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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-10126
Tremont Corporation
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(Exact name of registrant as specified in its charter)
Delaware 76-0262791
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5652
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock New York Stock Exchange
($1.00 par value per share) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
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
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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
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of February 28, 1997, 7,473,572 shares of common stock were outstanding.
The aggregate market value of the 4.2 million shares of voting stock held by
nonaffiliates of Tremont Corporation as of such date approximated $143 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.
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Forward-Looking Information
The statements contained in this Annual Report on Form 10-K which are
not historical facts, including, but not limited to, statements found (i) under
the captions "Unconsolidated Affiliate - TIMET" and "Unconsolidated Affiliate -
NL", contained in Item 1 - "Business", (ii) under the caption "Legal
Proceedings" in Item 3, and (iii) under the captions "Results of Operations" and
"Liquidity and Capital Resources", both contained in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements or discussions of trends which by their nature
involve substantial risks and uncertainties that could significantly impact
expected results. Actual results could differ materially from those described
in such forward-looking statements. Among the factors that could cause actual
results to differ materially are the risks and uncertainties discussed in this
Annual Report, including in the portions referenced above and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission, such as the cyclicality of NL's and TIMET's businesses,
TIMET's dependence on the aerospace industry, the sensitivity of NL and TIMET to
industry capacity, the possibility of labor disruptions, control by certain
stockholders and possible conflicts of interest, potential difficulties in
integrating acquisitions, uncertainties associated with new product development
and the supply of raw materials and services.
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PART I
ITEM 1: BUSINESS
GENERAL:
Tremont Corporation, headquartered in Denver, Colorado, is principally
a holding company with operations conducted through its 30%-owned affiliate,
Titanium Metals Corporation ("TIMET") and its 18%-owned affiliate, NL
Industries, Inc. ("NL"). Contran Corporation holds, directly or through
affiliates, approximately 44% of Tremont's outstanding common stock and 74% of
NL's outstanding common stock (including 18% of NL held by Tremont).
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of the children and grandchildren of Harold C.
Simmons of which Mr. Simmons is the sole trustee. Mr. Simmons, the Chairman of
the Board of NL, Chairman of the Board, President and Chief Executive Officer
of Contran, and a director of Tremont, may be deemed to control each of such
companies. Tremont and its consolidated subsidiaries are referred to herein
collectively as the "Company." Business and geographic information is included
in Note 3 to the Consolidated Financial Statements, which information is
incorporated herein by reference.
In February 1996, TIMET acquired the titanium metals businesses (the
"IMI Titanium Acquisition") of IMI plc ("IMI") and, in June 1996, completed an
initial public offering of 6.2 million shares of its common stock (the "Stock
Offering"), which included the Company's sale of 2.2 million shares of TIMET
common stock. These transactions reduced Tremont's ownership in TIMET from 75%
at December 31, 1995 to 30%. See Note 1 to the Consolidated Financial
Statements. As a result of its reduced ownership level, the Company has ceased
to consolidate TIMET and instead reports its interest in TIMET by the equity
method of accounting. Tremont may be deemed to control TIMET. In addition, as
part of the IMI Titanium Acquisition, IMI granted to Tremont an option expiring
February 15, 1999 to purchase up to an additional 2 million shares of TIMET's
outstanding common stock from IMI for $16 million. Tremont assigned Union
Titanium Sponge Corporation ("UTSC") the right to acquire from IMI up to .5
million shares of TIMET's outstanding common stock under the option.
Tremont reports its 18% interest in NL by the equity method due to the
fact that Tremont and NL may be deemed to be under common control by reason of
stock ownership and common directors and executive officers. See Note 4 to the
Consolidated Financial Statements.
UNCONSOLIDATED AFFILIATE - TIMET:
TIMET files periodic reports with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities and Exchange Act of
1934, as amended (the "Exchange Act"). The following information with respect
to TIMET (Commission file number 0-28538) has been summarized from such reports
which contain more detailed information concerning the business, results of
operations and financial condition of TIMET.
General. TIMET is one of the world's leading integrated producers of
titanium sponge and mill products, has the largest sales volume worldwide and
is the largest supplier of titanium to the aerospace and industrial markets.
TIMET believes it is the low-cost producer of titanium sponge and melt
products. Due to its economies of scale, manufacturing expertise and past
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investment in technology, TIMET believes that it is well-positioned to
capitalize on the improved fundamentals in the titanium industry.
TIMET's products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and cast products produced from ingot or slab,
including billet, bar, flat products (plate, sheet, and strip), tubular
products (welded tubing and pipe), extrusions, wire and castings.
Titanium is one of the newest specialty metals, having first been
manufactured for commercial use in the 1950s. Titanium's unique combination of
corrosion resistance, elevated-temperature performance and high
strength-to-weight ratio makes it particularly desirable for use in commercial
and military aerospace applications in which these qualities are essential
design requirements. While aerospace applications have historically accounted
for a substantial portion of the worldwide demand for titanium (more than half
of TIMET's sales in 1996), the number of end-use markets for titanium has
expanded substantially. Today, numerous industrial uses for titanium exist,
including chemical plants, industrial power plants, desalination plants and
pollution control equipment. Customer demand for titanium is also increasing
in new and emerging uses such as medical implants, golf club heads, other
sporting equipment, offshore oil and gas production installations, geothermal
facilities, and possible automotive and computer uses.
The titanium industry is comprised of several manufacturers which,
like TIMET, produce a relatively complete range of titanium products. TIMET
believes that at least 90% of the world's titanium sponge is produced by six
companies. However, there are a significant number of producers worldwide that
manufacture a limited range of titanium mill products.
Recent acquisitions and capital transactions. At the beginning of
1996, TIMET was owned by Tremont (75%) and UTSC (25%), and its operations were
conducted primarily in the United States.
In February 1996, TIMET acquired its TIMET UK and TIMET Castings
operations from IMI plc in the IMI Titanium Acquisition. TIMET UK is Western
Europe's largest producer of titanium ingot and mill products for aerospace and
industrial applications. TIMET Castings manufactures titanium castings for
aerospace applications and golf club heads. In connection with the IMI
Titanium Acquisition, TIMET issued (i) 9.6 million shares of common stock to
IMI valued at $70 million at the date of issue and (ii) $20 million of TIMET's
subordinated debt to IMI in exchange for a like amount of debt previously owed
to IMI by its UK titanium subsidiary. In addition, Tremont and UTSC received an
option to acquire from IMI a portion of the common stock issued to IMI.
In June 1996, TIMET completed an initial public stock offering
pursuant to which TIMET sold 6.2 million shares of common stock, and its
shareholders (Tremont, UTSC and IMI) sold an additional 10.5 million shares of
common stock. The price to the public in the Stock Offering was $23 per share.
Following the Stock Offering, approximately 54% of TIMET's outstanding common
stock was held by the public, 6% by IMI, 10% by UTSC and 30% by Tremont.
Tremont and UTSC have the option to acquire the shares currently held by IMI.
TIMET's net proceeds from the Stock Offering approximated $131 million and were
used primarily to repay indebtedness, including all amounts owed to Tremont and
IMI.
In October 1996, TIMET acquired certain assets from Axel Johnson
Metals, Inc. ("AJM") (the "AJM Acquisition"). The acquired assets included the
50% interest in Titanium Hearth Technologies ("THT") not already owned by TIMET
and AJM's titanium scrap business. The
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purchase price of the AJM Acquisition, including transaction costs, was $97
million cash, which was funded by borrowings under TIMET's U.S. credit
facility.
In November 1996, TIMET issued $201 million of TIMET-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities") through a trust, TIMET Capital Trust I, and used a portion of the
proceeds to repay the borrowings incurred in conjunction with the AJM
Acquisition. The remaining proceeds will be used for general corporate
purposes. The Convertible Preferred Securities are convertible, subject to
certain limitations, into an aggregate of 5.4 million shares of common stock.
In addition, TIMET completed acquisitions of 70% of CEZUS' titanium
business ("TIMET Savoie") in France (August 1996) and 100% of TISTO (July 1996)
and LASAB (January 1997) in Germany to enhance TIMET's titanium manufacturing,
distribution and technology capabilities in Europe.
In March 1997, TIMET announced that it had executed definitive
agreements to combine its welded tubing operations with those of Valinox
Welded, a French manufacturer of welded tubing, principally stainless steel and
titanium, with operations in France and China. The joint venture, "Valtimet",
would be 46% owned by TIMET and 54% owned by Valinox Welded. TIMET will supply
titanium strip product to Valtimet under a long-term contract as a preferred
supplier. The transaction is expected to close during the second quarter of
1997. The effect of the transaction on TIMET's near-term financial results is
not expected to be material.
TIMET intends to focus on the following strategic objectives: (i)
maximize its participation in the aerospace industry recovery by focusing on
TIMET's basic strengths of sponge production, melting, forging and casting of
various shapes of titanium products, (ii) invest in technology and innovative
projects aimed at reducing costs and enhancing productivity, quality and
production capacity, (iii) lower the cost of sourcing raw materials, (iv)
invest in strategic alliances, new markets, applications and products as well
as acquisitions, and (v) maintain a strong balance sheet.
Recent industry recovery. The titanium industry suffered a downturn
in the early 1990's, and in each of 1991 to 1995 TIMET reported a net loss.
The cyclical nature of the aerospace industry has historically been the
principal cause of the fluctuations in performance of titanium companies with
cyclical peaks in mill products shipments in 1980 and 1989, and with cyclical
lows in 1983 and 1991. Industry shipments remained relatively flat from 1991
to 1994.
Since 1995, the titanium industry has improved due to a combination of
factors including a resurgence in commercial aerospace demand, continuing and
stable industrial demand and the emergence of new uses for titanium, including
golf club heads. U.S. industry mill product shipments in 1995 increased 26%
from 1994. In 1996, U.S. industry mill product shipments were an estimated 57
million pounds, up 31% from 1995 with U.S. shipments to the commercial
aerospace market an estimated 25 million pounds, up 40% from the prior year.
In addition, U. S. industry mill product shipments to the golf club market in
1996 were approximately 8 to 10 million pounds compared to virtually none in
1994. While worldwide industry shipments are not as readily tracked as U.S.
shipments (in large part due to uncertainties of shipments by companies located
in the former Soviet Union), TIMET believes U.S. trends are a reasonable proxy
for worldwide trends.
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Aerospace demand for titanium products, which includes both jet
engines and air frames, can be broken down into commercial and military
sectors. Since 1987, sales to the commercial aerospace sector have been more
significant than to the military aerospace markets. The commercial aerospace
sector is expected to continue its predominance as a result of the expected
growth of worldwide airline traffic, new orders for aircraft, and replacement
and repair of the commercial airline fleet. Due to improved fundamentals, the
commercial airline industry reported operating profits of over $16 billion
(estimated) in 1996, $6 billion in 1995 and $2 billion in 1994 compared to
cumulative losses in excess of $5 billion in the 1990 to 1993 period. Most
major carriers are investing in upgrading and expanding their fleets. TIMET
can give no assurance as to the extent or duration of any recovery in the
commercial aerospace market or the extent to which such recovery will result in
increased demand for titanium products.
Since titanium's initial aerospace applications, the number of end-use
markets for titanium has expanded substantially. Existing industrial uses for
titanium include chemical plants, industrial power plants, desalination plants,
and pollution control equipment. Titanium is also experiencing increased
customer demand in new and emerging uses such as medical implants, golf club
heads, other sporting equipment, offshore oil and gas production installations,
geothermal facilities, and possible automotive and computer uses. Several of
these applications represent potential growth opportunities that may reduce the
industry's historical dependence on the aerospace market.
TIMET's strategy for investing in new markets and uses for titanium
includes investing in promising ventures and capital opportunities. In this
regard, during March 1997 TIMET announced it will invest up to $5 million in
Titanium Memory Systems, Inc. ("TMS") for an approximate 20% equity interest in
TMS. The funds will be used by TMS to continue its development and production
of a titanium substrate for use in computer hard disk drives.
TIMET's products, operations and raw materials. TIMET is a
vertically integrated titanium producer whose products include: titanium
sponge, the basic form of titanium metal used in processed titanium products;
titanium ingot and slab, the result of melting sponge and titanium scrap,
either alone or with various other alloying elements; and forged and cast
products produced from ingot or slab, including billet, bar, flat products
(plate, sheet, and strip), tubular products (welded tubing and pipe),
extrusions, wire and castings. The titanium product chain is described below.
Titanium sponge (so called because of its appearance) is the
commercially pure, elemental form of titanium metal. The first step in sponge
production involves the chlorination of titanium-containing rutile ores,
derived from beach sand, with chlorine and coke to produce titanium
tetrachloride. Titanium tetrachloride is purified and then reacted with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. A portion of TIMET's titanium sponge production capacity in
Henderson, Nevada, incorporates Vacuum Distillation Process ("VDP") technology,
which removes the magnesium and magnesium chloride residues by applying heat to
the sponge mass while maintaining vacuum in the chamber. The combination of
heat and vacuum boils the residues from the reactor mass into the condensing
vessel. The titanium mass is then mechanically pushed out of the original
reactor, sheared and crushed, while the residual magnesium chloride is
electrolytically separated and recycled. The balance of TIMET's sponge
production capacity uses the original Kroll-leach process, using a leaching
process rather than distillation to remove residues.
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Titanium ingots and slab are solid shapes (cylindrical and
rectangular, respectively) that weigh up to 17,500 pounds in the case of ingots
and up to 35,000 pounds in the case of slabs. Each is formed by melting
titanium sponge or scrap or both, usually with various other alloying elements
such as vanadium, aluminum, molybdenum, tin and zirconium. Titanium scrap is a
by-product of milling and machining operations, and significant quantities of
scrap are generated in the production process for most finished titanium
products. The melting process for ingots and slabs is closely controlled and
monitored utilizing computer control systems to maintain product quality and
consistency and meet customer specifications.
Titanium mill products result from the forging, rolling, drawing
and/or extrusion of titanium ingots or slabs into products of various sizes and
grades. These mill products include titanium billet, bar, rod, wire, plate,
sheet, strip, extrusions, pipe and tube. TIMET sends certain products to
outside vendors for further processing before being shipped to customers or to
TIMET's service centers. TIMET's customers usually process TIMET's products for
their ultimate end-use or for sale to third parties.
Titanium cast products are produced by remelting ingot or billet and
pouring molten metal into a cast, the cavity of which has been created in the
shape of the part to be produced. After the metal has cooled and solidified,
the part is removed from the cast and delivered to the customer or a third
party for finishing. The casting process provides significant flexibility in
the shapes that can be produced and is frequently utilized in forming tolerance
critical components such as diffusers, fan frames, seal rings, fluid system
components and missile components.
During the production process and following the completion of
products, TIMET performs extensive testing on its products, including sponge,
mill products and castings. Testing may involve chemical analysis, mechanical
testing, ultrasonic testing, x-ray and dye penetration testing. The inspection
process is critical to ensuring that TIMET's products meet the high quality
requirements of customers, particularly in aerospace components production.
TIMET is dependent upon the services of outside processors to perform
important processing functions with respect to certain of its products. In
particular, TIMET currently relies upon a single processor to perform certain
rolling steps with respect to some of its plate, sheet, and strip products, and
upon a single processor to perform certain finishing and conditioning steps
with respect to its THT slab products. Although TIMET believes that there are
numerous metal producers with the capability to perform these same processing
functions, arranging for an alternative processor or, in THT's case, possibly
installing comparable capabilities, could take several months and any
interruption in these functions could have a material and adverse effect on
TIMET's business, results of operations, financial condition and cash flows in
the short term.
In 1996, proforma for the IMI Titanium and AJM Acquisitions, over 90%
of TIMET's sales were generated from the sale of titanium ingot, slab, a wide
variety of mill products and castings with the balance from sales of titanium
tetrachloride, sponge and other by-products.
In addition to its U.S. sponge capacity discussed below, TIMET's
current worldwide rated melting capacity aggregates approximately 84 million
pounds, and its rated mill products and castings capacity aggregates
approximately 36 million pounds.
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TIMET's VDP sponge facility in Henderson, Nevada operated at
approximately 85% of its annual practical capacity of 20 million pounds during
1996, up from 75% in 1995. The plant produces VDP sponge principally as a raw
material for a 30 million pound annual practical capacity ingot melting
facility, also at the Nevada site, and for the THT cold hearth melting
facilities. Titanium mill products are principally produced at a forging and
rolling facility in Ohio, which receives titanium ingots from the Nevada plant,
titanium slabs from THT and titanium slabs and hot bands purchased from outside
vendors including those located in Russia. Certain mill products are also
produced at the Tennessee finishing facility. TIMET's production facilities
described above are owned.
TIMET's Henderson melting facility operated at about 65% of capacity
in 1996 (1995 - 45%). The Ohio and Tennessee facilities each operated at about
80% of capacity in 1996, compared to about 40% and 60%, respectively, in 1995.
TIMET closed its original 32 million pound rated capacity Kroll-leach process
sponge production facility in Nevada in 1994. However, in connection with
market demand for certain grades of sponge, TIMET reopened its original
Kroll-leach plant, producing approximately 1.4 million pounds in 1996. TIMET
expects to increase Kroll-leach production to an annual rate of approximately
10 million pounds during 1997. Costs to restart the Kroll-leach facility
approximated $2 million in 1996.
THT operates four electron beam cold hearth melting furnaces
(aggregate 31.5 million pound annual capacities) located in Pennsylvania (two),
Nevada, and California, raw materials processing operations located in
Pennsylvania, and a 1.5 million pound annual capacity vacuum induction melting
furnace located in California. TIMET's raw materials processing operations are
currently being relocated from leased facilities to a TIMET-owned facility in
Morgantown. TIMET Castings, with plants located in California and Oregon,
produces titanium castings used principally for aerospace applications and golf
club heads. TIMET Castings' facility in California is leased, whereas the
facility in Oregon is owned. THT operated at approximately 95% of aggregate
capacity in 1996 while TIMET Castings operated at approximately 65% of
aggregate capacity.
TIMET UK operates a 16 million pound practical capacity melting
facility in Witton, England which produces ingots sold to customers and used as
raw material feedstock for its forging and rolling operations in Witton, which
process the ingots principally into billet and wire. TIMET UK's Witton
facility, which is leased from IMI pursuant to long-term capital leases, also
provides stock to its TIMET-owned facility in Waunarlwydd, Wales, which
principally produces bar and plate. TIMET UK purchases its requirements of
sponge principally from suppliers located in Japan and the former Soviet Union.
The Witton facility operated at approximately 90% of capacity in 1996, while
the Wales facility operated at approximately 60%.
TIMET Savoie has the right, on a long-term basis, to utilize portions
of CEZUS' plant in Ugine, France. Capacity of TIMET Savoie in Ugine is to a
certain extent dependent upon the level of activity in CEZUS' zirconium
business, which may from time to time provide TIMET Savoie with capacity in
excess of that contractually required to be provided by CEZUS. During 1996,
TIMET Savoie operated at approximately 100% of the capacity required to be
provided by CEZUS.
TIMET's marketing and distribution system includes seven TIMET-owned
service centers (four in the U.S. and three in Europe) which sell TIMET's
products on a just-in-time basis, approximately 70 sales people based in the
U.S. and Europe and 30 independent agents worldwide.
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TIMET believes that it has a competitive sales and cost advantage
arising from the location of its production plants and service centers, which
are in close proximity to major customers. These centers primarily sell
value-added and customized mill products including bar and flat-rolled sheet
and strip. TIMET believes its service centers give it a competitive advantage
because of their ability to foster customer relationships, customize products
to suit specific customer requirements and respond quickly to customer needs.
The principal raw materials used in the production of titanium mill
and cast products are titanium sponge, titanium scrap and alloying materials.
TIMET is the only domestic integrated titanium products producer that processes
rutile ore into titanium tetrachloride and further processes the titanium
tetrachloride into titanium sponge. As a result, TIMET is less susceptible to
fluctuations in the market price of titanium sponge than its competitors. In
1996, TIMET produced 18 million pounds of sponge, of which 4.4 million pounds
were sold to UTSC pursuant to a sponge purchase agreement and the remainder of
which was used internally.
While TIMET is one of six major worldwide producers of titanium
sponge, a basic raw material in the production of titanium ingot and mill
products, under current market conditions it cannot supply all of its needs for
titanium sponge internally and is dependent, therefore, on third parties for a
portion of its needs. TIMET obtains sponge from four suppliers in Japan and the
former Soviet Union, both on a spot purchase basis and, with respect to a
portion of these purchases from three of such producers, pursuant to contracts
that permitted TIMET to purchase an aggregate of 10 million pounds of sponge at
specified or fixed prices through the end of 1996. Each contract is subject to
renegotiation or termination if certain events occur. TIMET has entered into,
or expects to enter into, similar contracts with such suppliers for
approximately 25 million pounds of sponge in 1997. Average spot prices of
titanium sponge sold by producers in the former Soviet Union have more than
doubled in the U.S. since the first quarter in 1994 and have increased
substantially outside of the U.S. Market conditions have generally enabled
TIMET to pass such increases to its customers.
The primary raw materials used in the production of titanium sponge
are titanium-containing rutile ore, chlorine, magnesium and coke. Chlorine,
magnesium, and coke are generally available from a number of suppliers.
Titanium-containing rutile ore is currently available from a number of
suppliers around the world, principally located in Australia, Africa (South
Africa and Sierra Leone), India and the United States. A majority of TIMET's
supply of rutile ore is currently purchased from Australian suppliers. TIMET
believes the availability of rutile ore will be adequate through the remainder
of the decade and does not anticipate any interruptions of its raw material
supplies, although political or economic instability in the countries from
which TIMET purchases its raw materials could materially and adversely affect
availability. In addition, although TIMET believes that the availability of
rutile ore is adequate in the near-term, there can be no assurance that TIMET
will not experience interruptions. Various alloying elements used in the
production of titanium ingot are available from a number of suppliers.
Markets and customer base. About 65% of TIMET's 1996 sales were to
customers within North America, with about 30% to European customers and the
balance to other regions. No single customer represents more than 10% of
TIMET's direct sales. However, in 1996 about 60% of TIMET's sales were used by
TIMET's customers to produce parts and other materials for the aerospace
industry. TIMET expects that while a majority of its 1997 sales will also be to
the aerospace sector, industrial and consumer goods markets will continue to
represent a significant portion of sales.
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The aerospace industry is dominated by three major manufacturers of
commercial aircraft (two of which, Boeing and McDonnell Douglas, are proposing
to combine) and four major manufacturers of aircraft engines. Typically,
TIMET's sales are not made directly to the major aircraft and engine
manufacturers but rather to companies who use TIMET's titanium to produce parts
and other materials for such manufacturers. For example, from 1994 through
1996, less than 1% of TIMET's sales were made directly to Boeing, the largest
aircraft manufacturer. However, if any of the major aerospace manufacturers
were to significantly reduce its activities, there could be a material adverse
effect on certain of TIMET's direct customers who supply to such manufacturer
and, therefore, indirectly on TIMET.
TIMET's order backlog was approximately $440 million at December 31,
1996 compared to a combined TIMET/IMI/AJM backlog of $226 million at December
31, 1995. Approximately 95% of the 1996 year end backlog is expected to be
delivered during 1997. Although TIMET believes that the backlog is a reliable
indicator of future business activity, conditions in the aerospace industry
could change and result in future cancellations or deferrals of existing
aircraft orders and materially and adversely affect TIMET's existing backlog,
orders, and future financial condition and operating results.
As of December 31, 1996, the estimated firm order backlog for Boeing,
McDonnell Douglas and Airbus, as reported by The Airline Monitor, was 2,370
planes versus 1,869 planes on December 31, 1995, an increase of 27%. The newer
wide body planes, such as the Boeing 777, and the Airbus A-330 and A-340, tend
to use a higher percentage of titanium in their frames, engines and parts (as
measured by total fly weight) than narrow body planes. "Fly weight" is the
empty weight of a finished aircraft with engines but without fuel or
passengers. The Boeing 777, for example, utilizes titanium for approximately 9%
of total fly weight, compared to between 2% to 3% on the older 737, 747 and 767
models. The estimated firm order backlog for wide body planes at year end 1996
was 767 (32% of total backlog) compared to 682 at the end of 1995. Growth in
firm order backlog for narrow body aircraft has also been strong, having
increased 35% during 1996 to 1,603.
Through various strategic relationships, TIMET seeks to gain access to
unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. TIMET has
explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. TIMET also will continue to
work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
In this regard, TIMET has, among other things, been exploring a potential
strategic relationship with a large titanium producer in Russia. TIMET believes
that such a relationship could lead to a substantial expansion of the market
for titanium products worldwide, particularly in emerging applications. The
establishment of this relationship, which TIMET does not currently anticipate
would involve significant investment, would entail significant uncertainty and
would be subject to various conditions. No assurances can be given that the
relationship will be formed or, if formed, as to the nature of the
relationship. In connection with TIMET's efforts to establish such a
relationship, TIMET has purchased 2.8 million pounds of intermediate and
finished mill products from such producer in 1995 and 3 million pounds in 1996.
Competition. The titanium metals industry is highly competitive on a
worldwide basis as a result of many factors, particularly the presence of
excess capacity in the industry, which has intensified price competition for
available business. Producers of mill products are located primarily in the
United States, Japan, Russia, Europe and China. TIMET is one of four integrated
producers in the world. TIMET regards as an integrated producer one that
produces at least both
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sponge and ingot. There are also a number of non-integrated producers that
produce mill products from purchased sponge, scrap or ingot. TIMET believes
that the sponge production capacity and actual production in the former Soviet
Union may be as much as one-half of aggregate worldwide levels and that
significant unused production capacity may exist in this region. Russia is also
known to have significant melting and mill product production capacity.
TIMET estimates that in 1996 it accounted for approximately 15% of
world sponge capacity and 24% of worldwide shipments of titanium mill products.
TIMET's principal competitors include RMI Titanium Company, Oregon
Metallurgical Corporation ("OREMET"), and Allegheny Teledyne Allvac. TIMET's
principal competitors in its U.S. castings business are Precision Cast Parts,
Howmet, Selmet and Coast Cast. TIMET competes primarily on the basis of price,
quality of products, technical support and the availability of products to meet
customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants
has become a significant competitive factor. Until 1993, imports of foreign
titanium products into the U.S. had not been significant. This was primarily
attributable to relative currency exchange rates, tariffs and, with respect to
Japan and the former Soviet Union, existing and prior duties (including
antidumping duties). However, imports of titanium sponge, scrap, and mill
products, principally from the former Soviet Union, have increased in recent
years and have had a significant competitive impact on the U.S. titanium
industry. To the extent TIMET has been able to take advantage of this situation
by purchasing such sponge, scrap or intermediate mill products from such
countries for use in its own operations during recent years, the negative
effect of these imports on TIMET has been somewhat diminished.
Currently, imports of titanium ingot and mill products from countries
that receive the Most Favored Nation ("MFN") tariff rate are subject to a 15%
tariff. The tariff rate applicable to imports from countries that do not
receive MFN treatment is 45%. In addition to regular tariffs, imports of
titanium sponge from certain countries of the former Soviet Union (Russia,
Kazakhstan and Ukraine) have been subject to antidumping duties of 84% for a
number of years. In November 1996, the Department of Commerce, based upon its
review of sales during a period in 1994 and 1995, issued its final
determination that this antidumping duty should be eliminated for future sales
by one of the two major importers of Russian sponge, lowered to 28% for the
other importer, and maintained at 84% for the sole Russian producer. A review
of sales for the corresponding 1995-96 period is currently underway. It is
possible that the lowering of the duties for the two importers could lead to
increased imports of Russian sponge into the U.S. and an increase in the amount
of sponge on the market generally, which could adversely affect titanium sponge
and mill product pricing and thus the business, financial condition, results of
operations and cash flows of TIMET. However, TIMET is also currently one of the
largest importers of Russian-produced sponge into the U.S. and to the extent
TIMET remains a substantial purchaser of Russian sponge, adverse effects on
product pricing could be partially ameliorated by decreased cost to TIMET for
duty-paid sponge.
The ability of the producers in Russia to compete in the U.S. has also
been enhanced by the elimination since September 1993 of tariffs on most
Russian titanium mill products (excluding titanium ingot, slab and billet,
which continue to carry a 15% duty). Since TIMET has been a significant
purchaser of titanium products from Russia in recent years, any failure to
renew this program again upon its scheduled expiration in May 1997 or otherwise
could have an adverse effect on TIMET's earnings as it would be more costly to
continue purchases of titanium mill products from Russia. Given the current
political and economic uncertainties in some of the
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countries of the former Soviet Union, there can be no assurance that this
supply of titanium products will continue to be available to TIMET without
interruption or at attractive prices.
Producers of other metal products, such as steel and aluminum,
maintain forging, rolling and finishing facilities that could be modified
without substantial expenditures to produce titanium products. TIMET believes,
however, that entry as a producer of titanium sponge would require a
significant capital investment and substantial technical expertise. Titanium
mill products also compete with stainless steels, nickel alloys, steel,
plastics, aluminum and composites in certain applications.
Research and development. TIMET's research and development
activities are directed toward improving process technology, developing new
alloys, enhancing the performance of TIMET's products in current applications,
and searching for new uses of titanium products. For example, one of TIMET's
proprietary alloys, TIMETAL(R)21S, has been specified for a number of aerospace
applications including the Boeing 777. Additionally, TIMETAL LCB, a new low
cost beta alloy, is being tested for new non-aerospace applications; and
TIMETAL 15-3 has been introduced into the sporting goods markets. TIMET
conducts the majority of its research and development activities at its Nevada
laboratory, which TIMET believes is one of the largest titanium research and
development centers in the world. Additional research and development
activities are performed at the Witton facility. TIMET's research and
development expenditures have approximated $2 million during each of the past
three years and are expected to be approximately $3 million in 1997.
Patents and trademarks. TIMET holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology.
TIMET continually seeks patent protection with respect to its technical base
and has occasionally entered into cross-licensing arrangements with third
parties. However, most of the titanium alloys and manufacturing technology used
by TIMET do not benefit from patent or other intellectual property protection.
TIMET believes that the trademarks TIMET(R) and TIMETAL, which are protected by
registration in the U.S. and other countries, are significant to its business.
Employees. As of December 31, 1996, TIMET employed approximately
2,070 persons in the U.S. and approximately 880 persons in Europe. TIMET's
production and maintenance workers in Henderson, Nevada and its production,
maintenance, clerical and technical workers in Toronto, Ohio are represented by
the United Steelworkers of America ("USWA") under contracts expiring in October
2000 and June 1999, respectively. Employees at TIMET's other U.S. facilities
are not covered by collective bargaining agreements. In February 1997,
employees at TIMET Castings' Albany, Oregon facility voted to not be
represented by the USWA.
Substantially all of the salaried and hourly employees at TIMET's
European facilities are members of various European labor unions. In January
1997, new one-year agreements covering the U.K. and French union employees were
entered into, providing for modest wage increases in 1997.
The USWA engaged in a nine month work stoppage at TIMET's Henderson
facility in 1993 - 1994 and in a three month stoppage at the Toronto facility
in 1994. While TIMET currently considers its employee relations to be
satisfactory, it is possible that there could be future work stoppages that
could materially and adversely affect TIMET's business, financial condition,
results of operations or cash flows.
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Regulatory and environmental matters. TIMET's operations are
governed by various Federal, state, local and foreign environmental and worker
safety laws and regulations. In the U.S., such laws include the Federal Clean
Air Act, the Clean Water Act and the Resource Conservation and Recovery Act.
TIMET uses and manufactures substantial quantities of substances that are
considered hazardous or toxic under environmental and worker safety and health
laws and regulations. In addition, at TIMET's Henderson facility, TIMET uses
substantial quantities of titanium tetrachloride, a material classified as
extremely hazardous under Federal environmental laws. TIMET has used such
substances during substantially the entire history of its operations. As a
result, risk of environmental damage is inherent in TIMET's operations. TIMET's
operations pose a continuing risk of accidental releases of, and worker
exposure to, hazardous or toxic substances. There is also a risk that
government environmental requirements, or enforcement thereof, may become more
stringent in the future. There can be no assurances that some, or all, of the
risks discussed under this heading will not result in liabilities that would be
material to TIMET's business, results of operations, financial condition or
cash flows.
TIMET's operations in Europe are similarly subject to foreign laws and
regulations respecting environmental and worker safety matters, which laws are
generally less stringent than U.S. laws and which have not had, and are not
presently expected to have, a material adverse effect on TIMET. There can be no
assurance that such foreign laws will not become more stringent.
TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker safety laws.
TIMET's policy is to continually strive to improve environmental performance.
From time to time, TIMET may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the
establishment of compliance programs. Occasionally, resolution of these matters
may result in the payment of penalties, but to date no material penalties have
been incurred. TIMET incurred capital expenditures for environmental protection
and compliance of less than $1 million in each of the past three years and its
capital budget provides less than $1 million for such expenditures in 1997.
However, the imposition of more strict standards or requirements under
environmental laws and regulations could result in expenditures in excess of
amounts estimated to be required for such matters.
TIMET determines the amount of its accruals for environmental matters
on a quarterly basis by analyzing and estimating the range of possible costs in
light of the available information. Because of a lack of relevant information,
it is not possible to estimate the range of costs for certain sites. The
imposition of more stringent standards or requirements under environmental laws
or regulations, the results of future testing and analysis undertaken by TIMET
at its operating or non-operating facilities, or a determination that TIMET is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future. TIMET expects to adopt the recognition and
disclosure requirements of AICPA's Statement of Position No. 96-1,
"Environmental Remediation Liabilities" in 1997. The new rule, among other
things, expands the types of costs which must be considered in determining
environmental remediation accruals. The effect on TIMET of adopting this new
Statement of Position is not expected to be material. TIMET currently believes
the disposition of all known environmental matters, individually or in the
aggregate, should not have a material adverse effect on TIMET's business,
results of operations, financial condition, or cash flows. See Note 13 to the
Company's Consolidated Financial Statements -
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"Commitments and Contingencies - Environmental matters - TIMET," which
information is incorporated herein by reference.
UNCONSOLIDATED AFFILIATE - NL:
NL files periodic reports with the Commission pursuant to the Exchange
Act, as amended. The following information with respect to NL (Commission file
number 1-640) has been summarized from such reports which contain more detailed
information concerning the business, results of operations and financial
condition of NL.
General. NL conducts its operations through its principal
wholly-owned subsidiaries, Kronos, Inc. and Rheox, Inc. Kronos is the world's
fourth largest producer of titanium dioxide pigments ("TiO2") with an
estimated 11% share of worldwide TiO2sales volume in 1996. Approximately
one-half of Kronos' 1996 sales volume was in Europe, where Kronos is the second
largest producer of TiO2. In 1996, Kronos accounted for 86% of NL's sales and
63% of its operating income. Rheox is the world's largest producer of
rheological additives for solvent-based systems. NL's objective is to maximize
total shareholder returns by (i) focusing on continued cost control, (ii)
investing in certain cost effective debottlenecking projects to increase TiO2
production capacity and productivity, and (iii) deleveraging as excess liquidity
becomes available.
TiO2 products and operations. Titanium dioxide pigments are
chemical products used for imparting whiteness, brightness and opacity to a
wide range of products, including paints, plastics, paper, 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.
Demand, supply and pricing within the TiO2 industry is cyclical, and
changes in industry economic conditions can significantly impact NL's earnings
and operating cash flow. NL's average TiO2 selling prices have been
declining since the last half of 1995, which followed an upturn in TiO2
prices that began in the third quarter of 1993. NL expects TiO2 prices will
begin to increase during the second quarter of 1997 as the impact of
recently-announced price increases begin to take effect. Despite the recent
decline in TiO2 average selling prices, industry-wide demand for TiO2 grew
in 1996, and Kronos' record 1996 sales volume was about 6% higher than 1995.
NL's expectations as to the future prospects of the TiO2 industry are based
upon several factors beyond NL's control, principally continued worldwide
growth of gross domestic product and the absence of technological advancements
in or modifications to TiO2 processes that would result in material and
unanticipated increases in production efficiencies. To the extent that actual
developments differ from NL's expectations, NL's 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 12% 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 market for TiO2could 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 growth in the Eastern European market.
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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 affected TiO2 consumption over the past decade
because extenders generally have, to date, failed to match the performance
characteristics of TiO2. NL believes that the use of extenders will not
materially alter the growth of the TiO2 business in the foreseeable future.
Kronos 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. Kronos' major customers
include domestic and international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
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' international operations are conducted through Kronos
International, Inc., a Germany-based holding company formed in 1989 to manage
and coordinate NL's manufacturing operations in Germany, Canada, Belgium and
Norway, and its sales and marketing activities in over 100 countries worldwide.
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, approximately one-half of Kronos' 1996 TiO2 sales were to Europe,
with 37% to North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process), 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.
TiO2 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 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 1996
represent approximately 56% of industry capacity.
Kronos currently operates four TiO2facilities in Europe (Leverkusen
and Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In
North America, Kronos has a facility in Varennes, Quebec, Canada and, through
the manufacturing joint venture described below, a one-half interest in a plant
in Lake Charles, Louisiana. Certain of NL's properties collateralize long-term
debt agreements and NL's Nordenham TiO2 plant has a lien that secures the
German tax authorities, pending resolution of certain tax litigation. 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 about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned
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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 facility. Both the lease and the supplies
and services agreement restrict Kronos' ability to transfer ownership or use of
the Leverkusen facility. All of Kronos' principal production facilities
described above are owned, except for the land under the Leverkusen facility.
Kronos has a governmental concession with an unlimited term to operate its
ilmenite mine in Norway.
Kronos produced 373,000 metric tons of TiO2 in 1996, compared to the
record 393,000 metric tons produced in 1995 and 357,000 metric tons in 1994.
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 inventories declined, Kronos' production rates were increased
to near full capacity in late 1996. Kronos believes its annual attainable
production capacity is approximately 400,000 metric tons, including its
one-half interest in the joint venture-owned Louisiana plant (see "TiO2
manufacturing joint venture"). Following the completion of the $35 million
debottlenecking expansion of its Leverkusen, Germany chloride-process plant in
late 1997, NL expects its worldwide annual attainable production capacity to
increase to approximately 410,000 metric tons.
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, Africa, Canada, India and the United States.
Kronos purchases slag refined from beach sand ilmenite from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa), approximately 50% of which
is owned by RTZ Iron and Titanium Inc. ("RTZ"), an indirect subsidiary of RTZ
Corp., under a long-term supply contract that expires in 2000. Natural rutile
ore, another chloride feedstock, is purchased primarily from RGC Mineral Sands
Limited (Australia), under a long-term supply contract that expires in 2000.
Raw materials under these contracts are expected to meet Kronos' chloride
feedstock requirements over the next several years. NL does not expect to
encounter difficulties obtaining new long-term supply contracts prior to the
expiration of its existing 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 1996. Kronos also purchases sulfate grade
slag under contracts negotiated annually with RTZ and, through 1997, with
Tinfos Titanium and Iron K/S.
Kronos believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate through the remainder of
the decade. 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 the countries from which NL purchases its
raw material supplies could adversely affect the availability of such
feedstock.
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TiO2 manufacturing joint venture. Subsidiaries of Kronos and
Tioxide Group, Ltd., a wholly-owned subsidiary of Imperial Chemicals Industries
PLC ("Tioxide"), each own a 50%-interest in a manufacturing joint venture. The
joint venture owns and operates a chloride-process TiO2 plant located in Lake
Charles, Louisiana. Production from the plant is shared equally by Kronos and
Tioxide (the "Partners") pursuant to separate offtake agreements.
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 daily 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
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
cost of sales as the related TiO2 acquired from the joint venture is sold,
and its share of the joint venture's interest expense is reported as a
component of interest expense.
Specialty chemicals products and operations. Rheological additives
control the flow and leveling characteristics for a variety of products,
including paints, inks, lubricants, sealants, adhesives and cosmetics.
Organoclay rheological additives are clays which have been chemically reacted
with organic chemicals and compounds. Rheox produces rheological additives for
both solvent-based and water-based systems. Rheox is the world's largest
producer of rheological additives for solvent-based systems and is also a
supplier of rheological additives used in water-based systems. Rheological
additives for solvent-based systems accounted for about 80% of Rheox's sales in
1996, with the remainder being principally rheological additives for
water-based systems. Rheox introduced a number of new products during the past
few years, the majority of which are for water-based systems, which are sold
into a larger market than solvent-based systems. NL believes water-based
additives will account for an increasing portion of its sales in the long term.
Specialty chemicals are produced by Rheox at facilities in Charleston, West
Virginia; Newberry Springs, California; St. Louis, Missouri; Livingston,
Scotland, and Nordenham, Germany. A portion of the land under the Livingston,
Scotland facility is leased from an unrelated party; all of the remaining
production facilities are owned.
Sales of rheological additives generally follow gross domestic product
growth in Rheox's principal markets and are influenced by the volume of
shipments of the worldwide coatings industry. Since a portion of Rheox's
rheological additives are used in industrial coatings, plant and equipment
spending has an influence on demand for this product line.
The primary raw materials utilized in the production of rheological
additives are bentonite clays, hectorite clays, quaternary amines, polyethylene
waxes and castor oil derivatives. Bentonite clays are currently purchased
under a three-year contract, renewable through 2004, with a subsidiary of
Dresser Industries, Inc. ("Dresser"), which has significant bentonite reserves
in Wyoming. This contract assures Rheox the right to purchase its anticipated
requirements of bentonite clays for the foreseeable future, and Dresser's
reserves are believed to be sufficient for such purpose. Hectorite clays are
mined from NL-owned reserves in Newberry Springs, California, which NL believes
are adequate to supply its needs for the foreseeable future. The Newberry
Springs ore body contains the largest known commercial deposit of hectorite
clays in the world. Quaternary amines are purchased primarily from a joint
venture that is 50%-owned by Rheox and are also generally available on the open
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market from a number of suppliers. Castor oil-based rheological additives are
purchased from sources outside the United States. Rheox has a supply contract
with a manufacturer of these products which may not be terminated without 180
days notice by either party.
Competition. The TiO2 industry is highly competitive. During the
early 1990s, 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 1980s, had a negative
impact during the subsequent downturn. During 1994 and the first half of 1995,
strong demand growth improved industry capacity utilization and resulted in
increases in worldwide TiO2 prices. Kronos believes that the increased
demand 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 in the second half of 1996,
indicating, Kronos believes, that customer inventories had returned to
more-normal levels. Price increases were announced in late 1996 by most major
TiO2 producers, including Kronos, and the results of such announcements are
expected to impact second-quarter 1997 operating results. No assurance can be
given than price trends will conform to NL's expectations.
Capacity additions that are the result of construction of grassroot
plants in the worldwide TiO2 market 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 plants. Based on the factors described
under the caption "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 few 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.
Kronos has an estimated 11% share of worldwide TiO2 sales volume, and
believes that it is the leading marketer of TiO2 in a number of countries,
including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("Du
Pont"); Imperial Chemical Industries PLC (Tioxide) ("ICI"); Millennium
Chemicals, Inc. (Millennium Inorganic Chemicals, Inc.), formerly a unit of
Hanson PLC; Kemira Oy; Kerr-McGee Corporation; Ishihara Sangyo Kaisha, Ltd.;
Bayer AG; and Thann et Mulhouse. In January 1997, ICI announced its intention
to spin off to its shareholders its Tioxide unit in the next six to eighteen
months. These eight competitors have estimated individual worldwide shares of
TiO2sales volume ranging from 3% to 21%, and an estimated aggregate 75% share
of TiO2sales volume. Du Pont has about one-half of total U.S. TiO2
production capacity and is Kronos' principal North American competitor.
Competition in the specialty chemicals industry generally focuses on
product uniqueness, quality and availability, technical service, knowledge of
end-use applications and price. Rheox's principal competitors for rheological
additives for solvent-based systems are Laporte PLC and Sud-Chemie AG. Rheox's
principal competitors for water-based systems are Rohm and Haas Company,
Hercules Incorporated, and Union Carbide Corporation.
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Research and development. NL's expenditures for research and
development and certain technical support programs have averaged approximately
$11 million annually during the past three years with Kronos accounting for
approximately three-quarters of the annual spending. Research and development
activities related to TiO2 are conducted principally at the Leverkusen,
Germany facility. Such activities are directed primarily toward improving both
the chloride and sulfate production processes, improving product quality and
strengthening Kronos' competitive position by developing new pigment
applications. Activities relating to rheological additives are conducted
primarily in the United States and are directed towards the development of new
products for water-based systems, environmental applications and new end-use
applications for existing product lines.
Patents and trademarks. Patents held for products and production
processes are believed to be important to NL and contribute to the continuing
business activities of Kronos and Rheox. 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. In connection with the formation of the manufacturing
joint venture with Tioxide, Kronos and certain of its subsidiaries exchanged
proprietary chloride process and product technologies with Tioxide and certain
of its affiliates. Use by each recipient of the other's technology in Europe
was restricted through October 1996. NL does not expect that the technology
sharing arrangement with Tioxide will materially impact NL's competitive
position within the TiO2 industry.
NL's major trademarks, including Kronos, Titanox and Rheox, are
protected by registration in the United States and elsewhere with respect to
those products it manufactures and sells.
Foreign operations. NL's chemical businesses have operated in
international markets since the 1920s. Most of Kronos' current production
capacity is located in Europe and Canada, and approximately one-third of
Rheox's sales in each of the past three years have been from European
production. Approximately three-quarters of NL's 1996 consolidated sales were
to non-U.S. customers, including 13% to customers in areas other than Europe
and Canada. Foreign operations are subject to, among other things, currency
exchange rate fluctuations and NL's results of operations have in the past been
both favorably and unfavorably affected by fluctuations in currency exchange
rates.
Political and economic uncertainties in certain of the countries in
which NL operates may expose it to risk of loss. NL does not believe that
there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. NL cannot
predict, however, whether events of this type in the future could have a
material effect on its operations. NL's manufacturing and mining operations
are also subject to extensive and diverse environmental regulation in each of
the foreign countries in which they operate.
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 the 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. Sales
of rheological additives are influenced by the worldwide industrial protective
coatings industry, where second calendar quarter sales are generally the
strongest.
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Employees. As of December 31, 1996, NL employed approximately 3,100
persons, excluding the joint venture employees, with approximately 400
employees in the United States and approximately 2,700 at sites outside the
United States. 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 good.
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. The policy of NL is to achieve compliance with applicable
environmental laws and regulations at all 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 consolidated financial position, results of operations or
liquidity.
NL's U.S. manufacturing operations 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 all of its U.S. plants and the Louisiana plant
owned and operated by the joint venture are in substantial compliance with
applicable requirements of these laws or compliance orders issued thereunder.
From time to time, NL's 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 that all its 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 (the "EU"). Germany, Belgium and the United
Kingdom, each a member of the EU, follow the initiatives of the EU. Norway,
although not a member, generally patterns its environmental regulatory actions
after the EU. NL believes that Kronos 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 also believes that Rheox is in substantial compliance with the environmental
regulations in Germany and the United Kingdom.
18
<PAGE> 21
NL has a contract with a third party to treat certain of its
Leverkusen and Nordenham, Germany sulfate-process effluents. Either party may
terminate the contract after giving four years notice with regard to the
Nordenham plant. After December 1998 and under certain circumstances, Kronos
may terminate the contract after giving six months notice with regard to the
Leverkusen plant.
In order to reduce sulfur dioxide emissions into the atmosphere
consistent with applicable environmental regulations, Kronos is completing the
installation of off-gas desulfurization systems at its Norwegian and German
plants at an estimated cost of $30 million. The manufacturing joint venture
installed a $16 million off-gas desulfurization system at the Louisiana plant
and Kronos completed an $11 million water treatment chemical purification
project at its Leverkusen, Germany facility in 1996.
The Quebec provincial government has environmental regulatory
authority over Kronos' Canadian chloride and sulfate-process TiO2 production
facility in Varennes, Quebec. The provincial government regulates discharges
into the St. Lawrence River. In May 1992, the Quebec provincial government
extended Kronos' right to discharge effluents from its Canadian sulfate-process
TiO2 plant into the St. Lawrence River until June 1994. Kronos completed a
waste acid neutralization facility and discontinued discharging untreated waste
acid effluents into the St. Lawrence River in June 1994. Notwithstanding the
foregoing, in March 1993, Kronos' Canadian subsidiary and two of its directors
were charged by the Canadian federal government with five violations of the
Canadian Fisheries Act relating to discharges into the St. Lawrence River from
the Varennes sulfate-process TiO2 plant. The monetary penalty for these
violations, if proven, could be up to Canadian $15 million. Additional
charges, if brought, could involve additional penalties. NL believes that this
charge is inconsistent with the extension granted by provincial authorities,
referred to above, and is vigorously contesting the charge. A trial date has
been set for May 1997.
NL's capital expenditures related to its ongoing environmental
protection and improvement programs are currently expected to be approximately
$3 million in 1997 and $5 million in 1998.
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,
or its subsidiaries, or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's ("U.S. EPA") Superfund National Priorities
List or similar state lists.
These proceedings seek cleanup costs, damages for personal injury or
property damage, or both. 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 PRP's who may also be
jointly and severally liable.
The extent of CERCLA liability cannot accurately 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 PRP's. 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, 1996, NL had accrued $113 million
for those environmental matters which are reasonably estimable. NL determines
the amount of
19
<PAGE> 22
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. During the first
quarter of 1997, NL expects to recognize a noncash cumulative charge of
approximately $30 million to include legal fees and other costs of managing and
monitoring environmental remediation sites as required by the adoption of the
AICPA's Statement of Position 96-1, "Environmental Remediation Liabilities."
The charge is not expected to materially change NL's 1997 tax expense due to
existing net operating losses for which no benefit is expected to be
recognized. 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 $160 million. NL's estimate of such liability has 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 either
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 PRP's 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.
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 (a) 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 (b) 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. 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. 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 by NL.
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. To date, one court has granted NL's motion for summary judgment
to pay to NL the reasonable defense costs of certain of NL's lead pigment cases,
however, the U.S. Court of Appeals for the Third Circuit reversed and remanded
for further consideration the decision by the trial court applying New York law
instead of New Jersey law which the trial court previously applied. On remand
from the Court of Appeals, the trial court in
20
<PAGE> 23
April 1996 granted NL's motion for summary judgment, finding that the insurance
carrier had a duty to defend NL in the subject lead paint cases. The court
also issued a partial ruling on the insurance carrier'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 certain lead paint
actions on which the court had previously granted NL summary judgment. The
court ruled that the insurance carrier is entitled to receive such contribution
from NL and the two other 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 it
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. Other than granting motions for summary judgment brought by
two excess liability insurance carriers, which contended that their policies
contained absolute 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. The Court has not made any final ruling on indemnity coverage in
the lead pigment litigation. No trial dates have been set. Other than rulings
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.
OTHER ITEMS:
NLI Insurance, Ltd. The Company's captive insurance subsidiary
("NLI Insurance, Ltd.") reinsured certain comprehensive general liability, auto
liability, workers' compensation and employers' liability risks to the Company,
Baroid, NL and their respective subsidiaries, and also participated on various
third party reinsurance treaties. As described in Note 12 to the Consolidated
Financial Statements, Baroid and NL have entered into insurance sharing
agreements with NLI Insurance, Ltd. whereby Baroid and NL, respectively, would,
among other things, reimburse NLI Insurance, Ltd. for certain loss payments and
reserves. NLI Insurance, Ltd. currently provides certain property and
liability insurance coverage to Tremont, TIMET and NL. However, the risk
associated with these policies are completely reinsured into the commercial
reinsurance market. All of the Company's unrelated reinsurance business is in
run-off. In 1994, Baroid was acquired by Dresser.
Other joint ventures. Prior to October 1995, TIMET held 32% of the
outstanding common stock of Basic Investments, Inc. ("BII"). Through its
subsidiaries, including Basic Management, Inc. ("BMI") and Victory Valley Land
Company, L.P. ("VVLC"), BII provides utility services to, and owns property
(the "BMI Complex") adjacent to, TIMET's plant in Henderson, Nevada, a suburb
of Las Vegas. BII, through VVLC, is actively engaged in efforts to develop for
commercial, industrial, and residential purposes approximately 3,000 acres of
land surrounding the BMI Complex. TIMET had a 12% limited partnership interest
in VVLC, which it acquired in exchange for certain water rights transferred to
VVLC. A wholly-owned subsidiary of BII and the other stockholders of BII own
the balance of the partnership interests in VVLC. In October 1995, TIMET made
a prorata distribution to its shareholders of a newly formed entity ("TRECO")
which held all of its interest in BII and VVLC, and certain real estate in
Nevada. As a result, Tremont holds a 75% equity interest in TRECO and UTSC
holds a 25% equity interest.
21
<PAGE> 24
REGULATORY AND ENVIRONMENTAL MATTERS:
Regulatory and environmental matters for TIMET and NL are discussed in
their respective business sections contained elsewhere herein and in Item 3 -
"Legal Proceedings." In addition, the information included in Note 13 to the
Consolidated Financial Statements is incorporated herein by reference.
In 1993, the Company entered into a settlement agreement with the
Arkansas Division of Pollution Control and Ecology in connection with certain
alleged water discharge permit violations at one ("Dempsey-Cogburn") of several
abandoned barite mining sites in Arkansas. The settlement agreement, in
addition to requiring the payment in 1993 of a $20,000 penalty, required the
Company to undertake a remediation/reclamation program which is nearing
completion at a total cost of approximately $2 million. Another of the sites
("Magnet Cove"), of which the Company is only one of several owners, is
currently being evaluated by the U.S. EPA. Based upon its evaluation, the U.S.
EPA could require the owners to take investigatory or remedial action at the
site, however, the Company believes that to the extent it has any liability for
remediation at this site, it is only one of a number of apparently solvent PRPs
that would ultimately share in such costs. As of December 31, 1996, the
Company had accrued $5 million related to these matters.
The Company determines the amount of its accruals for environmental
matters on a quarterly basis by analyzing and estimating the range of possible
costs in light of the available information. Because of a lack of relevant
information, it is not possible to estimate the range of costs for certain
sites. The imposition of more stringent standards or requirements under
environmental laws or regulations, the results of future testing and analysis
undertaken by the Company at its non-operating facilities, 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 to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance
that additional environmental matters will not arise in the future. The
Company currently believes the disposition of all of its environmental matters,
individually or in the aggregate, should not have a material adverse effect on
the Company's business, results of operations, financial condition, or cash
flows. The Company, TIMET and NL, will each adopt the recognition and
disclosure requirements of AICPA's Statement of Position No. 96-1,
"Environmental Remediation Liabilities" in 1997. The new rule, among other
things, expands the types of costs which must be considered in determining
environmental remediation accruals. The Company and TIMET do not expect the
effect of adopting this new Statement of Position to be material and, as
discussed above under "Unconsolidated Affiliate - NL - Regulatory and
Environmental Matters", NL expects to recognize a noncash cumulative charge of
approximately $30 million during the first quarter of 1997.
22
<PAGE> 25
ITEM 2: PROPERTIES
The Company's principal executive offices are leased and located at
1999 Broadway, Suite 4300, Denver, Colorado 80202.
The principal properties used in the operations of TIMET and NL are
described in their respective business sections of Item 1 - "Business." The
Company believes, and understands that TIMET and NL believe, that their
respective facilities are adequate and suitable for their respective uses.
ITEM 3: LEGAL PROCEEDINGS
The Company, TIMET and NL are involved in various legal proceedings.
Information called for by this Item, except for information regarding certain
of TIMET's and NL's legal proceedings that have been summarized, is included in
Item 1 and Note 13 to the Company's Consolidated Financial Statements, which
information is incorporated herein by reference. Information called for by
this Item regarding TIMET's and NL's legal proceedings that have been
summarized in Item 1 and Note 13 to the Company's Consolidated Financial
Statements is included in Item 3 of TIMET's and NL's Annual Report on Form 10-K
for the year ended December 31, 1996 as Exhibits 99.1 and 99.2, respectively,
of this Annual Report on Form 10-K, and are incorporated herein by reference.
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, 1996.
23
<PAGE> 26
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Tremont's common stock is traded on the New York and Pacific Stock
Exchanges (symbol: TRE). As of March 27, 1997, there were approximately 7,500
holders of record of Tremont common stock and the closing price of the
Company's common stock according to the New York Stock Exchange Composite Tape
was $34.50 per share. The high and low sales prices for the Company's common
stock, according to the NYSE Composite Tape, are set forth below.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended December 31, 1996:
First quarter $34 $15 1/2
Second quarter 40 3/4 28
Third quarter 36 31 1/8
Fourth quarter 39 1/8 32
Year ended December 31, 1995:
First quarter $14 $11
Second quarter 17 12 1/4
Third quarter 20 7/8 15 7/8
Fourth quarter 21 1/4 16 5/8
</TABLE>
The Company has not declared any cash dividends on its common stock
since 1992. Any payment of future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, cash requirements for its businesses,
cash availability and contractual restrictions with respect to payment of
dividends.
24
<PAGE> 27
ITEM 6: SELECTED HISTORICAL FINANCIAL DATA
The following selected consolidated 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,
-----------------------------------------------------------------------
1992 (c) 1993 (c) 1994 (c) 1995 (c) 1996
----------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
(In millions)
INCOME STATEMENT DATA:
Equity in earnings (loss) of:
TIMET $ (9.7) $(20.2) $(31.6) $ (3.2) $ 16.0
NL Industries (10.9) (44.8) (7.6) 11.4 (1.8)
Other joint ventures - - - - 2.5
------ ------ ------ ------ ------
$(20.6) $(65.0) $(39.2) $ 8.2 $ 16.7
====== ====== ====== ====== ======
Gain on sale of TIMET stock $ - $ - $ - $ - $ 27.6
====== ====== ====== ====== ======
Income (loss) from:
Continuing operations $(34.1) $(60.1) $(42.9) $ 5.4 $ 30.0
Discontinued operations (a) .4 7.5 - - -
Extraordinary item - (5.0) - - -
Cumulative effect of changes in
accounting principles (b) (31.9) - (.8) - -
------ ------ ------ ------ ------
$(65.6) $(57.6) $(43.7) $ 5.4 $ 30.0
====== ====== ====== ====== ======
INCOME (LOSS) PER SHARE:
Continuing operations $(4.64) $(8.18) $(5.83) $ .73 $ 3.91
Discontinued operations .06 1.02 - - -
Extraordinary item - (.68) - - -
Cumulative effect of changes in - - - - -
accounting principles (b) (4.34) - (.10) - -
------ ------ ------ ------ ------
Net income (loss) $(8.92) $(7.84) $(5.93) $ .73 $ 3.91
====== ====== ====== ====== ======
Cash dividends declared $ .60 $ - $ - $ - $ -
====== ====== ====== ====== ======
BALANCE SHEET DATA (at year end):
Cash and cash equivalents $ 3.8 $ 2.2 $ 3.8 $ 2.7 $ 68.0
Total assets 196.5 161.4 116.8 134.9 223.5
Indebtedness - - - 6.0 -
Stockholders' equity 149.3 118.4 76.0 83.7 158.0
</TABLE>
- --------------------------
(a) The Company's bentonite mining business was sold during 1993.
(b) See Note 11 to the Consolidated Financial Statements regarding changes in
accounting principles.
(c) Reclassified to report the Company's interest in TIMET by the equity
method of accounting for all periods presented. See Note 1 to the
Consolidated Financial Statements.
25
<PAGE> 28
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Tremont corporation is principally a holding company with operations
conducted through TIMET and NL. The Company holds 30% of the outstanding
common stock of TIMET and 18% of NL's outstanding common stock. The results
of TIMET, NL, general corporate and other items are discussed below.
TIMET:
The Company's 30% interest in TIMET is reported by the equity method.
Tremont's equity in TIMET's 1996 earnings differs from the amount that would be
expected by applying Tremont's current 30%-ownership percentage to TIMET's
separately-reported earnings because of changes in Tremont's level of ownership
in TIMET during 1996. The information included below relating to the financial
position, results of operations and liquidity and capital resources of TIMET
has been summarized from reports filed with the Commission by TIMET (File No.
0-28538), which reports contain more detailed information concerning TIMET,
including complete financial statements.
In 1995, TIMET and the worldwide titanium industry began recovering
from the depressed industry conditions that existed during the prior several
years. The aerospace industry in recent history has accounted for
approximately 65% of U.S. and 40% of worldwide titanium mill products
consumption and has had a significant effect on the overall sales and
profitability of the titanium industry. The aerospace industry, and
consequently the titanium metals industry, is highly cyclical. Until recently,
TIMET and the industry had been significantly and adversely affected by excess
worldwide production capacity, depressed levels of spending for both military
and commercial aircraft, and depressed selling prices resulting from, among
other things, weak demand, relatively inexpensive titanium scrap, sponge and
other mill products, principally from Russia and other countries comprising the
former Soviet Union. However, TIMET estimates that U.S. industry shipments of
titanium mill products in 1995 increased 26% and further increased 31% in 1996
to approximately 57 million pounds. Industry shipments had previously remained
relatively flat in the period between 1991 and 1994. TIMET also estimates that
U.S. industry mill products shipments to the commercial aerospace market in
1996 approximated 25 million pounds, a 40% increase over 1995 levels following
an 18% increase in 1995 over 1994. While worldwide industry shipments are not
as readily tracked as U.S. shipments (in large part due to uncertainties of
shipments by companies located in the former Soviet Union), TIMET believes U.S.
trends are a reasonable proxy for worldwide trends.
The titanium industry's recent improvement is due to a combination of
factors, including a resurgence in commercial aerospace demand, continued and
stable industrial demand, an end to customer inventory drawdowns, and the
emergence of new uses of titanium metal, including golf club heads. The
economic health of the commercial airline industry, the largest end market for
titanium, has improved significantly. Reported orders for new commercial
aircraft have increased significantly, particularly for wide body aircraft like
the Boeing 777, which use more titanium per plane than narrow body aircraft.
Although military aircraft deliveries continue to remain lower than deliveries
in the 1980s due to constrained defense budgets, sales to industrial markets in
1995 and 1996 have continued at strong levels and are expected to do so during
1997.
26
<PAGE> 29
TIMET's order backlog increased to approximately $440 million at
December 31, 1996, from $226 million at December 31, 1995 (which amount is
proforma for the IMI Titanium and AJM Acquisitions). TIMET defines "order
backlog" as firm purchase orders (which are generally subject to cancellation
by the customer upon payment of specified charges).
Beginning during the second half of 1995 and continuing into 1997,
TIMET has experienced a significant increase in requests for quotations,
increased orders and increased prices on accepted orders. TIMET estimates that
as of December 31, 1996, orders for over half of its anticipated 1997 shipments
have been booked at average selling prices (contracted or anticipated based
upon current negotiations) approximately 10% higher than its 1996 average
selling prices. The increase in average selling prices on new orders is partly
attributable to the renegotiation of certain long-term customer agreements at
higher prices. The increase in industry demand has been driven primarily by
the recovery in the commercial aerospace market. As capacity utilization in
the titanium industry continues to grow and delivery lead times lengthen, TIMET
expects prices on new orders to continue to strengthen in 1997, although there
can be no assurance that this trend will continue or not be reversed.
The increase in demand for titanium products has contributed to the
upward pressure on prices for certain raw materials used by TIMET, including
alloying materials, titanium scrap and titanium sponge. TIMET currently is a
significant purchaser of titanium sponge, despite having over 30 million pounds
of internal practical sponge production capacity. Prices for titanium sponge
under the terms of TIMET's sponge purchase contracts are specified for 1997 for
the contracted quantity. Purchases of sponge above the contracted quantity
would likely be at higher prices. TIMET expects increased selling prices to
more than offset any raw material cost increases in 1997, although there can be
no assurance that recent price increases will continue or not be reversed.
TIMET's castings sales to the golf club market were approximately 5%
of its proforma 1996 sales. In December 1996, TIMET Castings laid off
approximately one-half of its production employees at its Pomona, California
facility following a reduction in demand from one of its major golf club
manufacturing customers. The reduction in golf club business and the related
layoffs are not expected to have a material adverse effect on TIMET.
TIMET's 1996 results of operations include the effects of acquisitions
accounted for by the purchase method and, accordingly, are not directly
comparable to results for 1995. The proforma financial information for 1996
and 1995 has been prepared assuming the IMI Titanium Acquisition and the AJM
Acquisition had occurred at the beginning of 1995. The proforma financial
information is not necessarily indicative of the operating results that might
have occurred if the transactions had been completed at such date or the
operating results which may occur in the future.
27
<PAGE> 30
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
Proforma
---------------------
1994 1995 1996 1995 1996
---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(In millions) (In millions)
Net sales $146.0 $184.7 $507.1 $ 380.0 $ 564.4
====== ====== ====== ========= =========
Operating income (loss) $(34.7) $ 5.4 $ 59.8 $ (37.7) $ 59.8
======== =========
General corporate income, net .3 1.0 1.0
Interest expense 7.5 10.4 10.2 $ 24.4 $ 17.3
------ ------ ------ ======== =========
(41.9) (4.0) 50.6
Income taxes .2 .2 1.9
Minority interest - - 1.1
------ ------ ------
Income (loss) before cumulative effect
of a change in accounting principle $(42.1) $ (4.2) $ 47.6 $ (48.6) $ 43.2
====== ====== ====== ======== =========
Tremont's equity in TIMET's income (loss) $(31.6) $ (3.2) $ 16.0
====== ====== ======
</TABLE>
1996 compared to 1995. All 1996 to 1995 mill products price and
volume comparisons in this discussion are proforma assuming the IMI Titanium
Acquisition and the AJM Acquisition occurred at the beginning of 1995. The
proforma effect of TISTO and TIMET Savoie on price and volume information is not
material.
The significant improvement in sales and operating income in 1996 was
driven by price and volume increases for titanium products in both commercial
aerospace and other markets. Sales volume of titanium mill products increased
27% to 27.2 million pounds while average selling prices in 1996 were up
approximately 16% over 1995.
The selling price increases reflect both the pass-through of cost
increases, particularly raw material costs, and real price improvement
associated with increased market demand. Although TIMET and the titanium
industry are continuing to experience increases in the cost of certain raw
materials, TIMET's increased selling prices have more than offset those cost
increases. Prices on recent orders for titanium products have continued to
increase relative to 1996 levels although there can be no assurance that this
trend will continue.
Operating levels at TIMET's plants in 1996 were higher than in 1995
and contributed to the better operating results. The VDP titanium sponge plant
operated at approximately 85% of its annual practical capacity of 20 million
pounds in 1996 compared to about 75% of capacity in 1995. TIMET presently
expects its VDP plant to operate at about practical capacity in 1997 if current
conditions continue. TIMET restarted production of titanium sponge at its
original Kroll-leach facility during the second quarter of 1996 in response to
demand for certain grades of titanium sponge. TIMET presently intends to
increase Kroll-leach titanium sponge production to approximately 10 million
pounds of annual production in 1997. Costs to
28
<PAGE> 31
restart the Kroll-leach facility in 1996 approximated $2 million. In 1996,
TIMET's worldwide mill product capacity utilization approximated 80%.
Operating income in 1996 also included a special charge of $4.8
million compared to a restructuring credit of $1.2 million in 1995.
TIMET has substantial operations and assets located in Europe,
principally the United Kingdom. The U.S. dollar value of TIMET's foreign sales
and operating costs are subject to currency exchange rate fluctuations which
may slightly impact reported earnings and may affect the comparability of
period-to-period operating results. Approximately one-half of TIMET's European
sales are denominated in currencies other than the U.S. dollar, principally
major European currencies. Certain purchases of raw materials, principally
titanium sponge, for TIMET's European operations are denominated in U.S.
dollars while labor and other production costs are primarily denominated in
local currencies.
Interest expense in 1996 was slightly lower than in 1995 principally
due to relative average borrowing levels. Annual interest expense related to
the 6.625% Convertible Preferred Securities issued in November 1996
approximates $13.6 million, including amortization of financing costs.
1995 compared to 1994. Sales volume of sponge, ingot and mill
products in 1995 increased to 18.7 million pounds, a 20% improvement over 1994
levels. Shipments of titanium products for industrial applications were up
moderately compared to 1994 while aerospace volumes showed greater improvement
than industrial applications. The 9% increase in average selling prices in 1995
over 1994 reflects both the pass-through of certain cost increases and real
price improvement associated with increased market demand. TIMET's dollar
denominated export sales benefited during 1995 from the relative weakness in
the value of the U.S. dollar versus certain other currencies.
Operating levels at all of TIMET's plants were higher in 1995 than
1994 and contributed to the better operating results relative to 1994. The
higher production levels were partly attributable to the absence of work
stoppages in 1995, and improved VDP related equipment reliability during the
second half of 1995. The VDP plant operated at about 75% of its practical
capacity in 1995, compared with 45% in 1994. Depreciation expense increased
$4.9 million in 1995 over 1994 principally as a result of the units of
production method used to depreciate the VDP plant.
TIMET's operating income in 1995 includes $3.7 million of equity in
earnings of then 50%-owned THT, more than double the $1.6 million in 1994.
Operating income in 1995 also included a restructuring credit of $1.2
million compared to a $10 million charge in 1994.
Interest expense increased in 1995 compared to 1994 principally due to
higher average borrowings under TIMET's U.S. credit facility and higher average
interest rates effective on such debt.
Income taxes - 1996, 1995 and 1994. TIMET's income tax rate in 1996
varied from the U.S. statutory rate principally due to a $7 million reduction
in the deferred tax valuation allowance to reflect the utilization of a portion
of its U.S. net operating loss carryforwards ("NOLs") in 1996 and a $10 million
reduction in the deferred tax valuation allowance resulting from a change in
estimate of the NOL and AMT carryforwards that will more likely than not be
realized in the future. TIMET's effective income tax rates in each of 1994 and
1995 varied from the U.S. statutory rate
29
<PAGE> 32
due to losses for which recognition of a deferred tax asset was not considered
appropriate at the time.
TIMET operates in several tax jurisdictions and is subject to varying
income tax rates. For financial reporting purposes, TIMET has recognized
substantially all of its carryforwards and, accordingly, expects that its
effective income tax rate beginning in 1997 will increase. Such effective rate
may be slightly higher than the statutory U.S. federal rate due to the combined
effects of state income taxes and varying non-U.S. rates.
NL INDUSTRIES, INC.:
The Company's 18% interest in NL is reported by the equity method.
Tremont reports its 18% interest in NL by the equity method due to the fact
that Tremont and NL may be deemed to be under common control by reason of stock
ownership and common directors and executive officers. Valhi, Inc. and Tremont
together may be deemed to control NL. The information included below relating
to the financial position, results of operations and liquidity and capital
resources of NL has been summarized from reports filed with the Commission by
NL (File No. 1-640), which reports contain more detailed information concerning
NL, including complete financial statements on NL's historical basis of
accounting.
Tremont's equity in earnings of NL differs from the amount that would
be expected by applying Tremont's ownership percentage to NL's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by Tremont in conjunction with the acquisitions of
its interest in NL. Amortization of such basis differences generally reduces
earnings, and increases losses, attributable to NL as reported by Tremont.
NL's operations are conducted in two business segments - Ti2 conducted
by Kronos and specialty chemicals conducted by Rheox. As discussed below, TiO2
selling prices increased during 1994 and the first half of 1995, but declined
in the last half of 1995 and during 1996. Kronos' operating income and margins
improved during 1995, but declined in 1996.
Many factors influence TiO2 pricing levels, including industry
capacity, worldwide demand growth and customer inventory levels and purchasing
decisions. Kronos believes the decline in prices in 1996 was due, in part, to
the impact of recent debottlenecking projects increasing capacity, TiO2
customers reducing inventory levels in a period of declining prices, and
greater competition for sales volume with more industry capacity available.
Kronos believes that the TiO2 industry has long-term growth potential.
30
<PAGE> 33
<TABLE>
<CAPTION>
Years ended December 31, Change
--------------------------------------- ---------------------
1994 1995 1996 1994-95 1995-96
----------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
(in millions)
Net sales:
Kronos $770.1 $ 894.1 $851.2 +16% -5%
Rheox 117.9 129.8 134.9 +10% +4%
------ -------- ------
$888.0 $1,023.9 $986.1 +15% -4%
====== ======== ======
Operating income:
Kronos $ 80.6 $ 161.2 $ 71.6 +100% -56%
Rheox 30.8 38.5 41.8 +25% +8%
------ -------- ------
111.4 199.7 113.4 +79% -43%
General corporate items:
Securities earnings 3.9 7.4 4.7
Corporate expenses, net (44.8) (26.6) (17.5)
Interest expense (83.9) (81.6) (75.0)
------ -------- ------
(13.4) 98.9 25.6 $112.3 $(73.3)
Income taxes 9.7 12.7 14.8
Minority interest .9 .6 -
------ -------- ------
Net income (loss) $(24.0) $ 85.6 $ 10.8 $109.6 $(74.8)
====== ======== ====== ========= =========
Tremont's equity in
earnings (loss) of NL,
including amortization of
basis differences $ (7.6) $ 11.4 $ (1.8) $ 19.0 $(13.2)
====== ======== ====== ========= =========
Percent change in TiO2:
Sales volume -3% +6%
Average selling prices +15% -9%
(in billing currencies)
</TABLE>
Kronos' operating income in 1996 was lower than 1995 primarily due to
lower average Ti2 selling prices, partially offset by higher sales volumes. In
billing currency terms, Kronos' 1996 average TiO2 selling prices were
approximately 9% lower than in 1995. Average selling prices in the fourth
quarter of 1996 were 17% lower than the fourth quarter of 1995 and were 3%
lower than the third quarter of 1996. Selling prices at the end of 1996 were
17% below year-end 1995 levels, 8% below the average for 1996 and were 1% below
the average selling prices during the fourth quarter of 1996. The improvement
in Kronos' 1995 results over 1994 was primarily due to 15% higher average TiO2
selling prices and higher TiO2 production volumes, partially offset by lower
TiO2 sales volumes.
31
<PAGE> 34
Kronos' cost of sales in 1996 was higher than 1995 due to higher sales
volumes and higher unit costs, primarily due to lower production levels.
Kronos' costs of sales in 1995 was higher than 1994 due to slightly higher
manufacturing costs, partially offset by lower sales volumes. As a percentage
of net sales, cost of sales increased in 1996 and decreased in 1995 primarily
due to the impact on net sales of changes in the average selling price during
the respective years.
Kronos' selling, general and administrative expenses declined in 1996
from the previous year, as a result of continuing cost containment efforts,
while 1995's expense was higher than 1994 due to the unfavorable effect of
changes in currency exchange rates.
Record sales volume of 388,000 metric tons of TiO2 in 1996 increased
6% compared to 1995, with improvements in all major markets, including a 10%
increase in North America. Sales volumes in the second half of 1996 were 16%
higher than the same period in 1995. In response to soft 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 declined, Kronos' production rates were increased to near
full capacity in late 1996 and the average capacity utilization was 95% for the
year. Kronos' production rates were 94% of its capacity in 1994 and at full
capacity in 1995. Approximately one-half of Kronos' 1996 TiO2 sales, by
volume, were attributable to markets in Europe with approximately 37%
attributable to North America and the balance to other regions.
Demand, supply and pricing of Ti2 have historically been cyclical.
Kronos anticipates its TiO2 operating margins will begin to improve in the
second quarter of 1997 as the impact of recently-announced TiO2 price increases
takes effect; however, Kronos expects its 1997 operating income will be below
that of 1996, primarily because of lower anticipated average TiO2 prices for
1997 compared to 1996 and lower technology fee income. Demand for TiO2 in 1996
increased over 1995 and Kronos expects demand to remain strong in 1997. Kronos
believes continued growth in demand should result in significant improvement in
average selling prices over the longer term.
Rheox's operating income improved in 1996 compared to 1995 due to 5%
higher sales volumes, lower selling, general and administrative expenses and a
$2.7 million gain related to the curtailment of certain U.S. employee pension
benefits, partially offset by slightly higher manufacturing costs. Operating
income increased in 1995 over 1994 due to 5% higher sales volumes and higher
average selling prices partially offset by higher raw material costs. Rheox's
cost of sales increased in 1995 and 1996 over the respective prior year
primarily due to higher sales volumes, and cost of sales as a percentage of net
sales were approximately the same level in 1994, 1995 and 1996. Selling,
general and administrative expenses decreased slightly in 1996 compared to 1995
due to lower variable compensation expense, and selling, general and
administrative expenses in 1995 approximated 1994 amounts.
NL has substantial operations and assets located outside the United
States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
value of the Company's foreign sales and operating costs is subject to currency
exchange rate fluctuations which may slightly impact reported earnings and may
affect the comparability of period-to- period operating results. A significant
amount of the Company's sales are denominated in currencies other than the U.S.
dollar (61% in 1996), principally major European currencies and the Canadian
dollar. Certain purchases of raw materials, primarily titanium-containing
feedstocks, are denominated in U.S. dollars, while labor and other production
costs are primarily denominated in local currencies.
32
<PAGE> 35
Fluctuations in the value of the U.S. dollar relative to other currencies
decreased 1996 sales by $14 million compared to 1995 and increased 1995 sales
by $54 million compared to 1994.
Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Corporate expenses, net in 1996 were lower than
1995 due to lower provisions for environmental remediation cost. Corporate
expenses, net were significantly lower in 1995 compared to 1994 due to lower
provisions for environmental remediation and litigation costs. NL expects
corporate expenses, net in 1997 will exceed that of 1996, primarily due to
approximately $30 million of additional environmental remediation accruals
related to the adoption of a new accounting standard.
Interest expense in 1996 declined compared to 1995 principally due to
lower interest rates on variable rate debt, principally Kronos' Deutsche
mark-denominated debt, partially offset by higher levels of such DM-denominated
debt. Interest expense in 1995 declined compared to 1994 due to lower levels
of debt, principally DM-denominated debt, and lower interest rates on such
DM-denominated debt. In January 1997, NL refinanced certain U.S. debt and
prepaid certain DM-denominated debt, and expects its interest expense will be
higher in 1997 compared to 1996 as a result of higher anticipated interest
rates and average debt levels.
NL's operations are conducted on a worldwide basis and the geographic
mix of income can significantly impact NL's effective income tax rate. In 1994
and 1996, the geographic mix of income, including losses in certain
jurisdictions for which no current refund was available and recognition of a
deferred tax asset was not considered appropriate, contributed to NL's
effective tax rate varying from a normally-expected rate.
Due to NL's higher U.S. earnings before taxes in 1995, NL's valuation
allowance was reduced by approximately $10 million due to a change in estimate
of the future tax benefit of certain U.S. tax credits which NL believes
satisfies the "more-likely-than-not" recognition criteria. During 1995, NL
also recorded deferred tax benefits of $6.6 million due to the reduction in
dividend withholding tax rates pursuant to ratification of the U.S./Canada
income tax treaty.
The Company periodically evaluates the net carrying amount of its
investment in affiliates to determine if there has been any decline in value
that is considered to be other than temporary and would, therefore, require a
write- down accounted for as a realized loss. The Company's per share net
carrying amount of its investment in NL at December 31, 1996 was about $2.95
per share, compared to a quoted per share market value of about $10.88 at that
date. The Company's per share net carrying value of its investment in TIMET at
December 31, 1996 was about $10.34 per share, compared to a quoted per share
market price of $32.875 at that date.
TREMONT:
Corporate expenses, net and other items. Tremont's corporate expenses,
net for 1996 include a $2 million special compensation accrual to an executive
officer of the Company as approved by the Company's Board of Directors.
Certain amounts of the compensation award have been deferred under an agreement
between the Company and the executive officer.
In connection with the Stock Offering in June, 1996, the Company sold
2.2 million shares of TIMET common stock with net proceeds of approximately $47
million, resulting in a pre-tax gain of $27.6 million.
33
<PAGE> 36
Income taxes. The Company's income tax rate in 1996 varied from the
U.S. statutory rate principally due to a reduction in the deferred tax
valuation allowance to reflect the current utilization of its U.S. NOLs. The
Company's income tax rate varied from the U.S. statutory rate in 1994 due to no
benefit being recognizable on equity in losses of unconsolidated affiliates and
in 1995, due principally to a reduction in its valuation allowance related to
no income tax provision being required on equity in earnings of NL.
At December 31, 1996, the Company has no outstanding U.S. NOLs for
federal income tax purposes. The Company's income tax rate in 1997 is expected
to be substantially higher than the statutory federal tax rate due to no tax
benefit being recognizable on the expected equity in losses from its investment
in NL.
34
<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
Tremont Corporation
The Company's 1996 reported earnings improved significantly from 1995
and the loss in 1994 primarily due to improved earnings of TIMET and the gain
on the sale of TIMET common stock. The Company's $65 million increase in cash
and cash equivalents during 1996 was the result of the Company's sale of TIMET
common stock and TIMET's repayment of loans to the Company from proceeds of
TIMET's Stock Offering. The Company's equity in earnings of TIMET and NL are
primarily noncash. NL resumed cash dividends in the first quarter of 1996 and
paid three quarterly cash dividends during 1996 at the rate of $.10 per NL share
per quarter aggregating $2.7 million. NL suspended its quarterly dividend in
October 1996. TIMET did not pay any cash dividends during the last three years.
Certain TIMET and NL debt agreements presently limit dividend payments from
these affiliates as described in Note 4 to the Consolidated Financial
Statements. Relative changes in assets and liabilities did not materially
impact the Company's cash flow from operating activities.
Tremont, with its 30% interest in TIMET and 18% interest in NL at
December 31, 1996, is principally a holding company operating through TIMET and
NL. The Company had cash and cash equivalents of $68 million at December 31,
1996. At December 31, 1996, Tremont's 9.5 million shares of TIMET common stock
and 9.1 million shares of NL common stock had a market value of about $313
million and $99 million, respectively. At December 31, 1996 Tremont had the
right to acquire 1.5 million shares of TIMET's common stock from IMI with a
quoted market value of $32.875 per share, or an aggregate $49 million, for an
aggregate purchase price of $12 million ($7.95 per TIMET share). Tremont also
had approximately $15 million of letters of credit outstanding under a third
party credit agreement at December 31, 1996.
Tremont's intercompany loans plus accrued interest due from TIMET
aggregating $22.5 million were repaid with a portion of the net proceeds TIMET
received in 1996 from the Stock Offering. Additionally, in connection with the
Stock Offering, Tremont sold 2.2 million shares of TIMET common stock for net
proceeds of approximately $47 million.
In 1995, Tremont borrowed $2.5 million under a margin loan with an
investment bank which was repaid in 1996. Tremont also entered into a $15
million revolving credit agreement with Contran Corporation in 1995. Tremont
repaid the loan from Contran in 1996 and terminated the agreement.
In February 1997, the Company's Board of Directors authorized the
repurchase of up to 2 million shares of its common stock in open market or
privately negotiated transactions. Such shares represent approximately 27% of
the Company's 7.5 million shares outstanding. As of March 27, 1997 the Company
had repurchased 244,900 shares of its common stock for approximately $8.4
million. The repurchased shares will be added to the Company's treasury and
could be used for future acquisitions or other corporate purposes.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt
and equity capital, and estimated future operating cash flows. As a result of
this process, the Company has in the past and may in the future seek to raise
additional capital, modify its dividend policy, restructure ownership interests
of subsidiaries and affiliates, incur indebtedness, repurchase shares of
capital 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 its liquidity and capital resources. In the
35
<PAGE> 38
normal course of business, the Company 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, the Company may consider using available cash, issuing equity
securities or incurring indebtedness.
As previously reported, based upon the technical provisions of the
Investment Company Act of 1940 (the "1940 Act") and Tremont's ceasing to own a
majority of TIMET's common stock following the acquisition by TIMET in February
of the IMI titanium businesses, Tremont might arguably be deemed to have become
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 Commission that Tremont is
primarily engaged, through TIMET and NL, in a non-investment company business.
Tremont intends to study the future direction and opportunities available to
Tremont with a view to obviating any argument concerning Tremont's possible
status as an investment company under the 1940 Act. Based upon current trends,
the Company believes another exemption may be available to it under the 1940
Act should the Commission deny Tremont's application for an exemptive order.
See "Results of Operations" and Note 13 to the Consolidated Financial
Statements for additional matters affecting the Company's liquidity and capital
resources.
36
<PAGE> 39
Unconsolidated affiliate - Titanium Metals Corporation
Summarized historical balance sheet and cash flow information of TIMET
is presented below.
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
------ -----
<S> <C> <C>
(In millions)
Cash and cash equivalents $ - $ 86.5
Other current assets 103.6 284.5
Goodwill and other intangible assets 1.4 86.7
Other noncurrent assets 18.9 25.7
Property and equipment, net 124.9 219.6
------ -------
$248.8 $ 703.0
====== =======
Current liabilities $ 97.1 $ 112.8
Long-term debt 21.5 1.2
Capital lease obligations to related parties - 11.6
Payable to related parties 23.9 1.0
Accrued OPEB cost 28.2 27.5
Other noncurrent liabilities 10.0 17.2
Minority interest - TIMET-obligated mandatorily
redeemable preferred securities of subsidiary trust
holding solely subordinated debt securities - 201.3
Other minority interest - 4.2
Stockholders' equity 68.1 326.2
------ -------
$248.8 $ 703.0
====== =======
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1994 1995 1996
-------- ------- --------
(In millions)
<S> <C> <C> <C>
Net cash provided (used) by:
Operating activities $(20.0) $ (6.1) $ (1.3)
Investing activities:
Capital expenditures (4.6) (3.0) (21.7)
Business acquisitions - - (109.9)
Other, net - .4 .2
Financing activities:
Net borrowings (repayments), including 17.3 7.5 (108.2)
amounts to related parties
Issuance of common stock, net - - 131.5
Issuance of TIMET-obligated mandatorily
redeemable preferred securities, net - - 192.4
Capital contributions from related parties .4 1.1 -
Cash acquired - - 3.0
Currency translation .2 .1 .5
------ ------- -------
$ (6.7) $ - $ 86.5
====== ======= =======
Cash paid for:
Interest expense $ 6.5 $ 10.0 $ 9.0
Income taxes .1 .1 6.3
Acquisitions:
Cash and cash equivalents $ - $ - $ 3.0
Goodwill and other intangibles - - 85.2
Other noncash assets - - 180.8
Liabilities - - (89.1)
Common stock issued to IMI - - (70.0)
------- ------- -------
Cash paid $ - $ - $ 109.9
======= ======= =======
</TABLE>
TIMET's financial position was significantly improved during 1996
through the combined effects of (i) improved industry conditions, (ii)
acquisitions made during the year, (iii) the Stock Offering, and (iv) issuance
of the Trust Convertible Preferred Securities.
At December 31, 1996, TIMET had $87 million of cash and equivalents
and $110 million of borrowing availability under its U.S. and European bank
credit lines. Indebtedness consisted primarily of capital lease obligations
related to certain of its European manufacturing facilities and a relatively
nominal amount of European working capital borrowings. The Convertible
Preferred Securities do not require principal amortization and TIMET has the
right to defer interest payments for one or more periods of up to 20
consecutive quarters.
Reflecting improved operating results, cash provided by operating
activities (before changes in assets and liabilities) was $53 million in 1996
compared to $4 million provided in 1995 and $22 million used in 1994. Changes
in assets and liabilities used $54 million of cash in 1996
38
<PAGE> 41
compared to $10 million in 1995 and $2 million provided in 1994. While
receivable and inventory levels (excluding acquisitions) increased an aggregate
of $43 million in 1996 as a result of the higher levels of working capital
necessary to support the higher production and sales levels, days sales
outstanding ("DSO") in receivables and days sales in inventory ("DSI") did not
increase significantly. TIMET's goal is to better manage working capital such
that both DSO and DSI improve in 1997 over 1996.
TIMET's capital expenditures in 1996 approximated $22 million compared
to $3 million in 1995 and $5 million in 1994. The companies acquired during
1996 accounted for $10 million of the increase with much of the remaining $9
million increase resulting from projects deferred in prior years. TIMET
estimates capital expenditures in 1997 to be $50 million to $55 million,
including capacity expansion and a major project to redesign business processes
and implement integrated information systems throughout TIMET. About one-third
of planned capital expenditures in 1997 relate to capacity expansion projects,
the largest of which is a 20 million pound electron beam furnace to be
completed by THT in the second half of 1998. Capital spending related to the
business processes/information systems project is currently estimated at over
$30 million during the next few years, about one-half of which is expected to
be incurred in 1997.
Acquisitions aggregated $180 million in 1996 ($110 million cash; $70
million stock). TIMET believes the IMI Titanium Acquisition, along with other
smaller European acquisitions, among other things, augmented TIMET's scale and
geographic reach and increased its production flexibility. In addition, the
acquisition of the AJM scrap processing business enhanced TIMET's flexibility
in optimizing its mix of its raw material purchases.
TIMET's net proceeds from the June 1996 Stock Offering approximated
$131 million. TIMET used approximately $125 million of such net proceeds to
repay existing indebtedness ($23 million to Tremont, $20 million to IMI and $82
million under its U.S. credit facility).
TIMET received net proceeds from TIMET Capital Trust I's sale of the
Convertible Preferred Securities of approximately $192 million. TIMET used
approximately $96 million of such net proceeds to prepay indebtedness incurred
in conjunction with the AJM Acquisition with the rest for general corporate
purposes.
Reductions of indebtedness in 1995 include approximately $5 million of
installments on the term loan portion of TIMET's U.S. credit facility and
payment of the final $2 million installment due on the note associated with
TIMET's purchase of its original 50% interest in THT in 1992. In April 1994,
TIMET entered into its current U.S. credit facility, which replaced its prior
U.S. bank agreement, and TIMET repaid $45 million of borrowings outstanding
thereunder at closing.
TIMET is negotiating to increase its borrowing availability, and
expects, among other things, to be able to reduce current restrictions on use
of borrowed proceeds in order to further enhance its financial flexibility.
TIMET 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, TIMET has in the past and may in the future seek to raise additional
capital, modify its dividend policy, restructure ownership interests, refinance
or restructure indebtedness, repurchase shares of capital stock, sell
marketable securities or other assets, or take a combination of such steps or
other steps to increase or manage its liquidity and capital resources. In the
normal course of business, TIMET may investigate, evaluate, discuss and engage
in
39
<PAGE> 42
acquisition, joint venture and other business combination opportunities in the
titanium and specialty metal industries. In the event of any future
acquisition or joint venture opportunities, TIMET may consider using available
cash, issuing equity securities or incurring indebtedness.
40
<PAGE> 43
Unconsolidated affiliate - NL Industries, Inc.
Summarized historical balance sheet and cash flow information of NL is
presented below.
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
--------- ---------
<S> <C> <C>
(In millions)
Cash and cash equivalents $ 141.3 $ 114.1
Other current assets 409.7 386.1
Noncurrent securities 20.9 23.7
Investment in joint ventures 185.9 181.5
Other noncurrent assets 54.6 49.9
Property and equipment, net 459.2 466.0
-------- --------
$1,271.6 $1,221.3
======== ========
Current liabilities $ 302.4 $ 290.4
Long-term debt 740.3 737.1
Deferred income taxes 157.2 151.2
Accrued postretirement benefits cost 60.2 55.9
Environmental liabilities 112.8 106.8
Other noncurrent liabilities 105.0 83.2
Minority interest 3.1 .2
Shareholders' deficit:
Capital and retained earnings (80.0) (84.3)
Adjustments, principally foreign
currency translation (129.4) (119.2)
-------- --------
(209.4) (203.5)
-------- --------
$1,271.6 $1,221.3
======== ========
<CAPTION>
Years ended December 31,
------------------------------------------
1994 1995 1996
------- -------- --------
(In millions)
<S> <C> <C> <C>
Net cash provided (used) by:
Operating activities $ 181.7 $ 71.5 $ 16.5
Investing activities:
Capital expenditures (36.9) (64.2) (66.9)
Other, net 4.1 2.0 (.7)
Financing activities:
Net borrowings (repayments) (131.4) (3.5) 42.1
Dividends and other, net (.7) .2 (15.5)
Currency translation 7.7 4.2 (2.7)
------- -------- --------
$ 24.5 $ 10.2 $ (27.2)
======= ======== ========
Cash paid for:
Interest, net of amounts capitalized $ 66.8 $ 62.1 $ 51.7
Income taxes, net (111.4) 28.0 50.4
</TABLE>
41
<PAGE> 44
The TiO2 industry is cyclical and changes in economic conditions
within the industry significantly impact the earnings and operating cash flows
of NL. During 1996, declining TiO2 selling prices unfavorably impacted Kronos'
operating income and cash flows from operations compared to 1995. Average
selling prices began a downward trend in the last half of 1995 and continued
throughout 1996. NL expects prices will begin to increase in the second
quarter of 1997; however, no assurance can be given that price trends will
conform to NL's expectations and future cash flows will be adversely affected
should price trends be lower than NL's expectations.
Changes in NL's inventories, receivables and payables (excluding the
effect of currency translation) also contributed to the cash provided by
operations in 1994 and 1996; however, such changes used cash in 1995 primarily
due to increased inventory levels. In 1994 and 1995, net proceeds of $15
million and $26 million, respectively, from the sale of trading securities are
components of the cash provided from operations. Certain German income tax
refunds and payments, discussed below, significantly increased cash flows from
operating activities during 1994 and decreased cash flows from operating
activities in 1996.
NL's capital expenditures during the past three years include an
aggregate of $67 million ($26 million in 1996) for NL's ongoing environmental
protection and compliance programs, including a Canadian waste acid
neutralization facility, a Norwegian onshore tailings disposal system and
German and Norwegian off-gas desulfurization systems. NL's estimated 1997 and
1998 capital expenditures are $35 million and $36 million, respectively, and
include $3 million and $5 million, respectively, in the area of environmental
protection and compliance primarily related to the off-gas desulfurization
systems. NL spent $9 million in 1995, $18 million in 1996 and plans to spend
an additional $8 million in 1997 in capital expenditures related to a
debottlenecking project at its Leverkusen, Germany chloride-process TiO2
facility that is expected to increase NL's worldwide annual attainable
production to approximately 410,000 metric tons in 1998. Capital expenditures
of the manufacturing joint venture are not included in NL's capital
expenditures. Rheox acquired the minority interests of certain of its non-U.S.
subsidiaries for $5.2 million in 1996.
In 1996, NL borrowed DM 144 million ($96 million when borrowed) under
its DM credit facility and used DM 49 million ($32 million) to fund the German
tax settlement payments described below, and used the remainder of the proceeds
primarily to fund operations. Repayments of indebtedness in 1996 included
payments of $23 million on the Rheox bank term loan, $15 million in payments on
the joint venture term loan and DM 16 million ($10 million when repaid) in
payments on DM-denominated notes payable. Net repayments of indebtedness in
1995 included $30 million in payments on the Rheox bank term loan and $15
million in payments on the joint venture term loan. In addition, NL borrowed a
net DM 56 million ($40 million when borrowed) under DM-denominated short-term
credit lines. In 1994, NL borrowed DM 75 million ($45 million when borrowed)
under the DM credit facility, and repayments of indebtedness included DM 225
million ($140 million when paid) in payments on the DM credit facility, $15
million in payments on the Rheox bank term loan and $15 million in payments on
the joint venture term loan.
In order to improve its near-term liquidity, during January 1997, NL
refinanced its Rheox subsidiary, obtaining a net $125 million of new long-term
financing. The net proceeds, along with other available funds, were used to
prepay DM 207 million ($127 million when paid) of NL's DM term loan and to
repay DM 43 million ($26 million when paid) of NL's DM revolving credit
facility, leaving DM 130 million ($80 million) available for borrowing at
January 31, 1997. As a
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result of the 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). In connection with the prepayment, NL and its lenders
modified certain financial covenants of the DM credit agreement and NL
guaranteed the facility.
At December 31, 1996, NL had cash and cash equivalents aggregating
$114 million (44% held by non-U.S. subsidiaries) including restricted cash and
cash equivalents of $11 million. At December 31, 1996, after giving pro forma
effect for the refinancing discussed above, NL had cash and cash equivalents
aggregating $87 million and NL's subsidiaries had $9 million and $102 million
available for borrowing under U.S. and non-U.S. credit facilities,
respectively. At December 31, 1996, NL has complied with, or had obtained
waivers for, all financial covenants governing its debt agreements.
Dividends paid during 1996 totaled $15.3 million. No dividends were
paid in 1994 or 1995. In October 1996, NL's Board of Directors suspended NL's
quarterly dividend and NL is currently unable to pay dividends due to certain
restrictions under the indentures of the Senior Notes.
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 income tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies. During 1994, the German tax authorities withdrew
certain proposed tax deficiencies of DM 100 million and remitted tax refunds
aggregating DM 225 million ($136 million when received), including interest, on
a tentative basis while examination of NL's German income tax returns
continued. NL subsequently reached an agreement with the German tax
authorities regarding such examinations which resolved certain significant tax
contingencies for years through 1990. NL received final assessments and paid
certain tax deficiencies of approximately DM 50 million ($32 million),
including interest, in settlement of these issues in 1996. NL considers the
agreement to be a favorable resolution of the contingencies and the payment was
within previously-accrued amounts for such matters.
Certain other German tax contingencies remain outstanding and will
continue to be litigated. Although NL believes that it will ultimately prevail
in the litigation, NL has granted a DM 100 million ($64 million at December 31,
1996) lien on its Nordenham, Germany TiO2 plant in favor of the German tax
authorities until the litigation is resolved. No assurances can be given that
this litigation will be resolved in NL's favor in view of the inherent
uncertainties involved in court rulings. NL believes that it has adequately
provided accruals for additional income 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 NL's consolidated financial position, results of operations or
liquidity.
At December 31, 1996, NL had net deferred tax liabilities of $152
million. NL 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 $207 million
at December 31, 1996, principally related to the U.S. and Germany, partially
offsetting deferred tax assets which NL believes do not currently meet the
"more-likely-than-not" recognition criteria.
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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 and other holdings of marketable
equity securities including securities issued by Valhi and other Contran
subsidiaries.
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 adequate accruals 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. NL is also a defendant in a number of
legal proceedings seeking damages for personal injury and property damage
arising out of the sale of lead pigments and lead-based paints. 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 paint litigation is without merit. NL has not accrued any
amounts for such pending litigation. Liability that may result, if any, cannot
reasonably be estimated. NL currently believes the disposition of all claims
and disputes, individually or in the aggregate, should not have a material
adverse effect on NL's 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.
As discussed above, 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 credit facility, while its net investment in its other non-U.S. operations
are net assets.
NL periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL in the past has
sought and in the future may 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
available cash, issuing equity securities or increasing its indebtedness to the
extent permitted by the agreements governing NL's existing debt.
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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" on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Tremont's definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A within 120 days after the end of the fiscal year covered by
this report (the "Tremont Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Tremont Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Tremont Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Tremont Proxy Statement. See also Note 12 to the Consolidated Financial
Statements.
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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-1) are filed as part of this Annual Report.
50 percent-or-less owned persons
Consolidated financial statements of Titanium Metals
Corporation (30% owned), with independent auditors report
thereon, pages F-1 through F-30 inclusive of TIMET's Annual
Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-28538) included herein as Exhibit 99.1,
are filed as part of this Annual Report.
Consolidated financial statements of NL Industries, Inc. (18%
owned), with independent auditors report thereon, pages F-1
through F-36 inclusive of NL's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 1-640)
included herein as Exhibit 99.2, are filed as part of this
Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K filed by the Registrant for the quarter
ended December 31, 1996 and for the months of January and
February, 1997:
February 6, 1997 - reported items 5 and 7
February 14, 1997 - reported items 5 and 7
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. Tremont will furnish a copy of any of the exhibits
listed below upon payment of $4.00 per exhibit to cover the
costs to Tremont 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.
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<PAGE> 49
Item No. Exhibit Index
3.1 Restated Certificate of Incorporation of Tremont Corporation
("Tremont", formerly Baroid Corporation), incorporated by
reference to Exhibit 3.1 of Tremont's Annual Report on Form 10-K
for the year ended December 31, 1990.
3.2 By-Laws of Tremont, as amended May 14, 1991, incorporated by
reference to Exhibit 3.2 of Tremont's Annual Report on Form 10-K
for the year ended December 31, 1991.
3.3 Certificate of Amendment to Restated Certificate of Incorporation
of Tremont, incorporated by reference to Exhibit 3.3 of Tremont's
Annual Report on Form 10-K for the year ended December 31, 1991.
4.1 Plan of Restructuring between Baroid Corporation ("Baroid",
formerly New Baroid Corporation) and Tremont, incorporated by
reference to Exhibit 2.01 to Baroid's registration statement on
Form 10 (No. 1-10624), filed with the Commission on August 31,
1990.
4.2 Registration Rights Agreement dated October 30, 1991, by and
between NL Industries, Inc. and Tremont, incorporated by reference
to Exhibit 10.27 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1991.
4.3 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.
4.4 Indenture dated October 20, 1993 governing NL's 13% Senior
Secured 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.
4.5 Certificate of Trust of TIMET Capital Trust I, dated November 13,
1996, incorporated by reference to Exhibit 4.1 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.6 Amended and Restated Declaration of Trust of TIMET Capital Trust
I, dated as of November 20, 1996, among Titanium Metals
Corporation, as Sponsor, The Chase Manhattan Bank, as Property
Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee and
Joseph S. Compofelice, Robert E. Musgraves and Mark A. Wallace,
as Regular Trustees, incorporated by reference to Exhibit 4.2 to
Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
4.7 Indenture for the 6 5/8% Convertible Subordinated Debentures,
dated as of November 20, 1996, among Titanium Metals Corporation
and The Chase Manhattan Bank, as Trustee, incorporated by
reference to Exhibit 4.3 to Titanium Metals Corporation's Current
Report on Form 8-K filed with the Commission on December 5, 1996.
4.8 Form of 6 5/8% Convertible Preferred Securities (included in
Exhibit 4.4 above), incorporated by reference to Exhibit 4.5 to
Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
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<PAGE> 50
4.9 Form of 6 5/8% Convertible Subordinated Debentures (included in
Exhibit 4.5 above), incorporated by reference to Exhibit 4.5 to
Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
4.10 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.5
above), incorporated by reference to Exhibit 4.5 to Titanium
Metals Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.11 Convertible Preferred Securities Guarantee, dated as of November
20, 1996, between Titanium Metals Corporation, as Guarantor, and
The Chase Manhattan Bank, as Guarantee Trustee, incorporated by
reference to Exhibit 4.6 to Titanium Metals Corporation's Current
Report on Form 8-K filed with the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium
Metals Corporation, Tremont, IMI plc, IMI Kynoch Ltd., and IMI
Americas Inc., incorporated by reference to Exhibit 2.2 of
Tremont's Current Report on Form 8-K filed with the Commission On
March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29, 1996,
among Titanium Metals Corporation, Tremont Corporation, IMI plc,
IMI Kynoch Ltd., and IMI Americas Inc., incorporated by reference
to Exhibit 10.30 to Tremont Corporation's Annual Report on Form
10-K for the year ended December 31, 1995.
9.3 Investors' Agreement between Union Titanium Sponge Corporation,
Toho Titanium Co., Ltd., Nippon Mining Co., Ltd., Mitsui & Co.,
Ltd., Mitsui & Co. (U.S.A.), Inc., Tremont and Titanium Metals
Corporation, dated May 30, 1990, incorporated by reference to
Exhibit 10.33 of Baroid's registration statement on Form 10 (No.
1-10624), filed with the Commission on August 31, 1990.
9.4 Amendment No. 3 to Investors' Agreement between Union Titanium
Sponge Corporation, Toho Titanium Co., Ltd., Nippon Mining Co.,
Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.), Inc., Tremont
Corporation and Titanium Metals Corporation, dated May 30, 1990,
incorporated by reference to Exhibit 9.1 to Tremont Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
9.5 Amendment No. 4 to Investors' Agreement among Union Titanium
Sponge Corporation, Toho Titanium Co., Ltd., Nippon Mining Co.,
Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.) Inc., Tremont
Corporation and Titanium Metals Corporation, dated February 21,
1997, incorporated by reference to Exhibit 9.5 to Titanium Metals
Corporation's Amendment No. 1 to Registration Statement on Form
S-1 (No. 333-18829).
10.1 Amended and Restated 1988 Long Term Performance Incentive Plan of
Tremont, incorporated by reference to Exhibit 10.1 of Tremont's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.2 Form of Insurance Sharing Agreement between NL Industries, Inc.,
NL Insurance, Ltd., Tremont and Baroid, incorporated by reference
to Exhibit 10.6 to Baroid's registration statement on Form 10
(No. 1-10624), filed with the Commission on August 31, 1990.
10.3 Form of Employee Benefit Plan Assumption Agreement between Baroid
and Tremont, incorporated by reference to Exhibit 10.14 to
Baroid's registration statement on Form 10 (No. 1-10624), filed
with the Commission on August 31, 1990.
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<PAGE> 51
10.4 Indemnification Agreement between Baroid, Tremont and NL
Insurance, Ltd., dated September 26, 1990, incorporated by
reference to Exhibit 10.35 of Baroid's registration statement on
Form 10 (No. 1-10624), filed with the Commission on August 31,
1990.
10.5 Sponge Purchase Agreement, dated May 30, 1990 between Titanium
Metals Corporation and Union Titanium Sponge Corporation and
Amendments No. 1 and 2, incorporated by reference to Exhibit 10.25
of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1991.
10.6 Amendment No. 3 to the Sponge Purchase Agreement, dated December
3, 1993, between Titanium Metals Corporation and Union Titanium
Sponge Corporation, incorporated by reference to Exhibit 10.33 of
Tremont's Annual Report on Form 10-K for the year ended December
31, 1993.
10.7 Amendment No. 4 to the Sponge Purchase Agreement, dated May 2,
1996, between Titanium Metals Corporation and Union Titanium
Sponge Corporation, incorporated by reference to Exhibit 10.1 to
Tremont's Quarterly Reort on Form 10-Q for the quarter ended March
31, 1996.
10.8 Intercorporate Services Agreement between Valhi, Inc. and
Tremont, dated January 1, 1994, incorporated by reference to
Exhibit 10.35 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.9 Intercorporate Services Agreement between Contran Corporation and
Tremont, dated January 1, 1994, incorporated by reference to
Exhibit 10.36 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.10* Description of terms of an executive severance agreement between
Tremont and Joseph S. Compofelice, incorporated by reference to
the last paragraph of page 15 entitled "Executive Severance
Agreement" of Tremont's definitive proxy statement dated April 7,
1994.
10.11 Secured Promissory Note and Customer Margin Agreement between
Tremont and Salomon Brothers Inc., dated June 26, 1995,
incorporated by reference to Tremont's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
10.12 Credit Agreement between Tremont and Contran Corporation, dated
November 16, 1995, incorporated by reference to Exhibit 10.14 of
Tremont's Annual Report on Form 10-K for the year ended December
31, 1995.
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<PAGE> 52
10.13 Amended and Restated Loan Agreement between Titanium Metals
Corporation and Congress Financial Corporation (Central), dated
March 24, 1995, incorporated by reference to Exhibit 10.4 of
Tremont's Amended Annual Report on Form 10-K/A for the year ended
December 31, 1994.
10.14 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated September 29, 1995, incorporated by reference
to Exhibit 10.16 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.15 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated February 15, 1996, incorporated by reference to
Exhibit 10.17 of Tremont's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.16 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation (Central) and Titanium
Metals Corporation, dated May 31, 1996, incorporated by reference
to Exhibit 10.26 to Titanium Metals Corporation's Registration
Statement on Form S-1 (No. 333-2940).
10.17 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated November 26, 1996, incorporated by reference
to Exhibit 10.34 to Titanium Metals Corporation's Amendment No. 1
to Registration Statement on Form S-1 (No. 333-18829).
10.18 Amended and Restated Term Promissory Note in the principal amount
of $10,150,000 issued by Titanium Metals Corporation to Congress
Financial Corporation (Central), dated May 31, 1996, incorporated
by reference to Exhibit 10.27 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.19 Amended and Restated Term-B Promissory Note in the principal
amount of $13,000,000 issued by Titanium Metals Corporation to
Congress Financial Corporation (Central), dated May 31, 1996,
incorporated by reference to Exhibit 10.28 to Titanium Metals
Corporation's Registration Statement on Form S-1 (No. 333- 2940).
10.20 20,000,000 Subordinated Promissory Note issued by Titanium Metals
Corporation to IMI Kynoch Ltd. dated January 1, 1996, incorporated
by reference to Exhibit 10.21 of Tremont's Annual Report on Form
10-K for the year ended December 31, 1995.
10.21 Subordination Agreement between Tremont and Titanium Metals
Corporation, dated February 15, 1996, incorporated by reference to
Exhibit 10.25 of Tremont's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.22 Subordination Agreement between IMI Kynoch Ltd. and Titanium
Metals Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.26 of Tremont's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.23 Subordination Agreement between Tremont and IMI Kynoch Ltd.,
dated February 15, 1996, incorporated by reference to Exhibit
10.27 of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.24 Subordination Agreement between IMI Kynoch Ltd. and Congress
Financial Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.28 of Tremont's Annual Report on Form
10-K for the year ended December 31, 1995.
10.25 Amended and Restated Subordination Agreement between Tremont and
Congress Financial Corporation, dated February 15, 1996,
incorporated by reference to Exhibit 10.24 of Tremont's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.26 First Amendment to Subordination Agreement by and between IMI
Kynoch, Ltd. and Congress Financial Corporation (Central), dated
May 31, 1996, incorporated by reference to Exhibit 10.29 to
Titanium Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.27 First Amendment to Amended and Restated Subordination Agreement
by and between Tremont Corporation and Congress Financial
Corporation (Central), dated May 31, 1996, incorporated by
reference to Exhibit 10.30 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.28 Amended and Restated Subordinated Promissory Note, dated as of
January 1, 1996, between Titanium Metals Corporation and Tremont
Corporation, incorporated by reference to Exhibit 10.2 to
Titanium Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.29 Lease Agreement, dated January 1, 1996, between Holford Estates
Ltd. and IMI Titanium Ltd. related to the building known as
Titanium Number 2 Plant at Witton, England, incorporated by
reference to Exhibit 10.23 to Tremont Corporation's Annual Report
on Form 10-K for the year ended December 31, 1995.
10.30* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to
Titanium Metals Corporation's Amendment No. 1 to Registration
Statement on Form S-1 (No. 333-18829).
10.31 Assignment Agreement dated February 15, 1996 between Tremont and
UTSC, incorporated by reference to Exhibit 10.24 of Titanium
Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.32 Acquisition Agreement, dated February 15, 1996, by and between
Titanium Metals Corporation and IMI Kynoch Ltd. and IMI Americas
Inc., incorporated by reference to Exhibit 2.1 of Tremont's
Current Report on Form 8-K filed with the Commission on March 1,
1996.
10.33 Intercorporate Services Agreement between Tremont and NL
effective as of January 1, 1996, incorporated by reference to
Exhibit 10.42 of NL's Annual Report on Form 10-K for the year
ended December 31, 1995.
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<PAGE> 53
10.38* Agreement to Defer Bonus Payment between Tremont and J. Landis
Martin, dated August 23, 1996, and the Trust Agreement, dated
August 23, 1996, related thereto, incorporated by reference to
Exhibit 10.1 to Tremont's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.41 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 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.42 Amended and Restated Loan Agreement dated as of October 15, 1993,
among Kronos International, Inc., the Banks set forth therein,
Hypobank International S.A., as Agent, and Banque Paribas, as
Co-Agent, incorporated by reference to Exhibit 10.17 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended September 30, 1993.
10.43 Second Amended and Restated Loan Agreement dated as of January
31, 1997 among Kronos International, Inc., Hypobank International
S.A., as Agent and the banks set forth therein, incorporated by
reference to Exhibit 10.2 of NL's Annual Report on Form 10-K for
the year ended December 31, 1996.
10.44 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.
10.45 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.
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<PAGE> 54
10.46 Amendment No. 1 to Joint Venture Agreement dated as of December
20, 1995 between Tioxide Americas Inc. and Kronos Louisiana,
Inc., incorporated by reference to Exhibit 10.20 of NL's Annual
Report on Form 10-K (File No. 1-640) for the year ended December
31, 1995.
10.47 Kronos Offtake Agreement dated as of October 18, 1993 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.
10.48 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.
10.49 Master Technology 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.
10.50 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.
10.51 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.
10.52 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.
10.53 Intercorporate Services Agreement by and between Contran
Corporation and NL effective as of January 1, 1996, incorporated
by reference to Exhibit 10.41 to NL's Annual Report on Form
10-K (File No. 1-640) for the year ended December 31, 1996.
10.54 Incorporate Services Agreement between Valhi, Inc. and NL
effective as of January 1, 1996, incorporated by reference to
Exhibit 10.40 of NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1996.
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10.55* 1985 Long Term Performance Incentive Plan of NL Industries, Inc.,
as adopted by the Board of Directors on February 27, 1985,
incorporated by reference to Exhibit A to NL's Proxy Statement on
Schedule 14A (File No. 1-640) for the annual meeting of
shareholders held on April 24, 1985.
10.56* 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.
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10.34 Agreement, dated June 28, 1995, among Titanium Metals
Corporation, Tremont Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.24 to
Titanium Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.35* Form of Agreement relating to a grant of Management Shares
between Titanium Metals Corporation and certain executive
officers, effective as of February 15, 1996, incorporated by
reference to Exhibit 10.22 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.36* Employment Agreement between Andrew R. Dixey and Titanium Metals
Corporation, dated February 13, 1996, incorporated by reference
to Exhibit 10.21 to Titanium Metals Corporation's Registration
Statement on Form S-1 (No. 333-2940).
10.37* 1996 Non-Employee Director Compensation Plan, incorporated by
reference to Exhibit 10.20 to Titanium Metals Corporation's
Amendment No. 1 to Registration Statement on Form S-1 (No.
333-18829).
10.39 Purchase Agreement, dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated, as Initial Purchasers, incorporated
by reference to Exhibit 99.1 to Titanium Metals Corporation's
Current Report on Form 8-K filed with the Commission on December
5, 1996.
10.40 Registration Agreement, dated November 20, 1996, between TIMET
Capital Trust I and Salomon Brothers Inc., as Representative of
the Initial Purchasers, incorporated by reference to Exhibit 99.1
to Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
54
<PAGE> 57
10.57* 1989 Long Term Performance Incentive Plan of NL Industries, Inc.,
incorporated by reference to Exhibit B to NL's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held on May 8, 1996.
10.58* NL Industries, Inc. Variable Compensation Plan, incorporated by
reference to Exhibit A to NL's Proxy Statement on Schedule
14A for the annual meeting of shareholders held on May 8, 1996.
10.59* NL Industries, Inc. Retirement Savings Plan, as amended and
restated effective April 1, 1996, incorporated by reference to
Exhibit 10.38 of NL's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.60 Intercorporate Services Agreement between Tremont and Titanium
Metals Corporation dated March 28, 1996, incorporated by reference
to Exhibit 10.29 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.61* 1992 Non-Employee Director Stock Option Plan of Tremont
Corporation, incorporated by reference to Exhibit 10.21 of
Tremont's Annual Report on Form 10-K for the year ended December
31, 1991.
21.1 Subsidiaries of Tremont.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule for the year ended December 31, 1996.
99.1 Titanium Metals Corporation (File No. 0-28538) Annual Report on
Form 10-K for the year ended December 31, 1996, Item 3 - "Legal
Proceedings" and Item 8 - "Financial Statements and Supplementary
Data" (pages F-1 to F-30).
55
<PAGE> 58
99.2 NL Industries, Inc. (File No. 1-640) Annual Report on Form 10-K
for the year ended December 31, 1996, Item 3 - "Legal
Proceedings" and Item 8 - "Financial Statements and Supplementary
Data" (pages F-1 to F-36).
___________________________________________________________________________
* Management contract, compensatory plan or arrangement.
56
<PAGE> 59
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.
TREMONT CORPORATION
(Registrant)
By /s/ J. Landis Martin
----------------------------------------
J. Landis Martin, March 28, 1997
(Chairman of the Board, President
and Chief Executive Officer)
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:
<TABLE>
<S> <C>
/s/ Susan E. Alderton /s/ Harold C. Simmons
- --------------------------------- -----------------------------------
Susan E. Alderton, March 28, 1997 Harold C. Simmons, March 28, 1997
(Director) (Director)
/s/ Richard J. Boushka /s/ Thomas P. Stafford
- ---------------------------------- -----------------------------------
Richard J. Boushka, March 28, 1997 Thomas P. Stafford, March 28, 1997
(Director) (Director)
/s/ J. Landis Martin /s/ Avy H. Stein
- ---------------------------------- -----------------------------------
J. Landis Martin, March 28, 1997 Avy H. Stein, March 28, 1997
(Chairman of the Board, President (Director)
and Chief Executive Officer)
/s/ Glenn R. Simmons /s/ Joseph S. Compofelice
- ---------------------------------- -------------------------------------
Glenn R. Simmons, March 28, 1997 Joseph S. Compofelice, March 28, 1997
(Director) (Vice President and Chief
Financial Officer)
/s/ Mark A. Wallace
-------------------------------------
Mark A. Wallace, March 28, 1997
(Vice President and Controller)
</TABLE>
57
<PAGE> 60
TREMONT CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1995 and 1996 F-3/F-4
Consolidated Statements of Operations - Years ended December 31, 1994,
1995, and 1996 F-5
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1994, 1995, and 1996 F-6
Consolidated Statements of Cash Flows - Years ended December 31, 1994,
1995 and 1996 F-7/F-8
Notes to Consolidated Financial Statements F-9/F-25
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Tremont Corporation:
We have audited the accompanying consolidated balance sheets of Tremont
Corporation as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Tremont Corporation as of December 31, 1995 and 1996, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 7, 1997
F-2
<PAGE> 62
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1995* 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,650 $ 68,035
Accounts and notes receivable 4,104 6,445
Refundable income taxes 225 --
Receivable from related parties 274 1,026
Prepaid expenses 257 1,785
-------- --------
Total curent assets 7,510 77,291
-------- --------
Other assets:
Investment in TIMET 49,474 98,479
Investment in NL 31,586 26,724
Investment in joint ventures 4,795 6,937
Receivable from related parties 27,990 4,722
Deferred income taxes 248 --
Other 12,520 8,656
-------- --------
Total other assets 126,613 145,518
-------- --------
Net property and equipment 755 714
-------- --------
$134,878 $223,523
======== ========
</TABLE>
- -------------------
* Reclassified.
F-3
<PAGE> 63
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 * 1996
--------- ---------
<S> <C> <C>
Current liabilities:
Notes payable $ 2,500 $ --
Accrued liabilities 4,631 7,336
Payable to related parties 491 225
Income taxes -- 112
--------- ---------
Total current liabilities 7,622 7,673
--------- ---------
Noncurrent liabilities:
Payable to related parties 3,450 --
Insurance claims and claim expenses 12,778 12,867
Accrued postretirement benefit cost 22,123 22,072
Deferred income taxes -- 16,319
Other 4,000 4,677
--------- ---------
Total noncurrent liabilities 42,351 55,935
--------- ---------
Minority interest 1,246 1,886
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued -- --
Common stock, $1.00 par value; 14,000 shares authorized;
7,550 and 7,640 shares issued, respectively 7,550 7,640
Additional paid-in capital 231,815 273,780
Accumulated deficit (146,796) (116,834)
Adjustments:
Currency translation (3,145) (2,764)
Marketable securities (62) 702
Pension liabilities (2,107) (899)
--------- ---------
87,255 161,625
Less treasury stock, at cost (173 shares) 3,596 3,596
--------- ---------
Total stockholders' equity 83,659 158,029
--------- ---------
$ 134,878 $ 223,523
========= =========
</TABLE>
Commitments and contingencies (Notes 12 and 13).
- --------------------
* Reclassified.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 64
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1994 * 1995 * 1996
-------- -------- --------
<S> <C> <C> <C>
Equity in earnings (loss) of:
TIMET $(31,558) $ (3,163) $ 15,965
NL Industries (7,605) 11,411 (1,778)
Other joint ventures -- -- 2,476
-------- -------- --------
(39,163) 8,248 16,663
Gain on sale of TIMET stock -- -- 27,599
Corporate expenses, net 3,502 2,696 4,052
Interest expense -- 163 274
-------- -------- --------
Income (loss) before income taxes
and minority interest (42,665) 5,389 39,936
Income tax expense 237 4 9,335
Minority interest -- -- 639
-------- -------- --------
Income (loss) before cumulative effect
of a change in accounting principle (42,902) 5,385 29,962
Cumulative effect of a change in
accounting principle (750) -- --
-------- -------- --------
Net income (loss) $(43,652) $ 5,385 $ 29,962
======== ======== ========
Income (loss) per common share:
Before cumulative effect of a change in
accounting principle $ (5.83) $ .73 $ 3.91
Cumulative effect of a change in
accounting principle (.10) -- --
Net income (loss) per common share $ (5.93) $ .73 $ 3.91
======== ======== ========
Weighted average common shares outstanding 7,353 7,354 7,665
======== ======== ========
</TABLE>
- ---------------------
* Reclassified.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 65
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1994, 1995, 1996
(In thousands)
<TABLE>
<CAPTION>
Adjustments
Additional Accumulated -------------------------------------- Total
Common paid-in earnings Currency Marketable Pension Treasury stockholders'
stock capital (deficit) translation securities liabilities stock equity
--------- --------- --------- ----------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 7,526 $ 231,314 $(108,529) $ (6,571) $ (298) $ (1,424) $ (3,596) $118,422
Net loss -- -- (43,652) -- -- -- -- (43,652)
Adjustments -- -- -- 1,590 297 (994) -- 893
Other -- 314 -- -- -- -- -- 314
--------- --------- --------- --------- --------- --------- --------- --------
Balance at December 31, 1994 7,526 231,628 (152,181) (4,981) (1) (2,418) (3,596) 75,977
Net income -- -- 5,385 -- -- -- -- 5,385
Common stock issued 24 187 -- -- -- -- -- 211
Adjustments -- -- -- 1,836 (61) 311 -- 2,086
--------- --------- --------- --------- --------- --------- --------- --------
Balance at December 31, 1995 7,550 231,815 (146,796) (3,145) (62) (2,107) (3,596) 83,659
Net income -- -- 29,962 -- -- -- -- 29,962
Reduction of interest in
TIMET, net (Note 1) -- 40,227 -- (179) -- 898 -- 40,946
Common stock issued 90 1,562 -- -- -- -- -- 1,652
Adjustments -- -- -- 560 764 310 -- 1,634
Other -- 176 -- -- -- -- -- 176
--------- --------- --------- --------- --------- --------- --------- --------
Balance at December 31, 1996 $ 7,640 $ 273,780 $(116,834) $ (2,764) $ 702 $ (899) $ (3,596) $158,029
========= ========= ========= ========= ========= ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 66
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 * 1995 * 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(43,652) $ 5,385 $ 29,962
Earnings of affiliates in
excess of distributions 39,913 (8,248) (13,649)
Gain on sale of TIMET stock -- -- (27,599)
Deferred income taxes -- -- 7,811
Other, net (244) (520) 636
Change in assets and liabilities:
Accounts and notes receivable 2,333 211 (462)
Accounts with related parties (2,098) (1,629) (244)
Accrued liabilities 755 (308) 2,738
Income taxes 637 (6) 337
Other, net (2,219) (593) (1,577)
Sales of marketable trading securities 8,030 3,322 --
-------- -------- --------
Net cash provided (used) by operating activities 3,455 (2,386) (2,047)
-------- -------- --------
Cash flows from investing activities:
Loans to related party:
Loans (2,500) (5,500) --
Collections 442 -- 22,460
Proceeds from disposition of:
TIMET common stock, net -- -- 46,898
Property held for sale -- 1,140 3,000
Other, net 685 574 (631)
-------- -------- --------
Net cash provided (used) by investing activities (1,373) (3,786) 71,727
======== ======== ========
</TABLE>
F-7
<PAGE> 67
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 * 1995 * 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Loans from related party:
Loans $ -- $ 3,450 $ 50
Repayments (442) -- (3,500)
Notes payable and long-term debt:
Borrowings -- 2,500 --
Reductions -- -- (2,500)
Capital contribution to affiliate -- (1,148) --
Other, net -- 211 1,655
-------- -------- --------
Net cash provided (used) by financing activities (442) 5,013 (4,295)
-------- -------- --------
Cash and cash equivalents:
Net increase (decrease) 1,640 (1,159) 65,385
Balance at beginning of year 2,169 3,809 $ 2,650
-------- -------- --------
Balance at end of year $ 3,809 $ 2,650 $ 68,035
======== ======== ========
Supplemental disclosures - cash paid (received) for:
Interest expense $ -- $ 155 334
Income taxes (355) 10 1,189
</TABLE>
- ---------------------
* Reclassified.
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 68
TREMONT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Tremont Corporation is principally a holding company with operations
conducted through its 30%-owned affiliate, Titanium Metals Corporation
("TIMET"), and 18%-owned affiliate, NL Industries, Inc. ("NL"). Contran
Corporation holds, directly or through affiliates, approximately 44% of
Tremont's outstanding common stock and 74% of NL's outstanding common stock
(including 18% of NL held by Tremont). 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 may be deemed to control each of Contran, NL and Tremont.
In February 1996, TIMET acquired the titanium metals businesses (the
"IMI Titanium Acquisition") of IMI plc ("IMI") and, in June 1996, completed an
initial public offering of 6.2 million shares of its common stock (the "Stock
Offering"), which included the Company's sale of 2.2 million shares of TIMET
common stock. These transactions reduced Tremont's ownership in TIMET from 75%
at December 31, 1995 to 30%. See Note 4. As a result of its reduced ownership
level, Tremont has ceased to consolidate TIMET and instead reports its interest
in TIMET by the equity method of accounting and, for comparative purposes, has
reclassified its financial statements for all periods presented. Tremont
accounted for its equity in TIMET's capital transactions as a reduction of
ownership interest in an affiliate and, accordingly, recorded a $41 million net
increase to stockholders' equity in 1996. The change in stockholders' equity
resulted from the difference between the book values of Tremont's current 30%
interest in TIMET and its 75% interest in TIMET before the IMI Titanium
Acquisition and Stock Offering.
Note 2 - Summary of significant accounting policies:
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of Tremont and its majority-owned subsidiaries (collectively, the "Company").
All material intercompany accounts and balances have been eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Use of 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 highly liquid investments with original
maturities of three months or less. At December 31, 1996, substantially all of
the Company's cash and cash equivalents were held by one financial institution.
F-9
<PAGE> 69
Marketable and other securities and securities transactions
The Company's equity in unrealized gain and loss adjustments of less
than majority-owned affiliates are accumulated in the marketable securities
adjustment component of stockholders' equity, net of related deferred income
taxes. Realized gains and losses on the Company's securities are based upon the
specific identification of the securities sold.
Investments in TIMET, NL and joint ventures
Investments in TIMET, NL and more than 20%-owned but less than
majority-owned entities are accounted for by the equity method. Differences
between the cost of each such investment and the underlying equity in the
historical carrying amounts of the entity's net assets are allocated among the
respective assets and liabilities based upon estimated relative fair values.
Such differences are charged or credited to income as the entities depreciate,
amortize or dispose of the related net assets. At December 31, 1996, the
unamortized net difference relating to NL was approximately $63 million, of
which $26 million is goodwill being amortized over 40 years, with substantially
all of the remainder attributable to NL's property and equipment. The
unamortized net basis difference is greater than the Company's $27 million net
carrying amount of its investment in NL because NL reports a shareholders'
deficit on its separate historical basis of accounting.
Employee benefit plans
Accounting and funding policies for postretirement benefits other than
pensions ("OPEB") are described in Note 9.
The Company, TIMET and NL have elected the disclosure alternative
proscribed by SFAS No. 123, "Accounting for Stock-Based Compensation" and to
account for stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB 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. See Note 10.
Income taxes
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 subsidiaries and unconsolidated affiliates not
included in the consolidated tax group.
Income (loss) per share of common stock
Income (loss) per common share is based upon the weighted average
number of common shares outstanding, including common stock equivalents that
consist of nonqualified stock options. Common stock equivalents and other
securities are excluded from the calculation when they are either antidilutive
or if the effect is not material.
F-10
<PAGE> 70
Note 3 - Business and geographic segments:
Tremont is principally a holding company with operations conducted
through its equity affiliates, TIMET and NL. Substantially all of Tremont's
assets are located in the U.S.
TIMET is a vertically integrated titanium producer whose products
include titanium sponge, ingot, slab, and forged and cast products for
aerospace, industrial and other applications. TIMET's production facilities are
located in the U.S. and Europe, while its products are sold throughout the
world.
NL is a producer of titanium dioxide pigments ("TiO2") and
rheological additives for solvent-based systems. TiO2 is a chemical product
used in a wide range of "quality-of-life" type products. NL's production
facilities are located in Europe and North America and its products are sold
throughout the world.
The Company's captive insurance subsidiary ("NLI Insurance, Ltd.")
reinsured certain risks of the Company, Baroid, NL and their respective
subsidiaries and also participated on various third party reinsurance treaties.
NLI Insurance, Ltd. currently provides certain property and liability insurance
coverage to Tremont, TIMET and NL, however, the risk associated with these
policies are reinsured into the commercial reinsurance market. All of the
Company's unrelated reinsurance business is in run-off. Results of the
Company's captive insurance operations, which are not significant, are included
in corporate expenses, net. See Note 12.
Note 4 - Investment in TIMET, NL and other joint ventures:
See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Annual Report on Form 10-K for
summarized information relating to the results of operations, financial
position and cash flows of TIMET and NL, which information is incorporated
herein by reference.
TIMET
At December 31, 1996, Tremont held 9.5 million shares, or 30%, of
TIMET's outstanding common stock. See Note 1. At December 31, 1996, the net
carrying amount of the Company's investment in TIMET was approximately $10.34
per share while the market price per share of TIMET common stock on that date
was $32.875 ($25.25 per share at March 27, 1997). TIMET's credit facilities
presently prohibit dividends on TIMET's common stock in excess of 20% of TIMET's
net income in any year.
In connection with the IMI Titanium Acquisition by TIMET, Tremont was
granted an option expiring February 15, 1999 to purchase up to an additional 2
million shares of TIMET's common stock from IMI for $16 million. Tremont
assigned to UTSC the right to acquire from IMI for $4 million up to .5 million
shares of TIMET's common stock under the option. At December 31, 1996, Tremont
had the right, under the aforementioned option, to acquire 1.5 million shares
of TIMET's common stock from IMI with a quoted market value of $32.875 per
share ($25.25 per share at March 27, 1997), or an aggregate $49 million ($38
million at March 27, 1997), for an aggregate purchase price of $12 million
($7.95 per TIMET share).
In November 1996, TIMET issued $201 million of 6.625% TIMET-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities"). The Convertible Preferred Securities pay cumulative preferred
distributions of 6.625% per annum, compounded
F-11
<PAGE> 71
quarterly, and are convertible, at the option of the holder, into TIMET common
stock at the rate of 1.339 shares of common stock per Convertible Preferred
Security (an equivalent price of $37.34 per share), for an aggregate of 5.4
million common shares if fully converted. The Convertible Preferred Securities
mature December 2026 and are redeemable at TIMET's option beginning December
1999. TIMET has the right to defer interest payments for up to 20 consecutive
quarters ("Extension Period") on one or more occasions. In the event TIMET
exercises this right, it would be unable during any Extension Period to, among
other things, pay dividends on or reacquire its capital stock.
NL Industries
Tremont holds 9.1 million shares, or 18%, of NL's outstanding common
stock. At December 31, 1996, the net carrying amount of the Company's
investment in NL was about $2.95 per share while the market price per share of
NL common stock on December 31, 1996 was $10.88 per share ($11.38 per share at
March 27, 1997). Certain of NL's debt agreements presently prohibit NL from
paying dividends on its common stock.
Joint Ventures
Investment in joint ventures represents the Company's 75% interest in
TRECO, L.L.C., which is principally comprised of a (i) 32% equity interest in
Basic Investments, Inc. ("BII"), which, among other things, provides utility
services in the industrial park where one of TIMET's plants is located, and a
(ii)12% interest in Victory Valley Land Company, L.P. ("VVLC"), which is
actively engaged in efforts to develop certain real estate. BII, through a
wholly-owned subsidiary, owns an additional 50% interest in VVLC.
Note 5 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Restricted securities $ 9,445 $ 6,025
Other 3,075 2,631
------- -------
$12,520 $ 8,656
======= =======
</TABLE>
F-12
<PAGE> 72
Note 6 - Accrued liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
------ ------
(In thousands)
<S> <C> <C>
Accrued liabilities:
Postretirement benefit cost $1,819 $1,924
Other employee benefits -- 1,107
Environmental cost 535 300
Legal costs 463 546
Miscellaneous taxes 259 256
Other 1,555 3,203
------ ------
$4,631 $7,336
====== ======
</TABLE>
Note 7 - Notes payable:
In 1995, Tremont borrowed $2.5 million under a margin loan with an
investment bank and repaid the balance during 1996.
At December 31, 1996, Tremont had approximately $9 million of
outstanding letters of credit issued under a Dresser credit agreement. The
Company reimburses Dresser for any fees and expenses related to these letters
of credit and for any amounts drawn thereunder.
See Note 12 regarding related party transactions.
F-13
<PAGE> 73
Note 8 - Income taxes:
Summarized below are (i) the difference between the income tax expense
attributable to the income (loss) before cumulative effect of a change in
accounting principle ("pretax income (loss)") and the amounts that would be
expected using the U.S. federal statutory income tax rate of 35%, (ii) the
components of the income tax expense attributable to the pretax income (loss),
and (iii) the components of the comprehensive tax expense. Substantially all of
the Company's income (loss) is derived from the U.S.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Expected income tax expense (benefit) $(14,933) $ 1,886 $ 13,977
Incremental tax and rate differences on equity in
income of companies not included in the
consolidated tax group -- -- (1,071)
Valuation allowance 15,280 (1,835) (3,495)
U.S. state income taxes, net 154 3 78
Other, net (264) (50) (154)
-------- -------- --------
$ 237 $ 4 $ 9,335
-------- -------- --------
Income tax expense (benefit):
Current income taxes:
U.S. federal $ (149) $ -- $ 1,404
U.S. state 386 4 120
Deferred income taxes -- -- 7,811
-------- -------- --------
$ 237 $ 4 $ 9,335
-------- -------- --------
Comprehensive tax expense allocable to:
Pretax income $ 237 $ 4 $ 9,335
Stockholders' equity:
Reduction of interest in TIMET -- -- 7,878
Foreign currency translation and other 871 890 880
-------- -------- --------
$ 1,108 $ 894 $ 18,093
======== ======== ========
</TABLE>
F-14
<PAGE> 74
The components of deferred taxes are summarized below.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1996
---------------------- ----------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Temporary differences relating to net assets:
Property and equipment $ -- $ -- $ .1 $ --
Accrued OPEB cost 8.4 -- 8.4 --
Accrued liabilities and other deductible differences 5.2 -- 6.8 --
Other taxable differences -- (3.6) -- (3.8)
Investments in subsidiaries and affiliates
including foreign currency translation
adjustments 35.4 -- 10.1 --
Tax loss and credit carryforwards 5.8 -- -- --
Valuation allowance (50.9) -- (37.9) --
-------- -------- -------- --------
Gross deferred tax assets (liabilities) 3.9 (3.6) (12.5) (3.8)
Netting (3.6) 3.6 12.5 (12.5)
-------- -------- -------- --------
Total deferred taxes .3 -- -- (16.3)
Less current deferred taxes -- -- -- --
-------- -------- -------- --------
Net noncurent deferred taxes $ .3 $ -- $ -- $ (16.3)
======== ======== ======== ========
</TABLE>
The Company has a deferred tax valuation allowance of $37.9 million at
December 31, 1996, offsetting deferred tax assets which the Company believes do
not meet the "more-likely-than-not" recognition criteria, principally related
to the Company's interest in NL. The Company's valuation allowance increased in
the aggregate (including amount allocated to items other than continuing
operations) by $14.8 million in 1994 and decreased by $4.8 million and $13
million in 1995 and 1996, respectively. During 1995, the valuation allowance
was reduced by $4.8 million due primarily to a net increase in the bases
differences of the Company's investments in unconsolidated affiliates. In 1996,
the valuation allowance decreased due to utilization of NOLs and the Company's
reduction of its ownership interest in TIMET. During 1996, the Company utilized
$14 million of U.S. federal income tax net operating loss carryforwards.
F-15
<PAGE> 75
Note 9 - Employee benefit plans:
Postretirement benefits other than pensions ("OPEB")
Tremont retained the obligations for certain postretirement health
care and life insurance benefits provided to eligible petroleum services
employees who retired prior to the separation of the petroleum services
businesses and titanium metals businesses from Baroid Corporation in 1990.
The components of net periodic OPEB costs and accumulated OPEB
obligations are set forth below. The rates used in determining the actuarial
present value of the accumulated OPEB obligations at December 31 were (i)
discount rate -- 7.75% in 1996 and 7.5% in 1995, and (ii) rate of increase in
future health care costs -- 11% in 1997, gradually declining to 6% in 2016 and
thereafter. If the health care cost trend rate was increased by one percentage
point for each year, OPEB expense would have increased approximately $.1
million in 1996, and the actuarial present value of accumulated OPEB
obligations at December 31, 1996 would have increased approximately $1.4
million. The accrued OPEB cost is sensitive to changes in these estimated rates
and actual results may differ from the obligations noted below.
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated OPEB
obligations attributable solely to retiree benefits $ 17,645 $ 19,160
Unrecognized net loss from experience
different from actuarial assumptions (117) (1,137)
Unrecognized prior service credits 6,414 5,973
-------- --------
Total accrued OPEB cost 23,942 23,996
Less current portion 1,819 1,924
-------- --------
Noncurrent accrued OPEB cost $ 22,123 $ 22,072
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1994 1995 1996
------- ------- -----
(In thousands)
<S> <C> <C> <C>
Interest cost on accumulated OPEB obligations $ 1,278 $ 1,422 1,463
Net amortization and deferrals (441) (441) (441)
------- ------- -----
OPEB expense $ 837 $ 981 1,022
======= ======= =====
</TABLE>
F-16
<PAGE> 76
Note 10 - Stockholders' equity:
Tremont has a long-term performance incentive plan that provides for
discretionary grants of restricted stock, stock options and stock appreciation
rights. Options generally vest ratably over a five year period and expire ten
years from the date of grant.
Tremont's 1992 Non-Employee Director Stock Option Plan provides that
options to purchase 1,000 shares of Tremont common stock are automatically
granted once a year to each non-employee director. Options are granted at a
price equal to the fair market value of such stock on the date of grant,
generally vest in one year and expire five years from date of grant.
Changes in options outstanding under the Company's long-term
performance incentive and non-employee Director plans are summarized in the
table below. At December 31, 1996, options to purchase 140,401 shares were
exercisable and options to purchase an additional 81,640 shares become
exercisable in 1997. Outstanding options at December 31, 1996 had a weighted
average exercise price of $10.54 per share and a weighted average remaining
life of 6.3 years. At December 31, 1996, 484,681 shares were available for
future grant under the Company's long-term performance incentive plan and
35,000 shares were available for future grant under the Company's non-employee
Director plan.
<TABLE>
<CAPTION>
Exercise Amount payable
Shares price per share upon exercise
-------- --------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Outstanding at December 31, 1993 233 $ 4.69 - $22.22 $ 2,933
Granted 252 8.00 - 11.13 2,213
Canceled (43) 8.13 - 18.75 (549)
-------- --------------- -------
Outstanding at December 31, 1994 442 4.69 - 22.22 4,597
Granted 3 13.25 40
Exercised (24) 8.63 - 18.56 (211)
Canceled (2) 8.13 - 18.56 (19)
-------- --------------- -------
Outstanding at December 31, 1995 419 4.69 - 22.22 4,407
Granted 3 22.75 68
Exercised (86) 4.69 - 18.75 (936)
-------- --------------- -------
Outstanding at December 31, 1996 336 $ 8.13 - $22.75 $ 3,539
======== =============== =======
</TABLE>
Had the Company, TIMET 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 Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for
F-17
<PAGE> 77
Stock-Based Compensation", the impact on the Company's reported income from
continuing operations and related per share amount for 1995 and 1996 would not
have been material.
Note 11 - Changes in accounting principles:
Earnings per share (SFAS No. 128)
SFAS No. 128, "Earnings per Share," issued in February 1997 is effective
for the Company in 1997. Had SFAS No. 128 been effective during 1994, 1995 and
1996, "Basic earnings per share" and "Dilutive earnings per share" under
SFAS No. 128 would not have been materially different from earnings per common
share reported by the Company.
Postemployment benefits (SFAS No. 112)
TIMET adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits", in 1994 and recorded a $1 million charge for this change in
accounting principle. Tremont's equity in TIMET's accounting change for SFAS
No. 112 was $.8 million in 1994.
Other
See Notes 10 and 13 regarding SFAS No. 123, "Accounting for
Stock-Based Compensation" and SOP 96-1, "Environmental Remediation
Liabilities."
Note 12 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions with related
companies 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 (ii) 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, Valhi 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. In connection with these activities, the Company
may consider issuing additional equity securities or incurring additional
indebtedness. The Company's acquisition activities have in the past and may in
the future include participation in the acquisition or restructuring activities
conducted by Contran, Valhi, NL and other companies that may be deemed to be
controlled by Harold C. Simmons.
It is the policy of the Company to engage in transactions with related
parties on terms which are, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
F-18
<PAGE> 78
The Company is a party to intercorporate services agreements with
Valhi and Contran pursuant to which Valhi and Contran agreed to provide certain
services to Tremont on a fee basis. Fees for services provided under such
agreements were $.2 million in each of the last three years.
The Company is a party to an intercorporate services agreement with NL
pursuant to which NL provides certain management and financial services to
Tremont on a fee basis. Fees for services provided by NL were nil in 1994, $.1
million in 1995 and $.1 million in 1996.
The Company has an intercorporate services agreement with TIMET
whereby TIMET will provide certain management, financial and other services to
the Company for approximately $.4 million in 1996, subject to renewal for
future years. Charges from TIMET approximated nil in 1994 and $.9 million in
1995 pursuant to similar arrangements for compensation and intercorporate
services.
NL and NLI Insurance, Ltd. are parties to an insurance sharing
agreement with respect to certain loss payments and reserves established by NLI
Insurance, Ltd. that (i) arise out of claims against other entities for which
NL is responsible and (ii) are subject to payment by NLI Insurance. Ltd. under
certain reinsurance contracts. Also, NLI Insurance, Ltd. will credit NL with
respect to certain underwriting profits or credit recoveries that NLI
Insurance, Ltd. receives from independent reinsurers that relate to retained
liabilities. Baroid entered into an insurance sharing agreement with NLI
Insurance, Ltd. containing, with respect to liabilities for which it may be
responsible, substantially the same terms and conditions as the insurance
sharing agreement between NL and NLI Insurance, Ltd.
In 1995, Tremont entered into a $15 million revolving credit agreement
with Contran Corporation maturing in January 1998 and collateralized by 2.5
million shares of NL common stock. During 1996, Tremont repaid all $3.5 million
of outstanding debt at December 31, 1995 and terminated the agreement.
Current receivables from related parties at December 31, 1995 and 1996
principally related to amounts due from TIMET for exercises of Tremont stock
options. Noncurrent receivables from related parties principally include
amounts due under insurance loss sharing agreements with NL and Baroid. Current
payables to related parties principally represent amounts due under
intercorporate service arrangements.
See Note 4 regarding other related party transactions.
Note 13 - Commitments and contingencies:
Legal proceedings and contingencies
Tremont and consolidated subsidiaries
Kahn. 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 the
Company's agreement to purchase 7.8 million shares of NL's outstanding common
stock from Valhi in 1991. In addition to the Company, the complaint names as
defendants Valhi and all the members of the Board of Directors of the Company.
The complaint alleges, among other things, that the Company's purchase of the
NL shares constitutes a waste of the Company's assets and that Tremont's Board
of Directors breached their fiduciary duties to Tremont's public stockholders
and seeks,
F-19
<PAGE> 79
among other things, to rescind Tremont's consummation of the purchase of the NL
shares and award damages to the Company for injuries allegedly suffered as a
result of the defendants' wrongful conduct. In March 1996, the court ruled in
favor of the defendants, and concluded that the Company's purchase did not
constitute an overreaching of Tremont by the controlling shareholder (Valhi),
that the Company'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 a
hearing before the full Supreme Court was held in February 1997. The Company
believes that the action is without merit.
Other. The Company is involved in various other environmental,
contractual and other claims and disputes incidental to its business.
The Company currently believes the disposition of all claims and
disputes individually or in the aggregate, should not have a material adverse
affect on the Company's financial condition, results of operations or
liquidity.
TIMET
In 1995 TIMET learned that a jet engine disk that had been in service
since 1989 was discovered during routine inspection to have a high density
inclusion that was not identified during manufacture and testing by TIMET or
the subsequent forger of the material. The inclusion was completely intact and
showed no signs of cracking or fatigue that would suggest that it posed a
safety problem. Subsequent metallurgical inspection identified the inclusion as
pure tungsten, which TIMET believes would have resulted from contaminated
chromium used in the manufacture of the titanium alloy. TIMET currently
believes that the engine manufacturer will require that engines containing
disks manufactured from titanium having a link to the potentially contaminated
lot of chromium be subjected to a higher level of inspection or to more
frequent inspection to assure that there is no safety issue involved. While
TIMET does not currently anticipate that it will incur any material liability
in connection with this matter, no assurances can be given in this regard. At
December 31, 1996, TIMET had not accrued any amount with respect to this
matter.
NL Industries
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.
F-20
<PAGE> 80
NL believes that 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
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.
Seinfeld. Plaintiff brought the complaint in Frank D. Seinfeld v.
Harold C. Simmons, et al. (Superior Court of New York, Bergen County, Chancery
Division, No. C-336-96) in September 1996 on behalf of himself and
derivatively, on behalf of NL, against NL, Valhi, Inc. and certain current and
former members of NL's Board of Directors, including J. Landis Martin,
Tremont's Chairman, President and Chief Executive Officer. The complaint
alleges, among other things, that NL's purchase of shares in an August 1991
"Dutch auction" tender offer was an unfair and wasteful expenditure of NL's
funds that constituted a breach of the defendants' fiduciary duties to NL's
shareholders. Plaintiff seeks, among other things, to rescind NL's purchase of
approximately 10.9 million shares of its common stock from Valhi pursuant to
the Dutch auction, and plaintiff has stated that damages sought are $149
million. NL and the other defendants have answered the complaint and have
denied all allegations of wrongdoing. NL believes, and understands that each of
the other defendants believes, that the complaint is without merit. NL intends,
and believes that each of the other defendants intends, to defend the action
vigorously. Trial is scheduled to begin in November 1997.
Environmental matters
Tremont and consolidated subsidiaries
The Company's non-operating facilities are governed by various
federal, state, local and foreign environmental laws and regulations. The
Company's policy is to achieve compliance with environmental laws and
regulations at all of its non-operating facilities and to continually strive to
improve environmental performance. The Company believes that it is 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. Occasionally, resolution of these matters
may result in the payment of penalties, but to date such penalties have not
involved amounts having a material adverse effect on the Company.
Arkansas Division of Pollution Control and Ecology. In 1993, the
Company entered into a settlement agreement with the Arkansas Division of
Pollution Control and Ecology in connection with certain alleged water
discharge permit violations at one ("Dempsey-Cogburn") of several abandoned
barite mining sites in Arkansas. The settlement agreement, in addition to
requiring the payment in 1993 of a $20,000 penalty, required the Company to
undertake a remediation/reclamation program which is nearing completion at a
total cost of approximately $2 million. Another of the sites ("Magnet Cove"),
of which the Company is only one of several owners, is currently being
evaluated by the U.S. Environmental Protection Agency. Based upon its
evaluation, the EPA could require the owners to take investigatory or remedial
action at the site, however, the Company believes that to the extent it has any
additional liability for remediation at this site, it is only one of a number
of apparently solvent potentially responsible parties that would ultimately
share in any such costs. As of December 31, 1996, the Company had accrued $5
million related to these matters.
The Company determines the amount of its accruals for environmental
matters on a quarterly basis by analyzing and estimating the range of possible
costs in light of the available
F-21
<PAGE> 81
information. Because of a lack of relevant information, it is not possible to
estimate the range of costs for certain sites. The imposition of more stringent
standards or requirements under environmental laws or regulations, the results
of future testing and analysis undertaken by the Company at its non-operating
facilities, 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 to be required for such
matters. No assurance can be given that actual costs will not exceed accrued
amounts or that costs will not be incurred with respect to sites as to which no
problem is currently known or where no estimate can presently be made. Further
there can be no assurance that additional environmental matters will not arise
in the future. However, the Company currently believes the disposition of all
environmental matters, individually or in the aggregate, should not have a
material adverse effect on the Company's business, results of operations,
financial condition, or cash flow.
The Company, TIMET and NL will adopt the recognition and disclosure
requirements of AICPA's Statement of Position No. 96-1, "Environmental
Remediation Liabilities," ("SOP 96-1") in 1997. The new rule, among other
things, expands the types of costs which must be considered in determining
environmental remediation accruals. The Company and TIMET believe the effect of
adopting SOP 96-1 will not be material. NL's effect of adopting SOP 96-1 is
discussed below.
TIMET
BMI Companies. TIMET and certain other companies, including Kerr-McGee
Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali, Inc.
(successor to Stauffer Chemical Company) operate facilities in a complex (the
"BMI Complex") owned by BMI, adjacent to TIMET's Henderson, Nevada plant. In
1993, TIMET and each of such companies, along with certain other companies who
previously operated facilities in the common areas of the BMI Complex
(collectively the "BMI Companies") completed a Phase I environmental assessment
of the common areas of the BMI Complex and each of the individual company sites
pursuant to consent agreements with the Nevada Division of Environmental
Protection ("NDEP"). In July 1996, TIMET signed a consent agreement with NDEP
regarding implementation of the Phase II assessment of TIMET property within
the BMI Complex. A report regarding the Phase II assessment of the common areas
of the BMI Complex was submitted to NDEP in August 1996. At December 31, 1996,
TIMET had accrued $1 million with respect to this matter. Until completion of
the sampling and analysis that will be involved in the Phase II assessment of
TIMET property and any further Phase II testing that NDEP may require for the
BMI Complex common areas, it is not possible to provide a reasonable estimate
of the additional remediation costs, if any, or TIMET's likely share of any
such costs.
In November 1995, TIMET and other BMI Companies were contacted by a
company proposing to develop a parcel of land adjacent to the BMI Complex,
alleging that the parcel had been contaminated by the BMI Companies through
their operations and threatening legal action to recover its development costs
to date of approximately $2.8 million. Based on the results of the
investigation in late 1995 and early 1996, TIMET does not believe there is any
basis for the claim, and the claimants have not pursued the matter further. At
December 31, 1996, TIMET had not accrued any amounts with respect to this
matter. The parties are currently negotiating a complete settlement of this
matter in connection with a sale of certain other properties by VVLC to the
claimant.
F-22
<PAGE> 82
TIMET determines the amount of its accruals for environmental matters
on a quarterly basis by analyzing and estimating the range of possible costs in
light of the available information. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by TIMET at its operating facilities, or a
determination that TIMET is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can
be given that actual costs will not exceed accrued amounts or that costs will
not be incurred with respect to sites as to which no problem is currently known
or where no estimate can presently be made. Further, there can be no assurance
that additional environmental matters will not arise in the future.
Other. TIMET is involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
TIMET currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
TIMET's financial condition, results of operations or liquidity.
In addition to litigation referred to above, certain information
relating to regulatory and environmental matters pertaining to TIMET is
included in Item I - "Business - Unconsolidated Affiliate - TIMET" of this
Annual Report on Form 10-K.
NL Industries
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 the Comprehensive Environmental Response, Compensation and
Liability Act, as amended by the Superfund Amendments and Reauthorization Act
("CERCLA") in approximately 75 governmental and private actions associated with
hazardous waste sites and former mining locations, certain of which are on the
U.S. Environmental Protection Agency's Superfund National Priorities List.
These actions seek cleanup costs and/or damages for personal injury or property
damage. 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,
1996, NL had accrued $113 million for those environmental matters which are
reasonably estimable. 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 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. 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. 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. Further,
there can be no assurance that additional
F-23
<PAGE> 83
environmental matters will not arise in the future. NL will adopt the AICPA's
Statement of Position 96-1, "Environmental Remediation Liabilities", during the
first quarter of 1997, which is expected to increase its environmental
liability by approximately $30 million as a result of including legal fees and
other costs of managing and monitoring environmental remediation sites.
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 operations and products of NL
have the potential to cause environmental or other damage. NL continues to
implement various policies and programs in an effort to minimize these risks.
NL's policy is to comply with environmental laws and regulations at all of its
facilities and to continually strive to improve environmental performance in
association with applicable industry initiatives. It is possible that future
developments, such as stricter requirements of environmental laws and
enforcement policies thereunder, could affect NL's production, handling, use,
storage, transportation, sale or disposal of such substances as well as NL's
consolidated financial position, results of operations or liquidity.
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. Discovery is
proceeding.
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. One such case, In re:
Monongalia Mass II, (Circuit Court of Monongalia County, West Virginia Nos.
93-C-362, et al.), involves the consolidated claims of approximately 3,100
plaintiffs. NL intends to defend these matters vigorously.
Other. NL is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
present and former businesses.
NL currently believes the disposition of all claims and disputes
individually or in the aggregate, should not have a material adverse effect on
NL's consolidated financial condition, results of operations or liquidity.
In addition to litigation referred to above, certain information
relating to regulatory and environmental matters pertaining to NL is included
in Item 1 - "Business - Unconsolidated Affiliate - NL" of this Annual Report
on Form 10-K.
Income taxes
NL is undergoing examination of certain of its income tax returns in
various U.S. and non-U.S. jurisdictions, including Germany, and tax authorities
have proposed or may propose tax deficiencies. The Company understands that NL
believes that it has provided adequate 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
F-24
<PAGE> 84
should not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
Note 14 - Quarterly results of operations (unaudited):
<TABLE>
<CAPTION>
Quarters 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:
Equity in earnings (loss) of:
TIMET $ 1.3 $ 3.3 $ 4.1 $ 7.3
NL 1.4 1.3 (1.7) (2.8)
Gain on sale of TIMET stock -- 27.6 -- --
Net income (loss) $ 2.2 $ 24.1 $ 2.2 $ 1.5
Net income (loss) per common share .29 3.14 .28 .19
Year ended December 31, 1995:
Equity in earnings (loss) of:
TIMET $(3.0) $ (1.6) $ (.2) $ 1.6
NL 1.4 2.8 2.1 5.1
Net income (loss) $(2.20) $ 1.20 $1.60 $4.80
Net income (loss) per common share (.29) .16 .21 .65
</TABLE>
The quarterly results of operations for 1995 have been reclassified
to report the Company's interest in TIMET by the equity method of accounting.
Note 15 - Subsequent event:
In February 1997, the Company's Board of Directors authorized the
repurchase of up to 2 million shares of its common stock in open market or
privately negotiated transactions. Such shares represent approximately 27% of
the Company's 7.5 million shares outstanding. As of March 27, 1997 the Company
had repurchased 244,900 shares of its common stock for approximately $8.4
million. The repurchased shares will be added to the Company's treasury and
could be used for future acquisitions or other corporate purposes.
F-25
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Tremont Corporation:
Our report on the consolidated financial statements of Tremont
Corporation as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996 is included on page F-2 of this Form 10-K.
In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on page
F-1 of this Annual Report on Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 7, 1997
S-1
<PAGE> 86
TREMONT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
charged
Balance at (credited) to Balance
beginning costs and at end
Description of year expenses Deductions Other of year
----------- ---------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $ 2,663 $ -- $ -- $ -- $ 2,663
======== ======== ======== ======== ========
Valuation allowance for deferred
income taxes $ 50,923 $ (3,495) $ -- (9,529)(a) $ 37,899
======== ======== ======== ======== ========
Year ended December 31, 1995:
Allowance for doubtful accounts $ 2,663 $ -- $ -- $ -- $ 2,663
======== ======== ======== ======== ========
Valuation allowance for deferred
income taxes $ 55,701 $ (1,835) $ -- $ (2,943)(b) $ 50,923
======== ======== ======== ======== ========
Year ended December 31, 1994:
Allowance for doubtful accounts $ 2,663 $ -- $ -- $ -- $ 2,663
======== ======== ======== ======== ========
Valuation allowance for deferred
income taxes $ 40,890 $ 15,280 $ -- $ (469)(b) $ 55,701
======== ======== ======== ======== ========
</TABLE>
- -------------------------------------------------------
(a) Represents reduction in valuation allowance principally attributable to
the Company's reduction of its ownership interest in TIMET.
(b) Represents direct offset to the decrease in gross deferred income tax
assets due to the expiration of certain U.S. tax credit carryforwards
and changes in estimate in tax bases differences.
S-2
<PAGE> 87
EXHIBIT INDEX
Item No. Exhibit Index
3.1 Restated Certificate of Incorporation of Tremont Corporation
("Tremont", formerly Baroid Corporation), incorporated by
reference to Exhibit 3.1 of Tremont's Annual Report on Form 10-K
for the year ended December 31, 1990.
3.2 By-Laws of Tremont, as amended May 14, 1991, incorporated by
reference to Exhibit 3.2 of Tremont's Annual Report on Form 10-K
for the year ended December 31, 1991.
3.3 Certificate of Amendment to Restated Certificate of Incorporation
of Tremont, incorporated by reference to Exhibit 3.3 of Tremont's
Annual Report on Form 10-K for the year ended December 31, 1991.
4.1 Plan of Restructuring between Baroid Corporation ("Baroid",
formerly New Baroid Corporation) and Tremont, incorporated by
reference to Exhibit 2.01 to Baroid's registration statement on
Form 10 (No. 1-10624), filed with the Commission on August 31,
1990.
4.2 Registration Rights Agreement dated October 30, 1991, by and
between NL Industries, Inc. and Tremont, incorporated by reference
to Exhibit 10.27 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1991.
4.3 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.
4.4 Indenture dated October 20, 1993 governing NL's 13% Senior
Secured 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.
4.5 Certificate of Trust of TIMET Capital Trust I, dated November 13,
1996, incorporated by reference to Exhibit 4.1 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.6 Amended and Restated Declaration of Trust of TIMET Capital Trust
I, dated as of November 20, 1996, among Titanium Metals
Corporation, as Sponsor, The Chase Manhattan Bank, as Property
Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee and
Joseph S. Compofelice, Robert E. Musgraves and Mark A. Wallace,
as Regular Trustees, incorporated by reference to Exhibit 4.2 to
Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
4.7 Indenture for the 6 5/8% Convertible Subordinated Debentures,
dated as of November 20, 1996, among Titanium Metals Corporation
and The Chase Manhattan Bank, as Trustee, incorporated by
reference to Exhibit 4.3 to Titanium Metals Corporation's Current
Report on Form 8-K filed with the Commission on December 5, 1996.
4.8 Form of 6 5/8% Convertible Preferred Securities (included in
Exhibit 4.4 above), incorporated by reference to Exhibit 4.5 to
Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
47
<PAGE> 88
4.9 Form of 6 5/8% Convertible Subordinated Debentures (included in
Exhibit 4.5 above), incorporated by reference to Exhibit 4.5 to
Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
4.10 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.5
above), incorporated by reference to Exhibit 4.5 to Titanium
Metals Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.11 Convertible Preferred Securities Guarantee, dated as of November
20, 1996, between Titanium Metals Corporation, as Guarantor, and
The Chase Manhattan Bank, as Guarantee Trustee, incorporated by
reference to Exhibit 4.6 to Titanium Metals Corporation's Current
Report on Form 8-K filed with the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium
Metals Corporation, Tremont, IMI plc, IMI Kynoch Ltd., and IMI
Americas Inc., incorporated by reference to Exhibit 2.2 of
Tremont's Current Report on Form 8-K filed with the Commission On
March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29, 1996,
among Titanium Metals Corporation, Tremont Corporation, IMI plc,
IMI Kynoch Ltd., and IMI Americas Inc., incorporated by reference
to Exhibit 10.30 to Tremont Corporation's Annual Report on Form
10-K for the year ended December 31, 1995.
9.3 Investors' Agreement between Union Titanium Sponge Corporation,
Toho Titanium Co., Ltd., Nippon Mining Co., Ltd., Mitsui & Co.,
Ltd., Mitsui & Co. (U.S.A.), Inc., Tremont and Titanium Metals
Corporation, dated May 30, 1990, incorporated by reference to
Exhibit 10.33 of Baroid's registration statement on Form 10 (No.
1-10624), filed with the Commission on August 31, 1990.
9.4 Amendment No. 3 to Investors' Agreement between Union Titanium
Sponge Corporation, Toho Titanium Co., Ltd., Nippon Mining Co.,
Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.), Inc., Tremont
Corporation and Titanium Metals Corporation, dated May 30, 1990,
incorporated by reference to Exhibit 9.1 to Tremont Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
9.5 Amendment No. 4 to Investors' Agreement among Union Titanium
Sponge Corporation, Toho Titanium Co., Ltd., Nippon Mining Co.,
Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.) Inc., Tremont
Corporation and Titanium Metals Corporation, dated February 21,
1997, incorporated by reference to Exhibit 9.5 to Titanium Metals
Corporation's Amendment No. 1 to Registration Statement on Form
S-1 (No. 333-18829).
10.1 Amended and Restated 1988 Long Term Performance Incentive Plan of
Tremont, incorporated by reference to Exhibit 10.1 of Tremont's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.2 Form of Insurance Sharing Agreement between NL Industries, Inc.,
NL Insurance, Ltd., Tremont and Baroid, incorporated by reference
to Exhibit 10.6 to Baroid's registration statement on Form 10
(No. 1-10624), filed with the Commission on August 31, 1990.
10.3 Form of Employee Benefit Plan Assumption Agreement between Baroid
and Tremont, incorporated by reference to Exhibit 10.14 to
Baroid's registration statement on Form 10 (No. 1-10624), filed
with the Commission on August 31, 1990.
48
<PAGE> 89
10.4 Indemnification Agreement between Baroid, Tremont and NL
Insurance, Ltd., dated September 26, 1990, incorporated by
reference to Exhibit 10.35 of Baroid's registration statement on
Form 10 (No. 1-10624), filed with the Commission on August 31,
1990.
10.5 Sponge Purchase Agreement, dated May 30, 1990 between Titanium
Metals Corporation and Union Titanium Sponge Corporation and
Amendments No. 1 and 2, incorporated by reference to Exhibit 10.25
of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1991.
10.6 Amendment No. 3 to the Sponge Purchase Agreement, dated December
3, 1993, between Titanium Metals Corporation and Union Titanium
Sponge Corporation, incorporated by reference to Exhibit 10.33 of
Tremont's Annual Report on Form 10-K for the year ended December
31, 1993.
10.7 Amendment No. 4 to the Sponge Purchase Agreement, dated May 2,
1996, between Titanium Metals Corporation and Union Titanium
Sponge Corporation, incorporated by reference to Exhibit 10.1 to
Tremont's Quarterly Reort on Form 10-Q for the quarter ended March
31, 1996.
10.8 Intercorporate Services Agreement between Valhi, Inc. and
Tremont, dated January 1, 1994, incorporated by reference to
Exhibit 10.35 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.9 Intercorporate Services Agreement between Contran Corporation and
Tremont, dated January 1, 1994, incorporated by reference to
Exhibit 10.36 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1993.
10.10* Description of terms of an executive severance agreement between
Tremont and Joseph S. Compofelice, incorporated by reference to
the last paragraph of page 15 entitled "Executive Severance
Agreement" of Tremont's definitive proxy statement dated April 7,
1994.
10.11 Secured Promissory Note and Customer Margin Agreement between
Tremont and Salomon Brothers Inc., dated June 26, 1995,
incorporated by reference to Tremont's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
10.12 Credit Agreement between Tremont and Contran Corporation, dated
November 16, 1995, incorporated by reference to Exhibit 10.14 of
Tremont's Annual Report on Form 10-K for the year ended December
31, 1995.
49
<PAGE> 90
10.13 Amended and Restated Loan Agreement between Titanium Metals
Corporation and Congress Financial Corporation (Central), dated
March 24, 1995, incorporated by reference to Exhibit 10.4 of
Tremont's Amended Annual Report on Form 10-K/A for the year ended
December 31, 1994.
10.14 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated September 29, 1995, incorporated by reference
to Exhibit 10.16 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.15 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated February 15, 1996, incorporated by reference to
Exhibit 10.17 of Tremont's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.16 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation (Central) and Titanium
Metals Corporation, dated May 31, 1996, incorporated by reference
to Exhibit 10.26 to Titanium Metals Corporation's Registration
Statement on Form S-1 (No. 333-2940).
10.17 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated November 26, 1996, incorporated by reference
to Exhibit 10.34 to Titanium Metals Corporation's Amendment No. 1
to Registration Statement on Form S-1 (No. 333-18829).
10.18 Amended and Restated Term Promissory Note in the principal amount
of $10,150,000 issued by Titanium Metals Corporation to Congress
Financial Corporation (Central), dated May 31, 1996, incorporated
by reference to Exhibit 10.27 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.19 Amended and Restated Term-B Promissory Note in the principal
amount of $13,000,000 issued by Titanium Metals Corporation to
Congress Financial Corporation (Central), dated May 31, 1996,
incorporated by reference to Exhibit 10.28 to Titanium Metals
Corporation's Registration Statement on Form S-1 (No. 333- 2940).
10.20 20,000,000 Subordinated Promissory Note issued by Titanium Metals
Corporation to IMI Kynoch Ltd. dated January 1, 1996, incorporated
by reference to Exhibit 10.21 of Tremont's Annual Report on Form
10-K for the year ended December 31, 1995.
10.21 Subordination Agreement between Tremont and Titanium Metals
Corporation, dated February 15, 1996, incorporated by reference to
Exhibit 10.25 of Tremont's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.22 Subordination Agreement between IMI Kynoch Ltd. and Titanium
Metals Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.26 of Tremont's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.23 Subordination Agreement between Tremont and IMI Kynoch Ltd.,
dated February 15, 1996, incorporated by reference to Exhibit
10.27 of Tremont's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.24 Subordination Agreement between IMI Kynoch Ltd. and Congress
Financial Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.28 of Tremont's Annual Report on Form
10-K for the year ended December 31, 1995.
10.25 Amended and Restated Subordination Agreement between Tremont and
Congress Financial Corporation, dated February 15, 1996,
incorporated by reference to Exhibit 10.24 of Tremont's Annual
Report on Form 10-K for the year ended December 31, 1995.
10.26 First Amendment to Subordination Agreement by and between IMI
Kynoch, Ltd. and Congress Financial Corporation (Central), dated
May 31, 1996, incorporated by reference to Exhibit 10.29 to
Titanium Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.27 First Amendment to Amended and Restated Subordination Agreement
by and between Tremont Corporation and Congress Financial
Corporation (Central), dated May 31, 1996, incorporated by
reference to Exhibit 10.30 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.28 Amended and Restated Subordinated Promissory Note, dated as of
January 1, 1996, between Titanium Metals Corporation and Tremont
Corporation, incorporated by reference to Exhibit 10.2 to
Titanium Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.29 Lease Agreement, dated January 1, 1996, between Holford Estates
Ltd. and IMI Titanium Ltd. related to the building known as
Titanium Number 2 Plant at Witton, England, incorporated by
reference to Exhibit 10.23 to Tremont Corporation's Annual Report
on Form 10-K for the year ended December 31, 1995.
10.30* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to
Titanium Metals Corporation's Amendment No. 1 to Registration
Statement on Form S-1 (No. 333-18829).
10.31 Assignment Agreement dated February 15, 1996 between Tremont and
UTSC, incorporated by reference to Exhibit 10.24 of Titanium
Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.32 Acquisition Agreement, dated February 15, 1996, by and between
Titanium Metals Corporation and IMI Kynoch Ltd. and IMI Americas
Inc., incorporated by reference to Exhibit 2.1 of Tremont's
Current Report on Form 8-K filed with the Commission on March 1,
1996.
10.33 Intercorporate Services Agreement between Tremont and NL
effective as of January 1, 1996, incorporated by reference to
Exhibit 10.42 of NL's Annual Report on Form 10-K for the year
ended December 31, 1995.
50
<PAGE> 91
10.38* Agreement to Defer Bonus Payment between Tremont and J. Landis
Martin, dated August 23, 1996, and the Trust Agreement, dated
August 23, 1996, related thereto, incorporated by reference to
Exhibit 10.1 to Tremont's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.41 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 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.42 Amended and Restated Loan Agreement dated as of October 15, 1993,
among Kronos International, Inc., the Banks set forth therein,
Hypobank International S.A., as Agent, and Banque Paribas, as
Co-Agent, incorporated by reference to Exhibit 10.17 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended September 30, 1993.
10.43 Second Amended and Restated Loan Agreement dated as of January
31, 1997 among Kronos International, Inc., Hypobank International
S.A., as Agent and the banks set forth therein, incorporated by
reference to Exhibit 10.2 of NL's Annual Report on Form 10-K for
the year ended December 31, 1996.
10.44 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.
10.45 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.
51
<PAGE> 92
10.46 Amendment No. 1 to Joint Venture Agreement dated as of December
20, 1995 between Tioxide Americas Inc. and Kronos Louisiana,
Inc., incorporated by reference to Exhibit 10.20 of NL's Annual
Report on Form 10-K (File No. 1-640) for the year ended December
31, 1995.
10.47 Kronos Offtake Agreement dated as of October 18, 1993 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.
10.48 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.
10.49 Master Technology 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.
10.50 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.
10.51 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.
10.52 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.
10.53 Intercorporate Services Agreement by and between Contran
Corporation and NL effective as of January 1, 1996, incorporated
by reference to Exhibit 10.41 to NL's Annual Report on Form
10-K (File No. 1-640) for the year ended December 31, 1996.
10.54 Incorporate Services Agreement between Valhi, Inc. and NL
effective as of January 1, 1996, incorporated by reference to
Exhibit 10.40 of NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1996.
52
<PAGE> 93
10.55* 1985 Long Term Performance Incentive Plan of NL Industries, Inc.,
as adopted by the Board of Directors on February 27, 1985,
incorporated by reference to Exhibit A to NL's Proxy Statement on
Schedule 14A (File No. 1-640) for the annual meeting of
shareholders held on April 24, 1985.
10.56* 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.
53
<PAGE> 94
10.34 Agreement, dated June 28, 1995, among Titanium Metals
Corporation, Tremont Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.24 to
Titanium Metals Corporation's Registration Statement on Form S-1
(No. 333-2940).
10.35* Form of Agreement relating to a grant of Management Shares
between Titanium Metals Corporation and certain executive
officers, effective as of February 15, 1996, incorporated by
reference to Exhibit 10.22 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.36* Employment Agreement between Andrew R. Dixey and Titanium Metals
Corporation, dated February 13, 1996, incorporated by reference
to Exhibit 10.21 to Titanium Metals Corporation's Registration
Statement on Form S-1 (No. 333-2940).
10.37* 1996 Non-Employee Director Compensation Plan, incorporated by
reference to Exhibit 10.20 to Titanium Metals Corporation's
Amendment No. 1 to Registration Statement on Form S-1 (No.
333-18829).
10.39 Purchase Agreement, dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated, as Initial Purchasers, incorporated
by reference to Exhibit 99.1 to Titanium Metals Corporation's
Current Report on Form 8-K filed with the Commission on December
5, 1996.
10.40 Registration Agreement, dated November 20, 1996, between TIMET
Capital Trust I and Salomon Brothers Inc., as Representative of
the Initial Purchasers, incorporated by reference to Exhibit 99.1
to Titanium Metals Corporation's Current Report on Form 8-K filed
with the Commission on December 5, 1996.
54
<PAGE> 95
10.57* 1989 Long Term Performance Incentive Plan of NL Industries, Inc.,
incorporated by reference to Exhibit B to NL's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held on May 8, 1996.
10.58* NL Industries, Inc. Variable Compensation Plan, incorporated by
reference to Exhibit A to NL's Proxy Statement on Schedule
14A for the annual meeting of shareholders held on May 8, 1996.
10.59* NL Industries, Inc. Retirement Savings Plan, as amended and
restated effective April 1, 1996, incorporated by reference to
Exhibit 10.38 of NL's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.60 Intercorporate Services Agreement between Tremont and Titanium
Metals Corporation dated March 28, 1996, incorporated by reference
to Exhibit 10.29 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1995.
10.61* 1992 Non-Employee Director Stock Option Plan of Tremont
Corporation, incorporated by reference to Exhibit 10.21 of
Tremont's Annual Report on Form 10-K for the year ended December
31, 1991.
21.1 Subsidiaries of Tremont.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule for the year ended December 31, 1996.
99.1 Titanium Metals Corporation (File No. 0-28538) Annual Report on
Form 10-K for the year ended December 31, 1996, Item 3 - "Legal
Proceedings" and Item 8 - "Financial Statements and Supplementary
Data" (pages F-1 to F-30).
55
<PAGE> 96
99.2 NL Industries, Inc. (File No. 1-640) Annual Report on Form 10-K
for the year ended December 31, 1996, Item 3 - "Legal
Proceedings" and Item 8 - "Financial Statements and Supplementary
Data" (pages F-1 to F-36).
___________________________________________________________________________
* Management contract, compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of % of Voting
Incorporation or Securities Held at
Name of Corporation Organization December 31, 1996
- ------------------- ------------ -----------------
<S> <C> <C>
TRECO L.L.C. Nevada 75
Basic Investment Inc. Nevada 32
Victory Valley Land Company L.P. Nevada 50
Victory Valley Land Company L.P. Nevada 12
TRE Management Company Delaware 100
Titanium Metals Corporation Delaware 30
NL Insurance Limited of Vermont Vermont 100
NL Industries, Inc. New Jersey 18
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 and related Prospectus with respect to the Amended and
Restated 1988 Long-term Performance Incentive Plan of Tremont Corporation and
the 1992 Non-Employee Director Stock Option Plan of Tremont Corporation of our
reports dated February 7, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Tremont Corporation as of
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, our report dated February 7, 1997 on our audits of the
consolidated financial statements of NL Industries, Inc. as of December 31,
1995 and 1996 and the related consolidated statements of operations,
shareholders' deficit and cash flows for each of the three years in the period
ended December 31, 1996, and our report dated January 21, 1997 on our audits of
the consolidated financial statements of Titanium Metals Corporation as of
December 31, 1995 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996, which reports are included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 68,035
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 2,663
<INVENTORY> 0
<CURRENT-ASSETS> 77,291
<PP&E> 1,378
<DEPRECIATION> 664
<TOTAL-ASSETS> 223,523
<CURRENT-LIABILITIES> 7,673
<BONDS> 0
0
0
<COMMON> 7,640
<OTHER-SE> 153,985
<TOTAL-LIABILITY-AND-EQUITY> 223,523
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> 39,936
<INCOME-TAX> 9,335
<INCOME-CONTINUING> 29,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,962
<EPS-PRIMARY> 3.91
<EPS-DILUTED> 3.91
</TABLE>
<PAGE> 1
Exhibit 99.1
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. Certain
litigation (Cadmus/Sutherin, Ray Cook Golf and Tungsten contamination) is
described in Note 16 of the Consolidated Financial Statements, which
information is incorporated herein by reference.
<PAGE> 2
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3/F-4
Consolidated Statements of Operations for the Years ended
December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows for the Years ended
December 31, 1994, 1995 and 1996 F-7/F-8
Notes to Consolidated Financial Statements F-9/F-30
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I -- Condensed financial information of Registrant S-2/S-7
Schedule II -- Valuation and qualifying accounts S-8
</TABLE>
Schedules III and IV are omitted because they are not applicable.
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
We have audited the accompanying consolidated balance sheets of
Titanium Metals Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Titanium Metals Corporation as of December 31, 1995 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, in
1994 the Company changed its method of accounting for postemployment benefits
in accordance with Statement of Financial Accounting Standards No. 112.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
January 21, 1997
<PAGE> 4
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS 1995 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24 $ 86,526
Accounts and other receivables, less
allowance of $3,620 and $4,788 27,932 114,100
Receivable from related parties 3,070 1,676
Inventories 69,134 155,488
Prepaid expenses 3,452 12,510
Deferred income taxes -- 718
-------- --------
Total current assets 103,612 371,018
-------- --------
Other assets:
Investment in joint ventures 13,853 270
Goodwill -- 67,430
Other intangible assets 1,424 19,314
Other 5,027 13,799
Deferred income taxes -- 11,618
-------- --------
Total other assets 20,304 112,431
-------- --------
Property and equipment:
Land 4,598 6,129
Buildings 17,783 32,929
Equipment 127,228 207,046
Construction in progress 3,120 17,513
-------- --------
152,729 263,617
Less accumulated depreciation 27,861 44,048
-------- --------
Net property and equipment 124,868 219,569
-------- --------
$248,784 $703,018
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 5
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
--------- -------
<S> <C> <C>
Current liabilities:
Notes payable $ -- 7,992
Current maturities of long-term debt 45,695 397
Payable to related parties 2,627 1,649
Accounts payable 27,136 49,628
Accrued liabilities 20,963 46,173
Income taxes 47 6,638
Deferred income taxes 596 348
--------- ---------
Total current liabilities 97,064 112,825
--------- ---------
Noncurrent liabilities:
Long-term debt 21,540 1,158
Capital lease obligations to related parties -- 11,562
Payable to related parties 23,942 996
Accrued OPEB cost 28,152 27,512
Accrued pension cost 5,966 2,743
Deferred income taxes 789 10,629
Other 3,203 3,920
--------- ---------
Total noncurrent liabilities 83,592 58,520
--------- ---------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities -- 201,250
Other minority interest -- 4,207
Stockholders' equity:
Preferred stock, $.01 par value; 1 million shares
authorized, none outstanding -- --
Common stock, $.01 par value; 99 million shares
authorized, 15.7 million and 31.5 million shares
issued and outstanding 157 315
Additional paid-in capital 142,720 346,133
Accumulated deficit (72,653) (25,009)
Currency translation adjustment 283 5,635
Pension liabilities adjustment (2,379) (858)
--------- ---------
Total stockholders' equity 68,128 326,216
--------- ---------
$ 248,784 $ 703,018
========= =========
</TABLE>
Commitments and contingencies (Notes 15 and 16)
F-4
<PAGE> 6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues and other income:
Net sales $ 145,984 $ 184,723 $ 507,074
Equity in earnings of joint ventures 2,263 4,824 6,237
Other, net (187) 469 1,049
--------- --------- ---------
148,060 190,016 514,360
--------- --------- ---------
Costs and expenses:
Cost of sales 159,958 170,699 418,775
Selling, general, administrative and development 12,462 14,065 29,917
Special charges (credit) 10,000 (1,200) 4,824
Interest 7,562 10,414 10,223
--------- --------- ---------
189,982 193,978 463,739
--------- --------- ---------
Income (loss) before income taxes (41,922) (3,962) 50,621
Income tax expense 155 255 1,892
Minority interest and preacquisition earnings -- -- 1,085
--------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting principle (42,077) (4,217) 47,644
Change in accounting principle (1,000) -- --
--------- --------- ---------
Net income (loss) $ (43,077) $ (4,217) $ 47,644
========= ========= =========
Per common share:
Income (loss) before cumulative effect of
a change in accounting principle $ (2.80) $ (.27) 1.72
Change in accounting principle (.07) -- --
--------- --------- ---------
Net income (loss) $ (2.87) $ (.27) $ 1.72
========= ========= =========
Weighted average common shares outstanding 15,010 15,383 27,623
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
Adjustments
Additional ------------------------
Common Common paid-in Accumulated Currency Pension
shares stock capital deficit translation liabilities Total
------ --------- --------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 15,066 $ 150 $ 135,290 $ (25,359) $ (18) $ (1,081) $ 108,982
Net loss -- -- -- (43,077) -- -- (43,077)
Cash contribution -- -- 419 -- -- -- 419
Adjustments, net -- -- -- -- 178 (1,754) (1,576)
------ --------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 15,066 150 135,709 (68,436) 160 (2,835) 64,748
Net loss -- -- -- (4,217) -- -- (4,217)
Conversion of stockholder indebtedness 568 6 10,846 -- -- -- 10,852
Cash contribution 59 1 1,147 -- -- -- 1,148
Noncash distribution to stockholders -- -- (4,982) -- -- -- (4,982)
Adjustments, net -- -- -- -- 123 456 579
------ --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 15,693 157 142,720 (72,653) 283 (2,379) 68,128
Net income -- -- -- 47,644 -- -- 47,644
Common stock issued:
IMI Titanium Acquisition (Note 4) 9,561 96 69,904 -- -- -- 70,000
Stock Offering (Note 11) 6,200 62 132,926 -- -- -- 132,988
Other 1 -- 28 -- -- -- 28
Other, net -- -- 555 -- -- -- 555
Adjustments, net -- -- -- -- 5,352 1,521 6,873
------ --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 31,455 $ 315 $ 346,133 $ (25,009) $ 5,635 $ (858) $ 326,216
====== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 8
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (43,077) $ (4,217) $ 47,644
Depreciation and amortization 8,334 13,218 18,974
Earnings of joint ventures in excess of distributions (1,195) (3,824) (5,992)
Special charges (credit) 10,000 (1,200) 4,824
Deferred income taxes -- -- (10,416)
Minority interest and preacquisition earnings -- -- 1,085
Other, net 3,449 (86) (3,071)
--------- --------- ---------
(22,489) 3,891 53,048
Change in assets and liabilities, net of acquisitions:
Accounts and other receivables 5,273 (870) (29,998)
Inventories (738) (15,477) (13,309)
Prepaid expenses 194 19 (6,786)
Accounts payable and accrued liabilities (2,590) 6,036 (106)
Income taxes (9) 165 4,521
Accounts with related parties 116 (275) (8,412)
Other, net 222 396 (269)
--------- --------- ---------
Net cash used by operating activities (20,021) (6,115) (1,311)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (4,609) (2,981) (21,679)
Business acquisitions:
IMI Titanium Acquisition -- -- (2,250)
AJM Acquisition -- -- (96,799)
Other -- -- (10,885)
Other, net 40 421 213
--------- --------- ---------
Net cash used by investing activities (4,569) (2,560) (131,400)
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 9
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings $ 63,625 $ 9,371 $ 113,793
Reductions (48,829) (7,371) (179,480)
Proceeds from issuance of common stock, net -- -- 131,488
Proceeds from issuance of Company-obligated
mandatorily redeemable preferred securities, net -- -- 192,409
Capital contributions from related parties 419 1,148 --
Related parties loans (repayments) 2,500 5,500 (42,521)
--------- --------- ---------
Net cash provided by financing activities 17,715 8,648 215,689
--------- --------- ---------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities (6,875) (27) 82,978
Cash acquired -- -- 3,053
Currency translation 146 51 471
--------- --------- ---------
(6,729) 24 86,502
Balance at beginning of year 6,729 -- 24
--------- --------- ---------
Balance at end of year $ -- $ 24 $ 86,526
--------- --------- ---------
Supplemental disclosures:
Cash paid for:
Interest expense $ 6,497 $ 9,970 $ 8,958
Income taxes 120 112 6,348
Acquisitions:
Cash and cash equivalents $ -- $ -- $ 3,053
Goodwill and other intangibles -- -- 85,158
Other noncash assets -- -- 180,847
Liabilities -- -- (89,124)
Common stock issued to IMI -- -- (70,000)
--------- --------- ---------
Cash paid $ -- $ -- $ 109,934
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 10
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization:
Titanium Metals Corporation ("TIMET") was a 75%-owned subsidiary of
Tremont Corporation during 1994 and 1995 with the remaining 25% held by Union
Titanium Sponge Corporation ("UTSC"), a consortium of Japanese companies. In
February 1996, TIMET acquired the titanium businesses of IMI plc and affiliates
("IMI") for stock and in June 1996 completed an initial public offering of
common stock (the "Stock Offering") which together reduced Tremont's ownership
in TIMET to 30% and UTSC's ownership to 10%. Contran Corporation holds,
directly or through subsidiaries, approximately 44% of Tremont's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held
by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons may be
deemed to control each of Contran, Tremont and TIMET.
Note 2--Summary of significant accounting policies:
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of TIMET and its majority-owned subsidiaries
(collectively, the "Company"). All material intercompany accounts and balances
have been eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Use of 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.
Fiscal year. The Company uses a fiscal year ending on the Sunday
closest to December 31 of each year. Each of the past three fiscal years
reflect the results of operations for 52 weeks.
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 are accumulated in the currency translation adjustments
component of stockholders' equity, net of related deferred income taxes.
Currency transaction gains and losses are recognized in income currently.
Net sales. Sales are recognized when products are shipped.
Inventories and cost of sales. Inventories are stated at the lower of
cost or market. The first-in, first-out ("FIFO") method is used to determine
the cost of approximately 50% of inventories at December 31, 1996 with the
last-in, first-out ("LIFO") method used to determine the cost of other
inventories.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Investment in joint ventures. Investments in 20% to 50%-owned joint
ventures are accounted for by the equity method.
F-9
<PAGE> 11
Intangible assets and amortization. Goodwill, representing the excess
of cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized by the straight
line method over 15 years and is stated net of accumulated amortization of $1.6
million at December 31, 1996. Patents and other intangible assets, except
intangible pension assets, are amortized by the straight-line method over the
periods expected to be benefited, generally approximately nine years.
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 and were
nil in each of the past three years. Software development and conversion costs
(excluding training) are capitalized and amortized over the software's
estimated useful life.
Depreciation related to TIMET's vacuum distillation process ("VDP")
titanium sponge facility is computed on a units-of-production method based on
the pounds of sponge produced and a rated annual production capacity of 22
million pounds. The amount of depreciation expense recognized in the future
periods related to VDP is not expected to vary materially from the
straight-line method. Other depreciation is computed principally on the
straight-line method over the estimated useful lives of 15 to 40 years for
buildings and 3 to 25 years for machinery and equipment.
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 13.
Stock-based compensation. The Company has elected the disclosure
alternative proscribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," and to account for the
Company's stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB No. 25, no compensation
cost is generally recognized for fixed stock options for which the exercise
price is not less than the market price of the Company's common stock on the
grant date. See Note 11.
Research and development. Research and development expense
approximated $2 million in each of the past three years.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
Income taxes. 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 subsidiaries not included in TIMET's
consolidated U.S. tax group.
Stock split and earnings per share. Common shares outstanding for all
periods presented have been adjusted to reflect the 65-for-1 split (the "Stock
Split") of the Company's common stock effected in connection with the Stock
Offering. Earnings per share is based upon the weighted average number of
common shares outstanding after giving effect to the Stock Split. Common stock
equivalents are excluded from the calculation because the effect for each of
the past three years is either antidilutive or not material. See Note 17.
F-10
<PAGE> 12
Fair value of financial instruments. The Company's bank debt reprices
with changes in market interest rates and, accordingly, the carrying amount
of such debt is believed to approximate market value. See Note 9. At
December 31, 1996, the fair value of Company-obligated mandatorily redeemable
preferred securities (see Note 10) approximated $220 million based on quoted
market prices (book value - $201 million).
At December 31, 1996, the fair value of the Company's common equity,
based on a quoted market price at that date of $32.875 per share, was
approximately $1 billion (book value - $326 million).
Note 3--Business and geographic segments:
The Company's operations are conducted in one business segment,
titanium metals operations. The Company is a vertically integrated producer of
titanium sponge, ingot, slab and mill forged or cast products for aerospace,
industrial, and other applications. The Company's production facilities are
located principally in the United States, United Kingdom, and France with its
products sold throughout the world.
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Sales $ 145,984 $ 184,723 $ 507,074
========= ========= =========
Operating income (loss) $ (34,676) $ 5,378 $ 59,849
General corporate income, net 316 1,074 995
Interest expense (7,562) (10,414) (10,223)
--------- --------- ---------
Income (loss) before income taxes $ (41,922) $ (3,962) $ 50,621
========= ========= =========
Geographic segments
Net sales - point of origin:
United States $ 123,485 $ 174,802 $ 354,651
Europe 30,542 13,862 186,063
Eliminations (8,043) (3,941) (33,640)
--------- --------- ---------
$ 145,984 $ 184,723 $ 507,074
========= ========= =========
Net sales - point of destination:
United States $ 89,519 $ 135,421 $ 312,640
Europe 34,475 33,520 155,364
Other 21,990 15,782 39,070
--------- --------- ---------
$ 145,984 $ 184,723 $ 507,074
========= ========= =========
Operating income (loss):
United States $ (34,278) $ 4,408 $ 39,014
Europe (398) 970 20,835
--------- --------- ---------
$ (34,676) $ 5,378 $ 59,849
========= ========= =========
Identifiable assets:
United States $ 227,361 $ 235,844 $ 442,163
Europe 9,174 12,940 173,210
General corporate - U.S. 3,687 -- 87,645
--------- --------- ---------
$ 240,222 $ 248,784 $ 703,018
========= ========= =========
</TABLE>
F-11
<PAGE> 13
Operating income (loss) includes restructuring charges of $10 million
in 1994, a restructuring credit of $1.2 million in 1995 and $4.7 million of
special charges related to the IMI Titanium Acquisition in 1996. See Note 5.
General corporate income includes the Company's equity in earnings of
Basic Investments, Inc. ("BII") and Victory Valley Land Company L.P. ("VVLC")
of $.7 million in 1994 and $1.1 million in 1995, and interest income of $.4
million in 1996 on general corporate cash equivalents.
Export sales from U.S. based operations approximated $35 million in
1994, $40 million in 1995 and $58 million in 1996. At December 31, 1996, the
net assets of non-U.S. subsidiaries included in consolidated net assets
approximated $73 million.
Note 4--Business combinations and joint ventures:
IMI Titanium Acquisition. In February 1996, the Company acquired IMI's
titanium metals businesses (the "IMI Titanium Acquisition"). IMI previously
conducted its titanium business principally through its wholly owned United
Kingdom subsidiary, IMI Titanium Ltd. (now known as TIMET UK), and its U.S.
subsidiary, IMI Titanium, Inc. (now known as TIMET Castings). IMI conveyed all
of its titanium related businesses to the Company in exchange for 9.6 million
newly issued shares of common stock valued at $70 million, and the Company
issued $20 million of the Company's subordinated debt to IMI in exchange for a
like amount of debt previously owed to IMI by its U.K. subsidiary. In
connection with the IMI Titanium Acquisition, Tremont was granted a three year
option to purchase up to 2 million shares of the Company's common stock from
IMI for $16 million. Tremont assigned to UTSC the right to acquire from IMI .5
million shares of the Company's common stock under the option.
The Company accounted for the IMI Titanium Acquisition by the purchase
method of accounting (purchase price approximately $72 million, including
transaction costs). The Company has included the results of operations of the
IMI titanium business in its consolidated results of operations effective at
the beginning of 1996 with preacquisition earnings of approximately $.4 million
deducted in determining net income for 1996. Preacquisition sales of the IMI
titanium business included in consolidated sales for 1996 approximated $11.7
million.
Axel Johnson Metals Acquisition. In October 1996, the Company acquired
substantially all of the assets and assumed substantially all of the
liabilities of Axel Johnson Metals, Inc. ("AJM") for approximately $97 million
cash (the "AJM Acquisition"). The AJM Acquisition was completed through a
newly-formed subsidiary, Titanium Hearth Technologies, Inc. ("THT, Inc."), and
included the acquisition of the 50% partnership interest in Titanium Hearth
Technologies ("THT") that TIMET did not previously own. THT, Inc. and
subsidiaries operate titanium scrap processing facilities and electron beam
cold hearth melting furnaces.
The Company accounted for the AJM Acquisition by the purchase method
and consolidated THT, Inc.'s results effective October 1, 1996; revenues for
the fourth quarter of 1996 approximated $21 million. TIMET's purchases from THT
approximated $8 million in 1994, $10 million in 1995, and $9 million in 1996
prior to the acquisition.
TISTO. The Company held a 26% interest in TISTO, a German distributor
of titanium products, prior to June 30, 1996. In July 1996, the Company
purchased the remaining 74% equity interest for approximately $2 million in
cash and TIMET UK guaranteed approximately $2 million in existing loans from
former TISTO shareholders ($1.4 million outstanding at December 31, 1996). See
Note 9. TISTO's results were consolidated effective July 1, 1996; revenues
approximated $10 million for the six months ended December 31, 1996.
F-12
<PAGE> 14
TIMET Savoie. In August 1996, TIMET and Compagnie Europeenne du
Zirconium - CEZUS, S.A. ("CEZUS") completed an agreement to form a new
jointly-owned French company ("TIMET Savoie") to manufacture and sell titanium
products. TIMET Savoie is 70%-owned by TIMET and 30%-owned by CEZUS. CEZUS
contributed cash, equipment and the CEZUS titanium business to TIMET Savoie,
and certain CEZUS employees became employees of TIMET Savoie. TIMET contributed
proprietary technology, all of its interest in its previously existing
France-based distribution businesses and cash valued at a total of
approximately $8 million and purchased inventory of $8 million from CEZUS.
TIMET Savoie will manufacture products inside CEZUS' production facility in
Ugine, France both directly, utilizing its own personnel and equipment, and,
for melting and forging and certain other operations, indirectly by
subcontracting to CEZUS under a long-term manufacturing agreement with CEZUS.
The Company consolidated TIMET Savoie effective August 1, 1996; revenues for
the five months ended December 31, 1996 were approximately $18 million.
LASAB. In January 1997, the Company purchased LASAB Laser
Applications-und Bearbeitungs GmbH ("LASAB") for less than $1 million cash and
guaranteed, through its wholly-owned subsidiary, TIMET Deutschland,
approximately $1 million of LASAB outstanding bank indebtedness. LASAB is in
the titanium and stainless steel laser-welded tube and pipe and laser cutting
business.
Proforma financial information (unaudited). The following unaudited
proforma financial information has been prepared assuming the IMI Titanium
Acquisition and the AJM Acquisition occurred at the beginning of 1995. The
proforma effect of the TISTO, TIMET Savoie and LASAB transactions is not
material. The proforma financial information is not necessarily indicative of
the operating results that might have occurred if the transactions had been
completed at such earlier dates or the operating results which may occur in the
future.
<TABLE>
<CAPTION>
1995 1996
------- -------
(In millions, except per share amounts)
<S> <C> <C>
Sales $ 380.0 $ 564.4
Operating income (loss) (37.7) 59.8
Interest expense 24.4 17.3
Net income (loss) (48.6) 43.2
Earnings per common share $ (1.94) $ 1.50
Weighted average shares outstanding 25.0 28.8
</TABLE>
Joint ventures. The Company's investment in joint ventures at December
31, 1996 consisted of its one-third interest in MZI, LLC, which owns a
technologically advanced ultrasonic unit for inspecting titanium billet.
Prior to the October 1996 AJM Acquisition discussed above, the Company
accounted for its 50% interest in THT by the equity method.
Prior to October 1995, TIMET owned (i) a 32% equity interest in BII,
which, among other things, provides utility services in the industrial park
where one of TIMET's plants is located, and (ii) a 12% interest in VVLC, which
is actively engaged in efforts to develop certain real estate. BII, through a
wholly-owned subsidiary, owns an additional 50% interest in VVLC. In October
1995, TIMET made a pro rata distribution to its shareholders consisting of its
interest in BII and VVLC, and certain real estate. The Company distributed the
assets at their net carrying amount, which approximated $5 million.
F-13
<PAGE> 15
Summarized 1996 financial information of unconsolidated joint ventures
for 1996 is omitted because (i) THT is now consolidated by the Company and
proforma consolidated financial information is presented above and (ii) other
joint ventures are insignificant. Summarized combined financial information of
unconsolidated joint ventures for 1994 and 1995, principally THT, is shown
below.
<TABLE>
<CAPTION>
1994 1995
------- -------
(In thousands)
<S> <C> <C>
Income statement data:
Revenues $43,043 $69,107
Operating costs and expenses 38,598 54,764
Interest and other expenses 582 1,153
Net income $ 3,863 $13,190
Balance sheet data:
Current assets $23,098 $23,980
Noncurrent assets 44,050 21,190
Current liabilities 11,520 4,484
Noncurrent liabilities 21,409 16,099
Equity $34,219 $24,587
</TABLE>
Note 5-- Special charges (credit):
IMI titanium business. During 1996, TIMET recorded $4.7 million of
special charges resulting from the IMI Titanium Acquisition and related
integration of the operations acquired. Certain key executive officers of TIMET
received common stock and cash payments with a combined value of approximately
$3 million ($1.5 million common stock and $1.5 million cash) in consideration
for their services in connection with the IMI Titanium Acquisition. TIMET also
incurred $1.7 million of integration and other costs relating principally to
the relocation of personnel and the consolidation of certain facilities.
Integration costs are charged to operations as incurred.
F-14
<PAGE> 16
Restructuring charges. The Company's restructuring charges in 1994 and
prior years were related to cost reduction and containment efforts taken in
response to depressed industry conditions existing in those years. In the
fourth quarter of 1995, the Company determined that its restructuring costs
would ultimately be less than previously estimated and reversed $1.2 million of
previously accrued restructuring charges. At December 31, 1996 all amounts were
utilized and no restructuring charges remained accrued. Cash costs charged to
the restructuring accrual were $1.2 million in 1994, $1.7 million in 1995 and
$.8 million in 1996.
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(In millions)
<S> <C> <C> <C>
Special charges (credit) to operating income:
IMI titanium business $ -- $ -- $ 4.7
Workforce related 3.7 (.7) --
Excess space and other 1.3 (.5) .1
Idled assets 4.5 -- --
Other .5 -- --
------ ------ ------
$ 10.0 $ (1.2) $ 4.8
====== ====== ======
</TABLE>
Note 6--Inventories:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(In thousands)
<S> <C> <C>
Raw materials $ 7,778 $ 22,806
In process and finished products 57,538 125,137
Supplies 3,818 7,545
-------- --------
$ 69,134 $155,488
======== ========
</TABLE>
The average cost of LIFO inventories exceeded the net carrying amount
of such inventories by approximately $19 million at December 31, 1995 and $32
million at December 31, 1996.
F-15
<PAGE> 17
Note 7-- Intangible and other noncurrent assets:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Intangible assets:
Patents $ -- $14,103
Convenants not to compete -- 5,000
Intangible pension assets 1,424 1,199
------- -------
1,424 20,302
Less accumulated amortization -- 988
------- -------
$ 1,424 $19,314
======= =======
Other noncurrent assets:
Deferred financing costs $ -- $ 8,775
Prepaid pension costs 1,253 1,340
Other 3,774 3,684
------- -------
$ 5,027 $13,799
======= =======
</TABLE>
Note 8--Accrued liabilities:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
OPEB cost $ 2,240 $ 2,024
Pension cost 1,378 1,507
Other employee benefits 9,210 21,360
Environmental cost 1,143 1,643
Taxes, other than income 1,655 2,292
Interest 3 1,304
Other 5,334 16,043
------- -------
$20,963 $46,173
======= =======
</TABLE>
F-16
<PAGE> 18
Note 9--Notes payable, long-term debt and capital lease obligations to related
parties:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Notes payable - non U.S. credit agreements $ -- $ 7,992
======= =======
Long-term debt:
U.S. credit agreement $66,955 $ --
Former TISTO shareholders -- 1,415
Other 280 140
------- -------
67,235 1,555
Less current maturities 45,695 397
------- -------
$21,540 $ 1,158
======= =======
Capital lease obligations to related parties:
IMI $ -- $10,671
CEZUS -- 963
------- -------
-- 11,634
Less current maturities -- 72
------- -------
$ -- $11,562
======= =======
</TABLE>
U.S. credit agreement. TIMET's $105 million U.S. credit facility
provides for term loans aggregating $24 million with the balance of the
facility available as a revolving credit/letter of credit facility. Borrowings
under the revolving portion are limited to a formula-determined amount (the
"borrowing base") of accounts receivable and inventories. Interest accrues, at
the Company's option, at the prime rate plus .75% or LIBOR plus 2.25%. The
credit facility matures on December 31, 1998. The weighted average interest
rate on outstanding revolver and term loan borrowings was 11% at December 31,
1995 (none outstanding at December 31, 1996). Borrowings are collateralized by
substantially all of TIMET's assets. The credit agreement prohibits dividends
on the Company's common stock in excess of 20% of net income in any year,
limits additional indebtedness and transactions with affiliates, requires the
maintenance of certain financial amounts and contains other covenants customary
in transactions of this type. At December 31, 1996, the Company had about $102
million of borrowing availability under this credit agreement.
Non-U.S. credit agreements. At December 31, 1996, TIMET UK had a
(pound)10 million ($15 million) overdraft/revolving bank credit facility. The
agreement restricts payments of dividends from TIMET UK, loans and other
transactions with related parties and contains other covenants customary in
agreements of this type. Borrowings are collateralized by substantially all of
TIMET UK's assets and bear interest generally at the bank's base rate plus 2%
(8% at December 31, 1996). Borrowings of approximately $2.9 million were
outstanding at December 31, 1996. The TIMET UK facility was revised in 1997 to,
among other things, increase the facility to (pound)21 million ($35 million),
reduce the interest rate by up to .75% and extend the agreement through March
1998.
F-17
<PAGE> 19
TISTO has Deutsche mark ("DM") denominated short-term bank credit
agreements with outstanding balances of $1.2 million at December 31, 1996.
Interest accrues based on a variable rate (9.25% at December 31, 1996).
TIMET Savoie has French franc denominated short-term bank credit
facilities providing for aggregate borrowings of approximately $3.8 million.
Interest accrues at PIBOR plus .6% (4% at December 31, 1996) and outstanding
borrowings approximated $3.8 million at December 31, 1996. TIMET UK has
guaranteed outstanding indebtedness under these facilities. In addition, TIMET
Savoie has a $6 million factoring agreement with a French finance company.
During 1996, TIMET Savoie factored trade receivables approximating $7.2 million
and at December 31, 1996 was contingently liable for receivables factored with
recourse of approximately $1.6 million. Under the terms of the factoring
agreement, TIMET Savoie pays a fee equal to .2% of the amount factored and
interest accrues at PIBOR plus .45%. TIMET UK has guaranteed payment on
factored amounts. See Note 15 for a related party credit agreement TIMET Savoie
has with CEZUS.
At December 31, 1996, unused borrowing availability under the
Company's non-U.S. bank credit agreements approximated $8 million.
Capital lease obligations. In connection with the IMI Titanium
Acquisition, the Company entered into long-term leases with IMI principally
covering its production facilities within England and in connection with the
TIMET Savoie transaction, entered into long-term leases with CEZUS covering
machinery and equipment. The terms of these capital leases range from 10 to 30
years. The UK rentals are subject to adjustment every five years based on
changes in certain published price indexes. TIMET has guaranteed TIMET UK's
obligations under its leases. Assets held under capital leases included in
buildings and equipment at December 31, 1996 were $10.7 million and $1 million,
respectively, with related accumulated depreciation of $.3 million.
Aggregate maturities of long-term debt and capital lease obligations:
<TABLE>
<CAPTION>
Capital Long-term
Leases Debt
-------- --------
(In thousands)
<S> <C> <C>
Years ending December 31,
1997 $ 1,219 $ 397
1998 1,219 1,158
1999 1,219 --
2000 1,219 --
2001 1,219 --
2002 and thereafter 26,750 --
Less amounts representing interest (21,211) --
-------- --------
$ 11,634 $ 1,555
======== ========
</TABLE>
F-18
<PAGE> 20
Note 10--Minority interest - Company-obligated mandatorily redeemable preferred
securities:
In November 1996, TIMET Capital Trust I (the "Trust"), a wholly-owned
subsidiary of TIMET, issued $201 million of 6.625% Company-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities") and $6 million of 6.625% common securities. TIMET holds all of the
outstanding common securities of the Trust. The Trust used the proceeds from
such issuance to purchase from the Company $207 million principal amount of
TIMET's 6.625% convertible junior subordinated debentures due 2026 (the
"Subordinated Debentures") and, in the aggregate, constitute a full and
unconditional guarantee by the Company of the Trust's obligations under the
Convertible Preferred Securities. The sole assets of the Trust are the
Subordinated Debentures. The Convertible Preferred Securities represent
undivided beneficial ownership interests in the Trust, are entitled to
cumulative preferred distributions from the Trust of 6.625% per annum,
compounded quarterly, and are convertible, at the option of the holder, into
TIMET common stock at the rate of 1.339 shares of common stock per Convertible
Preferred Security (an equivalent price of $37.34 per share), for an aggregate
of 5.4 million common shares if fully converted.
The Convertible Preferred Securities mature December 2026 and are
redeemable at the Company's option beginning December 1999, initially at
approximately 104.6% of principal amount declining to 100% from December 2006.
The Company has the right to defer interest payments for up to 20 consecutive
quarters ("Extension Period") on one or more occasions. In the event the
Company exercises this right, it would be unable during any Extension Period
to, among other things, pay dividends on or reacquire its capital stock.
Note 11--Stockholders' equity:
Common stock. In June 1996, the Company completed the sale of 6.2
million shares of its common stock in the Stock Offering at an initial price to
the public of $23 per share. In connection with the Stock Offering, the Company
effected the Stock Split, increased its authorized common shares to 99 million
shares, increased its authorized preferred stock to 1 million shares, and
reserved up to 3.1 million shares to be issued under the 1996 Long Term
Incentive Plan (the "TIMET Incentive Plan"). The Company's net proceeds from
the Stock Offering approximated $131 million. The Company used approximately
$42.5 million of the net proceeds to repay existing indebtedness to
stockholders ($22.5 million to Tremont and $20 million to IMI) and $82 million
to repay indebtedness under its U.S. credit agreement. Supplemental earnings
per common share, assuming the stock offering had been completed at the
beginning of 1996, would have been $1.75 per share.
Certain key executive officers of the Company received shares (the
"Management Shares") of the Company's Class B common stock and cash payments
with a combined value of approximately $3 million in consideration for their
services in connection with the IMI Titanium Acquisition. The Class B
Management Shares were converted into 93,000 shares of the Company's common
stock in connection with the Stock Offering, and no Class B shares are
currently outstanding or authorized.
Preferred stock. Effective with the Stock Offering, the Company is
authorized to issue 1 million shares of preferred stock. The rights of
preferred stock as to, among other things, dividends, liquidation, redemption,
conversions, and voting rights are determined by the Board of Directors.
Common stock options. The TIMET Incentive Plan provides for the
discretionary grant of restricted common stock, stock options, stock
appreciation rights and other incentive compensation to officers and other key
employees of the Company. Effective with the Stock Offering, options were
granted to acquire 437,400 shares at prices equal to or greater than the market
price at the date of grant ($23 to $29 per share). Other options granted in
1996, principally in conjunction with the AJM Acquisition, aggregated 98,000
shares at market prices
F-19
<PAGE> 21
ranging from $28.56 to $31.25. Options vest over five years and expire ten
years from date of grant.
Additionally, the Board of Directors authorized, effective with the
Stock Offering, a plan for its nonemployee directors that provides for eligible
directors to receive 625 options effective with the Stock Offering and to
annually be granted options to purchase 625 shares of the Company's common
stock at a price equal to the market price on the date of grant and to receive,
as partial payment of director fees, annual grants of 400 shares of common
stock. In 1996, options to purchase 3,750 shares of the Company's common stock
were granted to nonemployee directors of the Company at exercise prices ranging
from $23 to $32.875 per share. Options granted to nonemployee directors vest in
one year and expire five years from date of grant. In February 1997, the
non-eligible members of the Board of Directors amended this plan to increase
the number of shares granted under options to 1,500 per year beginning in 1998,
and to increase the term of future options to ten years.
At December 31, 1996, 538,150 options were outstanding at prices
ranging from $23 to $32.875 ($13.8 million aggregate amount payable upon
exercise), no options were exercisable, and 1,875 nonemployee director options
become exercisable in 1997. At December 31, 1996, 1,964,600 shares and 58,750
shares were available for future grant under the TIMET Incentive Plan and the
nonemployee director plan, respectively.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996. Weighted average fair values were
estimated using the Black-Scholes model and assumptions listed below.
<TABLE>
<CAPTION>
Weighted Average
----------------------------------
Option Exercise Exercise Fair Remaining
Grants Shares Prices Price Value Life (years)
------ ------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
At market 371,150 $23-$32.875 $ 24.64 $ 12.47
Above market 167,000 $26-$29 27.50 $ 10.22
------- ----------- --------- ---------
538,150 $23-$32.875 $ 25.53 $ 11.77 9.5
======= =========== ========= ========= ======
</TABLE>
<TABLE>
<S> <C>
Assumptions:
Expected life (years) 6
Risk-free interest rate 6.67%
Volatility 40%
Dividend yield 0%
</TABLE>
Had stock-based compensation cost been determined based on the
estimated fair values of options granted and recognized as compensation expense
over the vesting period of the grants in accordance with SFAS No. 123, the
Company's pretax income, net income and earnings per share for 1996 would have
been reduced by $1.1 million, $.7 million and $.03 per share, respectively.
F-20
<PAGE> 22
Note 12--Income taxes:
Summarized below are (i) the components of income (loss) before income
taxes, minority interest, preacquisition earnings and cumulative effect of a
change in accounting principle ("pretax income (loss)"), (ii) the difference
between the income tax expense (benefit) attributable to pretax income (loss)
and the amounts that would be expected using the U.S. federal statutory income
tax rate of 35%, and (iii) the components of the income tax expense (benefit)
attributable to pretax income (loss).
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Expected income tax expense (benefit) $(14,673) $ (1,387) 17,717
Adjustment of deferred tax valuation allowance:
Related to current year results 14,900 1,502 (6,519)
Change in estimate of future realization -- -- (10,000)
Incremental tax on non-tax group companies (164) (1) (46)
U.S. state income taxes, net 97 -- 848
Other, net (5) 141 (108)
-------- -------- --------
$ 155 $ 255 1,892
======== ======== ========
Income tax expense:
Current income taxes:
U.S $ 149 $ -- $ 6,072
Non-U.S 6 255 6,236
-------- -------- --------
155 255 12,308
======== ======== ========
Deferred income taxes (benefit):
U.S -- -- (10,809)
Non-U.S -- -- 393
-------- -------- --------
-- -- (10,416)
-------- -------- --------
$ 155 $ 255 $ 1,892
======== ======== ========
Pretax income (loss):
U.S $(41,284) $ (4,589) $ 32,671
Non-U.S (638) 627 17,950
-------- -------- --------
$(41,922) $ (3,962) $ 50,621
======== ======== ========
Comprehensive tax provision allocable to:
Pretax income $ 155 $ 255 $ 1,892
Stockholders' equity, principally deferred taxes
allocable to adjustment components -- -- 2,500
-------- -------- --------
$ 155 $ 255 $ 4,392
======== ======== ========
</TABLE>
F-21
<PAGE> 23
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1996
--------------------- ----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
<S> <C> <C> <C> <C>
Temporary differences relating to net assets:
Inventories $ -- $ (5.0) $ -- $ (4.9)
Property and equipment -- (3.8) -- (13.0)
Accrued OPEB cost 11.7 -- 11.4 --
Accrued liabilities and other deductible differences 8.3 -- 10.9 --
Other taxable differences -- (2.5) -- (5.5)
Investments in subsidiaries and affiliates not
included in the consolidated tax group -- (3.2) -- (3.0)
Tax loss and credit carryforwards 15.8 -- 11.7 --
Valuation allowance (22.7) -- (6.2) --
------- ------- ------- -------
Gross deferred tax assets (liabilities) 13.1 (14.5) 27.8 (26.4)
Netting (13.1) 13.1 (15.5) 15.5
------- ------- ------- -------
Total deferred taxes -- (1.4) 12.3 (10.9)
Less current deferred taxes -- (.6) 0.7 (.3)
------- ------- ------- -------
Net noncurrent deferred taxes $ -- $ (.8) $ 11.6 $ (10.6)
======= ======= ======= =======
</TABLE>
The Company's valuation allowance increased in the aggregate
(including amounts allocated to items other than continuing operations) by
$14.7 million in 1994 and decreased by $.9 million in 1995 and $16.5 million in
1996. The 1996 valuation allowance reduction included $10 million due to a
change in estimate of the future tax benefits of certain tax net operating loss
carryforwards ("NOLs") and alternative minimum tax credit ("AMT") carryforwards
that will more likely than not be realized.
At December 31, 1996, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $24 million expiring in 2008 and 2009. The
utilization of the Company's NOLs is subject to an annual limitation. At
December 31, 1996, the Company had an AMT carryforward of approximately $3
million, which can be utilized to offset regular income taxes payable in future
years. The AMT carryforward has an indefinite carryforward period.
Note 13--Employee benefit plans:
Variable compensation plans. Approximately 85% of the Company's total
worldwide employees, including a significant portion of its domestic hourly
employees, participate in compensation programs which provide for variable
compensation based upon the financial performance of the Company and, in
certain circumstances, the individual performance of the employee. The cost of
these plans was $.8 million in 1994, $.3 million in 1995 and $12 million in
1996.
Defined contribution plans. All of the Company's domestic hourly and
salaried employees (70% of total worldwide employees at December 31, 1996) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on company
profitability for 60% of eligible employees. Approximately 40% of the Company's
total employees at December 31, 1996 also participate in a defined contribution
pension plan with contributions based, beginning in 1996, upon a fixed
percentage of the employee's eligible earnings. The cost of these pension and
savings plans was $3 million in 1996 and was insignificant in 1994 and 1995 due
to the Company reporting net losses in those years.
F-22
<PAGE> 24
Defined benefit pension plans. The Company maintains contributory and
noncontributory defined benefit pension plans covering approximately 50% of
employees at December 31, 1996 (substantially all European employees and
one-third of its domestic workforce). Defined pension benefits are generally
based on years of service and compensation, and the related expense is based
upon independent actuarial valuations. The Company's funding policy for U.S.
plans is to contribute annually amounts satisfying the funding requirements of
the Employee Retirement Income Security Act of 1974, as amended. Non-U.S.
defined benefit pension plans are funded in accordance with applicable
statutory requirements. The defined benefit pension plans for domestic
employees were closed to new participants prior to 1996 and, in addition with
respect to salaried employees, benefit levels have been frozen.
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. The rates used in determining the actuarial present value of benefit
obligations at December 31, 1996 were: (i) discount rates -- 7% to 8.75% (7.5%
in 1995), and (ii) rates of increase in future compensation levels -- 3% to
6.5% (3% in 1995). The expected long-term rates of return on assets used was 7%
to 9.75% in 1996 and 9% in 1995. The benefit obligations are sensitive to
changes in these estimated rates and actual results may differ from the
obligations noted below. At December 31, 1996, the assets of the plans are
primarily comprised of U.S. government obligations, corporate stocks and bonds.
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
------------------------- -------------------------
December 31, December 31,
1995 1996 1995 1996
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $ 16,183 $ 47,733 $ 34,705 $ 34,424
Nonvested benefits 955 3,040 1,510 1,448
-------- -------- -------- --------
Accumulated benefit obligations 17,138 50,773 36,215 35,872
Effect of projected salary increases 65 27,766 110 114
-------- -------- -------- --------
Projected benefit obligations 17,203 78,539 36,325 35,986
Plan assets at fair value 18,146 82,118 28,884 31,624
-------- -------- -------- --------
Plan assets over (under) projected benefit
obligations 943 3,579 (7,441) (4,362)
Unrecognized net loss from experience
different from actuarial assumptions 1,186 (2,674) 3,837 1,981
Unrecognized prior service cost 235 1,269 1,424 1,199
Unrecognized net assets being amortized
over 14 years (1,111) (834) (1,349) (1,011)
Adjustment to recognize minimum liability -- -- (3,815) (2,057)
-------- -------- -------- --------
Total prepaid (accrued) pension cost 1,253 1,340 (7,344) (4,250)
Current portion -- -- (1,378) (1,507)
-------- -------- -------- --------
Noncurrent prepaid (accrued) pension cost $ 1,253 $ 1,340 $ (5,966) $ (2,743)
======== ======== ======== ========
</TABLE>
F-23
<PAGE> 25
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned $ 846 $ 630 $ 3,260
Interest cost on projected benefit obligations 3,457 3,959 7,696
Actual return on plan assets 1,163 (9,560) (7,256)
Net amortization and deferrals (5,254) 5,910 (1,951)
------- ------- -------
Net pension expense $ 212 $ 939 $ 1,749
======= ======= =======
</TABLE>
Postretirement benefits other than pensions. The Company provides
certain postretirement health care and life insurance benefits to certain of
its domestic eligible retired employees. The Company funds such benefits as
they are incurred, net of any contributions by the retirees. Under plans
currently in effect, a majority of TIMET's active domestic employees would
become eligible for these benefits if they reach normal retirement age while
working for TIMET. These plans have been revised to discontinue employer-paid
health care coverage for future retirees once they become Medicare-eligible.
The components of the periodic OPEB cost and accumulated OPEB
obligations are set forth below. The rates used in determining the actuarial
present value of the accumulated OPEB obligations at December 31, 1996 were:
(i) discount rate--7.75% (7.5% in 1995), (ii) rate of increase in future
compensation levels -- 3% and (iii) rate of increase in future health care
costs--11% in 1997, gradually declining to 6% in 2016 and thereafter. If the
health care cost trend rate was increased by one percentage point for each
year, OPEB expense would have increased approximately $.2 million in 1996, and
the actuarial present value of accumulated OPEB obligations at December 31,
1996 would have increased approximately $1.5 million. The accrued OPEB cost is
sensitive to changes in these estimated rates and actual results may differ
from the obligations noted below.
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $18,805 $16,266
Other fully eligible active plan participants 1,227 1,236
Other active plan participants 5,456 3,750
------- -------
25,488 21,252
Unrecognized net gain from experience different from
actuarial assumptions 730 4,536
Unrecognized prior service credits 4,174 3,748
------- -------
Total accrued OPEB cost 30,392 29,536
Less current portion 2,240 2,024
------- -------
Noncurrent accrued OPEB cost $28,152 $27,512
======= =======
</TABLE>
F-24
<PAGE> 26
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned $ 395 $ 242 $ 407
Interest cost on accumulated OPEB obligations 1,791 2,060 1,567
Net amortization and deferrals (244) (475) (653)
------- ------- -------
Net OPEB expense $ 1,942 $ 1,827 $ 1,321
======= ======= =======
</TABLE>
Note 14--Changes in accounting principles:
In 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" and recorded a $1 million charge for this change in
accounting principle.
SFAS No. 128, "Earnings per Share," issued in February 1997 is
effective for the Company in 1997. Had SFAS No. 128 been effective during
1994, 1995 and 1996, (i) "Basic earnings per share" under SFAS No. 128 would
have been the same as earnings per common share reported by the Company and
(ii) "Dilutive earnings per share" under SFAS No. 128 would have been the same
as fully diluted earnings per share reported by the Company.
Note 15--Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions with related
companies 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 (ii) 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, Tremont 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.
It is the policy of the Company to engage in transactions with related
parties on terms which are, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
The Company has an intercorporate services agreement with Tremont
whereby the Company will provide certain management, financial and other
services to Tremont for approximately $.4 million in 1996, subject to renewal
for future years. Charges to (from) Tremont approximated nil in 1994 and $(.9)
million in 1995 pursuant to similar arrangements for compensation and
intercorporate services.
The Company purchases certain utility services from BMI. The amount
paid to BMI approximated $1 million in each of the past three years.
Receivables from related parties relate principally to sales to UTSC.
Current payables to related parties include current portions of capital leases
and loans from CEZUS. Noncurrent
F-25
<PAGE> 27
payables to related parties, excluding long-term capital lease obligations (see
Note 9), are summarized below.
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Noncurrent liabilities - Tremont:
Loans and interest $22,460 $ --
Other 1,482 996
------- -------
$23,942 $ 996
======= =======
</TABLE>
Interest expense on related party indebtedness was $2.4 million in
1994, $2.1 million in 1995 and $2.9 million in 1996. In connection with the IMI
Titanium Acquisition, the Company issued $20 million of TIMET subordinated debt
payable to IMI in exchange for a like amount of debt previously owed to IMI by
the IMI titanium businesses. The subordinated debt to both IMI and Tremont
accrued interest at 10.4%. See Note 11 regarding, among other things, the
repayment of loans due to IMI and Tremont with proceeds from the Stock
Offering.
TIMET Savoie has a French franc denominated short term credit facility
available from CEZUS which provides, under certain circumstances, for
borrowings up to $13 million. Interest accrues at a weighted average rate
published by Banque de France plus .125% (4% at December 31, 1996). At December
31, 1996 approximately $1 million was outstanding under this agreement.
Additionally, CEZUS has the right to sell their interest in TIMET Savoie to the
Company for 30% of TIMET Savoie's registered capital after TIMET Savoie has had
two consecutive years of profitable operations and all outstanding borrowings
to CEZUS have been repaid. The Company has the right to purchase CEZUS' 30%
interest in TIMET Savoie for 30% of TIMET Savoie's equity determined under
French accounting principles on or after December 31, 1997 and following the
repayment of all outstanding borrowings to CEZUS.
TIMET completed a recapitalization in 1995 under which, among other
things, (i) Tremont made a $1 million cash capital contribution to TIMET and
exchanged $8 million of TIMET subordinated debt into TIMET common equity, (ii)
TIMET made a $1 million cash prepayment of accrued interest to UTSC, and (iii)
UTSC exchanged $3 million of interest owed by TIMET to UTSC into TIMET common
equity. In connection with the recapitalization, TIMET issued .5 million shares
of common stock pro rata to its then-existing shareholders.
In connection with amendments of the Company's credit facility during
1995, Tremont advanced TIMET $8 million as additional subordinated TIMET debt
($2.5 million advanced in 1994 and $5.5 million advanced in 1995), guaranteed
$5 million of the term loans, collateralized such guarantee with approximately
600,000 shares of NL Industries, Inc. common stock held by Tremont, and agreed
to pledge additional NL shares as necessary to meet certain market value
thresholds. NL is an indirect subsidiary of Contran. Contran entered into an
agreement with TIMET's lenders whereby Contran was obligated to purchase the
pledged shares from TIMET's lenders under certain conditions. In connection
with the Stock Offering, the security arrangements between the Company's
lenders and Tremont and Contran were terminated.
UTSC made a $.4 million capital contribution to TIMET during 1994.
In connection with the construction and financing of TIMET's VDP
plant, UTSC licensed certain technology to TIMET in exchange for the right,
effective after UTSC's conversion of debt into TIMET common stock, to acquire
up to 20% of TIMET's annual production capacity of VDP sponge at agreed-upon
prices through early 1997 and higher formula-determined prices
F-26
<PAGE> 28
thereafter through 2008. TIMET's December 1996 selling prices to UTSC were
approximately 15% below the cost at which TIMET was purchasing titanium sponge
under agreements with third parties. The discount from fair market value
represents TIMET's consideration to UTSC for the licensed technology. Sales to
UTSC approximated $2 million in 1994, $9 million in 1995 and $12 million in
1996.
Note 16--Commitments and contingencies:
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Net rent expense
was approximately $1.3 million in 1994, $1.4 million in 1995 and $2.7 million
in 1996.
At December 31, 1996, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
<TABLE>
<CAPTION>
Amount
------
(In thousands)
Years ending December 31,
- -------------------------
<S> <C>
1997 $3,003
1998 1,701
1999 832
2000 339
2001 189
------
6,064
LESS SUBLEASE INCOME 614
------
$5,450
======
</TABLE>
Legal proceedings and contingencies.
Cadmus/Sutherin. In May 1995, TIMET received notice of two separate
actions naming TIMET as a defendant, each brought by a former employee alleging
that TIMET intentionally exposed such employee to dangerous levels of certain
chemicals and/or metals during his employment at TIMET's plant in Toronto, Ohio
(Sutherin v. Titanium Metals Corporation, No. 95 CV 00168, Court of Common
Pleas, Jefferson County, Ohio; Cadmus v. Titanium Metals Corporation, No. 94 CV
00469, Court of Common Pleas, Jefferson County, Ohio). The complaints seek
compensatory and punitive damages totaling approximately $2.5 million each.
Both of these cases were subsequently removed to U.S. District Court for the
Southern District of Ohio (Sutherin, No. C2-95-551; Cadmus, No. C2-95-586). The
Sutherin case was dismissed without prejudice by the plaintiff in June 1996.
The Cadmus action is currently in discovery.
Plaintiff's claims in Cadmus are similar to previous claims made by
plaintiff and rejected by the Ohio Industrial Commission (which decision is
currently on appeal in state court in Ohio). TIMET intends to vigorously defend
this action as well. At December 31, 1996, TIMET had not accrued any amounts
related to either of these matters.
F-27
<PAGE> 29
Ray Cook Golf. In April 1996, TIMET Castings received a letter from a
golf club manufacturer, Ray Cook Golf Company ("Ray Cook"), claiming breach of
contract and trademark infringement. Ray Cook asserted damages in the
approximate amount of $.6 million for lost profits and delivery delays relating
to the production of golf club heads by TIMET Castings. In March 1997, the
Company received notice that Ray Cook had filed (but not yet served) an action
claiming damages in excess of $5 million with respect to this matter. The
Company believes that this action is without merit, intends to continue to deny
all allegations of liability and to defend this action vigorously. The Company
has not accrued any amounts related to this matter.
Tungsten contamination. In 1993, TIMET discovered an anomaly in
certain alloyed titanium material manufactured by TIMET for shipment to a jet
engine manufacturer, resulting from tungsten carbide contaminated chromium sold
to TIMET by a third-party vendor and used as an alloying addition to this
titanium material. In June 1996, the Company entered into a settlement
agreement with the purchaser of the material which calls for payment by the
Company of an aggregate $2 million; a $.2 million lump-sum payment with the
balance payable in equal quarterly payments ($1.5 million unpaid and accrued at
December 31, 1996). The Company has filed an action against the chromium
supplier (Titanium Metals Corp. v. Elkem Metals, Case No. 97-0369, W.D. Pa.)
seeking recovery of the cost to TIMET to settle with its customer plus related
costs. The Company's estimate of any recovery from the chromium supplier and/or
TIMET's insurance carrier is based on management's judgment of the likely
outcome based on facts and circumstances known at the time and is subject to
future revisions.
In addition, in 1995 TIMET learned that a jet engine disk that had
been in service since 1989 was discovered during routine inspection to have a
high density inclusion that was not identified during manufacture and testing
by TIMET or the subsequent forger of the material. The inclusion was completely
intact and showed no signs of cracking or fatigue that would suggest that it
posed a safety problem. Subsequent metallurgical inspection identified the
inclusion as pure tungsten, which TIMET believes would have resulted from
contaminated chromium used in the manufacture of the titanium alloy. TIMET
currently believes that the engine manufacturer will require that engines
containing disks manufactured from titanium having a link to the potentially
contaminated lot of chromium be subjected to a higher level of inspection or to
more frequent inspection to assure that there is no safety issue involved.
While TIMET does not currently anticipate that it will incur any material
liability in connection with this matter, no assurances can be given in this
regard. At December 31, 1996, TIMET had not accrued any amount with respect to
this matter.
Environmental matters.
BMI Companies. TIMET and certain other companies, including Kerr-McGee
Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali, Inc.
(successor to Stauffer Chemical Company) operate facilities in a complex (the
"BMI Complex") owned by BMI, adjacent to TIMET's Henderson, Nevada plant. In
1993, TIMET and each of such companies, along with certain other companies who
previously operated facilities in the common areas of the BMI Complex
(collectively the "BMI Companies") completed a Phase I environmental assessment
of the common areas of the BMI Complex and each of the individual company sites
pursuant to consent agreements with the Nevada Division of Environmental
Protection ("NDEP"). In July 1996, the Company signed a consent agreement with
NDEP regarding implementation of the Phase II assessment of the Company
property within the BMI Complex. A report regarding the Phase II assessment of
the common areas of the BMI Complex was submitted to NDEP in August 1996. At
December 31, 1996, the Company had accrued $1 million with respect to this
matter. Until completion of the sampling and analysis that will be involved in
the Phase II assessment of the Company property and any further Phase II
testing that NDEP may require for the BMI Complex common areas, it is not
possible to provide a
F-28
<PAGE> 30
reasonable estimate of the additional remediation costs, if any, or the
Company's likely share of any such costs.
In November 1995, TIMET and other BMI Companies were contacted by a
company proposing to develop a parcel of land adjacent to the BMI Complex,
alleging that the parcel had been contaminated by the BMI Companies through
their operations and threatening legal action to recover its development costs
to date of approximately $2.8 million. Based on the results of the
investigation in late 1995 and early 1996, the Company does not believe there
is any basis for the claim, and the claimants have not pursued the matter
further. At December 31, 1996, TIMET had not accrued any amounts with respect
to this matter. The parties are currently negotiating a complete settlement of
this matter in connection with a sale of certain other properties by VVLC to
the claimant.
Pomona facility. The Company has conducted an additional study and
assessment work as required by the California Regional Water Quality Control
Board--Los Angeles Region (the "Water Quality Board") related to soil and
possible groundwater contamination at TIMET Castings' Pomona, California
facility. The site is near an area that has been designated as a U.S.
Environmental Protection Agency "Superfund" site. At December 31, 1996, the
Company had accrued $.6 million related to this matter. Although the Company
does not believe it will incur a material liability in respect of the Pomona
facility, the Water Quality Board has not completed its review.
The Company determines the amount of its accruals for environmental
matters on a quarterly basis by analyzing and estimating the range of possible
costs in light of the available information. It is not possible to estimate the
range of costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by the Company at its operating facilities, 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 to be required for such matters. No assurance can
be given that actual costs will not exceed accrued amounts or that costs will
not be incurred with respect to sites as to which no problem is currently known
or where no estimate can presently be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
Other. The Company is involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business.
The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
Concentration of credit and other risks. Substantially all of the
Company's operating income and most of its sales are derived from U.S. and
Europe-based operations. The majority of the Company's sales are to customers
in the aerospace industry (including airframe and engine construction). Such
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that such customers may be
similarly affected by economic or other conditions. The Company's ten largest
customers accounted for about one-third of net sales in each of the past three
years and about one-third of accounts receivable at December 31, 1995 and 1996.
Receivables are generally not collateralized.
At December 31, 1996, substantially all of the Company's cash and cash
equivalents were held by one financial institution.
F-29
<PAGE> 31
Note 17--Quarterly results of operations (unaudited):
<TABLE>
<CAPTION>
Quarters 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 $ 107.6 $ 118.8 $ 123.4 $ 157.3
Operating income 6.8 13.8 17.8 21.4
Net income $ 2.1 $ 8.1 $ 13.3 $ 24.1
Net income per common share .10 .30 .42 .77
Fully diluted net income per share .75
Year ended December 31, 1995:
Net sales $ 41.7 $ 45.6 $ 47.9 $ 49.5
Operating income (loss) (1.6) 1.1 2.3 3.6
Net income (loss) $ (4.0) $ (2.2) $ (.3) $ 2.3
Net income (loss) per common share (.26) (.14) (.02) .14
</TABLE>
Due to the timing of the issuance of common stock, such as the Stock
Offering, the sum of 1996 quarterly earnings per share is different than
earnings per share for the full year. Fully diluted earnings per share is not
presented for periods prior to the fourth quarter of 1996 as, prior to the
issuance of the Convertible Preferred Securities in November 1996 (see Note
10), the dilutive effect was nil.
F-30
<PAGE> 1
EXHIBIT 99.2
ITEM 3. LEGAL PROCEEDINGS
LEAD PIGMENT LITIGATION
The Company was formerly involved in the manufacture of lead pigments
for use in paint and lead-based paint. The Company has been named as a
defendant or third party defendant in various legal proceedings alleging that
the Company and other manufacturers are responsible for personal injury and
property damage allegedly associated with the use of lead pigments. The
Company is vigorously defending such litigation. Considering the Company'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
<PAGE> 2
time, been enacted or proposed that seek to (a) 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 (b) effectively overturn court decisions in which the Company 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. No legislation or regulations have been enacted to date
which are expected to have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. The
Company has not accrued any amounts for the pending lead pigment and lead-based
paint litigation. There is no assurance that the Company 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, the Company 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 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against the Company,
other alleged manufacturers of lead pigment (together with the Company, 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
pending 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 remain pending.
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.
The Company has answered the remaining portions of the complaint denying all
allegations of wrongdoing, and the case is in discovery. 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
<PAGE> 3
defendants' motion to dismiss the plaintiffs' restitution and indemnification
claims, and plaintiffs appealed. In June 1996, the Appellate Division reversed
the trial court's dismissal of plaintiffs' restitution and indemnification
claims, reinstating those claims. Defendants' motion for summary judgment on
the fraud claim was denied in August 1995; defendants have appealed. In
December 1995, defendants moved for summary judgment on the basis that the
fraud claim was time-barred. In February 1996, the motion was denied and
defendants have appealed. Discovery is proceeding.
In March 1992, the Company was served with a complaint in Skipworth v.
Sherwin-Williams Co., et al. (No. 92-3069), Court of Common Pleas,
Philadelphia County. Plaintiffs are a minor and her legal guardians seeking
damages from lead paint and pigment producers, the LIA, the Philadelphia
Housing Authority and the owners of the plaintiffs' premises for bodily
injuries allegedly suffered by the minor from lead-based paint. Plaintiffs'
counsel has asserted that approximately 200 similar complaints would be served
shortly, but no such complaints have yet been served. In April 1994, the court
granted defendants' motion for summary judgment and the dismissal was affirmed
by the Superior Court in October 1995. In February 1997, the Pennsylvania
Supreme Court unanimously affirmed the Superior Court's decision.
In August 1992, the Company 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, the Company 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, the Company 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,
the Company answered the complaint, denying liability. Discovery is
proceeding.
<PAGE> 4
In January 1995, the Company 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' motions for summary
judgement on plaintiffs' conspiracy claim, and dismissed the Company and
certain other defendants from the cases. In September 1996, the trial court
granted the remaining defendants' motions for summary judgment. Plaintiffs
have appealed as to all defendants.
In November 1995, the Company was served with the complaint in
Jefferson v. Lead Industry Association, et. al. (No. 95-2835), filed in the
U.S. District Court for the Eastern District of Louisiana. The complaint
asserts claims against the LIA and the lead pigment defendants on behalf of a
putative class of allegedly injured children in Louisiana. The complaint
purports to allege claims for strict liability, negligence, failure to warn,
breach of alleged warranties, fraud and misrepresentation, and conspiracy, and
seeks actual and punitive damages. The complaint asserts several theories of
liability, including joint and several and market share liability. In June
1996, the trial court granted defendants' motions to dismiss the complaint and
entered judgment in favor of all defendants. Plaintiffs appealed to the Fifth
Circuit Court of Appeals, which affirmed the judgment in favor of all
defendants in March 1997.
In January 1996, the Company 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 class action lawsuit had originally been brought
against the City of New York and other landlord defendants. The intervenors'
complaint alleges claims against the Company 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, the Company and the other former
manufacturers of lead pigments filed motions to dismiss the intervenors'
complaint. Class discovery is proceeding.
In April 1996, the Company was served with a complaint in Gates v.
American Cyanamid Co., et al., (No. I1996-2114) Supreme Court, State of New
York, Erie County, an action alleging personal injury arising out of exposure
to lead pigment. Plaintiff seeks compensatory and punitive damages from the
Company, other former lead pigment manufacturers and the LIA based on claims of
negligence, strict liability, fraud, concert of action, civil conspiracy,
enterprise liability, market share liability and alternative liability.
Plaintiff also asserts claims against the landlords of the apartments in which
<PAGE> 5
plaintiff has lived since 1977. In July 1996, the Company filed an answer
denying plaintiff's allegations of wrongdoing and liability. Discovery is
proceeding.
In September 1996, the Company was served with a complaint in Ritchie
v. NL Industries, et al. (U.S. District Court, Northern District of Western
Virginia, Civil Action No. 5:96-CV-166), an action originally filed in West
Virginia state court on behalf of a minor allegedly injured as a result of
exposure to lead pigment. Plaintiffs seeks compensatory and punitive damages
from the Company and five other former manufacturers of lead pigment based on
claims of negligence, strict liability, breach of warranty, fraud, conspiracy,
market share liability and alternative liability. In October 1996, the
defendants removed the case to federal court and filed motions to dismiss.
Plaintiffs has filed a motion to remand the case to state court. The motions
are pending.
The Company 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.
The Company 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 the Company's favor. In July 1991, the court
granted the Company's motion for summary judgment and ordered Commercial Union
to pay the Company's reasonable defense costs for such cases. In June 1992,
the Company 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 the Company's favor. In August 1993, the court granted the
Company'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
Company 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 had made its decision applying New Jersey law; the appeals court
concluded that New York 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 the Company's motion
for summary judgment, finding that Commercial Union had a duty to defend the
Company in the four lead paint cases which were the subject of the Company'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 the Company and two other insurance carriers in
connection with the three lead paint actions on which the court had granted the
Company summary judgment in 1991. The court
<PAGE> 6
ruled that Commercial Union is entitled to receive such contribution from the
Company and the two carriers, but reserved ruling with respect to the relative
contributions to be made by each of the parties, including contributions by the
Company that may be required with respect to periods in which it was
self-insured and contributions from one carrier which were reinsured by a
former subsidiary of the Company, the reinsurance costs of which the Company
may ultimately be required to bear. Other than granting motions for summary
judgment brought by two excess liability insurance carriers, which contended
that their policies contained absolute 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
the Company's pending environmental litigation. The Court has not made any
final ruling on indemnity coverage in the lead pigment litigation. No trial
dates have been set. Other than rulings 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. The Company has not
considered any potential insurance recoveries for lead pigment or environmental
litigation in determining related accruals.
ENVIRONMENTAL MATTERS AND LITIGATION
The Company 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 the Company, or its
subsidiaries, or their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage, or both.
Certain of these proceedings involve claims for substantial amounts. Although
the Company may be jointly and severally liable for such costs, in most cases
it is only one of a number of PRPs who may also be jointly and severally
liable.
The extent of CERCLA liability cannot accurately 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. The Company believes it has
provided adequate accruals for reasonably estimable costs for CERCLA matters
and other environmental liabilities. At December 31, 1996, the Company had
accrued $113 million for those environmental matters which are reasonably
estimable. The Company determines the amount of accrual on a quarterly basis
by analyzing and estimating the range of possible costs to the Company. Such
costs include, among other things, remedial investigations, monitoring,
studies, clean-up, removal and remediation. During the first quarter of 1997,
the Company's accrual will be increased to include legal fees and other costs
of managing and monitoring environmental remediation sites as required by the
adoption of the AICPA's Statement of Position 96-1, "Environmental Remediation
Liabilities." See Note 2 to the Consolidated Financial Statements. It is not
possible to estimate the range of costs for certain sites. The Company has
estimated that the upper end of the range of reasonably possible costs to the
Company for sites for which it is possible to estimate costs is approximately
$160 million. The Company's estimate of such liability has not been discounted
to present value and the
<PAGE> 7
Company has not recognized any potential insurance recoveries. No assurance
can be given that actual costs will not exceed either 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 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. 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.
At Pedricktown, the U.S. EPA divided the site into two operable units.
Operable unit one addresses 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 the Company, entered
into an administrative consent order with the U.S. EPA to perform the remedial
design phase of operable unit one. In addition, the U.S. EPA incurred past
costs in the estimated amount of $5 million. The U.S. EPA issued an order with
respect to operable unit two in March 1992 to the Company and 30 other PRPs
directing immediate removal activities including the cleanup of waste, surface
water and building surfaces. The Company has complied with the order, and the
work with respect to operable unit two is completed. The Company has paid
approximately 50% of operable unit two costs, or $2.5 million.
At Granite City, the RIFS is complete, and in 1990 the U.S. EPA
selected a remedy estimated at that time to cost approximately $28 million. In
July 1991, the United States filed an action in the U.S. District Court for the
Southern District of Illinois against the Company and others (United States of
America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to
the Granite City smelter. 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.
The Company and the other parties did not implement the order believing that
the remedy selected by the U.S. EPA was invalid, arbitrary, capricious and was
not selected 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 the Company 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 amended decision selecting cleanup remedies for the Granite
City site. At that time, the cost of the remedies selected by the U.S. EPA
aggregated, in its estimation, $40.8 million to $67.8 million, although its
decision stated that the higher amount was not considered to be representative
of expected costs. The Company presently is challenging portions of the U.S.
EPA's selection of the remedy. The U.S. EPA's current estimate for completion
of the cleanup is $24.3 million, and in January 1997, the Company was informed
that the U.S. EPA incurred
<PAGE> 8
cleanup and other past costs approximating $30 million. There is currently no
allocation among the PRPs for these costs.
Having completed the RIFS at Portland, the Company 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 the Company, 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 the Company and
six other PRPs directing the performance of the remedy. The Company and the
other PRPs commenced performance of the remedy. In August 1994, the U.S. EPA
authorized the Company and the other PRPs to cease performing most aspects of
the selected remedy. The U.S. EPA has issued a proposed Record of Decision
Amendment changing portions of the cleanup remedy selected for the site. The
U.S. EPA currently estimates the cost of the proposed remedy to be from $10
million to $13 million. Pursuant to an interim allocation, the Company's share
of remedial costs is approximately 50%. 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
the Company 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. The court granted
Gould's motion to amend the complaint to add additional defendants (adjoining
current and former landowners and generators). The amended complaint deletes
the fraud and punitive damages claims asserted against NL; thus, the pending
action is essentially one for reallocation of past and future cleanup costs.
Discovery is proceeding. A trial date has been set for September 1997. The
Company and the other PRPs performing the cleanup have reached settlement in
principle with many of the generators and adjoining landowner defendants.
The Company 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 the Company and others formerly mined lead and
zinc. A former subsidiary of the Company mined at the Baxter Springs subsite,
where it is the largest viable PRP. The final RIFS was submitted to the U.S.
EPA in May 1993. In August 1994, the U.S. EPA issued its proposed plan for the
cleanup of the Baxter Springs and Treece sites in Cherokee County. The
proposed remedy is estimated by U.S. EPA to cost $6 million.
In January 1989, the State of Illinois brought an action against the
Company and several other subsequent owners and operators of the former plant
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
<PAGE> 9
reinstate the complaint, and dismissed the case with prejudice. In November
1996, the appeals court reversed the dismissal. The U.S. EPA has issued an
order to the Company to perform a removal action at the Company's former
facility involved in the State of Illinois case. The Company is complying with
the order.
In 1980, the State of New York commenced litigation against the
Company in connection with the operation of a plant in Colonie, New York
formerly owned by the Company. Flacke v. NL Industries, Inc., No. 1842-80
("Flacke I") and Flacke v. Federal Insurance Company and NL Industries, Inc.,
No. 3131-92 ("Flacke II"), New York Supreme Court, Albany County. The plant
manufactured military and civilian products from depleted uranium and was
acquired from the Company by the U.S. Department of Energy ("DOE") in 1984.
Flacke I seeks penalties for alleged violations of New York's Environmental
Conservation Law, and of a consent order entered into to resolve these alleged
violations. Flacke II seeks forfeiture of a $200,000 surety bond posted in
connection with the consent order, plus interest from February 1980. The
Company denied liability in both actions. The litigation had been inactive
from 1984 until July 1993 when the State moved for partial summary judgment for
approximately $1.5 million on certain of its claims in Flacke I and for summary
judgment in Flacke II. In January 1994, the Company cross-moved for summary
judgment in Flacke I and Flacke II. All summary judgment motions have been
denied. The Company has reached a settlement in principle with the State.
Residents in the vicinity of the Company'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, Inc. and NL Industries,
Inc., No. 87-4420, Court of Common Pleas, Philadelphia County. The complaint
sought compensatory and punitive damages from the Company 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. The Company answered the complaint, denying liability. In December
1994, the jury returned a verdict in favor of the Company. Plaintiffs appealed
to the Pennsylvania Superior Court, requesting a new trial and in September
1996, the Superior Court affirmed the judgment in favor of the Company. In
December 1996, plaintiffs filed a petition for allowance of appeal to the
Pennsylvania Supreme Court. Plaintiffs' petition is pending. 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 the Company with prejudice, and stayed the case pending the outcome
of the state court litigation.
<PAGE> 10
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 the Company's
alleged failure to comply with the U.S. EPA's administrative order No. 88-13.
The order, which alleged that the Company arranged for the treatment or
disposal of materials at the Norco site, directed the immediate removal of
hazardous substances from the site. The Company 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
the Company 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 the Company to pay $6.3 million plus interest. Both the
Company and the government have appealed. In August 1994, this matter was
referred to mediation, which is pending.
At a municipal and industrial waste disposal site in Batavia, New
York, the Company and six 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, the Company conducted a RIFS for
operable unit one, the closure of the industrial waste disposal section of the
landfill. The Company's RIFS costs were 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 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. The Company and other PRPs entered into an
interim cost sharing arrangement for this phase of work. With respect to the
second operable unit, the extension of the municipal water supply, the U.S. EPA
estimated the costs at $1.2 million plus annual operation and maintenance
costs. The Company and the other PRPs are performing the work comprising
operable unit two. The U.S. EPA has also demanded approximately $.9 million in
past costs from the PRPs.
See Item 1. "Business - Regulatory and Environmental Matters."
OTHER LITIGATION
Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court of
Putnam County, West Virginia, No. 95-C-261). Twelve plaintiffs brought this
action against the Company and various other defendants in July 1995.
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
defendants' premises in West Virginia. Plaintiffs allege personal injuries and
seek compensatory damages totaling $18.5 million and punitive damages totaling
$55.5 million. The Company has filed an answer denying plaintiffs'
allegations. Discovery is proceeding.
<PAGE> 11
The Company 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. One such
case, In re: Monongalia Mass II, (Circuit Court of Monongalia County, West
Virginia, Nos. 93-C-362, et al.), involves the consolidated claims of
approximately 3,100 plaintiffs. The Company intends to defend these matters
vigorously.
Plaintiff brought the complaint in Frank D. Seinfeld v. Harold C.
Simmons, et al. (Superior Court of New York, Bergen County, Chancery
Division, No. C-336-96) in September 1996 on behalf of himself and
derivatively, on behalf of NL, against the Company, Valhi and certain current
and former members of the Company's Board of Directors. The complaint alleges,
among other things, that the Company's purchase of shares in an August 1991
"Dutch auction" tender offer was an unfair and wasteful expenditure of the
Company's funds that constituted a breach of the defendants' fiduciary duties
to the Company's shareholders. Plaintiff seeks, among other things, to rescind
the Company's purchase of approximately 10.9 million shares of its common stock
from Valhi pursuant to the Dutch auction, and 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. The Company
believes, and understands that each of the other defendants believes, that the
complaint is without merit. The Company intends, and believes that each of the
other defendants intends, to defend the action vigorously. Trial is scheduled
to begin in November 1997.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
present and former businesses, and the disposition of past properties and
former businesses.
<PAGE> 12
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
<TABLE>
<CAPTION>
Financial Statements Pages
- -------------------- -----
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1995 and 1996 F-3 / F-4
Consolidated Statements of Operations - Years ended
December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Shareholders' Deficit - Years
ended December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows - Years ended
December 31, 1994, 1995 and 1996 F-7 / F-9
Notes to Consolidated Financial Statements F-10 / F-36
Financial Statement Schedules
- -----------------------------
Report of Independent Accountants S-1
Schedule I - Condensed Financial Information of Registrant S-2 / S-7
Schedule II - Valuation and qualifying accounts S-8
</TABLE>
F-1
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
We have audited the accompanying consolidated balance sheets of NL
Industries, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NL
Industries, Inc. as of December 31, 1995 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 7, 1997
F-2
<PAGE> 14
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents, including
restricted cash of $10,104 and $10,895 $ 141,333 $ 114,115
Accounts and notes receivable, less
allowance of $4,039 and $3,813 147,428 138,538
Refundable income taxes 4,941 9,267
Inventories 251,630 232,510
Prepaid expenses 3,217 4,219
Deferred income taxes 2,522 1,597
---------- ----------
Total current assets 551,071 500,246
---------- ----------
Other assets:
Marketable securities 20,944 23,718
Investment in joint ventures 185,893 181,479
Prepaid pension cost 22,576 24,821
Deferred income taxes 788 223
Other 31,165 24,825
---------- ----------
Total other assets 261,366 255,066
---------- ----------
Property and equipment:
Land 22,902 21,963
Buildings 166,349 165,479
Machinery and equipment 648,458 660,333
Mining properties 97,190 95,891
Construction in progress 11,187 13,231
---------- ----------
946,086 956,897
Less accumulated depreciation and depletion 486,870 490,851
---------- ----------
Net property and equipment 459,216 466,046
---------- ----------
$1,271,653 $1,221,358
========== ==========
</TABLE>
F-3
<PAGE> 15
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
1995 1996
---- ----
<S> <C> <C>
Current liabilities:
Notes payable $ 39,247 $ 25,732
Current maturities of long-term debt 43,369 91,946
Accounts payable and accrued liabilities 165,985 153,904
Payable to affiliates 10,181 10,204
Income taxes 40,088 5,664
Deferred income taxes 3,555 2,895
---------- ----------
Total current liabilities 302,425 290,345
---------- ----------
Noncurrent liabilities:
Long-term debt 740,334 737,100
Deferred income taxes 157,192 151,221
Accrued pension cost 69,311 57,941
Accrued postretirement benefits cost 60,235 55,935
Other 148,511 132,048
---------- ----------
Total noncurrent liabilities 1,175,583 1,134,245
---------- ----------
Minority interest 3,066 249
---------- ----------
Shareholders' deficit:
Preferred stock - 5,000 shares authorized,
no shares issued or outstanding - -
Common stock - $.125 par value; 150,000
shares authorized; 66,839 shares issued 8,355 8,355
Additional paid-in capital 759,281 759,281
Adjustments:
Currency translation (126,934) (118,629)
Pension liabilities (1,908) (1,822)
Marketable securities (525) 1,278
Accumulated deficit (481,432) (485,948)
Treasury stock, at cost (15,748 and 15,721
shares) (366,258) (365,996)
---------- ----------
Total shareholders' deficit (209,421) (203,481)
---------- ----------
$1,271,653 $1,221,358
========== ==========
</TABLE>
Commitments and contingencies (Notes 13 and 17)
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 16
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues and other income:
Net sales $887,954 $1,023,939 $ 986,074
Other, net 44,828 22,241 30,480
-------- ---------- ----------
932,782 1,046,180 1,016,554
-------- ---------- ----------
Costs and expenses:
Cost of sales 649,745 676,184 738,438
Selling, general and administrative 212,516 189,477 177,464
Interest 83,926 81,617 75,039
-------- ---------- ----------
946,187 947,278 990,941
-------- ---------- ----------
Income (loss) before income
taxes and minority interest (13,405) 98,902 25,613
Income tax expense 9,734 12,671 14,833
-------- ---------- ----------
Income (loss) before minority
interest (23,139) 86,231 10,780
Minority interest 843 622 (37)
-------- ---------- ----------
Net income (loss) $(23,982) $ 85,609 $ 10,817
======== ========== ==========
Net income (loss) per share of common
stock and common stock equivalents $ (.47) $ 1.66 $ .21
======== ========== ==========
Weighted average common shares and
common stock equivalents outstanding 51,022 51,512 51,350
======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 17
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
Adjustments
Additional -----------------------------------
Common paid-in Currency Pension Marketable Accumulated Treasury
stock capital translation liabilities securities deficit stock Total
------- ---------- --------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $8,355 $759,281 $(115,803) $(3,442) $(2,164) $(543,059) $(367,963) $(264,795)
Net loss - - - - - (23,982) - (23,982)
Treasury stock reissued - - - - - - 1,427 1,427
Adjustments - - (9,691) 1,807 2,152 - - (5,732)
------ -------- --------- ------- ------- --------- --------- ---------
Balance at December 31, 1994 8,355 759,281 (125,494) (1,635) (12) (567,041) (366,536) (293,082)
Net income - - - - - 85,609 - 85,609
Treasury stock reissued - - - - - - 278 278
Adjustments - - (1,440) (273) (513) - - (2,226)
------ -------- --------- ------- ------- --------- --------- ---------
Balance at December 31, 1995 8,355 759,281 (126,934) (1,908) (525) (481,432) (366,258) (209,421)
Net income - - - - - 10,817 - 10,817
Common dividends declared -
$.30 per share - - - - - (15,333) - (15,333)
Treasury stock reissued - - - - - - 262 262
Adjustments - - 8,305 86 1,803 - - 10,194
------ -------- --------- ------- ------- --------- --------- ---------
Balance at December 31, 1996 $8,355 $759,281 $(118,629) $(1,822) $ 1,278 $(485,948) $(365,996) $(203,481)
====== ======== ========= ======= ======= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 18
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(23,982) $ 85,609 $ 10,817
Depreciation, depletion and
amortization 34,592 38,989 39,664
Noncash interest expense 18,071 19,396 20,959
Deferred income taxes 11,907 (29,248) 2,802
Minority interest 843 622 (37)
Net (gains) losses from:
Securities transactions 1,220 (1,175) -
Disposition of property and
equipment 1,981 2,713 2,312
Pension cost, net (2,753) (7,248) (12,893)
Other postretirement benefits, net (3,437) (4,169) (5,086)
Other, net 68 (477) (126)
-------- -------- --------
38,510 105,012 58,412
Change in assets and liabilities:
Accounts and notes receivable (13,152) (1,483) 2,798
Inventories 17,778 (57,378) 8,401
Prepaid expenses 3,221 1,148 (1,426)
Accounts payable and accrued
liabilities (17,343) (17,700) (3,311)
Income taxes 109,243 14,861 (39,424)
Accounts with affiliates (2,024) (4,059) 3,229
Other noncurrent assets 2,219 1,587 684
Other noncurrent liabilities 28,706 3,233 (12,825)
Marketable trading securities:
Purchases (870) (762) -
Dispositions 15,530 27,102 -
-------- -------- --------
Net cash provided by operating
activities 181,818 71,561 16,538
-------- -------- --------
</TABLE>
F-7
<PAGE> 19
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (36,931) $(64,196) $(66,906)
Purchase of minority interest - - (5,168)
Investment in joint ventures, net 3,133 1,793 4,359
Proceeds from disposition of
property and equipment 598 182 108
Other, net 362 - -
--------- -------- --------
Net cash used by investing
activities (32,838) (62,221) (67,607)
--------- -------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 44,490 57,556 97,503
Principal payments (175,886) (61,128) (55,403)
Dividends paid - - (15,333)
Other, net (742) 264 (202)
--------- -------- --------
Net cash provided (used) by
financing activities (132,138) (3,308) 26,565
--------- -------- --------
Net change during the year from
operating, investing and
financing activities $ 16,842 $ 6,032 $(24,504)
========= ======== ========
</TABLE>
F-8
<PAGE> 20
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities $ 16,842 $ 6,032 $(24,504)
Currency translation 7,689 4,177 (2,714)
--------- -------- --------
24,531 10,209 (27,218)
Balance at beginning of year 106,593 131,124 141,333
--------- -------- --------
Balance at end of year $ 131,124 $141,333 $114,115
========= ======== ========
Supplemental disclosures - cash paid
(received) for:
Interest, net of amounts capitalized $ 66,801 $ 62,078 $ 51,678
Income taxes, net (111,418) 27,965 50,400
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 21
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
NL Industries, Inc. conducts its operations primarily through its
wholly-owned subsidiaries, Kronos, Inc. (titanium dioxide pigments or "TiO2")
and Rheox, Inc. (specialty chemicals).
Valhi, Inc. and Tremont Corporation, each affiliates of Contran
Corporation, hold 56% and 18%, respectively, of NL's outstanding common stock.
Contran holds, directly or through subsidiaries, approximately 91% of Valhi's
and 44% of Tremont's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of the
children and grandchildren of Harold C. Simmons, of which Mr. Simmons is the
sole trustee. Mr. Simmons, the Chairman of the Board of NL and the Chairman of
the Board, President, and Chief Executive Officer of Contran and Valhi and a
director of Tremont, may be deemed to control each of such companies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the
accounts of NL and its majority-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated. 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.
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 weighted average exchange
rates prevailing during the year. Resulting translation adjustments and the
related income tax effects are accumulated in the currency translation
adjustment component of shareholders' deficit. Currency transaction gains and
losses are recognized in income currently.
F-10
<PAGE> 22
Cash and cash equivalents
Cash equivalents, including restricted cash, include U.S. Treasury
securities purchased under short-term agreements to resell, bank deposits, and
government and commercial notes and bills with original maturities of three
months or less. Restricted cash of approximately $6 million in 1995 and 1996
is restricted under the Company's joint venture indebtedness agreement and
restricted cash of approximately $4 million in 1995 and $5 million in 1996
secures undrawn letters of credit.
Marketable securities and securities transactions
Marketable securities are classified as either "available-for-sale" or
"trading" and are carried at market based on quoted market prices. Unrealized
gains and losses on trading securities are recognized in income currently.
Unrealized gains and losses on available-for-sale securities, and the related
deferred income tax effects, are accumulated in the marketable securities
adjustment component of shareholders' deficit. See Note 4. Realized gains or
losses are computed based on specific identification of the securities sold.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Investment in joint ventures
Investments in 20% to 50%-owned entities are accounted for by the
equity method.
Intangible assets
Intangible assets, included in other noncurrent assets, are amortized
by the straight-line method over the periods expected to be benefitted, not
exceeding ten years.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of
construction costs. Maintenance, repairs and minor renewals are expensed;
major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to forty years for buildings and three to
twenty years for machinery and equipment. Depletion of mining properties is
computed by the unit-of-production and straight-line methods.
F-11
<PAGE> 23
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID is amortized over the period during which cash interest payments
are not required and deferred financing costs are amortized over the term of
the applicable issue, both by the interest method.
Employee benefit plans
Accounting and funding policies for retirement plans and
postretirement benefits other than pensions ("OPEB") are described in Note 11.
The Company accounts for stock-based employee compensation in
accordance with Accounting Principles Board Opinion ("APBO") 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 each of the past three years.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures are not discounted to present value. Recoveries of remediation
costs from other parties, if any, are reported as receivables when their
receipt is deemed probable. At December 31, 1995 and 1996, no receivables for
recoveries have been recognized.
The Company will adopt the recognition and disclosure requirements of
AICPA's Statement of Position No. 96-1, "Environmental Remediation
Liabilities," in the first quarter of 1997. The new rule, among other things,
expands the types of costs which must be considered in determining
environmental remediation accruals. As a result of adopting the new Statement
of Position, the Company expects to recognize a noncash cumulative charge of
approximately $30 million in the first quarter of 1997. The charge is not
expected to materially change the Company's 1997 tax expense due to existing
net operating losses for which no benefit is expected to be recognized. Such
charge is comprised primarily of estimated future undiscounted expenditures
associated with managing and monitoring existing environmental remediation
sites. The expenditures consist principally of legal and professional fees,
but do not include litigation defense costs with respect to situations in which
the Company asserts that no liability exists. Currently, such expenditures are
expensed as incurred.
Net sales
Sales are recognized as products are shipped.
Income taxes
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 subsidiaries and unconsolidated affiliates not
included in the
F-12
<PAGE> 24
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets and adjusts any related valuation allowance.
The Company's valuation allowance is equal to the amount of deferred tax assets
which the Company believes do not meet the "more-likely-than-not" realization
criteria.
Income (loss) per share of common stock
Income (loss) per share of common stock is based on the weighted
average number of common shares and equivalents outstanding. Common stock
equivalents, consisting of nonqualified stock options, are excluded from the
computation when their effect is antidilutive.
NOTE 3 - BUSINESS AND GEOGRAPHIC SEGMENTS:
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox. Titanium
dioxide pigments are used to impart whiteness, brightness and opacity to a wide
variety of products, including paints, plastics, paper, fibers and ceramics.
Specialty chemicals include rheological additives which control the flow and
leveling characteristics of a variety of products, including paints, inks,
lubricants, sealants, adhesives and cosmetics. General corporate assets
consist principally of cash, cash equivalents and marketable securities. At
December 31, 1995 and 1996, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $121 million and $124 million,
respectively.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Business segments
Net sales:
Kronos $ 770,077 $ 894,149 $851,179
Rheox 117,877 129,790 134,895
--------- ---------- --------
$ 887,954 $1,023,939 $986,074
========= ========== ========
Operating income:
Kronos $ 80,515 $ 161,175 $ 71,606
Rheox 30,837 38,544 41,767
--------- ---------- --------
111,352 199,719 113,373
General corporate income (expense):
Securities earnings 3,855 7,419 4,708
Expenses, net (44,686) (26,619) (17,429)
Interest expense (83,926) (81,617) (75,039)
--------- ---------- --------
$ (13,405) $ 98,902 $ 25,613
========= ========== ========
Capital expenditures:
Kronos $ 34,522 $ 60,699 $ 64,201
Rheox 2,283 3,464 2,665
General corporate 126 33 40
--------- ---------- --------
$ 36,931 $ 64,196 $ 66,906
========= ========== ========
</TABLE>
F-13
<PAGE> 25
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Depreciation, depletion and
amortization:
Kronos $ 31,156 $ 35,706 $ 36,295
Rheox 3,153 3,089 3,175
General corporate 283 194 194
--------- ---------- --------
$ 34,592 $ 38,989 $ 39,664
========= ========== ========
Geographic areas
Net sales - point of origin:
United States $ 303,475 $ 339,568 $ 348,071
Europe 587,291 703,206 653,828
Canada 122,957 139,341 139,346
Eliminations (125,769) (158,176) (155,171)
--------- ---------- ---------
$ 887,954 $1,023,939 $ 986,074
========= ========== =========
Net sales - point of destination:
United States $ 238,568 $ 258,850 $ 273,110
Europe 468,915 580,794 523,667
Canada 64,374 60,472 56,436
Other 116,097 123,823 132,861
--------- ---------- ---------
$ 887,954 $1,023,939 $ 986,074
========= ========== =========
Operating income:
United States $ 49,358 $ 75,650 $ 71,914
Europe 50,273 103,096 27,971
Canada 11,721 20,973 13,488
--------- ---------- ---------
$ 111,352 $ 199,719 $ 113,373
========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Identifiable assets
Business segments:
Kronos $ 950,200 $1,063,369 $1,064,285
Rheox 83,176 83,620 90,095
General corporate 129,034 124,664 66,978
---------- ---------- ----------
$1,162,410 $1,271,653 $1,221,358
========== ========== ==========
Geographic segments:
United States $ 308,017 $ 311,374 $ 303,547
Europe 594,921 690,353 718,626
Canada 130,438 145,262 132,207
General corporate 129,034 124,664 66,978
---------- ---------- ----------
$1,162,410 $1,271,653 $1,221,358
========== ========== ==========
</TABLE>
F-14
<PAGE> 26
NOTE 4 - MARKETABLE SECURITIES AND SECURITIES TRANSACTIONS:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains $ 1,962 $ 3,516
Unrealized losses (2,770) (1,550)
Cost 21,752 21,752
------- -------
Aggregate market $20,944 $23,718
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities transactions gains (losses)
on trading securities:
Unrealized $(1,177) $1,125 $ -
Realized (43) 50 -
------- ------ ------
$(1,220) $1,175 $ -
======= ====== ======
</TABLE>
NOTE 5 - INVENTORIES:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Raw materials $ 35,075 $ 43,284
Work in process 9,132 10,356
Finished products 172,330 142,091
Supplies 35,093 36,779
-------- --------
$251,630 $232,510
======== ========
</TABLE>
NOTE 6 - INVESTMENT IN JOINT VENTURES:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
TiO2 manufacturing joint venture $183,129 $179,195
Other 2,764 2,284
-------- --------
$185,893 $181,479
======== ========
</TABLE>
Kronos Louisiana, Inc. ("KLA"), a wholly-owned subsidiary of Kronos,
owns a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Group, Ltd., a
wholly- owned subsidiary of Imperial Chemicals Industries PLC ("Tioxide"). LPC
owns and operates a chloride-process TiO2 plant in Lake Charles, Louisiana.
F-15
<PAGE> 27
LPC has long-term debt that is collateralized by the partnership
interests of the partners and substantially all of the assets of LPC. 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. KLA's 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
its tranche. See Note 10.
LPC 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 LPC's production costs and interest expense. Kronos' share of the
production costs are reported as cost of sales as the related TiO2 acquired
from LPC is sold, and its share of the interest expense is reported as a
component of interest expense.
Summary balance sheets of LPC are shown below.
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---- ----
ASSETS (In thousands)
<S> <C> <C>
Current assets $ 49,398 $ 47,861
Other assets 1,553 1,224
Property and equipment, net 335,254 325,617
-------- --------
$386,205 $374,702
======== ========
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche $ 73,286 $ 57,858
Tioxide tranche 59,400 16,800
Note payable to Tioxide - 21,000
Other liabilities, primarily current 17,719 14,084
-------- --------
150,405 109,742
Partners' equity 235,800 264,960
-------- --------
$386,205 $374,702
======== ========
</TABLE>
F-16
<PAGE> 28
Summary income statements of LPC are shown below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues and other income:
Kronos $ 70,492 $ 76,365 $ 74,916
Tioxide 67,218 75,241 73,774
Interest income 462 653 518
-------- -------- --------
138,172 152,259 149,208
-------- -------- --------
Cost and expenses:
Cost of sales 126,972 140,103 140,361
General and administrative 572 385 377
Interest 10,628 11,771 8,470
-------- -------- --------
138,172 152,259 149,208
-------- -------- --------
Net income $ - $ - $ -
======== ======== ========
</TABLE>
NOTE 7 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Intangible assets, net of accumulated
amortization of $20,562 and $22,207 $11,803 $ 7,939
Deferred financing costs, net 13,199 9,791
Other 6,163 7,095
------- -------
$31,165 $24,825
======= =======
</TABLE>
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Accounts payable $ 68,734 $ 60,648
-------- --------
Accrued liabilities:
Employee benefits 49,884 34,618
Environmental costs 6,000 6,000
Interest 6,633 9,429
Miscellaneous taxes 2,557 4,073
Other 32,177 39,136
-------- --------
97,251 93,256
-------- --------
$165,985 $153,904
======== ========
</TABLE>
F-17
<PAGE> 29
NOTE 9 - OTHER NONCURRENT LIABILITIES:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Environmental costs $112,827 $106,849
Employee benefits 13,148 11,960
Insurance claims expense 12,088 11,673
Deferred technology fee income 8,456 -
Other 1,992 1,566
-------- --------
$148,511 $132,048
======== ========
</TABLE>
NOTE 10 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Notes payable (DM 56,000 and DM 40,000,
respectively) $ 39,247 $ 25,732
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes $250,000 $250,000
13% Senior Secured Discount Notes 132,034 149,756
-------- --------
382,034 399,756
-------- --------
Kronos:
DM bank credit facility (DM 397,610 and
DM 539,971, respectively) 276,895 347,362
LPC term loan 73,286 57,858
Other 13,672 9,125
-------- --------
363,853 414,345
-------- --------
Rheox:
Bank term loan 37,263 14,659
Other 553 286
-------- --------
37,816 14,945
-------- --------
783,703 829,046
Less current maturities 43,369 91,946
-------- --------
$740,334 $737,100
======== ========
</TABLE>
The Company'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 "Notes") are collateralized by a series of intercompany
notes from Kronos International, Inc. ("KII"), a wholly-owned subsidiary of
Kronos, to NL, the interest rate and payment terms of which mirror those of the
respective Notes (the "Mirror Notes"). The Senior Secured 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 Note
holders would have access
F-18
<PAGE> 30
to the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent to a full, unconditional and joint and several
guarantee of the Notes by Kronos and Rheox.
The Senior Secured Notes and the Senior Secured Discount Notes are
redeemable, at the Company's option, after October 2000 and October 1998,
respectively. The redemption prices range from 101.5% (starting October 2000)
declining to 100% (after October 2001) of the principal amount for the Senior
Secured Notes and range from 106% (starting October 1998) declining to 100%
(after October 2001) of the accreted value of the Senior Secured Discount
Notes. In the event of a Change of Control, as defined, the Company would be
required to make an offer to purchase the Notes at 101% of the principal amount
of the Senior Secured Notes and 101% of the accreted value of the Senior
Secured Discount Notes. The Notes are issued pursuant to indentures which
contain a number of covenants and restrictions which, among other things,
restrict the ability of the Company 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. At December 31, 1996, no
amounts were available for payment of dividends pursuant to the terms of the
indentures. The Senior Secured Discount Notes do not require cash interest
payments through October 1998. The net carrying value of the Senior Secured
Discount Notes per $100 principal amount at maturity was $70.42 and $79.87 at
December 31, 1995 and 1996, respectively. At December 31, 1996, the quoted
market price of the Senior Secured Notes was $106.08 per $100 principal amount
and the quoted market price of the Senior Secured Discount Notes was $86.34 per
$100 principal amount (1995 - $107.06 and $80.95, respectively).
At December 31, 1996, the DM credit facility consists of a DM 396
million term loan and a DM 250 million revolving credit facility, of which DM
144 million is outstanding. Borrowings bear interest at DM LIBOR plus 1.625%
(5.5% and 4.76% at December 31, 1995 and 1996, respectively), and are
collateralized by the stock of certain KII subsidiaries. In January 1997, the
Company completed an amendment to the DM credit facility in which the Company
prepaid a net DM 207 million ($127 million) of the term loan and DM 43 million
($26 million) of the revolver, leaving DM 188 million and DM 100 million
outstanding, respectively. In addition, the aggregate amount available for
borrowing under the revolver was reduced to DM 230 million. The majority of
the cash generated from a refinancing of the Rheox term loan, discussed below,
was used for a portion of such prepayments. As amended, 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%, additional collateral in the form of pledges of certain
Canadian and German assets was granted and NL has guaranteed the facility.
At December 31, 1996, Rheox's term loan is due in quarterly
installments through December 1997, and is collateralized principally by the
stock of Rheox and its U.S. subsidiaries. The term loan bears interest, at
Rheox's option, at the prime rate plus 1.5% or LIBOR plus 2.5% (1995 - 8.3%
with LIBOR rate borrowings; 1996 - 9.8% with prime rate borrowings). In
January 1997, the Company completed a refinancing of this facility which
increased the term loan to $125 million and provided for a $25 million
revolving facility, generating a net $135 million in cash proceeds and credit
availability. As amended, the term
F-19
<PAGE> 31
loan is due in quarterly installments commencing in September 1997 through
January 2004 and the revolver is due no later than January 2004. The margin on
LIBOR-based borrowings will range from .75% to 1.75%, depending upon the level
of a certain Rheox financial ratio.
After giving effect for the Rheox term loan and the amendment to the
DM credit facility, unused lines of credit available for borrowing under the
Rheox U.S. facility and under the Company's non-U.S. credit facilities,
including the DM facility, approximated $9 million and $102 million,
respectively, at December 31, 1996.
Borrowings under KLA's tranche of LPC's term loan bear interest at
U.S. LIBOR plus 1.625% (7.315% and 7.245% at December 31, 1995 and 1996,
respectively) and are repayable in quarterly installments through September
2000. See Note 6.
Notes payable at December 31, 1995 and 1996 consists of DM 56 million
and DM 40 million, respectively, of short-term borrowings due within one year
from non-U.S. banks with interest rates ranging from 4.25% to 4.856% in 1995
and from 3.25% to 3.70% in 1996.
The aggregate maturities of long-term debt at December 31, 1996 on a
historical and a pro forma basis, giving effect for the January 1997
refinancing described above, are shown in the table below.
<TABLE>
<CAPTION>
Years ending December 31, Historical Pro forma
- ------------------------- ---------- ---------
(In thousands)
<S> <C> <C>
1997 $ 91,946 $ 28,152
1998 103,938 65,040
1999 133,295 120,609
2000 11,855 26,855
2001 215 22,715
2002 and thereafter 525,541 567,937
-------- --------
866,790 831,308
Less unamortized original issue discount
on the Senior Secured Discount Notes 37,744 37,744
-------- --------
$829,046 $793,564
======== ========
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLANS:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Personnel employed by
non-U.S. subsidiaries are covered by separate plans in their respective
countries and U.S. employees are covered by various plans including the
Retirement Programs of NL Industries, Inc. (the "NL Pension Plan").
A majority of U.S. employees are eligible to participate in a
contributory savings plan. The Company partially matches employee
contributions to the Plan, and, beginning April 1996, the Company contributes
to each employee's account an amount equal to approximately 3% of the
employee's annual eligible earnings. The Company also has an unfunded defined
contribution plan covering certain
F-20
<PAGE> 32
executives, and contributions are based on a formula involving eligible
earnings. The Company's expense related to these plans was $.8 million in
1994, and $1.2 million in 1995 and $1.3 million in 1996.
Defined pension benefits are generally based upon years of service and
compensation under fixed-dollar, final pay or career average formulas, and the
related expenses are based upon independent actuarial valuations. The funding
policy for U.S. defined benefit plans is to contribute amounts which satisfy
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended, and the Retirement Protection Act of 1994. Non-U.S. defined benefit
pension plans are funded in accordance with applicable statutory requirements.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1994 1995 1996
---- ---- ----
(Percentages)
<S> <C> <C> <C>
Discount rate 8.5 7.0 to 8.5 6.5 to 8.5
Rate of increase in future
compensation levels 5.0 to 6.0 3.5 to 6.0 3.5 to 6.0
Long-term rate of return on
plan assets 8.5 to 9.0 8.0 to 9.0 7.0 to 9.0
</TABLE>
During 1996, the Company curtailed certain U.S. employee pension
benefits and recognized a $4.6 million gain. Plan assets are comprised
primarily of investments in U.S. and non-U.S. corporate equity and debt
securities, short-term investments, mutual funds and group annuity contracts.
Statement of Financial Accounting Standards ("SFAS") No. 87,
"Employers' Accounting for Pension Costs" requires that an additional pension
liability be recognized when the unfunded accumulated pension benefit
obligation exceeds the unfunded accrued pension liability. Variances from
actuarially-assumed rates, including the rate of return on pension plan assets,
will result in additional increases or decreases in accrued pension
liabilities, pension expense and funding requirements in future periods. At
December 31, 1996, 79% of the projected benefit obligations in excess of plan
assets relate to non-U.S. plans. The funded status of the Company's defined
benefit pension plans is set forth below.
F-21
<PAGE> 33
<TABLE>
<CAPTION>
Assets exceed Accumulated benefits
accumulated benefits exceed assets
-------------------- ---------------------
December 31, December 31,
-------------------- ---------------------
1995 1996 1995 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $47,181 $48,953 $156,275 $167,411
Nonvested benefits 3,744 4,075 2,562 9,466
------- ------- -------- --------
Accumulated benefit obligations 50,925 53,028 158,837 176,877
Effect of projected salary
increases 7,885 7,598 22,373 25,741
------- ------- -------- --------
Projected benefit obligations
("PBO") 58,810 60,626 181,210 202,618
Plan assets at fair value 71,345 78,511 124,632 126,580
------- ------- -------- --------
Plan assets over (under) PBO 12,535 17,885 (56,578) (76,038)
Unrecognized net loss (gain) from
experience different from
actuarial assumptions 7,155 3,567 (20,643) 11,414
Unrecognized prior service cost
(credit) 3,147 3,838 (2,711) 262
Unrecognized transition obligations
(assets) being amortized over 15
to 18 years (261) (469) 2,517 2,043
Adjustment required to recognize
minimum liability - - (1,908) (1,822)
------- ------- -------- --------
Total prepaid (accrued)
pension cost 22,576 24,821 (79,323) (64,141)
Less current portion - - (10,012) (6,200)
------- ------- -------- --------
Noncurrent prepaid (accrued)
pension cost $22,576 $24,821 $(69,311) $(57,941)
======= ======= ======== ========
</TABLE>
The components of the net periodic defined benefit pension cost,
excluding curtailment gain, are set forth below.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost benefits $ 4,905 $ 4,325 $ 3,482
Interest cost on PBO 15,371 17,853 16,577
Return on plan assets (8,039) (16,574) (16,245)
Net amortization and deferrals (5,940) (2,399) (39)
------- -------- --------
$ 6,297 $ 3,205 $ 3,775
======= ======== ========
</TABLE>
F-22
<PAGE> 34
Incentive bonus programs
The Company has incentive bonus programs for certain employees
providing for annual payments, which may be in the form of NL common stock,
based on formulas involving the profitability of Kronos and Rheox in relation
to the annual operating plan of the employee's business unit and, for most of
these employees, individual performance.
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently
provides certain health care and life insurance benefits for eligible retired
employees. Certain of the Company's U.S. and Canadian employees may become
eligible for such postretirement health care and life insurance benefits if
they reach retirement age while working for the Company. In 1989, the Company
began phasing out such benefits for currently active U.S. employees over a
ten-year period. The majority of all retirees are required to contribute a
portion of the cost of their benefits and certain current and future retirees
are eligible for reduced health care benefits at age 65. The Company's policy
is to fund medical claims as they are incurred, net of any contributions by the
retirees.
For measuring the OPEB liability at December 31, 1996, the expected
rate of increase in health care costs is 8% in 1997, gradually declining to 5%
in 2000. Other assumptions used to measure the liability and expense are
presented below.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1994 1995 1996
---- ---- ----
(Percentages)
<S> <C> <C> <C>
Discount rate 8.5 7.5 7.5
Long-term rate for compensation increases 6.0 4.5 6.0
Long-term rate of return on plan assets 9.0 9.0 9.0
</TABLE>
Variances from actuarially-assumed rates will result in additional
increases or decreases in accrued OPEB liabilities, net periodic OPEB expense
and funding requirements in future periods. If the health care cost trend rate
was increased by one percentage point for each year, postretirement benefit
expense would have increased approximately $.2 million in 1996, and the
actuarial present value of accumulated benefit obligations at December 31, 1996
would have increased by approximately $2.2 million. During 1996, the Company
curtailed certain Canadian employee OPEB benefits and recognized a $1.3 million
gain.
F-23
<PAGE> 35
<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Retiree benefits $53,211 $41,768
Other fully eligible active plan participants 1,228 840
Other active plan participants 2,322 2,152
------- -------
56,761 44,760
Plan assets at fair value 7,103 6,689
------- -------
Accumulated postretirement benefit obligations
in excess of plan assets 49,658 38,071
Unrecognized net gain from experience different
from actuarial assumptions 4,676 7,083
Unrecognized prior service credit 12,199 16,259
------- -------
Total accrued postretirement benefits cost 66,533 61,413
Less current portion 6,298 5,478
------- -------
Noncurrent accrued postretirement benefits
cost $60,235 $55,935
======= =======
</TABLE>
The components of the Company's net periodic postretirement benefit
cost, excluding curtailment gain, are set forth below.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest cost on accumulated benefit
obligations $ 4,338 $ 4,415 $ 3,995
Service cost benefits earned during the year 99 101 112
Return on plan assets (688) (637) (596)
Net amortization and deferrals (1,495) (1,870) (1,473)
------- ------- -------
$ 2,254 $ 2,009 $ 2,038
======= ======= =======
</TABLE>
NOTE 12 - SHAREHOLDERS' DEFICIT:
Common stock
<TABLE>
<CAPTION>
Shares of common stock
-------------------------------
Treasury
Issued stock Outstanding
------ -------- -----------
(In thousands)
<S> <C> <C> <C>
Balance at December 31, 1993 66,839 15,949 50,890
Treasury shares reissued - (162) 162
------ ------ ------
Balance at December 31, 1994 66,839 15,787 51,052
Treasury shares reissued - (39) 39
------ ------ ------
Balance at December 31, 1995 66,839 15,748 51,091
Treasury shares reissued - (27) 27
------ ------ ------
Balance at December 31, 1996 66,839 15,721 51,118
====== ====== ======
</TABLE>
F-24
<PAGE> 36
Common stock options
The 1989 Long Term Performance Incentive Plan of NL Industries, Inc.
(the "NL Option Plan") provides for the discretionary grant of restricted
common stock, stock options, stock appreciation rights ("SARs") and other
incentive compensation to officers and other key employees of the Company.
Although certain stock options granted pursuant to a similar plan which
preceded the NL Option Plan ("the Predecessor Option Plan") remain outstanding
at December 31, 1996, no additional options may be granted under the
Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan and at December 31, 1996, an aggregate of 2.5 million shares
were available for future grants. The NL Option Plan provides for the grant of
options that qualify as incentive options and for options which are not so
qualified. Generally, stock options and SARs (collectively, "options") are
granted at a price equal to or greater than 100% of the market price at the
date of grant, vest over a five year period and expire ten 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 SARs have been granted under the NL Option
Plan.
In addition to the NL Option Plan, the Company maintains a stock
option plan for its nonemployee directors. At December 31, 1996, there were
options to acquire 10,000 shares of common stock outstanding of which 8,000
were fully vested.
Changes in outstanding options granted pursuant to the NL Option Plan,
the Predecessor Option Plan and the nonemployee director plan are summarized in
the table below.
F-25
<PAGE> 37
<TABLE>
<CAPTION>
Exercise price Amount
per share payable
----------------- upon
Shares Low High exercise
------ --- ---- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 1,718 $ 4.81 $24.19 $20,624
Granted 675 8.69 10.69 6,315
Exercised (13) 9.31 10.50 (120)
Forfeited (6) 5.00 9.31 (46)
----- ------ ------ -------
Outstanding at December 31, 1994 2,374 4.81 24.19 26,773
Granted 94 11.81 14.81 1,150
Exercised (39) 5.00 10.78 (282)
Forfeited (36) 5.00 11.81 (320)
----- ------ ------ -------
Outstanding at December 31, 1995 2,393 4.81 24.19 27,321
Granted 218 14.25 17.25 3,316
Exercised (27) 5.00 10.78 (262)
Forfeited (10) 5.00 14.25 (91)
Expired (1) 10.78 10.78 (6)
----- ------ ------ -------
Outstanding at December 31, 1996 2,573 $ 4.81 $24.19 $30,278
===== ====== ====== =======
</TABLE>
At December 31, 1994, 1995 and 1996, options to purchase 850,582,
1,189,907 and 1,660,068 shares, respectively, were exercisable and options to
purchase 298,698 shares become exercisable in 1997. Of the exercisable options
at December 31, 1996, options to purchase 1,161,398 shares had exercise prices
less than the Company's December 31, 1996 quoted market price of $10.875 per
share. Outstanding options at December 31, 1996 expire at various dates through
2006, with a weighted-average remaining life of six years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued during 1995 and 1996. The weighted average fair values of
options granted during 1995 and 1996 were $6.02 and $8.38 per share,
respectively. The fair values of employee stock options were calculated using
the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1995 and 1996: stock price volatility of 31%
and 42% in 1995 and 1996, respectively; risk-free rate of return of 5%; no
dividend yield; and an expected term of 9 years. If the fair value-based
method of accounting in SFAS No. 123 had been applied, the Company's earnings
per share would not have changed in 1995 and would have been reduced by $.01
per share in 1996. The pro forma impact on earnings per share for 1996 is not
necessarily indicative of future effects on earnings per share.
Preferred stock
The Company is authorized to issue a total of five million shares of
preferred stock. The rights of preferred stock as to dividends, redemption,
liquidation and conversion are determined upon issuance.
F-26
<PAGE> 38
NOTE 13 - INCOME TAXES:
The components of (i) income (loss) before income taxes and minority
interest ("pretax income (loss)"), (ii) the difference between the provision
for income taxes attributable to pretax income (loss) and the amounts that
would be expected using the U.S. federal statutory income tax rate of 35%,
(iii) the provision for income taxes and (iv) the comprehensive tax provision
are presented below.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Pretax income (loss):
U.S. $ (6,241) $ 43,125 $ 50,430
Non-U.S. (7,164) 55,777 (24,817)
-------- -------- --------
$(13,405) $ 98,902 $ 25,613
======== ======== ========
Expected tax expense (benefit) $ (4,692) $ 34,616 $ 8,965
Non-U.S. tax rates (7,108) (7,016) (206)
Rate change adjustment of deferred taxes - (6,593) -
Valuation allowance 24,309 (9,588) 3,013
Settlement of U.S. tax audits (5,437) - -
Incremental tax on income of companies not
included in the NL Tax Group 790 499 3,132
U.S. state income taxes 534 721 468
Other, net 1,338 32 (539)
-------- -------- --------
$ 9,734 $ 12,671 $ 14,833
======== ======== ========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal $ (5,222) $ 249 $ 4,934
U.S. state 475 2,135 1,136
Non-U.S. 2,574 39,535 5,961
-------- -------- --------
(2,173) 41,919 12,031
-------- -------- --------
Deferred income tax expense (benefit):
U.S. federal 4,058 (9,005) (4,764)
U.S. state 347 (1,026) (668)
Non-U.S. 7,502 (19,217) 8,234
-------- -------- --------
11,907 (29,248) 2,802
-------- -------- --------
$ 9,734 $ 12,671 $ 14,833
======== ======== ========
Comprehensive tax provision allocable to:
Pretax income (loss) $ 9,734 $ 12,671 $ 14,833
Shareholders' deficit, principally
deferred income taxes allocable to
currency translation and marketable
securities adjustments 7 10 971
-------- -------- --------
$ 9,741 $ 12,681 $ 15,804
======== ======== ========
</TABLE>
F-27
<PAGE> 39
The components of the net deferred tax liability are summarized below:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1996
---- ----
Deferred tax Deferred tax
--------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Tax effect of temporary
differences relating to:
Inventories $ 5,277 $ (5,644) $ 4,130 $ (4,967)
Property and equipment 574 (109,418) 512 (109,963)
Accrued postretirement
benefits cost 23,200 - 21,396 -
Accrued (prepaid) pension
cost 8,978 (14,942) 6,308 (17,579)
Accrued environmental
costs 38,214 - 36,670 -
Other accrued liabilities
and deductible
differences 26,496 - 33,464 -
Other taxable differences - (101,621) - (102,578)
Tax on unremitted earnings
of non-U.S. subsidiaries 281 (22,526) - (18,048)
Tax loss and tax credit
carryforwards 189,263 - 205,476 -
Valuation allowance (195,569) - (207,117) -
--------- --------- --------- ---------
Gross deferred tax assets
(liabilities) 96,714 (254,151) 100,839 (253,135)
Reclassification,
principally netting by tax
tax jurisdiction (93,404) 93,404 (99,019) 99,019
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) 3,310 (160,747) 1,820 (154,116)
Net current deferred tax
assets (liabilities) 2,522 (3,555) 1,597 (2,895)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets (liabilities) $ 788 $(157,192) $ 223 $(151,221)
========= ========= ========= =========
</TABLE>
The Company's valuation allowance increased in the aggregate by $31
million in each of 1994 and 1995 and $12 million in 1996. During 1995, both
the Company's gross deferred tax assets and the offsetting valuation allowance
were increased by $34 million as a result of recharacterizations of certain tax
attributes primarily due to changes in certain tax return elections. In
addition, the valuation allowance increased during 1995 by $6 million due to
foreign currency translation and was reduced by approximately $10 million due
to a change in estimate of the future tax benefit of certain tax credits which
the Company believes satisfies the "more-likely-than-not" recognition criteria.
In 1996, both the Company's gross deferred tax assets and the offsetting
valuation allowance were increased by $14 million due to certain non-U.S. tax
losses of its dual resident subsidiary. In addition, the valuation allowance
decreased during
F-28
<PAGE> 40
1996 by $6 million due to foreign currency translation and was increased by $3
million as a result of increases in certain other deductible temporary
differences during the year which the Company believes do not currently satisfy
the "more-likely-than-not" recognition criteria.
Certain of the Company's income tax returns in various U.S. and
non-U.S. jurisdictions are being examined and tax authorities have proposed or
may propose tax deficiencies. During 1994, the German tax authorities withdrew
certain proposed tax deficiencies of DM 100 million and remitted tax refunds
aggregating DM 225 million ($136 million), including interest, on a tentative
basis while examination of the Company's German income tax returns continued.
The Company subsequently reached an agreement with the German tax authorities
regarding such examinations which resolved certain significant tax
contingencies for years through 1990. The Company received final assessments
and paid certain tax deficiencies of approximately DM 50 million ($32 million
when paid), including interest, in settlement of these issues in 1996. The
Company considers the agreement to be a favorable resolution of the
contingencies and the payment was within previously-accrued amounts for such
matters.
Certain other German tax contingencies remain outstanding and will
continue to be litigated. Although the Company believes that it will
ultimately prevail in the litigation, the Company has granted a DM 100 million
($64 million at December 31, 1996) lien on its Nordenham, Germany TiO2 plant in
favor of the German tax authorities until the litigation is resolved. No
assurances can be given that this litigation will be resolved in the Company's
favor in view of the inherent uncertainties involved in court rulings. The
Company believes that it has adequately provided accruals for additional income
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 the Company's consolidated
financial position, results of operations or liquidity.
During 1995, the Company recorded tax benefits of $6.6 million due to
the reduction in dividend withholding tax rates pursuant to ratification of the
U.S./Canada income tax treaty.
During 1995, the Company utilized $14 million of foreign tax credit
carryforwards and U.S. net operating loss carryforwards from prior years to
reduce its 1995 U.S. federal income tax expense. At December 31, 1996, for
U.S. federal income tax purposes, the Company had approximately $27 million of
foreign tax credit carryforwards expiring during 1997 through 2001 and
approximately $10 million of alternative minimum tax credit carryforwards with
no expiration date. The Company also had approximately $400 million of income
tax loss carryforwards in Germany with no expiration date.
F-29
<PAGE> 41
NOTE 14 - OTHER INCOME, NET:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities earnings:
Interest and dividends $ 5,075 $ 6,244 $ 4,708
Securities transactions (1,220) 1,175 -
------- ------- -------
3,855 7,419 4,708
Litigation settlement gains 22,978 - 2,756
Technology fee income 10,344 10,660 8,743
Currency transaction gains, net 1,735 561 5,637
Pension and OPEB curtailment gains - - 5,900
Royalty income 1,508 - -
Disposition of property and equipment (1,981) (2,713) (2,312)
Other, net 6,389 6,314 5,048
------- ------- -------
$44,828 $22,241 $30,480
======= ======= =======
</TABLE>
Litigation settlement gains includes $20 million related to the
Company's 1994 settlement of its lawsuit against Lockheed Corporation.
Technology fee income was amortized by the straight-line method over a
three-year period ending October 1996.
NOTE 15 - OTHER ITEMS:
Advertising costs, expensed as incurred, were $2 million in each of
1994, 1995 and 1996.
Research, development and certain sales technical support costs,
expensed as incurred, approximated $10 million in 1994, and $11 million in each
of 1995 and 1996.
Interest capitalized in connection with long-term capital projects was
$1 million in each of 1994 and 1995, and $2 million in 1996.
NOTE 16 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons.
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. While no
transactions of the type described above are planned or proposed with respect
to the Company other than as set forth in this Annual Report on Form 10-K, the
Company from time to time
F-30
<PAGE> 42
considers, reviews and evaluates and understands that Contran, Valhi and
related entities consider, review and evaluate, such transactions. Depending
upon the business, tax and other objectives then relevant, and restrictions
under the indentures and other agreements, it is possible that the Company
might be a party to one or more such transactions in the future.
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.
The Company is a party to an intercorporate services agreement with
Contran (the "Contran ISA") whereby Contran provides certain management
services to the Company on a fee basis. Management services fee expense
related to the Contran ISA was $.4 million in each of 1994, 1995 and 1996.
The Company is a party to an intercorporate services agreement with
Valhi (the "Valhi ISA") whereby Valhi and the Company provide certain
management, financial and administrative services to each other on a fee basis.
Net management services fee expense related to the Valhi ISA was $.2 million in
1994, and $.1 million in each of 1995 and 1996.
The Company is party to an intercorporate services agreement with
Tremont (the "Tremont ISA"). Under the terms of the contract, the Company
provides certain management and financial services to Tremont on a fee basis.
Management services fee income related to the Tremont ISA was nil in 1994, and
$.1 million in each of 1995 and 1996.
Baroid Corporation, a former wholly-owned subsidiary of the Company
and currently a subsidiary of Dresser Industries, Inc., and the Company were
parties to an intercorporate services agreement (the "Baroid ISA") pursuant to
which, as amended, Baroid agreed to make certain services available to the
Company on a fee basis. The agreement was terminated in 1994. Management
services fee expense pursuant to the Baroid ISA approximated $.2 million in
1994.
Sales to Baroid in the ordinary course of business were $1.8 million
in 1994, $1.6 million in 1995 and $1.1 million in 1996.
Purchases in the ordinary course of business from unconsolidated joint
ventures, including LPC, were approximately $74 million in 1994, $79 million in
1995 and $81 million in 1996.
Certain employees of the Company have been granted options to purchase
Valhi common stock under the terms of Valhi's stock option plans. The Company
and Valhi have agreed that 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 (income) ($64,000 in 1994, $(25,000) in 1995
and $1,000 in 1996) in a manner similar to accounting for SARs. At December
31, 1996, employees of the Company held options to purchase 365,000 shares of
Valhi common stock at exercise prices ranging from $4.76 to $14.66 per share.
At December 31, 1996, 30,000 of the vested options were exercisable at prices
less than Valhi's quoted market price per share of $6.375.
F-31
<PAGE> 43
The Company and NLI Insurance, Ltd., a wholly-owned subsidiary of
Tremont, are parties to an Insurance Sharing Agreement with respect to certain
loss payments and reserves established by NLI Insurance, Ltd. that (i) arise
out of claims against other entities for which the Company is responsible and
(ii) are subject to payment by NLI Insurance, Ltd. under certain reinsurance
contracts. Also, NLI Insurance, Ltd. will credit the Company with respect to
certain underwriting profits or credit recoveries that NLI Insurance, Ltd.
receives from independent reinsurers that relate to retained liabilities.
Net amounts payable to affiliates are summarized in the following
table.
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1996
---- ----
(In thousands)
<S> <C> <C>
Tremont Corporation $ 3,525 $ 3,529
LPC 6,677 6,677
Other (21) (2)
------- -------
$10,181 $10,204
======= =======
</TABLE>
Amounts payable to LPC are generally for the purchase of Ti2 (see Note
6), and amounts payable to Tremont principally relate to the Company's
Insurance Sharing Agreement described above.
NOTE 17 - COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases, pursuant to operating leases, various
manufacturing and office space and transportation equipment. Most of the
leases contain purchase and/or various term renewal options at fair market and
fair rental values, respectively. In most cases management expects that, in
the normal course of business, leases will be renewed or replaced by other
leases.
Kronos' principal German operating subsidiary leases the land under
its Leverkusen Ti2 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 the Company's ability to transfer ownership or use
of the Leverkusen facility.
F-32
<PAGE> 44
Net rent expense aggregated $8 million in 1994, $9 million in 1995 and
$12 million in 1996. At December 31, 1996, minimum rental commitments under
the terms of noncancellable operating leases were as follows:
<TABLE>
<CAPTION>
Years ending December 31, Real Estate Equipment
- ------------------------- ----------- ---------
(In thousands)
<S> <C> <C>
1997 $ 2,219 $ 2,721
1998 2,086 2,179
1999 2,102 1,197
2000 1,777 119
2001 1,415 17
2002 and thereafter 24,752 -
------- -------
$34,351 $ 6,233
======= =======
</TABLE>
Capital expenditures
At December 31, 1996, the estimated cost to complete capital projects
in process approximated $16 million, including a $8 million debottlenecking
expansion project at the Company's Leverkusen, Germany chloride-process TiO2
facility and $2 million related to environmental protection and compliance
programs.
Purchase commitments
The Company has long-term supply contracts that provide for the
Company's chloride feedstock requirements through 2000. The agreements require
the Company purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $115 million.
Legal proceedings
Lead pigment litigation. Since 1987, the Company, 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.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
F-33
<PAGE> 45
actions vigorously. The Company has not accrued any amounts for the pending
lead pigment litigation. Considering the Company'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. Some of the Company's current
and former facilities, including several divested secondary lead smelters and
former mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company
has been named a potential responsible party ("PRP") pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") in
approximately 75 governmental and private actions associated with hazardous
waste sites and former mining locations, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List. These
actions seek cleanup costs and/or damages for personal injury or property
damage. While the Company 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, the Company is a party to a number of lawsuits
filed in various jurisdictions alleging CERCLA or other environmental claims.
At December 31, 1996, the Company had accrued $113 million for those
environmental matters which are reasonably estimable. It is not possible to
estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to the Company for sites which it is possible to
estimate costs is approximately $160 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries. 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. 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.
Further, there can be no assurance that additional environmental matters will
not arise in the future. As discussed in Note 2, the Company will adopt the
AICPA's Statement of Position 96-1, "Environmental Remediation Liabilities,"
during the first quarter of 1997, increasing its environmental liability by
approximately $30 million.
Certain of the Company'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 operations and
products of the Company have the potential to cause environmental or other
damage. The Company continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to comply with
environmental laws and regulations at all of its facilities and to continually
strive to improve environmental performance in association with applicable
industry initiatives. It is possible that future developments, such as
stricter requirements of
F-34
<PAGE> 46
environmental laws and enforcement policies thereunder, could affect the
Company's production, handling, use, storage, transportation, sale or disposal
of such substances as well as the Company's consolidated financial position,
results of operations or liquidity.
Other litigation. 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 the disposition of all claims and
disputes individually or in the aggregate, should not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
Concentrations of credit risk
Sales of TiO2 accounted for almost 90% of net sales during the past
three years. TiO2 is sold to the paint, plastics and paper industries. Such
markets 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 net sales. In each of the past three
years, approximately one-half of the Company's TiO2 sales by volume were to
Europe and approximately 36% in both 1994 and 1995 and 37% in 1996 of sales
were attributable to North America.
Consolidated cash, cash equivalents and restricted cash includes $103
million and $53 million invested in U.S. Treasury securities purchased under
short-term agreements to resell at December 31, 1995 and 1996, respectively, of
which $88 million and $41 million, respectively, of such securities are held in
trust for the Company by a single U.S. bank.
NOTE 18 - FINANCIAL INSTRUMENTS:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In millions)
<S> <C> <C> <C> <C>
Cash and cash equivalents, including
restricted cash $ 141.3 $141.3 $ 114.1 $114.1
Marketable securities - classified as
available-for-sale 20.9 20.9 23.7 23.7
Notes payable and long-term debt:
Fixed rate with market quotes:
Senior Secured Notes $ 250.0 $267.7 $ 250.0 $265.2
Senior Secured Discount Notes 132.0 151.8 149.8 161.9
Variable rate debt 440.9 440.9 455.0 455.0
Common shareholders' equity (deficit) $(209.4) $619.5 $(203.5) $555.9
</TABLE>
F-35
<PAGE> 47
Fair value of the Company's marketable securities and Notes are based
upon quoted market prices and the fair value of the Company's common
shareholder's equity (deficit) is based upon quoted market prices for NL's
common stock. The Company held no derivative financial instruments at December
31, 1995 and 1996.
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Net sales $250,875 $283,474 $255,339 $234,251
Cost of sales 169,768 187,896 169,058 149,462
Operating income 41,968 57,549 50,590 49,612
Net income $ 13,062 $ 21,002 $ 17,426 $ 34,119(a)
======== ======== ======== ========
Net income per share of
common stock $ .26 $ .41 $ .34 $ .66(a)
======== ======== ======== ========
Weighted average shares
and common stock
equivalents outstanding 51,176 51,552 51,628 51,486
======== ======== ======== ========
Year ended December 31, 1996:
Net sales $240,440 $263,162 $248,462 $234,010
Cost of sales 169,816 194,794 193,271 180,557
Operating income 41,938 36,098 19,471 15,866
Net income (loss) $ 13,444 $ 11,919 $ (4,249) $(10,297)
======== ======== ======== ========
Net income (loss) per
share of common stock $ .26 $ .23 $ (.08) $ (.20)
======== ======== ======== ========
Weighted average shares
and common stock
equivalents outstanding 51,510 51,493 51,118 51,118
======== ======== ======== ========
</TABLE>
(a) Income tax benefits in the fourth quarter of 1995 include the
recognition of $10 million of deferred tax assets related to a change
in estimate of the future tax benefit of certain tax credits which the
Company believes satisfies the "more-likely-than-not" recognition
criteria and $6.6 million related to the reduction in U.S./Canada
dividend withholding tax rates. See Note 13.
F-36
