SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10126
Tremont Corporation
(Exact name of registrant as specified in its charter)
Delaware 76-0262791
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5652
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock New York Stock Exchange
($1.00 par value per share) Pacific Stock Exchange
<PAGE>
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
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.
As of March 1, 1999, 6,385,058 shares of common stock were outstanding. The
aggregate market value of the 3.0 million shares of voting stock held by
nonaffiliates of Tremont Corporation as of such date approximated $74 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.
<PAGE>
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K that are not
historical facts, including, but not limited to, statements found (i) in Item 1
- - Business, including those under the captions "Unconsolidated Affiliate -
TIMET" and "Unconsolidated Affiliate - NL", (ii) in Item 3 - Legal Proceedings,
and (iii) in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements that
represent management's beliefs and assumptions based on currently available
information. Forward-looking statements can be identified by the use of words
such as "believes," "intends," "may," "should," "anticipates," "expected" or
comparable terminology or by discussions of strategy or trends. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot give any assurances that these expectations
will prove to be correct. Such statements by their nature involve substantial
risks and uncertainties that could significantly impact expected results.
Actual future results could differ materially from those described in such
forward-looking statements, and the Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Among the factors that
could cause actual results to differ materially are the risks and uncertainties
discussed in this Annual Report, including those 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 TIMET's and
NL's businesses, TIMET's dependence on the aerospace industry, the sensitivity
of TIMET's and NL's businesses to global industry capacity, global economic
conditions, changes in product pricing, the impact of TIMET's long-term
contracts with customers on its ability to raise prices and of its long-term
contracts with vendors on its ability to reduce or increase supply or achieve
lower costs, 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
<PAGE>
and the supply of raw materials and services, and the possibilities of
disruptions of normal business activities from "Year 2000" issues. Should one
or more of these risks materialize (or the consequences of such a development
worsen), or should the underlying assumptions prove incorrect, actual results
could differ materially from those forecasted or expected.
<PAGE>
PART I
ITEM 1: BUSINESS
GENERAL:
Tremont Corporation, headquartered in Denver, Colorado, is a holding
company with operations conducted through 39%-owned Titanium Metals Corporation
("TIMET"), 20%-owned NL Industries, Inc. ("NL") and other joint ventures through
75%-owned TRECO L.L.C. At December 31, 1998, Valhi, Inc. and Tremont, each
affiliates of Contran Corporation, held approximately 58% and 20%, respectively,
of NL's outstanding common stock, and together they may be deemed to control NL.
Tremont may be deemed to control TIMET. At December 31, 1998, Contran and its
subsidiaries held approximately 92% of Valhi's outstanding common stock, and
Valhi and other entities related to Harold C. Simmons held approximately 53% of
Tremont's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held either by trusts established for the benefit of certain
children and grandchildren of Mr. Simmons, of which Mr. Simmons is the sole
trustee, or by Mr. Simmons directly. Mr. Simmons may be deemed to control each
of Contran, Valhi, Tremont, NL and TIMET. Tremont and its consolidated
subsidiaries are referred to herein collectively as the "Company." Operating
segment information included in Note 3 to the Consolidated Financial Statements
is incorporated herein by reference.
During 1998, Tremont (i) purchased additional shares of NL common stock,
increasing its ownership from 18% to 20%, and (ii) purchased additional shares
of TIMET common stock, increasing its ownership percentage from 30% to 33%. In
February 1999, Tremont exercised an option to purchase an additional 2 million
shares of TIMET stock from IMI plc, increasing its ownership to 39%. See Note 4
to the Consolidated Financial Statements.
UNCONSOLIDATED AFFILIATE - TIMET:
<PAGE>
TIMET files periodic reports with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities 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, ingot, slab and mill products and has the largest sales volume
worldwide. TIMET is the only integrated producer with major manufacturing
facilities in both the United States and Europe, the world's principal markets
for titanium. TIMET estimates that in 1998 it accounted for approximately 27%
of worldwide industry shipments of mill products and approximately 12% of world
sponge production.
Titanium was first 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 for certain critical parts such as
wing supports and jet engine components. While aerospace applications have
historically accounted for a substantial portion of the worldwide demand for
titanium and were approximately half of industry mill product shipments in 1998,
the number of non-aerospace end-use markets for titanium has expanded
substantially. Today, numerous industrial uses for titanium exist, including
chemical and industrial power plants, desalination plants and pollution control
equipment. Demand for titanium is also increasing in diverse new and emerging
uses such as medical implants, sporting equipment, offshore oil and gas
production installations, geothermal facilities, military armor and automotive
uses.
<PAGE>
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 products produced from ingot or slab, including
billet, bar, flat products (plate, sheet, and strip), extrusions and wire.
TIMET believes it is among the lowest cost producers of titanium sponge and melt
products due in part to its economies of scale, manufacturing expertise and
investment in technology. The titanium industry is comprised of several
manufacturers which, like TIMET, produce a relatively complete range of titanium
products and a significant number of producers worldwide that manufacture a
limited range of titanium mill products. TIMET believes that at least 90% of
the world's titanium sponge is produced by six companies.
TIMET intends to continue its focus on the following goals and objectives
to change the traditional way business is conducted:
. Maximize the long-term value of its core aerospace business by focusing
on its basic strengths of sponge production, melting and forging of
various shapes of titanium products, and by entering into strategic
agreements with major titanium users to help mitigate the cyclicality of
TIMET's aerospace business.
. Invest in strategic alliances, including joint ventures, acquisitions
and entrepreneurial arrangements, as well as new markets, applications
and products, to help reduce traditional dependence on the aerospace
sector.
. Invest in technology, capacity and innovative projects aimed at reducing
costs and enhancing productivity, quality, customer service and
production capabilities.
. Stabilize the cost and supply of raw materials.
<PAGE>
. Maintain a strong balance sheet.
~Outlook~for~1999.~~~The business environment in which TIMET finds itself
in 1999 is substantially different from the 1996-1998 market for titanium metal.
Throughout 1996, 1997 and much of 1998, TIMET was producing titanium ingot and
mill products for aerospace customers in contemplation of continuing record jet
aircraft build rates that were expected to last through at least 2001. During
the second half of 1998 it became evident that the anticipated record rates of
aircraft production would not be reached, and that a decline in overall
production rates would begin earlier than forecast, particularly in titanium-
intensive widebody planes. As aerospace customers continue to reduce
inventories during 1999 and adjust to decreases in overall production rates,
TIMET faces a decrease in demand from 1997-98 levels.
Adding to the challenges in the aerospace sector, industrial demand for
titanium has also declined due to the weakness in Asian and other economies.
This has led to significant declines in volume and pricing. These declines in
TIMET's key markets occurred earlier than had been anticipated and at a time
when TIMET was in the midst of a large capital expenditure program to modernize
operations and to provide lower-cost, more efficient capacity to meet peak
demand for its products. TIMET was also in the process of installing
enterprise-wide systems and software in order to standardize systems and
information, improve efficiencies, reduce costs and also to help make its
systems "Year 2000" ("Y2K") ready.
Assuming demand remains at currently expected levels and does not decrease
or increase significantly in 1999, TIMET currently expects net losses in at
least the first two quarters and a return to modest profitability in the third
or fourth quarter. In both the aerospace and industrial sectors, reduced demand
and lower prices (including prices under new long-term contracts referred to
below) will cause lower sales and gross profit margins.
<PAGE>
On the expense side, TIMET's costs related to the new enterprise-wide
system and Y2K readiness program will continue to run at high levels throughout
1999. At the same time, the benefits of the new system will likely be modest in
1999, particularly with the reduction in capacity utilization.
In the fourth quarter of 1998, TIMET began implementing a plan of action
designed to address current market conditions without abandoning key elements of
its long-term strategy, which it believes remain sound. The action plan entails
the following:
. TIMET has permanently closed manufacturing facilities in Verdi, NV, Milbury,
MA and Pomona, CA. TIMET has also temporarily or permanently closed parts of
facilities in Henderson, NV, Morgantown, PA and Witton, England.
. TIMET has planned workforce reductions of approximately 600 people in the
United States and Europe. These reductions represent over 20% of its mid-
1998 worldwide workforce and have occurred at all levels within TIMET.
Approximately two-thirds of the reductions have been implemented as of
February 1999.
. TIMET has merged all of its North American manufacturing operations into one
operating unit to reduce costs and, at the same time, improve customer
service.
. Reductions in plant overhead costs as well as in selling and administrative
costs have been targeted.
. Supply contracts with key vendors have been renegotiated in order to reduce
volumes and, to some extent, prices.
<PAGE>
. Capital expenditures will be substantially cut back with exceptions of
expenditures for environmental and safety purposes and funds needed to
complete carryover projects begun in 1998, including the capital needed to
complete implementation of TIMET's business enterprise-wide software system.
Total capital expenditures are expected to be less than $40 million in 1999,
compared to an aggregate of approximately $180 million in 1997 and 1998. For
the year 2000, capital expenditures should decline further.
. Plans are already in place to reduce working capital, especially inventory
and receivables, and TIMET believes it will see the benefits of this program
beginning in the first quarter of 1999.
. TIMET has also obtained the agreement of Nippon Mining & Metals Co., Ltd. and
Mitsui & Co., Ltd. to defer indefinitely TIMET's plan to purchase
approximately 5% of the outstanding stock of Toho Titanium Company, Ltd. from
Nippon Mining & Metals and Mitsui at a purchase price of approximately $13
million. TIMET plans to proceed with the other elements of the previously
announced strategic alliance between Toho and TIMET, including study of the
possible formation of a titanium hearth melting joint venture in Japan and an
anticipated long-term agreement for the purchase of certain grades of
titanium sponge by TIMET from Toho.
In addition to its short-term plan of actions as described above, TIMET has
long-term agreements with certain major aerospace customers, including The
Boeing Company, Rolls-Royce plc, United Technologies Corporation (and related
companies) and Wyman-Gordon Company. These agreements provide for (i) minimum
market shares of the customers' titanium requirements (generally at least 70%)
for extended periods (nine to ten years) and (ii) fixed or formula-determined
prices generally for at least the first five years. These contracts are
structured to provide incentives to both parties to lower TIMET's costs and
share in the savings. These contracts and others represent the core of TIMET's
long-term aerospace strategy and in 1999 and beyond are anticipated to account
<PAGE>
for more than 60% of aerospace revenues. These agreements should limit pricing
volatility (both up and down), for the long term benefit of both parties, while
providing TIMET with a solid base of aerospace volume.
As a complement to the long-term agreements entered into with TIMET's key
customers, TIMET has also entered into agreements with certain key suppliers
that were intended to assure anticipated raw material needs to satisfy
production requirements for TIMET's key customers. When the order flow did not
meet expectations in 1998, TIMET sought to restructure the terms of certain
agreements. TIMET is continuing to work with suppliers and believes that the
contracts can be amended or terminated without any material adverse effect to
TIMET.
With the new enterprise-wide information system in place, and the assured
minimum volume shares and prices of the aerospace contracts referred to above,
TIMET can focus on cost reduction programs to increase TIMET's profitability to
acceptable levels.
~ TIMET~acquisitions~and~capital~transactions~during~the~past~three~years.~At
the beginning of 1996, TIMET was 75%-owned by Tremont and its operations were
conducted primarily in the United States. During 1996, TIMET expanded both
geographically and operationally as a result of the acquisition of the titanium
business of IMI plc (the "IMI Titanium Acquisition") for stock, the acquisition
of certain assets from Axel Johnson Metals, Inc. ("the "AJM Acquisition") for
cash and certain smaller acquisitions in Europe for cash.
TIMET also significantly improved its liquidity and capital structure
during 1996 through its initial public offering of common stock and the issuance
of company-obligated manditorily redeemable preferred securities (the
"Convertible Preferred Securities") through a subsidiary trust, TIMET Capital
Trust I.
<PAGE>
The IMI Titanium Acquisition and TIMET's IPO together reduced Tremont's
ownership to 30% in 1996.
During 1997, TIMET entered into a welded tube joint venture ("ValTimet")
and in 1998 a castings joint venture ("Wyman-Gordon Titanium Castings"), both
intended to combine best manufacturing practices and market coverage in these
smaller markets. In 1998, TIMET acquired Loterios S.p.A. to increase market
share in industrial markets, particularly oil and gas, and provide increased
geographic sales coverage in Europe.
TIMET's strategy for investing in new markets and uses for titanium also
includes investing in emerging businesses. In this regard, during 1997 TIMET
acquired equity interests in Ti.Pro, LLC, Titanium Memory Systems, Inc. ("TMS")
and TiComp, Inc. Ti.Pro's focus is on developing the market for titanium in
automobile racing and other specialty vehicle applications. TMS is continuing
its development and production of a titanium substrate for use in computer hard
disk drives. TiComp is working on the development and production of layered
titanium and composite materials for a variety of potential applications.
~Recent~Titanium~Industry~Conditions.~The titanium industry historically
has derived the majority of its business from the aerospace industry. The
cyclical nature of the aerospace industry has been the principal cause of the
historical fluctuations in performance of titanium companies, which had cyclical
peaks in mill products shipments in 1980, 1989 and 1997 and cyclical lows in
1983 and 1991. During the 1996-1998 period, TIMET reported aggregate net income
of $176 million, which substantially more than offset the aggregate net losses
of $93 million it reported during the difficult 1991-1995 period.
Worldwide industry mill product shipments of approximately 60,000 metric
tons in 1997 were 65% above 1994 levels. In 1998, industry mill product
shipments declined approximately 10%, to approximately 54,000 metric tons, with
a further 15% decline, to approximately 46,000 metric tons, expected in 1999.
<PAGE>
TIMET believes that the reduction in demand for aerospace products is
attributable to a decline in the number of aircraft forecast to be produced,
particularly in titanium-intensive wide body planes, compounded by reductions in
inventories as customers adjust to the decreases in overall production rates.
Industrial demand for titanium has also declined due to weakness in Asian and
other economies.
Aerospace demand for titanium products, which includes both jet engine
components such as rotor blades, discs, rings and engine cases, and air frame
components, such as bulkheads, tail sections, landing gear and wing supports,
can be broken down into commercial and military sectors. Industry shipments to
the commercial aerospace sector in 1998 accounted for approximately 80% of total
aerospace demand (40% of total titanium demand).
According to~The~Airline~Monitor~, a leading aerospace publication, the
commercial airline industry reported operating income of over $11 billion
(estimated) in 1998, compared to $16 billion in 1997 and $12 billion in 1996.
TIMET understands commercial aircraft deliveries are expected to peak in 1999.
Current expected deliveries for 2000 and 2001, while below the record levels of
1998 and 1999, are still high by historical standards, and the current
generations of airplanes use substantially more titanium than their
predecessors. TIMET can give no assurance as to the extent or duration of the
current commercial aerospace cycle or the extent to which it will result in
demand for titanium products.
Since titanium's initial applications in the aerospace sector, 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, sporting
equipment, offshore oil and gas production installations, geothermal facilities,
military armor and automotive uses. Several of these emerging applications
<PAGE>
represent potential growth opportunities that TIMET believes may reduce the
industry's historical dependence on the aerospace market.
~ Products~and~Operations.~ 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 rolled products produced from ingot or slab,
including billet, bar, flat products (plate, sheet, and strip) and extrusions.
In 1998, approximately 97% of TIMET's sales were generated by TIMET's integrated
titanium operations (its "Titanium melted and mill products" segment). 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. TIMET's
titanium sponge production capacity in Henderson, NV, 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.
Titanium ingots and slabs are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons 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
<PAGE>
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. Ingots and slabs are both sold to customers
and further processed into mill products.
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, plate, sheet, strip and
extrusions. 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.
During the production process and following the completion of products,
TIMET performs extensive testing on its products, including sponge, ingot and
mill products. Testing may involve chemical analysis, mechanical testing and
ultrasonic and x-ray 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 slab products. Although TIMET believes that there are other
metal producers with the capability to perform these same processing functions,
arranging for alternative processors, or possibly acquiring or 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
<PAGE>
of operations, financial condition and cash flows in the short term. TIMET is
exploring ways to lessen its dependence on any individual processor.
~ Raw~Materials.~The principal raw materials used in the production of
titanium mill products are titanium sponge, titanium scrap and alloying
materials. TIMET processes rutile ore into titanium tetrachloride and further
processes the titanium tetrachloride into titanium sponge.
While TIMET is one of six major worldwide producers of titanium sponge, it
cannot supply all of its needs for all grades of titanium sponge internally and
is dependent, therefore, on third parties for a portion of its sponge needs.
TIMET expects to provide approximately 45% of its 1999 sponge needs from
suppliers in Japan and the former Soviet Union ("FSU").
TIMET has a long-term agreement, concluded in 1997, for the purchase of
titanium sponge produced in Kazakhstan to support demand for both aerospace and
non-aerospace applications. This sponge purchase agreement is for ten years,
with firm pricing for the first five years (subject to certain possible
adjustments). This contract provides for annual purchases by TIMET of 6,000 to
10,000 metric tons. The parties have agreed in principle to a reduced minimum
for 1999, and TIMET currently expects to do the same for 2000. TIMET also has
agreed in principle to purchase on a long-term basis premium quality sponge
produced in Japan primarily to support production of material for critical
rotating jet engine applications.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
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 for the foreseeable future and does
<PAGE>
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. Chlorine is currently obtained from a single source
near TIMET's plant, but alternative suppliers are available. Magnesium and
petroleum coke are generally available from a number of suppliers.
Various alloying elements used in the production of titanium ingot are
available from a number of suppliers. TIMET has agreed in principle to enter
into long-term agreements with certain suppliers for a substantial portion of
its alloy requirements at fixed and/or formula-determined prices.
~TIMET~Facilities.~In addition to its U.S. sponge capacity discussed below,
TIMET's 1999 worldwide melting capacity aggregates approximately 48,000 metric
tons (26% of world capacity), and its mill products capacity aggregates
approximately 20,000 metric tons (16% of world capacity). Approximately 63% of
TIMET's worldwide melting capacity is represented by electron beam cold hearth
melting ("EB") furnaces, 35% by vacuum arc remelting ("VAR") furnaces and 2% by
a vacuum induction melting ("VIM") furnace. During much of the past three
years, TIMET operated its major production facilities at high levels of
practical capacity. Production levels and capacity utilization in 1999 will be
lower than in 1998.
<PAGE>
TIMET's VDP sponge facility in Henderson, NV is expected to operate at
approximately 60% of its annual practical capacity of 9,100 metric tons during
1999, down from approximately 85% in 1998. VDP sponge is used principally as a
raw material for TIMET's ingot melting facilities in the U.S., with some 1999
VDP production expected to be used in Europe. Due to changing market conditions
for certain grades of sponge, TIMET reopened its original Kroll-leach process
sponge plant in Nevada in 1996 and is temporarily idling this facility at the
end of March 1999. TIMET's raw materials processing facilities in Morgantown,
PA primarily process scrap used as melting feedstock, either in combination with
sponge or separately.
TIMET's U.S. melting facilities in Henderson, NV, Morgantown, PA and
Vallejo, CA produce ingots and slabs both sold to customers and used as
feedstock for its mill products operations. These melting facilities are
expected to operate at approximately 60% of aggregate capacity in 1999, with
certain production facilities temporarily idled.
Titanium mill products are produced in the U.S. principally at a forging
and rolling facility in Toronto, OH, which receives titanium ingots and slabs
from TIMET's U.S. melting facilities and titanium slabs and hot bands purchased
from outside vendors.
TIMET UK's melting facility in Witton, England produces VAR ingots sold to
customers and used as raw material feedstock for its forging operations, also in
Witton. The forging operation principally process the ingots into billet
product for sale to customers and for further processing into bar and plate at
TIMET's facility in Waunarlwydd, Wales. U.K. melting and mill products
production in 1999 is expected to be approximately 70% and 65%, respectively, of
capacity.
Capacity of 70%-owned TIMET Savoie in Ugine, France is provided under a
long-term contract with Compagnie Europeenne du Zirconium - CEZUS, S.A.
<PAGE>
("CEZUS"), which is the minority partner in TIMET Savoie. Such capacity 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. During 1999, TIMET Savoie
expects to operate at approximately 95% of the maximum capacity required to be
provided by CEZUS.
Sponge for melting requirements in both the U.K. and France is purchased
principally from suppliers in Japan and Kazakhstan, with a portion of 1999 U.K.
requirements expected to be provided by TIMET's Henderson, NV VDP plant.
~Distribution.~TIMET sells its products through its own sales force based
in the U.S. and Europe, and through independent agents worldwide. TIMET's
marketing and distribution system also includes nine TIMET-owned service centers
(five in the U.S. and four in Europe), which sell TIMET's products on a
just-in-time basis.
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.
~ Markets~and~Customer~Base.~ About 52% of TIMET's 1998 sales were to
customers within North America, with about 40% to European customers and the
balance to other regions. No single customer represents more than 10% of TIMET's
direct sales. However, in 1998, about 75% of TIMET's mill product shipments
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 1999 sales
<PAGE>
will be to the aerospace sector, other markets will continue to represent a
significant portion of sales.
The commercial aerospace industry consists of two major manufacturers of
large (over 100 seats) commercial aircraft (Boeing Commercial Airplane Group and
the Airbus consortium) and four major manufacturers of aircraft engines (Rolls-
Royce, Pratt & Whitney (a unit of United Technologies Corporation), General
Electric and SNECMA). TIMET's sales are made both directly to these major
manufacturers and to companies (including forgers such as Wyman-Gordon) that use
TIMET's titanium to produce parts and other materials for such manufacturers.
If any of the major aerospace manufacturers were to significantly reduce build
rates from those currently expected, there could be a material adverse effect,
both directly and indirectly, on TIMET.
TIMET's order backlog was approximately $350 million at December 31, 1998,
compared to $530 million at December 31, 1997. Approximately 95% of the 1998
year end backlog is expected to be delivered during 1999. Although TIMET
believes that the backlog is a reliable indicator of near-term 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, 1998, the estimated firm order backlog for Boeing and
Airbus, as reported by~The~Airline~Monitor~, was 3,224 planes versus 2,753
planes at the end of 1997 and 2,370 planes at the end of 1996. 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
<PAGE>
firm order backlog for wide body planes at year end 1998 was 820 (25% of total
backlog) compared to 840 (30%) at the end of 1997.
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.
~
Competition.~The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, Europe, the FSU and China. TIMET is one of four integrated
producers in the world (with "integrated producers" being considered as those
that produce at least both 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 most producers will generally operate at lower
capacity levels in 1999 than in 1998, increasing price competition.
TIMET's principal competitors in aerospace markets are Allegheny Teledyne
Inc., RTI International Metals, Inc. (formerly RMI Titanium Company) and
Verkhanya Salda Metallurgical Production Organization ("VSMPO"). These
companies, along with the Japanese producers and other companies, are also
principal competitors in industrial markets. 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
<PAGE>
FSU, existing and prior duties (including antidumping duties). However, imports
of titanium sponge, scrap, and mill products, principally from the FSU, have
increased in recent years and have had a significant competitive impact on the
U.S. titanium industry. To the extent 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 mitigated.
Generally, imports into the U.S. of titanium products from countries
designated by the U.S. Government as "most favored nations" are subject to a 15%
tariff (45% for other countries). Titanium products for tariff purposes are
broadly classified as either wrought or unwrought. Wrought products include
bar, sheet, strip, plate and tubing. Unwrought products include sponge, ingot,
slab and billet. Starting in 1993, imports of titanium wrought products from
Russia were exempted from this duty under the "generalized system of
preferences" or "GSP" program designed to aid developing economies. In recent
years, the GSP program has been subject to annual review and renewal and is
currently scheduled to expire in the second quarter of 1999.
In 1997, GSP benefits to these Russian products were suspended when the
level of Russian wrought products imports reached 50% of all imports of titanium
wrought products. A petition was filed in 1997 to restore duty-free status to
these products, and that petition was granted in June 1998. In addition, a
petition was also filed to bring unwrought products under the GSP program, which
would allow such products from the countries of the FSU (notably Russia and, in
the case of sponge, Kazakhstan and Ukraine) to be imported into the U.S. without
the payment of regular duties. This petition concerning unwrought products has
not been acted upon pending further investigation of the merits of such a
change.
In addition to regular duties, titanium sponge imported from countries of
the FSU (Russia, Kazakhstan and Ukraine) has for many years been subject to
<PAGE>
substantial antidumping penalties. In addition, titanium sponge imports from
Japan were subject to a standing antidumping order, but no penalties had been
attached in recent years. In 1998, the International Trade Commission ("ITC")
revoked all outstanding antidumping orders on titanium sponge based upon a
determination that changed circumstances in the industry did not warrant
continuation of the orders. TIMET has appealed that decision, with first
hearings expected in the second quarter of 1999. Pending the appeal, the orders
remain revoked.
Further reductions in, or the complete elimination of, all or any of these
tariffs could lead to increased imports of foreign sponge, ingot, and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge and
mill products and thus the business, financial condition, results of operations
and cash flows of TIMET. However, TIMET has, in recent years, been one of the
largest importers of foreign titanium sponge and mill products into the U.S. To
the extent TIMET remains a substantial purchaser of these products, any adverse
effects on product pricing as a result of any reduction in, or elimination of,
any of these tariffs would be partially ameliorated by the decreased cost to
TIMET for these products to the extent it currently bears the cost of the import
duties.
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 many applications.
~Research~and~Development.~TIMET's research and development activities are
directed toward improving process technology, developing new alloys, enhancing
<PAGE>
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 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 Henderson, NV 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, England facility.
~ 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, 1998, TIMET employed
approximately 2,550 persons (1,650 in the U.S. and 900 in Europe), down
approximately 16% from a total of 3,025 at the end of 1997. During 1999, TIMET
expects to reduce employment by an additional 300 persons, the vast majority of
which reduction should occur during the first quarter.
TIMET's production and maintenance workers in Henderson, NV and its
production, maintenance, clerical and technical workers in Toronto, OH are
represented by the United Steelworkers of America ("USWA") under contracts
expiring in October 2000 and June 2002, respectively. Employees at TIMET's
other U.S. facilities are not covered by collective bargaining agreements.
<PAGE>
Over 80% of the salaried and hourly employees at TIMET's European
facilities are members of various European labor unions, generally under annual
agreements, certain of which are still under negotiation for 1999.
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 has long-term contracts with the USWA and 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.
~
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, among others, 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, NV facility, TIMET uses
substantial quantities of titanium tetrachloride, a material classified as
extremely hazardous under Federal environmental laws. TIMET has used such
substances throughout the 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
<PAGE>
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, health and
safety 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 health,
safety and environmental protection and compliance of approximately $4 million
in each of 1997 and 1998, and its capital budget provides for approximately $6
million of such expenditures in 1999. 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.
See Note 11 to the Consolidated Financial Statements - "Commitments and
Contingencies - Environmental Matters," 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.
~
~G~eneral~. NL conducts its continuing operations through its principal
wholly-owned subsidiary, Kronos, Inc. In January 1998, the specialty chemicals
business of Rheox, Inc., a wholly-owned subsidiary of NL, was sold for $465
million to Elementis plc, including $20 million attributable to a five-year
<PAGE>
agreement by NL not to compete in the rheological products business. See "Rheox
- - discontinued operations" for related discussion.
Kronos is the world's fourth largest producer of titanium dioxide pigments
("TiO2") with an estimated 11% share of worldwide TiO2 sales volume in 1998.
Approximately one-half of Kronos' 1998 sales volume was in Europe, where Kronos
is the second largest producer of TiO2.
NL's objective is to maximize total shareholder returns by focusing on (i)
acquiring additional TiO2 production capacity, (ii) investing in certain cost
effective debottlenecking projects to increase TiO2 production capacity and
efficiency, (iii) controlling costs, (iv) enhancing its capital structure and
(v) considering mergers or acquisitions within the chemical industry.
~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 a "quality-of-life" product with demand affected by gross domestic
product in various regions of the world.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. NL's average TiO2 selling prices increased during the first three
quarters of 1998, continuing the upturn in prices that began in the second
quarter of 1997. Industry-wide demand for TiO2 declined in 1998, with second-
half 1998 demand lower than first-half 1998 demand. Kronos' 1998 sales volume
decreased 4% from its record sales volume in 1997 reflecting lower sales volume
in Asia and Latin America. Kronos' European sales volume in the second half of
1998 was lower than the first half of 1998. NL expects industry demand in 1999
will be relatively unchanged from 1998, but this will depend upon global
economic conditions. Prices in the fourth quarter of 1998 were even with prices
in the third quarter of 1998 and the outlook for prices in 1999 is uncertain.
<PAGE>
NL's expectations as to the future prospects of the TiO2 industry and prices are
based upon a number of factors beyond NL's control, including continued
worldwide growth of gross domestic product, competition in the market place,
unexpected or earlier-than-expected capacity additions and technological
advances. If actual developments differ from NL's expectations, industry and NL
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. Per capita consumption
of TiO2 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. Significant TiO2 consumption could emerge in Eastern Europe,
the Far East or China if the economies in these countries develop to the point
where quality-of-life products, including TiO2, are in greater demand. NL
believes that, due to its strong presence in Western Europe, it is well
positioned to participate in growth in consumption of TiO2 in Eastern Europe.
NL believes that there are no effective substitutes for TiO2. However,
extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used in a number of Kronos' markets. Generally, extenders are used to reduce to
some extent the utilization of higher-cost TiO2. The use of extenders has not
significantly changed anticipated TiO2 consumption over the past decade because
extenders generally have, to date, failed to match the performance
characteristics of TiO2. As a result, NL believes that the use of extenders
will not materially alter the growth of the TiO2 business in the foreseeable
future.
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.
<PAGE>
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' 1998 TiO2 sales was 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 described below), and
the manufacture and sale of iron-based water treatment chemicals (derived from
co-products of the pigment production processes). Water treatment chemicals are
used as treatment and conditioning agents for industrial effluents and municipal
wastewater, and in the manufacture of iron pigments.
~TiO2~manufacturing~process~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
<PAGE>
few years, and chloride-process production facilities in 1998 represented almost
60% of industry capacity.
Kronos produced a record 434,000 metric tons of TiO2 in 1998, compared to
the previous record of 408,000 metric tons produced in 1997 and 373,000 metric
tons in 1996. Kronos maintained near full capacity production rates throughout
1997 and 1998 in response to strong demand in 1997 and early 1998. Kronos' $36
million debottlenecking expansion of its Leverkusen, Germany chloride-process
plant increased annual production capacity by approximately 20,000 metric tons
in 1997. Kronos believes its current annual attainable production capacity is
approximately 440,000 metric tons, including its one-half interest in the joint
venture-owned Louisiana plant (see "TiO2 manufacturing joint venture").
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from beach sand ilmenite from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa) under a long-term supply
contract that expires at the end of 2000. Natural rutile ore, another chloride
feedstock, is purchased primarily from RGC Mineral Sands Limited (Australia), a
wholly-owned subsidiary of Westralian Sands Limited (Australia), under a long-
term supply contract that also expires at the end of 2000. NL does not expect
to encounter difficulties obtaining long-term extensions to existing supply
contracts prior to the expiration of the contracts. Raw materials purchased
under these contracts and extensions thereof are expected to meet Kronos'
chloride feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
<PAGE>
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 rock ilmenite mine in Norway which provided
all of Kronos' feedstock for its European sulfate-process pigment plants in
1998. For its Canadian plant, Kronos also purchases sulfate grade slag from
Q.I.T.-Fer et Titane Inc. under a long-term supply contract which expires in
2002.
NL believes the availability of titanium-containing feedstock for both the
chloride and sulfate processes is adequate for the next several years. NL does
not expect to experience any interruptions of its raw material supplies because
of its long-term supply contracts. However, political and economic instability
in certain countries from which NL purchases its raw material supplies could
adversely affect the availability of such feedstock.
~TiO~2~~manufacturing~joint~venture~. Subsidiaries of Kronos and Tioxide
Group, Ltd., a wholly-owned subsidiary of Imperial Chemicals Industries plc
("ICI"), each own a 50%-interest in a manufacturing joint venture, Louisiana
Pigment Company ("LPC"). LPC 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 LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
<PAGE>
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,
if any. 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.
~
~C~ompetition.~ The TiO2 industry is highly competitive. During the early
1990s, supply of TiO2 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 early-1990s. Prices improved in the mid-1990s with a mini-
peak in the first half of 1995. Prices declined until the first quarter of
1997, when selling prices of TiO2 began to increase as a result of increased
demand. Sales volume in Europe remained strong in the first half of 1998, but
moderated in the second half. Sales volume in 1998 in North America was even
with 1997, while sales volume to export markets declined, especially in Asia.
Average selling prices increased 16% in 1998 versus 1997, but fourth-quarter
1998 prices were even with the third quarter of 1998 as worldwide demand
softened. NL expects industry demand in 1999 will be relatively unchanged from
1998, but this will depend upon global economic conditions. As a result, the
outlook for prices in 1999 is uncertain. No assurance can be given that demand
or price trends will conform to NL's expectations. See "TiO2 Products and
Operations" for a description of certain risks and uncertainties within the TiO2
industry.
Capacity additions that are the result of construction of greenfield plants
in the worldwide TiO2 market require significant capital expenditures and
substantial lead time, typically three to five years in NL's experience. No
greenfield plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors debottleneck existing plants. Based on
the factors described under the caption "TiO2 Products and Operations" above, NL
<PAGE>
expects that the average annual increase in industry capacity from announced
debottlenecking projects will be less than the average annual demand growth for
TiO2 during the next three to five years.
Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
Kronos' grades and substantially all of Kronos' production are considered
commodity pigments with price generally being the most significant competitive
factor. During 1998 Kronos had an estimated 11% share of worldwide TiO2 sales
volume, and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont");
ICI (Tioxide); Millennium Chemicals, Inc. (Millennium Inorganic Chemicals,
Inc.), Kerr-McGee Corporation; Kemira Oy; and Ishihara Sangyo Kaisha, Ltd. In
1998, Rhone-Poulenc sold its Thann et Mulhouse Ltd. French TiO2 operations to
Millennium. Also in 1998, Bayer AG sold approximately 80% of its European TiO2
operations to Kerr-McGee and all of its Brazilian operations to Millennium.
Kronos' six largest competitors have estimated individual shares of TiO2
production capacity ranging from 23% to 5%, and an estimated aggregate 74% share
of worldwide TiO2 production volume. DuPont has about one-half of total U.S.
TiO2 production capacity and is Kronos' principal North American competitor.
~
~R~heox~-~discontinued~operations~. On January 30, 1998, the specialty
chemicals business of Rheox was sold to Elementis plc for $465 million,
including $20 million attributable to a five-year agreement by NL not to compete
in the rheological products business. As a result of the sale, NL has reported
its Rheox business as discontinued operations. Following the sale of its net
assets, Rheox, Inc. was renamed NL Capital Corporation ("NLCC"). The majority
of the $380 million after-tax proceeds has been used to reduce NL's outstanding
indebtedness.
<PAGE>
~
~R~esearch~and~development~. NL's expenditures for research and
development and certain technical support programs, excluding discontinued
operations, have averaged approximately $7 million annually during the past
three years. Research and development activities 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.
~Patents~and~trademarks~. Patents held for products and production
processes are believed to be important to NL and to the continuing business
activities of Kronos. NL continually seeks patent protection for its technical
developments, principally in the United States, Canada and Europe, and from time
to time enters into licensing arrangements with third parties.
NL's major trademarks, including Kronos and Titanox, are protected by
registration in the United States and elsewhere with respect to those products
it manufactures and sells.
~
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. Approximately three-quarters of NL's 1998 consolidated
sales, excluding discontinued operations, were to non-U.S. customers, including
10% to customers in areas other than Europe and Canada. Sales to customers in
Asia accounted for 2% of 1998's consolidated net sales. 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. Effects of fluctuations in
currency exchange rates on NL's results of operations are discussed in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
<PAGE>
Operations" and Item 7A - "Quantitative and Qualitative Disclosures about Market
Risk."
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. See "Regulatory and Environmental Matters."
~
~C~ustomer~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.
~ Employees~. As of December 31, 1998, NL employed approximately 2,500
persons, excluding the joint venture employees and discontinued operations, with
approximately 100 employees in the United States and approximately 2,400 at
sites outside the United States. Hourly employees in production facilities
worldwide, including the TiO2 manufacturing joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
NL believes its labor relations are good.
~
~R~egulatory~and~environmental~matters~and~litigation~. 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
<PAGE>
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 maintain 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 ("RCRA"), 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 the Louisiana plant owned and operated by the joint
venture is in substantial compliance with applicable requirements of these laws
or compliance orders issued thereunder. Following the sale of its specialty
chemicals business, NL has no U.S. plants other than LPC. 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
<PAGE>
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 and Belgium are members of the EU and follow
its initiatives. 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 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 advance notice with regard to the Nordenham
plant. Under certain circumstances, Kronos may terminate the contract after
giving six months notice with respect to treatment of effluents from the
Leverkusen plant.
In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos completed the installation of
off-gas desulfurization systems in 1997 at its Norwegian and German plants at a
cost of $30 million. The manufacturing joint venture completed the installation
of a $16 million off-gas desulfurization system at the Louisiana plant in 1996.
NL's capital expenditures related to its ongoing environmental protection
and improvement programs are currently expected to be approximately $13 million
in 1999 and $8 million in 2000.
NL has been named as a defendant, potentially responsible party ("PRP"), or
both, pursuant to CERCLA and similar state laws in approximately 75 governmental
<PAGE>
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, and/or damages for injury to natural
resources. Certain of these proceedings involve claims for substantial amounts.
Although NL may be jointly and severally liable for such costs, in most cases it
is only one of a number of PRPs who 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. NL believes it has provided adequate
accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 1998 NL had accrued $126 million for
those environmental matters which are reasonably estimable. NL determines the
amount of accrual on a quarterly basis by analyzing and estimating the range of
possible costs to NL. Such costs include, among other things, remedial
investigations, monitoring, studies, cleanup, removal and remediation. 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 PRPs, or
<PAGE>
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. Furthermore, there
can be no assurance that additional environmental matters will not arise in the
future. More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below.
In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against NL and others (United States of
America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to
the Granite City, Illinois lead smelter formerly owned by NL. The complaint
seeks injunctive relief to compel the defendants to comply with an
administrative order issued pursuant to CERCLA, and fines and treble damages for
the alleged failure to comply with the order. NL and the other parties did not
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
NL and ten other defendants, there are 330 other PRPs who have been notified by
the U.S. EPA. Some of those notified were also respondents to the
administrative order. In February 1992, the court entered a case management
order directing that the remedy issues be tried before the liability aspects are
presented. In September 1995, the U.S. EPA released its amended decision
selecting cleanup remedies for the Granite City site. NL presently is
challenging portions of the U.S. EPA's selection of the remedy. In September
1997, the U.S. EPA informed NL that past and future cleanup costs are estimated
to total approximately $63.5 million. There is currently no allocation among the
PRPs for these costs. NL has been informed that the U.S. EPA has reached an
agreement in principle with certain other PRPs settling their liabilities with
respect to the site for approximately 50% of the site costs. NL is negotiating
with the U.S. EPA to settle its liability.
<PAGE>
At the Pedricktown, New Jersey lead smelter site formerly owned by NL the
U.S. EPA has 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 NL, entered into an administrative consent
order with the U.S. EPA to perform the remedial design phase of operable unit
one. The U.S. EPA issued an order with respect to operable unit two in March
1992 to NL and 30 other PRPs directing immediate removal activities including
the cleanup of waste, surface water and building surfaces. NL has complied with
the order, and the work with respect to operable unit two is completed. NL has
paid $2.5 million, which represents approximately 50% of operable unit two
costs. In June 1998, NL entered into a consent decree with the U.S. EPA and
other PRPs to perform the remedial action phase of operable unit one. In
addition, NL reached an agreement in principle with certain PRPs with respect to
NL's liability at the site to settle this matter within previously-accrued
amounts.
Having completed the RIFS at NL's former Portland, Oregon lead smelter
site, NL conducted predesign studies to explore the viability of the U.S. EPA's
selected remedy pursuant to a June 1989 consent decree captioned U.S. v. NL
Industries, Inc., Civ. No. 89-408, United States District Court for the District
of Oregon. Subsequent to the completion of the predesign studies, the U.S. EPA
issued notices of potential liability to approximately 20 PRPs, including NL,
directing them to perform the remedy, which was initially estimated to cost
approximately $17 million, exclusive of administrative and overhead costs and
any additional costs, for the disposition of recycled materials from the site.
In January 1992 the U.S. EPA issued unilateral administrative orders to NL and
six other PRPs directing the performance of the remedy. NL and the other PRPs
commenced performance of the remedy. In August 1994, the U.S. EPA authorized NL
and the other PRPs to cease performing most aspects of the selected remedy. In
May 1997 the U.S. EPA issued an Amended Record of Decision ("ARD") for the soils
<PAGE>
operable unit changing portions of the cleanup remedy selected. The ARD
requires construction of an onsite containment facility estimated to cost
between $10.5 million and $12 million, including capital costs and operating and
maintenance costs. NL and certain other PRPs have entered into a consent decree
to perform the remedial action in the ARD. In November 1991, Gould, Inc., the
current owner of the site, filed an action, Gould, Inc. v. NL Industries, Inc.,
No. 91-1091, United States District Court for the District of Oregon, against NL
for damages for alleged fraud in the sale of the smelter, rescission of the
sale, past CERCLA response costs and a declaratory judgment allocating future
response costs and punitive damages. In February 1998, NL and the other
defendants reached an agreement settling the litigation by agreeing to pay a
portion of future costs, which are estimated to be within previously-accrued
amounts.
NL and other PRPs entered into an administrative consent order with the
U.S. EPA requiring the performance of a RIFS at two sites in Cherokee County,
Kansas, where NL and others formerly mined lead and zinc. A former subsidiary
of NL mined at the Baxter Springs subsite, where it is the largest viable PRP.
In August 1997, the U.S. EPA issued the record of decision for the Baxter
Springs and Treece subsites. The U.S. EPA has estimated that the selected
remedy will cost an aggregate of approximately $7.1 million for both subsites
($5.4 million for the Baxter Springs subsite). NL is negotiating with the U.S.
EPA to resolve its liability at the Baxter Springs subsite. In addition, NL
received a notice in March 1998 from the U.S. EPA that it may be a PRP in three
additional subsites in Cherokee County.
In January 1989, the State of Illinois brought an action against NL and
several other subsequent owners and operators of 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 August 1997, the trial court
<PAGE>
dismissed the case. In June 1998, the Illinois appellate court affirmed. In
October 1998, the Supreme Court of Illinois declined the State's petition to
review decisions in favor of NL. The U.S. EPA has issued an order to NL to
perform a removal action at NL's former facility involved in the State of
Illinois case. NL is complying with the order.
Residents in the vicinity of NL's former Philadelphia lead chemicals plant
commenced a class action allegedly comprised of over 7,500 individuals seeking
medical monitoring and damages allegedly caused by emissions from the plant
(Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No. 87-4420, Court of
Common Pleas, Philadelphia County). The complaint sought compensatory and
punitive damages from NL and the current owner of the plant, and alleged causes
of action for, among other things, negligence, strict liability, and nuisance.
A class was certified to include persons who resided, owned or rented property,
or who work or have worked within up to approximately three-quarters of a mile
from the plant from 1960 through the present. NL answered the complaint,
denying liability. In December 1994, the jury returned a verdict in favor of
NL. Plaintiffs appealed to the Pennsylvania Superior Court and in September
1996, the Superior Court affirmed the judgment in favor of NL. In December
1996, plaintiffs filed a petition for allowance of appeal to the Pennsylvania
Supreme Court, which was declined. Residents also filed consolidated actions in
the United States District Court for the Eastern District of Pennsylvania,
Shinozaki v. Anzon, Inc. and Wagner and Antczak v. Anzon and NL Industries, Inc.
Nos. 87-3441, 87-3502, 87-4137 and 87-5150. The consolidated action is a
putative class action seeking CERCLA response costs, including cleanup and
medical monitoring, declaratory and injunctive relief and civil penalties for
alleged violations of the RCRA, and also asserting pendent common law claims for
strict liability, trespass, nuisance and punitive damages. The court dismissed
the common law claims without prejudice, dismissed two of the three RCRA claims
as against NL with prejudice, and stayed the case pending the outcome of the
state court litigation.
<PAGE>
At a municipal and industrial waste disposal site in Batavia, New York, NL
and approximately 50 others have been identified as PRPs. The U.S. EPA has
divided the site into two operable units. Pursuant to an administrative consent
order entered into with the U.S. EPA, NL conducted a RIFS for operable unit one,
the closure of the industrial waste disposal section of the landfill. NL's RIFS
costs 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.
NL and other PRPs entered into an interim cost sharing arrangement for this
phase of work. NL and the other PRPs have completed the work comprising
operable unit two (the extension of the municipal water supply) with the
exception of annual operation and maintenance. The U.S. EPA also has claimed it
has incurred approximately $2.4 million in past costs from the PRPs. NL and the
other PRPs have submitted to a nonbinding allocation process, as a result of
which NL was assigned a 30% share of future site liability.
~
~L~ead~pigment~litigation~. NL was formerly involved in the manufacture of
lead pigments for use in paint and lead-based paint. NL has been named as a
defendant or third party defendant in various legal proceedings alleging that NL
and other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. NL is vigorously defending
such litigation. Considering NL's previous involvement in the lead pigment and
lead-based paint businesses, there can be no assurance that additional
litigation, similar to that described below, will not be filed. In addition,
various legislation and administrative regulations have, from time to time, been
enacted or proposed that seek to (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
<PAGE>
would permit civil liability for damages on the basis of market share, rather
than requiring plaintiffs to prove that the defendant's product caused the
alleged damage. While no legislation or regulations have been enacted to date
that are expected to have a material adverse effect on NL's consolidated
financial position, results of operations or liquidity, the imposition of market
share liability could have such an effect. NL has not accrued any amounts for
the pending lead pigment and lead-based paint litigation. There is no assurance
that NL will not incur future liability in respect of this pending litigation in
view of the inherent uncertainties involved in court and jury rulings in pending
and possible future cases. However, based on, among other things, the results
of such litigation to date, NL believes that the pending lead pigment and lead-
based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against NL, other
alleged manufacturers of lead pigment (together with NL, the "pigment
manufacturers") and the Lead Industries Association (the "LIA") in 14 actions
commenced by residents of HANO units seeking compensatory and punitive damages
for injuries allegedly caused by lead pigment. The actions, which were 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 and have been inactive
<PAGE>
since 1992, Hall v. HANO, et al. (No. 89-3552) and Allen v. HANO, et al. (No.
89-427) Civil District Court for the Parish of Orleans, State of Louisiana.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et
al., No. 89-4617). In December 1991, the court granted the defendants' motion
to dismiss claims alleging negligence and strict liability and denied the
remainder of the motion. In January 1992, defendants appealed the denial. NL
has answered the remaining portions of the complaint denying all allegations of
wrongdoing. In May 1993, the Appellate Division of the Supreme Court affirmed
the denial of the motion to dismiss plaintiffs' fraud, restitution and
indemnification claims. In May 1994, the trial court granted the defendants'
motion to dismiss the plaintiffs' restitution and indemnification claims, 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. 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. In July 1997, the denial of defendants' two summary
judgment motions on the fraud claim were affirmed by the Appellate Division. In
December 1998, plaintiffs moved for partial summary judgment on their claims of
market share, alternative liability, enterprise liability, and concert of
action. In February 1999, claims for plaintiffs New York City and New York City
Health and Hospital Corporation dismissed with prejudice all their claims and
<PAGE>
were no longer parties to the case. Also in February 1999, the New York City
Housing Authority dismissed with prejudice all of its claims except for claims
for damages relating to two housing projects. Briefing on the December 1998
motion and limited discovery are proceeding.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The amended complaint identifies 18 other defendants who allegedly manufactured
lead products or lead-based paint, and asserts causes of action under theories
of strict liability, negligence per se, negligence, breach of express and
implied warranty, fraud, nuisance, restitution, and negligent infliction of
emotional distress. The complaint asserts several theories of liability
including joint and several, market share, enterprise and alternative liability.
In October 1992, NL and the other defendants moved to dismiss the complaint with
prejudice. In July 1993, the court dismissed the complaint. In December 1994,
the Ohio Court of Appeals reversed the trial court dismissal and remanded the
case to the trial court. In July 1996, the trial court granted defendants'
motion to dismiss the property damage and enterprise liability claims, but
denied the remainder of the motion. Discovery and briefing is proceeding with
respect to class certification.
In November 1993, NL was served with a complaint in Brenner, et al. v.
American Cyanamid, et al., (No. 12596-93) Supreme Court, State of New York, Erie
County alleging injuries to two children purportedly caused by lead pigment.
The complaint seeks $24 million in compensatory and $10 million in punitive
damages for alleged negligent failure to warn, strict liability, fraud and
misrepresentation, concert of action, civil conspiracy, enterprise liability,
market share liability, and alternative liability. In January 1994, NL answered
<PAGE>
the complaint, denying liability. In June 1998, defendants moved for partial
summary judgment dismissing plaintiffs' market share and alternative liability
claims. In January 1999, the trial court granted defendants' summary judgment
motion to dismiss the alternative liability and enterprise liability claims, but
denied defendants' motion to dismiss the market share liability claim.
Discovery is proceeding.
In January 1996, NL was served with a complaint on behalf of individual
intervenors in German, et. al. v. Federal Home Loan Mortgage Corp., et. al.,
(U.S. District Court, Southern District of New York, Civil Action No. 93 Civ.
6941 (RWS)). This alleged class action lawsuit had originally been brought
against the City of New York and other landlord defendants. The intervenors'
complaint alleges claims against NL and other former manufacturers of lead
pigment for medical monitoring, property abatement, and other injunctive relief,
based on various causes of action, including negligent product design, negligent
failure to warn, strict liability, fraud and misrepresentation, concert of
action, civil conspiracy, enterprise liability, market share liability, breach
of express and implied warranties, and nuisance. The intervenors purport to
represent a class of children and pregnant women who reside in New York City.
In May 1996, NL and the other former manufacturers of lead pigments filed
motions to dismiss the intervenors' complaint. In May 1997, plaintiffs moved
for class certification and defendants moved for summary judgment. In June
1997, the Court stayed all further activity in the case pending reconsideration
of its 1995 decision permitting filing of the complaint against the manufacturer
defendants and joinder of the new complaint with the pre-existing complaint
against New York City and other landlords. In November 1998, the court
dismissed without prejudice all claims against NL and the other pigment
manufacturer defendants, finding that such claims were improperly joined.
In April 1997, NL was served with a complaint in Parker v. NL Industries,
et al. (Circuit Court, Baltimore City, Maryland, No. 97085060 CC915).
Plaintiff, now an adult, and his wife, seek compensatory and punitive damages
<PAGE>
from NL, another former manufacturer of lead paint and a local paint retailer,
based on claims of negligence, strict liability and fraud, for plaintiff's
alleged ingestion of lead paint as a child. In June 1997, NL answered the
complaint denying liability. In February 1998, the Court dismissed the fraud
claim. In July 1998, the Court granted NL's motion for summary judgment on all
remaining claims. Plaintiffs have appealed.
In December 1998, NL was served with a complaint on behalf of four children
and their guardians in Sabater, et al. v. Lead Industries Association, et al.
(Supreme Court of the State of New York, County of Bronx, Index No. 25533/98).
Plaintiffs purport to represent a class of all persons similarly situated. The
complaint alleges against NL, a trade association, and other former
manufacturers of lead pigment various causes of action including negligence,
strict products liability, fraud and misrepresentation, concert of action, civil
conspiracy, enterprise liability, market share liability, breach of warranties,
nuisance, and violation of New York State's consumer protection act. The
complaint seeks damages for establishment of property abatement and medical
monitoring funds and compensatory damages for alleged injuries to plaintiffs.
Defendants filed motions to dismiss the nuisance and consumer protection act
claims in the complaint in March 1999.
NL believes that the foregoing lead pigment actions are without merit and
intends to continue to deny all allegations of wrongdoing and liability and to
defend such actions vigorously.
NL has filed actions seeking declaratory judgment and other relief against
various insurance carriers with respect to costs of defense and indemnity
coverage for certain of its environmental and lead pigment litigation. NL
Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124, -2125
(HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
<PAGE>
of New York lead pigment case and two other cases that have since been resolved
in NL's favor. In July 1991, the court granted NL's motion for summary judgment
and ordered Commercial Union to pay NL's reasonable defense costs for such
cases. In June 1992, NL filed an amended complaint in the United States
District Court for the District of New Jersey against Commercial Union seeking
to recover costs incurred in defending four additional lead pigment cases which
have since been resolved in NL's favor. In August 1993, the court granted NL's
motion for summary judgment and ordered Commercial Union to pay the reasonable
costs of defending those cases. In July 1994, the court entered judgment on the
order requiring Commercial Union to pay previously-incurred NL costs in
defending those cases. In September 1995, the U.S. Court of Appeals for the
Third Circuit reversed and remanded for further consideration the decision by
the trial court that Commercial Union was obligated to pay NL'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 NL's motion for summary judgment, finding that
Commercial Union had a duty to defend NL in the four lead paint cases which were
the subject of NL's second amended complaint. The court also issued a partial
ruling on Commercial Union's motion for summary judgment in which it sought
allocation of defense costs and contribution from NL and two other insurance
carriers in connection with the three lead paint actions on which the court had
granted NL summary judgment in 1991. The court ruled that Commercial Union is
entitled to receive such contribution from NL and the two carriers, but reserved
ruling with respect to the relative contributions to be made by each of the
parties, including contributions by NL that may be required with respect to
periods in which 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.
<PAGE>
In June 1997, NL reached a settlement in principle with its insurers
regarding allocation of defense costs in the lead pigment cases in which
reimbursement of defense costs had been sought.
Other than granting motions for summary judgment brought by two excess
liability insurance carriers, which contended 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.
In September 1998, the U.S. Court of Appeals for the Third Circuit issued
an opinion regarding which states' laws applied to the various sites for which
environmental coverage is sought, and remanded the case to the trial court. 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.
~
~O~ther~litigation.~~NL has been named as a defendant in various lawsuits
in a variety of jurisdictions alleging personal injuries as a result of
occupational exposure to asbestos, silica and/or mixed dust 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 has reached an agreement to settle this
case.
<PAGE>
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 NL 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. An agreement has been
reached settling this matter, with NL being indemnified by another party.
In March 1997, NL was served with a complaint in Ernest Hughes, et al. v.
Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the Fifth
Judicial District Court of Cass County, Texas, on behalf of approximately 4,000
plaintiffs and their spouses alleging injury due to exposure to asbestos and
seeking compensatory and punitive damages. NL has filed an answer denying the
material allegations. The case has been stayed, and the plaintiffs are refiling
their cases in Ohio. NL is also a defendant in approximately 1,000 additional
asbestos cases pending in Ohio, the first of which is scheduled for trial in the
third quarter of 1998.
In February 1999 NL was served with a complaint in Cosey, et al. v.
Bullard, et al., No. 95-0069, filed in the Circuit Court of Jefferson County,
Mississippi, on behalf of approximately 1,600 plaintiffs alleging injury due to
exposure to asbestos and silica and seeking compensatory and punitive damages.
NL intends to file an answer denying the material allegations of the complaint.
NL 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.
OTHER ITEMS:
~
<PAGE>
~C~aptive~Insurance~Subsidiary.~ The Company's captive insurance
subsidiary ("TRE Insurance") reinsured certain comprehensive general liability,
auto liability, workers' compensation and employers' liability risks to the
Company and related parties, and also participated on various third party
reinsurance treaties. As described in Note 10 to the Consolidated Financial
Statements, certain related parties have entered into insurance sharing
agreements whereby they would, among other things, reimburse TRE Insurance for
certain loss payments and reserves. TRE Insurance 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 TRE Insurance's unrelated reinsurance
business is in run-off.
~Other~Joint~Ventures.~Other joint ventures, held by TRECO, are principally
comprised of (i) a 32% equity interest in Basic Investments, Inc. ("BII"), and
(ii) a 12% interest in Victory Valley Land Company, L.P. ("VVLC"). BII has an
additional 50% interest in VVLC. Through its subsidiaries, including Basic
Management, Inc. ("BMI"), BII provides utility services to, and owns property
(the "BMI Complex") adjacent to, TIMET's plant in Henderson, NV, a suburb of Las
Vegas. BII, through VVLC, is actively engaged in efforts to develop certain
land holdings surrounding the BMI Complex for commercial, industrial, and
residential purposes.
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 11 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
<PAGE>
water discharge permit violations at one 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 was substantially completed at a total
cost of approximately $2 million. Another of the sites 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 this 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, 1998, the Company had accrued approximately $6.0 million
related to these matters.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. 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.
<PAGE>
ITEM 2: PROPERTIES
The Company's principal executive offices, located at 1999 Broadway, Suite
4300, Denver, Colorado 80202, are leased by TIMET, which provides space to
Tremont's executives through an intercorporate services agreement.
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 11 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 11 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, 1998 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, 1998.
PART II
<PAGE>
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 1, 1999, there were approximately 10,600
holders of record of Tremont common stock. On March 22, 1999, the closing price
of the Company's common stock according to the New York Stock Exchange Composite
Tape was $21.94 per share. The high and low sales prices for the Company's
common stock, according to the NYSE Composite Tape, are set forth below.
<PAGE>
<TABLE>
<CAPTION>
<S> High Low
~Year~ended~December~31,~1998:~ <C> <C>
First quarter $60.125 $51.688
Second quarter 60.313 52.625
Third quarter 56.500 42.250
Fourth quarter 41.125 31.625
~Year~ended~December~31,~1997:~
First quarter $36.875 $30.250
Second quarter 44.875 34.875
Third quarter 58.500 42.750
Fourth quarter 58.500 49.625
</TABLE>
<PAGE>
In the second quarter of 1998, the Company instituted a regular quarterly
dividend of $.07 per common share. 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,
cash availability and contractual restrictions with respect to payment of
dividends.
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."
<PAGE>
<TABLE>
<CAPTION>
<S> Years ended December 31,
1994 1995 1996 1997 1998
(In millions)
INCOME STATEMENT DATA:
Equity in earnings <C> <C> <C> <C> <C>
(loss) of:
TIMET $(31.6) $ (3.2) $ 16.0 $25.2 $14.0
NL Industries (7.6) 11.4 (1.8 (5.1) 57.8
Other joint ventures - - 2.5 5.2 2.9
$(39.2) $ 8.2 $ 16.7 $25.3 $74.7
Gain on sale of TIMET $ - $ - $ 27.6 $ - $ -
stock
Income (loss):
Before extraordinary $(42.9) $ 5.4 $ 30.0 $13.6 $75.7
item
Extraordinary item - - - - (1.9)
(a)
Cumulative effect of
changes in
Accounting (.8) - - - -
principles (b)
<PAGE>
Net income $(43.7) $ 5.4 $ 30.0 $13.6 $73.8
(loss)
Earnings per basic
share:
Before extraordinary $ (5.83) $ .73 $ 4.05 $ 1.92 $11.55
item
Net income (loss) (5.93) .73 4.05 1.92 11.25
Earnings per diluted
share:
Before extraordinary $ (5.83) $ .70 $ 3.90 $ 1.76 $11.18
item
Net income (loss) (5.93) .70 3.90 1.76 10.88
Cash dividends per share $ - $ - $ - $ - $ .21
BALANCE SHEET DATA (at year
end):
Cash and cash $ 3.8 $ 2.7 $ 68.0 $ 38.0 $ 3.1
equivalents
Total assets 116.8 134.9 223.5 215.0 288.6
Indebtedness - 6.0 - - 5.9
Stockholders' equity 76.0 83.7 158.0 136.3 200.2
____________________
<FN>
(a) Represents the Company's equity in NL's extraordinary item.
(b) Represents the Company's equity in a TIMET accounting change.
<PAGE>
</TABLE>
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
~TREMONT
~
Tremont is a holding company with operations conducted principally through
TIMET (titanium metals) and NL (TiO2). The results of operations of TIMET and
NL, and the Company's equity therein, are discussed below. Equity in earnings
of other joint ventures consist principally of real estate development earnings
of VVLC, which can fluctuate from period-to-period.
~Corporate~expenses,~net~and~other~items.~~Tremont's corporate expenses,
net for 1998, include $1.4 million of interest earned on short-term investments
and a $.9 million gain for cash received related to an investment that had
previously been written off, offset primarily by expenses related to
intercorporate service agreements and OPEB. Corporate expenses, net for 1997,
include $2.7 million of interest earned on short-term investments and a $1.2
million gain on sale of a certain oil and gas production well interest while
such expenses 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.~
~
In connection with TIMET's initial public stock offering in 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.
~Income~taxes.~The Company's income tax rate in 1998 varied from the U.S.
statutory rate principally because of a reduction in the deferred tax asset
valuation allowance. Such reduction was principally due to a net decrease in
<PAGE>
the basis differences related to the Company's investment in NL. The variance
in rates in 1997 was principally due to no tax benefit being recognizable on
equity in losses from its investment in NL. The variance in rates in 1996 was
principally due to a reduction in the deferred tax valuation allowance to
reflect the current utilization of its U.S. NOLs. The Company expects its
income tax rate in 1999 to approximate the U.S. statutory rate. See Note 7 to
the Consolidated Financial Statements.
~Other.~Tremont periodically evaluates the net carrying value of its long-
term assets, principally its investments in NL and TIMET, to determine if there
has been any decline in value that is other than temporary and would, therefore,
require a writedown which would be accounted for as a realized loss. The
Company's per share net carrying amount of its investment in NL at December 31,
1998 was $9.30 per share, compared to a per share market price of $14.19 at that
date. The Company's per share net carrying value of its investment in TIMET at
December 31, 1998 was $14.14 per share, compared to a per share market price of
$8.50 at that date. As of March 22, 1999, the market price for TIMET common
stock was $6.19 per share and for NL common stock was $9.31 per share. The
Company believes stock market prices are not necessarily indicative of a
company's enterprise value or the value that could be realized if the company
were sold. After considering what it believes to be all relevant factors
including, among other things, the relatively short period of time that the
market price has been less than the Company's per share investment in TIMET,
TIMET's operating results, financial position and prospects, the Company
concluded that there has been no other than temporary decline in value of the
Company's investment in TIMET below its net carrying value at December 31, 1998.
As discussed above, the Company's major assets are its interests in NL
(TiO2) and TIMET (titanium metals). It is possible, should the TiO2 or titanium
metals industries in general, or NL or TIMET specifically, encounter a prolonged
downturn, or suffer other unforeseen adverse events, that the value of the
Company's investment in NL, TIMET or both could decline to a level that could
<PAGE>
warrant a writedown. The Company will continue to monitor and evaluate its
interests in NL and TIMET based upon, among other things, their respective
results of operations, financial condition, liquidity and business outlook. In
the event Tremont determines that any decline in value of its interests below
their net carrying value has occurred which is other than temporary, it would
report an appropriate writedown at that time.
~
~Y~ear~2000~("Y2K").~~~Year 2000 issues exist because many computer systems
and applications currently use two-digit fields to designate a year. Date-
sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to treat the year 2000 properly could cause systems to process
critical financial, manufacturing and operational information incorrectly.
Tremont, as a holding company, does not itself have numerous applications
or systems. The Company (i) has completed an initial assessment of potential
Y2K issues in its information systems, (ii) is in the process of determining,
prioritizing and implementing remedial actions, including testing, and (iii)
will develop contingency plans in the event internal or external Y2K issues are
not resolved by the Company's June 30, 1999 target date for completion. The
cost for Y2K readiness is not expected to be material to the Company. Although
not anticipated, the most reasonably likely worst-case scenario of failure by
Tremont or its key service providers to become Y2K ready would be a short-term
inability on the part of Tremont to process banking transactions. Y2K issues
related to NL and TIMET are discussed below.
~TIMET
~
The Company's equity in TIMET's earnings differs from the amount that would
be expected by applying Tremont's December 31, 1998 33%-ownership percentage to
TIMET's separately-reported earnings because of changes in Tremont's level of
ownership of TIMET in 1996 and 1998 and because of the effect of amortization of
purchase accounting adjustments made by Tremont in conjunction with the
<PAGE>
acquisitions of its interest in TIMET. Amortization of such basis differences
in TIMET generally increases earnings, and decreases losses, attributable to
TIMET as reported by Tremont. 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.
~General.~~The aerospace industry in recent history has accounted for
approximately two-thirds of U.S. and 40% to 50% 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. Throughout 1996,
1997 and much of 1998, TIMET was producing titanium ingot and mill products for
aerospace customers in contemplation of continuing record jet aircraft build
rates then expected to last through at least 2001. During the second half of
1998, it became evident to TIMET that the anticipated record rates of aircraft
production would not be reached and that a decline in overall production rates
would begin earlier than forecast, particularly in titanium-intensive widebody
planes. As aerospace customers reduce inventories during 1999 and adjust to
decreases in overall production rates, TIMET faces a decrease in demand from
1997-1998 levels. Industrial demand for titanium has also declined due to
weakness in Asian and other economies.
TIMET estimates that worldwide industry shipments of titanium mill products
peaked in 1997 at approximately 60,000 metric tons and decreased 10% in 1998 to
approximately 54,000 metric tons. TIMET also estimates industry mill product
shipments will further decline in 1999 to approximately 46,000 metric tons.
TIMET's order backlog decreased to approximately $350 million at December
31, 1998 from approximately $530 million at December 31, 1997 and from $440
million at December 31, 1996. TIMET defines "order backlog" as firm purchase
<PAGE>
orders (which are generally subject to cancellation by the customer upon payment
of specified charges).
TIMET expects that production levels, capacity utilization, sales volumes,
sales prices, gross profit margins and operating income margins excluding
special charges will all be lower in 1999 than they were in 1998. Assuming
demand remains at currently expected levels and does not decrease or increase
significantly in 1999, TIMET currently expects net losses in at least the first
two quarters of 1999 and a return to modest profitability in the third or fourth
quarter. In both the aerospace and industrial sectors, reduced demand and lower
prices (including prices under new long-term contracts with key aerospace
customers) will cause lower sales and gross profit margins. TIMET has
implemented plans to address the current market conditions, as more fully
described in Item 1 - "Business - Unconsolidated Affiliate - TIMET -- Outlook
for 1999." Special restructuring charges in 1998 as a result of TIMET's action
plans were $24 million, as discussed below. Expenses related to implementing
and maintaining TIMET's business-enterprise system and to addressing Y2K issues
are expected to remain high in 1999.
<PAGE>
<TABLE>
<CAPTION> Years ended December 31,
1996 1997 1998
<S> (In millions)
Net sales: <C> <C> <C>
Titanium melted and mill $ 459.7 $ 700.4 $ 686.7
products
Other 51.5 36.2 23.9
Eliminations (4.1) (3.0) (2.9)
$ 507.1 $ 733.6 $ 707.7
Operating income:
Titanium melted and mill $ 55.6 $ 139.3 $ 87.4
products
Other 4.2 (6.3) (4.7)
59.8 133.0 82.7
<PAGE>
General corporate income, net 1.0 4.2 6.1
Interest expense 9.0 2.0 2.9
Pretax income 51.8 135.2 85.9
Income taxes 2.3 41.0 29.2
Minority interest - Convertible .8 8.9 8.8
Preferred Securities
Other minority interest 1.1 2.3 2.1
Net income $ 47.6 $ 83.0 $ 45.8
Tremont's equity in TIMET's income $ 16.0 $ 25.2 $ 14.0
Mill product shipments:
Volume (metric tons) 12,400 15,100 14,800
Average price ($ per $ 32.00 $ 35.00 $ 35.25
Kilogram)
</TABLE>
<PAGE>
~
~TIMET operates in two segments (i) "Titanium melted and mill products",
its principal segment, and (ii) "Other", which consists primarily of TIMET's
titanium castings operations that were combined in a joint venture during 1998.
~
~ ~Sales~and~Operating~Income~-~1998~compared~with~1997.~Net sales of the
"Titanium melted and mill products" segment in 1998 were 2% below 1997 levels
primarily due to lower volumes due to reduced demand during the last half of the
year in both aerospace and industrial markets, as described above. Mill product
shipment volume for the year declined 2% to 14,800 metric tons. Selling prices
on shipments were relatively flat, in large part due to prices on orders entered
prior to the decline in demand. Average prices on 1999 shipments are expected
to be 5% to 10% lower than in 1998, reflecting both provisions of long-term
agreements effective in 1999 and increased price competition on non-contract
business.
Net sales of the "Other" segment were down 34% primarily as a result of
TIMET's ceasing to consolidate its castings business after July 1998.
Total cost of sales was 77% of sales in 1998, comparable to 76% of sales in
1997. Cost of sales is expected to be a higher percent of sales in 1999, as the
effect of lower average selling prices, lower volumes and higher depreciation
will more than offset the positive effect of TIMET's cost saving initiatives.
Selling, general, administrative and developmental expenses in 1998 were
higher than in 1997, in both total dollar and percent of sales terms (8.5%, up
from 6.2%), in large part due to information technology costs, including
implementation of TIMET's enterprise-wide business information system and
addressing Y2K issues.
Equity in earnings of joint ventures of the "Titanium melted and mill
products" segment were $1.9 million in 1998 compared to a loss of $.5 million in
<PAGE>
1997, principally due to improved earnings of ValTimet. Equity losses of the
"Other" segment were $1.5 million in 1998, $1.0 million higher than in 1997, as
certain ventures were held for the full year, compared to a part year in 1997.
Operating income of the "Titanium melted and mill products" segment in 1998
included special charges of $19.5 million and the "Other" segment included $4.5
million of charges. TIMET's restructuring plan included the permanent closure
of three plants, the permanent or temporary closures of parts of three other
plants, the merger of all North American manufacturing operations into one
operating unit and the termination or layoff of 600 people, or approximately 20%
of TIMET's worldwide workforce. Components of the 1998 restructuring charge are
summarized below.
<PAGE>
<TABLE>
<CAPTION> Segment
Melted and
Mill Other Total
Products
(in millions)
<S> <C> <C> <C>
Property and equipment $ 7.1 $ 2.6 $ 9.7
Pension costs - SFAS No. 88 5.7 - 5.7
Personnel severance and benefits 5.3 .5 5.8
Other exit costs, principally 1.4 1.4 2.8
related to leased facilities
$ 19.5 $ 4.5 $ 24.0
</TABLE>
<PAGE>
Substantially all of the property and equipment loss relates to items sold,
scrapped or abandoned, with disposition already substantially complete.
Depreciation of equipment not impaired and only temporarily idled was not
suspended. The pension charge relates to the actuarial valuation of accelerated
defined benefits of employees to be terminated.
At December 31, 1998, 50% of the personnel reductions had been accomplished
with substantially all of the remainder to be accomplished in the first quarter
of 1999. Other exit costs relate primarily to carrying costs on leased
facilities, which leases have or will be terminated, assumed or expire by mid-
year. Of the $8.6 million personnel and other exit costs accrued, $1.9 million
had been paid at year-end. Most of the remaining accrued costs will be paid
during the first half of 1999, although certain payments, for items such as
benefit continuation for terminated employees, will be paid later.~
~ ~
~ ~Operating~Income~-~1997~compared~with~1996.~~~The significant improvement
in sales, operating income and operating margins of the "Titanium melted and
mill products" segment in 1997 over 1996 were driven by price and volume
increases for titanium products in both commercial aerospace and other markets.
Sales volume of titanium mill products increased 22% in 1997, to approximately
15,100 metric tons. Average selling prices in 1997 increased, reflecting both
the pass-through of cost increases, particularly raw material costs, and real
price improvement associated with increased market demand.
The "Other" segment results declined significantly in 1997 relative to 1996
in large part due to deterioration in the golf castings market.
Total cost of sales in 1997 was 76% of sales versus 83% of sales in 1996,
reflecting the real price improvement in sales, higher volumes and generally
higher operating levels at TIMET's plants.
<PAGE>
Selling, general, administrative and development expenses as a percent of
sales in 1997 (6.2%) were higher than in 1996 (5.9%) primarily due to higher
information technology and market/product development costs.
Equity in earnings of joint ventures in 1996 was $6.2 million and consisted
principally of TIMET's 50% interest in Titanium Hearth Technologies ("THT"),
reported by the equity method prior to the AJM Acquisition in October 1996.
Operating income of the "Titanium melted and mill products" segment in 1996
included special charges of $5 million related to the IMI Acquisition, $3
million of which related to compensation for services in connection with the
acquisition, with the remainder related principally to integration and
consolidation of certain facilities.
~ European~Operations.~~~TIMET has substantial operations and assets located
in Europe, principally the United Kingdom, with smaller operations in France,
Italy and Germany. Titanium is a worldwide market and the factors influencing
TIMET's U.S. and Europe operations are substantially the same. The relative
changes in 1998 sales to customers in Europe (increased 5% compared to 1997) and
in the U.S. (declined 12%) was impacted, respectively, by the acquisition of
Loterios in April 1998 and deconsolidation of TIMET's castings operations in
July 1998.
Sales of TIMET's European subsidiaries represented approximately 44% of
TIMET's consolidated net sales in 1998. Approximately one-half of these
European sales are denominated in currencies other than the U.S. dollar,
principally major European currencies. Certain purchases of raw materials,
principally titanium sponge and alloys, for TIMET's European operations are
denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies. The functional currencies of TIMET's
European subsidiaries are those of their respective countries; thus, the U.S.
dollar value of these subsidiaries' sales and costs denominated in currencies
<PAGE>
other than their functional currency, including sales and costs denominated in
U.S. dollars, are subject to exchange rate fluctuations which may impact
reported earnings and may affect the comparability of period-to-period operating
results. Borrowings of TIMET's European operations may be in U.S. dollars or in
functional currencies. TIMET's export sales from the United States are
denominated in U.S. dollars and as such are not subject to currency exchange
rate fluctuations.
The U. S. dollar sales and purchases of TIMET's European operations
described above provide some natural hedge of non functional currencies, and
TIMET does not use currency contracts to hedge its currency exposures. Net
currency transaction/translation gains/losses included in income were less than
$.5 million in each of the past three years. At December 31, 1998, TIMET's
consolidated assets and liabilities denominated in currencies other than
functional currencies were approximately $37 million and $40 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable,
accounts payable and borrowings. Exchange rates among 11 European currencies
(including the French franc, Italian lira and German mark but excluding the UK
pound Sterling) became fixed relative to each other as a result of the new
European currency unit ("Euro") effective in 1999. Costs associated with
modifications of systems to handle Euro-denominated transactions have not been
significant.
~General~Corporate~Income.~General corporate income consists principally of
earnings on corporate cash equivalents and varies with cash levels and interest
rates. Such income in 1999 is expected to be lower than in 1998.
~ Interest~Expense.~~~Interest expense was lower in 1997 than 1996,
principally due to lower average borrowing levels. While average borrowing
levels increased in 1998 over 1997, interest rates declined and interest
capitalized increased. Interest expense in 1999 is expected to be higher than
<PAGE>
in 1998 due to higher average borrowing levels and lower levels of interest
capitalization due to lower capital expenditures.
~ Minority~Interest.~~~Annual dividend expense related to the 6.625%
Convertible Preferred Securities, issued in November 1996, approximates $13
million and is reported as minority interest net of allocable income taxes.
Other minority interest relates primarily to the 30% interest in TIMET Savoie
held by CEZUS.
~ Income~Taxes.~~~TIMET operates in several tax jurisdictions and is subject
to varying income tax rates. As a result, the geographic mix of pretax income
can impact TIMET's overall effective tax rate. In 1997 and 1996, TIMET's income
tax rate also varied from the U.S. statutory rate due to reductions in the
deferred tax valuation allowance related to current year utilization of tax
attributes and a 1996 $10 million reduction in the deferred tax valuation
allowance resulting from a change in estimate of the net operating loss
carryforwards and alternative minimum tax carryforwards that would more likely
than not be realized in the future. For financial reporting purposes, TIMET has
recognized all of its net operating loss carryforwards.
<PAGE>
~
~Y~ear~2000.~~~Year 2000 issues exist because many computer systems and
applications currently use two-digit fields to designate a year. Date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
treat the year 2000 properly could cause systems to process critical financial,
manufacturing and operational information incorrectly. Most of TIMET's
information systems have been replaced in connection with the implementation of
TIMET's business-enterprise system, the initial implementation of which was
substantially completed with the rollout of the system to the U.K. in February
1999. The cost of the new system, including related equipment and networks,
aggregated approximately $50 million in 1997-98 ($41 million capital; $9 million
expense) with an additional $4 million to $5 million expected to be incurred in
1999.
TIMET, with the help of outside specialists and consultants (i) has
substantially completed an initial assessment of potential Y2K issues in its
non-information systems (e.g., its manufacturing and communication systems), as
well as in those information systems that were not replaced by the new business
enterprise-wide system, (ii) is in the process of determining, prioritizing and
implementing remedial actions, including testing, and (iii) will develop
contingency plans in the event internal or external Y2K issues are not resolved
by TIMET's June 30, 1999 target date for completion. TIMET's Y2K readiness
varies by location. Some locations have completed their internal Y2K readiness
plans while others are in the midst of remediation and testing. At this time,
most sites anticipate completing their respective Y2K readiness plans by the
June 1999 target date. However, remediation of some items at the Henderson, NV
site, and possibly others, could be delayed beyond the June 1999 target date.
TIMET expended approximately $2 million on these specific non-information system
Y2K issues in 1998, principally embedded system technology, and expects to incur
approximately $5 million on such issues in 1999. TIMET's evaluation of
potential Y2K exposures related to key suppliers and customers is also in
process and will continue throughout 1999.
<PAGE>
Although TIMET believes its key information systems will be Y2K ready
before the end of 1999, it cannot yet fully predict the outcome or success of
the Y2K readiness programs related to certain of its embedded manufacturing
systems or those comparable systems of its suppliers or customers. TIMET also
cannot predict whether it will find additional problems that would result in
unplanned upgrades of applications after June 1999 or even December 1999. As a
result of these uncertainties, TIMET cannot predict the impact on its financial
condition, results of operations or cash flows or operations resulting from Y2K
failures in systems that TIMET directly or indirectly relies upon. Should
TIMET's Y2K readiness plan not be successful or be delayed beyond December 1999,
the consequences to TIMET could be far-reaching and material, including an
inability to produce titanium metal products at its manufacturing facilities,
which could lead to an indeterminate amount of lost revenue. Other potential
negative consequences could include impeded communications or power supplies,
slower transaction processing and financial reporting, and potential liability
to third parties. Although not anticipated, the most reasonably likely worst-
case scenario of failure by TIMET or its key suppliers or customers to become
Y2K ready would be a short-term slowdown or cessation of manufacturing
operations at one or more of TIMET's facilities and a short-term inability on
the part of TIMET to process orders and billings in a timely manner, and to
deliver product to customers.
~NL~Industries
~
The Company's 20% interest in NL is reported by the equity method. Valhi
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.
<PAGE>
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 changes in Tremont's level of ownership of NL in 1998 and
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 continuing operations are conducted by Kronos in the TiO2 business
segment. As discussed below, average TiO2 selling prices declined in 1997, but
increased in 1998 compared to the prior year. Kronos' operating income and
margins improved in both 1997 and 1998.
Many factors influence TiO2 pricing levels, including industry capacity,
worldwide demand growth and customer inventory levels and purchasing decisions.
Kronos believes that the TiO2 industry has long-term growth potential, as
discussed in "Item 1. Unconsolidated Affiliate - NL: "TiO2 Products and
Operations" and "Competition."
<PAGE>
<TABLE><CAPTION>
Years ended December Change
31,
1996 1997 1998 1996-97 1997-98
(In millions)
<S> <C> <C> <C> <C> <C>
Net sales - Kronos $851.2 $837.2 $894.7 -2% +7%
Operating income - $ 71.6 $ 82.5 $171.2 +15% +107%
Kronos
General corporate items:
Securities earnings 4.7 5.4 14.9
Corporate expenses, (17.2) (49.8) (18.3)
net
Interest expense (69.3) (65.8) (58.1)
Pretax income (loss) (10.2) (27.7) 109.7 $(17.5) $137.4
Income taxes 1.5 2.2 19.8
Discontinued operations 22.5 20.4 287.4
- - Rheox
Extraordinary item - - (10.6)
Net income (loss) $ 10.8 $ (9.5) $366.7 $(20.3) $376.2
<PAGE>
Tremont's equity in
Earnings (loss) of
NL,
Including
amortization of
Basis differences $ (1.8) $ (5.1) $ 57.8 $ (3.3) $ 62.9
Percent change in TiO2
Sales volume +10% -4%
Average selling prices (in -4% +16%
billing currencies)
</TABLE>
<PAGE>
Operating income for 1998 more than doubled due to higher average TiO2
selling prices, partially offset by lower sales volume and $12.9 million of 1997
income from refunds of German trade capital taxes, discussed below. In billing
currency terms, Kronos' 1998 average TiO2 selling prices were 16% higher than in
1997. Average selling prices in the fourth quarter of 1998 were 11% higher than
the fourth quarter of 1997 and even with the third quarter of 1998. Selling
prices at the end of 1998 were 10% higher than year-end 1997 levels. Operating
income in 1997 was higher than 1996, primarily due to record production and
sales volumes and the German trade capital tax income, partially offset by 4%
lower average TiO2 selling prices.
The $12.9 million of German trade capital tax refunds received in 1997
relates to years prior to 1997 and includes interest. The German tax
authorities were required to remit refunds based on (i) recent court decisions
which reduced the trade capital tax base and (ii) prior agreements between NL
and the German tax authorities regarding payment of disputed taxes.
Cost of sales in 1998 was lower than 1997 due to lower sales volume. Cost
of sales in 1997 was lower than 1996 due to the favorable effects of foreign
currency translation and lower unit costs, primarily due to higher production
levels, partially offset by higher sales volumes. Cost of sales, as a
percentage of net sales, decreased in 1998 primarily due to the impact on net
sales of increased average selling prices and decreased in 1997 primarily due to
lower unit costs.
Selling, general and administrative expenses declined in 1998 from the
previous year due to lower distribution expenses related to lower sales volume
and favorable effects of foreign currency translation, while 1997 expenses were
lower than 1996 as a result of favorable effects of foreign currency translation
and German trade capital tax refunds, partially offset by higher distribution
expenses associated with higher 1997 sales volumes.
<PAGE>
Sales volume of 408,000 metric tons of TiO2 in 1998 was 4% lower than the
record sales volume in 1997 reflecting lower sales volume in Asia and Latin
America. Approximately one-half of Kronos' 1998 TiO2 sales, by volume, was
attributable to markets in Europe with approximately 37% attributable to North
America, approximately 2% to Asia and the balance to other regions.
Industry-wide demand was lower in the first half of 1996, NL believes, due
to customer destocking inventories. Kronos reduced its production rates to
manage its inventory levels, and its average capacity utilization was
approximately 95% in 1996. Demand improved in the second half of 1996, and was
strong throughout 1997 and the first half of 1998, before moderating in the
second half of 1998. NL expects industry demand in 1999 will be relatively
unchanged from 1998, but this will depend on global economic conditions. Kronos
produced near full capacity in 1997 and 1998, but is curtailing production in
1999 to a level not to exceed Kronos' expected 1999 sales volume. NL's outlook
for average TiO2 selling prices in 1999 is uncertain. Notwithstanding the
uncertain outlook for TiO2 prices in 1999, NL anticipates its 1999 operating
income will be lower than 1998 due to lower production levels.
NL has substantial operations and assets located outside the United States
(principally Germany, Norway, Belgium and Canada). The U.S. dollar translated
value of NL's foreign sales and operating costs is subject to currency exchange
rate fluctuations which may impact reported earnings and may affect the
comparability of period-to-period revenues and expenses. A significant amount
of NL's sales are denominated in currencies other than the U.S. dollar (64% in
1998), 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. Fluctuations in the value of the
U.S. dollar relative to other currencies decreased sales by $58 million and $24
million during 1997 and 1998, respectively, compared to the year-earlier period.
<PAGE>
Fluctuation in the value of the U.S. dollar relative to other currencies
similarly impacted NL's operating expenses and the net impact of currency
exchange rate fluctuations on operating income comparisons was not significant
in 1997 or 1998.
Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Average funds invested in 1998 was higher than
1997 primarily due to the net proceeds from the sale of Rheox in January 1998.
NL expects security earnings in 1999 will be lower than 1998, due to lower
average levels of funds available for investment due to the repayment of certain
of NL's debt in 1998. Corporate expenses, net in 1998 were lower than 1997,
primarily due to the $30 million noncash charge taken in 1997 related to NL's
adoption of SOP 96-1, "Environmental Remediation Liabilities." Excluding this
charge, 1998 corporate expenses, net were slightly lower than 1997 due to the
recognition of $3.7 million of income in 1998 related to the straight-line,
five-year amortization of $20 million of deferred income received in conjunction
with the sale of Rheox, partially offset by $3.0 million of expenses in 1998
related to the unsuccessful acquisition of certain TiO2 businesses and assets of
Tioxide. Corporate expenses, net in 1997 exceeded that of 1996, primarily due
to the aforementioned $30 million noncash charge taken in 1997.
Interest expense in 1998 declined compared to 1997 principally due to
prepayments of outstanding indebtedness, principally the Senior Secured Discount
Notes, the joint venture term loan and a portion of Kronos'
Deutsche mark-denominated debt. Interest expense declined in 1997 from 1996 due
to lower levels of Kronos' DM-denominated debt, partially offset by higher
variable interest rates on such debt. Assuming no significant increase in
interest rates, interest expense in 1999 is expected to be lower compared to
1998 due to lower levels of outstanding indebtedness, including required
payments on the DM term loan.
<PAGE>
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 1996 and
1997, 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. In 1998, NL's effective tax rate varied
from the normally-expected rate due predominantly to the recognition of certain
deductible tax attributes which previously did not meet the "more-likely-than-
not" recognition criteria and the one-time effect of a refund of German
withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
~TREMONT
~
The Company had cash and equivalents of $3 million at December 31, 1998,
down from $38 million at the end of 1997 and from $68 million at the end of
1996. The decrease in cash during the past two years was primarily the result
of cash used in the stock repurchase program during 1997 and 1998 and to
purchase additional NL and TIMET common stock in 1998. The Company's $65
million increase in cash and cash equivalents during 1996 was primarily 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 initial public stock offering.
Tremont's 10.3 million shares of TIMET common stock and 10.2 million shares
of NL common stock had a quoted market value of about $87 million and $145
million, respectively, at December 31,1998. In February 1999, the Company
exercised an option to purchase an additional 2 million shares of TIMET stock
from IMI for $16 million. See Note 4 to the Consolidated Financial Statements.
During 1998, the Company entered into an advance agreement with Contran and
borrowed $5.9 million from Contran primarily to fund purchases of NL common
<PAGE>
stock. In February 1999, the Company borrowed an additional $6.3 million from
Contran to partially fund the purchase of TIMET common stock from IMI. See
Notes 4 and 10 to the Consolidated Financial Statements. The Contran advance
agreement is currently Tremont's major source of liquidity. Absent additional
purchases of NL, TIMET or Tremont securities, the Company does not currently
believe it will need to borrow significant additional amounts from Contran.
During 1998, the Company collateralized with cash certain letters of credit
backing insurance policies at its captive insurance subsidiary. In February
1999, NL collateralized a portion of the letters of credit as they related to
its business with the captive, and the Company received $9.7 million in cash
previously pledged to collateralize the letters of credit, which funds were
primarily used in the purchase of TIMET common stock from IMI.
The settlement of the previously reported stockholder derivative litigation
and Tremont's common stock repurchase program are described in Note 9 to the
Consolidated Financial Statements.
The Company's equity in earnings of affiliates are primarily noncash. The
Company received cash distributions from VVLC of $1 million in 1997 and $.6
million in 1998 primarily to cover taxes associated with VVLC's income from land
sales. NL paid three quarterly cash dividends during 1996 at the rate of $.10
per NL share per quarter aggregating $2.7 million, paid no dividends in 1997 and
paid three quarterly cash dividends during 1998 at the rate of $.03 per NL share
per quarter aggregating $.8 million. TIMET did not pay any cash dividends
during 1996 or 1997 and paid three quarterly cash dividends during 1998 at the
rate of $.04 per TIMET share per quarter aggregating $1.2 million. Any future
dividends from NL and TIMET will be at the discretion of the respective
company's board of directors and will depend upon, among other things, earnings,
financial condition, cash requirements, cash availability and contractual
requirements. Relative changes in assets and liabilities did not materially
impact the Company's cash flow from operating activities.
<PAGE>
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 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 IMI Titanium Acquisition by TIMET
in February 1996, 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. 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.
<PAGE>
See "Results of Operations" and Note 11 to the Consolidated Financial
Statements for additional matters affecting the Company's liquidity and capital
resources.
~
~T~IMET
~
Summarized balance sheet and cash flow information of TIMET is presented
below.
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In millions)
<S> <C> <C>
Cash and cash equivalents $ 69.0 $ 15.5
Other current assets 344.8 380.3
Goodwill and other intangible assets 77.7 79.4
Other noncurrent assets 39.2 126.8
Property and equipment, net 262.4 351.2
$ 793.1 $ 953.2
Current liabilities $ 123.8 $ 136.9
Long-term debt and capital lease 11.5 110.0
obligations
Accrued OPEB cost 26.2 24.1
Other noncurrent liabilities 14.8 24.4
Minority interest - Convertible Preferred 201.2 201.2
Securities
Other minority interest 6.7 8.2
Stockholders' equity 408.9 448.4
$ 793.1 $ 953.2
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
1996 1997 1998
<S> In millions)
Net cash provided (used) by: <C> <C> <C>
Operating activities $ (.7) $ 72.6 $ 76.1
Investing activities:
Capital expenditures (21.7) (66.3) (115.2)
Business acquisitions and (109.9) (13.5) (27.4)
joint ventures
Purchase of preferred - - (80.0)
securities
Other, net .2 - (.6)
Financing activities:
Net borrowings (repayments) (108.2) (5.8) 97.1
Issuance of common stock, net 131.5 - -
Issuance of Convertible
Preferred
Securities, net 192.4 - -
Other, net (.6) (4.0) (4.9)
Cash acquired and currency 3.5 (.6) 1.4
translation
$ 86.5 $ (17.6) $ (53.5)
Cash paid for:
Interest expense $ 9.0 $ 2.2 $ 2.2
<PAGE>
Convertible Preferred Securities - 13.3 13.3
dividends
Income taxes 6.3 22.5 23.7
</TABLE>
<PAGE>
At December 31, 1998, TIMET had $15 million of cash and equivalents and
$133 million of borrowing availability under its U.S. and European bank credit
lines. Available borrowings in the future could potentially be reduced due to
the leverage and interest coverage ratios included in TIMET's U.S. credit
agreement. Net debt at year-end 1998 was $90 million ($15 million of cash and
equivalents and $105 million of notes payable and long-term debt, principally
borrowings under TIMET's U.S. and U.K. long-term bank credit agreements). 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.
~Operating~Activities.~~~Cash provided by operating activities was
approximately $76 million in 1998 and $73 million in 1997. Cash used by
operating activities was approximately $1 million in 1996, as summarized below.
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
(in millions)
<S> <C> <C> <C>
Excluding changes in assets and $ 53.0 $ 121.3 $108.7
liabilities
Changes in assets and liabilities (53.7) (48.7) (32.6)
$ (.7) $ 72.6 $ 76.1
</TABLE>
<PAGE>
Cash provided by operating activities, excluding changes in assets and
liabilities, during the past three years generally follows the trend in
operating results. Changes in assets and liabilities reflect the timing of
purchases, production and sales, and can vary significantly from period to
period. Accounts receivable increased (used cash) in 1996 and 1997 primarily
because sales levels were increasing, and provided cash in 1998 as sales levels
were decreasing. TIMET currently expects net collections of receivables to be a
source of cash in 1999, particularly in the early part of the year due to both
lower sales levels and improved collection efforts.
Inventories increased in 1996, reflecting the higher activity levels, and
decreased in 1997 as a result of very high shipment levels in the fourth quarter
of that year. Inventories increased significantly in 1998, reflecting material
purchases and build rates that were based on expected sales levels higher than
the actual sales level turned out to be. TIMET expects to significantly reduce
inventories during 1999 as excess raw materials are consumed and other
reduction/control efforts are realized.
Changes in net current income taxes payable increased in 1996 and 1997 and
decreased in 1998 in part due to the delayed timing of cash payments for taxes
in Europe relative to earnings. Changes in accounts with related parties
resulted primarily from payment of accrued interest in 1996 and relative changes
in receivable levels with joint ventures in 1997 and 1998.
~Investing~Activities.~~~TIMET's capital expenditures were $115 million in
1998, up from $66 million in 1997 and $22 million in 1996. About one-half of
capital expenditures during the two-year 1997-1998 period related to capacity
expansion projects associated with long-term customer agreements, which projects
are also expected to improve cycle times and yields and to increase efficiency.
The majority of these significant projects in both the U.S. and Europe have come
on line or will be complete by the end of the first quarter of 1999.
<PAGE>
Approximately one-fourth of the two-year 1997-1998 period capital spending
related to the major business enterprise-wide information systems and
information technology project being implemented throughout TIMET. The new
system was implemented in stages in the U.S. during 1998, with initial
implementation substantially completed with the rollout to the U.K. in February
1999. Certain costs associated with the business enterprise information systems
project, including training and reengineering, are expensed as incurred.
Capital spending for 1999 is currently expected to be below $40 million,
which is less than expected depreciation and amortization expense of
approximately $45 million.
Cash used for business acquisitions and joint ventures in 1998 related
primarily to the Loterios and Wyman-Gordon transactions. In 1997, such
investments consist primarily of cash contributions in connection with the
formation of ValTimet and investments in companies developing new markets and
uses for titanium. Acquisitions in 1996 consisted of the IMI Titanium
Acquisition, the AJM Acquisition and other smaller European acquisitions.
In October 1998, TIMET purchased $80 million of Special Metals Corporation
6.625% convertible preferred stock (the "SMC Preferred Stock"), in connection
with SMC's acquisition of the Inco Alloys International high performance nickel
alloys business unit of Inco Limited. No dividends have been paid to date on
the SMC Preferred Stock due to limitations imposed by SMC's bank credit
agreement, and TIMET believes that these limitations may prevent SMC's payment
of dividends for some time.
~Financing~Activities.~~~Net borrowings of $97 million in 1998 were
primarily to fund capital expenditures and the Loterios acquisition. Net debt
repayments of $6 million in 1997 relate primarily to reductions in European
<PAGE>
working capital borrowings, including amounts due to CEZUS, TIMET's minority
partner in TIMET Savoie.
TIMET's net proceeds from the initial public offering in June 1996
approximated $131 million. TIMET used approximately $125 million of such net
proceeds to repay existing indebtedness, including amounts due to Tremont and
IMI. TIMET received net proceeds of approximately $192 million from the sale of
the Convertible Preferred Securities by TIMET Capital Trust I in November 1996.
TIMET used approximately $96 million of such net proceeds to repay indebtedness
incurred in conjunction with the AJM Acquisition.
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, in light of its current outlook, may in the future seek to
raise additional capital, modify its dividend policy, restructure ownership
interests, incur, refinance or restructure indebtedness, repurchase shares of
capital stock, sell 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 investigates, evaluates, discusses
and engages in acquisition, joint venture, strategic relationship and other
business combination opportunities in the titanium, specialty metal and related
industries. In the event of any future acquisition or joint venture
opportunities, TIMET may consider using then-available liquidity, issuing equity
securities or incurring additional indebtedness.
~
NL~Industries
~ Summarized balance sheet and cash flow information of NL is presented
below.
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1998
(In millions)
<S> <C> <C> <C>
Cash and cash equivalents $ 106.1 $ 163.1
Other current assets 348.4 383.0
Noncurrent securities 17.3 17.6
Investment in joint 172.7 171.2
ventures
Other noncurrent assets 42.5 37.9
Property and equipment, net 411.2 382.2
$1,098.2 $ 1,155.0
Current liabilities $ 276.4 $ 310.0
Long-term debt 666.8 292.8
Deferred income taxes 132.8 196.2
Accrued OPEB cost 51.0 41.7
Environmental liabilities 125.5 81.5
Other noncurrent 67.7 79.9
liabilities
Minority interest .3 .6
Shareholders' equity
(deficit)
Capital and retained (92.8) 284.4
earnings
<PAGE>
Other comprehensive income,
principally foreign
currency translation
(129.5) (132.1)
(222.3) 152.3
$1,098.2 $ 1,155.0
Years ended December 31,
1996 1997 1998
(In millions)
Net cash provided (used)
by:
Operating activities $ 16.5 $ 89.2 $ 45.1
Investing activities:
Capital (64.2) (28.2) (22.4)
expenditures
Other, net (4.2) 17.1 439.7
Financing activities:
Net borrowings 65.1 (182.2) (285.4)
(repayments)
Other, net (38.5) 99.6 (110.8)
Currency translation (2.7) (2.3) (7.6)
and other
<PAGE>
$ (28.0) $ (6.8) $ 58.6
Cash paid for:
Interest, net of $ 51.7 $ 55.9 $ 38.0
amounts capitalized
Income taxes, net 50.4 6.9 54.2
</TABLE>
<PAGE>
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of NL. Cash
flow from operations, before changes in assets and liabilities and Rheox, net,
in 1997 and 1998 improved from the prior year primarily due to higher operating
income.
Changes in NL's inventories, receivables and payables (excluding the effect
of currency translation) provided cash in 1996 and 1997 and used cash in 1998
primarily due to reductions in inventory levels in 1996 and 1997 and increases
in inventory levels in 1998. Income tax payments in 1998 as a result of the
gain on sale of Rheox and certain German income tax payments in 1996, discussed
below, significantly decreased cash flows from operating activities for each
respective year.
NL sold the net assets of its Rheox specialty chemicals business to
Elementis plc in January 1998 for $465 million cash (before fees and expenses),
including $20 million attributable to a five-year agreement by NL not to compete
in the rheological products business. NL recognized an after-tax gain of
approximately $286 million on the sale of this business segment.
NL used a majority of the $380 million after-tax net proceeds from the sale
of Rheox to (i) prepay $118 million of the Rheox term loan, (ii) prepay $42
million of Kronos' tranche of the LPC joint venture term loan, (iii) make $65
million of open-market purchases of NL's 13% Senior Secured Discount Notes at
prices ranging from $101.25 to $105.19 per $100 of their principal amounts, (iv)
purchase $6 million of the Senior Secured Notes and $61 thousand of the Senior
Secured Discount Notes at a price of $100 and $96.03 per $100 of their principal
amounts, respectively, pursuant to a June 1998 pro rata tender offer to Note
holders as required under the terms of the indenture, and (v) redeem the
remaining $121 million 13% Senior Secured Discount Notes on October 15, 1998 at
<PAGE>
the redemption price of 106% of the principal amount, in accordance with the
terms of the Senior Secured Discount Notes indenture.
Borrowings in 1998 included DM 35 million ($19 million when borrowed) under
NL's short-term non-U.S. credit facilities and DM 20 million ($11 million when
borrowed) under NL's DM revolving credit facility. Repayments in 1998 included
DM 40 million ($23 million when paid) of the DM revolving credit facility and
DM 81 million ($44 million when paid) of its DM term loan. In 1997, NL prepaid
DM 207 million ($127 million when paid) of its DM term loan, repaid DM 43
million ($26 million when paid) of its DM revolving credit facility, repaid $15
million of its joint venture term loan and repaid DM 15 million ($9 million when
paid) of its short-term DM-denominated notes payable. In 1996 NL borrowed DM
144 million ($96 million when borrowed) under its DM revolving credit facility.
It 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 $15 million
on the joint venture term loan and DM 16 million ($10 million when repaid) in
payments on DM-denominated notes payable.
NL's capital expenditures during the past three years include an aggregate
of $38 million ($6 million in 1998) for NL's ongoing environmental protection
and compliance programs, including German and Norwegian off-gas desulfurization
systems. NL's estimated 1999 and 2000 capital expenditures are $38 million and
$30 million, respectively, and include $13 million and $8 million, respectively,
in the area of environmental protection and compliance.
In the last three years, NL spent $27 million ($2 million in 1998) in
capital expenditures related to its debottlenecking project at its Leverkusen,
Germany chloride-process TiO2 facility. The debottlenecking project increased
NL's annual attainable production by approximately 20,000 metric tons in 1997,
and NL estimates its worldwide annual attainable capacity is 440,000 metric
<PAGE>
tons. Capital expenditures of the manufacturing joint venture and NL's
discontinued operations are not included in NL's capital expenditures.
At December 31, 1998, NL had cash and cash equivalents aggregating $155
million (17% held by non-U.S. subsidiaries) and $12 million of restricted cash
equivalents. At December 31, 1998, NL's subsidiaries had $104 million available
for borrowing under non-U.S. credit facilities. At December 31, 1998, NL had
complied with all financial covenants governing its debt agreements.
Dividends paid during 1998 totaled $4.6 million. No dividends were paid in
1997. Dividends paid during 1996 totaled $15.3 million. At December 31, 1998,
NL had $47 million available for payment of dividends pursuant to the Senior
Notes indenture. On February 10, 1999, NL's Board of Directors increased the
regular quarterly dividend from $.03 per share to $.035 per share and declared a
dividend to shareholders of record as of March 17, 1999 to be paid on March 31,
1999.
In June 1998, as a result of the settlement of a shareholder derivative
lawsuit on behalf of NL, Valhi transferred $14.4 million in cash to NL, and NL
paid plaintiffs' attorneys' fees and expenses of $3.2 million.
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 tax returns in various U.S. and non-U.S. jurisdictions are
being examined and tax authorities have proposed or may propose tax
deficiencies, including non-income tax related items and interest. NL
previously reached an agreement with the German tax authorities and paid certain
tax deficiencies of approximately DM 44 million ($28 million when paid),
<PAGE>
including interest, which resolved significant tax contingencies for years
through 1990. In the third quarter of 1998, NL received a DM 14 million ($8.2
million when received) refund of 1990 German dividend withholding taxes. The
German tax authorities were required to refund such amounts based on a 1998
German Supreme Court decision in favor of another taxpayer. The refund resulted
in a reduction of the settlement amount from DM 44 million referred to above to
DM 30 million for years through 1990. No further withholding tax refunds are
expected.
Certain other significant German tax contingencies aggregating an estimated
DM 172 million ($103 million at December 31, 1998) through 1997 remain
outstanding and are in litigation. Of these, one primary issue represents
disputed amounts aggregating DM 160 million ($96 million at December 31, 1998)
for years through 1997. NL has received tax assessments for a substantial
portion of these amounts. No payments of tax or interest deficiencies related
to these assessments are expected until the litigation is resolved. During
1997, a German tax court proceeding involving a tax issue substantially the same
as this issue was decided in favor of the taxpayer. The German tax authorities
appealed that decision to the German Supreme Court which in February 1999
rendered its judgment in favor of the taxpayer. NL believes that the German
Supreme Court's judgment should determine the outcome of NL's primary dispute
with the German tax authorities. Based on this recent favorable judgment, NL
will request that the tax assessments be withdrawn. NL has granted a DM 94
million ($57 million at December 31, 1998) lien on its Nordenham, Germany TiO2
plant in favor of the City of Leverkusen related to this tax contingency, and a
DM 5 million ($3 million at December 31, 1998) lien in favor of the German
federal tax authorities for other tax contingencies. If the German tax
authorities withdraw their assessments based on the German Supreme Court's
decision, NL expects to request the release of the DM 94 million lien in favor
of the City of Leverkusen.
<PAGE>
In addition, during 1997, NL reached an agreement with the German tax
authorities regarding certain other issues not in litigation for the years 1991
through 1994, and agreed to pay additional tax deficiencies of DM 9 million ($5
million at December 31, 1998), most of which was paid in the third quarter of
1998.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at
December 31, 1998) relating to 1994. NL has appealed this assessment and has
begun litigation proceedings. During 1998 NL was informed by the Norwegian tax
authorities that additional tax deficiencies of NOK 39 million ($5 million at
December 31, 1998) will likely be proposed for the year 1996. NL intends to
vigorously contest this issue and litigate, if necessary. Although NL believes
that it will ultimately prevail, NL has granted a lien for the 1994 tax
assessment on its Norway TiO2 plant in favor of the Norwegian tax authorities
and will be required to grant security on the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has provided adequate accruals for additional taxes and related
interest expense which may ultimately result from all such examinations and
believes that the ultimate disposition of such examinations should not have a
material adverse effect on NL's consolidated financial position, results of
operations or liquidity.
At December 31, 1998, NL had net deferred tax liabilities of $195 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 $134 million at December 31,
1998, 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.
<PAGE>
In addition to the chemicals business conducted through Kronos, NL also has
certain interests and associated liabilities relating to certain discontinued or
divested businesses, and 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
<PAGE>
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.
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, certain of NL's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities.
NL is in the process of evaluating and upgrading its computer systems (both
information technology systems and non-IT systems involving embedded chip
technology) and software applications (collectively referred to as "systems") to
ensure that the systems function properly beginning January 1, 2000. To achieve
its Y2K compliance plan, NL is utilizing internal and external resources to
identify, correct or reprogram, and test its systems.
NL has conducted an inventory of its IT systems worldwide and is currently
testing the systems and applications that have been corrected or reprogrammed
for Y2K readiness. NL has completed a preliminary inventory of its non-IT
systems and is in the process of validating the inventory and correcting or
replacing date-deficient systems. The remediation effort is well under way on
all critical IT and non-IT systems, and NL anticipates that remediation of such
critical systems will be substantially complete by March 1999, and that
remediation and testing of all remaining systems will be complete by September
1999. Once systems undergo remediation, they are tested for year 2000
readiness. For critical systems, the testing process usually involves
<PAGE>
subjecting the remediated system to a simulated change of date from the year
1999 to the year 2000 using, in many cases, computer resources. NL uses a
number of packaged software products that have been upgraded to a Y2K ready
version in the normal course of business. Excluding the cost of these software
upgrades, NL's cost of becoming Y2K ready is expected to be approximately $2
million, of which about half has been spent through December 31, 1998.
NL has identified approximately 30 major computer systems and assessed them
for year 2000 readiness. At December 31, 1998, approximately 80% of the systems
are year 2000 ready. Each operating unit has responsibility for its own
conversion, in line with overall guidance and oversight provided by a corporate-
level coordinator, and the status of each of the remaining systems will be
specifically tracked and monitored.
As part of its Y2K readiness plan, NL has requested confirmations from its
major domestic and foreign software vendors, hardware vendors, primary suppliers
and major customers, that they are developing and implementing plans to become,
or are, Y2K ready. Confirmations received to date from NL's software vendors,
hardware vendors, primary suppliers and major customers indicate that generally
they are in the process of implementing remediation plans to ensure that their
systems are ready by December 31, 1999. The major software vendors used by NL
have already delivered Y2K ready software. Not withstanding these efforts, the
ability of NL to affect Y2K readiness of such vendors, suppliers and customers
is limited.
NL is developing a contingency plan to address potential Y2K related
business interruptions that may occur on January 1, 2000, or thereafter. This
plan is expected to be completed in the second quarter of 1999.
Although NL expects its systems to be Y2K ready before December 31, 1999,
it cannot predict the outcome or success of the Y2K readiness programs of its
vendors, suppliers, and customers. NL also cannot predict whether its major
<PAGE>
software vendors, who continue to test for Y2K readiness, will find additional
problems that would result in unplanned upgrades of their applications after
December 31, 1999. As a result of these uncertainties, NL cannot predict the
impact on its financial condition or results of nonready Y2K systems that NL
directly or indirectly relies upon. Should NL's Y2K readiness plan not be
successful or be delayed beyond January 2000, or should one or more vendors,
suppliers or customers fail to adequately address their Y2K issues, the
consequences to NL could be far-reaching and material, including an inability to
produce TiO2 at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include plant malfunction, impeded communications or power supplies, or
slower transaction processing and financial reporting. Although not
anticipated, the most reasonably likely worst-case scenario of failure by NL or
its key suppliers or customers to become Y2K ready would be a short-term
slowdown or cessation of manufacturing operations at one or more of its
facilities and a short-term inability on the part of NL to process orders and
billings in a timely manner, and to deliver product to customers.
Beginning January 1, 1999, eleven of the fifteen members of the European
Union, including Germany, Belgium, the Netherlands and France, adopted the Euro
as their common legal currency. Following the introduction of the Euro, the
participating countries' national currencies remain legal tender as
denominations of the Euro from January 1, 1999 through January 1, 2002, and the
exchange rates between the Euro and such national currency units are fixed.
NL conducts substantial operations in Europe. The functional currency of
NL's German, Belgian, Dutch and French operations will convert to the Euro from
their respective national currencies over a two-year period beginning in 1999.
The Euro conversion may impact NL's operations including, among other things,
changes in product pricing decisions necessitated by cross-border price
transparencies. Such changes in product pricing decisions could impact both
<PAGE>
selling prices and purchasing costs and, consequently, favorably or unfavorably
impact results of operations.
NL has a significant amount of outstanding DM-denominated indebtedness
which, at NL's option, may be repaid in euros. Modifications of information
systems to handle Euro-denominated transactions will be required, although the
modifications are not expected to be extensive.
In 1998 NL assessed and evaluated the impact of the Euro conversion on its
business and made the necessary system conversions. NL spent and charged to
expense less than $1 million in evaluation and conversion costs. Because of the
inherent uncertainty of the effect of the euro conversion, NL cannot accurately
predict the impact on its results of operations, financial condition or
liquidity.
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 acquisition or joint venture 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.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
<PAGE>
TREMONT
The Company is exposed to market risk from changes in interest rates and
equity security prices, and through its equity investees, foreign exchange
rates. The Company typically does not enter into interest rate swaps or other
types of contracts in order to manage its interest rate market risk and
typically does not enter into currency forward contracts to manage its foreign
exchange market risk. The Company was not a party to any type of forward or
derivative option contract at December 31, 1998.
~Interest~rates.~The Company is exposed to market risk from changes in
interest rates related to indebtedness to Contran, a related party. See Note 10
to the Consolidated Financial Statements. At December 31, 1998, the Company's
$5.9 million of such indebtedness was 100% variable rate, had a weighted average
interest rate of 7.25% and, being payable on demand, is classified as a current
liability.
~Marketable~equity~security~prices.~The Company is exposed to market risk
due to changes in prices of marketable securities which are owned. The fair
value of such equity securities at December 31, 1998 was $.5 million. The
potential change in the aggregate fair value of these investments, assuming a
10% change in prices, would be $50,000.
TIMET
~ General.~TIMET is exposed to market risk from changes in foreign currency
exchange rates and interest rates. TIMET typically does not enter into interest
rate swaps or other types of contracts in order to manage its interest rate
market risk and typically does not enter into currency forward contracts to
manage its foreign exchange market risk associated with receivables, payables
and indebtedness denominated in a currency other than the functional currency of
<PAGE>
the particular entity. TIMET was not a party to any type of forward or
derivative option contract at December 31, 1998.
~Interest~rates.~TIMET is exposed to market risk from changes in interest
rates related to indebtedness. At December 31, 1998, substantially all of
TIMET's indebtedness was denominated in U.S. dollars and bore interest at
variable rates, primarily related to spreads over LIBOR, as summarized below.
<PAGE>
<TABLE>
<CAPTION> Contractual maturity date
Interes
t
1999 2000 2001 2002 Rate
(1)
<S> ( In millions )
Variable rate debt: <C> <C> <C> <C> <C>
U. S. dollars $ 3.5 $ - $18.8 $80.0 5.64%
Italian lira (2) 1.6 - - - 6.88%
Fixed rate debt:
German marks (2) .1 - - - 8.25%
Italian lira (2) .5 .5 .4 .2 5.90%
<FN>
(1) Weighted average.
(2) Non-U. S. dollar denominated amounts are translated at year-end rates of exchange.
</TABLE>
<PAGE>
~Foreign~currency~exchange~rates.~TIMET is exposed to market risk arising
from changes in foreign currency exchange rates as a result of its international
operations. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Results of Operations - TIMET European
Operations," which information is incorporated herein by reference.
~Other.~TIMET holds $80 million of preferred securities that are not
publicly-traded and are accounted for by the cost method. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - TIMET - Investing Activities."
NL Industries
NL is exposed to market risk from changes in foreign exchange rates,
interest rates and equity security prices. In the past, NL has periodically
entered into interest rate swaps or other types of contracts in order to manage
a portion of its interest rate market risk. Otherwise, NL has not generally
entered into forward or option contracts to manage such market risks, nor has NL
entered into any such contract or other type of derivative instrument for
trading purposes. NL was not a party to any forward or derivative option
contracts related to currency exchange rates or equity security prices at
December 31, 1998.
~ Interest~rates~. NL is exposed to market risk from changes in interest
rates, primarily related to indebtedness.~
~
At December 31, 1998 NL's aggregate indebtedness was split between 62% of
fixed-rate instruments and 38% of variable-rate borrowings. The large
percentage of fixed-rate debt instruments minimizes earnings volatility which
would result from changes in interest rates. The following table presents
principal amounts and weighted average interest rates, by contractual maturity
<PAGE>
dates, for NL's aggregate indebtedness. At December 31, 1998 all outstanding
fixed-rate indebtedness was denominated in U.S. dollars, and all outstanding
variable-rate indebtedness was denominated in Deutsche marks. Information shown
below for such DM-denominated indebtedness is presented in its U.S. dollar
equivalent at December 31, 1998 using that date's exchange rate of 1.66 DM per
U.S. dollar.
<PAGE>
<TABLE>
<CAPTION> Contractual Maturity Date Fair
Value
December
31,
1999 2000 2001 2002 2003 Total 1998
<S> (In millions)
Fixed-rate debt <C> <C> <C> <C> <C> <C> <C>
(U.S. dollar-
denominated):
Principal $- $- $- $- $244.0 $244.0 $253.1
amount
Weighted- - - - - 11.75% 11.75%
average
interest rate
Variable rate
debt (DM
denominated):
Principal $101.2 $48.4 $.2 $.2 $- $150.0 $150.0
amount
Weighted- 5.4% 6.1% 9.3% 9.3% - 5.6%
average
interest rate
</TABLE>
<PAGE>
~Currency~exchange~rates.~NL is exposed to market risk arising from changes
in currency exchange rates as a result of manufacturing and selling its products
worldwide. Earnings are primarily affected by fluctuations in the value of the
U.S. dollar relative to the Deutsche mark, Canadian dollar, Belgian franc,
French franc, Norwegian krone and the United Kingdom pound sterling. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of risks and uncertainties related to the
conversion of certain of these currencies to the Euro.
As described above, at December 31, 1998, NL had $150 million of
indebtedness denominated in Deutsche marks. The potential increase in the U.S.
dollar equivalent of the principal amount outstanding resulting from a
hypothetical 10% adverse change in exchange rates would be approximately $15
million.
~Marketable~equity~security~prices.~NL is exposed to market risk due to
changes in prices of the marketable securities which are owned. The fair value
of such equity securities at December 31, 1998 was $18 million. The potential
change in the aggregate fair value of these investments, assuming a 10% change
in prices, would be $1.8 million.
~
~O~ther.~ The Company believes there are certain shortcomings in the
sensitivity analyses presented above, which analyses are required under the
Securities and Exchange Commission's regulations. For example, the hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other variables which affect NL's results of operations and cash flows, such
as demand for NL's products, sales volumes and selling prices and operating
expenses. Contrary to the above assumptions, changes in interest rates rarely
result in simultaneous parallel shifts along the yield curve. Accordingly, the
amounts presented above are not necessarily an accurate reflection of the
potential losses NL would incur assuming the hypothetical changes in market
prices were actually to occur.
<PAGE>
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by NL of future events or losses.
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.
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.
<PAGE>
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 10 to the Consolidated Financial
Statements.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
~The~Registrant
~
The consolidated financial statements and schedules listed on the
accompanying Index of Financial Statements and Schedules (see page F)
are filed as part of this Annual Report.
~50~percent-or-less~owned~persons
~
Consolidated financial statements of Titanium Metals Corporation (33%
owned at December 31, 1998), with independent auditors report thereon,
pages F through F-29 inclusive of TIMET's Annual Report on Form 10-K
for the year ended December 31, 1998 (Commission File No. 0-28538)
included herein as Exhibit 99.1, are filed as part of this Annual
Report.
<PAGE>
Consolidated financial statements of NL Industries, Inc. (20% owned at
December 31, 1998), with independent auditors report thereon, pages F-
1 through F-45 inclusive of NL's Annual Report on Form 10-K for the
year ended December 31, 1998 (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, 1998 and the months of January and February, 1999:
Filing Date Items Reported
October 20, 1998 - 5 and 7
October 22, 1998 - 5 and 7
January 28, 1999 - 5 and 7
February 10, 1999 - 5 and 7
February 16, 1999 - 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
<PAGE>
of long-term debt issues which do not exceed 10% of consolidated total
assets will be furnished to the Commission upon request.
Item No. Exhibit Index
3.1 Restated 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 of Baroid's registration statement on Form 10 (File 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 Corporation, incorporated by reference
to Exhibit 4.3 of NL's Annual Report on Form 10-K (File No. 1-640) for
the year ended December 31, 1991.
4.3 Indenture dated October 20, 1993 governing NL's 11.75% Senior Secured
Notes due 2003, including form of Senior 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.
<PAGE>
4.4 Senior Mirror Notes dated October 20, 1993, incorporated by reference to
Exhibit 4.3 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
4.5 Senior Note Subsidiary Pledge Agreement dated October 20, 1993 between NL
and Kronos, Inc., incorporated by reference to Exhibit 4.4 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
4.6 Third Party Pledge and Intercreditor Agreement dated October 20, 1993
between NL, Chase Manhattan Bank (National Association) and Chemical
Bank, incorporated by reference to Exhibit 4.5 of NL's Quarterly Report
on Form 10-Q (File No. 1-640) for the quarter ended September 30, 1993.
4.7 Certificate of Trust of TIMET Capital Trust I, dated November 13, 1996,
incorporated by reference to Exhibit 4.1 of Titanium Metals
Corporation's Current Report on Form 8-K (File No. 0-28538) filed with
the Commission on December 5, 1996.
4.8 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 of Titanium Metals Corporation's Current
Report on Form 8-K (File No. 0-28538) filed with the Commission on
December 5, 1996.
4.9 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 of
<PAGE>
Titanium Metals Corporation's Current Report on Form 8-K (File No. 0-
28538) filed with the Commission on December 5, 1996.
4.10 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit
4.5 above), incorporated by reference to Exhibit 4.5 of Titanium Metals
Corporation's Current Report on Form 8-K (File No. 0-28538) filed with
the Commission on December 5, 1996.
4.11 Form of 6 5/8% Convertible Subordinated Debentures (included in Exhibit
4.6 above), incorporated by reference to Exhibit 4.5 of Titanium Metals
Corporation's Current Report on Form 8-K (File No. 0-28538) filed with
the Commission on December 5, 1996.
4.12 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.6 above),
incorporated by reference to Exhibit 4.5 of Titanium Metals
Corporation's Current Report on Form 8-K (File No. 0-28538) filed with
the Commission on December 5, 1996.
4.13 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 of Titanium Metals Corporation's Current Report on Form 8-K
(File No. 0-28538) filed with the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium Metals
Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI
Americas, Inc., incorporated by reference to Exhibit 2.2 of the
Registrant'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
<PAGE>
Ltd., and IMI Americas, Inc., incorporated by reference to Exhibit
10.30 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
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 of Baroid's registration statement on Form 10 (File 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 of Baroid's
registration statement on Form 10 (No. 1-10624), filed with the
Commission on August 31, 1990.
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 Intercorporate Services Agreement between Contran Corporation and Tremont
effective as of January 1, 1998, incorporated by reference to Exhibit
10.6 of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.6 Intercorporate Services Agreement by and between Tremont and NL effective
as of January 1, 1998, incorporated by reference to Exhibit 10.11 of
NL's Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended September 30, 1998.
<PAGE>
10.7* 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.
10.8 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 the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991.
10.9 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 the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993.
10.10 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 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
10.11 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
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.12 Intercorporate Services Agreement between Titanium Metals Corporation
and Tremont Corporation, effective as of January 1, 1998, incorporated
by reference to Exhibit 10.1 of Titanium Metals Corporation's Quarterly
<PAGE>
Report on Form 10-Q (File No. 0-28538) for the quarter ended September
30, 1998.
10.13* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 of Titanium
Metals Corporation's Amendment No. 1 to Registration Statement on Form
S-1 (No. 333-18829).
10.14* 1996 Amended and Restated Non-employee Director Compensation Plan of
Titanium Metals Corporation incorporated by reference to Exhibit 10.7*
of Titanium Metals Corporations's Annual Report on Form 10-K (File No.
0-28538) for the year ended December 31, 1998.
10.15* Employment Agreement between Andrew R. Dixey and Titanium Metals
Corporation, dated February 13, 1996, incorporated by reference to
Exhibit 10.21 of Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).
10.16 Agreement, dated June 28, 1995, among Titanium Metals Corporation,
Tremont Corporation and Union Titanium Sponge Corporation, incorporated
by reference to Exhibit 10.24 of Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.17 Asset Purchase Agreement, dated October 1, 1996, by and between
Titanium Metals Corporation and Axel Johnson Metals, Inc., incorporated
by reference to Exhibit 2.1 of Titanium Metals Corporation's Current
Report on Form 8-K (File No. 0-28538) filed with the Commission on
October 16, 1996.
10.18 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.
<PAGE>
Incorporated, as Initial Purchasers, incorporated by reference to
Exhibit 99.1 of Titanium Metals Corporation's Current Report on Form
8-K (File No. 0-28538) filed with the Commission on December 5, 1996.
10.19 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 of Titanium
Metals Corporation's Current Report on Form 8-K (File No. 0-28538)
filed with the Commission on December 5, 1996.
10.20 $200,000,000 Credit Agreement among Titanium Metals Corporation and
various lending institutions dated as of July 30,1997 incorporated by
reference to Exhibit 10.1 of Titanium Metals Corporation's Current
Report on Form 8-K (File No. 0-28538) dated July 30, 1997.
10.21 First Amendment to Credit Agreement and Waiver among Titanium Metals
Corporation and various lending institutions dated as of May 15, 1998,
incorporated by reference to Exhibit 10.2 of Titanium Metals
Corporation's Quarterly Report on Form 10-Q (File No. 0-28538) for the
quarter ended June 30, 1998.
10.22 Investment Agreement dated July 9, 1998, between Titanium Metals
Corporation, TIMET Finance Management Company and Special Metals
Corporation, incorporated by reference to Exhibit 10.1 of Titanium
Metals Corporation's Current Report on Form 8-K (File No. 0-28538)
dated July 9, 1998.
10.23 Form of Loan and Pledge Agreement by and between Titanium Metals
Corporation and individual TIMET executives under Titanium Metals
Corporation's Executive Stock Ownership Loan Program, incorporated by
reference to Exhibit 10.3 of Titanium Metals Corporation's Quarterly
<PAGE>
Report on Form 10-Q (File No. 0-28538) for the quarter ended September
30, 1998.
10.24 Amendment to Investment Agreement, dated October 28, 1998, among
Titanium Metals Corporation, TIMET Finance Management Company and
Special Metals Corporation, incorporated by reference to Exhibit 10.4
of Titanium Metals Corporation's Quarterly Report on Form 10-Q (File
No. 0-28538) for the quarter ended September 30, 1998.
10.25 Registration Rights Agreement, dated October 28, 1998, between TIMET
Finance Management Company and Special Metals Corporation, incorporated
by reference to Exhibit 10.5 of Titanium Metals Corporation's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended September
30, 1998.
10.26 Certificate of Designations for the Special Metals Corporation Series A
Preferred Stock, filed on October 28, 1998, with the Secretary of State
of Delaware, incorporated by reference to Exhibit 4.5 of a Current
Report on Form 8-K dated October 28, 1998, filed by Special Metals
Corporation (File No. 000-22029).
10.27 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.
10.28 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 (File No. 1-640) for
the year ended December 31, 1996.
<PAGE>
10.29 Amended and Restated Liquidity Undertaking dated October 15, 1993 by
NL, Kronos, Inc. and Kronos International, Inc. to Hypobank
International S.A., as Agent, and the Banks set forth therein,
incorporated by reference to Exhibit 10.18 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended September 30, 1993.
10.30 Second Amended and Restated Liquidity Undertaking dated January 31,
1997 by NL, Kronos, Inc. and Kronos International, Inc. to and in favor
of Hypobank International S.A., as Agent, and the Banks set forth
therein, incorporated by reference to Exhibit 10.4 of NL's Annual
Report on Form 10-K (File No. 1-640) for the year ended December 31,
1996.
10.31 Guaranty dated as of January 31, 1997 made by NL in favor of Hypobank
International S.A., as Agent, incorporated by reference to Exhibit 10.5
of NL's Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1996.
10.32 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.
10.33 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.
<PAGE>
10.34 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 of NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1995.
10.35 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.
10.36 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc., incorporated by reference to
Exhibit 10.3 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1993.
10.37 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.
10.38 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.
10.39 Tioxide Americas Offtake Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Louisiana Pigment Company, L.P., incorporated
by reference to Exhibit 10.5 of NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended September 30, 1993.
10.40 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana Pigment
<PAGE>
Company, L.P., incorporated by reference to Exhibit 10.24 of NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended December
31, 1995.
10.41 TCI/KCI Output Purchase Agreement dated as of October 18, 1993 between
Tioxide Canada Inc. and Kronos Canada, Inc., incorporated by reference
to Exhibit 10.6 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1993.
10.42 TAI/KLA Output Purchase Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Kronos Louisiana, Inc., incorporated by
reference to Exhibit 10.7 of NL's Quarterly Report on Form 10-Q (File
No. 1-640) for the quarter ended September 30, 1993.
10.43 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.
10.44 Parents' Undertaking dated as of October 18, 1993 between ICI American
Holdings Inc. and Kronos, Inc., incorporated by reference to Exhibit
10.9 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.45 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.
<PAGE>
10.46* 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 of NL's Proxy Statement on Schedule 14A (File
No. 1-640) for the annual meeting of shareholders held on April 24,
1985.
10.47 Form of Director's Indemnity Agreement between NL and the independent
members of the Board of Directors of NL, 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, 1987.
10.48* 1989 Long Term Performance Incentive Plan of NL Industries, Inc.,
incorporated by reference to Exhibit B of NL's Proxy Statement on
Schedule 14A (File No. 1-640) for the annual meeting of shareholders
held on May 8, 1996.
10.49* NL Industries, Inc. Variable Compensation Plan, incorporated by
reference to Exhibit A of NL's Proxy Statement on Schedule 14A (File
No. 1-640) for the annual meeting of shareholders held on May 8, 1996.
10.50* 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 (File No. 1-640) for the year ended
December 31, 1996.
10.51* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
adopted by the Board of Directors on February 13, 1992, incorporated by
reference to Appendix A of NL's Proxy Statement on Schedule 14A (File
No. 1-640) for the annual meeting of shareholders held on April 30,
1992.
<PAGE>
10.52 Intercorporate Services Agreement by and between Valhi, Inc. and NL
effective as of January 1, 1998, 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, 1998.
10.53 Intercorporate Services Agreement by and between Contran Corporation
and NL effective as of January 1, 1998, incorporated by reference to
Exhibit 10.9 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1998.
10.54 Intercorporate Service Agreement by and between Titanium Metals
Corporation and NL effective January 1, 1998, incorporated by reference
to Exhibit 10.12 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1998.
10.55 Intercorporate Services Agreement by and between CompX International
Inc. and NL effective as of January 1, 1998, incorporated by reference
to Exhibit 10.13 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1998.
10.56 Insurance Sharing Agreement, effective January 1, 1990, by and between
NL, NL Insurance, Ltd. (an indirect subsidiary of Tremont Corporation)
and Baroid Corporation, incorporated by reference to Exhibit 10.20 of
NL's Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1991.
10.57* Executive severance agreement effective as of March 9, 1995 by and
between NL and Lawrence A. Wigdor, 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, 1996.
<PAGE>
10.58* Executive severance agreement effective as of July 24, 1996 by and
between NL and J. Landis Martin, incorporated by reference to Exhibit
10.1 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended March 31, 1997.
10.59* 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 of NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1992.
10.60* Agreement to Defer Bonus Payment dated February 20, 1998 between NL and
Lawrence A. Wigdor and related trust agreement, incorporated by
reference to Exhibit 10.48* of NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31, 1997.
10.61* Agreement to Defer Bonus Payment dated February 20, 1998 between NL and
J. Landis Martin and related trust agreement, incorporated by reference
to Exhibit 10.49* of NL's Annual Report on Form 10-K (File No. 1-640)
for the year ended December 31, 1997.
10.62 Asset Purchase Agreement dated as of December 29, 1997 by and among NL
Industries, Inc., Rheox, Inc., Rheox International, Inc., Harrisons and
Crosfield plc, Harrisons and Crosfield (America) Inc. and Elementis
Acquisition 98, Inc, incorporated by reference to Exhibit 10.50 of NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended December
31, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the year ended December 31, 1998.
<PAGE>
99.1 Titanium Metals Corporation (File No. 0-28538) Annual Report on Form 10-K
for the year ended December 31, 1998, Item 3 - "Legal Proceedings" and
Item 8 - "Financial Statements and Supplementary Data" (pages F to F-
29).
99.2 NL Industries, Inc. (File No. 1-640) Annual Report on Form 10-K for the
year ended December 31, 1998, Item 3 - "Legal Proceedings" and Item 8 -
"Financial Statements and Supplementary Data" (pages F-1 to F-45).
* Management contract, compensatory plan or arrangement.
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 23, 1999
(Chairman of the Board, President
and Chief Executive Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Susan E. Alderton /s/ Harold C. Simmons
Susan E. Alderton, March 23, 1999 Harold C. Simmons, March 23, 1999
(Director) (Director)
/s/ Richard J. Boushka /s/ Thomas P. Stafford
Richard J. Boushka, March 23, 1999 Thomas P. Stafford, March 23, 1999
(Director) (Director)
/s/ J. Landis Martin /s/ Avy H. Stein
J. Landis Martin, March 23, 1999 Avy H. Stein, March 23, 1999
(Chairman of the Board, President (Director)
and Chief Executive Officer)
/s/ Glenn R. Simmons /s/ J. Thomas Montgomery, Jr.
Glenn R. Simmons, March 23, 1999 J. Thomas Montgomery, Jr., March 23, 1999
(Director) (Vice President-Controller and Treasurer)
(Principal Finance and Accounting Officer)
<PAGE>
TREMONT CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
FINANCIAL STATEMENTS
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1997 and 1998 F-2/F-3
Consolidated Statements of Income - Years ended December 31, 1996,
1997 and 1998 F-4
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1997 and 1998 F-6/F-7
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1996, 1997 and 1998 F-8
Notes to Consolidated Financial Statements F-9/F-26
FINANCIAL STATEMENT SCHEDULES
<PAGE>
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.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Tremont Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Tremont Corporation as of December 31, 1997 and 1998
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
<PAGE>
Denver, Colorado
January 28, 1999
<PAGE>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
ASSETS 1997 1998
<S>
Current assets: <C> <C>
Cash and cash equivalents $37,959 $ 3,132
Accounts and notes receivable 5,544 3,255
Receivable from related parties 2,277 2,157
Refundable income taxes - 1,087
Prepaid expenses 1,206 1,203
Total current assets 46,986 10,834
Other assets:
Investment in TIMET 123,521 145,180
Investment in NL Industries 15,737 94,980
Investment in joint ventures 10,509 13,063
Receivable from related parties 4,019 2,212
Other 13,550 21,688
Total other assets 167,336 277,123
Property and equipment
Land 330 330
Buildings 893 913
Equipment 172 172
1,395 1,415
Less accumulated depreciation 721 782
<PAGE>
Net property and equipment 674 633
$214,996 $288,590
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1997 and 1998
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
<S>
Current liabilities: <C> <C>
Accrued liabilities $5,714 $3,821
Loan payable to related party - 5,875
Other payables to related parties 62 167
Income taxes 212 -
Total current liabilities 5,988 9,863
Noncurrent liabilities:
Insurance claims and claim expenses 17,000 15,812
Accrued postretirement benefit cost 21,730 21,888
Accrued environmental cost 4,978 5,910
Deferred income taxes 25,766 30,995
Total noncurrent liabilities 69,474 74,605
Minority interest 3,206 3,968
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares - -
authorized; none issued
Common stock, $1.00 par value; 14,000 shares
authorized;
7,690 and 7,769 shares issued, respectively 7,690 7,769
<PAGE>
Additional paid-in capital 274,736 290,118
Accumulated deficit (103,277) (30,906)
Accumulated other comprehensive income (7,099) (7,469)
172,050 259,512
Less treasury stock, at cost (960 and 1,392 35,722 59,358
shares, respectively)
Total stockholders' equity 136,328 200,154
$214,996 $288,590
<FN>
Commitments and contingencies (Notes 10 and 11).
</TABLE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
<S>
Equity in earnings (loss) of: <C> <C> <C>
TIMET $ 15,965 $25,137 $ 14,013
NL Industries (1,778) (5,085) 57,826
Other joint ventures 2,476 5,231 2,911
16,663 25,283 74,750
Gain on sale of TIMET stock 27,599 - -
Corporate income (expense), net (4,052) 1,139 (228)
Interest expense (274) - (97)
Income before income taxes
and minority interest 39,936 26,422 74,425
Income tax expense (benefit) 9,335 11,545 (2,040)
Minority interest 639 1,320 762
Income before extraordinary item 29,962 13,557 75,703
Equity in extraordinary loss of NL-
early extinguishment of debt - - (1,964)
Net income $ 29,962 $13,557 $ 73,739
<PAGE>
Earnings per share:
Before extraordinary item:
Basic $ 4.05 $ 1.92 $ 11.55
Diluted $ 3.90 $ 1.76 $ 11.18
Net income:
Basic $ 4.05 $ 1.92 $ 11.25
Diluted $ 3.90 $ 1.76 $ 10.88
Weighted average shares outstanding:
Common shares 7,406 7,058 6,553
Diluted shares 7,665 7,246 6,690
</TABLE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Net income $ 29,962 $ 13,557 $ 73,739
Other comprehensive income (loss), net
of taxes:
Currency translation adjustment 560 (5,067) 1,089
Unrealized gains (losses) on
marketable
securities 764 30 (142)
Pension liabilities adjustment 310 899 (1,317)
Comprehensive income $ 31,596 $ 9,419 $ 73,369
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
<S>
Cash flows from operating activities: <C> <C> <C>
Net income $29,962 $13,557 $73,739
Earnings of affiliates:
Before extraordinary item (16,663) (25,283) (74,750) ) ) )
Extraordinary item - - 1,964
Distributions 3,014 1,040 2,635
Gain on sale of TIMET stock (27,599) - -
Deferred income taxes 7,811 11,707 (2,049)
Minority interest 639 1,320 762
Other, net (3) (1,529) 834
Change in assets and liabilities:
Accounts and notes receivable (462) 857 2,289
Accounts with related parties (244) (380) 778
Accrued liabilities 2,738 (1,586) (779)
Income taxes 337 101 (411)
Other, net (1,577) 225 (2,390)
Net cash provided (used) by (2,047) 29 2,622
operating activities
Cash flows from investing activities:
Purchases of NL and TIMET common - - (31,368)
stock
Proceeds from disposition of:
<PAGE>
TIMET common stock, net 46,898 - -
Property held for sale 3,000 - -
Oil and gas production well - 1,206 -
interest
Collections on loan to TIMET 22,460 - -
Other, net (631) (63) (20)
Net cash provided (used) by 71,727 1,143 (31,388)
investing activities
Cash flows from financing activities:
Repurchases of common stock $ - $(32,126) $(23,636)
Litigation settlement, net - - 18,976
Letters of credit cash - - (6,955)
collateralized
Dividends paid - - (1,368)
Borrowings from related parties 50 - 5,875
Related party loan repayments (3,500) - -
Repayments of indebtedness (2,500) - -
Other, net 1,655 878 1,047
Net cash used by financing (4,295) (31,248) (6,061)
activities
Net increase (decrease) $65,385 $(30,076) $(34,827)
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
<S>
Cash and cash equivalents: <C> <C> <C>
Net increase (decrease) $65,385 $(30,076) $ (34,827)
Balance at beginning of year 2,650 68,035 37,959
Balance at end of year $68,035 $ 37,959 $ 3,132
Supplemental disclosures - cash paid
(received) for:
Interest expense $ 334 $ - $ -
Income taxes 1,189 (263) 421
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997, 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
Common Stock Additional
Shares Treasury Common paid-in Accumulated
issued shares stock capital deficit
<S> <C> <C> <C> <C> <C>
Balance at 7,550 173 $7,550 $231,815 $(146,796)
December 31,
1995
Comprehensive - - - - 29,962
income
Reduction of
interest in
TIMET, net - - - 40,227 -
(Note 4)
Common stock 90 - 90 1,562 -
issued
Other - - - 176 -
Balance at 7,640 173 7,640 273,780 (116,834)
December 31,
1996
Comprehensive - - - - 13,557
income
<PAGE>
Repurchases - 787 - - -
of common
stock
Common stock 50 - 50 828 -
issued
Other - - - 128 -
Balance at 7,690 960 7,690 274,736 (103,277)
December 31,
1997
Comprehensive - - - - 73,739
income
Litigation - - - 12,334 -
settlement,
net (Note 9)
Dividends - - - - (1,368)
Repurchases - 432 - - -
of common
stock
Common stock 79 - 79 968 -
issued
Other - - - 2,080 -
Balance at 7,769 1,392 $7,769 $290,118 $(30,906)
December 31,
1998
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income Total
Currency Marketable Pension Treasury Stockholders'
translation securities liabilities stock equity
<S> <C> <C> <C> <C> <C>
Balance at $(3,145) $(62) $(2,107) $(3,596) $83,659
December 31,
1995
Comprehensive 560 764 310 - 31,596
income
Reduction of
interest in
TIMET, net (179) - 898 - 40,946
(Note 4)
Common stock - - - - 1,652
issued
Other - - - - 176
Balance at (2,764) 702 (899) (3,596) 158,029
December 31,
1996
Comprehensive (5,067) 30 899 - 9,419
<PAGE>
income
Repurchases - - - (32,126) (32,126)
of common
stock
Common stock - - - - 878
issued
Other - - - - 128
Balance at (7,831) 732 - (35,722) 136,328
December 31,
1997
Comprehensive 1,089 (142) (1,317) - 73,369
income
Litigation - - - - 12,334
settlement,
net (Note 9)
Dividends - - - - (1,368)
Repurchases - - - (23,636) (23,636)
of common
stock
Common stock - - - - 1,047
issued
Other - - - - 2,080
Balance at $(6,742)$ 590 $(1,317) $(59,358)$200,154
December 31,
1998
</TABLE>
<PAGE>
<PAGE>
TREMONT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
Tremont Corporation is principally a holding company with operations
conducted through 33%-owned Titanium Metals Corporation ("TIMET"), 20%-owned NL
Industries, Inc. ("NL") and other joint ventures through 75%-owned TRECO L.L.C.
In February 1999, Tremont exercised an option to purchase an additional two
million shares of TIMET common stock from IMI plc, increasing its ownership to
39%. See Note 4.
At December 31, 1998, Valhi, Inc. and Tremont, each affiliates of Contran
Corporation, held approximately 58% and 20%, respectively, of NL's outstanding
common stock, and together may be deemed to control NL. At December 31, 1998,
Contran and its subsidiaries held approximately 92% of Valhi's outstanding
common stock, and Valhi and other entities related to Harold C. Simmons held
approximately 53% of Tremont's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held either by trusts established for the
benefit of certain children and grandchildren of Mr. Simmons, of which Mr.
Simmons is the sole trustee, or by Mr. Simmons directly. Mr. Simmons may be
deemed to control each of Contran, Valhi, Tremont, NL and TIMET. See Note 10.
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.
<PAGE>
~ 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,
1998, substantially all of the Company's cash and cash equivalents were held by
one financial institution.
~
~ ~Marketable~and~other~securities~and~securities~transactions.~~~The
Company's equity in unrealized gain and loss adjustments of investments held by
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
other 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, 1998, the unamortized net difference relating to NL was
approximately $65 million, of which $40 million is goodwill being amortized over
40 years, with substantially all of the remainder attributable to NL's property
<PAGE>
and equipment and being amortized over the weighted-average remaining lives of
the assets, or approximately 11 years. At December 31, 1998, the unamortized
net difference relating to TIMET was a credit of approximately $2 million being
amortized over 15 years.
~ Property,~equipment~and~depreciation~. Property and equipment are stated at
cost. Maintenance, repairs and minor renewals are expensed; major improvements
are capitalized. Depreciation is computed on the straight-line method over
estimated useful lives of 10-20 years.
~Employee~benefit~plans.~~~Accounting and funding policies for
postretirement benefits other than pensions ("OPEB") are described in Note 8.
~Stock-based~compensation.~~~The Company, TIMET and NL have elected the
disclosure alternative prescribed by Statement of Financial Accounting Standards
("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 9.~
~ ~
~I~ncome~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.
Note 3 - Operating segments:
Tremont is a holding company with operations conducted through its equity
affiliates, principally TIMET and NL.
<PAGE>
TIMET is a vertically integrated producer of titanium sponge, melted
products (ingot and slab), and a variety of titanium mill products for
aerospace, industrial and other applications. TIMET's production facilities are
located in the U.S. and Europe, and its products are sold throughout the world.
These worldwide integrated activities comprise TIMET's principal segment,
"Titanium melted and mill products." TIMET's "Other" segment consists primarily
of its titanium castings operations which were combined in a joint venture
during 1998.
NL is a producer of titanium dioxide pigments ("TiO2") and, during 1996 and
1997, rheological additives. 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. NL
sold its rheological additives business for $465 million in January 1998.
Other joint ventures, held by 75%-owned TRECO, are 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 owns an additional 50% interest in VVLC.
The Company's captive insurance subsidiary, referred to herein as "TRE
Insurance", reinsured certain risks of the Company, NL and their respective
subsidiaries and also participated in various third party reinsurance treaties.
TRE Insurance currently provides certain property and liability insurance
coverage to Tremont, TIMET and NL; however, the risk associated with these
policies is 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 10.
<PAGE>
Note 4 - Investment in TIMET and NL:
See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" ("MD&A") 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.~~In February 1996, TIMET acquired the titanium metals businesses
(the "IMI Titanium Acquisition") of IMI plc and, in June 1996, completed an
initial public offering of 6.2 million shares of its common stock (the "Stock
Offering"), in which Tremont sold 2.2 million shares of TIMET common stock.
These transactions reduced Tremont's ownership in TIMET from 75% at December 31,
1995 to 30%. 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 30% interest in TIMET and its 75% interest in TIMET before the IMI
Titanium Acquisition and Stock Offering.
In 1998, Tremont purchased additional shares of TIMET's outstanding common
stock for $9.6 million and at December 31, 1998, held 10.3 million shares, or
33%, of TIMET's outstanding common stock. At December 31, 1998, the net
carrying amount of the Company's investment in TIMET was approximately $14.14
per share while the market price per share of TIMET common stock on that date
was $8.50. See Item 7 - "MD&A". In February 1999, Tremont exercised an option,
received in connection with the IMI Titanium Acquisition, to purchase an
additional 2.0 million shares of TIMET's common stock from IMI for $16 million
($7.95 per TIMET share).
<PAGE>
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 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.~~~In 1998, Tremont purchased additional shares of NL common
stock for $21.8 million and at December 31, 1998 held 10.2 million shares, or
20%, of NL's outstanding common stock. At December 31, 1998, the net carrying
amount of the Company's investment in NL was approximately $9.30 per share while
the market price per share of NL common stock on that date was $14.19 per share.
See Item 7 - "MD&A".
~
~Note 5 - Other noncurrent assets:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
Restricted deposits $6,302 $14,478
Other 7,248 7,210
$13,550 $21,688
</TABLE>
<PAGE>
Restricted deposits for both years consist of cash collateral on letters of
credit backing insurance policies at TRE Insurance. Approximately $9.7 million
of such deposits were refunded in February 1999. See Note 10.
Note 6 - Accrued liabilities:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
Postretirement benefit cost $1,887 $1,503
Other employee benefits 242 324
Environmental cost 299 307
Legal costs 1,482 -
Miscellaneous taxes 134 135
Other 1,670 1,552
$5,714 $3,821
</TABLE>
<PAGE>
Note 7 - Income taxes:
Summarized below are (i) the difference between the income tax expense
attributable to the income before income taxes and minority interest ("pretax
income") 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, and (iii) the components of the comprehensive
tax expense.
<PAGE>
<TABLE>
<CAPTION> Years ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
Expected income tax expense $ 13,977 $ 9,247 $ 26,049
Adjustment of deferred tax asset
valuation allowance (3,495) 895 (26,876)
Incremental tax and rate
differences on equity in
income of companies not included
in the
consolidated tax group (1,071) 961 (358)
U.S. state income taxes, net 78 41 (74)
Other, net (154) 401 (781)
$ 9,335 $ 11,545 $(2,040)
Income tax expense (benefit):
Current income taxes:
U.S. federal $ 1,404 $ (225) $ 124
U.S. state 120 63 (115)
Deferred income taxes 7,811 11,707 (2,049)
$ 9,335 $ 11,545 $(2,040)
<PAGE>
Comprehensive tax expense allocable
to:
Pretax income $ 9,335 $ 11,545 $(2,040)
Stockholders' equity:
Reduction of interest in TIMET 7,878 - -
Litigation settlement - - 6,642
Other, principally other 880 (2,258) (253)
comprehensive income
$ 18,093 $ 9,287 $ 4,349
</TABLE>
<PAGE>
The components of deferred taxes are summarized below.
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
Assets Liabilities ASSETS LIABILITIES
(In millions)
<S> <C> <C> <C> <C>
Temporary differences relating
to net assets:
Property and equipment $ .1 $ - $ .1 $ -
Accrued OPEB cost 8.3 - 8.2 -
Accrued liabilities and 5.9 - 5.8 -
other deductible differences
Other taxable differences - (4.2) - (5.5)
Investments in subsidiaries
and affiliates
including foreign
currency translation
adjustments 2.8 - - (26.2)
Tax loss and credit .1 - 1.2 -
carryforwards
Valuation allowance (38.8) - (14.6) -
Gross deferred tax assets (21.6) (4.2) .7 (31.7)
(liabilities)
Netting 21.6 (21.6) (.7) .7
Total deferred taxes - (25.8) - (31.0)
<PAGE>
Less current deferred taxes - - - -
Net noncurrent deferred $ - $(25.8) $ - $(31.0)
taxes
</TABLE>
<PAGE>
The Company has a deferred tax valuation allowance of $ 14.6 million at
December 31, 1998, offsetting deferred tax assets which the Company believes did
not meet the "more-likely-than-not" recognition criterion at that date. In
1996, the valuation allowance decreased by $13 million due to utilization of net
operating loss carryforwards and the Company's reduction of its ownership
interest in TIMET. In 1997, the valuation allowance increased by $.9 million
primarily due to the Company's equity in losses in NL as partially offset by
adjustments to certain corporate items. In 1998, the valuation allowance
decreased by $24.2 million primarily due to a net decrease in the basis
differences of the Company's investment in NL, of which $7.4 million was related
to revised estimates of future equity in earnings of NL and which the Company
now believes meets the "more-likely-than-not" criterion.
At December 31, 1998, the Company had, for U.S. federal income tax
purposes, NOL carryforwards of approximately $.3 million which expire in 2018
and AMT credit carryforwards of approximately $.7 million, which can be used to
offset regular income taxes payable in future years. The AMT credit
carryforwards have an indefinite carryforward period.
Note 8 - Postretirement benefits other than pensions ("OPEB"):
The Company retained the obligations for certain postretirement health care
and life insurance benefits provided to eligible employees who retired prior to
a separation of certain businesses from the Company in 1990. The Plan is
unfunded and contributions to the Plan during the year equal benefits paid.
<PAGE>
<TABLE>
<CAPTION> December 31,
<S> 1997 1998
Actuarial present value of accumulated OPEB <C> <C>
obligations
Balance at beginning of year $19,160 $20,479
Interest cost 1,441 1,310
Service cost - -
Actuarial (gain) loss 1,258 (297)
Benefits paid, net of participant (1,380) (1,095)
contributions
Balance at end of year 20,479 20,397
Unrecognized prior service cost 5,533 5,091
Unrecognized net actuarial loss (2,395) (2,097)
Total accrued OPEB cost 23,617 23,391
Less current portion 1,887 1,503
Noncurrent accrued OPEB cost $21,730 $21,888
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Years ended December 31,
<S> 1996 1997 1998
OPEB Expense: <C> <C> <C>
Interest cost $1,463 $1,441 $ 1,310
Service cost - - -
Amortization of prior service cost (441) (441) (441)
Net OPEB expense $1,022 $1,000 $ 869
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION> December 31,
<S> 1997 1998
Weighted average assumptions: <C> <C>
Discount rate 7.00% 6.50%
Expected return on plan assets n/a N/A
Rate of compensation increase n/a N/A
Health care cost trend rate for the 9.83% 8.85%
following period
Ultimate health care cost trend rate 5.25% 4.75%
Fiscal period ultimate health care cost 2016 2016
trend rate attained
</TABLE>
<PAGE>
The health care cost trend rate grades gradually from the current level to the
ultimate level, remaining constant thereafter.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Effects of 1% changes in the health care cost
trend rate:
Effect of a 1% increase in health care cost
trend rate on:
OPEB obligation $1,197 $1,130
Total of service and interest cost 79 80
components
Effect of a 1% decrease in health care cost
trend rate on:
OPEB obligation $(1,127) $(1,064)
Total of service and interest cost (74) (75)
components
</TABLE>
<PAGE>
Note 9 - Stockholders' equity:
~Common~stock.~~~In 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 represented approximately 27% of
the Company's 7.5 million shares then outstanding. At December 31, 1998, the
Company had repurchased 1,219,300 shares for $55.7 million pursuant to this
program, including 432,200 shares repurchased during 1998 for $23.6 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 instituted a regular quarterly dividend of seven cents per
share of common stock in June 1998. Cash dividends paid in 1998 aggregated $1.4
million.
~Litigation~settlement.~~~In June 1998, Tremont and Valhi completed the
settlement of the previously reported shareholder derivative suit,
~Kahn~v.~Tremont~Corp.,~et.~al.~Under the final, court approved settlement,
Valhi transferred to Tremont $24.3 million in cash. Tremont reimbursed
plaintiffs for attorneys' fees and related costs totaling $5.3 million. The net
proceeds of approximately $19 million ($12.3 million net of allocable income
taxes) are reported as a direct increase in equity and consequently are not a
component of net income.
~Stock~options.~~~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
<PAGE>
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.
Fair values were estimated using the Black-Scholes model and the assumptions
listed below. At December 31, 1998, options to purchase approximately 122,000
shares were exercisable at a weighted average exercise price per share of $11.77
and options to purchase an additional 33,800 shares become exercisable in 1999.
Outstanding options at December 31, 1998 had a weighted average remaining life
of 4.4 years (1997 - 5.4 years). At December 31, 1998, 484,681 shares were
available for future grant under the Company's long-term performance incentive
plan and 29,000 shares were available for future grant under the Company's Non-
Employee Director plan.
<PAGE>
<TABLE>
<CAPTION> Weighted Fair
Average value at
Exercise Amount payable Exercise Grant
Shares Price per share Upon exercise Price Date
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Outstanding at 419 $4.69-$22.22 $ 4,407 $10.52
December 31, 1995
Granted 3 22.75 68 22.75 $9.51
Exercised (86) 4.69-18.75 (936) 10.88
Outstanding at 336 8.00-22.75 3,539 10.54
December 31, 1996
Granted 3 30.88 93 30.88 13.30
Exercised (50) 8.00-18.75 (544) 10.90
Canceled (52) 8.13-18.75 (531) 10.20
Outstanding at 237 8.00-30.88 2,557 10.80
December 31, 1997
<PAGE>
Granted 3 56.50 170 56.50 $24.01
Exercised (79) 8.13-18.75 (813) 10.29
Canceled (3) 8.13 (19) 8.13
Outstanding at 158 $8.00-$56.50 $ 1,895 $ 11.96
December 31, 1998
</TABLE>
<PAGE>
Assumptions at date of grant: 1996 1997 1998
Expected life (years) 4.7 4.7 4.7
Risk free interest rate 5.22% 6.02% 5.60%
Volatility 40% 40% 40%
Dividend yield 0% 0% 0%
Had the Company elected to account for stock-based employee compensation
for all awards granted in accordance with the fair value based accounting method
of SFAS No. 123, the impact on the Company's pretax income, net income and
diluted earnings per share was $.3 million, $.2 million and $.02 per share,
respectively, in 1996, $.2 million, $.1 million and $.01 per share,
respectively, in 1997 and $.1 million, $.1 million and $.01 per share,
respectively, in 1998.
Note 10 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (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 other entities related to Mr. Simmons consider, review and
evaluate such transactions. Depending upon the business, tax, and other
<PAGE>
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 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.
During October 1998, the Company entered into an advance agreement with
Contran under which both parties may advance funds to each other, at the prime
rate less 0.5%. At December 31, 1998, the interest rate was 7.25%. Obligations
under this agreement are payable upon demand. At December 31, 1998, Tremont
owed Contran $5.9 million pursuant to this agreement, which amount was borrowed
primarily to purchase shares of NL common stock. In February 1999, the Company
borrowed an additional $6.3 million from Contran to purchase TIMET common stock
from IMI. See Note 4. During 1996, Tremont repaid $3.5 million of outstanding
debt under a prior revolving credit agreement with Contran and terminated the
agreement.
During 1998, the Company purchased, from officers of NL at market rates on
the day of purchase, 169,461 shares of NL common stock for $3.5 million.
The Company is a party to intercorporate services agreements with Contran
and Valhi pursuant to which Valhi and Contran provide certain services to
Tremont on a fee basis. Fees for services provided under such agreements were
$.2 million in 1996, $.5 million in 1997 and $1.1 million in 1998.
<PAGE>
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 $.1 million in
each of the last three years.
The Company has an intercorporate services agreement with TIMET whereby
TIMET provides certain management, financial and other services to the Company
on a fee basis. Fees for services provided by TIMET were approximately $.4
million in each of 1996 and 1997 and $.3 million in 1998.
NL and TRE Insurance are parties to an insurance sharing agreement with
respect to certain loss payments and reserves established by TRE Insurance that
(i) arise out of claims against other entities for which NL is responsible and
(ii) are subject to payment by TRE Insurance under certain reinsurance
contracts. Also, TRE Insurance will credit NL with respect to certain
underwriting profits or credit recoveries that TRE Insurance receives from
independent reinsurers that relate to retained liabilities. A business
separated from the Company in 1990 entered into an insurance sharing agreement
with TRE Insurance 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 TRE Insurance. During 1998, Tremont
collateralized with cash letters of credit backing insurance policies at TRE
Insurance formerly outstanding under a related party credit agreement. In
February 1999, NL cash collateralized certain letters of credit, and Tremont was
refunded $9.7 million cash.
TRE Insurance, Valmont (a Valhi subsidiary), and EWI RE, Inc. arrange for
or broker certain of Tremont's, TIMET's and NL's insurance policies. Parties
related to Contran own 90% of the outstanding common stock of EWI, and a son-in-
law of Harold C. Simmons manages the operations of EWI. Consistent with
insurance industry practices, TRE Insurance, Valmont and EWI receive
commissions from the insurance and reinsurance underwriters for the policies
<PAGE>
that they arrange or broker. During 1998, Tremont, TIMET and NL paid
approximately $0.1 million, $1.8 million and $3.0 million, respectively, for
policies arranged or brokered by EWI and, in certain cases, also by either TRE
Insurance or Valmont. These amounts principally included payments for
reinsurance and insurance premiums paid to unrelated third parties, but also
included commissions paid to TRE Insurance, Valmont and EWI. In Tremont's
opinion, the amounts that Tremont paid for these insurance policies are
reasonable and similar to those it could have obtained through an unrelated
insurance broker and/or insurance company. Tremont understands that TIMET
and NL take the same view with respect to the amounts paid by TIMET and NL.
Tremont expects, and understands that TIMET and NL expect, that these
relationships with TRE Insurance, Valmont, and EWI will continue in 1999.
Current receivables from related parties at December 31, 1997 and 1998
principally include amounts due under insurance loss sharing agreements referred
to above. Noncurrent receivables from related parties include amounts due from
TIMET for exercises of Tremont stock options and amounts due under insurance
loss sharing agreements. Current payables to related parties principally
represent amounts due under the Contran advance agreement.
Note 11 - Commitments and contingencies:
~TIMET~long-term~agreements.~
TIMET has long-term agreements with certain major aerospace customers,
including The Boeing Company, Rolls-Royce plc, United Technologies Corporation
(and related companies) and Wyman-Gordon Company, pursuant to which TIMET will
be the major supplier of titanium products to these customers. The Boeing
agreement was effective in 1998, but was not expected to reach volume levels
until 1999. The other agreements mentioned are effective in 1999. The
agreements provide for minimum market shares of the customer's titanium
requirements (generally at least 70%) for 9-10 year periods. The agreements
<PAGE>
generally provide for fixed or formula-determined prices, at least for the first
five years. The contracts are structured to provide incentives to both parties
to lower TIMET's costs and share in the savings. TIMET believes that these
contracts and others will help mitigate the cyclicality of its aerospace
business.
TIMET also has long-term arrangements with certain suppliers for the
purchase of certain raw materials, including titanium sponge and various
alloying elements, at fixed and/or formula determined prices. TIMET believes
these arrangements will help stabilize the cost and supply of raw materials.
The sponge contract provides for annual purchases by TIMET of 6,000 to 10,000
metric tons. The parties have agreed in principle to a reduced minimum for
1999, and TIMET currently expects to do the same for 2000.
TIMET may enter into other long-term agreements with other customers and
suppliers.
~
Legal~proceedings~and~contingencies~
~Tremont~and~consolidated~subsidiaries~
In May 1998, the previously-reported settlement in the stockholder
derivative case ~Kahn~v.~Tremont~Corp.,~et~al.,~~No. 12339 was approved by the
Court. Pursuant to the settlement, in June 1998, Valhi transferred $24.3
million to the Company and the Company reimbursed plaintiffs' attorneys $5.3
million for fees and related costs. See Note 9.
The Company may, from time-to-time, be 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
effect on the Company's financial condition, results of operations or liquidity.
<PAGE>
~
~N~L~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, strict liability, 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; some are on appeal.
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.
Other litigation. NL is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
present and former businesses.
<PAGE>
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.
~
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 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 was substantially completed at a total cost of approximately $2
million. Another of the sites 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 this site,
however, the Company believes that to the extent it has any additional liability
<PAGE>
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, 1998, the Company had accrued approximately $6 million
related to these matters.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. 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.
~
TIMET~
<PAGE>
~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. In July 1998, NDEP approved TIMET's Phase II assessment report
with certain conditions that required additional investigation. TIMET submitted
its supplemental work plan in October 1998, which NDEP approved in December
1998. Field work to assess the sites is continuing. Based upon the work to
date, TIMET believes its likely share of remediation costs would be in the range
of $2 million to $3 million.
~Pomona~facility.~TIMET 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 a Pomona, California facility formerly owned by
TIMET. The site is near an area that has been designated as a
U.S. Environmental Protection Agency "Superfund" site. In December 1998, TIMET
received a letter from the Water Quality Board stating that, after review of the
information provided pertaining to environmental site assessment the case was
eligible for a "no further work requirement letter".
~Henderson~facility.~In April 1998, the U. S. Environmental Protection
Agency ("EPA") filed a civil action against TIMET (United States of America v.
Titanium Metals Corporation; Civil Action No. CV-S-98-682-HDM (RLH), U. S.
District Court, District of Nevada) in connection with an earlier notice of
<PAGE>
violation alleging that TIMET violated several provisions of the Clean Air Act
in connection with the start-up and operation of certain environmental equipment
at TIMET's Henderson, Nevada facility during the early to mid-1990s. The action
seeks civil penalties in an unspecified total amount at the statutory rate of up
to $25,000 per day of violation ($27,500 per day for violations after January
30, 1997). In December 1998, TIMET and the EPA agreed in principle to settle
the matter for $.3 million payable in installments, plus TIMET's agreement to
carry out a supplemental environment project at an estimated cost of $.2
million.
At December 31, 1998, TIMET had accrued an aggregate of approximately $2.3
million for the environmental matters discussed above under BMI Companies,
Pomona facility and Henderson facility. TIMET records liabilities related to
environmental remediation obligations when estimated future expenditures are
probable and reasonably estimable. Such accruals are adjusted as further
information becomes available or circumstances change. Estimated future
expenditures are not discounted to their present value. 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.
<PAGE>
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 investigations arising under federal
and state environmental laws. Additionally, in connection with past disposal
practices, NL 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, damages for personal injury or property damage
and/or damages for injury to natural resources. While NL may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who are also jointly and severally liable. In addition, NL is a party to a
number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims. At December 31, 1998 NL had accrued $126 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 for which it is possible to estimate
costs is approximately $160 million. NL's estimates of such liabilities have
not been discounted to present value, and NL has not recognized any potential
<PAGE>
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
environmental matters will not arise in the future.
Certain of NL's businesses are and have been engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain past and current operations and
products of NL have the potential to cause environmental or other damage. NL
has implemented and continues to implement various policies and programs in an
effort to minimize these risks. NL's policy is to maintain compliance with
applicable environmental laws and regulations at all of its facilities and to
strive to improve its environmental performance. It is possible that future
developments, such as stricter requirements of environmental laws and
enforcement policies thereunder, could adversely affect NL's production,
handling, use, storage, transportation, sale or disposal of such substances as
well as NL's consolidated financial position, results of operations or
liquidity.
~
Concentration~of~credit~and~other~risks.~
Substantially all of TIMET's sales and operating income are derived from
operations based in the U.S., U.K. and France. Sales to customers in the U.S.
accounted for 50% of TIMET's sales in 1998 (1997 - 55%; 1996 - 62%) while sales
<PAGE>
to customers in Europe accounted for 41% (1997 - 38%; 1996 - 31%). The majority
of TIMET's sales are to customers in the aerospace industry (including airframe
and engine construction). Such concentration of customers may impact TIMET'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.
TIMET's ten largest customers accounted for about 40% of its net sales in 1998
and about one-third of its net sales in each of 1997 and 1996.
Sales of TiO2 accounted for more than 90% of NL's net sales from continuing
operations during each of the past three years. The remaining sales result from
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 TiO2 production processes). 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 NL's TiO2
sales by volume were to Europe and approximately 37% in 1996, 36% in 1997 and
37% in 1998 of sales were attributable to North America.
NL's consolidated cash, cash equivalents and restricted cash equivalents
includes $53 million and $136 million invested in U.S. Treasury securities
purchased under short-term agreements to resell at December 31, 1997 and 1998,
respectively, of which $45 million and $126 million, respectively, of such
securities are held in trust for NL by a single U.S. bank.
Note 12 - Earnings per share:
A reconciliation of the numerator and denominator used in the calculation
of basic and diluted earnings per share is presented below. The effect of
conversion of TIMET's Convertible Preferred Securities would be a net reduction
<PAGE>
of the Company's equity in earnings of TIMET. The reduction results from
dilution of the Company's ownership percentage offset in part by increased TIMET
net income resulting from elimination of dividends on the Convertible Preferred
Securities. TIMET's Convertible Preferred Securities were issued in November
1996. Stock options omitted from the denominator because they were antidilutive
were not material.
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
<S> (in thousands)
Numerator: <C> <C> <C>
Net income $ 29,962 $ 13,557 $ 73,739
Effect of dilutive securities (36) (875) (955)
of equity investees
Diluted net income $ 29,926 $ 12,682 $ 72,784
Denominator:
Average common shares 7,406 7,058 6,553
outstanding
Average dilutive stock options 259 188 137
Diluted shares 7,665 7,246 6,690
</TABLE>
<PAGE>
Note 13 - New accounting principles not yet adopted:
The Company, NL and TIMET will adopt Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, no later than the first quarter of 2000. SFAS No. 133 establishes
accounting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
No. 133, all derivatives will be recognized as either assets or liabilities and
measured at fair value. The accounting for changes in fair value of derivatives
will depend upon the intended use of the derivative. The Company, NL and TIMET
are currently studying this newly-issued accounting rule, and the impact of
adopting SFAS No. 133, if any, will be dependent upon the extent to which they
are then a party to derivative contracts or engaged in hedging activities. At
December 31, 1998, the Company and TIMET are not parties to any derivative
contracts or engaged in any hedging activities covered by SFAS No. 133.
The Company, NL and TIMET are required to adopt in 1999 the requirements of
AICPA Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The Company, NL and TIMET
believe adoption of the pronouncement will have no material effect on their
respective financial position, results of operations or liquidity.
Note 14 - Quarterly results of operations (unaudited):
<PAGE>
<TABLE>
<CAPTION> Quarters ended
March June 30 Sept. Dec. 31
31 30
(In millions, except per share data)
<S>
~Year~ended~December~31,~1998
:~
Equity in earnings (loss) of:<C> <C> <C> <C>
TIMET $ 5.6 $ 4.2 $ 5.0 $ (0.8)
NL 46.8 3.4 4.8 2.8
Income before 51.1 5.9 7.9 10.8
extraordinary item
Net income 50.7 5.9 7.5 9.7
Earnings per share:
Before extraordinary
item:
Basic $ 7.57 $ .88 $ 1.23 $ 1.69
Diluted 7.28 .86 1.19 1.66
Net income:
Basic $ 7.51 $ .88 $ 1.17 $ 1.52
Diluted 7.22 .86 1.12 1.49
~Year~ended~December~31,~1997
<PAGE>
:~
Equity in earnings (loss)
of:
TIMET $ 4.8 $ 6.1 $ 6.5 $ 7.8
NL (7.2) (0.4) 0.9 1.6
Net income (loss) (2.4) 4.4 5.1 6.5
Net income (loss) per
share:
Basic $(.32) $ .62 $ .74 $ .96
(.32)
Diluted (.33) .58 .68 .89
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Tremont Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 28, 1999 appearing on page F-1 of this Annual Report on
Form 10-K also included an audit of the financial statement schedule listed in
the index on page F of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Denver, Colorado
January 28, 1999
<PAGE>
TREMONT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<PAGE>
<TABLE>
<CAPTION> Additions
charged
Balance at (credited) to Balance
Description beginning of year costs and at end
of year expenses Deductions Other of year
Year ended December
31, 1998:
<S> <C> <C> <C> <C> <C>
Allowance for $2,663 $ - $ - $ - $2,663
doubtful accounts
Valuation
allowance for
deferred
income taxes $38,794 $(26,876) $ - $ 2,650 (a) $14,568
Year ended December
31, 1997:
Allowance for $2,663 $ - $ - $ - $ 2,663
doubtful accounts
Valuation
<PAGE>
allowance for
deferred
income taxes $37,899 $ 895 $ - $ - $38,794
Year ended December
31, 1996:
Allowance for $2,663 $ - $ - $ - $ 2,663
doubtful accounts
Valuation
allowance for
deferred
income taxes $50,923 $ (3,495) $ - $(9,529) (b) $37,899
<FN>
(a)Represents increase in valuation allowance principally attributable to the redetermination of the deferred tax asset related to
the Company's investment in NL.
(b)Represents reduction in valuation allowance principally attributable to the Company's reduction of its ownership interest in
TIMET.
</TABLE>
<PAGE>
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of % of Voting
Incorporation or Securities Held at
Name of Corporation Organization December 31, 1998~
~
TRECO L.L.C. Nevada 75
Basic Investments, Inc. Nevada 28
Victory Valley Land Company L.P. Nevada 50
Victory Valley Land Company L.P. Nevada 12
TRE Holding Corporation Delaware 100
TRE Management Company Delaware 100
Titanium Metals Corporation Delaware 33
NL Insurance Limited of Vermont Vermont 100
NL Industries, Inc. New Jersey 20
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Tremont Corporation on Form S-8 (File No. 33-25914 and File No. 33-48147) of our
reports dated January 28, 1999, on our audits of the consolidated financial
statements and the financial statement schedule of Tremont Corporation as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and
1996, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Denver, Colorado
March 26, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Tremont
Corporation's financial statements for the twelve months ended December 31, 1998
and is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<CIK> 0000842718
<NAME> TREMONT CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,132
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 2,663
<INVENTORY> 0
<CURRENT-ASSETS> 10,834
<PP&E> 1,415
<DEPRECIATION> 782
<TOTAL-ASSETS> 288,590
<CURRENT-LIABILITIES> 9,863
<BONDS> 0
0
0
<COMMON> 7,769
<OTHER-SE> 192,385
<TOTAL-LIABILITY-AND-EQUITY> 288,590
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 74,425
<INCOME-TAX> (2,040)
<INCOME-CONTINUING> 75,703
<DISCONTINUED> 0
<EXTRAORDINARY> (1,964)
<CHANGES> 0
<NET-INCOME> 73,739
<EPS-PRIMARY> 11.25
<EPS-DILUTED> 10.88
</TABLE>
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. See Note 15 of
the Consolidated Financial Statements, which information is incorporated herein
by reference.
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
FINANCIAL STATEMENTS
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1997 and 1998 F-2/F-3
Consolidated Statements of Operations - Years ended F-4
December 31, 1996, 1997 and 1998
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1997 and 1998 F-6/F-7
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1996, 1997 and 1998 F-8
Notes to Consolidated Financial Statements F-9/F-29
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
<PAGE>
Schedule II - Valuation and qualifying accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Titanium Metals Corporation as of December 31, 1997
and 1998 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
January 25, 1999
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
ASSETS 1997 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $68,957 $15,464
Accounts and other receivables, less
allowance of $2,218 and $1,932 155,678 126,988
Receivable from related parties 15,844 8,119
Refundable income taxes - 6,819
Inventories 153,818 225,880
Prepaid expenses and other 13,253 10,650
Deferred income taxes 6,219 1,900
Total current assets 413,769 395,820
Other assets:
Investment in joint ventures 23,270 32,633
Preferred securities - 80,000
Goodwill 59,771 59,547
Other intangible assets 17,889 19,894
Other 15,341 14,129
Deferred income taxes 593 -
Total other assets 116,864 206,203
Property and equipment:
Land 6,545 5,974
Buildings 26,823 25,610
Information technology systems and equipment 24,031 56,089
<PAGE>
Manufacturing and other equipment 213,926 278,669
Construction in progress 43,628 52,651
314,953 418,993
Less accumulated depreciation 52,527 67,770
Net property and equipment 262,426 351,223
$793,059 $953,246
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1997 and 1998
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' 1997 1998
EQUITY
<S> <C> <C>
Current liabilities:
Notes payable $ 3,372 $5,134
Current maturities of long-term debt and 1,354 771
capital lease obligations
Accounts payable 59,501 69,302
Accrued liabilities 46,809 50,628
Payable to related parties 1,298 3,223
Income taxes 11,482 5,391
Deferred income taxes - 2,500
Total current liabilities 123,816 136,949
Noncurrent liabilities:
Long-term debt 451 99,950
Capital lease obligations 10,996 10,069
Payable to related parties 847 1,395
Accrued OPEB cost 26,192 24,065
Accrued pension cost 836 8,754
Other 1,441 -
Deferred income taxes 11,620 14,200
Total noncurrent liabilities 52,383 158,433
Minority interest - Company-obligated mandatorily
redeemable
<PAGE>
preferred securities of subsidiary trust
holding solely
subordinated debt securities ("Convertible 201,250 201,250
Preferred Securities")
Other minority interest 6,663 8,237
Stockholders' equity:
Preferred stock $.01 par value; 1 million
shares authorized,
none outstanding - -
Common stock, $.01 par value; 99 million
shares authorized,
31.4 million shares issued and 315 315
outstanding
Additional paid-in capital 346,723 347,972
Retained earnings 58,001 99,981
Accumulated other comprehensive income 3,908 1,317
Treasury stock at cost - 90,000 shares - (1,208)
Total stockholders' equity 408,947 448,377
$793,059 $953,246
<FN>
Commitments and contingencies (Note 15)
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Revenues and other income:
Net sales $507,074 $733,577 $707,677
Equity in earnings of joint ventures 6,237 (1,013) 351
Other, net 1,049 4,530 6,859
514,360 737,094 714,887
Costs and expenses:
Cost of sales 418,775 554,546 542,285
Selling, general, administrative and 29,917 45,319 59,837
development
Special charges 4,824 - 24,000
Interest 8,953 2,066 2,916
462,469 601,931 629,038
Income before income taxes and 51,891 135,163 85,849
minority interest
Income tax expense 2,336 41,004 29,197
Minority interest - Convertible Preferred 826 8,840 8,840
Securities
Other minority interest 1,085 2,309 2,060
<PAGE>
Net income $ 47,644 $83,010 $45,752
Diluted net income $ 48,470 $91,850 $54,592
Earnings per share:
Basic $ 1.72 $ 2.64 $ 1.46
Diluted 1.72 2.49 *
Weighted average shares outstanding:
Basic 27,623 31,457 31,435
Diluted 28,142 36,955 36,846
<FN>
* Antidilutive.
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Net income $ 47,644 $ 83,010 $ 45,752
Other comprehensive income:
Currency translation 5,352 (1,727) 1,692
adjustment
Pension liabilities
adjustment, net of 1,521 858 (4,283)
deferred taxes
Comprehensive income $ 54,517 $ 82,141 $ 43,161
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 47,644 $ 83,010 $ 45,752
Depreciation and amortization 18,974 28,384 32,514
Special charges - non cash portion - - 15,425
Earnings of joint ventures, net of (5,992) 1,013 170
distributions
Deferred income taxes (10,416) 6,578 13,172
Other minority interest 1,085 2,309 2,060
Other, net 1,753 (36) (433)
Change in assets and liabilities,
net of acquisitions:
Receivables (29,998) (41,781) 36,564
Inventories (13,309) 294 (62,990)
Prepaid expenses (6,207) 1,600 2,539
Accounts payable and accrued (106) 1,231 (9,497)
liabilities
Accrued restructuring charges - - 6,727
Income taxes 4,521 5,526 (12,213)
Accounts with related parties, (8,412) (13,292) 9,650
net
Other, net (269) (2,266) (3,323)
Net cash provided (used) by (732) 72,570 76,117
operating activities
Cash flows from investing activities:
Capital expenditures (21,679) (66,295) (115,155)
<PAGE>
Business acquisitions and joint (109,934) (13,496) (27,413)
ventures
Purchase of preferred securities - - (80,000)
Other, net 213 - (647)
Net cash used by investing (131,400) (79,791) (223,215)
activities
Cash flows from financing activities:
Indebtedness:
Borrowings 113,793 - 153,765
Repayments (179,480) (4,833) (56,670)
Deferred financing costs (579) (2,230) -
Repayment of related parties loans (42,521) (930) -
Proceeds from issuance of:
Common stock, net 131,488 - -
Convertible Preferred 192,409 - -
Securities, net
Dividends paid - - (3,772)
Treasury stock purchased - - (1,208)
Other, net - (1,830) 117
Net cash provided (used) by 215,110 (9,823) 92,232
financing activities
$ 82,978 $(17,044) $(54,866)
<PAGE>
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION> 1996 1997 1998
<S> <C> <C> <C>
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and $82,978 $(17,044) $(54,866)
financing activities
Cash acquired 3,053 - 1,187
Currency translation 471 (525) 186
86,502 (17,569) (53,493)
Balance at beginning of year 24 86,526 68,957
Balance at end of year $86,526 $68,957 $15,464
Supplemental disclosures:
Cash paid for:
Interest, net of amounts $ 8,958 $ 2,159 $ 2,215
capitalized
Convertible Preferred Securities - 13,332 13,332
dividends
Income taxes 6,348 22,483 23,737
Business acquisitions and joint
ventures:
3,053 - 1,187
Receivables 45,067 736 6,574
Inventories 62,415 769 15,352
<PAGE>
Property, equipment and other 73,365 1,998 21,765
Investments in joint ventures - 24,307 8,460
Goodwill and other intangibles 85,158 577 8,566
Liabilities assumed (89,124) (3,604) (18,117)
179,934 24,783 43,787
Less noncash consideration:
Common stock issued (70,000) - -
Other, principally property - (11,287) (16,374)
and equipment
Cash paid $109,934 $13,496 $ 27,413
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
Additionaal Retained
Common Common paid-in Earnings
shares stock capital (deficit)
<S> > <C> <C> <C> <C>
Balance at December 31, 15,693 $ 157 $142,720 $(72,653)
1995
Comprehensive income - - - 47,644
Common stock issued:
IMI Titanium 9,561 96 69,904 -
Acquisition (Note 3)
Stock Offering 6,200 62 132,926 -
(Note 10)
Other 1 - 28 -
Other, net - - 555 -
Balance at December 31, 31,455 315 346,133 (25,009)
1996
Comprehensive income - - - 83,010
Other, net 3 - 590 -
Balance at December 31, 31,458 315 346,723 58,001
1997
Comprehensive income - - - 45,752
Dividends paid ($.12 - - - (3,772)
per share)
Treasury stock (90) - - -
<PAGE>
purchases
Other, net 1 - 1,249 -
Balance at December 31, 31,369 $ 315 $347,972 $ 99,981
1998
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<PAGE>
<TABLE>
<CAPTION> Accumulated Other
Comprehensive
Income
Currency Pension Treasury
translation liabilities Stock Total
<S> <C> <C> <C> <C>
Balance at December 31,
1995 $ 283 $(2,379) $ - $68,128
Comprehensive income 5,352 1,521 - 54,517
Common stock issued: -
IMI Titanium - - - 70,000
Acquisition (Note 3)
Stock Offering - - - 132,988
(Note 10)
Other - - - 28
Other, net - - - 555
Balance at December 31, 5,635 (858) - 326,216
1996
Comprehensive income (1,727) 858 - 82,141
Other, net - - - 590
Balance at December 31, 3,908 - - 408,947
1997
Comprehensive income 1,692 (4,283) - 43,161
Dividends paid ($.12 - - - (3,772)
per share)
<PAGE>
Treasury stock - - (1,208) (1,208)
purchases
Other, net - - - 1,249
Balance at December 31, $5,600 $(4,283) $(1,208) $448,377
1998
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
~ Principles~of~consolidation.~~~~~The accompanying consolidated financial
statements include the accounts of Titanium Metals Corporation ("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.
~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, and were a net gain of $421,000 in 1998 and nominal in 1997 and 1996.
~Net~sales.~~~ Sales are recognized when products are shipped.
<PAGE>
~Inventories~and~cost~of~sales.~~~~~Inventories are stated at the lower of
cost or market. Approximately one-half of inventories are costed using the
last-in, first-out ("LIFO") method with the remainder costed using an average or
first-in, first-out ("FIFO") method.
~Cash~and~cash~equivalents.~~~ Cash equivalents include highly liquid
investments with original maturities of three months or less.
~Other~investments.~~~~~Investments in 20% to 50%-owned joint ventures are
accounted for by the equity method. Differences between the Company's
investment in joint ventures and its proportionate share of the joint ventures'
reported equity are amortized over not more than 15 years.
Nonmarketable preferred securities are accounted for by the cost method.
~
~ ~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 $10.5
million at December 31, 1998 (1997 - $6.0 million). Patents and other
intangible assets, except intangible pension assets, are amortized by the
straight-line method over the periods expected to be benefited, generally 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
$2.6 million in 1998, $1.0 million in 1997 and nil in 1996. Software
development costs are capitalized; training, reengineering and similar costs are
expensed as incurred.
<PAGE>
Depreciation is computed principally on the straight-line method over the
estimated useful lives of 15 to 40 years for buildings and three to 25 years for
machinery and equipment. Software costs are amortized over the software's
estimated useful life, generally three to five years.
S~tock-based~compensation.~~~~~The Company has elected the disclosure
alternative prescribed by Standard 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.
~Employee~benefit~plans.~~~ Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 13. The Company retroactively adopted SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits" in 1998.
~Research~and~development.~~~~~Research and development expense
approximated $3.4 million in 1998 ($3.6 million in 1997 and $2 million in 1996).
~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. See Note 12.
<PAGE>
~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 TIMET's June
1996 initial public offering of common stock (the "Stock Offering").
Diluted earnings per share reflects the assumed conversion of the
Convertible Preferred Securities and the dilutive effect of common stock
options. See Note 18.
~Comprehensive~income.~The Company retroactively adopted SFAS No. 130,
"Reporting Comprehensive Income" in 1998.
~Fair~value~of~financial~instruments.~~~The fair value of the nonmarketable
preferred securities, issued in October 1998, held by the Company is deemed by
the Company to approximate net carrying value.
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. The fair value of the Convertible Preferred Securities based on quoted
market prices approximated $102 million at December 31, 1998 and $200 million at
December 31, 1997 (book value at both dates - $201 million).
At December 31, 1998, the fair value of the Company's common equity, based
on the quoted market closing price at that date of $8.50 per share, was
approximately $267 million (book value - $448 million).
Note 2 - Segment information:
In 1998, the Company retroactively adopted SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information". The Company is a vertically
integrated producer of titanium sponge, melted products (ingot and slab) and a
variety of mill products for aerospace, industrial and other applications. The
Company's production facilities are located principally in the United States,
<PAGE>
United Kingdom and France, and its products are sold throughout the world.
These worldwide integrated activities compose the Company's principal segment,
"Titanium melted and mill products".
The "Other" segment consists primarily of the Company's titanium castings
operations, which were combined in a joint venture during 1998. See Note 4.
Operating income, inventory and receivables are the key management measures
used to evaluate segment performance. Operating income of the "Titanium melted
and mill products" segment includes special charges of $4.8 million in 1996 and
$19.5 million in 1998. Operating income of the "Other" segment includes special
charges of $4.5 million in 1998. These charges are more fully described in Note
5.
<PAGE>
<TABLE>
<CAPTION> Years Ended December 31,
1996 1997 1998
<S> (In thousands)
~Operating~Segments:~ <C> <C> <C>
Net sales:
Titanium melted and mill $459,693 $700,427 $ 686,677
products
Other 51,501 36,217 23,936
Eliminations (4,120) (3,067) (2,936)
$507,074 $733,577 $ 707,677
Mill product shipments:
Volume (metric tons) 12,400 15,100 14,800
Average price ($ per $ 32.0 $ 35.00 $ 35.25
Kilogram)
Operating income:
Titanium melted and mill $55,644 $139,252 $ 87,411
products
Other 4,205 (6,290) (4,706)
59,849 132,962 82,705
General corporate income 995 4,267 6,060
Interest expense (8,953) (2,066) (2,916)
<PAGE>
Income before income taxes
and $51,891 $135,163 $ 85,849
minority interest
Depreciation and
amortization:
Titanium melted and mill $ 17,332 $26,463 $ 31,599
products
Other 1,642 1,921 915
$ 18,974 $28,384 $ 32,514
Capital expenditures:
Titanium melted and mill $20,561 $62,869 $ 115,103
products
Other 1,118 3,426 52
$21,679 $66,295 $ 115,155
Years Ended December 31,
1996 1997 1998
<PAGE>
(In thousands)
Inventories:
Titanium melted and mill $146,230 $146,782 $ 225,073
products
Other 9,432 7,165 871
Eliminations (174) (129) (64)
$155,488 $153,818 $ 225,880
Accounts receivable:
Titanium melted and mill $105,231 $149,293 $ 124,900
products
Other 8,869 6,385 2,088
$114,100 $155,678 $ 126,988
Investment in joint ventures:
Titanium melted and mill $ 270 $20,114 $ 22,044
Products
Other - 3,156 10,589
$ 270 $23,270 $ 32,633
Equity in earnings of joint
ventures:
Titanium melted and mill $ 6,237 $ (517) $ 1,869
<PAGE>
products
Other - (496) (1,518)
$ 6,237 $(1,013) $ 351
Geographic segments:
Net sales - point of origin:
United States $354,651 $534,440 $ 465,519
United Kingdom 177,717 223,573 217,709
Other Europe 8,346 96,659 109,347
Eliminations (33,640) (121,095) (84,898)
$507,074 $733,577 $ 707,677
Net sales - point of
destination:
United States $312,640 $401,217 $ 354,001
Europe 155,364 276,419 290,988
Other 39,070 55,941 62,688
$507,074 $733,577 $ 707,677
<PAGE>
Operating income:
United States $39,014 $76,434 $45,760
Europe 20,835 56,528 36,945
$59,849 $132,962 $82,705
Long-lived assets - property
and equipment:
United States $165,096 $188,564 $ 264,856
United Kingdom 52,173 69,470 78,731
Other Europe 2,300 4,392 7,636
$219,569 $262,426 $ 351,223
</TABLE>
<PAGE>
Export sales from U.S. based operations approximated $58 million in 1996,
$97 million in 1997 and $81 million in 1998.
Geographic segment operating income in 1998 includes special restructuring
charges of $14.5 million in the U.S. and $9.5 million in Europe.
Note 3 - Business combinations:
~IMI~Titanium~Acquisition.~~~~~In February 1996, the Company acquired the
titanium metals businesses of IMI plc and affiliates (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. 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.
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
<PAGE>
subsidiary, Titanium Hearth Technologies, Inc. ("THT"), and included the
acquisition of the 50% partnership interest in Titanium Hearth Technologies that
TIMET did not previously own. THT, now part of the Company's manufacturing
operations in North America, operates titanium scrap processing facilities and
titanium melting furnaces.
The Company accounted for the AJM Acquisition by the purchase method and
consolidated THT's results effective October 1, 1996; revenues for the fourth
quarter of 1996 approximated $21 million. Prior to the AJM Acquisition, the
Company accounted for its 50% interest in the THT partnership by the equity
method.
~Other~European~acquisitions.~~~~~During the last half of 1996 and January
1997, the Company completed three acquisitions in Europe for an aggregate cash
cost of approximately $12 million which were accounted for by the purchase
method. 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. TIMET Savoie manufactures
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. In July 1996, TIMET purchased the 74% equity
interest in TISTO, a German distributor of titanium products, that it did not
already own. In January 1997, the Company purchased LASAB Laser Applikations-
und Bearbeitungs GmbH ("LASAB'), which is in the titanium and stainless steel
laser-welded tube and pipe and laser cutting business.
In April 1998, the Company acquired Loterios S.p.A., a producer and
distributor of titanium pipe and fittings to the offshore oil and gas drilling
and production markets, based in Italy. The cost of the Loterios acquisition,
accounted for by the purchase method, was approximately $19 million in cash.
<PAGE>
Additional consideration of up to approximately $7 million is contingent upon
Loterios' achieving certain operating targets. The results of Loterios'
operations have been reflected in the consolidated financial statements from the
date of acquisition; net sales in 1998 subsequent to acquisition approximated
$23 million.
Note 4 - Joint ventures and preferred securities:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
<S> (in thousands)
Joint ventures: <C> <C>
ValTimet $ 19,845 $21,658
Wyman-Gordon Titanium Castings - 6,158
Other 3,425 4,817
$ 23,270 $32,633
Preferred securities $ - $80,000
</TABLE>
<PAGE>
~Joint~ventures.~~~In July 1997, TIMET combined its Tennessee-based 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", is 46% owned by TIMET and 54% owned by
Valinox Welded. The Company's initial investment in ValTimet aggregated $19.8
million, consisting of $11.3 million of noncash consideration contributed at net
carrying value (principally property and equipment) plus cash of $8.5 million to
fund working capital. For the six months ended December 31, 1997, and the year
ended December 31, 1998, ValTimet reported sales of $56.6 million and $119.3
million and net income of $.1 million and $4.1 million, respectively. At
December 31, 1997 and 1998, ValTimet reported total assets of $80.1 million and
$69.1 million and equity of $28.7 million and $31.8 million, respectively.
In August 1998, the Company completed a series of strategic transactions
with Wyman-Gordon Company. The principal components were: (i) the Company
exchanged certain of its titanium castings assets and $5 million in cash for
Wyman-Gordon's Millbury, MA vacuum arc remelting facility, which produced
titanium ingot; (ii) Wyman-Gordon and the Company combined their respective
titanium castings business into a new joint venture, Wyman-Gordon Titanium
Castings LLC, 80% owned by Wyman-Gordon and 20% by the Company; and (iii) the
Company and Wyman-Gordon entered into a contract pursuant to which the Company
will be the principal supplier of titanium material to Wyman-Gordon through
2007. The Company accounts for its interest in the castings joint venture by
the equity method. The Company accounted for the castings business/melting
facility transaction at fair value, which approximated the $18 million net
carrying value of the assets exchanged, and, accordingly, recognized nil gain on
the transaction. For the five months ended December 31, 1998, Wyman-Gordon
Titanium Castings reported sales of $16.6 million and a net loss of $.4 million.
At December 31, 1998, Wyman-Gordon Titanium Castings reported total assets of
$29.2 million and equity of $25.3 million.
<PAGE>
TIMET's strategy for developing new markets and uses for titanium includes
providing funds to third parties to prove out a new use or uses of titanium.
Other joint ventures consist principally of such investments.
~
Preferred~securities.~In October 1998, the Company purchased for cash $80
million of non-voting preferred securities of Special Metals Corporation, a U.S.
manufacturer of wrought nickel-based superalloys and special alloy long
products. The investment was made in conjunction with, and concurrent with, the
acquisition by SMC of the Inco Alloys International unit of Inco, Ltd. The
preferred securities accrue dividends at the annual rate of 6.625%, are
mandatorily redeemable in April 2006 and are convertible into SMC common stock
at $16.50 per share.
Note 5 - Special charges:
In 1998, TIMET implemented a plan of action designed to address current
market conditions, which resulted in recognizing $24 million of restructuring
charges. The plan included the permanent closure of three plants, permanent or
temporary closures of parts of three other plants, the merger of all North
American manufacturing operations into one operating unit and termination of 600
people, or approximately 20% of TIMET's worldwide work force. See also Item 1 -
"Business - Outlook for 1999" of this Annual Report. Components of the
restructuring charge are summarized below.
<PAGE>
Segment
Melted and
Mill Other Total
Products
(in millions)
Property and equipment $ 7.1 $ 2.6 $ 9.7
Pension costs - SFAS No. 88 5.7 - 5.7
Personnel severance and benefits 5.3 .5 5.8
Other exit costs, principally related 1.4 1.4 2.8
to leased facilities
$ 19.5 $ 4.5 $ 24.0
<PAGE>
Substantially all of the property and equipment loss relates to items sold,
scrapped or abandoned, with disposition already substantially complete.
Depreciation of equipment not impaired and only temporarily idled was not
suspended. The pension charge relates to the actuarial valuation of accelerated
defined benefits of employees to be terminated.
At December 31, 1998, 50% of the personnel reductions had been accomplished
with substantially all of the remainder to be accomplished in the first quarter
of 1999. Other exit costs relate primarily to carrying costs on leased
facilities, which leases have or will be terminated, assumed or expire by mid-
year. Of the $8.6 million personnel and other exit costs accrued, $1.9 million
had been paid at year-end. Most of the remaining accrued costs will be paid
during the first half of 1999, although certain payments, for items such as
benefit continuation for terminated employees, will be paid later.
In 1996, TIMET's "Titanium melted and mill products" segment incurred $4.8
million of special charges related to the IMI Titanium Acquisition, $3 million
of which related to compensation for services in connection with the
acquisition, with the remainder related principally to integration and
consolidation of certain facilities.
Note 6 - Inventories:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
Raw materials $28,514 $56,109
Work-in-process 85,278 97,947
Finished products 32,904 61,213
Supplies 7,122 10,611
$153,818 $225,880
</TABLE>
<PAGE>
The average cost of LIFO inventories exceeded the net carrying amount of
such inventories by approximately $32 million and $28 million at December 31,
1997 and 1998, respectively.
Note 7 - Intangible and other noncurrent assets:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
Intangible assets:
Patents $ 14,333 $14,381
Covenants not to compete 5,000 8,759
Intangible pension assets 1,997 2,783
21,330 25,923
Less accumulated amortization 3,441 6,029
$ 17,889 $19,894
Other noncurrent assets:
Deferred financing costs $ 8,482 $ 9,911
Prepaid pension costs 2,228 -
Notes receivable from officers - 580
Other 4,631 3,638
$ 15,341 $14,129
</TABLE>
<PAGE>
Note 8 - Accrued liabilities:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
OPEB cost $2,102 $2,371
Pension cost 1,072 1,482
Other employee benefits 25,869 20,881
Environmental costs 1,762 2,273
Restructuring costs - 6,727
Taxes, other than income 3,062 1,292
Accrued dividends - Convertible Preferred 1,103 1,111
Securities
Other 11,839 14,491
$ 46,809 $ 50,628
</TABLE>
<PAGE>
Note 9 - Notes payable, long-term debt and capital lease obligations:
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
Notes payable - European credit agreements $3,372 $ 5,134
Long-term debt:
Bank credit agreement - U.S. $ - $80,000
Bank credit agreement - U.K. - 18,781
Other 1,612 1,740
1,612 100,521
Less current maturities 1,161 571
$ 451 $99,950
Capital lease obligations $ 11,189 $ 10,269
Less current maturities 193 200
$ 10,996 $ 10,069
</TABLE>
<PAGE>
~European~credit~agreements.~At December 31, 1998, aggregate unused
borrowing availability under short-term bank credit agreements in France and
Italy approximated $8 million.
~Long-term~bank~credit~agreements.~~~TIMET has a $200 million revolving
bank credit facility expiring in July 2002. Borrowings generally bear interest
at LIBOR plus 0.50% (5.56% at December 31, 1998) and are collateralized by
substantially all of TIMET's assets. The credit agreement generally limits
dividends on TIMET's common stock to 25% of net income, limits additional
indebtedness and transactions with affiliates, requires the maintenance of
certain financial ratios and contains other covenants customary in transactions
of this type.
TIMET UK has a Pounds15 million ($25 million) overdraft/revolving bank
credit facility maturing in April 2001. Borrowings may be in sterling or
dollars, are collateralized by TIMET UK's inventories and receivables, and
generally bear interest at LIBOR plus 0.75% (5.75% at December 31, 1998).
At December 31, 1998, the Company had approximately $125 million of unused
borrowing availability under its long-term U.S. and U.K. bank credit agreements.
Available borrowings in the future could potentially be reduced due to the
leverage and interest coverage ratios included in the U.S. credit agreement.
~Capital~lease~obligations.~In connection with the IMI Titanium
Acquisition, TIMET UK entered into long-term leases with IMI principally
covering production facilities within England. In connection with the TIMET
Savoie transaction, TIMET Savoie entered into long-term leases with CEZUS
covering machinery and equipment. The terms of these capital leases range from
10-30 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 in equipment at December 31, 1998 were $9.7 million and $.9
<PAGE>
million, respectively, with related aggregate accumulated depreciation of $1.2
million.
Aggregate maturities of long-term debt and capital lease obligations:
<PAGE>
<TABLE>
<CAPTION> Capital Long-term
Leases Debt
(In thousands)
<S> <C> <C>
Years ending December 31,
1999 $ 1,110 $ 571
2000 1,110 508
2001 1,110 19,216
2002 1,110 80,226
2003 1,110 -
2004 and thereafter 22,073 -
Less amounts representing interest (17,354) -
$ 10,269 $ 100,521
</TABLE>
<PAGE>
Note 10 - Minority interest:
~Convertible~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 and $6 million of
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"). TIMET's
guarantee of payment of the Convertible Preferred Securities (in accordance with
the terms thereof) and its obligations under the Trust documents constitute, in
the aggregate, 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 approximately 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 dividend 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.
Dividends on the Convertible Preferred Securities are reported in the
Consolidated Statement of Operations as minority interest, net of allocable
income tax benefit.
<PAGE>
~Other.~~~~~~Other minority interest relates principally to TIMET Savoie.
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 ($7.5
million at December 31, 1998), which amount is recorded as minority interest.
CEZUS has the right to sell its interest in TIMET Savoie to the Company for 30%
of TIMET Savoie's registered capital ($2.9 million at December 31, 1998).
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 bank
indebtedness.
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, which cost was
expensed as incurred. The 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.~~~~~The Company is authorized to issue 1 million shares
of preferred stock. The rights of preferred stock as to, among other things,
<PAGE>
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. Options generally vest over five years and expire ten
years from date of grant.
Additionally, a plan for TIMET's nonemployee directors provides for
eligible directors to annually be granted options to purchase 1,500 shares of
the Company's common stock (5,000 beginning in 1999) 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 500 shares of common stock. Options granted to
nonemployee directors vest in one year and expire ten years from date of grant
(five year expiration for grants prior to 1998).
The weighted average remaining life of options outstanding at December 31,
1998 was 8.2 years (1997 - 8.7 years). At December 31, 1998, options to
purchase approximately 199,000 shares were exercisable at an average exercise
price of $25.89 per share and approximately 242,000 options become exercisable
in 1999.
At December 31, 1998, approximately 1.9 million shares and 50,350 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.
<PAGE>
<TABLE>
<CAPTION>
Weighted
Exercise Amount average
Exercise Payable Weighted fair
price Upon Average value at
per Exercise Exercies grant
Shares share (thousands) price date
<S> <C> <C> <C> <C> <C>
Outstanding at - $ - $ - $ -
December 31, 1995
Granted:
At market 370,275 23.00-31.25 9,110 24.60 $ 12.46
Above market 167,000 26.00-29.00 4,592 27.50 10.22
Canceled (1,000) 23.00 (23) 23.00
Outstanding at 536,275 23.00-31.25 13,679 25.51
December 31, 1996
Granted:
At market 230,075 25.94-29.50 6,414 27.88 12.72
Above market 134,000 31.00-34.00 4,355 32.50 11.29
Exercised (1,250) 23.00-29.50 (33) 26.25
<PAGE>
Canceled (79,100) 23.00-34.00 (2,045) 25.86
Outstanding at 820,000 23.00-34.00 22,370 27.28
December 31, 1997
Granted:
At market 320,900 26.13-29.31 9,392 29.27 14.08
Above market 142,000 32.31-35.31 4,802 33.81 12.79
Canceled (65,200) 23.00-35.31 (1,878) 28.80
Outstanding at 1,217,700 $23.00-$35.31 $34,686 $28.48
December 31, 1998
</TABLE>
<PAGE>
Weighted average fair values of options at grant date were estimated using
the Black-Scholes model and assumptions listed below.
<PAGE>
Assumptions at date of 1996 1997 1998
grant:
Expected life 6 6 6
(years)
Risk-free interest 6.67% 6.00% 5.56%
rate
Volatility 40% 35% 40%
Dividend yield 0% 0% 0%
<PAGE>
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 1998 would have been
reduced by $5.4 million, $3.5 million and $.11 per share, respectively, for 1997
would have been reduced by $3.7 million, $2.4 million and $.06 per share,
respectively, and for 1996 would have been reduced by $1.1 million, $.7 million
and $.02 per share, respectively.
Note 12 - Income taxes:
Summarized below are (i) the components of income before income taxes and
minority interest ("pretax income"), (ii) the difference between the income tax
expense attributable to pretax income and the amounts that would be expected
using the U.S. federal statutory income tax rate of 35%, (iii) the components of
the income tax expense attributable to pretax income, and (iv) the components of
the comprehensive tax provision.
<PAGE>
<TABLE>
<CAPTION> Years Ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
Pretax income:
U.S. $33,941 $ 81,766 $ 51,090
Non-U.S. 17,950 53,397 34,759
$51,891 $135,163 $ 85,849
Expected income tax expense, at 35% $18,161 $ 47,307 $30,047
Non-U.S. tax rates 37 (464) 41
U.S. state income taxes, net 848 126 472
Export sales credit - (361) (979)
Adjustment of deferred tax valuation(16,519) (5,785) -
allowance
Other, net (191) 181 (384)
$2,336 $ 41,004 $ 29,197
Income tax expense:
Current income taxes:
<PAGE>
U.S. $6,516 $ 17,146 $ 4,617
Non-U.S. 6,236 17,280 11,408
12,752 34,426 16,025
Deferred income taxes (benefit):
U.S. (10,809) 5,998 12,374
Non-U.S. 393 580 798
(10,416) 6,578 13,172
$ 2,336 $ 41,004 $ 29,197
Comprehensive tax provision
allocable to:
Pretax income $ 2,336 $ 41,004 $ 29,197
Minority interest - Convertible (444) (4,760) (4,703)
Preferred Securities
Stockholders' equity, including
amounts allocated
to other comprehensive income 2,500 (533) (3,520)
$4,392 $ 35,711 $ 20,974
<PAGE>
December 31,
1997 1998
Assets Liabilities ASSETS LIABILITIES
(In millions)
Temporary differences relating
to net assets:
Inventories $ .1 $ (5.5) $ .1 $(5.1)
Property and equipment, .2 (17.8) 1.4 (30.5)
including software
Accrued OPEB cost 11.7 - 11.0 -
Accrued liabilities and 8.7 - 11.1 -
other deductible differences
Other taxable differences - (7.7) - (7.7)
Tax loss and credit 5.9 - 4.9 -
carryforwards
Valuation allowance (.4) - - -
Gross deferred tax assets 26.2 (31.0) 28.5 (43.3)
(liabilities)
Netting (19.4) 19.4 (26.6) 26.6
Total deferred taxes 6.8 (11.6) 1.9 (16.7)
<PAGE>
Less current deferred taxes 6.2 - 1.9 (2.5)
Net noncurrent deferred taxes $ .6 $ (11.6) $ - $(14.2)
</TABLE>
<PAGE>
The Company's valuation allowance (nominal at December 31, 1997 and nil in
1998) decreased in the aggregate (including amounts allocated to items other
than pretax income) by $16.5 million in 1996, $5.8 million in 1997 and $.4
million in 1998. The 1996 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, 1998, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $2.5 million expiring in 2010. At December 31,
1998, the Company had an AMT credit carryforward of approximately $4 million,
which can be utilized to offset regular income taxes payable in future years.
The AMT credit carryforward has an indefinite carryforward period.
Note 13 - Employee benefit plans:
~Variable~compensation~plans.~~~~~Substantially all 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 $12 million in 1996, $11 million in 1997 and $6 million in 1998.
~Defined~contribution~plans.~~All of the Company's domestic hourly and
salaried employees (65% of total worldwide employees at December 31, 1998) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on Company
profitability for approximately 80% of eligible employees. Approximately 35% of
the Company's total employees at December 31, 1998 also participate in a defined
contribution pension plan with contributions based upon a fixed percentage of
the employee's eligible earnings. The cost of these pension and savings plans
approximated $3 million in each of 1996, 1997 and 1998.
<PAGE>
~Defined~benefit~pension~plans.~~~~~The Company maintains contributory and
noncontributory defined benefit pension plans covering substantially all
European employees and a minority 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 U.S. defined benefit pension plans were
closed to new participants prior to 1996 and, in some cases, benefit levels have
been frozen.
The rates used in determining the actuarial present value of benefit
obligations at December 31, 1998 were: (i) discount rates -- 6% to 6.5% (1997 -
7% to 7.25%), and (ii) rates of increase in future compensation levels - 3%
(1997 - 3% to 5%). The expected long-term rates of return on assets used was
7.5% to 9% (1997 - 7% to 9%). The benefit obligations are sensitive to changes
in these estimated rates and actual results may differ from the obligations
noted below. At December 31, 1998, the assets of the plans are primarily
comprised of government obligations, corporate stocks and bonds.
<PAGE>
<TABLE>
<CAPTION> Years ended
December 31,
1997 1998
<S> (in thousands)
Change in projected benefit obligations: <C> <C>
Balance at beginning of year $114,525 $136,367
Service cost 3,906 5,462
Interest cost 9,201 9,519
Adjustments - SFAS No. 88 - 5,725
Actuarial loss (gain) 13,828 553
Benefits paid (5,093) (5,334)
Balance at end of year $136,367 $152,292
Change in plan assets:
Fair value at beginning of year $113,743 $136,827
Actual return on plan assets 20,555 (2,999)
Contributions 7,623 4,606
Benefits paid (5,093) (5,334)
Fair value at end of year $136,827 $133,100
<PAGE>
Funded status:
Plan assets over (under) projected $ 460 $(19,192)
benefit obligations
Unrecognized:
Actuarial loss 9 16,154
Prior service cost 3,077 2,783
Transaction obligation (1,229) (615)
Total prepaid (accrued) pension $ 2,317 $ (870)
cost
Amounts recognized in balance sheet:
Noncurrent prepaid pension cost $ 2,228 $ -
Intangible pension asset 1,997 2,783
Current pension liability (1,072) (1,482)
Noncurrent pension liability (836) (8,754)
Accumulated other comprehensive income - 6,583
$ 2,317 $ (870)
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION> Years Ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned $ 3,260 $ 3,906 $ 5,462
Interest cost on projected benefit 7,696 9,201 9,519
obligations
Expected return on plan assets (7,256) (20,555) (12,247)
Net amortization (1,951) 9,724 (2,030)
Net pension expense $ 1,749 $2,276 $ 704
</TABLE>
<PAGE>
~Postretirement~benefits~other~than~pensions.~~~~~The Company provides
certain postretirement health care and life insurance benefits to certain of its
domestic 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 change in the accumulated OPEB
obligations are set forth below. The plan is unfunded and contributions to the
plan during the year equal benefits paid. The rates used in determining the
actuarial present value of the accumulated OPEB obligations at December 31, 1998
were: (i) discount rate--6.5% (1997 - 7%), (ii) rate of increase in health care
costs for the following period--8.9% (1997 - 9.9%) (iii) ultimate health care
trend rate (achieved in 2016) - 4.75% (1997 - 5.25%). 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 1998, and the actuarial
present value of accumulated OPEB obligations at December 31, 1998 would have
increased approximately $2.3 million. A one percentage point decrease would
have a similar, but opposite, effect. The accrued OPEB cost is sensitive to
changes in these estimated rates and actual results may differ from the
obligations noted below.
<PAGE>
<TABLE>
<CAPTION> December 31,
1997 1998
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated OPEB
obligations:
Balance at beginning of year $21,252 $22,297
Service cost 357 326
Interest cost 1,613 1,553
Actuarial loss 1,654 1,648
Benefits paid, net of participant (2,579) (3,187)
contributions
Balance at end of year 22,297 22,637
Unrecognized net actuarial gain 2,673 900
Unrecognized prior service credits 3,324 2,899
Total accrued OPEB cost 28,294 26,436
Less current portion 2,102 2,371
Noncurrent accrued OPEB cost $26,192 $24,065
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION> Years Ended December 31,
1996 1997 1998
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned $ 407 $ 357 $ 326
Interest cost on accumulated OPEB 1,567 1,613 1,553
obligations
Net amortization and deferrals (653) (635) (550)
Net OPEB expense $1,321 $ 1,335 $1,329
</TABLE>
<PAGE>
Note 14 - Related party transactions:
TIMET was a 75%-owned subsidiary of Tremont Corporation at December 31,
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 for stock and in June 1996 completed the Stock
Offering which together reduced Tremont's ownership in TIMET to 30% and UTSC's
ownership to 10%. In 1997, UTSC reduced its ownership to less than 5% and is no
longer required to publicly report its ownership. In 1998, Tremont purchased
additional TIMET common stock in market transactions. In connection with the
IMI Titanium Acquisition, Tremont held an option, exercised in February 1999, to
purchase approximately 2.0 million shares of the Company's common stock from IMI
for approximately $16 million ($7.95 per share). At March 1, 1999, Tremont held
approximately 39% of TIMET's outstanding common stock.
Valhi, Inc. (a majority-owned subsidiary of Contran Corporation) and other
entities related to Harold C. Simmons hold an aggregate of approximately 53% of
Tremont's outstanding common stock. Mr. Simmons may be deemed to control each
of Contran, Valhi, Tremont and TIMET. 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,
<PAGE>
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.
TIMET supplies titanium strip product to ValTimet under a long-term
contract as the preferred supplier and supplies castings ingot to Wyman-Gordon
Titanium Castings. Sales to these joint ventures were $22 million in 1997 and
$40 million in 1998. Receivables from related parties at December 31, 1997 and
1998 relate principally to sales to these joint ventures.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, UTSC licensed certain
technology to TIMET in exchange for the right 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 thereafter through 2008. A discount
from market value represents TIMET's consideration to UTSC for the licensed
technology. Sales to UTSC approximated $12 million in 1996, $17 million in 1997
and $7 million in 1998.
The Company has an intercorporate services agreement with Tremont whereby
the Company provides certain management, financial and other services to Tremont
for approximately $.4 million in each of 1996, 1997 and 1998, subject to renewal
for future years.
The Company has guidelines for its officers regarding ownership level of
TIMET stock. In order to facilitate compliance with these guidelines, the
Company extended loans in 1998 to certain officers pursuant to a Board-approved
<PAGE>
loan program. The loans are payable in five annual installments beginning six
years from date of loan and bear interest at a rate tied to the Company's
borrowing rate, payable quarterly. At December 31, 1998, the outstanding
balance of officer notes receivable was $580,000.
EWI RE, Inc. arranges for and brokers certain of the Company's
insurance policies. Parties related to Contran own 90% of the outstanding
common stock of EWI, and a son-in-law of Harold C. Simmons manages the
operations of EWI. Consistent with insurance industry practices, EWI receives a
commission from the insurance underwriters for the policies that it arranges or
brokers. The Company paid an aggregate of approximately $1.8 million for such
policies in 1998, which amount principally included premiums for the insurance
policies paid to third parties, but also included commissions paid to EWI. In
the Company's opinion, the premiums paid for these insurance
policies are reasonable and similar to those the Company could have obtained
through an unrelated insurance broker. The Company expects that these
relationships with EWI will continue in 1999.
Interest expense on related party indebtedness approximated $2 million in
1996 and was nil in 1997 and 1998. The subordinated debt to both IMI and
Tremont accrued interest at 10.4% and was repaid in 1996 with proceeds from the
Stock Offering. During 1997, TIMET Savoie repaid amounts outstanding under a
revolving line of credit provided by CEZUS and terminated the facility.
TIMET's purchases from THT approximated $9 million in 1996 prior to the AJM
Acquisition.
Note 15 - Commitments and contingencies:
~Long-term~agreements.~~~The Company has long-term agreements with certain
major aerospace customers, including The Boeing Company, Rolls-Royce plc, United
Technologies Corporation (and related companies) and Wyman-Gordon Company,
<PAGE>
pursuant to which the Company will be the major supplier of titanium products to
these customers. The Boeing agreement was effective in 1998 but was not
expected to reach volume levels until 1999. The other agreements mentioned are
effective in 1999. The agreements provide for minimum market shares of the
customer's titanium requirements (generally at least 70%) for 10 year periods.
The agreements generally provide for fixed or formula-determined prices, at
least for the first five years. The contracts are structured to provide
incentives to both parties to lower TIMET's costs and share in the savings.
TIMET believes that these contracts and others will help mitigate the
cyclicality of its aerospace business.
The Company also has long-term arrangements with certain suppliers for the
purchase of certain raw materials, including titanium sponge and various
alloying elements, at fixed and/or formula determined prices. TIMET believes
these arrangements will help stabilize the cost and supply of raw materials.
The sponge contract provides for annual purchases by the Company of 6,000 to
10,000 metric tons. The parties have agreed in principle to a reduced minimum
for 1999, and the Company currently expects to do the same for 2000.
The Company may enter into other long-term agreements with other customers
and suppliers.
~
Concentration~of~credit~and~other~risks.~~~~~Substantially all of the
Company's sales and operating income are derived from operations based in the
U.S., the U.K. and France. 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 40% of net sales in 1998 and about one-third of
net sales in each of 1997 and 1996.
<PAGE>
~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 $2.7 million in 1996, $3.6 million in 1997 and $5.0 million in
1998.
At December 31, 1998, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
<PAGE>
<TABLE>
<CAPTION> Amount
(In
thousands)
<S> <C>
Years ending
December 31,
1999 $ 3,784
2000 2,301
2001 1,728
2002 942
2003 805
2004 and -
thereafter
$ 9,560
</TABLE>
<PAGE>
~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. In July 1998, NDEP approved TIMET's Phase II assessment
report with certain conditions that required additional investigation. TIMET
submitted its supplemental work plan in October 1998, which NDEP approved in
December 1998. Field work to assess the sites is continuing. Based upon the
work to date, the Company believes its likely share of remediation costs would
be in the range of $2 million to $3 million.
~ 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 a Pomona, California facility formerly
owned by the Company. The site is near an area that has been designated as a
U.S. Environmental Protection Agency "Superfund" site. In December 1998, the
Company received a letter from the Water Quality Board stating that, after
review of the information provided pertaining to environmental site assessment
the case was eligible for a "no further work requirement letter".
~Henderson~facility.~In April 1998, the U. S. Environmental Protection
Agency ("EPA") filed a civil action against TIMET
<PAGE>
~(United~States~of~America~v.~Titanium~Metals~Corporation;~~Civil Action No. CV-
S-98-682-HDM (RLH), U. S. District Court, District of Nevada) in connection with
an earlier notice of violation alleging that TIMET violated several provisions
of the Clean Air Act in connection with the start-up and operation of certain
environmental equipment at TIMET's Henderson, Nevada facility during the early
to mid-1990s. The action seeks civil penalties in an unspecified total amount
at the statutory rate of up to $25,000 per day of violation ($27,500 per day for
violations after January 30, 1997). In December 1998, TIMET and the EPA agreed
in principle to settle the matter for $.3 million payable in installments, plus
TIMET's agreement to carry out a supplemental environment project at an
estimated cost of $.2 million.
At December 31, 1998, the Company had accrued an aggregate of approximately
$2.3 million for the environmental matters discussed above under
~BMI~Companies,~Pomona~facility~and~Henderson~facility~. The Company records
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future expenditures are not discounted to their present value. 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.
<PAGE>
~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.
Note 16 - New accounting principles not yet adopted:
The Company is required to adopt in 1999 the requirements of AICPA
Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The Company's existing
accounting policies with respect to costs of internal-use software are
substantially equivalent to those required by SOP 98-1, thus the Company
believes adoption of the pronouncement will have no significant effect on its
financial position or results of operations.
The Company will adopt SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," no later than the first quarter of 2000. SFAS No. 133
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, all derivatives will be recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair
value of derivatives will depend upon the intended use of the derivative. The
Company is currently studying this newly-issued accounting rule, and the impact
of adopting SFAS No. 133, if any, will be dependent upon the extent to which the
Company is then a party to derivative contracts or engaged in hedging
activities. At December 31, 1998, the Company is not a party to any derivative
contracts or engaged in any hedging activities covered by SFAS No. 133.
Note 17 - Quarterly results of operations (unaudited):
<PAGE>
<TABLE>
<CAPTION> Quarters ended
March 31 June 30 Sept. 30 Dec. 31
(In millions, except per share data)
~Year~ended~December~31,~1998
:~
<S> <C> <C> <C> <C>
Net sales $ 187.1 $ 190.8 $ 173.5 $ 156.3
Operating income 31.6 23.9 27.3 (.2)
Net income 18.3 13.8 16.1 (2.5)
Net income per share:
Basic $ .58 $ .44 $ .51 $ (0.8)
Diluted .56 .44 .50 *
~Year~ended~December~31,~1997
:~
Net sales $ 167.1 $ 181.4 $ 177.2 $ 207.9
Operating income 26.5 32.8 33.3 40.4
Net income 15.8 20.3 21.3 25.6
Net income per share:
Basic $ .50 $ .65 $ .68 $ .81
Diluted .49 .61 .64 .75
<FN>
* Antidilutive.
</TABLE>
<PAGE>
Due to the timing of the issuance and repurchase of common stock and
rounding in calculations, the sum of quarterly earnings per share may be
different than earnings per share for the full year.
Note 18 - Earnings per share:
A reconciliation of the numerator and denominator used in the calculation
of basic and diluted earnings per share is presented below. The Convertible
Preferred Securities were issued in November 1996. In 1998, the effect of the
assumed conversion of the Convertible Preferred Securities was antidilutive.
Stock options omitted from the calculation because they were antidilutive
approximated: 1.2 million in 1998 and were not material in 1996 and 1997.
<PAGE>
<TABLE>
<CAPTION> Years Ended December 31,
1996 1997 1998
<S> (in thousands)
Numerator: <C> <C> <C>
Net income $ 47,644 $ 83,010 $ 45,752
Minority interest -
Convertible
Preferred Securities 826 8,840 8,840
Diluted net income $ 48,470 $ 91,850 $ 54,592
Denominator:
Average common shares 27,623 31,457 31,435
outstanding
Convertible Preferred 491 5,389 5,389
Securities
Average dilutive stock options 28 109 22
Diluted shares 28,142 36,955 36,846
</TABLE>
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
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, rather than requiring plaintiffs to prove that the defendant's
product caused the alleged damage. While 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 imposition of market share liability could have such an effect. The Company
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<PAGE>
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 and have been inactive
since 1992, Hall v. HANO, et al. (No. 89-3552) and Allen V. HANO, et al. (No.
89-427) Civil District Court for the Parish of Orleans, State of Louisiana.
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. In May 1993 the Appellate Division of the Supreme Court affirmed the
denial of the motion to dismiss plaintiffs' fraud, restitution and
indemnification claims. In May 1994 the trial court granted the defendants'
motion to dismiss the plaintiffs' restitution and indemnification claims, 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. In December 1995 defendants moved for summary
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<PAGE>
judgment on the basis that the fraud claim was time-barred. In February 1996 the
motion was denied. In July 1997 the denial of defendants' two summary judgment
motions on the fraud claim were affirmed by the Appellate Division. In December
1998 plaintiffs moved for partial summary judgment on their claims of market
share, alternative liability, enterprise liability, and concert of action. In
February 1999 claims for plaintiffs New York City and New York City Health and
Hospital Corporation dismissed with prejudice all their claims and were no
longer parties to the case. Also in February 1999 the New York City Housing
Authority dismissed with prejudice all of its claims except for claims for
damages relating to two housing projects. Briefing on the December 1998 motion
and limited discovery are proceeding.
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 and briefing 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. In June 1998 defendants
moved for partial summary judgment dismissing plaintiffs' market share and
alternative liability claims. In January 1999 the trial court granted
defendants' summary judgment motion to dismiss the alternative liability and
enterprise liability claims, but denied defendants' motion to dismiss the market
share liability claim. Discovery is proceeding.
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 alleged class action lawsuit had originally been
brought against the City of New York and other landlord defendants. The
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<PAGE>
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. In May 1997 plaintiffs moved for class certification and defendants
moved for summary judgment. In June 1997 the Court stayed all further activity
in the case pending reconsideration of its 1995 decision permitting filing of
the complaint against the manufacturer defendants and joinder of the new
complaint with the pre-existing complaint against New York City and other
landlords. In November 1998 the court dismissed without prejudice all claims
against the Company and the other pigment manufacturer defendants, finding that
such claims were improperly joined.
In April 1997 the Company was served with a complaint in Parker v. NL
Industries, et al. (Circuit Court, Baltimore City, Maryland, No. 97085060
CC915). Plaintiff, now an adult, and his wife, seek compensatory and punitive
damages from the Company, another former manufacturer of lead paint and a local
paint retailer, based on claims of negligence, strict liability and fraud, for
plaintiff's alleged ingestion of lead paint as a child. In June 1997 the Company
answered the complaint denying liability. In February 1998 the Court dismissed
the fraud claim. In July 1998 the Court granted the Company's motion for summary
judgment on all remaining claims. Plaintiffs have appealed.
In December 1998 the Company was served with a complaint on behalf of four
children and their guardians in Sabater, et al. v. Lead Industries Association,
et al. (Supreme Court of the State of New York, County of Bronx, Index No.
25533/98). Plaintiffs purport to represent a class of all persons similarly
situated. The complaint alleges against the Company, a trade association, and
other former manufacturers of lead pigment various causes of action including
negligence, strict products liability, fraud and misrepresentation, concert of
action, civil conspiracy, enterprise liability, market share liability, breach
of warranties, nuisance, and violation of New York State's consumer protection
act. The complaint seeks damages for establishment of property abatement and
medical monitoring funds and compensatory damages for alleged injuries to
plaintiffs. Defendants filed motions to dismiss the nuisance and consumer
protection act claims in the complaint in March 1999.
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
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<PAGE>
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 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. In June 1997 the Company
reached a settlement in principle with its insurers regarding allocation of
defense costs in the lead pigment cases in which reimbursement of defense costs
had been sought.
Other than granting motions for summary judgment brought by two excess
liability insurance carriers, which contended that their policies contained
absolute pollution exclusion language, and certain summary judgment motions
regarding policy periods and ruling regarding choice of law issues, the Court
has not made any final rulings on defense costs or indemnity coverage with
respect to the Company's pending environmental litigation. Nor has the Court
made any final ruling on indemnity coverage in the lead pigment litigation. No
trial dates have been set. Other than 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.
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<PAGE>
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, and/or
damages for injury to natural resources. 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, 1998 the Company had accrued $126
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, cleanup, removal and
remediation. 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 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. Furthermore, there can
be no assurance that additional environmental matters will not arise in the
future. More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below.
In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against 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, Illinois lead smelter formerly owned by the
Company. 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
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<PAGE>
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. The Company presently is
challenging portions of the U.S. EPA's selection of the remedy. In September
1997 the U.S. EPA informed the Company that past and future cleanup costs are
estimated to total approximately $63.5 million. There is currently no allocation
among the PRPs for these costs. The Company has been informed that the U.S. EPA
has reached an agreement in principle with certain other PRPs settling their
liabilities with respect to the site for approximately 50% of the site costs.
The Company is negotiating with the U.S. EPA to settle its liability.
At the Pedricktown, New Jersey lead smelter site formerly owned by the
Company the U.S. EPA has 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. 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 $2.5 million,
which represents approximately 50% of operable unit two costs. In June 1998 the
Company entered into a consent decree with the U.S. EPA and other PRPs to
perform the remedial action phase of operable unit one. In addition, the Company
reached an agreement in principle with certain PRPs with respect to the
Company's liability at the site to settle this matter within previously-accrued
amounts.
Having completed the RIFS at the Company's former Portland, Oregon lead
smelter site, 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. In May 1997 the
U.S. EPA issued an Amended Record of Decision ("ARD") for the soils operable
unit
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<PAGE>
changing portions of the cleanup remedy selected. The ARD requires construction
of an onsite containment facility estimated to cost between $10.5 million and
$12 million, including capital costs and operating and maintenance costs. The
Company and certain other PRPs have entered into a consent decree to perform the
remedial action in the ARD. In November 1991 Gould, Inc., the current owner of
the site, filed an action, Gould, Inc. v. NL Industries, Inc., No. 91-1091,
United States District Court for the District of Oregon, against 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. In February 1998 the Company and the other
defendants reached an agreement settling the litigation by agreeing to pay a
portion of future costs, which are estimated to be within previously-accrued
amounts.
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. In August 1997 the U.S. EPA issued the record of
decision for the Baxter Springs and Treece subsites. The U.S. EPA has estimated
that the selected remedy will cost an aggregate of approximately $7.1 million
for both subsites ($5.4 million for the Baxter Springs subsite). The Company is
negotiating with the U.S. EPA to resolve its liability at the Baxter Springs
subsite. In addition, the Company received a notice in March 1998 from the U.S.
EPA that it may be a PRP in three additional subsites in Cherokee County.
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 August 1997 the trial court
dismissed the case. In June 1998 the Illinois appellate court affirmed. In
October 1998 the Supreme Court of Illinois declined the State's petition to
review the decisions in favor of the Company. 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.
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 and in September 1996 the Superior Court affirmed
the
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<PAGE>
judgment in favor of the Company. In December 1996 plaintiffs filed a petition
for allowance of appeal to the Pennsylvania Supreme Court, which was declined.
Residents also filed consolidated actions in the United States District Court
for the Eastern District of Pennsylvania, Shinozaki v. Anzon, Inc. and Wagner
and Antczak v. Anzon and NL Industries, Inc. Nos. 87-3441, 87-3502, 87-4137 and
87- 5150. The consolidated action is a putative class action seeking CERCLA
response costs, including cleanup and medical monitoring, declaratory and
injunctive relief and civil penalties for alleged violations of the 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.
At a municipal and industrial waste disposal site in Batavia, New York,
the Company and approximately 50 others have been identified as PRPs. The U.S.
EPA has divided the site into two operable units. Pursuant to an administrative
consent order entered into with the U.S. EPA, 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. The Company and the other PRPs have
completed the work comprising operable unit two (the extension of the municipal
water supply) with the exception of annual operation and maintenance. The U.S.
EPA also has claimed it has incurred approximately $2.4 million in past costs
from the PRPs. The Company and the other PRPs have submitted to a nonbinding
allocation process, as a result of which the Company was assigned a 30% share of
future site liability.
See Item 1. "Business - Regulatory and Environmental Matters."
Other litigation
The Company has been named as a defendant in various lawsuits in a variety
of jurisdictions alleging personal injuries as a result of occupational exposure
to asbestos, silica and/or mixed dust 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 has reached an agreement to settle this case.
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.
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Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive damages totaling $55.5 million. An agreement has been
reached settling this matter, with the Company being indemnified by another
party.
In March 1997 the Company was served with a complaint in Ernest Hughes, et
al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the
Fifth Judicial District Court of Cass County, Texas, on behalf of approximately
4,000 plaintiffs and their spouses alleging injury due to exposure to asbestos
and seeking compensatory and punitive damages. The Company has filed an answer
denying the material allegations. The case has been stayed, and the plaintiffs
have refiled their cases in Ohio. The Company is a defendant in various asbestos
cases pending in Ohio on behalf of approximately 8,800 personal injury
claimants. Plaintiffs have agreed to voluntarily dismiss the Company without
prejudice from approximately 7,500 of such claims.
In February 1999 the Company was served with a complaint in Cosey, et al.
v. Bullard, et al., No. 95-0069, filed in the Circuit Court of Jefferson County,
Mississippi, on behalf of approximately 1,600 plaintiffs alleging injury due to
exposure to asbestos and silica and seeking compensatory and punitive damages.
The Company intends to file an answer denying the material allegations of the
complaint.
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>
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
-------------------------------------------
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1998 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 1996, 1997 and 1998 F-5 / F-6
Consolidated Statements of Comprehensive Income - Years
ended December 31, 1996, 1997 and 1998 F-7
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1996, 1997 and 1998 F-8
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1997 and 1998 F-9 / F-11
Notes to Consolidated Financial Statements F-12 / F-45
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
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets of NL
Industries, Inc. and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows present fairly, in all
material respects, the consolidated financial position of NL Industries, Inc. at
December 31, 1997 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for environmental remediation costs in
1997 in accordance with Statement of Position No. 96-1.
PricewaterhouseCoopers LLP
Houston, Texas
February 10, 1999
F-2
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
1997 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 96,394 $ 154,953
Restricted cash equivalents .................... 9,751 8,164
Accounts and notes receivable, less
allowance of $2,828 and $2,377 ................ 148,676 133,769
Refundable income taxes ........................ 1,941 15,919
Inventories .................................... 192,780 228,611
Prepaid expenses ............................... 3,348 2,724
Deferred income taxes .......................... 1,642 1,955
---------- ----------
Total current assets ....................... 454,532 546,095
---------- ----------
Other assets:
Marketable securities .......................... 17,270 17,580
Investment in joint ventures ................... 172,721 171,202
Prepaid pension cost ........................... 23,848 23,990
Deferred income taxes .......................... 110 --
Other .......................................... 18,482 13,927
---------- ----------
Total other assets ......................... 232,431 226,699
---------- ----------
Property and equipment:
Land ........................................... 19,479 19,626
Buildings ...................................... 150,090 144,228
Machinery and equipment ........................ 616,309 586,400
Mining properties .............................. 88,617 84,015
Construction in progress ....................... 2,577 4,385
---------- ----------
877,072 838,654
Less accumulated depreciation and depletion .... 465,843 456,495
---------- ----------
Net property and equipment ................. 411,229 382,159
---------- ----------
$1,098,192 $1,154,953
========== ==========
</TABLE>
F-3
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1997 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1998
----------- -----------
<S> <C> <C>
Current liabilities:
Notes payable .................................. $ 13,968 $ 36,391
Current maturities of long-term debt ........... 77,374 64,826
Accounts payable and accrued liabilities ....... 161,730 187,661
Payable to affiliates .......................... 11,512 10,625
Income taxes ................................... 10,910 9,224
Deferred income taxes .......................... 891 1,236
----------- -----------
Total current liabilities .................. 276,385 309,963
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 666,779 292,803
Deferred income taxes .......................... 132,797 196,180
Accrued pension cost ........................... 44,389 44,649
Accrued postretirement benefits cost ........... 50,951 41,659
Other .......................................... 148,903 116,732
----------- -----------
Total noncurrent liabilities ............... 1,043,819 692,023
----------- -----------
Minority interest ................................ 257 633
----------- -----------
Shareholders' equity:
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 ..................... 759,281 774,288
Accumulated deficit ............................ (495,421) (133,379)
Accumulated other comprehensive income (loss):
Currency translation ......................... (133,810) (133,440)
Marketable securities ........................ 4,297 4,498
Pension liabilities .......................... -- (3,187)
Treasury stock, at cost (15,572 and 15,028
shares) ....................................... (364,971) (364,801)
----------- -----------
Total shareholders' equity (deficit) ....... (222,269) 152,334
----------- -----------
$ 1,098,192 $ 1,154,953
=========== ===========
</TABLE>
Commitments and contingencies (Notes 13 and 17)
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues and other income:
Net sales ............................. $ 851,179 $ 837,240 $ 894,724
Other, net ............................ 27,669 19,367 25,453
--------- --------- ---------
878,848 856,607 920,177
--------- --------- ---------
Costs and expenses:
Cost of sales ......................... 668,605 649,945 618,447
Selling, general and administrative ... 151,144 168,592 133,970
Interest .............................. 69,333 65,759 58,070
--------- --------- ---------
889,082 884,296 810,487
--------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority interest ........ (10,234) (27,689) 109,690
Income tax expense ...................... 1,496 2,244 19,788
--------- --------- ---------
Income (loss) from continuing
operations before minority
interest ........................... (11,730) (29,933) 89,902
Minority interest ....................... 5 (58) 40
--------- --------- ---------
Income (loss) from continuing
operations ......................... (11,735) (29,875) 89,862
Discontinued operations ................. 22,552 20,402 287,396
Extraordinary item - early retirement
of debt, net of tax benefit of $5,698 .. -- -- (10,580)
--------- --------- ---------
Net income (loss) ................... $ 10,817 $ (9,473) $ 366,678
========= ========= =========
</TABLE>
F-5
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
Continuing operations .......... $ (.23) $ (.58) $ 1.75
Discontinued operations ........ .44 .39 5.59
Extraordinary item ............. -- -- (.21)
---------- ---------- ----------
Net income (loss) ............ $ .21 $ (.19) $ 7.13
========== ========== ==========
Diluted earnings per share:
Continuing operations .......... $ (.23) $ (.58) $ 1.73
Discontinued operations ........ .44 .39 5.52
Extraordinary item ............. -- -- (.20)
---------- ---------- ----------
Net income (loss) ............ $ .21 $ (.19) $ 7.05
========== ========== ==========
Shares used in the calculation of
earnings per share:
Basic .......................... 51,103 51,152 51,460
Dilutive impact of stock options -- -- 540
---------- ---------- ----------
Diluted ........................ 51,103 51,152 52,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Net income (loss) ........................... $10,817 $ (9,473) $ 366,678
------- -------- ---------
Other comprehensive income (loss), net
of tax:
Marketable securities adjustment .......... 1,803 3,019 201
Minimum pension liabilities
adjustment ............................... 86 1,822 (3,187)
Currency translation adjustment ........... 8,305 (15,181) 370
------- -------- ---------
Other comprehensive income (loss) ....... 10,194 (10,340) (2,616)
------- -------- ---------
Comprehensive income (loss) ............... $21,011 $(19,813) $ 364,062
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive income (loss)
Additional ----------------------------------
Common paid-in Accumulated Currency Pension Marketable Treasury
stock capital deficit translation liabilities securities stock Total
------- ---------- ----------- ----------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ..... $8,355 $759,281 $(481,432) $(126,934) $(1,908) $ (525) $(366,258) $(209,421)
Net income ....................... -- -- 10,817 -- -- -- -- 10,817
Other comprehensive income, net
of tax .......................... -- -- -- 8,305 86 1,803 -- 10,194
Common dividends declared -
$.30 per share .................. -- -- (15,333) -- -- -- -- (15,333)
Treasury stock reissued .......... -- -- -- -- -- -- 262 262
------ -------- --------- --------- ------- ------- --------- ---------
Balance at December 31, 1996 ..... 8,355 759,281 (485,948) (118,629) (1,822) 1,278 (365,996) (203,481)
Net loss ......................... -- -- (9,473) -- -- -- -- (9,473)
Other comprehensive income (loss),
net of tax ...................... -- -- -- (15,181) 1,822 3,019 -- (10,340)
Treasury stock reissued .......... -- -- -- -- -- -- 1,025 1,025
------ -------- --------- --------- ------- ------- --------- ---------
Balance at December 31, 1997 ..... 8,355 759,281 (495,421) (133,810) -- 4,297 (364,971) (222,269)
Net income ....................... -- -- 366,678 -- -- -- -- 366,678
Other comprehensive income (loss),
net of tax ...................... -- -- -- 370 (3,187) 201 -- (2,616)
Common dividends declared - $.09
per share ....................... -- -- (4,636) -- -- -- -- (4,636)
Cash received upon settlement of
shareholder derivative lawsuit,
net of $3,198 in legal fees and
expenses ........................ -- 11,211 -- -- -- -- -- 11,211
Tax benefit of stock options
exercised ....................... -- 3,796 -- -- -- -- -- 3,796
Treasury stock reissued .......... -- -- -- -- -- -- 170 170
------ -------- --------- --------- ------- ------- --------- ---------
Balance at December 31, 1998 ..... $8,355 $774,288 $(133,379) $(133,440) $(3,187) $ 4,498 $(364,801) $ 152,334
====== ======== ========= ========= ======= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................... $ 10,817 $ (9,473) $ 366,678
Depreciation, depletion and
amortization .......................... 36,285 34,887 34,545
Noncash interest expense ............... 20,442 23,092 18,393
Deferred income taxes .................. 297 (5,627) 4,988
Minority interest ...................... 5 (58) 40
Net (gains) losses from:
Securities transactions .............. -- (2,657) --
Disposition of property and
equipment ........................... 2,236 (1,735) 768
Pension cost, net ...................... (8,018) (5,112) (5,566)
Other postretirement benefits, net ..... (4,962) (4,799) (6,299)
Change in accounting for environmental
remediation costs ..................... -- 30,000 --
Discontinued operations:
Net gain from sale of Rheox .......... -- -- (286,071)
Income from operations of Rheox ...... (22,552) (20,402) (1,325)
Extraordinary item ..................... -- -- 10,580
Other, net ............................. (67) -- 317
-------- --------- ---------
34,483 38,116 137,048
Rheox, net ............................. 20,705 31,506 (30,587)
Change in assets and liabilities:
Accounts and notes receivable ........ 3,083 (14,925) (2,012)
Inventories .......................... 7,192 22,872 (49,839)
Prepaid expenses ..................... (1,355) 96 436
Accounts payable and accrued
liabilities ......................... (1,949) 9,347 (2,741)
Income taxes ......................... (36,414) 12,978 (12,976)
Accounts with affiliates ............. 3,408 (3,915) 2,286
Other noncurrent assets .............. 236 (269) (178)
Other noncurrent liabilities ......... (12,851) (6,640) 3,650
-------- --------- ---------
Net cash provided by operating
activities ...................... 16,538 89,166 45,087
-------- --------- ---------
</TABLE>
F-9
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sale of Rheox ............ $ -- $ -- $ 435,080
Capital expenditures ................... (64,241) (28,220) (22,392)
Proceeds from disposition of
marketable securities ................. -- 6,875 6,875
Change in restricted cash
equivalents, net ...................... (791) 1,144 (2,638)
Investment in joint venture, net ....... 3,934 8,364 (372)
Proceeds from disposition of
property and equipment ................ 76 3,049 769
Rheox, net ............................. (7,376) (2,314) (26)
-------- --------- ---------
Net cash provided (used) by
investing activities .............. (68,398) (11,102) 417,296
-------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ........................... 97,503 -- 30,491
Principal payments ................... (32,362) (182,215) (315,892)
Deferred financing costs ............. -- (2,343) --
Settlement of shareholder derivative
lawsuit, net .......................... -- -- 11,211
Dividends paid ......................... (15,333) -- (4,636)
Rheox, net ............................. (23,492) 100,940 (117,500)
Other, net ............................. 249 1,023 168
-------- --------- ---------
Net cash provided (used) by
financing activities .............. 26,565 (82,595) (396,158)
-------- --------- ---------
Net change during the year from
operating, investing and
financing activities .............. $(25,295) $ (4,531) $ 66,225
======== ========= =========
</TABLE>
F-10
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities ......................... $ (25,295) $ (4,531) $ 66,225
Currency translation ................ (2,714) (2,295) (36)
Sale of Rheox ....................... -- -- (7,630)
--------- --------- ---------
(28,009) (6,826) 58,559
Balance at beginning of year .......... 131,229 103,220 96,394
--------- --------- ---------
Balance at end of year ................ $ 103,220 $ 96,394 $ 154,953
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 51,678 $ 55,908 $ 37,965
Income taxes ........................ 50,400 6,875 54,230
Noncash investing activities -
marketable securities exchanged
for a note receivable ................ $ -- $ 6,875 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations through its wholly-owned subsidiary, Kronos, Inc. In January 1998 the
specialty chemicals business of Rheox, Inc., a wholly-owned subsidiary of NL,
was sold. See Note 20.
At December 31, 1998 Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation, held approximately 58% and 20%, respectively, of NL's
outstanding common stock, and together they may be deemed to control NL. At
December 31, 1998 Contran and its subsidiaries held approximately 92% of Valhi's
outstanding common stock, and Valhi and other entities related to Harold C.
Simmons held approximately 53% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is the sole trustee, or by Mr. Simmons directly.
Mr. Simmons, the Chairman of the Board of NL and the Chairman of the Board 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. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. 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 are included in
other comprehensive income (loss), net of related deferred income taxes.
Currency transaction gains and losses are recognized in income currently.
F-12
<PAGE>
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
Restricted cash equivalents
At December 31, 1998 restricted cash equivalents of approximately $5
million collateralize undrawn letters of credit, and restricted cash equivalents
of approximately $7 million collateralize certain environmental remediation
obligations of the Company, of which $4 million has been classified as a
noncurrent asset. At December 31, 1997 restricted cash equivalents of
approximately $5 million collateralized undrawn letters of credit and cash
equivalents of approximately $5 million were restricted under an indebtedness
agreement, which was repaid in 1998.
Marketable securities and securities transactions
Marketable securities are classified as "available-for-sale" and are
carried at market based on quoted market prices. Unrealized gains and losses on
available-for-sale securities are included in other comprehensive income (loss),
net of related deferred income taxes. See Note 4. Gains and losses on
available-for-sale securities are recognized in income upon realization and 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
Investment in a 50%-owned joint venture is accounted for by the equity
method.
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-13
<PAGE>
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 was nil 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, 1997 and 1998 no receivables for recoveries
have been recognized.
The Company adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in 1997. The SOP, among other things, expands the types of costs which must be
considered in determining environmental remediation accruals. As a result of
adopting the SOP, the Company recognized a noncash cumulative charge of $30
million in 1997. The charge did not impact the Company's 1997 income tax expense
because the Company believes the resulting deferred income tax asset does not
currently satisfy the more-likely-than-not recognition criteria and,
accordingly, the Company established an offsetting valuation allowance. The $30
million noncash charge is comprised primarily of estimated future expenditures
associated with managing and monitoring existing environmental remediation
sites, and the expenditures have not been discounted to present value. The
expenditures consist principally of legal and professional fees, but exclude
litigation defense costs for matters in which the Company asserts that no
liability exists. Previously, all such expenditures were expensed as incurred.
Net sales
Sales are recognized as products are shipped.
F-14
<PAGE>
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
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" recognition
criteria.
Interest rate swaps and contracts
The Company periodically uses interest rate swaps and contracts (such as
caps and floors) to manage interest rate risk with respect to financial assets
or liabilities. The Company has not entered into these contracts for speculative
purposes in the past, nor does it currently anticipate doing so in the future.
Any cost associated with the swap or contract designated as a hedge of assets or
liabilities is deferred and amortized over the life of the agreement as an
adjustment to interest income or expense. If the swap or contract is terminated,
the resulting gain or loss is deferred and amortized over the remaining life of
the underlying asset or liability. If the hedged instrument is disposed of, the
swap or contract agreement is marked to market with any resulting gain or loss
included with the gain or loss from the disposition. The Company held no
derivative financial instruments at December 31, 1998.
Earnings per share
Basic earnings per share is based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted average common shares outstanding and the dilutive impact of
outstanding stock options. The weighted average number of shares resulting from
outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive aggregated
2,483,000, 2,709,000 and 1,942,000 in 1996, 1997 and 1998, respectively. There
were no adjustments to income (loss) from continuing operations or net income
(loss) in the computation of earnings per share.
New accounting principles not yet adopted
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
no later than the first quarter of 2000. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The Company is currently studying this
newly-issued accounting rule, and the impact of adopting SFAS No. 133, if any,
will be
F-15
<PAGE>
dependent upon the extent to which the Company is then a party to derivative
contracts or engaged in hedging activities.
Note 3 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating business
segment - TiO2. Titanium dioxide pigments are used to impart whiteness,
brightness and opacity to a wide variety of products, including paints,
plastics, paper, fibers and ceramics. Discontinued operations consists of the
Company's specialty chemicals business owned by Rheox which was sold in January
1998. See Note 20. At December 31, 1997 and 1998 the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $287 million and
$310 million, respectively.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain nonrecurring items and certain general corporate income and
expense items (including securities transactions gains and interest and dividend
income) which are not attributable to the operations of the reportable operating
segment. The accounting policies of the reportable operating segment are the
same as those described in Note 1. Interest income included in the calculation
of segment operating income is disclosed in Note 14.
Segment assets are comprised of all assets attributable to the reportable
operating segment. The Company's investment in the TiO2 manufacturing joint
venture (see Note 6) is included in TiO2 business segment assets. Corporate
assets are not attributable to the reportable operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents and
marketable securities. For geographic information, net sales are attributed to
the place of manufacture (point-of-origin) and the location of the customer
(point-of-destination); property and equipment are attributed to their physical
location.
F-16
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Business segment - TiO2
Net sales ............................. $ 851,179 $ 837,240 $ 894,724
Other income, excluding corporate ..... 18,388 12,339 6,110
--------- --------- ---------
869,567 849,579 900,834
Cost of sales ......................... 668,605 649,945 618,447
Selling, general and
administrative, excluding
corporate ............................ 129,356 117,133 111,206
--------- --------- ---------
Operating income .................... 71,606 82,501 171,181
General corporate income (expense):
Securities earnings, net ............ 4,708 5,393 14,921
Expenses, net ....................... (17,215) (49,824) (18,342)
Interest expense .................... (69,333) (65,759) (58,070)
--------- --------- ---------
$ (10,234) $ (27,689) $ 109,690
========= ========= =========
Capital expenditures:
Kronos .............................. $ 64,201 $ 28,193 $ 22,310
General corporate ................... 40 27 82
--------- --------- ---------
$ 64,241 $ 28,220 $ 22,392
========= ========= =========
Depreciation, depletion and
amortization:
Kronos .............................. $ 36,091 $ 34,684 $ 34,341
General corporate ................... 194 203 204
--------- --------- ---------
$ 36,285 $ 34,887 $ 34,545
========= ========= =========
Geographic areas
Net sales - point of origin:
Germany ............................. $ 424,861 $ 439,926 $ 451,061
United States ....................... 245,424 250,798 289,701
Canada .............................. 134,199 145,160 158,967
Belgium ............................. 133,708 122,784 159,558
Norway .............................. 109,947 96,448 91,112
Other ............................... 89,466 88,030 96,912
Eliminations ........................ (286,426) (305,906) (352,587)
--------- --------- ---------
$ 851,179 $ 837,240 $ 894,724
========= ========= =========
Net sales - point of destination:
Europe .............................. $ 471,948 $ 442,043 $ 493,942
United States ....................... 222,710 230,923 246,209
Canada .............................. 51,292 58,231 66,843
Latin America ....................... 41,140 43,078 35,281
Asia ................................ 43,842 41,328 21,042
Other ............................... 20,247 21,637 31,407
--------- --------- ---------
$ 851,179 $ 837,240 $ 894,724
========= ========= =========
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1997 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Identifiable assets
Net property and equipment:
Germany ....................... $ 238,372 $ 213,762 $ 223,605
Canada ........................ 73,616 67,247 60,574
Belgium ....................... 62,615 50,783 51,683
Norway ........................ 55,367 44,841 42,336
Other ......................... 4,640 4,289 3,961
Discontinued operations ....... 31,436 30,307 --
---------- ---------- ----------
$ 466,046 $ 411,229 $ 382,159
========== ========== ==========
Total assets:
Kronos ........................ $1,064,285 $ 961,635 $ 997,893
General corporate ............. 66,978 47,922 157,060
Discontinued operations ....... 90,095 88,635 --
---------- ---------- ----------
$1,221,358 $1,098,192 $1,154,953
========== ========== ==========
</TABLE>
Note 4 - Marketable securities and securities transactions:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 6,939 $ 8,512
Unrealized losses ................................ (328) (1,591)
Cost ............................................. 10,659 10,659
-------- --------
Aggregate market ............................. $ 17,270 $ 17,580
======== ========
</TABLE>
In 1997 securities transactions gains of $2.7 million were realized on
sales of available-for-sale securities.
Note 5 - Inventories:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Raw materials ............................ $ 45,844 $ 46,114
Work in process .......................... 8,018 11,530
Finished products ........................ 107,427 136,225
Supplies ................................. 31,491 34,742
-------- --------
$192,780 $228,611
======== ========
</TABLE>
F-18
<PAGE>
Note 6 - Investment in joint ventures:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
TiO2 manufacturing joint venture ............... $170,830 $171,202
Other .......................................... 1,891 --
-------- --------
$172,721 $171,202
======== ========
</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.
("Tioxide"), a wholly-owned subsidiary of Imperial Chemicals Industries plc
("ICI"). LPC owns and operates a chloride-process TiO2 plant in Lake Charles,
Louisiana.
LPC had two tranches of long-term debt, one of which was guaranteed by
KLA. LPC prepaid the KLA tranche in 1998 with cash provided by the Company.
KLA's tranche of LPC's debt was reflected as outstanding indebtedness of the
Company because Kronos had guaranteed the purchase obligation relative to the
debt service of its tranche. See Note 10.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC is
intended to be operated on a break-even basis and, accordingly, Kronos' cost 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, if any, is reported as a component of interest expense.
Summary balance sheets of LPC are shown below.
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
(In thousands)
ASSETS
<S> <C> <C>
Current assets ..................................... $ 41,602 $ 60,686
Other assets ....................................... 764 --
Property and equipment, net ........................ 309,989 294,906
-------- --------
$352,355 $355,592
======== ========
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche ................................... $ 42,429 $ --
Tioxide tranche .................................. 7,200 --
Note payable to Tioxide .......................... 9,000 --
Other liabilities, primarily current ............... 8,466 10,960
-------- --------
67,095 10,960
Partners' equity ................................... 285,260 344,632
-------- --------
$352,355 $355,592
======== ========
</TABLE>
F-19
<PAGE>
Summary income statements of LPC are shown below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenues and other income:
Kronos ............................. $ 74,916 $ 82,171 $ 90,392
Tioxide ............................ 73,774 80,512 89,879
Interest income .................... 518 636 753
-------- -------- --------
149,208 163,319 181,024
-------- -------- --------
Cost and expenses:
Cost of sales ...................... 140,361 156,811 178,803
General and administrative ......... 377 355 348
Interest ........................... 8,470 6,153 1,873
-------- -------- --------
149,208 163,319 181,024
-------- -------- --------
Net income ....................... $ -- $ -- $ --
======== ======== ========
</TABLE>
Note 7 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Deferred financing costs, net ...................... $ 9,973 $ 4,124
Restricted cash equivalents ........................ -- 4,225
Intangible assets, net of accumulated
amortization of $22,366 and $23,704 ............... 4,228 1,985
Other .............................................. 4,281 3,593
------- -------
$18,482 $13,927
======= =======
</TABLE>
Note 8 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Accounts payable ......................... $ 64,698 $ 55,270
-------- --------
Accrued liabilities:
Employee benefits ...................... 40,110 37,399
Environmental costs .................... 9,000 44,122
Interest ............................... 6,966 7,346
Other .................................. 40,956 43,524
-------- --------
97,032 132,391
-------- --------
$161,730 $187,661
======== ========
</TABLE>
F-20
<PAGE>
Note 9 - Other noncurrent liabilities:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Environmental costs ........................ $125,502 $ 81,454
Insurance claims expense ................... 11,436 10,872
Employee benefits .......................... 10,835 9,778
Deferred income ............................ -- 12,333
Other ...................................... 1,130 2,295
-------- --------
$148,903 $116,732
======== ========
</TABLE>
Note 10 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Notes payable (DM 25,000 and DM 60,500,
respectively) ..................................... $ 13,968 $ 36,391
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $244,000
13% Senior Secured Discount Notes .............. 169,857 --
-------- --------
419,857 244,000
-------- --------
Kronos:
DM bank credit facility (DM 288,322 and
DM 187,322, respectively) ..................... 161,085 112,674
LPC term loan .................................. 42,429 --
Other .......................................... 3,282 955
-------- --------
206,796 113,629
-------- --------
Rheox - bank term loan ........................... 117,500 --
-------- --------
744,153 357,629
Less current maturities .......................... 77,374 64,826
-------- --------
$666,779 $292,803
======== ========
</TABLE>
The Company's $244 million of 11.75% Senior Secured Notes due 2003 (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 Notes are also collateralized by a first priority lien
on the stock of Kronos and a second priority lien on the stock of another
wholly-owned subsidiary of the Company.
In the event of foreclosure, the holders of the Notes would have access to
the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
F-21
<PAGE>
functional economic equivalent of a full, unconditional and joint and several
guarantee of the Notes by Kronos and the other subsidiary, whose net assets
amount to $308 million at December 31, 1998.
The Notes are redeemable, at the Company's option, starting in October
2000 at a redemption price of 101.5% of the principal amount and declining to
100% after October 2001. In the event of a Change of Control as defined in the
indenture, the Company would be required to make an offer to purchase the Notes
at 101% of the principal amount of the Notes. The Notes are issued pursuant to
an indenture which contains 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, 1998 $47 million was available for payment of dividends pursuant to
the terms of the indenture. The quoted market price of the Senior Secured Notes
per $100 principal amount was $111.17 and $103.73 at December 31, 1997 and 1998,
respectively.
At December 31, 1998 the DM credit facility consisted of a DM 107 million
term loan and a DM 230 million revolving credit facility, of which DM 80 million
was outstanding. Borrowings bear interest at DM LIBOR plus 2.75% (6.28% and
6.00% at December 31, 1997 and 1998, respectively), and are collateralized by
the stock of certain KII subsidiaries, pledges of certain Canadian and German
assets, and NL has guaranteed the facility. The term loan has scheduled payments
of DM 38 million ($23 million at December 31, 1998) due in March 1999 and DM 69
million ($41 million at December 31, 1998) due in September 1999. In accordance
with the provisions of the DM credit agreement and as a result of the level of
operating income in 1998 for KII, the Company prepaid the term loan in full in
March 1999, principally by drawing on its DM revolving credit facility. The
revolver's balance is scheduled to be reduced to DM 105 million in March 2000,
with the remaining balance to be repaid in September 2000.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities, including the DM facility, approximated $104 million
at December 31, 1998.
Notes payable at December 31, 1997 and 1998 consists of DM 25 million and
DM 61 million, respectively, of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 3.75% to 3.875% at December 31,
1997 and from 3.75% to 4.60% at December 31, 1998.
The Company used a portion of the net proceeds from the January 1998 sale
of Rheox's net assets to (i) prepay $118 million of the Rheox term loan, (ii)
prepay $42 million of Kronos' tranche of the LPC joint venture term loan, (iii)
make $65 million of open-market purchases of the Company's 13% Senior Secured
Discount Notes at prices ranging from $101.25 to $105.19 per $100 of their
principal amounts, (iv) purchase $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively, pursuant to a June 1998 pro rata
tender offer to Note holders as required by the indentures, and (v) redeem the
remaining 13% Senior Secured Discount Notes on October 15, 1998 at the
redemption
F-22
<PAGE>
price of 106% of the principal amount, in accordance with the terms of the
indenture.
The aggregate maturities of long-term debt at December 31, 1998 are shown
in the table below.
<TABLE>
<CAPTION>
Years ending December 31, Amount
- ------------------------- --------------
(In thousands)
<S> <C>
1999 $ 64,826
2000 48,406
2001 199
2002 198
2003 244,000
--------
$357,629
========
</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 contributes to each employee's account an amount equal
to approximately 3% of the employee's annual eligible earnings and partially
matches employee contributions to the Plan. The Company also has an unfunded,
nonqualified defined contribution plan covering certain executives, and
contributions are based on a formula involving eligible earnings. The Company's
expense related to these plans included in continuing operations was $.8 million
in 1996, $.7 million in 1997 and $.8 million in 1998. Expense related to these
plans included in discontinued operations was $.5 million in each of 1996 and
1997 and nil in 1998.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1996 1997 1998
---- ---- ----
(Percentages)
<S> <C> <C> <C>
Discount rate ..................... 6.5 to 8.5 6.0 to 8.5 5.5 to 8.5
Rate of increase in future
compensation levels .............. 3.5 to 6.0 3.0 to 6.0 2.5 to 6.0
Long-term rate of return on
plan assets ...................... 7.0 to 9.0 6.0 to 9.0 6.0 to 9.0
</TABLE>
During 1996 and 1998 the Company curtailed certain U.S. employee pension
benefits and recognized gains of $4.6 million and $1.5 million, respectively, of
which $2.7 million and $1.5 million, respectively, are included in discontinued
F-23
<PAGE>
operations. 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.
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.
The components of the net periodic defined benefit pension cost, excluding
curtailment gain and discontinued operations, are set forth below. The net
periodic defined benefit pension cost included in discontinued operations was
$.3 million in 1996 and nil in each of 1997 and 1998.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net periodic pension cost:
Service cost benefits .................... $ 3,131 $ 4,067 $ 3,835
Interest cost on projected benefit
obligation ("PBO") ...................... 15,439 15,335 15,669
Expected return on plan assets ........... (15,079) (13,271) (15,172)
Amortization of prior service cost ....... 415 344 332
Amortization of net transition
obligation .............................. 319 255 173
Recognized actuarial losses (gains) ...... (719) (2,653) 385
-------- -------- --------
$ 3,506 $ 4,077 $ 5,222
======== ======== ========
</TABLE>
The funded status of the Company's defined benefit pension plans is set
forth below.
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
--------- ---------
(In thousands)
<S> <C> <C>
Change in PBO:
Beginning of year .......................... $ 263,244 $ 251,372
Service cost ............................... 4,067 3,835
Interest ................................... 15,335 15,669
Participant contributions .................. 1,276 1,228
Plan amendments ............................ 161 --
Actuarial losses ........................... 4,035 30,768
Curtailment gain ........................... -- (1,513)
Discontinued operations:
Service cost ............................. 207 --
Interest cost on PBO ..................... 1,129 --
Benefits paid .............................. (11,811) (15,748)
Change in currency exchange rates .......... (26,271) 10,402
--------- ---------
End of year .............................. 251,372 296,013
--------- ---------
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
--------- ---------
(In thousands)
<S> <C> <C>
Change in fair value of plan assets:
Beginning of year .............................. $ 205,091 $ 199,371
Actual return on plan assets ................... 18,327 20,951
Employer contributions ......................... 9,691 10,788
Participant contributions ...................... 1,276 1,228
Benefits paid .................................. (11,811) (15,748)
Change in currency exchange rates .............. (23,203) 4,445
--------- ---------
End of year .................................. 199,371 221,035
--------- ---------
Funded status at year end:
Plan assets less than PBO ...................... (52,001) (74,978)
Unrecognized actuarial loss .................... 18,153 44,945
Unrecognized prior service cost ................ 4,198 3,341
Unrecognized net transition obligation ......... 1,003 1,215
--------- ---------
$ (28,647) $ (25,477)
========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost ........................... $ 23,848 $ 23,990
Accrued pension cost:
Current ...................................... (8,106) (8,005)
Noncurrent ................................... (44,389) (44,649)
Accumulated other comprehensive income ......... -- 3,187
--------- ---------
$ (28,647) $ (25,477)
========= =========
</TABLE>
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 1998, 83% of the projected benefit
obligations of such plans relate to non-U.S. plans (1997 - 77%).
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Projected benefit obligation ................. $188,724 $231,860
Accumulated benefit obligation ............... 165,998 200,269
Fair value of plan assets .................... 125,925 148,682
</TABLE>
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 in relation to the annual
operating plan and, for most of these employees, individual performance.
F-25
<PAGE>
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 and
employees retiring after 1998 will not be entitled to any such benefits. 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, 1998, the expected rate
of increase in health care costs is 6% in 1999 and 5% in 2000 and years
thereafter. Other weighted average assumptions used to measure the liability and
expense are presented below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1997 1998
---- ---- ----
(Percentages)
<S> <C> <C> <C>
Discount rate ....................................... 7.5 7.0 6.5
Long-term rate for compensation increases ........... 6.0 6.0 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 (decreased) by one percentage point for each year, postretirement
benefit expense would have increased approximately $.1 million (decreased by $.1
million) in 1998, and the projected benefit obligation at December 31, 1998
would have increased by approximately $.9 million (decreased by $.8 million).
During 1996 the Company curtailed certain Canadian employee OPEB benefits and
recognized a $1.3 million gain. During 1998, as a result of the sale of Rheox,
the Company settled certain U.S. employee OPEB benefits and recognized a $3.2
million gain, all of which is included in discontinued operations.
The components of the Company's net periodic postretirement benefit cost,
excluding curtailment and settlement gains and discontinued operations, are set
forth below. The net periodic postretirement benefit costs included in
discontinued operations excluding the settlement gain was $.3 million in 1996,
$.2 million in 1997 and nil in 1998.
F-26
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net periodic OPEB cost:
Service cost benefits .................... $ 52 $ 39 $ 43
Interest cost on PBO ..................... 3,777 2,972 2,393
Expected return on plan assets ........... (596) (584) (583)
Amortization of prior service cost ....... (2,075) (2,075) (2,075)
Recognized actuarial losses (gains) ...... 615 (305) (811)
------- ------- -------
$ 1,773 $ 47 $(1,033)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Change in PBO:
Beginning of year .............................. $ 44,760 $ 36,994
Service cost ................................... 39 43
Interest cost .................................. 2,972 2,393
Actuarial losses (gains) ....................... (5,696) 2,117
Discontinued operations:
Service cost ................................. 66 --
Interest cost on PBO ......................... 194 --
Settlement gain .............................. -- (2,354)
Benefits paid from:
Company funds ................................ (4,183) (4,179)
Plan assets .................................. (1,087) (1,087)
Change in currency exchange rates .............. (71) (115)
-------- --------
End of year ................................ 36,994 33,812
-------- --------
Change in fair value of plan assets:
Beginning of year .............................. 6,689 6,527
Actual return on plan assets ................... 450 450
Employer contributions ......................... 475 475
Benefits paid .................................. (1,087) (1,087)
-------- --------
End of year ................................ 6,527 6,365
-------- --------
Funded status at year end:
Plan assets less than PBO ...................... (30,467) (27,447)
Unrecognized actuarial loss .................... (11,722) (7,447)
Unrecognized prior service cost ................ (14,171) (12,008)
-------- --------
$(56,360) $(46,902)
======== ========
Amounts recognized in the balance sheet:
Current ........................................ $ (5,409) $ (5,243)
Noncurrent ..................................... (50,951) (41,659)
-------- --------
$(56,360) $(46,902)
======== ========
</TABLE>
F-27
<PAGE>
Note 12 - Shareholders' equity:
Common stock
<TABLE>
<CAPTION>
Shares of common stock
------------------------------------
Treasury
Issued stock Outstanding
------ -------- -----------
(In thousands)
<S> <C> <C> <C>
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
Treasury shares reissued ......... -- (149) 149
------ ------ ------
Balance at December 31, 1997 ....... 66,839 15,572 51,267
Treasury shares reissued ......... -- (544) 544
------ ------ ------
Balance at December 31, 1998 ....... 66,839 15,028 51,811
====== ====== ======
</TABLE>
The Company reinstated a regular quarterly dividend in June 1998 and
subsequently paid three quarterly $.03 per share cash dividends in 1998. On
February 10, 1999, the Company's Board of Directors increased the regular
quarterly dividend to $.035 per share and declared a dividend to shareholders of
record as of March 17, 1999 to be paid on March 31, 1999.
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan (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, 1998, 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, 1998, 4,990,000 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 had a stock option plan for
its nonemployee directors that expired in 1998. At December 31, 1998 there were
options to acquire 8,000 shares of common stock outstanding under this plan, all
of which were fully vested. Future grants to directors are expected to be
granted from the NL Option Plan.
F-28
<PAGE>
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.
<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, 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
----- --------- --------- --------
Granted ...................... 442 11.88 14.88 5,792
Exercised .................... (149) 4.81 11.81 (1,025)
Forfeited .................... (21) 5.00 22.29 (284)
----- --------- --------- --------
Outstanding at December 31, 1997 2,845 4.81 24.19 34,761
Granted ...................... 474 17.97 21.97 9,334
Exercised .................... (960) 4.81 17.25 (8,740)
Forfeited .................... (240) 5.00 19.97 (4,336)
----- --------- --------- --------
Outstanding at December 31, 1998 2,119 $ 5.00 $ 24.19 $ 31,019
===== ========= ========= ========
</TABLE>
At December 31, 1996, 1997 and 1998 options to purchase 1,660,068,
1,801,955 and 957,861 shares, respectively, were exercisable and options to
purchase 358,220 shares become exercisable in 1999. Of the exercisable options
at December 31, 1998, options to purchase 641,621 shares had exercise prices
less than the Company's December 31, 1998 quoted market price of $14.19 per
share. Outstanding options at December 31, 1998 expire at various dates through
2008, 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 subsequent to January 1, 1995. The weighted-average fair values
of options granted during 1996, 1997 and 1998 were $8.38, $6.35 and $9.78 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 1996, 1997 and 1998: stock price volatility of
42%, 37% and 51% in 1996, 1997 and 1998, respectively; risk-free rate of return
of 5% in 1996 and 1997 and 4% in 1998; no dividend yield in 1996 and 1997, and a
dividend yield of .9% in 1998; and an expected term of 10 years in 1996, 9 years
in 1997 and 8 years in 1998. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
F-29
<PAGE>
The Company's pro forma net income (loss) and basic net income (loss) per
common share were as follows. The pro forma impact on earnings per common share
for 1996, 1997 and 1998 is not necessarily indicative of future effects on
earnings per share.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1997 1998
----------- ----------- -----------
(In thousands except per share amounts)
<S> <C> <C> <C>
Net income (loss)- as reported ........ $ 10,817 $ (9,473) $ 366,678
Net income (loss)- pro forma .......... $ 10,085 $ (11,057) $ 363,843
Net income (loss) per basic common
share - as reported .................. $ .21 $ (.19) $ 7.13
Net income (loss) per basic common
share - pro forma .................... $ .20 $ (.22) $ 7.07
</TABLE>
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.
Note 13 - Income taxes:
The components of (i) income (loss) from continuing operations 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,
----------------------------------
1996 1997 1998
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Pretax income (loss):
U.S .................................... $ 20,481 $ (9,308) $ 57,638
Non-U.S ................................ (30,715) (18,381) 52,052
-------- --------- ---------
$(10,234) $ (27,689) $ 109,690
======== ========= =========
Expected tax expense (benefit) ........... $ (3,581) $ (9,692) $ 38,391
Non-U.S. tax rates ....................... (6) (784) 339
German solidarity income taxes ........... -- 3,597 2,168
Valuation allowance ...................... 3,013 5,107 (19,143)
Incremental tax on income of companies
not included in the NL Tax Group ........ 3,423 3,886 4,277
Refund of prior-year German dividend
withholding taxes ....................... -- -- (8,219)
U.S. state income taxes .................. (569) 231 307
Other, net ............................... (784) (101) 1,668
-------- --------- ---------
$ 1,496 $ 2,244 $ 19,788
======== ========= =========
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................... $ (3,539) $ (6,881) $ 850
U.S. state ............................. (460) 681 307
Non-U.S ................................ 5,198 14,071 13,643
-------- -------- --------
1,199 7,871 14,800
-------- -------- --------
Deferred income tax expense (benefit):
U.S. federal ........................... (6,493) 1,224 2,112
U.S. state ............................. (668) (450) --
Non-U.S ................................ 7,458 (6,401) 2,876
-------- -------- --------
297 (5,627) 4,988
-------- -------- --------
$ 1,496 $ 2,244 $ 19,788
======== ======== ========
Comprehensive provision (benefit) for
income taxes allocable to:
Pretax income (loss) ..................... $ 1,496 $ 2,244 $ 19,788
Discontinued operations .................. 13,337 12,475 87,000
Extraordinary item ....................... -- -- (5,698)
Additional paid-in capital ............... -- -- (3,796)
Other comprehensive income:
Marketable securities .................. 971 1,626 108
Currency translation ................... (642) 410 --
-------- -------- --------
$ 15,162 $ 16,755 $ 97,402
======== ======== ========
</TABLE>
F-31
<PAGE>
The components of the net deferred tax liability are summarized below:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1997 1998
---- ----
Deferred tax Deferred tax
------------------------ ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- ------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Tax effect of temporary
differences relating to:
Inventories .............. $ 4,223 $ (2,674) $ 3,359 $ (3,858)
Property and equipment ... -- (105,806) -- (110,189)
Accrued postretirement
benefits cost ........... 19,682 -- 16,434 --
Accrued (prepaid)
pension cost ............ 5,296 (16,697) 5,341 (18,921)
Accrued environmental
costs ................... 45,242 -- 42,666 --
Noncompete agreement ..... -- -- 5,717 --
Other accrued
liabilities and
deductible
differences ............. 42,393 -- 17,094 --
Other taxable
differences ............. -- (85,139) -- (135,487)
Tax on unremitted
earnings of
non-U.S. subsidiaries ..... -- (17,551) -- (21,351)
Tax loss and tax credit
carryforwards ............. 167,680 -- 138,211 --
Valuation allowance ........ (188,585) -- (134,477) --
--------- --------- --------- ---------
Gross deferred tax
assets (liabilities) .... 95,931 (227,867) 94,345 (289,806)
Reclassification,
principally netting by
tax jurisdiction .......... (94,179) 94,179 (92,390) 92,390
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) .... 1,752 (133,688) 1,955 (197,416)
Net current deferred
tax assets
(liabilities) ........... 1,642 (891) 1,955 (1,236)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets
(liabilities) ........... $ 110 $(132,797) $ -- $(196,180)
========= ========= ========= =========
</TABLE>
F-32
<PAGE>
Changes in the Company's deferred income tax valuation allowance during
the past three years are summarized below. The decrease in deductible temporary
differences in 1998 includes items that have been reported as discontinued
operations.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at the beginning of year ........ $ 195,569 $ 207,117 $ 188,585
Recognition of certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria ................. (10,766) (11,106) (64,274)
Increase in certain deductible
temporary differences which the
Company believes do not meet the
"more-likely-than-not" recognition
criteria ............................. 13,779 16,213 6,964
Offset to the change in gross deferred
income tax assets due to dual
residency status of a Company
subsidiary and redetermination of
certain U.S. tax attributes .......... 14,472 (11,300) (3,734)
Foreign currency translation .......... (5,937) (12,339) 6,936
--------- --------- ---------
Balance at the end of year .............. $ 207,117 $ 188,585 $ 134,477
========= ========= =========
</TABLE>
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including non-income tax related items and interest.
The Company previously reached an agreement with the German tax authorities and
paid certain tax deficiencies of approximately DM 44 million ($28 million when
paid), including interest, which resolved significant tax contingencies for
years through 1990. In the third quarter of 1998, the Company received a DM 14
million ($8.2 million when received) refund of 1990 German dividend withholding
taxes. The German tax authorities were required to refund such amounts based on
a 1998 German Supreme Court decision in favor of another taxpayer. The refund
resulted in a reduction of the settlement amount from DM 44 million referred to
above to DM 30 million for years through 1990. No further withholding tax
refunds are expected.
Certain other significant German tax contingencies aggregating an
estimated DM 172 million ($103 million at December 31, 1998) through 1997 remain
outstanding and are in litigation. Of these, one primary issue represents
disputed amounts aggregating DM 160 million ($96 million at December 31, 1998)
for years through 1997. The Company has received tax assessments for a
substantial portion of these amounts. No payments of tax or interest
deficiencies related to these assessments are expected until the litigation is
resolved. During 1997 a German tax court proceeding involving a tax issue
substantially the same as this issue was decided in favor of the taxpayer. The
German tax authorities appealed that decision to the German Supreme Court which
in February 1999 rendered its judgment in favor of the taxpayer. The Company
F-33
<PAGE>
believes that the German Supreme Court's judgment should determine the outcome
of the Company's primary dispute with the German tax authorities. Based on this
recent favorable judgment, the Company will request that the tax assessments be
withdrawn. The Company has granted a DM 94 million ($57 million at December 31,
1998) lien on its Nordenham, Germany TiO2 plant in favor of the City of
Leverkusen related to this tax contingency, and a DM 5 million ($3 million at
December 31, 1998) lien in favor of the German federal tax authorities for other
tax contingencies. If the German tax authorities withdraw their assessments
based on the German Supreme Court's decision, the Company expects to request the
release of the DM 94 million lien in favor of the City of Leverkusen.
In addition, during 1997 the Company reached an agreement with the German
tax authorities regarding certain other issues not in litigation for the years
1991 through 1994, and agreed to pay additional tax deficiencies of DM 9 million
($5 million at December 31, 1998), most of which was paid in the third quarter
of 1998.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1998) relating to 1994. The Company has appealed this assessment and has
begun litigation proceedings. During 1998 the Company was informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at December 31, 1998) will likely be proposed for the year 1996. The
Company intends to vigorously contest this issue and litigate, if necessary.
Although the Company believes that it will ultimately prevail, the Company has
granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant
in favor of the Norwegian tax authorities and will be required to grant security
on the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
The Company utilized foreign tax credit carryforwards of $2 million in
1996 and $17 million in 1997, and utilized U.S. net operating loss carryforwards
of $20 million in 1997 to reduce U.S. federal income tax expense. In 1998 the
Company utilized $13 million of alternative minimum tax credit carryforwards
(the benefit of which was recognized in discontinued operations) to reduce U.S.
federal income tax expense and $6 million of foreign tax credit carryovers
expired unutilized. At December 31, 1998 for U.S. federal income tax purposes,
the Company has approximately $2 million of unutilized foreign tax credit
carryforwards which expire in 1999. The Company also has approximately $360
million of income tax loss carryforwards in Germany with no expiration date.
F-34
<PAGE>
Note 14 - Other income, net:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1997 1998
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
Securities earnings:
Interest and dividends .................. $ 4,708 $ 2,736 $ 14,921
Securities transactions ................. -- 2,657 --
-------- ------- --------
4,708 5,393 14,921
Currency transaction gains, net ........... 5,890 5,919 4,157
Noncompete agreement income ............... -- -- 3,667
Trade interest income ..................... 1,613 2,983 2,115
Disposition of property and equipment ..... (2,236) 1,735 (768)
Technology fee income ..................... 8,743 -- --
Pension and OPEB curtailment gains ........ 3,240 -- --
Litigation settlement gains ............... 2,756 -- --
Other, net ................................ 2,955 3,337 1,361
-------- ------- --------
$ 27,669 $19,367 $ 25,453
======== ======= ========
</TABLE>
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company is amortizing the fee to income
using the straight-line method over the five-year noncompete period beginning
January 30, 1998. Technology fee income was amortized by the straight-line
method over a three-year period ending October 1996.
Note 15 - Other items:
Advertising costs included in continuing operations, expensed as incurred,
were $1 million in each of 1996, 1997 and 1998.
Research, development and certain sales technical support costs included
in continuing operations is expensed as incurred and approximated $8 million in
1996 and $7 million in each of 1997 and 1998.
Interest capitalized related to continuing operations in connection with
long-term capital projects was $2 million in each of 1996 and 1997 and $1
million in 1998.
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)
F-35
<PAGE>
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
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 1996, $.5 million in 1997 and $1.0 million in
1998.
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 (income) related to the Valhi ISA was $.1
million in 1996, $(.1) million in 1997 and nil in 1998.
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 $.1 million in 1996, $.2
million in 1997 and $.1 million in 1998.
The Company is party to an intercorporate services agreement (the "Timet
ISA") with Titanium Metals Corporation ("Timet"), approximately 39% of the
outstanding common stock of which is currently held by Tremont. Under the terms
of the contract, the Company provides certain management and financial services
to Timet on a fee basis. Management services fee income related to the Timet ISA
was $.3 million in each of 1997 and 1998.
The Company is party to an intercorporate services agreement (the "CompX
ISA") with CompX International, Inc. ("CompX"). Under the terms of the contract,
the Company provides certain management and administrative services to CompX on
a fee basis. Management services fee income related to the CompX ISA was $.1
million in 1998.
Purchases of TiO2 from LPC were $69.8 million in 1996, $78.1 million in
1997 and $89.0 million in 1998.
An employee of the Company has been granted options to purchase Valhi
common stock under the terms of Valhi's stock option plans. Prior to March 1998,
F-36
<PAGE>
the Company paid 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 of
$1,000 in 1996, $68,000 in 1997 and nil in 1998 in a manner similar to
accounting for SARs. Subsequent to March 1998, the Company no longer will pay
Valhi upon the exercise of such options.
The Company and NL Insurance, Ltd. of Vermont ("NLIV"), a wholly-owned
subsidiary of Tremont, are parties to an Insurance Sharing Agreement ("ISA")
with respect to certain loss payments and reserves established by NLIV that (i)
arise out of claims against other entities for which the Company is responsible
and (ii) are subject to payment by NLIV under certain reinsurance contracts.
Also, NLIV will credit the Company with respect to certain underwriting profits
or credit recoveries that NLIV receives from independent reinsurers that relate
to retained liabilities. In the first quarter of 1999 the Company collateralized
letters of credit issued and outstanding on behalf of NLIV pursuant to the ISA
with $9.7 million of the Company's cash, and expects to classify such amount as
current restricted cash equivalents in the first quarter of 1999.
EWI RE, Inc. ("EWI") arranges for and brokers certain of the Company's
insurance policies and those of the Company's 50%-owned joint venture. Parties
related to Contran own 90% of the outstanding common stock of EWI, and a
son-in-law of Harold C. Simmons manages the operations of EWI. Consistent with
insurance industry practices, EWI receives a commission from the insurance
underwriters for the policies that it arranges or brokers. The Company and its
joint venture paid an aggregate of approximately $3.0 million for such policies
in 1998, which amount principally included payments for reinsurance premiums
paid to third parties, but also included commissions paid to EWI.
Net amounts payable to affiliates are summarized in the following table.
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998
-------- --------
(In thousands)
<S> <C> <C>
Tremont Corporation .................... $ 3,354 $ 3,053
LPC .................................... 8,513 8,264
Other, net ............................. (355) (692)
-------- --------
$ 11,512 $ 10,625
======== ========
</TABLE>
Amounts payable to LPC are generally for the purchase of TiO2 (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,
F-37
<PAGE>
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 TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreements restrict the Company's ability to transfer ownership or use of the
Leverkusen facility.
Net rent expense included in continuing operations aggregated $8 million
in 1996, $7 million in 1997 and $6 million in 1998. At December 31, 1998 minimum
rental commitments under the terms of noncancellable operating leases, excluding
discontinued operations, were as follows:
<TABLE>
<CAPTION>
Years ending December 31, Real Estate Equipment
- ------------------------- ----------- ---------
(In thousands)
<S> <C> <C>
1999 $ 2,151 $1,130
2000 1,135 722
2001 1,093 300
2002 1,093 105
2003 916 32
2004 and thereafter 19,996 5
------- ------
$26,384 $2,294
======= ======
</TABLE>
Capital expenditures
At December 31, 1998 the estimated cost to complete capital projects in
process approximated $14 million, including $7 million to complete a landfill
expansion for the Company's Belgian facility.
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
to purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $98 million.
Legal proceedings
Lead pigment litigation. Since 1987, the Company, other former
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
F-38
<PAGE>
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, strict liability, 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; some 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
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, damages for personal injury or property damage and/or damages for
injury to natural resources. 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, 1998 the Company had accrued $126 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
F-39
<PAGE>
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.
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 past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect 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 more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
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 TiO2 production processes). 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 37% in 1996, 36% in 1997
and 37% in 1998 of sales were attributable to North America.
Consolidated cash, cash equivalents and restricted cash equivalents
includes $53 million and $136 million invested in U.S. Treasury securities
purchased under short-term agreements to resell at December 31, 1997 and 1998,
respectively, of which $45 million and $126 million, respectively, of such
securities are held in trust for the Company by a single U.S. bank.
F-40
<PAGE>
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,
1997 1998
------------------ ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In millions)
<S> <C> <C> <C> <C>
Cash, cash equivalents and current
restricted cash equivalents $ 106.1 $106.1 $163.1 $163.1
Marketable securities - classified as
available-for-sale 17.3 17.3 17.6 17.6
Notes payable and long-term debt:
Fixed rate with market quotes:
Senior Secured Notes $ 250.0 $277.9 $244.0 $253.1
Senior Secured Discount Notes 169.9 186.7 - -
Variable rate debt 338.3 338.3 150.0 150.0
Common shareholders' equity (deficit) $(222.3) $698.5 $152.3 $735.1
</TABLE>
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 at the
end of the year.
In connection with its credit facility, Rheox entered into interest rate
collar agreements in 1997 which effectively set minimum and maximum U.S. LIBOR
interest rates of 5.25% and 8%, respectively, on $50 million principal amount of
its variable-rate bank term loan through May 2001. The margin on such borrowings
ranged from .75% to 1.75%, depending upon the level of a certain Rheox financial
ratio. The Company was exposed to interest rate risk in the event of
nonperformance by the other parties to the agreements. At December 31, 1997 the
estimated fair value of such agreements was estimated to be a $.1 million
payable. Such fair value represented the amount the Company would pay if it
terminated the collar agreements at that date, and is based upon quotes obtained
from the counter party financial institutions. The Company terminated these
agreements in the first quarter of 1998 concurrently with the prepayment and
termination of the underlying credit facility. See Note 20. The Company held no
derivative financial instruments at December 31, 1998.
F-41
<PAGE>
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, 1997:
Net sales .................... $ 204,389 $ 214,354 $210,343 $208,154
Cost of sales ................ 167,175 172,679 162,499 147,592
Operating income ............. 8,689 16,815 24,908 32,089
Income (loss) from
continuing operations ....... (40,180) (3,428) 3,984 9,749
Net income (loss) ............ $ (35,721) $ 2,255 $ 9,761 $ 14,232
========= ========= ======== ========
Basic and diluted
earnings per share:
Income (loss) from
continuing operations ..... $ (.79) $ (.07) $ .08 $ .19
========= ========= ======== ========
Net income (loss) .......... $ (.70) $ .04 $ .19 $ .28
========= ========= ======== ========
Weighted average common
shares and potential
common shares
outstanding:
Basic ...................... 51,140 51,144 51,146 51,175
Diluted .................... 51,140 51,144 51,585 51,717
Year ended December 31, 1998:
Net sales .................... $ 222,629 $ 241,645 $221,520 $208,930
Cost of sales ................ 156,915 167,329 151,782 142,421
Operating income ............. 39,399 46,725 45,024 40,033
Income from continuing
operations .................. 16,300 23,414 31,359 18,789
Net income ................... $ 301,015 $ 23,729 $ 28,959 $ 12,975
========= ========= ======== ========
Earnings per share:
Basic:
Income from
continuing
operations .............. $ .32 $ .46 $ .61 $ .36
========= ========= ======== ========
Net income ............... $ 5.87 $ .46 $ .56 $ .25
========= ========= ======== ========
Diluted:
Income from
continuing
operations .............. $ .31 $ .45 $ .60 $ .36
========= ========= ======== ========
Net income ............... $ 5.80 $ .46 $ .55 $ .25
========= ========= ======== ========
Weighted average common
shares and potential
common shares
outstanding:
Basic ...................... 51,282 51,341 51,444 51,805
Diluted .................... 51,852 52,030 52,194 52,014
</TABLE>
F-42
<PAGE>
Note 20 - Discontinued operations:
The Company sold the net assets of its Rheox specialty chemical business
to Elementis plc for $465 million cash (before fees and expenses) in January
1998, including $20 million attributable to a five-year agreement by the Company
not to compete in the rheological products business. The Company recognized an
after-tax gain of approximately $286 million on the sale of this business
segment. As a result of the sale, the Company has presented the results of this
business segment as discontinued operations for all periods presented. Following
the sale of its assets, Rheox, Inc. was renamed NL Capital Corporation.
Condensed income statements related to discontinued operations for the
years ended December 31, 1996 and 1997 and the month ended January 31, 1998 are
as follows. Interest expense has been allocated to discontinued operations based
on the amount of debt specifically attributed to Rheox's operations.
<TABLE>
<CAPTION>
Years ended December 31, Month ended
------------------------- January 31,
1996 1997 1998
---------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Net sales ............................... $ 134,895 $ 147,199 $ 12,630
Other income (expense), net ............. 2,811 (200) (50)
--------- --------- ---------
137,706 146,999 12,580
--------- --------- ---------
Cost of sales ........................... 69,843 73,583 6,969
Selling, general and administrative ..... 26,310 29,231 2,737
Interest expense ........................ 5,706 11,207 771
--------- --------- ---------
101,859 114,021 10,477
--------- --------- ---------
Income before income taxes and
minority interest .................. 35,847 32,978 2,103
Income tax expense ...................... 13,337 12,475 778
Minority interest ....................... (42) 101 --
--------- --------- ---------
22,552 20,402 1,325
Gain from sale of Rheox, net of tax
expense of $86,222 ..................... -- -- 286,071
--------- --------- ---------
$ 22,552 $ 20,402 $ 287,396
========= ========= =========
</TABLE>
F-43
<PAGE>
A condensed balance sheet related to discontinued operations included in
the Company's consolidated balance sheet at December 31, 1997 is as follows.
<TABLE>
<CAPTION>
December 31,
ASSETS 1997
--------------
(In thousands)
<S> <C>
Current assets:
Cash and cash equivalents ................................. $ 9,137
Accounts and notes receivable ............................. 15,415
Inventories ............................................... 19,921
Other current assets ...................................... 6,443
---------
Total current assets .................................... 50,916
Other assets:
Property, plant and equipment, net ........................ 30,308
Other assets .............................................. 7,411
---------
$ 88,635
=========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt ...................... $ 15,000
Other current liabilities ................................. 19,129
---------
Total current liabilities ............................... 34,129
---------
Noncurrent liabilities:
Long-term debt ............................................ 102,500
Deferred income taxes ..................................... 2,485
Other noncurrent liabilities .............................. 4,489
---------
Total noncurrent liabilities ............................ 109,474
---------
Stockholder's deficit ....................................... (54,968)
---------
$ 88,635
=========
</TABLE>
F-44
<PAGE>
Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below.
<TABLE>
<CAPTION>
Years ended December 31, Month ended
------------------------ January 31,
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities .... $ 20,705 $ 31,506 $ (30,587)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................. (2,665) (2,330) (26)
Purchase of minority interests ........ (5,168) -- --
Other, net ............................ 457 16 --
--------- --------- ---------
(7,376) (2,314) (26)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness, net ..................... (23,041) 100,940 (117,500)
Other, net ............................ (451) -- --
--------- --------- ---------
(23,492) 100,940 (117,500)
--------- --------- ---------
Net change from operating,
investing and financing
activities ......................... $ (10,163) $ 130,132 $(148,113)
========= ========= =========
</TABLE>
F-45
