. NL has
received tax assessments for a substantial portion of these amounts. No
payments of tax or interest deficiencies related to these assessments are
expected until the litigation is resolved. During 1997, a German tax court
proceeding involving a tax issue substantially the same as NL's primary dispute
was decided in favor of the taxpayer. The German tax authorities appealed the
decision to the German Supreme Court, which in February 1999 rendered its
judgment in favor of the taxpayer. NL believes that the German Supreme Court's
judgment should determine the outcome of NL's primary dispute with the German
tax authorities. Based on this recent favorable judgment, NL has requested that
its tax assessments related to this issue be withdrawn and expects a decision
from the German authorities regarding this request during 1999. NL has granted
a DM 94 million ($52 million) lien on its Nordenham, Germany TiO2 plant in favor
of the City of Leverkusen related to this tax contingency, and a DM 5 million
lien in favor of the German federal tax authorities for other tax contingencies.
If the German tax authorities withdraw their assessments based on the German
Supreme Court's decision, NL expects to request the release of the DM 94 million
lien in favor of the City of Leverkusen.
On April 1, 1999, the German government enacted certain income tax law
changes that were retroactively effective as of January 1, 1999. Based on these
changes, NL expects its effective cash income tax rate in Germany will increase
beginning in the second quarter of 1999. Through the use of ongoing tax
planning strategies, NL does not expect the income tax law changes will
materially affect its deferred income tax liabilities.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at March
31, 1999) relating to 1994. NL has appealed this assessment and has begun
litigation proceedings. During 1998, NL was informed by the Norwegian tax
authorities that additional tax deficiencies of NOK 39 million ($5 million) will
likely be proposed for the year 1996. NL intends to vigorously contest this
issue and litigate, if necessary. Although NL believes that it will ultimately
prevail, NL has granted a lien for the 1994 tax assessment on its Norwegian Ti02
plant in favor of the Norwegian tax authorities and will be required to grant a
lien for the 1996 assessment when received.
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 provided adequate 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 has been named as a defendant, potentially responsible party ("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
($123 million at March 31, 1999) 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. 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 $160 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.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage. 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.
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 or other
industries. 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.
COMPONENT PRODUCTS - COMPX INTERNATIONAL
In January 1999, CompX acquired a precision ball bearing slide producer for
approximately $52 million, using available cash on hand and $20 million of
borrowing under its revolving bank credit facility.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, CompX
may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, joint ventures or
other business combinations in the component products industry. In the event of
any such transaction, CompX may consider using available cash, issuing
additional equity securities or increasing the indebtedness of CompX or its
subsidiaries.
TREMONT CORPORATION
Tremont is primarily a holding company which, at March 31, 1999, owned
approximately 39% of TIMET and 20% of NL. At March 31, 1999, the market value
of the 12.3 million shares of TIMET and the 10.3 million shares of NL held by
Tremont was approximately $71 million and $92 million, respectively.
In October 1998, Tremont entered into a revolving advance agreement with
Contran. Through March 31, 1999, Tremont had borrowed $12 million from Contran
under such facility, primarily to fund Tremont's purchases of shares of NL and
TIMET common stock. Absent additional purchases of NL and TIMET common stock,
Tremont does not currently believe it will need to borrow significant additional
amounts from Contran.
At March 31, 1999, Tremont reported total assets and stockholders' equity
of $288 million and $196 million, respectively. Tremont's total assets at such
date include its investments in TIMET ($157 million), NL ($92 million) and other
joint ventures ($14 million) and $3 million in cash and cash equivalents;
Tremont's total liabilities at such date include the demand loan owed to Contran
($12 million), accrued OPEB costs ($22 million), accrued insurance claims and
claim expenses related to its wholly-owned captive insurance subsidiary ($15
million) and deferred income taxes ($29 million).
Tremont periodically evaluates the net carrying value of its long-term
assets, principally its investments in NL and TIMET, to determine if there has
been any decline in value below their net carrying amounts that is other than
temporary and would, therefore, require a write-down which would be accounted
for as a realized loss. Tremont's per share net carrying amount of its
investment in NL at March 31, 1999 was $9.02 per share, compared to a NYSE per
share market price of $9.00 at that date and $11.81 on April 30, 1999. At March
31, 1999, the NYSE price of $5.75 per TIMET share indicated an aggregate NYSE
market value of Tremont's investment in TIMET of $71 million, or $86 million
less than Tremont's $157 million net carrying value of its investment in TIMET
at that date ($12.82 per TIMET share held). TIMET's NYSE stock price was $7.38
per share on April 30, 1999. Tremont believes NYSE stock prices (particularly
in the case of companies such as TIMET and NL which have a major shareholder)
are not necessarily indicative of a company's enterprise value or the value that
could be realized if the company were sold. After considering what Tremont
believes to be all relevant factors including, among other things, the
relatively short period of time that the NYSE stock prices have been less than
Tremont's per share investment in TIMET and NL, recent trends in market prices
and TIMET's and NL's operating results, financial position and prospects,
Tremont has concluded that there has been no other than temporary decline in the
value of its investment in TIMET or NL below their respective net carrying
values at March 31, 1999.
It is possible, should the TiO2 or titanium metals industries in general,
or NL or TIMET specifically, encounter a prolonged downturn, or suffer other
unforeseen adverse events, that the value of Tremont's investment in TIMET, NL
or both, could decline to a level which would result in a write-down. Tremont
will continue to monitor and evaluate the value of its investment in TIMET and
NL based on, among other things, their respective results of operations,
financial condition, liquidity and business outlook. In the event Tremont
determines any decline in value of its investments below their net carrying
value has occurred which is other than temporary, Tremont would report an
appropriate write-down at that time.
In 1997, Tremont's board of directors authorized Tremont 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 March 31, 1999, Tremont
had acquired 1.2 million shares under such authorization. To the extent Tremont
acquires additional shares of its common stock, the Company's ownership interest
in Tremont would increase as a result of the fewer number of Tremont shares
outstanding.
Based upon certain technical provisions of the Investment Company Act of
1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act and has sought an order from the Securities and Exchange Commission
that Tremont is primarily engaged, through TIMET and NL, in a non-investment
company business. Tremont believes another exemption may be currently available
to it under the 1940 Act should the Commission deny Tremont's application for an
exemptive order.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to raise additional capital,
modify its dividend policy, restructure ownership interests of subsidiaries and
affiliates, incur indebtedness, purchase shares of its common stock, consider
the sale of interests in subsidiaries, affiliates, marketable securities or
other assets, or take a combination of such steps or other steps to increase or
manage liquidity and capital resources. In the normal course of business,
Tremont may investigate, evaluate, discuss and engage in acquisition, joint
venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
available cash, issuing equity securities or incurring indebtedness.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS
At March 31, 1999, Waste Control Specialists reported total assets of $29.4
million and total members' equity of $12.4 million. Waste Control Specialists'
assets consist principally of property and equipment related to the West Texas
facility and trade accounts receivable, and its liabilities consist principally
of indebtedness, including $4 million owed to the Company at March 31, 1999, and
trade payables and accruals.
GENERAL CORPORATE - VALHI
Valhi's operations are conducted primarily through subsidiaries and
affiliates (NL Industries, CompX, Tremont 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 of
1996. Suspension of NL's dividend did not materially adversely impact Valhi's
financial position or liquidity. Starting in the second quarter of 1998, NL
resumed regular quarterly dividends at a rate of $.03 per NL share, and NL
increased its quarterly dividend to $.035 per share in the first quarter of
1999. At the $.035 per share quarterly rate, and based on the 30.1 million NL
shares held by Valhi at March 31, 1999, Valhi would receive aggregate annual
dividends from NL of approximately $4.2 million. Tremont currently pays a
quarterly dividend of $.07 per share, and Valhi began to receive quarterly
dividends from Tremont in the third quarter of 1998. At that rate, and based
upon the 3.1 million Tremont shares owned by Valhi at March 31, 1999, Valhi
would receive aggregate annual dividends from Tremont of approximately $865,000.
Various credit agreements to which certain subsidiaries or affiliates 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. Valhi has not guaranteed any indebtedness of its subsidiaries or
affiliates. At March 31, 1999, Valhi had $5 million of parent level cash and
cash equivalents, including a portion held by Valcor which could be distributed
to Valhi, and had $20 million of short-term borrowings owed to Contran. In
addition, Valhi had $50 million of borrowing availability under its revolving
credit facility. In April 1999, Valhi sold certain marketable securities for
approximately $4 million, which approximates both their fair market value and
cost basis at March 31, 1999.
Valhi's LYONs do not require current cash debt service. At March 31, 1999,
Valhi held 2.7 million shares of Halliburton 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 Halliburton shares owned by
Valhi. Exchanges of LYONs for Halliburton stock result in the Company reporting
income related to the disposition of the Halliburton stock for both financial
reporting and income tax purposes, although no cash proceeds are generated by
such exchanges. Valhi's potential cash income tax liability that would have
been triggered at March 31, 1999, assuming exchanges of all of the outstanding
LYONs for Halliburton stock at such date, was approximately $25 million. Valhi
continues to receive regular quarterly Halliburton dividends (currently $.125
per share) on the escrowed shares. At March 31, 1999, the LYONs had an accreted
value equivalent to approximately $32 per Halliburton share, and the market
price of the Halliburton common stock was $38.50 per share.
Based on The Amalgamated Sugar Company LLC's current projections, Valhi
currently expects that distributions received from the LLC in 1999, which are
dependent in part upon the future operations of the LLC, will approximate its
debt service requirements under its $250 million loans from Snake River.
Certain covenants contained in Snake River Sugar Company's third-party senior
debt limit the amount of debt service payments (principal and interest) which
Snake River is permitted to remit to Valhi under Valhi's $80 million loan to
Snake River, and such loan is subordinated to Snake River's third-party senior
debt. Due to these covenants, Snake River has not made any principal or
interest payments on the $80 million loan in 1998 or to-date in 1999 other than
payment of the accrued and unpaid interest owed as of December 31, 1997 ($3
million). The Company does not currently expect that Snake River will remit a
significant amount of principal or interest during 1999. However, such
noncollection is not expected to have a material adverse effect on the Company's
liquidity, and the Company believes both the accrued and unpaid interest as well
as the $80 million principal amount outstanding at March 31, 1999 will
ultimately be collected.
Redemption of the Company's interest in the LLC 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.
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 policies, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1998 Annual Report for descriptions of certain
legal proceedings.
In March 1999, the court approved the previously-reported settlement
agreement in American Federation of Grain Millers International, et al. v.
Valhi, Inc. et al.
Pedricktown Site. In March 1999, NL executed the previously-reported
agreement in principle with certain PRPs with respect to NL's liability at the
site, settling the matter within previously-accrued amounts.
Batavia, New York Site. In April 1999, NL received a revised estimate by
the U.S. EPA estimating the cost to remediate operable unit one at $15.1 million
and received a revised claim by the U.S. EPA seeking past costs of $4.6 million,
including interest.
Brenner, et al. v. American Cyanamid, et al., (No. 12596-93). In May 1999,
defendants appealed the previously-reported denial of their motion to dismiss
the market share liability claim.
In April 1999, NL was served with an amended complaint in Sweet, et al. v.
Sheahan, et al., (U.S. District Court, Northern District of New York, Civil
Action No. 97-CV-1666/LEK-DNH), adding NL and other defendants to a suit
originally filed against plaintiffs' landlord. Plaintiffs, a parent and child,
allege injuries purportedly caused by lead pigment, and seek recovery of actual
and punitive damages from their landlord, alleged former manufacturers of lead
pigment and the Lead Industries Association, and purport to allege causes of
action against the former pigment manufacturers based on negligence, strict
product liability, fraud and misrepresentation, concert of action, civil
conspiracy and market share liability. The time for NL to answer or otherwise
plead with respect to the complaint has not yet occurred. NL intends to deny
all allegations of wrongdoing and liability and to defend the case vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 -Form of Deferred Compensation Agreement between the Registrant
and certain executive officers (a management compensatory
contract).
27.1 -Financial Data Schedule for the three-month period ended March
31, 1999.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 1999.
January 29, 1999 - Reported Items 5 and 7.
February 11, 1999 - Reported Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date May 12, 1999 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date May 12, 1999 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)
_______________________
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT, made as of January 1, 1999, to be effective as of January
1, 1998, by and between Valhi, Inc., a Delaware corporation, (the "COMPANY") and
_____________ ("EMPLOYEE"), amends and restates in its entirety that certain
Deferred Compensation Agreement dated as of January 1, 1998, by and between the
Company and Employee.
W I T N E S S E T H:
WHEREAS, Employee has been and is presently employed by the Company and
currently serves as an employee thereof; and
WHEREAS, Employee possesses an intimate knowledge of the business and
affairs of the Company and its policies, procedures, methods and personnel; and
WHEREAS, the Company desires to further compensate Employee for services
performed by establishing a deferred compensation arrangement on Employee's
behalf.
NOW, THEREFORE, for and in consideration of the mutual premises,
representations and covenants herein contained, the parties hereto mutually
agree as follows:
1. Deferred compensation shall be credited by the Company to a reserve
account on its accounting books (the "RESERVE ACCOUNT"), on behalf of
Employee, and such deferred compensation shall be deferred and
accumulated.
2. The amount of deferred compensation to be credited to the Reserve
Account on behalf of Employee shall be such amount as agreed upon from
time to time by Employee and the Company.
3. An additional amount shall be credited to the Reserve Account, in lieu
of interest, at the end of each calendar quarter and on the date
payment is made pursuant to SECTION 4 of this Agreement, equal to the
Prime Rate plus two percent (2%) per annum, as may be adjusted from
time to time, multiplied by the balance outstanding in the Reserve
Account on a daily basis during each calendar quarter. The "Prime
Rate" for purposes of this Agreement shall mean the fluctuating
interest rate per annum in effect from time to time equal to the base
rate on corporate loans as reported as the Prime Rate in the Money
Rates column of The Wall Street Journal, Southwest Edition.
4. Upon the termination of Employee's employment with the Company,
voluntarily, involuntarily or by retirement, death or disability, the
Company shall pay in cash the full credit balance in the Reserve
Account to or on behalf of Employee in a lump sum within one-hundred
eighty (180) days of such termination.
5. It is specifically understood and agreed by the parties hereto that
the deferred compensation provided for in this Agreement shall not be
funded. The obligation of the Company hereunder is a contractual
obligation to make the payments of deferred compensation when due in
accordance with the terms hereof, and the parties hereto do not intend
that the amounts credited to the Reserve Account are to be held by the
Company in trust, escrow or other fiduciary capacity for Employee.
The amounts credited to the Reserve Account shall not be subject in
any manner to attachment or other legal process for debts of Employee
or his successors, legal representatives or assigns, for any reason;
and neither Employee, nor any legal representative, successor or
assign shall have any right against the Company with respect to any
portion of the amounts credited to the Reserve Account, except as a
general unsecured creditor of the Company. Neither Employee nor his
successors, assigns or legal representatives shall have any right to
assign, transfer, pledge, hypothecate, anticipate or otherwise
alienate any payment of deferred compensation to become due in the
future to such person, and any attempt to do so shall be void and will
not be recognized by the Company.
6. It is agreed by Employee and the Company that the correct outstanding
balance of the Reserve Account, computed as of December 31, 1997, was
$________.
IN WITNESS WHEREOF, the parties have hereunto affixed their signatures as
of January 1, 1999.
ATTEST: VALHI, INC.
______________________________ _________________________________
EMPLOYEE:
__________________________________
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