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, 1999
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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5652
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock New York Stock Exchange
($1.00 par value per share) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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 17, 2000, 6,391,058 shares of common stock were outstanding. The
aggregate market value of the 2.4 million shares of voting stock held by
nonaffiliates of Tremont Corporation as of such date approximated $44.5 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," "will," "looks," "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 affect
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 in those 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 performance of The Boeing
Company and other aerospace manufacturers under their long-term purchase
agreements with TIMET, the impact of 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 and the supply of raw materials and
services. 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, 1999, Valhi, Inc. and Tremont, each
affiliates of Contran Corporation, held approximately 59% 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, 1999, the Combined
Master Retirement Trust ("CMRT"), a trust formed by Valhi to permit the
collective investment by trusts that maintain assets of certain employee benefit
plans adopted by Valhi and related entities, owned an additional 8% of TIMET's
outstanding common stock. At December 31, 1999, Contran and its subsidiaries
held approximately 93% of Valhi's outstanding common stock, and Valhi and other
entities related to Harold C. Simmons held approximately 55% 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. Mr. Simmons is sole trustee of the CMRT and is a
member of the trust investment committee of the CMRT. 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 purchased additional shares of NL common stock,
increasing its ownership from 18% to 20%. During 1998 and 1999, Tremont
purchased additional shares of TIMET common stock, increasing its ownership
percentage from 30% at December 31, 1997 to 39% at December 31, 1999. See Note 4
to the Consolidated Financial Statements.
In the fourth quarter of 1999, the Company recognized a $61 million
pre-tax impairment charge ($38 million net-of-tax) for an other than temporary
decline in the market value of TIMET. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 4 to the Consolidated
Financial Statements.
UNCONSOLIDATED AFFILIATE - TIMET:
TIMET files periodic reports with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities 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. Titanium Metals Corporation ("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 titanium processing facilities in both the United States and
Europe, the world's principal markets for titanium. The demand for titanium
reached a peak in 1997 when worldwide mill products shipments reached 60,000
metric tons. Since this peak, annual shipments declined 10% to 54,000 metric
tons in 1998 and a further 11% to 48,000 metric tons in 1999. TIMET estimates
that in 1999 it accounted for approximately 24% of worldwide industry shipments
of mill products and approximately 13% of world sponge production.
<PAGE>
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 40% of industry mill product shipments in 1999,
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 uses such as
medical implants, sporting equipment, offshore oil and gas production
installations, geothermal facilities, military armor and automotive and
architectural uses.
TIMET's products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and rolled products produced from ingot or slab,
including billet, bar, flat products (plate, sheet and strip), welded pipe, pipe
fittings, extrusions and wire. TIMET believes it is among the lower 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 long-term goals
and objectives to change the traditional way business is conducted:
o Maximize the long-term value of its core aerospace business by
focusing on TIMET's 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.
o 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.
o Invest in technology, capacity and innovative projects aimed at
reducing costs and enhancing productivity, quality, customer
service and production capabilities.
o Stabilize the cost and supply of raw materials.
o Maintain a strong balance sheet.
TIMET's focus in the short-term is to return to profitability as
quickly as possible by reducing costs, improving quality and streamlining its
overall business and manufacturing processes. To that end, TIMET has:
o Limited planned capital expenditures to include those principally
intended for capital maintenance, environmental, health and safety
purposes.
o Rationalized staffing and production worldwide to fit current
market conditions.
o Suspended the dividend on its common stock.
o Negotiated new credit agreements to provide liquidity through the
current down-cycle.
o Initiated a plan to reduce overhead, inventory and receivables.
TIMET intends to consider further means to reduce costs if the
foregoing do not prove sufficient to return to profitability.
<PAGE>
Current industry conditions and outlook for 2000. 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. TIMET currently expects that the loss in 2000 will exceed the 1999 loss
and looks to return to profitability in late 2001.
Worldwide industry mill products 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 11% decline to approximately 48,000 metric tons in 1999. Expectations
for 2000 are a further decline in mill product shipments although it is expected
to be less than the decline as experienced during each of the last two years.
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 throughout the aerospace industry supply chain 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 1999 accounted for approximately 85% of total
aerospace demand (35% of total titanium demand).
According to The Airline Monitor, a leading aerospace publication, the
commercial airline industry reported operating income of over $17 billion
(estimated) in 1999, compared to $16 billion in each of 1998 and 1997. TIMET
believes that commercial aircraft deliveries peaked 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. The demand for titanium
generally precedes aircraft deliveries by about a year, which results in TIMET's
cycle preceding that of the cycle of the aircraft industry and related
deliveries. 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.
<PAGE>
Since titanium's initial applications in the aerospace sector, the
number of end-use markets for titanium has expanded. 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 diverse uses such as medical implants, sporting equipment,
offshore oil and gas production installations, geothermal facilities, military
armor and automotive and architectural uses. Several of these are emerging
applications and represent potential growth opportunities that TIMET believes
may reduce the industry's historical dependence on the aerospace market.
The business environment in which TIMET finds itself in 2000 remains
very different from 1996-1998. 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 wide body planes. During 1999,
aerospace customers continued to reduce inventories, and customers and end users
continue to indicate that a substantial inventory overhang exists. As a result,
a significant number of TIMET's major aerospace customers canceled or delayed
previously scheduled orders. Most importantly, TIMET believes orders under
TIMET's long-term contract with The Boeing Company ("Boeing") were significantly
below the contractual volume requirements for 1999. Although Boeing has informed
TIMET that it will either order the required contractual volume under the
contract in 2000 or pay the liquidated damages provided for in the agreement,
TIMET has received virtually no Boeing-related orders under the contract for the
year 2000. Boeing has also informed TIMET that it is unwilling to commit to the
contract beyond the year 2000, and TIMET has filed a lawsuit against Boeing for
repudiation and breach of the Boeing contract. These factors lead TIMET to
believe that year 2000 sales will be somewhat lower than the fourth quarter 1999
annualized amount.
Adding to the challenges in the aerospace sector, industrial demand for
titanium remains soft due to the weakness in Asian and other economies. Assuming
overall market demand remains at currently expected levels, which is lower than
1999, TIMET currently expects operating and net losses in each quarter of 2000.
In both the aerospace and industrial sectors, reduced demand and lower prices
(including prices under new long-term contracts referred to below) are expected
to cause sales, gross profit and operating income excluding special charges to
be lower in 2000 than in 1999.
<PAGE>
In the fourth quarter of 1999 and January 2000 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:
o TIMET's global manufacturing operations and commercial operations
have been consolidated into two organizations with personnel
reductions of about 250 people compared to year end 1999 levels.
This comes on top of a reduction of approximately 700 people
during 1998 and 1999.
o TIMET will focus significant efforts in improving manufacturing
performance. Considerable resources will be devoted to continuous
improvement programs to improve the quality of manufacturing,
customer service and management processes.
o Reductions in plant overhead costs as well as in selling and
administrative costs have been targeted.
o Supply contracts with key vendors have been renegotiated in order
to reduce volumes and, to some extent, prices. Similar efforts
will continue throughout 2000.
o Capital expenditures will be reduced from 1999 levels. Total
capital expenditures are expected to be approximately $15 million
in 2000, compared to approximately $25 million in 1999 and an
aggregate of approximately $180 million in 1997 and 1998.
In addition to its short-term plan of actions as described above, TIMET
has long-term agreements with certain major aerospace customers, including
Boeing, 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. The contracts were 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. 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.
The Boeing contract requires Boeing to purchase a minimum percentage of
their titanium requirements from TIMET. Although Boeing placed orders and
accepted delivery of certain volumes in 1999, TIMET believes the level of orders
was significantly below the contractual volume requirements for 1999. Although
Boeing has informed TIMET that it will either order the required contractual
volume under the contract in 2000 or pay the liquidated damages provided for in
the agreement, TIMET has received virtually no Boeing-related orders under the
contract for the year 2000. Boeing has also informed TIMET that it is unwilling
to commit to the contract beyond the year 2000. On March 21, 2000, TIMET filed a
lawsuit against Boeing in a Colorado state court seeking damages for Boeing's
repudiation and breach of the Boeing contract. TIMET's complaint seeks damages
from Boeing that TIMET believes are in excess of $600 million and a declaration
from the court of TIMET's rights under the contract.
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. Primarily because of the lack
of Boeing orders, the order flow did not meet expectations in 1999; therefore,
TIMET restructured the terms of certain agreements.
<PAGE>
Acquisitions and capital transactions during the past three years.
During 1997, TIMET entered into a welded tube joint venture ("ValTimet")
intended to combine best manufacturing practices and market coverage in this
market. In 1998, TIMET (i) acquired Loterios S.p.A. to increase market share in
industrial markets, particularly oil and gas, and provide increased geographic
sales coverage in Europe, (ii) 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, and (iii)
entered into a castings joint venture with Wyman-Gordon. In January 2000, TIMET
sold its interest in the castings joint venture.
During the fourth quarter of 1999, TIMET recorded a $2.3 million charge
to pretax earnings for the write-down associated with TIMET's investment in
certain start-up joint ventures.
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), welded pipe, pipe
fittings, extrusions and wire. In 1999, virtually all 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, Nevada, incorporates vacuum
distillation process ("VDP") technology, which removes the magnesium and
magnesium chloride residues by applying heat to the sponge mass while
maintaining vacuum in the chamber. The combination of heat and vacuum boils the
residues from the reactor mass into the condensing vessel. The titanium mass is
then mechanically pushed out of the original reactor, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
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 the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
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,
welding 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, welded pipe, pipe fittings, extrusions and wire. 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.
<PAGE>
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.
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 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
elements. TIMET processes rutile ore into titanium tetrachloride and further
processes the titanium tetrachloride into titanium sponge. During 1999,
approximately 25% of TIMET's production was made from internally produced
sponge, 35% from purchased sponge, 32% from titanium scrap and 8% from alloying
elements.
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
in 2000. Based upon TIMET's evaluation of the relative cost of raw materials and
the technical requirements of its customers, TIMET expects the mix of raw
materials in 2000 to be 25% internally produced sponge, 32% purchased sponge,
36% scrap and 7% alloying elements. Sponge producers in Japan and Kazakhstan are
expected to supply all of TIMET's sponge purchases in 2000.
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 agreed to reduced minimums for 1999 and 2000.
Due to the decrease in demand for titanium, TIMET has abandoned its plans to
purchase on a long-term basis premium quality sponge produced in Japan.
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
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.
<PAGE>
TIMET facilities. In addition to its U.S. sponge capacity discussed
below, TIMET's worldwide melting capacity in 2000 aggregates approximately
48,000 metric tons (estimated 26% of world capacity), and its mill products
capacity aggregates approximately 20,000 metric tons (estimated 16% of world
capacity). Approximately 35% of TIMET's worldwide melting capacity is
represented by electron beam cold hearth melting ("EB") furnaces, 62% by vacuum
arc remelting ("VAR") furnaces and 3% by a vacuum induction melting ("VIM")
furnace.
TIMET has operated its major production facilities at varying levels of
practical capacity during the past three years. In 1997, the plants operated at
90% of practical capacity, decreasing to 80% in 1998 and a further reduction to
55% in 1999. In 2000, TIMET's plants are expected to operate at 50% of practical
capacity. During 1998, TIMET closed 2,500 metric tons of melting capacity by
permanently shutting down facilities in Verdi, Nevada and Millbury,
Massachusetts. In 1999, TIMET temporarily idled its Kroll-leach process sponge
facility in Nevada due to changing market conditions for certain grades of
titanium sponge.
TIMET's VDP sponge facility in Henderson, Nevada is expected to operate
at approximately 60% of its annual practical capacity of 9,100 metric tons
during 2000, which approximates the 1999 level and 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. During 1999, TIMET expanded the use of VDP sponge
to its European facilities and approximately 900 metric tons of VDP production
was used in Europe, which represented approximately 15% of the sponge consumed
in TIMET's European operations. TIMET expects the consumption of VDP sponge in
its European operations to increase to one-third of their sponge requirements in
2000, which is expected to increase operating volumes and reduce manufacturing
cost rates at the Henderson, Nevada facility. Due to changing market conditions
for certain grades of sponge, TIMET's older Kroll-leach process sponge plant in
Nevada was temporarily idled at the end of March 1999. The raw materials
processing facilities in Morgantown primarily process scrap used as melting
feedstock, either in combination with sponge or separately.
TIMET's U.S. melting facilities in Henderson, Nevada, Morgantown,
Pennsylvania and Vallejo, California 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 50% of aggregate capacity in
2000, with certain production facilities temporarily idled.
Titanium mill products are principally produced at TIMET's forging and
rolling facility in Toronto, Ohio, which receives titanium ingots and slabs from
TIMET's U.S. melting facilities. TIMET's forging and rolling facilities are
expected to operate at approximately 55% of practical capacity in 2000.
TIMET UK's melting facility in Witton, England produces VAR ingots used
primarily as feedstock for its forging operations, also in Witton. The forging
operations process the ingots principally into billet product for sale to
customers or into an intermediate for further processing into bar and plate at
its facility in Waunarlwydd, Wales. U.K. melting and mill products production in
2000 is expected to be approximately 60% and 55%, respectively, of capacity.
Capacity of 70%-owned TIMET Savoie in Ugine, France is to a certain
extent dependent upon the level of activity in CEZUS' zirconium business, which
may from time to time provide TIMET Savoie with capacity in excess of that
contractually required to be provided by CEZUS (the 30% minority partner in
TIMET Savoie). During 2000, TIMET Savoie expects to operate at approximately 70%
of the maximum capacity required to be provided by CEZUS.
<PAGE>
Sponge for melting requirements in both the U.K. and France is
purchased principally from suppliers in Japan and Kazakhstan, with approximately
one-third of TIMET's 2000 European requirements expected to be provided by
TIMET's Henderson, Nevada 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 ten TIMET-owned service centers
(six 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 50% of TIMET's 1999 sales were to
customers within North America, with about 42% to European customers and the
balance to other regions. While no customer accounts for more than 10% of
TIMET's direct sales in 1999, about 85% of TIMET's mill product sales were used
by TIMET's customers to produce parts and other materials for the aerospace
industry. TIMET has long-term agreements with certain major aerospace customers,
which accounted for approximately 44% of aerospace sales in 1999. TIMET expects
that while a majority of its 2000 sales 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 aircraft 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 $195 million at December 31,
1999, compared to $350 million at December 31, 1998 and $530 million at December
31, 1997. Substantially all of the 1999 year end backlog is scheduled to be
shipped during 2000. 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, 1999, the estimated firm order backlog for Boeing
and Airbus, as reported by The Airline Monitor, was 2,943 planes versus 3,224
planes at the end of 1998 and 2,753 planes at the end of 1997. The newer wide
body planes, such as the Boeing 777 and the Airbus A-330 and A-340, tend to use
a higher percentage of titanium in their frames, engines and parts (as measured
by total fly weight) than narrow body planes. "Fly weight" is the empty weight
of a finished aircraft with engines but without fuel or passengers. The Boeing
777, for example, utilizes titanium for approximately 9% of total fly weight,
compared to between 2% to 3% on the older 737, 747 and 767 models. The estimated
firm order backlog for wide body planes at year end 1999 was 679 (23% of total
backlog) compared to 820 (25% of total backlog) at the end of 1998.
<PAGE>
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, Former Soviet Union ("FSU") and China. TIMET is one of
five 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 continue to
generally operate at lower capacity utilization levels in 2000 than in 1999,
increasing price competition.
TIMET's principal competitors in aerospace markets are Allegheny
Technologies Inc., RTI International Metals, Inc. 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 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. The GSP program has been
renewed for two years and is scheduled to expire during the second quarter 2001.
In 1997, GSP benefits to these 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.
<PAGE>
In addition to regular duties, titanium sponge imported from countries
of the FSU (Russia, Kazakhstan and Ukraine) had for many years been subject to
substantial antidumping penalties. Titanium sponge imports from Japan were also
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, and the briefing of the appeal was
concluded in the third quarter of 1999. A decision is expected during 2000 and
until such decision is reached, 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 process 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 the performance of TIMET's products in current applications, and
searching for new uses of titanium products. For example, aerospace applications
continue to grow for some of TIMET's proprietary alloys such as TIMETAL(R) 21S
and TIMETAL 834. Additionally, testing of alloys such as TIMETAL LCB and TIMETAL
5-1-1-1 is increasing for new non-aerospace applications. TIMET conducts the
majority of its research and development activities at its Henderson, Nevada
laboratory, which TIMET believes is one of the largest titanium research and
development centers in the world. Additional research and development activities
are performed at the Witton, 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.
<PAGE>
Employees. The following table shows the significant reduction in the
number of TIMET employees over the past 3 years. The 23% reduction in employees
from the peak in 1997 was in response to a 25% reduction in market demand.
During 2000, TIMET expects to reduce employment by an additional 250 people, or
approximately 10% of TIMET's worldwide workforce. The vast majority of the
employee reductions are expected to occur during the first half of the year.
<TABLE>
<CAPTION>
Employees at December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
U.S. 2,125 1,715 1,490
Europe 900 1,025 860
------------ ------------ ------------
Total 3,025 2,740 2,350
============ ============ ============
</TABLE>
TIMET's production and maintenance workers in Henderson, Nevada and its
production, maintenance, clerical and technical workers in Toronto, Ohio are
represented by the United Steelworkers of America ("USWA") under contracts
expiring in October 2000 and June 2002, respectively. Negotiations with respect
to the Henderson contract are expected to begin during the third quarter of
2000. Employees at TIMET's other U.S. facilities are not covered by collective
bargaining agreements.
Over 70% of the salaried and hourly employees at TIMET's European
facilities are represented by various European labor unions, generally under
annual agreements, the majority of which are still under negotiation for 2000.
TIMET expects to complete the negotiation of one year contracts in the U.K. and
France that would include modest wage increases.
While TIMET currently considers its employee relations to be
satisfactory, it is possible that there could be future work stoppages that
could materially and adversely affect TIMET's business, financial condition,
results of operations or cash flows.
Regulatory and environmental matters. TIMET's operations are governed
by various Federal, state, local and foreign environmental and worker safety
laws and regulations. In the U.S., such laws include the following Federal acts:
the 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, Nevada 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.
<PAGE>
TIMET's operations in Europe are similarly subject to foreign laws and
regulations respecting environmental and worker safety matters, which laws have
not had, and are not presently expected to have, a material adverse effect on
TIMET.
TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
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. TIMET
incurred capital expenditures for health, safety and environmental compliance
matters of approximately $4 million in each of 1997, 1998 and 1999 and its
capital budget provides for approximately $5 million of such expenditures in
2000. However, the imposition of more strict standards or requirements under
environmental, health or safety 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.
General. 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
agreement by NL not to compete in the rheological products business. See Item 1
"Business - Unconsolidated Affiliate - NL - Discontinued operations -Rheox" for
related discussion.
Kronos is the world's fourth largest producer of titanium dioxide
pigments ("TiO2") with an estimated 12% share of worldwide TiO2 sales volume in
1999. Approximately one-half of Kronos' 1999 sales volume was in Europe, where
Kronos is the second largest producer of TiO2.
NL's primary objective is to maximize total shareholder return. NL has
taken a number of steps towards achieving its objective, including (i)
increasing its regular quarterly dividend to $.15 per share, (ii) controlling
costs, (iii) investing in certain cost effective debottlenecking projects to
increase TiO2 production capacity and efficiency, and (iv) improving its capital
structure. NL periodically considers mergers or acquisitions within the chemical
industry and acquisitions of additional TiO2 production capacity to meet its
objective.
Industry. 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.
<PAGE>
Pricing within the global 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 on a billing currency
basis decreased during the first three quarters of 1999, before increasing 1% in
the fourth quarter of 1999 compared to the third quarter of 1999. Industry-wide
demand for TiO2 increased in 1999, with second-half 1999 demand higher than
first-half 1999 demand as a result of, among other things, customers buying in
advance of anticipated price increases. Kronos' 1999 sales volume increased 5%
from its 1998 sales volume with growth in all major regions. Kronos expects
industry demand in 2000 will be relatively unchanged from 1999, depending
primarily upon global economic conditions. Prices at the end of the fourth
quarter of 1999 were 1% higher than the average for the quarter and NL expects
to continue to phase in previously announced price increases during the first
quarter of 2000. 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's 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 regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these regions develop
to the point that quality-of-life products, including TiO2, are in greater
demand. Kronos believes that, due to its strong presence in Western Europe, it
is well positioned to participate in growth in consumption of TiO2 in Eastern
Europe.
Products and operations. 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 TiO2 consumption over the
past decade because, to date, extenders generally have 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.
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 80 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' 1999 TiO2 sales were to Europe, with 37% to
North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process described below) and has
estimated ilmenite reserves that are expected to last at least 20 years. Kronos
is also engaged in 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.
<PAGE>
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
and, in 1999, chloride-process production facilities represented almost 60% of
industry capacity.
Kronos produced 411,000 metric tons of TiO2 in 1999, compared to a
record 434,000 metric tons produced in 1998 and 408,000 metric tons in 1997.
Kronos' average production capacity utilization rate in 1999 was 93%, down from
full capacity in 1998, primarily due to NL's decision to manage inventory levels
by curtailing production volume during the first quarter of 1999. 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 Item 1 "Business - Unconsolidated Affiliate - NL -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 2003. Natural rutile ore, another chloride
feedstock, is purchased primarily from Iluka Resources, Inc. (formerly RGC
Mineral Sands Limited)(Australia), a wholly owned subsidiary of Westralian Sands
Limited (Australia), under a long-term supply contract that 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 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 1999. For its Canadian plant, Kronos also purchases sulfate grade slag
from Rio Tinto Iron and Titanium, Inc. (formerly Q.I.T.-Fer et Titane Inc.)
under a long-term supply contract which expires in 2002.
Kronos believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
Kronos does not 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.
<PAGE>
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
ICI Holdings ("HICI") 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 HICI (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.
The manufacturing joint venture operates 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, if any, is reported as a component of interest
expense.
Competition. 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, which suppressed selling prices. Prices improved in
the mid-1990s with a 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, peaking in the fourth quarter of 1998. Kronos' average
selling price in 1999 was 1% lower than 1998. Pigment prices declined during the
first three quarters of 1999, but increased in the fourth quarter as a result of
price increases announced by all major producers effective during the fourth
quarter. Such price increases began to be phased in during the fourth quarter of
1999 and continue to be implemented in the first quarter of 2000. Kronos
recently announced a price increase in Europe effective April 1, 2000. The
successful implementation of the price increase will depend on market
conditions. Should demand in 2000 remain strong, additional price increases
could be announced later in 2000. No assurance can be given that demand or price
trends will conform to NL's expectations. See Item 1 "Business - Unconsolidated
Affiliate - NL - Industry" for a description of certain risks and uncertainties
affecting the TiO2 industry.
Kronos' worldwide sales volume in the first half of 1999 was lower than
the first half of the previous year. Demand in the second half of 1999 was
stronger than comparable periods in both 1998 and 1997 although a portion of the
increased demand may be attributed to customers buying in advance of announced
price increases. Kronos' total 1999 worldwide sales volume was 5% higher than
1998. Kronos expects industry demand in 2000 will be relatively unchanged from
the strong overall performance of 1999, but this will depend upon, among other
things, global economic conditions.
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 1999 Kronos had an estimated 12% share of worldwide TiO2 sales
volume, and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.
<PAGE>
Kronos' principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; HICI; Kerr-McGee Corporation; Kemira Oy;
and Ishihara Sangyo Kaisha, Ltd. 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.
Effective June 30, 1999, Imperial Chemicals Industries plc ("ICI") sold
its titanium dioxide business, including its 50% ownership interest in LPC, to
HICI, a newly formed company that is 70%-owned by Huntsman Corporation and
30%-owned by ICI. In February 2000 Kerr-McGee announced an agreement to acquire
Kemira's TiO2 business in The Netherlands and the U.S. If this acquisition is
completed, Kronos would become the world's fifth largest producer of TiO2.
Capacity additions that are the result of construction of greenfield
plants in the worldwide TiO2 market require significant capital 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 "Industry" above, NL expects that the average annual
increase in industry capacity from announced debottlenecking projects will be
less than the average annual demand growth for TiO2 during the next three to
five years.
Discontinued operations - Rheox. On January 30, 1998, NL sold its Rheox
specialty chemicals business 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 operation as discontinued operations. The majority of the $380 million
after-tax proceeds has been used to reduce NL's outstanding indebtedness.
Research 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 non-U.S.
markets since the 1920s. Most of Kronos' current production capacity is located
in Europe and Canada. Kronos' European operations include facilities in Germany,
Belgium and Norway. Approximately three-quarters of NL's 1999 consolidated sales
were to non-U.S. customers, including 11% to customers in areas other than
Europe and Canada. Foreign operations are subject to, among other things,
currency exchange rate fluctuations and NL's results of operations have in the
past been both favorably and unfavorably affected by fluctuations in currency
exchange rates. 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 Operations - Results of
Operations - NL Industries" and Item 7A "Quantitative and Qualitative
Disclosures about Market Risk - NL Industries."
<PAGE>
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" below.
Customer base and seasonality. NL believes that neither its aggregate
sales nor those of any of its principal product groups are concentrated in or
materially dependent upon any single customer or small group of customers.
Neither NL's business as a whole nor that of any of its principal product groups
is seasonal to any significant extent. Due in part to the increase in paint
production in the spring to meet the spring and summer painting season demand,
TiO2 sales are generally higher in the second and third calendar quarters than
in the first and fourth calendar quarters.
NL facilities. Kronos currently operates four TiO2 facilities in Europe
(Leverkusen and Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad,
Norway). In North America, Kronos has a facility in Varennes, Quebec, Canada
and, through the manufacturing joint venture described above, a one-half
interest in a plant in Lake Charles, Louisiana. NL also owns a slurry plant in
Lake Charles, Louisiana. NL's Fredrikstad TiO2 plant has a lien on it that
secures a claim by Norwegian tax authorities, pending resolution of certain tax
litigation.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Kronos is the only unrelated party so situated. Under a separate supplies
and services agreement expiring in 2011, Bayer provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and the supplies and services agreement
restrict Kronos' ability to transfer ownership or use of the Leverkusen
facility.
All of Kronos' principal production facilities described above are
owned, except for the land under the Leverkusen facility. Kronos has a
governmental concession with an unlimited term to operate its ilmenite mine in
Norway.
Employees. As of December 31, 1999, NL employed approximately 2,500
persons, excluding the joint venture employees, 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.
Regulatory and environmental matters. Certain of NL's businesses are
and have been engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of
applicable environmental laws. As with other companies engaged in similar
businesses, certain past and current operations and products of NL have the
potential to cause environmental or other damage. NL has implemented and
continues to implement various policies and programs in an effort to minimize
these risks. The policy of NL is to 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.
<PAGE>
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 and a slurry facility owned by NL are in substantial compliance with
applicable requirements of these laws or compliance orders issued thereunder. NL
has no other U.S. plants. From time to time, NL's facilities may be subject to
environmental regulatory enforcement under such statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
NL's consolidated financial position, results of operations or liquidity.
NL's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. NL believes that all its plants are
in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany 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 regulatory
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.
NL expects to complete in 2000 an $8 million landfill expansion for its
Belgian plant which will provide the plant with twenty years of storage space
for neutralized chloride process solids. 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.
NL's capital expenditures related to its ongoing environmental
protection and improvement programs are currently expected to be approximately
$7 million in 2000 and $11 million in 2001.
NL has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
or its subsidiaries, or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's ("U.S. EPA") Superfund National Priorities
List or similar state lists. These proceedings seek cleanup costs, damages for
personal injury or property damage, 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.
<PAGE>
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, 1999, NL had accrued $112 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, expenditures for
remedial investigations, monitoring, managing, studies, certain legal fees,
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 $150 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 with respect to 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. 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. In 1999 the U.S. EPA and certain other PRPs entered into a consent
decree settling their liability at the site for approximately 50% of the site
costs. NL and the U.S. EPA reached an agreement-in-principle in 1999 to settle
NL's liability at the site for $31.5 million. NL and the U.S. EPA are
negotiating a consent decree embodying the terms of this agreement-in-principle.
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.
<PAGE>
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
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 reached an agreement settling
the litigation by agreeing to pay a portion of future costs, which are estimated
to be within previously accrued amounts.
In 1999 NL and other PRPs entered into an administrative consent order
with the U.S. EPA requiring the performance of a RIFS at two subsites 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). In 1999 NL entered into
a consent decree with the U.S. EPA resolving its liability at the Baxter Springs
subsite, and has reached an agreement-in-principle with the other PRPs with
respect to allocation of site costs. In addition, NL and other PRPs are
performing an investigation in four additional subsites in Cherokee County.
In 1996 the U.S. EPA ordered NL to perform a removal action at a
formerly owned facility in Chicago, Illinois. NL is complying with the order and
has completed the on-site work at the facility. Offsite contamination is being
investigated.
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 75 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 alleges it has incurred approximately $4
million in past costs. NL and other PRPs have concluded a nonbinding allocation
process, as a result of which NL was assigned 30% of future site costs. NL and
other PRPs currently are negotiating a consent decree based on this allocation.
Lead pigment litigation. NL was formerly involved in the manufacture of
lead-based paint and lead pigments for use in 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, property damage and
government expenditures allegedly associated with the use of lead pigments. NL
is vigorously defending such litigation. Considering NL's previous involvement
in the lead pigment and lead-based paint businesses, there can be no assurance
that additional litigation, similar to that described below, will not be filed.
In addition, various legislation and administrative regulations have, from time
to time, been enacted or proposed that seek to (a) impose various obligations on
present and former manufacturers of lead pigment and lead-based paint with
respect to asserted health concerns associated with the use of such products and
(b) effectively overturn court decisions in which NL and other pigment
manufacturers have been successful. Examples of such proposed legislation
include bills which would permit civil liability for damages on the basis of
market share, rather than requiring plaintiffs to prove that the defendant's
product caused the alleged damage and bills which would revive actions barred by
the statute of limitations. While no legislation or regulations have been
enacted to date which are expected to have a material adverse effect on NL's
consolidated financial position, results of operations or liquidity, the
imposition of market share liability or other legislation 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 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 Lead
Industries Association ("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. 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. 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. In September 1999 the trial court denied the plaintiffs'
motions for summary judgment on market share and conspiracy issues and denied
defendants' April 1999 motion for summary judgment on statute of limitations
grounds. Plaintiffs have appealed the denial of their motions. Discovery has
resumed.
<PAGE>
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 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. Plaintiffs
moved for class certification in October 1998, and all briefing on the issue was
completed in April 1999. No decision regarding class certification has been
issued by the trial court.
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 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. In May 1999 defendants appealed the denial of their motion to dismiss the
market share liability claim. The Fourth Department intermediate appellate court
in December 1999 reversed the trial court and dismissed the market share claim.
The case has been remanded to the trial court for further proceedings on the
remaining claims. Plaintiffs are seeking review in the Court of Appeals.
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 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 February 1998 the
Court dismissed the fraud claim. In July 1998 the Court granted NL's motion for
summary judgment on all remaining claims. In September 1999 the Special Court of
Appeals reversed the grant of summary judgment to defendants. The Court of
Appeals denied review of this decision in December 1999. Trial has been set for
May 2000.
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, the LIA, 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. In
February 2000 the trial court granted defendants' motions to dismiss the product
defect, express warranty, nuisance and consumer fraud statute claims.
In April 1999 NL was served with an amended complaint in Sweet, et al.
v. Sheahan, et al., (U.S. District Court, Northern District of New York, Civil
Action No. 97-CV-1666/LEK-DNH), adding NL and other defendants to a suit
originally filed against plaintiffs' landlord. Plaintiffs, a parent and child,
allege injuries purportedly caused by lead pigment, and seek recovery of actual
and punitive damages from their landlord, alleged former manufacturers of lead
pigment, and the LIA, and purport to allege causes of action against the former
pigment manufacturers based on negligence, strict products liability, fraud and
misrepresentation, concert of action, civil conspiracy, and market share
liability. In November 1999 the trial court denied defendants' October 1999
motion arguing for dismissal due to absence of Federal jurisdiction. In January
2000 the court certified for interlocutory review the issue of Federal
jurisdiction. Defendants have requested such review from the U.S. Court of
Appeals for the Second Circuit. Plaintiff is considering dismissal without
prejudice.
<PAGE>
In September 1999 an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants NL and seven other companies alleged to have
manufactured lead products in paint to a suit originally filed against
plaintiff's landlords. Plaintiff, a minor, alleges injuries purportedly caused
by lead on the surfaces of premises in homes in which he resided. Plaintiff
seeks compensatory and punitive damages. Plaintiff alleges strict liability,
negligence, negligent misrepresentation and omissions, fraudulent
misrepresentations and omissions, concert of action, civil conspiracy, and
enterprise liability causes of action against NL, seven other alleged former
manufacturers of lead products contained in paint, and the LIA. In January 2000
NL filed an answer denying all wrongdoing and liability, and all manufacturer
defendants filed a motion to dismiss the product defect claim and to strike the
demand for relief under the Wisconsin consumer protection statute.
In October 1999 NL was served with a complaint in State of Rhode Island
v. Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). Rhode Island, by and through its Attorney General, seeks compensatory
and punitive damages for medical, school, and public and private building
abatement expenses that the State alleges were caused by lead paint, and for
funding of a public education campaign and screening programs. Plaintiff seeks
judgments of joint and several liability against NL, seven other companies
alleged to have manufactured lead products in paint, and the LIA. Plaintiffs
allege public nuisance, violation of the Rhode Island Unfair Trade Practices and
Consumer Protection Act, strict liability, negligence, negligent
misrepresentation and omissions, fraudulent misrepresentation and omissions,
civil conspiracy, unjust enrichment, indemnity, and equitable relief to protect
children. In January 2000 defendants moved to dismiss all claims. Plaintiffs'
response is not yet due.
In October 1999 NL was served with a complaint in Cofield, et al. v.
Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland,
Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to represent a class
of all owners of nonrental residential properties in Maryland. Plaintiffs seek
compensatory and punitive damages for the existence of lead-based paint in their
homes, including funds for monitoring, detecting and abating lead-based paint in
those residences. Plaintiffs allege that NL, fourteen other companies alleged to
have manufactured lead pigment, paint and/or gasoline additives, the LIA, and
the National Paint and Coatings Association are jointly and severally liable for
alleged negligent product design, negligent failure to warn, supplier
negligence, strict liability/defective design, strict liability/failure to warn,
nuisance, indemnification, fraud and deceit, conspiracy, concert of action,
aiding and abetting, and enterprise liability. Plaintiffs seek damages in excess
of $20,000 per household. In October 1999 defendants removed the case to
Maryland federal court. In February 2000 defendants moved to dismiss the design
defect, fraud and deceit, indemnification and nuisance claims.
In October 1999 NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, six minors, each seek compensatory damages of
$5 million and punitive damages of $10 million. Plaintiffs allege that NL,
fourteen other companies alleged to have manufactured lead pigment, paint and/or
gasoline additives, the LIA, and the National Paint and Coatings Association are
jointly and severally liable for alleged negligent product design, negligent
failure to warn, supplier negligence, fraud and deceit, conspiracy, concert of
action, aiding and abetting, strict liability/failure to warn, and strict
liability/defective design. In October 1999 defendants removed the case to
Maryland federal court and in November 1999 the case was remanded to state
court. In February 2000 NL answered the complaint and denied all wrongdoing and
liability, and all defendants filed motions to dismiss the product defect and
fraud and deceit claims.
<PAGE>
In February 2000 NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). The City of St. Louis
seeks compensatory and punitive damages for its expenses discovering and abating
lead, detecting lead poisoning and providing medical care, educational programs
for City residents, and the costs of educating children suffering injuries due
to lead exposure. Plaintiff seeks judgments of joint and several liability
against NL, eight other companies alleged to have manufactured lead products for
paint, and the LIA. Plaintiff alleges claims of public nuisance, product
liability, negligence, negligent misrepresentation, fraudulent
misrepresentation, civil conspiracy, unjust enrichment, and indemnity. NL
intends to deny all allegations of wrongdoing and liability and to defend the
case vigorously.
NL believes that the foregoing lead pigment actions are without merit
and intends to continue to deny all allegations of wrongdoing and liability and
to defend such actions vigorously.
NL has filed actions seeking declaratory judgment and other relief
against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in NL's favor. In July 1991 the court granted NL's motion for summary judgment
and ordered Commercial Union to pay NL's reasonable defense costs for such
cases. In June 1992 NL filed an amended complaint in the United States District
Court for the District of New Jersey against Commercial Union seeking to recover
costs incurred in defending four additional lead pigment cases which have since
been resolved in NL's favor. In August 1993 the court granted NL's motion for
summary judgment and ordered Commercial Union to pay the reasonable costs of
defending those cases. In July 1994 the court entered judgment on the order
requiring Commercial Union to pay previously incurred NL costs in defending
those cases. In September 1995 the U.S. Court of Appeals for the Third Circuit
reversed and remanded for further consideration the decision by the trial court
that Commercial Union was obligated to pay 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. 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.
<PAGE>
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 NL's pending environmental litigation. Nor has the Court made any
final ruling on indemnity coverage in the lead pigment litigation. No trial
dates have been set. Other than rulings to date, the issue of whether insurance
coverage for defense costs or indemnity or both will be found to exist depends
upon a variety of factors, and there can be no assurance that such insurance
coverage will exist in other cases. NL has not considered any potential
insurance recoveries for lead pigment or environmental litigation in determining
related accruals.
Other 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.
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 have
refiled their cases in Ohio. NL 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 NL without prejudice from approximately 7,500
of such claims.
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.
<PAGE>
OTHER ITEMS:
Captive 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, NL and other
affiliates of Contran Corporation. 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 Management, Inc.
("BMI"), and (ii) a 12% interest in The Landwell Company L.P. ("Landwell")
(formerly the Victory Valley Land Company, L.P.). BMI has an additional 50%
interest in Landwell. Through its subsidiaries BMI provides utility services to,
and owns property (the "BMI Complex") adjacent to, TIMET's plant in Henderson,
Nevada, a suburb of Las Vegas. BMI, through Landwell, 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 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 has been completed at a total cost of
approximately $2 million. This site is now subject only to ongoing monitoring
and maintenance obligations. Another of the sites is currently being evaluated
by the Arkansas Department of Environmental Quality ("ADEQ"). The Company, along
with two other identified potentially responsible parties, has entered into
discussions with ADEQ that are expected to result in one or more voluntary
settlement agreements pertaining to investigations and remedial actions to be
undertaken at this site. 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, 1999, 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.
<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, 1999 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, 1999.
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Tremont's common stock is traded on the New York and Pacific Stock
Exchanges (symbol: TRE). As of March 13, 2000, there were approximately 11,500
holders of record of Tremont common stock. On March 17, 2000, the closing price
of the Company's common stock was $18.5625 per share. The high and low sales
prices for the Company's common stock are set forth below.
<TABLE>
<CAPTION>
High Low
Year ended December 31, 1998:
<S> <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, 1999
First quarter $33.625 $17.625
Second quarter 22.875 16.313
Third quarter 25.125 18.500
Fourth quarter 22.688 13.750
</TABLE>
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.
<PAGE>
ITEM 6: SELECTED HISTORICAL FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In millions, except per share data)
INCOME STATEMENT DATA:
Equity in earnings (loss) of:
<S> <C> <C> <C> <C> <C>
TIMET (c) $ (3.2) $ 16.0 $ 25.2 $ 14.0 $( 72.0)
NL Industries 11.4 (1.8) (5.1) 57.8 28.1
Other joint ventures - 2.5 5.2 2.9 .6
------------ ------------ ------------ ------------ -----------
$ 8.2 $ 16.7 $ 25.3 $ 74.7 $ (43.3)
============ ============ ============ ============ ===========
Gain on sale of TIMET stock $ - $ 27.6 $ - $ - $ -
============ ============ ============ ============ ===========
Income (loss):
Before extraordinary item $ 5.4 $ 30.0 $ 13.6 $ 75.7 $ (28.2)
Extraordinary item (a) - - - (1.9) -
------------ ------------ ------------ ------------ -----------
Net income (loss) $ 5.4 $ 30.0 $ 13.6 $ 73.8 $ (28.2)
============ ============ ============ ============ ===========
Earnings (loss) per basic share:
Before extraordinary item $ .73 $ 4.05 $ 1.92 $ 11.55 $ (4.41)
Net income (loss) .73 4.05 1.92 11.25 (4.41)
Earnings per diluted share (b):
Before extraordinary item $ .70 $ 3.90 $ 1.76 $ 11.18 $ -
Net income .70 3.90 1.76 10.88 -
Cash dividends per share $ - $ - $ - $ .21 $ .28
============ ============ ============ ============ ===========
BALANCE SHEET DATA (at year end):
Cash and cash equivalents $ 2.7 $ 68.0 $ 38.0 $ 3.1 $ 3.0
Total assets 134.9 223.5 215.0 288.6 232.6
Indebtedness 6.0 - - 5.9 13.7
Stockholders' equity 83.7 158.0 136.3 200.2 163.7
<FN>
(a) Represents the Company's equity in NL's extraordinary item.
(b) Antidilutive in 1999.
(c) In 1999 includes a $61 million ($38 million net-of-tax) writedown of
the Company's investment in TIMET (See Note 4 to the Consolidated
Financial Statements).
</FN>
</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 Landwell, which can fluctuate from period-to-period.
Corporate expenses, net. Tremont's corporate expenses, net for 1999
consist primarily of expenses related to intercorporate service agreements and
OPEB. Tremont's corporate expenses, net for 1998 include expenses related to
intercorporate service agreements and OPEB primarily offset by $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.
Corporate expenses, net for 1997, include $2.7 million of interest earned on
short-term investments and a $1.2 million gain on the sale of a certain oil and
gas production well interest.
Interest expense. Interest expense was higher in 1999 due to higher
average borrowings under the advance agreement with Contran, which agreement was
entered into in October 1998. See Note 10 to the Consolidated Financial
Statements. The Company expects interest expense in 2000 to be comparable to
1999 due to slightly lower borrowing levels offset by higher interest rates.
Income taxes. The Company's income tax rate in 1999 varied from the
U.S. statutory rate principally due to a reduction in the deferred tax valuation
allowance related to the recognition of a deductible difference associated with
affiliates not included in the consolidated tax group that previously did not
meet the "more-likely-than-not" recognition criteria. The variance in rates in
1998 was due to a reduction in the deferred tax asset valuation allowance due to
a net decrease in 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. See Note 7 to the
Consolidated Financial Statements.
As discussed below, the Company expects to report equity in losses of
TIMET in 2000. The Company's effective income tax rate in 2000 is expected to
vary from the U.S. statutory rate because Tremont does not expect that
recognizing a deferred income tax asset with respect to such equity in losses
will be appropriate under the "more-likely-than-not" recognition criteria.
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, 1999 was $11.12 per share, compared to a per share market price of $15.06 at
that date.
<PAGE>
At December 31, 1999, after considering what the Company believes to be
all relevant factors including, among other things, TIMET's operating results,
financial position, estimated asset values and prospects, the Company recorded a
$61 million pre-tax non-cash charge ($38 million net-of-tax) to earnings to
reduce the net carrying value of its investment in TIMET for an other than
temporary impairment in its market value. After such writedown, at December 31,
1999, the Company's net carrying value of its investment in TIMET was $7.00 per
share compared to a per share market price of $4.50 at that date. In determining
the amount of the impairment charge, the Company considered, among other things,
recent ranges of TIMET's stock price and current estimate of TIMET's future
operating losses which would further reduce the Company's net carrying value of
its investment in TIMET as it records additional equity in losses.
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 further 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.
Year 2000 ("Y2K"). Tremont, as a holding company, does not itself have
numerous applications or systems. During 1999, the Company completed an
assessment of potential Y2K issues in its information systems and implemented
remedial actions as necessary. The cost to the Company for Y2K readiness was not
material. The Company did not experience any significant adverse effects on its
systems or operations as a result of the Y2K issues. Y2K issues related to TIMET
and NL are discussed below.
TIMET
The Company's equity in TIMET's earnings (losses) differs from the
amount that would be expected by applying Tremont's December 31, 1999
39%-ownership percentage to TIMET's separately-reported earnings because of
changes in Tremont's level of ownership of TIMET and because of the effect of
amortization of purchase accounting adjustments made by Tremont in conjunction
with the acquisitions of its interest in TIMET. Amortization of such basis
differences in TIMET (other than with respect to the other than temporary
impairment charge discussed above) 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 three-fourths 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. 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 wide body
planes. During 1999, aerospace customers reduced inventories and adjusted to
decreases in overall production rates and, as a result, TIMET's mill products
shipments declined 23% to 11,400 metric tons. TIMET's fourth quarter 1999 sales
of $105.5 million was the lowest quarterly sales amount in four years. At
present, a substantial inventory overhang still exists throughout the aerospace
industry supply chain and current expectations are that 2000 sales will be
somewhat below the fourth quarter 1999 annualized due to lower expected sales
volumes and selling prices. Industrial demand for titanium has also declined due
to weakness in Asian and other economies and is expected to remain soft during
2000.
<PAGE>
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 and decreased a further 11% in 1999 to
48,000 metric tons. Expectations for 2000 are a further decline in mill product
shipments although the decline is expected to be less than that experienced
during each of the last two years.
TIMET's order backlog decreased to approximately $195 million at
December 31, 1999 from $350 million at December 31, 1998 and $530 million at
December 31, 1997. Substantially all of the 1999 year end backlog is scheduled
to be shipped during 2000.
TIMET expects that production levels, capacity utilization, sales
volumes, sales prices, gross margins and operating income excluding special
charges, will all be lower in 2000 than they were in 1999. Accordingly, TIMET
currently expects that its 2000 loss before special charges will exceed its 1999
loss before special charges and looks to return to profitability in late 2001.
In January 2000, TIMET adopted a plan to restructure the organization and reduce
costs. As part of this reorganization, the global manufacturing and commercial
operations have been consolidated into two organizations, and TIMET will further
reduce personnel by about 10%, or 250 employees, primarily during the first half
of 2000. Additional resources will be focused in an effort to significantly
improve the quality of TIMET's manufacturing, customer service and management
processes to return to profitability. The restructuring actions taken in January
are expected to result in an additional restructuring charge in the first
quarter of 2000 of up to $10 million, primarily related to employee termination
costs. Additionally, in February 2000, TIMET entered into new U.S. and U.K.
credit facilities. In connection therewith, TIMET wrote off $1.3 million of
deferred financing costs associated with its previous U.S. facility.
TIMET has implemented plans to address the current market conditions,
as more fully described in Item 1 - "Business - Unconsolidated Affiliate - TIMET
- - Current Industry Conditions and Outlook for 2000." Restructuring charges in
1998 and 1999 as a result of TIMET's action plans were $24 million and $4.5
million, respectively. The components of the 1998 and 1999 restructuring charges
are summarized below.
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
Segment Segment
---------------------------- ----------------------------
Melted and Melted and
Mill Mill
Products Other Products Other
--------------- ----------- --------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Property and equipment $ 7.1 $ 2.6 $ .3 $ -
Disposition of German subsidiary - - 2.0 -
Pension and OPEB costs, net 5.7 - (.1) -
Personnel severance and benefits 5.3 .5 2.5 -
Other exit costs, principally
related to leased facilities 1.4 1.4 - (.2)
--------------- ----------- --------------- ----------
$ 19.5 $ 4.5 $ 4.7 $ (.2)
=============== =========== =============== ==========
</TABLE>
<PAGE>
Summarized statement of operations information of TIMET is presented below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1997 1998 1999
---- ---- ----
(In millions)
Net sales:
<S> <C> <C> <C>
Titanium melted and mill products $ 700.4 $ 686.7 $ 479.5
Other 36.2 23.9 2.2
Eliminations (3.0) (2.9) (1.7)
---------------- -------------- ----------------
$ 733.6 $ 707.7 $ 480.0
================ ============== ================
Operating income:
Titanium melted and mill products $ 139.3 $ 87.4 $ (27.7)
Other (6.3) (4.7) (3.7)
---------------- -------------- ----------------
133.0 82.7 (31.4)
Dividends and interest income 1.4 6.3 6.0
General corporate income (expense), net 2.8 (.2) (1.2)
Interest expense 2.0 2.9 7.1
---------------- -------------- ---------------
Pretax income (loss) 135.2 85.9 (33.7)
Income tax expense (benefit) 41.0 29.2 (12.0)
Minority interest - Convertible Preferred
Securities 8.9 8.8 8.7
Other minority interest 2.3 2.1 1.0
---------------- -------------- ---------------
Net income (loss) $ 83.0 $ 45.8 $ (31.4)
================ ============== ===============
Tremont's equity in TIMET's income (loss),
including amortization of basis differences $ 25.2 $ 14.0 $ (11.2)
Provision for market value decline (Note 4) - - (60.8)
---------------- -------------- ----------------
$ 25.2 $ 14.0 $ (72.0)
================ ============== ================
Mill product shipments:
Volume (metric tons) 15,100 14,800 11,400
Average price ($ per Kilogram) $ 35.00 $ 35.25 $ 33.00
</TABLE>
<PAGE>
TIMET operates in two segments (i) "Titanium melted and mill products",
its principal segment, and (ii) "Other." In 1997 and 1998, the "Other" segment
consisted primarily of TIMET's titanium castings operations which were combined
in a joint venture during 1998 and subsequently sold in January 2000. In 1999,
the "Other" segment consists of TIMET's nonintegrated joint ventures.
Sales and operating income (loss) - 1999 compared with 1998. The
"Titanium melted and mill product" segment net sales in 1999 decreased 30%
compared to 1998 primarily due to a 23% decrease in mill products shipment
volume resulting primarily from reduced demand in the aerospace market, as
described above. Average selling prices for 1999 were approximately 7% lower
than 1998 reflecting both the price effect of long-term agreements and increased
price competition on non-contract business. Average prices on 2000 shipments are
expected to be as much as 15% lower than average 1999 in certain product lines,
but only slightly lower than average prices in the fourth quarter of 1999. TIMET
produced approximately $16 million of titanium ingot in 1999, for which the
customer was billed but income recognition was deferred. TIMET anticipates the
majority of this ingot will be converted and shipped in 2000, at which time the
related income will be recorded.
The decrease in net sales of the "Other" segment is a result of TIMET's
ceasing to consolidate its castings business after July 1998.
Total cost of sales in 1999 was 95% of sales compared to 77% in 1998.
The increase in the percentage is a result of the lower selling prices, lower
production volumes, higher depreciation, and increased reserves for slow-moving
inventory. Yield, rework and deviated material costs were also higher and plant
operating rates were lower. Selling, general, administrative and developmental
expenses in 1999 were lower than 1998 in dollar terms due in large part to the
completion of the implementation of the initial phase of TIMET's
business-enterprise system during the first half of 1999. These costs as a
percentage of sales, however, increased to approximately 10% primarily due to
the decline in sales.
In the fourth quarter of 1999, TIMET recorded $6.8 million of special
charges consisting of $4.5 million of restructuring charges and $2.3 million of
write-downs associated with TIMET's investment in certain start-up joint
ventures. During the same quarter, TIMET also recorded a $4.3 million charge to
cost of sales for slow-moving inventory. Approximately half of the restructuring
charges were non-cash, primarily related to the disposition of a Germany
subsidiary, with the cash component relating to the termination of 100 people.
The $4.3 million charge for slow-moving inventory and $4.7 million of the $6.8
million of special charges are included in the operating loss of the "Titanium
melted and mill products" segment in 1999. Operating income of the "Titanium
melted and mill products" segment in 1998 included special charges of $19.5
million. Operating losses of the "Other" segment included $4.5 million and $2.1
million of special charges in 1998 and 1999, respectively.
Equity in earnings (losses) of joint ventures of the "Titanium melted
and mill products" segment decreased by $1.3 million from 1998 principally due
to the decline in earnings of ValTimet. Equity in losses of the "Other" segment
were higher in 1999 due to TIMET recording a higher share of the losses for a
full year in 1999 as a result of increased ownership in certain of these
ventures in mid-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 from 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.
<PAGE>
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. 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 business-enterprise information system and
addressing Y2K issues.
Equity in earnings of joint ventures of the "Titanium melted and mill
products" segment improved in 1998 over 1997 principally due to improved
earnings of ValTimet. Equity losses of the "Other" segment were higher in 1998
as certain ventures were held for the full year, compared to a part year in
1997.
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 European operations are substantially the same.
Approximately 60% of TIMET's European sales are denominated in
currencies other than the U.S. dollar, principally the British pound and
European currencies tied to the euro. 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
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 U.S. 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 gains/losses included in earnings was a $1.2 million loss
in 1999, a $.4 million gain in 1998 and nominal in 1997. At December 31, 1999,
consolidated assets and liabilities denominated in currencies other than
functional currencies were approximately $20 million and $24 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
British pound) became fixed relative to each other as a result of the
implementaion of the euro effective in 1999. Costs associated with modifications
of systems to handle euro-denominated transactions were not significant.
Dividends and interest income. In 1999, dividends and interest income
consists principally of accrued dividends on $80 million of non-voting preferred
securities of Special Metals Corporation, which were purchased by TIMET in
October 1998. In 1997 and 1998, the amount represents primarily earnings on
corporate cash equivalents and varies with cash levels and interest rates. See
"Liquidity and Capital Resources - TIMET - Financing Activities".
General corporate income (expense). General corporate income (expense)
consists principally of currency transaction gains/losses.
Interest expense. Interest expense for 1999 more than doubled from the
levels of 1998 primarily due to higher levels of average debt and increased
interest rates. Also contributing to the higher comparative interest expense is
a lower level of interest being capitalized in 1999 compared to 1998 as major
capital projects have been completed. While average borrowing levels increased
in 1998 over 1997, interest rates declined and interest capitalized increased.
Interest expense in 2000 is expected to be higher than 1999 due to higher
average borrowing levels and higher interest rates on the new credit facilities.
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 Compagnie Europeene du Zirconium-CEZUS, S.A. ("CEZUS").
<PAGE>
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 (loss) can impact TIMET's overall effective tax rate. In 1997, 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. For financial reporting purposes, TIMET has recognized the tax
benefit of all of its net operating loss carryforwards, and expects that tax
benefits to be recognized during 2000 will be deferred.
Year 2000 ("Y2K"). As a result of many computer systems and
applications being written to use two-digit fields to designate a year, many
date-sensitive systems may have recognized the year 2000 as 1900, or not at all.
This could have resulted in a system failure or miscalculations causing systems
to incorrectly process critical financial, manufacturing and operational
information. These are generally referred to as the "Y2K Issues".
During 1999, TIMET, with the help of outside specialists and
consultants, completed all Y2K readiness procedures and did not experience any
significant adverse effects on its systems or operations as a result of the Y2K
Issues. These readiness procedures included (i) 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 system, (ii) determining, prioritizing
and implementing remedial actions, including testing, and (iii) developing
contingency plans in the event internal or external Y2K Issues were not resolved
by the target date for completion. TIMET expended in the aggregate approximately
$4.5 million in 1998-99 ($2.5 million in 1999) on these specific non-information
system Y2K Issues, principally embedded system technology. Additionally, 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.
sites in 1999. The cost of the new system, including related equipment and
networks, aggregated approximately $54.0 million in 1997-99 ($43.5 million
capital; $10.5 million expense), of which $4.0 million ($2.5 million capital;
$1.5 million expense) was expended in 1999. To date in 2000, none of TIMET's
manufacturing facilities have suffered any downtime due to noncompliant systems,
nor have any significant problems associated with the Y2K Issues been identified
in any systems. TIMET will continue to monitor its major systems in order to
ensure that such systems continue to be year 2000 compliant. However, based
primarily upon success to date, TIMET does not currently expect any significant
Y2K Issues will develop for any of its systems. Furthermore, TIMET is not aware
of any significant adverse Y2K Issues that may have arisen for its key suppliers
or 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.
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 significantly increased
in 1998 and slightly decreased in 1999 compared to the prior year. Kronos'
operating income increased $88.7 million in 1998 and declined $25.5 million in
1999. Gross profit margins were 22% in 1997, 31% in 1998 and 27% in 1999.
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 under the captions "Industry" and "Competition" in Item
1. "Business - Unconsolidated Affiliate - NL."
<PAGE>
Summarized statement of operations information of NL is presented below.
<TABLE>
<CAPTION>
Years ended December 31, Change
-------------------------------------- -----------------------------
1997 1998 1999 1997-98 1998-99
---- ---- ---- ------- -------
(In millions)
<S> <C> <C> <C> <C> <C>
Net sales - Kronos $837.2 $894.7 $908.4 +7% +2%
Operating income - Kronos $ 82.5 $171.2 $145.7 +107% -15%
General corporate items:
Securities earnings 5.4 14.9 6.6
Corporate expenses, net (49.8) (18.3) (16.9)
Interest expense (65.8) (58.1) (36.9)
--------- ---------- ----------
Pretax income (loss) (27.7) 109.7 98.5 $137.4 $ (11.2)
Income tax expense (benefit) 2.2 19.8 (64.6)
Discontinued operations - Rheox 20.4 287.4 -
Extraordinary item - (10.6) -
Minority interest - - (3.3)
--------- ---------- ----------
Net income (loss) $ (9.5) $366.7 $159.8 $376.2 $(206.9)
========= ========== ========== ============ ============
Tremont's equity in
earnings (loss) of NL,
including amortization of
basis differences $ (5.1) $ 57.8 $28.1 $ 62.9 $ (29.7)
========= ========== ========== ============ ============
Percent change in TiO2
Sales volume -4% +5%
Average selling prices (in billing currencies) +16% -1%
</TABLE>
Kronos' operating income in 1999 was lower than 1998, primarily due to
lower average TiO2 selling prices and lower production volume, partially offset
by higher sales volume and a $5.3 million currency exchange transaction gain
related to certain of NL's short-term intercompany cross-border financings.
Kronos' operating income for 1998 was higher than 1997 due to 16% 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' 1999 average TiO2 selling prices
were 1% lower than in 1998 with higher prices in North America offset by lower
prices in Europe and export markets. European prices at the end of the year
(when expressed in U.S. dollars at year-end exchange rates) were 9% below prices
available in the U.S. as a result of the strong U.S. dollar against major
European currencies. Pigment prices declined during the first three quarters of
1999, but increased in the fourth quarter as a result of price increases
announced by all major producers effective during the fourth quarter. Such price
increases began to be phased in during the fourth quarter of 1999 and continue
to be implemented in the first quarter of 2000. Kronos recently announced a
price increase in Europe effective April 1, 2000. The successful implementation
of the price increase will depend on market conditions. Average selling prices
in the fourth quarter of 1999 were 3% lower than the fourth quarter of 1998, 1%
lower than the average selling price for full-year 1999 and 1% higher than the
third quarter of 1999. Selling prices at the end of the fourth quarter were 1%
higher than the average for the quarter. Average TiO2 selling prices in 1998
were 16% higher than 1997 with strong increases in all major regions.
<PAGE>
Industry-wide demand was strong throughout 1997 and the first half of
1998, before moderating in the second half of 1998 and early 1999. Demand in the
second half of 1999 was stronger than comparable periods in both 1998 and 1997
as a result of, among other things, customers buying in advance of anticipated
price increases. Kronos' sales volume in the fourth quarter of 1999 increased
21% from the fourth quarter of 1998. Sales volume of 427,000 metric tons of TiO2
in 1999 was 5% higher than 1998 with growth in all major regions. Sales volume
in 1998 was 4% lower than 1997, reflecting lower sales in Asia and Latin
America. Approximately one-half of Kronos' 1999 TiO2 sales, by volume, were
attributable to markets in Europe with approximately 37% attributable to North
America, and the balance to other regions.
Kronos expects industry demand in 2000 will be relatively unchanged
from 1999, depending primarily upon global economic conditions, and accordingly,
NL believes 2000 sales volume will approximate 1999 levels. Kronos produced at
or near full capacity in 1997 and 1998, but curtailed production during the
first quarter of 1999 to manage inventory levels. As a result, Kronos reduced
finished goods inventories by approximately 15,000 metric tons. Kronos'
production volume in 1999 was 5% lower than 1998 and capacity utilization in
1999 was 93% compared to full capacity in 1998. Kronos' production volume in
2000 is expected to closely match expected 2000 sales volume. Kronos believes
average TiO2 selling prices in 2000 should continue an upward trend as NL
expects to continue to phase-in announced price increases during 2000. Should
demand in 2000 remain strong, additional price increases could be announced
later in 2000. NL believes that average 2000 prices will exceed average 1999
prices. As a result of anticipated higher average prices and its continued focus
on controlling costs, Kronos expects its 2000 operating income will be higher
than 1999. The extent of this improvement will be determined primarily by the
magnitude of realized price increases.
Excluding the effects of foreign currency translation, which decreased
NL's expenses in both 1998 and 1999, Kronos' cost of sales in 1999 was higher
than 1998 due to higher sales volume and higher unit costs, which resulted
primarily from lower production levels. Kronos' cost of sales in 1998 was lower
than 1997 primarily due to lower sales volume. Cost of sales, as a percentage of
net sales, increased in 1999 primarily due to the impact on net sales of lower
average selling prices and higher unit costs, and decreased in 1998 primarily
due to the impact on net sales of increased average selling prices.
Excluding the effects of foreign currency translation, which decreased
NL's expenses in both 1998 and 1999, Kronos' selling, general and administrative
expenses, in absolute dollar amounts, increased in 1999 from the previous year
due to higher distribution expenses associated with higher 1999 sales volumes,
while 1998 expenses, in absolute dollar amounts, were lower than 1997 as a
result of lower distribution expenses related to lower sales volume. Selling,
general and administrative expenses, as a percentage of net sales, were 14% in
1997 and 12% in both 1998 and 1999.
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) 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.
<PAGE>
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 (61% in 1999), principally the euro, other 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 $24 million and $15 million during 1998 and 1999,
respectively, compared to the year-earlier period. Excluding the 1999 $5.3
million gain described above, fluctuations 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 1998 or 1999.
General corporate. The following table sets forth certain information
regarding general corporate income (expense).
<TABLE>
<CAPTION>
Years ended December 31, Change
------------------------------------------ -----------------------------
1997 1998 1999 1997-98 1998-99
------------ ---------- ----------- ------------- ------------
(In millions)
<S> <C> <C> <C> <C> <C>
Securities earnings $ 5.4 $ 14.9 $ 6.6 $ 9.5 $ (8.3)
Corporate expenses, net (49.8) (18.3) (16.9) 31.5 1.4
Interest expense (65.8) (58.1) (36.9) 7.7 21.2
------------ ---------- ----------- ------------- ------------
$ (110.2) $ (61.5) $ (47.2) $ 48.7 $ 14.3
============ ========== =========== ============= ============
</TABLE>
Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Average funds invested in 1999 were lower than 1998
primarily due to the repayment of certain of NL's debt in the last half of 1998.
Average funds invested in 1998 were higher than 1997 primarily due to the net
proceeds from the sale of Rheox in January 1998. NL expects security earnings in
2000 will be lower than 1999 due to lower average levels of funds available for
investment due to debt reduction made during 1999 and higher projected
expenditures in 2000 for dividends, environmental remediation and other
corporate purposes.
Corporate expenses, net in 1999 were lower than 1998, primarily due to
$3.0 million of expenses in 1998 related to the unsuccessful acquisition of
certain TiO2 businesses and assets of a competitor. 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." This charge is included in selling, general and administrative
expense for 1997 in NL's Consolidated Statements of Income. 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 proceeds received in conjunction with
the sale of Rheox attributable to a five-year agreement by NL not to compete in
the rheological products business, partially offset by the aforementioned $3.0
million expense in 1998. In 1999 NL recorded $4 million of income related to the
amortization of this deferred income.
<PAGE>
Interest expense. Interest expense declined in 1999 and 1998 compared
to the respective prior years due to prepayment of the Deutsche mark ("DM")
- -denominated bank credit facility in 1999 and prepayments of outstanding
indebtedness in 1998, principally the Senior Secured Discount Notes, the joint
venture term loan and a portion of Kronos' DM-denominated debt. Interest expense
in 1998 declined compared to 1997 principally due to prepayments of this
outstanding indebtedness. Assuming no significant change in interest rates,
interest expense in 2000 is expected to be lower compared to 1999 due to lower
levels of outstanding indebtedness and lower margins on variable rate debt.
Provision for income taxes. 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 1998 and 1999 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. Also in 1998 and 1999, NL
recognized certain one-time benefits related to German tax settlements. In 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.
NL's contingencies related to income taxes at December 31, 1999 are
discussed below in "Liquidity and Capital Resources - NL Industries."
Other. Minority interest in 1999 relates to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of NL's environmental liabilities. EMS' earnings are based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
The shareholders of EMS, other than NL, actively manage the environmental
liabilities and share in 39% of EMS' cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS' environmental liabilities, as discussed below.
Discontinued operations in 1998 represent NL's former specialty
chemicals operations which were sold in January 1998. The extraordinary item in
1998 resulted from early extinguishment of debt.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
TREMONT
The Company had cash and equivalents of approximately $3 million at each
of December 31, 1998 and 1999, down from $38 million at the end of 1997. The
decrease in cash during the past two years was primarily the result of cash used
in the stock repurchase program during 1998 and to purchase additional NL and
TIMET common stock in 1998 and 1999, which included the Company's 1999 exercise
of an option to purchase two million shares of TIMET stock from IMI for $16
million. See Note 4 to the Consolidated Financial Statements.
Tremont's 12.3 million shares of TIMET common stock and 10.2 million
shares of NL common stock had a quoted market value of approximately $55 million
and $154 million, respectively, at December 31,1999.
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
stock. In 1999, the Company borrowed an additional $6.3 million from Contran to
partially fund the purchase of TIMET common stock from IMI. During 2000, the
Company expects to begin making payments on this debt as dividends from NL,
which were increased to $.15 per share in the first quarter 2000, are expected
to exceed the Company's other cash requirements. See Notes 4 and 10 to the
Consolidated Financial Statements.
The Contran advance agreement and dividends from NL are currently
Tremont's primary sources of liquidity. As discussed below, NL raised its
quarterly dividend from $.035 to $.15 per NL share in 2000. Unless the Company
decides to purchase additional shares of NL, TIMET or Tremont securities, the
Company does not currently believe it will need to borrow additional amounts
from Contran.
During 1998, the Company collateralized with cash certain letters of
credit backing insurance policies at its captive insurance subsidiary. In 1999,
NL collateralized a portion of the letters of credit as they related to its
business with the captive, and the Company received $9.9 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 (losses) of affiliates are primarily
noncash. The Company received cash distributions from Landwell of $1 million in
1997 and $.6 million in 1998 primarily to cover taxes associated with Landwell's
income from land sales. No cash distributions were received from Landwell in
1999. NL paid no dividends in 1997, paid three quarterly cash dividends during
1998 at the rate of $.03 per NL share per quarter aggregating $.8 million and
paid four quarterly cash dividends during 1999 at the rate of $.035 per NL share
per quarter aggregating $1.4 million. TIMET did not pay any cash dividends
during 1997, paid three quarterly cash dividends during 1998 at the rate of $.04
per TIMET share per quarter aggregating $1.2 million and paid three quarterly
cash dividends during 1999 at the rate of $.04 per TIMET share per quarter
aggregating $1.5 million. In the third quarter of 1999, TIMET suspended payment
of its regular quarterly common stock dividend. NL raised its dividend on
February 9, 2000 from $.035 per share to $.15 per share for shareholders of
record as of March 16, 2000 to be paid March 31, 2000. Any future dividends from
NL and TIMET will be at the discretion of the respective company's boards of
directors and will depend upon, among other things, earnings, financial
condition, cash requirements, cash availability and contractual requirements.
Based upon the Company's holdings of NL common stock at December 31, 1999 and
the $.15 per share per quarter dividend expected from NL during 2000, the
Company expects to receive approximately $6 million in dividends from NL in
2000. 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, refinance or restructure 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 acquisition of IMI Titanium 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.
See "Results of Operations" and Note 11 to the Consolidated Financial
Statements for additional matters affecting the Company's liquidity and capital
resources.
TIMET
Summarized balance sheet and cash flow information of TIMET is
presented below.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
-------------- --------------
(In millions)
<S> <C> <C>
Cash and cash equivalents $ 15.5 $ 20.7
Other current assets 379.4 321.9
Goodwill and other intangible assets 79.4 71.1
Other noncurrent assets 127.7 136.0
Property and equipment, net 351.2 333.4
-------------- --------------
$ 953.2 $ 883.1
============== ==============
Current liabilities $ 136.9 $ 194.4
Long-term debt and capital lease obligations 110.0 32.2
Accrued OPEB cost 24.1 20.0
Other noncurrent liabilities 24.4 19.9
Minority interest - Convertible Preferred Securities 201.2 201.2
Other minority interest 8.2 7.3
Stockholders' equity 448.4 408.1
-------------- --------------
$ 953.2 $ 883.1
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1997 1998 1999
----------------- -------------- -----------------
(In millions)
Net cash provided (used) by:
<S> <C> <C> <C>
Operating activities $ 72.6 $ 76.1 $ 19.5
Investing activities:
Capital expenditures (66.3) (115.2) (24.8)
Business acquisitions and joint ventures (13.5) (27.4) -
Purchase of preferred securities - (80.0) -
Other, net - (.6) 3.1
Financing activities:
Net borrowings (repayments) (5.8) 97.1 12.6
Other, net (4.0) (4.9) (4.0)
Cash acquired and currency translation (.6) 1.4 -
----------------- -------------- -----------------
$ (17.6) $ (53.5) $ 6.4
================= ============== =================
Cash paid for:
Interest expense, net of amounts capitalized $ 2.2 $ 2.2 $ 6.7
Convertible Preferred Securities dividends 13.3 13.3 13.3
Income taxes, net 22.5 23.7 .1
</TABLE>
At December 31, 1999, TIMET had $21 million of cash and cash
equivalents and $21 million of borrowing availability under its U.S. and
European bank credit lines. Net debt at year end 1999 was approximately $96
million ($21 million of cash and equivalents and $117 million of notes payable
and debt, principally borrowings under TIMET's U.S. and U.K. credit agreements).
In February 2000, TIMET completed a new $125 million, three-year
U.S.-based revolving credit agreement replacing its previous U.S. bank credit
facility. Borrowings under the new facility are limited to a formula-determined
borrowing base derived from the value of accounts receivable, inventory and
equipment. The credit agreement limits additional indebtedness, prohibits the
payment of common stock dividends, and contains other covenants customary in
lending transactions of this type. TIMET also increased its U.K. credit
agreement from (pound)18 million ($29 million) to (pound)30 million ($48
million) with its existing U.K. lender.
Borrowings under these U.S. and U.K. agreements at closing were used to
repay the $58 million in then-outstanding borrowings under the prior U.S. credit
agreement, which was terminated. Upon closing on the new credit facilities on
February 25, 2000, TIMET had about $96 million of borrowing availability under
these agreements. TIMET believes the new U.S. and U.K. credit facilities will
provide it with the liquidity necessary for current market and operating
conditions.
<PAGE>
Operating activities. Cash provided by operating activities was
approximately $19 million in 1999, $76 million in 1998 and $73 million in 1997.
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
(In millions)
<S> <C> <C> <C>
Excluding changes in assets and liabilities $ 121.3 $ 108.7 $ 23.9
Changes in assets and liabilities (48.7) (32.6) (4.4)
-------------- -------------- --------------
$ 72.6 $ 76.1 $ 19.5
============== ============== ==============
</TABLE>
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 1997 primarily because
sales levels were increasing, and provided cash in 1998 and 1999 as sales levels
were decreasing.
Inventories 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 production rates that were based on expected
sales levels higher than the actual sales level turned out to be. TIMET reduced
inventories during 1999 as excess raw materials were consumed and other
reduction and control efforts were put in place. TIMET expects a further
reduction during 2000 in raw materials and finished goods inventory.
Changes in net current income taxes payable increased in 1997 and
decreased in 1998 in part due to the delayed timing of cash payments for taxes
in Europe relative to earnings. In 1999, income taxes payable decreased and is
principally a receivable at December 31, 1999 as the current year's losses will
be carried back to recover a portion of prior years' taxes paid. Changes in
accounts with related parties resulted primarily from relative changes in
receivable levels with joint ventures in 1997, 1998 and 1999.
Investing activities. TIMET's capital expenditures were $25 million in
1999, down from $115 million in 1998 and $66 million in 1997. About one-half of
capital expenditures during the two-year period 1997-1998 related to capacity
expansion projects associated with long-term customer agreements. Capital
expenditures in 1999 are primarily related to the expansion of forging capacity
at the Toronto, Ohio facility, the installation of the business-enterprise
system in Europe and various environmental and other projects.
Approximately 10% of TIMET's capital spending in 1999 related to the
major business-enterprise information systems and information technology project
implemented at various sites throughout TIMET. Approximately one-fourth of the
two-year period 1997-1998 capital spending related to this project. 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 2000 is currently expected to be about $15 million
covering principally capital maintenance and health, safety and environmental
projects, which is less than the expected depreciation and amortization expense
of approximately $44 million.
<PAGE>
Cash used for business acquisitions and joint ventures in 1998 related
primarily to the Loterios and Wyman-Gordon transactions. In 1997, such
investments consisted primarily of cash contributions in connection with the
formation of ValTimet and investments in companies developing new markets and
uses for titanium.
In October 1998, TIMET purchased for cash $80 million of Special Metals
Corporation 6.625% convertible preferred stock (the "SMC Preferred Stock") in
conjunction with, and concurrent with, SMC's acquisition of the Inco Alloys
International high performance nickel alloys business unit of Inco Limited.
TIMET is accruing dividends on the SMC Preferred Stock, although dividends
cannot currently be paid by SMC due to limitations imposed by an amendment of
SMC's bank credit agreement. TIMET understands that SMC has sued Inco Limited
alleging that it made various misrepresentations to SMC in connection with the
acquisition. TIMET is evaluating the position it will take with respect to SMC's
claims.
Financing activities. Net borrowings of $13 million in 1999 and $97
million in 1998 were primarily to fund capital expenditures and in 1998 the
Loterios acquisition. Net debt repayments of $6 million in 1997 related
primarily to reductions in European working capital borrowings, including
amounts due to CEZUS, TIMET's minority partner in TIMET Savoie.
In November 1999, TIMET's Board of Directors ("Board") voted to suspend
the regular quarterly dividend on its common stock in view of, among other
things, the continuing weakness in overall market demand for titanium metal
products. TIMET's new U.S. credit agreement entered into in February 2000 now
prohibits the payment of dividends on TIMET's common stock.
TIMET's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters for each period. TIMET's new U.S.
credit agreement prohibits the payment of Convertible Preferred Securities
dividends if "excess availability", as determined under the agreement, is less
than $25 million. Upon closing of the new U.S. credit facility on February 25,
2000, TIMET had approximately $80 million of borrowing availability under this
agreement. TIMET's Board will continue to evaluate the payment of dividends on
the Convertible Preferred Securities on a quarter-by-quarter basis based upon,
among other things, TIMET's actual and forecasted results of operations,
financial condition, cash requirements for its businesses, contractual
requirements and other factors deemed relevant.
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 common and preferred dividend
policies, 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.
Environmental matters. See Item 1 - "Business - Unconsolidated
Affiliate - TIMET - Regulatory and Environmental Matters" for a discussion of
environmental matters.
<PAGE>
NL Industries
Summarized balance sheet and cash flow information of NL is presented
below.
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
----------- ---------
(In millions)
<S> <C> <C>
Cash and cash equivalents $ 163.1 $ 151.8
Other current assets 383.6 354.6
Noncurrent securities 17.6 15.1
Investment in joint ventures 171.2 157.6
Other noncurrent assets 37.9 28.7
Property and equipment, net 382.2 348.4
------------ -----------
$ 1,155.6 $ 1,056.2
============ ============
Current liabilities $ 310.6 $ 264.8
Long-term debt 292.8 244.3
Deferred income taxes 196.2 108.2
Accrued OPEB cost 41.7 37.1
Environmental liabilities 81.5 64.5
Other noncurrent liabilities 79.9 62.3
Minority interest .6 3.9
Shareholders' equity 152.3 271.1
------------ ------------
$ 1,155.6 $ 1,056.2
============ ============
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1998 1999
----------- ---------- -----------
(In millions)
Net cash provided (used) by:
Operating activities:
<S> <C> <C> <C>
Rheox, net $ 31.5 $ (30.6) $ -
Other 57.7 75.7 108.3
Investing activities:
Capital expenditures (28.2) (22.4) (35.6)
Other, net 17.1 439.7 (2.8)
Financing activities:
Net repayments (182.2) (285.4) (73.7)
Other, net 99.6 (110.8) (14.3)
Currency translation and other (2.3) (7.6) (2.6)
------------- ------------ --------------
$ (6.8) $ 58.6 $ (20.7)
============= ============ ==============
Cash paid for:
Interest, net of amounts capitalized $ 55.9 $ 38.0 $ 35.5
Income taxes, net 6.9 54.2 15.0
</TABLE>
Operating activities. 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, declined in 1999 from the prior year primarily
due to lower operating income, partially offset by $13.7 million of cash
distributions from NL's TiO2 manufacturing joint venture, and improved in 1998
from the prior year primarily due to higher operating income.
Changes in NL's assets and liabilities (excluding the effect of
currency translation and Rheox, net) provided cash in 1997 and used cash in 1998
and 1999 primarily due to reductions in inventory levels in 1997, increases in
inventory levels in 1998 and increases in receivable levels in 1999 due to high
year-end demand. Rheox, net in 1998, primarily income tax payments made as a
result of the gain on sale of Rheox, significantly decreased cash flows from
operating activities.
Investing activities. NL's capital expenditures were $28 million, $22
million and $36 million in 1997, 1998 and 1999. The increase in capital
expenditures in 1999 is partially due to $6 million of expenditures for a
landfill expansion for NL's Belgian facility. Capital expenditures in 1997
included $7 million related to a 20,000 metric ton debottlenecking project.
Capital expenditures of the manufacturing joint venture and NL's discontinued
operations are not included in NL's capital expenditures.
NL's capital expenditures during the past three years include an
aggregate of $22 million ($10 million in 1999) for NL's ongoing environmental
protection and compliance programs. NL's estimated 2000 and 2001 capital
expenditures are $37 million and $35 million, respectively, and include $7
million and $11 million, respectively, in the area of environmental protection
and compliance.
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.
<PAGE>
Financing activities. NL prepaid its DM 107 million ($60 million when
paid) term loan in full in the first quarter of 1999, principally by drawing DM
100 million ($56 million when drawn) on its DM revolving credit facility. In the
second and third quarters of 1999, NL repaid DM 60 million ($33 million when
paid) of the DM revolving credit facility with cash provided from operations.
The revolver's outstanding balance of DM 120 million was further reduced in
October 1999 by DM 20 million ($11 million when paid). In December 1999 NL
borrowed $26 million of short-term unsecured euro-denominated bank debt and used
the proceeds along with cash on hand to prepay the remaining balance of DM 100
million ($52 million when paid) under its Deutsche mark-denominated bank credit
agreement. The DM facility was then terminated, which released collateral and
eliminated certain restrictive loan covenants.
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. NL's
borrowings and principal repayments excludes activity related to NL's
discontinued operations.
With a majority of the $380 million after-tax net proceeds from the
sale of Rheox, NL (i) prepaid $118 million of the Rheox term loan, (ii) prepaid
$42 million of Kronos' tranche of the LPC joint venture term loan, (iii) made
$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) purchased $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) redeemed
$121 million of 13% Senior Secured Discount Notes outstanding on October 15,
1998 at the redemption price of 106% of the principal amount, in accordance with
the terms of the Senior Secured Discount Notes indenture.
Dividends paid during 1998 and 1999 totaled $4.6 million and $7.2
million, respectively. No dividends were paid in 1997. At December 31, 1999, NL
had $114 million available for payment of dividends and acquisition of treasury
shares pursuant to the Senior Notes indenture. On February 9, 2000, NL's Board
of Directors increased the regular quarterly dividend from $.035 per share to
$.15 per share and declared a dividend to shareholders of record as of March 16,
2000 to be paid on March 31, 2000.
During 1999 NL's Board of Directors authorized the purchase of up to
1.5 million shares of NL's common stock over an unspecified period of time, to
be held as treasury shares available for general corporate purposes. Pursuant to
this authorization, NL purchased 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999 and 575,000 shares at an
aggregate cost of $8.3 million in January and February of 2000.
In 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.
At December 31, 1999, NL had cash and cash equivalents aggregating $134
million (54% held by non-U.S. subsidiaries) and $18 million of restricted cash
equivalents. At December 31, 1999, NL's subsidiaries had $19 million available
for borrowing under non-U.S. credit facilities. At December 31, 1999, NL had
complied with all financial covenants governing its debt agreements.
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.
<PAGE>
Income tax contingencies. 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. Certain significant German tax contingencies aggregating an estimated
DM 188 million ($100 million when resolved) through 1998 were resolved in NL's
favor in 1999.
During 1999 the German government enacted certain income tax law
changes that were retroactively effective as of January 1, 1999. Based on these
changes, NL's ongoing current (cash) income tax rate in Germany increased in
1999.
During 1997 NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at December
31, 1999) relating to 1994. NL appealed this assessment and, in February 2000,
the Fredrikstad City Court ruled in favor of the Norwegian tax authorities on
the primary issue, but asserted that such tax authorities' assessment was
overstated by NOK 34 million ($4 million at December 31, 1999). The tax
authorities' response to the Court's assertion is expected by the end of March
2000. NL is considering its appeals options. During 1998 NL was informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at December 31, 1999) will likely be proposed for the year 1996 on an
issue similar to the aforementioned 1994 case. The outcome of the 1996 case is
dependent on the eventual outcome of the 1994 case. Although NL believes that it
will ultimately prevail, NL 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 NL's tax matters will be favorably
resolved due to 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, 1999, NL had net deferred tax liabilities of $97
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 $234 million
at December 31, 1999, principally related to Germany, partially offsetting
deferred tax assets which NL believes do not currently meet the
"more-likely-than-not" recognition criteria.
Environmental matters and litigation. 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, including sites for which EMS has contractually assumed NL's
obligation. 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
and 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. See Item 1. "Business - Unconsolidated Affiliate - NL - Regulatory and
Environmental Matters."
<PAGE>
Foreign operations. As discussed above, NL has substantial operations
located outside the United States for which the functional currency is not the
U.S. dollar. As a result, the reported amount of NL's assets and liabilities
related to its non-U.S. operations, and therefore NL's consolidated net assets,
will fluctuate based upon changes in currency exchange rates. At December 31,
1999, NL had substantial net assets denominated in the Canadian dollar and
Norwegian kroner, partially offset by a euro-denominated net liability.
Year 2000 issue. Over the past few years, NL spent time, effort and
money in order to address the Y2K Issues in an attempt to ensure that computer
systems, both information technology ("IT") systems and non-IT systems involving
embedded chip technology, and software applications would function properly
after December 31, 1999. This process included, among other things, the
identification of all systems and applications potentially affected by the Y2K
Issues, the determination of which systems and applications required remediation
and the completion thereof and the testing of systems and applications following
remediation for Year 2000 compliance. In addition, NL requested confirmation
from its major software and hardware vendors, suppliers and customers that they
were developing and implementing plans to become, or that they had become, Year
2000 compliant. Contingency plans were also developed to address potential Y2K
Issues related to business interruption in the event one or more of NL's
internal systems or the systems of third parties upon which it relies ultimately
proved not to be Year 2000 compliant. As part of these contingency plans, NL
temporarily idled its manufacturing facilities shortly before the end of 1999 as
an added safeguard against unexpected loss of utility service; all of such
facilities resumed production shortly after midnight of year-end 1999. After all
of the efforts described above, NL believed that its key systems were Year 2000
compliant prior to December 31, 1999.
As part of its normal business operations, NL had already installed
upgraded information systems at certain locations which addressed the Y2K
Issues. Excluding the cost of the ongoing system upgrades, the amount spent to
address the Y2K Issues was $2 million ($1.1 million in 1999).
To date in 2000, none of NL's manufacturing facilities have suffered
any downtime due to noncompliant systems, nor have any significant problems
associated with the Y2K Issues been identified in any systems. NL will continue
to monitor its major systems in order to ensure that such systems continue to be
Year 2000 compliant. However, based primarily upon success to date, NL does not
currently expect to experience any significant Y2K Issues.
<PAGE>
Euro currency. Beginning January 1, 1999, eleven of the fifteen members
of the European Union ("EU"), including Germany, Belgium, the Netherlands and
France, adopted a new European currency unit (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. NL has assessed and evaluated the impact of the euro conversion on its
business and made the necessary system conversions. The euro conversion may
impact NL's operations including, among other things, changes in product pricing
decisions necessitated by cross-border price transparencies. Such changes in
product pricing decisions could impact both selling prices and purchasing costs
and, consequently, favorably or unfavorably impact results of operations,
financial condition or liquidity.
Other. 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; repurchase shares of its common stock; 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 or other industries. 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
Tremont
The Company is exposed to market risk from changes in interest rates
and equity security prices, and through its equity investments, 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, 1999.
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 and 1999, the
Company's $5.9 million and $13.7 million, respectively, of such indebtedness was
100% variable rate, had weighted average interest rates of 7.25% and 8%,
respectively, and, being payable on demand, is classified as a current liability
in both years.
<PAGE>
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 and 1999 was $.5 million
and $.3 million, respectively. The potential change in the aggregate fair value
of these investments at December 31, 1999, assuming a 10% change in prices,
would be $30,000.
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
the particular entity. TIMET was not a party to any type of forward or
derivative option contract at December 31, 1998 or 1999.
Interest rates. TIMET is exposed to market risk from changes in
interest rates related to indebtedness. At December 31, 1999, 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.
<TABLE>
<CAPTION>
Contractual maturity date (1)
---------------------------------------- Interest
2000 2001 2002 Rate (2)
---------- ----------- ----------- ------------
(In millions)
Variable rate debt:
<S> <C> <C> <C> <C>
U. S. dollars $ 2.9 $ - $ 101.9 7.06%
British pounds - - 5.0 6.25%
Italian lira 5.1 .6 - 4.26%
French francs 2.0 - - 3.06%
<FN>
(1) Non-U. S. dollar denominated amounts are translated at year-end rates of exchange.
(2) Weighted average.
</FN>
</TABLE>
At December 31, 1998, substantially all of TIMET's outstanding
indebtedness consisted of $80 million of U.S. dollar-denominated variable rate
debt.
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 and are considered
"held-to-maturity" securities. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - TIMET - Investing Activities."
<PAGE>
NL Industries
General. NL is exposed to market risk from changes in currency 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, interest rates or equity
security prices at December 31, 1998 or 1999.
Interest rates. NL is exposed to market risk from changes in interest
rates, primarily related to indebtedness.
At December 31, 1999, NL's aggregate indebtedness was split between 81%
of fixed-rate instruments and 19% of variable-rate borrowings (1998 - 62%
fixed-rate and 38% variable-rate). 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 dates, for NL's aggregate
indebtedness at December 31, 1998 and 1999. At December 31, 1998 and 1999, all
outstanding fixed-rate indebtedness was denominated in U.S. dollars, and all
outstanding variable-rate indebtedness was denominated in euros in 1999 and
Deutsche marks in 1998. Information shown below for such euro-denominated
indebtedness is presented in its U.S. dollar equivalent at December 31, 1999
using that date's exchange rate of .99 euro per U.S. dollar (1998 - 1.66 DM per
U.S. dollar).
<TABLE>
<CAPTION>
Contractual Maturity Date Fair Value
--------------------------------------------------------------------
December 31,
December 31, 1999: 2000 2001 2002 2003 2004 Total 1999
-------------------------------------------------------- ----------- ------------------
(In millions)
Fixed-rate debt (U.S.
dollar-denominated):
<S> <C> <C> <C> <C> <C> <C> <C>
Principal amount $ - $ - $ - $244.0 $ - $244.0 $253.2
Weighted-average -
interest rate - - - 11.75% 11.75%
Variable rate debt (Euro denominated):
Principal amount $57.1 $ - $ - $ - $ - $ 57.1 $ 57.1
Weighted-average
interest rate 3.6% - - - - 3.6%
</TABLE>
<TABLE>
<CAPTION>
Contractual Maturity Date Fair Value
--------------------------------------------------------------------
December 31,
December 31, 1998: 1999 2000 2001 2002 2003 Total 1998
-------------------------------------------------------- ----------- ------------------
(In millions)
Fixed-rate debt (U.S.
dollar-denominated):
<S> <C> <C> <C> <C> <C> <C> <C>
Principal amount $- $- $- $ - $244.0 $244.0 $253.1
Weighted-average
interest rate - - - - 11.75% 11.75%
Variable rate debt (DM denominated):
Principal amount $100.9 $48.2 $- $- $ - $149.1 $149.1
Weighted-average
interest rate 5.4% 6.1% - - - 5.6%
</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 European Union euro, Canadian dollar,
Norwegian krone and the United Kingdom pound sterling. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations - NL Industries" 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, 1999, NL had $58 million of
indebtedness denominated in euros (1998 - $149 million outstanding 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 $6 million (1998 - $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 and 1999 was $18 million and $15
million, respectively. The potential change in the aggregate fair value of these
investments, assuming a 10% change in prices, would be $1.8 million and $1.5
million, respectively.
Other. NL 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.
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, gains or losses.
<PAGE>
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.
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.
<PAGE>
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 (39% owned at December 31, 1999), with independent
auditors report thereon, pages F through F-31 inclusive of
TIMET's Annual Report on Form 10-K for the year ended December
31, 1999 (Commission File No. 0-28538) included herein as
Exhibit 99.1, are filed as part of this Annual Report.
Consolidated financial statements of NL Industries, Inc. (20%
owned at December 31, 1999), with independent auditors report
thereon, pages F-1 through F-42 inclusive of NL's Annual
Report on Form 10-K for the year ended December 31, 1999
(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, 1999 and the months of January and
February, 2000:
<TABLE>
<CAPTION>
Filing Date Items Reported
------------------- -------------------
<S> <C> <C> <C> <C>
October 28, 1999 - 5 and 7
November 3, 1999 - 5 and 7
February 15, 2000 - 5 and 7
February 16, 2000 - 5 and 7
</TABLE>
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. Tremont will furnish a copy of any of the exhibits
listed below upon payment of $4.00 per exhibit to cover the
costs to Tremont of furnishing the exhibits. Instruments
defining the rights of holders of long-term debt issues which
do not exceed 10% of consolidated total assets will be
furnished to the Commission upon request.
<PAGE>
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.
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.
<PAGE>
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 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 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.
<PAGE>
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 (File 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 (File 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, 1999, incorporated by
reference to Exhibit 10.7 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.6 Intercorporate Services Agreement by and between Tremont and NL
effective as of January 1, 1999, incorporated by reference to
Exhibit 10.4 of NL's Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended March 31, 1999.
10.7 Advance Agreement, dated October 5, 1998, by and between Contrand
Corporation and the Registrant, incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
10.8* 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
<PAGE>
10.13 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation, effective as of January 1,
1999, incorporated by reference to Exhibit 10.6 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
10.14 Intercorporate Services Agreement by and between Valhi, Inc.
and the Registrant, effective as of January 1, 1999, incorporated
by reference to Exhibit 10.8 of the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999.
10.15* 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 (File No. 333-18829).
10.16* Titanium Metals Corporation Amended and Restated 1996
Non-employee Director Compensation Plan, as amended and restated
effective February 23, 1999, incorporated by reference to Exhibit
10.7 of Titanium Metals Corporation's Annual Report on Form 10-K
(File No. 0-28538) for the year ended December 31, 1999.
10.17* Senior Executive Cash Incentive Plan, incorporated by reference
to Appendix B to Titanium Metals Corporation's proxy statement
included as part of a statement on Schedule 14A dated April 17,
1997.
10.18* Executive Severance Policy of Titanium Metals Corporation,
incorporated by reference to Exhibit 10.9 of Titanium Metals
Corporation's Annual Report on Form 10-K (File No. 0-28538) for
the year ended December 31, 1999.
10.19* Severance Agreement between Titanium Metals Corporation and
Andrew R. Dixey dated February 25, 2000, incorporated by
reference to Exhibit 10.19 of Titanium Metals Corporation's
Annual Report on Form 10-K (File No. 0-28538) for the year ended
December 31, 1999.
10.20* Executive Severance Agreement, dated as of September 27, 1996,
between Titanium Hearth Technologies, Inc. and William C. Acton,
incorporated by reference to Exhibit 10.20 of Titanium Metals
Corporation's Annual Report on Form 10-K (File No. 0-28538) for
the year ended December 31, 1999.
10.21* Executive Severance Agreement, dated as of September 27, 1996,
between Titanium Hearth Technologies, Inc. and
Charles H. Entrekin, Jr., incorporated by reference to Exhibit
10.22 of Titanium Metals Corporation's Annual Report on Form
10-K (File No. 0-28538) for the year ended December 31, 1999.
10.22* Severance Agreement, dated February 19, 1999, between Titanium
Metals Corporation and William C. Acton, incorporated by
reference to Exhibit 10.21 of Titanium Metals Corporation's
Annual Report on Form 10-K (File No. 0-28538) for the year ended
December 31, 1999.
<PAGE>
10.23 Purchase Agreement dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers Inc,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan
Stanley & Co. Incorporated, as Initial Purchasers, incorporated
by reference to Exhibit 99.1 of Titanium Metals Corporation's
Current Report on Form 8-K (File No. 0-28538) filed with the
Commission on December 5, 1996.
10.24 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.
10.25 Loan and Security Agreement by and among Congress Financial
Corporation (Southwest), as lender, and Titanium Metals
Corporation and Titanium Hearth Technologies, Inc., as borrowers
dated February 25, 2000, incorporated by reference to Exhibit
10.12 of Titanium Metals Corporation's Annual Report on Form
10-K (File No. 0-28538) for the year ended December 31, 1999.
10.26 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.
10.27* 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 Report on Form 10-Q (File No. 0-28538)
for the quarter ended September 30, 1998.
10.28 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.
10.29 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.
10.30 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).
10.31 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.
10.32 Contract on Supplies and Services among Bayer AG, Kronos
Titan-GmbH and Kronos International, Inc. dated June 30, 1995
(English translation from German language document), incorporated
by reference to Exhibit 10.1 of NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended September 30, 1995.
10.33 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.
<PAGE>
10.34 Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
between Richards Bay Iron and Titanium (propriety) Limited and
Kronos, Inc., 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, 1999.
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 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.
10.46 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.
<PAGE>
10.47* 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.
10.48* 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.
10.49* 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.
10.50* 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.
10.51 Intercorporate Service Agreement by and between Valhi, Inc.
and NL effective as of January 1, 1999, 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 1, 1999.
10.52 Intercorporate Service Agreement by and between Contran
Corporation and NL effective as of January 1, 1999, incorporated
by reference to Exhibit 10.2 of NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended March 31, 1999.
10.53 Intercorporate Service Agreement by and between Titanium Metals
Corporation and NL effective January 1, 1999, incorporated by
reference to Exhibit 10.3 of NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended March 31, 1999.
10.54 Intercorporate Services Agreement by and between CompX
International Inc. and NL effective as of January 1, 1999,
incorporated by reference to Exhibit 10.1 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended June
30, 1999.
10.55 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.
10.56* 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.
10.57* 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.
10.58* 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.
10.59* 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.
10.60* 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.
<PAGE>
10.61 NL Industries, Inc. 1988 Long-Term Incentive Plan, incorporated
by reference to Appendix A to NL's Proxy Statement on Schedule
14A for the annual meeting of shareholders held on May 6, 1998.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the year ended December 31, 1999.
99.1 Titanium Metals Corporation (File No. 0-28538) Annual Report on
Form 10-K for the year ended December 31, 1999, Item 3 - "Legal
Proceedings" and Item 8 - "Financial Statements and Supplementary
Data" (pages F to F-31).
99.2 NL Industries, Inc. (File No. 1-640) Annual Report on Form 10-K
for the year ended December 31, 1999, Item 3 - "Legal
Proceedings" and Item 8 - "Financial Statements and Supplementary
Data" (pages F-1 to F-42).
99.3 Complaint and Jury Demand filed by Titanium Metals Corporation
against The Boeing Company in District Court, City and County of
Denver, State of Colorado, on March 21, 2000, Case No. 00CV1402,
including Exhibit A, Purchase and Sale Agreement (for titanium
products) dated as of November 5, 1997 by and between The Boeing
Company, acting through its division, Boeing Commercial Airplane
Group, and Titanium Metals Corporation, incorporated by reference
to Exhibit 99.2 to Titanium Metals Corporation's Current Report
on Form 8-K (File No. 0-28538) dated March 22, 2000.
- -------------------------------------------------------------------------------
* Management contract, compensatory plan or arrangement.
<PAGE>
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 24, 2000
(Chairman of the Board, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Susan E. Alderton /s/ Harold C. Simmons
- ------------------------------------ ----------------------
Susan E. Alderton, March 24, 2000 Harold C. Simmons, March 24, 2000
(Director) (Director)
/s/ Richard J. Boushka /s/ Thomas P. Stafford
- ------------------------------------ -----------------------
Richard J. Boushka, March 24, 2000 Thomas P. Stafford, March 24, 2000
(Director) (Director)
/s/ J. Landis Martin /s/ Avy H. Stein
- -------------------------------- ------------------------------
J. Landis Martin, March 24, 2000 Avy H. Stein, March 24, 2000
(Chairman of the Board, President (Director)
and Chief Executive Officer)
/s/ Glenn R. Simmons /s/ Mark A. Wallace
- -------------------------------- --------------------------------
Glenn R. Simmons, March 24, 2000 Mark A. Wallace, March 24, 2000
(Director) (Vice President and
Chief Financial Officer)
(Principal Finance Officer)
/s/ David P. Burlage
---------------------------------
David P. Burlage, March 24, 2000
(Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
<S> <C>
Financial Statements Page
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1998 and 1999 F-2/F-3
Consolidated Statements of Income - Years ended December 31, 1997,
1998 and 1999 F-4
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
1998 and 1999 F-6/F-7
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1997, 1998 and 1999 F-8
Notes to Consolidated Financial Statements F-9/F-27
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
</TABLE>
F
<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 income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Tremont Corporation as of December 31, 1998 and 1999 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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
February 11, 2000, except for the second paragraph of Note 11, as to which the
date is March 21, 2000.
F-1
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
(In thousands, except per share data)
ASSETS 1998 1999
-------------- ---------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,132 $ 3,002
Accounts and notes receivable 3,255 2,614
Receivable from related parties 2,157 1,847
Refundable income taxes 1,087 5
Prepaid expenses 1,203 1,783
-------------- ---------------
Total current assets 10,834 9,251
-------------- ---------------
Other assets:
Investment in TIMET 145,180 85,772
Investment in NL Industries 94,980 113,574
Investment in joint ventures 13,063 13,658
Receivable from related parties 2,212 1,161
Other 21,688 8,570
-------------- ---------------
Total other assets 277,123 222,735
-------------- ---------------
Property and equipment
Land 330 330
Buildings 913 913
Equipment 172 179
-------------- ---------------
1,415 1,422
Less accumulated depreciation 782 834
-------------- ---------------
Net property and equipment 633 588
-------------- ---------------
$ 288,590 $ 232,574
============== ===============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1998 and 1999
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
--------------- ---------------
Current liabilities:
<S> <C> <C>
Accrued liabilities $ 3,821 $ 4,623
Loan payable to related party 5,875 13,743
Other payables to related parties 167 426
--------------- ---------------
Total current liabilities 9,863 18,792
--------------- ---------------
Noncurrent liabilities:
Insurance claims and claim expenses 15,812 10,292
Accrued postretirement benefit cost 21,888 21,329
Accrued environmental cost 5,910 5,736
Deferred income taxes 30,995 8,598
--------------- ---------------
Total noncurrent liabilities 74,605 45,955
--------------- ---------------
Minority interest 3,968 4,159
--------------- ---------------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued - -
Common stock, $1.00 par value; 14,000 shares authorized;
7,769 and 7,781 shares issued, respectively 7,769 7,781
Additional paid-in capital 290,118 290,218
Accumulated deficit (30,906) (60,898)
Accumulated other comprehensive income (loss) (7,469) (14,075)
--------------- ---------------
259,512 223,026
Less treasury stock, at cost (1,392 shares) 59,358 59,358
--------------- ---------------
Total stockholders' equity 200,154 163,668
--------------- ---------------
$288,590 $232,574
=============== ===============
</TABLE>
Commitments and contingencies (Notes 10 and 11).
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1998 and 1999
(In thousands, except per share data)
1997 1998 1999
--------------- -------------- --------------
Equity in earnings (loss) of:
<S> <C> <C> <C>
TIMET $ 25,137 $ 14,013 $(71,992)
NL Industries (5,085) 57,826 28,126
Other joint ventures 5,231 2,911 595
--------------- -------------- --------------
25,283 74,750 (43,271)
Corporate income (expense), net 1,139 (228) (2,696)
Interest expense - (97) (917)
--------------- -------------- --------------
Income (loss) before income taxes
and minority interest 26,422 74,425 (46,884)
Income tax expense (benefit) 11,545 (2,040) (18,871)
Minority interest 1,320 762 191
--------------- -------------- --------------
Income (loss) before extraordinary item 13,557 75,703 (28,204)
Equity in extraordinary loss of NL-
early extinguishment of debt - (1,964) -
--------------- -------------- --------------
Net income (loss) $ 13,557 $ 73,739 $(28,204)
=============== ============== ==============
Earnings (loss) per share:
Before extraordinary item:
Basic $ 1.92 $ 11.55 $ (4.41)
Diluted $ 1.76 $ 11.18 *
Net income (loss):
Basic $ 1.92 $ 11.25 $ (4.41)
Diluted $ 1.76 $ 10.88 *
Weighted average shares outstanding:
Common shares 7,058 6,553 6,386
Diluted shares 7,246 6,690 6,454
<FN>
* Antidilutive in 1999
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Net income (loss) $ 13,557 $ 73,739 $ (28,204)
--------------- ------------- ---------------
Other comprehensive income (loss), net of taxes:
Currency translation adjustment (5,067) 1,089 (6,610)
Unrealized gains (losses) on marketable
securities 30 (142) (304)
Pension liabilities adjustment 899 (1,317) 308
--------------- -------------- ---------------
(4,138) (370) (6,606)
--------------- -------------- ---------------
Comprehensive income (loss) $ 9,419 $ 73,369 $ (34,810)
=============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 13,557 $ 73,739 $(28,204)
Losses (earnings) of affiliates:
Before extraordinary item (25,283) (74,750) 43,271
Extraordinary item - 1,964 -
Distributions from affiliates 1,040 2,635 2,904
Deferred income taxes 11,707 (2,049) (17,066)
Minority interest 1,320 762 191
Other, net (1,529) 834 (2,041)
Change in assets and liabilities:
Accounts and notes receivable 857 2,289 641
Accounts with related parties (380) 778 2,162
Accrued liabilities (1,586) (779) 802
Income taxes 101 (411) (686)
Other, net 225 (2,390) (580)
------------- ------------- -------------
Net cash provided by operating activities 29 2,622 1,394
------------- ------------- -------------
Cash flows from investing activities:
Purchases of NL and TIMET common stock - (31,368) (15,988)
Proceeds from disposition of oil and gas production
Other, net (63) (20) (7)
------------- ------------- -------------
Net cash provided (used) by investing activities 1,143 (31,388) (15,995)
------------- ------------- -------------
Cash flows from financing activities:
Repurchases of common stock (32,126) (23,636) -
Litigation settlement, net - 18,976 -
Letters of credit cash collateralized - (6,955) 9,872
Dividends paid - (1,368) (1,788)
Borrowings from related parties - 5,875 6,275
Other, net 878 1,047 112
------------- ------------- --------------
Net cash provided (used) by financing activities (31,248) (6,061) 14,471
------------- ------------- --------------
Net decrease $(30,076) $(34,827) $ (130)
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
------------- --------------- --------------
Cash and cash equivalents:
<S> <C> <C> <C>
Net decrease $(30,076) $ (34,827) $ (130)
Balance at beginning of year 68,035 37,959 3,132
------------- --------------- --------------
Balance at end of year $ 37,959 $ 3,132 $ 3,002
============= =============== ==============
Supplemental disclosures - cash paid (received) for:
Interest expense $ - $ - $ 400
Income taxes (263) 421 (1,119)
</TABLE>
See accompanying notes to consolidated financial statements.
F - 7
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998, 1999
(In thousands)
Accumulated other
Common stock Additional comprehensive income
-------------------- ------------------------------- Total
Shares Treasury Common paid-in Accumulated Currency Marketable Pension Treasury stockholders'
issued shares stock capital deficit translation securities liabilities stock equity
------ ------ -------- --------- ----------- ---------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 7,640 173 $7,640 $273,780 $(116,834) $ $ 702 $ $ $ 158,029
Comprehensive income - - - - 13,557 (5,067) 30 899 - 9,419
Repurchases of common - 787 - - - - - - (32,126) (32,126)
Common stock issued 50 - 50 828 - - - - - 878
Other - - - 128 - - - - - 128
------ ------ ------- --------- ----------- ---------- ---------- -------- --------- -----------
Balance at December 31, 7,690 960 7,690 274,736 (103,277) (7,831) 732 (35,722) 136,328
Comprehensive income - - - - 73,739 1,089 (142) (1,317) - 73,369
Litigation settlement, - - - 12,334 - - - - - 12,334
Dividends ($.21 per - - - - (1,368) - - - - (1,368)
Repurchases of common - 432 - - - - - - (23,636) (23,636)
Common stock issued 79 - 79 968 - - - - - 1,047
Other - - - 2,080 - - - - - 2,080
------ ------ -------- --------- ----------- ---------- ---------- -------- --------- -----------
Balance at December 31, 7,769 1,392 7,769 290,118 (30,906) (6,742) 590 (1,317) (59,358) 200,154
Comprehensive income - - - - (28,204) (6,610) (304) 308 - (34,810)
Dividends ($.28 per - - - - (1,788) - - - - (1,788)
Common stock issued 12 - 12 86 - - - - - 98
Other - - - 14 - - - - - 14
- -
------ ------ -------- --------- ----------- ---------- ---------- -------- --------- ----------
Balance at December 31, 7,781 1,392 $ 7,781 $290,218 $(60,898) $(13,352) $ 286 $(1,009) $(59,358) $163,668
1999
====== ====== ======== ========= =========== ========== ========== ======== ========= ==========
</TABLE>
F-8
<PAGE>
TREMONT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization:
Tremont Corporation is principally 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.
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, 1999, Valhi, Inc. and Tremont, each affiliates of
Contran Corporation, held approximately 59% and 20%, respectively, of NL's
outstanding common stock, and together may be deemed to control NL. At December
31, 1999, Contran and its subsidiaries held approximately 93% of Valhi's
outstanding common stock, and Valhi and other entities related to Harold C.
Simmons held approximately 55% of Tremont's outstanding common stock. At
December 31, 1999, the Combined Master Retirement Trust ("CMRT"), a trust formed
by Valhi to permit the collective investment by trusts that maintain assets of
certain employee benefit plans adopted by Valhi and related entities, owned an
additional 8% of TIMET'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. Mr. Simmons is
sole trustee of the CMRT and is a member of the trust investment committee of
the CMRT. 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
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,
1999, 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 other comprehensive income (loss), net of related income
taxes. Realized gains and losses on the Company's securities are based upon the
specific identification of the securities sold.
F - 9
<PAGE>
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.
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.
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 affiliates not included in the
consolidated tax group.
New accounting principles not yet adopted. The Company, NL and TIMET will
adopt SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," no later than the first quarter of 2001. 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 the
companies are then parties to derivative contracts or engaged in hedging
activities.
Note 3 - Operating segments:
Tremont is a holding company with operations conducted through its
equity affiliates, principally TIMET and NL.
F-10
<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 principally in the United States, the United Kingdom and France, 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 in 1997 and 1998 consisted primarily of its titanium castings
operations, which were combined in a joint venture during 1998 and subsequently
sold in January 2000. In 1999, TIMET's "Other" segment consists of its
nonintegrated joint ventures.
NL's operations are conducted by Kronos in one operating business
segment - the production and sale of titanium dioxide pigments ("TiO2").
Titanium dioxide pigments are 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. Discontinued operations consists of
NL's specialty chemicals business which was sold in January 1998.
Other joint ventures, held by 75%-owned TRECO, are principally
comprised of a (i) 32% equity interest in Basic Management, Inc. ("BMI"), 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 The Landwell Company
("Landwell") (formerly Victory Valley Land Company, L.P.), which is actively
engaged in efforts to develop certain real estate. BMI owns an additional 50%
interest in Landwell.
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, NL and other affiliates of Contran Corporation;
however, the risks associated with these policies are completely 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.
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 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. In February 1999,
Tremont exercised an option, received in connection with TIMET's acquisition of
IMI Titanium, to purchase an additional two million shares of TIMET's common
stock from IMI for $16 million ($7.95 per TIMET share), increasing its ownership
of TIMET to 39%.
F-11
<PAGE>
At December 31, 1999, after considering what the Company believes to be
all relevant factors including, among other things, TIMET's operating results,
financial position, estimated asset values and prospects, the Company recorded a
$61 million pre-tax non-cash charge ($38 million net-of-tax) to earnings to
reduce the net carrying value of its investment in TIMET for an other than
temporary impairment in its market value. After such writedown, at December 31,
1999, the Company's net carrying value of its investment in TIMET was $7.00 per
share compared to a per share market price of $4.50 at that date. In determining
the amount of the impairment charge, the Company considered, among other things,
recent ranges of TIMET's stock price and current estimate of TIMET's future
operating losses which would further reduce the Company's net carrying value of
its investment in TIMET as it records additional equity in losses.
At December 31, 1999, the unamortized net difference relating to NL was
approximately $60 million, of which $39 million is goodwill being amortized over
40 years, with substantially all of the remainder attributable to NL's property
and equipment and being amortized over the weighted-average remaining lives of
the assets, or approximately 11 years. At December 31, 1999, the unamortized net
difference relating to TIMET was a credit of approximately $14 million, being
amortized over 15 years. Also, at December 31, 1999, there exists an unamortized
net difference of $61 million relating to the write down of the Company's
investment in TIMET. The net difference, attributable to TIMET goodwill, other
intangibles and property and equipment, will be amortized beginning in 2000 over
the remaining lives of the TIMET assets which range from 5 to 14 years.
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. TIMET has the right to defer dividend 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 and 1999 held 10.2
million shares, or 20%, of NL's outstanding common stock. At December 31, 1999,
the net carrying amount of the Company's investment in NL was approximately
$11.12 per share while the market price per share of NL common stock on that
date was $15.06 per share. See Item 7 - "MD&A."
F-12
<PAGE>
<TABLE>
<CAPTION>
Note 5 - Other noncurrent assets:
December 31,
-----------------------------
1998 1999
------------ -------------
(In thousands)
<S> <C> <C>
Restricted deposits $ 14,478 $4,710
Other 7,210 3,860
------------ -------------
$ 21,688 $8,570
============ =============
</TABLE>
Restricted deposits for both years consist of cash collateral on
letters of credit backing insurance policies at TRE Insurance. Approximately
$9.9 million of such deposits were refunded in 1999. See Note 10.
<TABLE>
<CAPTION>
Note 6 - Accrued liabilities:
December 31,
--------------------------
1998 1999
----------- -----------
(In thousands)
<S> <C> <C>
Postretirement benefit cost $ 1,503 $ 1,535
Other employee benefits 324 250
Environmental cost 307 385
Miscellaneous taxes 135 136
Other 1,552 2,317
----------- -----------
$ 3,821 $ 4,623
=========== ===========
</TABLE>
F-13
<PAGE>
Note 7 - Income taxes:
Summarized below are (i) the difference between the income tax expense
(benefit) attributable to the income (loss) before income taxes and minority
interest ("pretax income (loss)") and the amounts that would be expected using
the U.S. federal statutory income tax rate of 35%, (ii) the components of the
income tax expense (benefit) attributable to the pretax income (loss), and (iii)
the components of the comprehensive tax expense (benefit).
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Expected income tax expense (benefit) $ 9,247 $ 26,049 $ (16,409)
Adjustment of deferred tax asset valuation allowance
Incremental tax and rate differences on equity in
income of companies not included in the
consolidated tax group 961 (358) (1,714)
U.S. state income taxes, net 41 (74) 6
Other, net 401 (781) 426
--------------- -------------- --------------
$ 11,545 $ (2,040) $ (18,871)
=============== ============== ==============
Income tax expense (benefit):
Current income taxes:
U.S. federal $ (225) $ 124 $ (1,812)
U.S. state 63 (115) 7
Deferred income taxes 11,707 (2,049) (17,066)
--------------- -------------- --------------
$ 11,545 $ (2,040) $ (18,871)
=============== ============== ==============
Comprehensive tax expense (benefit) allocable to:
Pretax income (loss) $ 11,545 $ (2,040) $ (18,871)
Stockholders' equity:
Litigation settlement - 6,642 -
Other, principally other comprehensive income (2,258) (253) (3,557)
--------------- -------------- --------------
$ 9,287 $ 4,349 $ (22,428)
=============== ============== ==============
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
The components of deferred taxes are summarized below.
December 31,
-------------------------------------------------------------
----------------------------- ----------------------------
Assets Liabilities Assets Liabilities
------------ ------------- ----------- -------------
(In millions)
Temporary differences relating to net assets:
<S> <C> <C> <C> <C>
Property and equipment $ .1 $ - $ .1 $ -
Accrued OPEB cost 8.2 - 8.0 -
Accrued liabilities and other deductible 5.8 - 4.4 -
Other taxable differences - (5.5) - (7.8)
Investments in subsidiaries and affiliates
including foreign currency translation
adjustments - (26.2) - (3.3)
Tax loss and credit carryforwards 1.2 - 3.6 -
Valuation allowance (14.6) - (13.6) -
------------ ------------- ----------- -------------
Gross deferred tax assets (liabilities) .7 (31.7) 2.5 (11.1)
Netting (.7) .7 (2.5) 2.5
------------ ------------- ----------- -------------
Total deferred taxes - (31.0) - (8.6)
Less current deferred taxes - - - -
------------ ------------- ----------- -------------
Net noncurrent deferred taxes $ - $ (31.0) $ - $(8.6)
============ ============= =========== =============
</TABLE>
The Company has a deferred tax valuation allowance of $13.6 million at
December 31, 1999, offsetting deferred tax assets which the Company believes did
not meet the "more-likely-than-not" recognition criteria at that date. The
Company's valuation allowance increased by $0.9 million in 1997, decreased by
$24.2 million in 1998 and decreased by $1.0 in 1999. The 1997 valuation
allowance increased primarily due to the Company's equity in losses in NL,
partially offset by adjustments to certain corporate items. In 1998, the
valuation allowance reduction was due primarily to a net decrease in the bases
differences of the Company's investment in its unconsolidated affiliate, NL, of
which $7.4 million was related to a change in estimate of future equity in
earnings of NL which the Company believes meets the "more-likely-than-not"
recognition criteria. The valuation allowance reduction in 1999 is due primarily
to the recognition of deferred tax assets which previously did not meet the
"more-likely-than-not" recognition criteria.
At December 31, 1999, the Company had, for U.S. federal income tax
purposes, NOL carryforwards of approximately $8.4 million, of which $5.3 million
and $3.1 million expire in 2018 and 2019, respectively. The Company has AMT
credit carryforwards of approximately $.7 million, which can be used to offset
regular income taxes payable in future years and 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
Tremont Retiree Medical Plan (the "Plan") is unfunded and contributions to the
Plan during the year equal benefits paid.
F-15
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
------------- ---------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
<S> <C> <C>
Balance at beginning of year $ 20,479 $ 20,397
Interest cost 1,310 1,164
Service cost - -
Actuarial gain (297) (3,400)
Benefits paid, net of participant contributions (1,095) (1,340)
------------- ---------------
Balance at end of year 20,397 16,821
Unrecognized prior service cost 5,091 4,650
Unrecognized net actuarial gain (loss) (2,097) 1,393
------------- ---------------
Total accrued OPEB cost 23,391 22,864
Less current portion 1,503 1,535
------------- ---------------
Noncurrent accrued OPEB cost $ 21,888 $ 21,329
============= ===============
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1997 1998 1999
-------------- ------------- --------------
(In thousands)
OPEB expense:
<S> <C> <C> <C>
Interest cost $ 1,441 $ 1,310 $ 1,164
Service cost - - -
Amortization of prior service cost (441) (441) (441)
-------------- ------------- --------------
Net OPEB expense $ 1,000 $ 869 $ 723
============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
------------- --------------
Weighted average assumptions:
<S> <C> <C>
Discount rate 6.50% 7.50%
Expected return on plan assets n/a n/a
Rate of compensation increase n/a n/a
Health care cost trend rate for the following period 8.85% 9.00%
Ultimate health care cost trend rate 4.75% 6.00%
Fiscal period ultimate health care cost trend rate attained 2016 2016
The health care cost trend rate grades gradually from the current level to
the ultimate level, remaining constant thereafter.
Effects of 1% changes in the health care cost trend rate (in thousands):
Effect of a 1% increase in health care cost trend rate on:
OPEB obligation $ 1,130 $ 881
Total of service and interest cost components 80 68
Effect of a 1% decrease in health care cost trend rate on:
OPEB obligation $ (1,064) $ (916)
Total of service and interest cost components (75) (70)
</TABLE>
F-16
<PAGE>
Note 9 - Stockholders' equity:
Common stock. In 1997, the Company's Board of Directors authorized the
repurchase of up to two 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. There were no treasury stock
purchases under this program in 1999.
In the second quarter 1998, the Company instituted a regular quarterly
dividend of $.07 per common share. Cash dividends paid in 1998 and 1999
aggregated $1.4 million and $1.8 million, respectively.
Litigation settlement. In June 1998, Tremont and Valhi completed the
settlement of the 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 stockholders' 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
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, 1999, options to purchase
approximately 145,000 shares were exercisable at a weighted average exercise
price per share of $12.30 and options to purchase an additional 3,000 shares
become exercisable in 2000. Outstanding options at December 31, 1999 had a
weighted average remaining life of 3.4 years (1998 - 4.4 years). At December 31,
1999, 484,681 shares were available for future grant under the Company's
long-term performance incentive plan and 26,000 shares were available for future
grant under the Company's Non-Employee Director plan.
F-17
<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 December 31, 1996 336 $8.00-$22.75 $ 3,539 $ 10.54
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 December 31, 1997 237 8.00-30.88 2,557 10.80
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 December 31, 1998 158 8.00-56.50 1,895 11.96
Granted 3 31.00 $ 10.78
Exercised (12)
Canceled (1) 8.13 (7) 8.13
-------- ---------------- ----------------- ------------
Outstanding at December 31, 1999 148 $8.00-$56.50 $1,883 $12.68
======== ================ ================= ============
</TABLE>
<TABLE>
<CAPTION>
Assumptions at date of grant: 1997 1998 1999
------------- ------------- ----------------
<S> <C> <C> <C>
Expected life (years) 4.7 4.7 4.7
Risk free interest rate 6.02% 5.60% 4.81%
Volatility 40% 40% 40%
Dividend yield 0% 0% 0%
</TABLE>
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 net income and
diluted earnings per share would have been a reduction of $.1 million and $.01
per share, respectively, in each of 1997 and 1998. The proforma impact on net
income and diluted earnings per share in 1999 would have been nominal.
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
F-18
<PAGE>
evaluate such transactions. Depending upon the business, tax, and other
objectives then relevant, it is possible that the Company might be a party to
one or more such transactions in the future. In connection with these
activities, the Company may consider issuing additional equity securities or
incurring additional indebtedness. The Company's acquisition activities have in
the past and may in the future include participation in the acquisition or
restructuring activities conducted by 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 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, 1999, the interest rate on outstanding advances was 8%.
Obligations under this agreement are payable upon demand. At December 31, 1999,
Tremont owed Contran $13.7 million pursuant to this agreement, which amounts
were borrowed primarily to purchase shares of NL and TIMET common stock during
1998 and 1999. See Note 4.
During 1998, the Company purchased, from certain 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 Contran and Valhi provide certain services
to Tremont on a fee basis. Fees for services provided under such agreements were
$.5 million in 1997 and $1.1 million in each of 1998 and 1999.
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 1997, $.3 million in 1998 and $.2 million in 1999.
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 1999,
NL cash collateralized certain letters of credit, and $9.9 million in cash that
had been used for collateral was released to Tremont.
F-19
<PAGE>
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 that they
arrange or broker. During 1999, Tremont paid less than $0.1 million and TIMET
and NL paid approximately $2.0 million and $3.3 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. Tremont expects,
and understands that TIMET and NL expect, that these relationships with TRE
Insurance, Valmont, and EWI will continue in 2000.
Current receivables from related parties at December 31, 1998 and 1999
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 Boeing, Rolls-Royce plc, United Technologies Corporation (and related
companies) and Wyman-Gordon Company, pursuant to which TIMET expects to be a
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 were effective in 1999. 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.
The Boeing contract requires Boeing to purchase a minimum percentage of
their titanium requirements from TIMET. Although Boeing placed orders and
accepted delivery of certain volumes in 1999, TIMET believes the level of orders
was significantly below the contractual volume requirements. Although Boeing has
informed TIMET that it will either order the required contractual volume under
the contract in 2000 or pay the liquidated damages provided for in the
agreement, TIMET has received virtually no Boeing-related orders under the
contract for the year 2000. On March 21, 2000, TIMET filed a lawsuit against
Boeing in a Colorado state court seeking damages for Boeing's repudiation and
breach of the Boeing contract. TIMET's complaint seeks damages from Boeing that
TIMET believes are in excess of $600 million and a declaration from the court of
TIMET's rights under the contract.
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 agreed to reduced minimums for 1999 and 2000.
F-20
<PAGE>
Legal proceedings and contingencies
Tremont and consolidated subsidiaries
In May 1998, 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.
NL Industries
Lead pigment litigation. Since 1987 NL, 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
states, 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.
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.
F-21
<PAGE>
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 Matters. 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 has been completed at a total cost of approximately $2 million. Another of
the sites is currently being evaluated by the Arkansas Department of
Environmental Quality ("ADEQ"). The Company, along with two other identified
potentially responsible parties, has entered into discussions with ADEQ that are
expected to result in one or more voluntary settlement agreements pertaining to
investigatory and remedial actions to be undertaken at this site. 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, 1999, 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.
F-22
<PAGE>
TIMET
BMI Complex. In the early 1990s, TIMET and certain other companies (the
"Steering Committee Companies") that currently have or formerly had operations
within a Henderson, Nevada industrial complex (the "BMI Complex") began
environmental assessments of the BMI Complex and each of the individual company
sites located within the BMI Complex pursuant to a series of consent agreements
entered into with the Nevada Division of Environmental Protection ("NDEP"). Most
of this assessment work has now been completed, although some of the assessment
work with respect to TIMET's property is continuing. In 1999, TIMET entered into
a series of agreements with Basic Management, Inc. (together with its
subsidiaries, "BMI") and, in certain cases, other Steering Committee Companies,
pursuant to which, among other things, BMI assumed responsibility for the
conduct of soils remediation activities on the properties described, including,
subject to final NDEP approval, the responsibility to complete all outstanding
requirements under the consent agreements with NDEP insofar as they relate to
the investigation and remediation of soils conditions on such properties. BMI
also agreed to indemnify TIMET and the other Steering Committee Companies
against certain future liabilities associated with any soils contamination on
such properties. TIMET contributed $2.8 million to the cost of this remediation
(which payment was charged against accrued liabilities). TIMET also agreed to
convey to BMI, at no additional cost, certain lands owned by TIMET adjacent to
its plant site (the "TIMET Pond Property") upon payment by BMI of the cost to
design, purchase, and install the technology and equipment necessary to allow
TIMET to stop discharging liquid and solid effluents and co-products onto the
TIMET Pond Property (BMI will pay 100% of the first $15.9 million cost for this
project, and TIMET will contribute 50% of the cost in excess of $15.9 million,
up to a maximum payment by TIMET of $2 million; TIMET does not currently expect
to incur any cost in connection with this project). TIMET, BMI and the other
Steering Committee Companies are continuing investigation with respect to
certain additional issues associated with the properties described above,
including any possible groundwater issues. In addition, TIMET is continuing
assessment work with respect to its own active plant site.
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
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. A
settlement agreement in this case was approved by the court in February 2000,
pursuant to which TIMET will make cash payments totaling approximately $.4
million from 2000 through 2002 and undertake certain additional monitoring and
emissions controls at a primarily capital cost of approximately $1.5 million.
At December 31, 1999, TIMET had accrued an aggregate of approximately
$1.2 million primarily for the environmental matters discussed above under BMI
Companies 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
F-23
<PAGE>
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed accrued amounts or that costs will not
be incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Other. TIMET is involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
TIMET currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
TIMET's financial condition, results of operations or liquidity.
In addition to litigation referred to above, certain information
relating to regulatory and environmental matters pertaining to TIMET is included
in Item 1 - "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, 1999, NL had accrued $112 million for those
environmental matters which are reasonably estimable. It is not possible to
estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to NL for sites which it is possible to estimate costs
is approximately $150 million. NL's estimates of such liabilities have not been
discounted to present value, and NL has not recognized any potential insurance
recoveries.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that NL
is potentially responsible for the release of hazardous substances at other
sites could result in expenditures in excess of amounts currently estimated by
NL to be required for such matters. No assurance can be given that actual costs
will not exceed accrued amounts or the upper end of the range for sites for
which estimates have been made and no assurance can be given that costs will not
be incurred with respect to sites as to which no estimate presently can be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
F-24
<PAGE>
Certain of NL's businesses are and have been engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain past and current operations and
products of NL have the potential to cause environmental or other damage. NL has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. The policy of NL is to 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., the U.K. and France. The majority of TIMET's
sales are to customers in the aerospace industry (including airframe and engine
construction). As described above, TIMET has long-term agreements with certain
major aerospace customers, including Boeing, Rolls-Royce plc, United
Technologies Corporation (and related companies) and Wyman-Gordon Company. These
agreements and others accounted for approximately 44% of aerospace revenues in
1999. 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. While no customer
accounts for more than 10% of TIMET's direct sales, TIMET's ten largest
customers accounted for about one-third of its net sales in 1997, about 40% of
net sales in 1998 and about 30% of net sales in 1999.
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 generally 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. Approximately one-half of NL's TiO2 sales by
volume were to Europe in each of the past three years and approximately 36% in
1997 and 37% in each of 1998 and 1999 of sales were attributable to North
America.
NL's consolidated cash, cash equivalents and restricted cash
equivalents includes $136 million and $78 million invested in U.S. Treasury
securities purchased under short-term agreements to resell at December 31, 1998
and 1999, respectively, of which $126 million and $58 million, respectively, of
such securities are held in trust for NL by a single U.S. bank.
F-25
<PAGE>
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
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. In 1999, the Convertible Preferred Securities were omitted from the
numerator because they were antidilutive. Stock options omitted from the
denominator because they were antidilutive were not material.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1997 1998 1999
---- ---- ----
(In thousands)
Numerator:
<S> <C> <C> <C>
Net income (loss) $ 13,557 $ 73,739 $ (28,204)
Effect of dilutive securities of equity investees (875) (955) (17)
--------------- --------------- ----------------
Diluted net income (loss) $ 12,682 $ 72,784 $ (28,221)
=============== =============== ================
Denominator:
Average common shares outstanding 7,058 6,553 6,386
Average dilutive stock options 188 137 68
--------------- --------------- ----------------
Diluted shares 7,246 6,690 6,454
=============== =============== ================
</TABLE>
F-26
<PAGE>
Note 13 - Quarterly results of operations (unaudited):
<TABLE>
<CAPTION>
Quarters ended
---------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------------- ------------ ------------- ------------
(In millions, except per share data)
Year ended December 31, 1999: Equity in earnings (loss) of:
<S> <C> <C> <C> <C>
TIMET $ (1.2) $ (.7) $ (2.7) $ (67.4)
NL 1.8 21.4 2.5 2.4
Net income (loss) .3 12.5 (0.5) (40.5)
Net income (loss) per share:
Basic $ .05 $ 1.95 $ (.08) $ (6.34)
Diluted .05 1.93 (.08) *
Year ended December 31, 1998: Equity in earnings (loss) of:
TIMET $ 5.6 $ 4.2 $ 5.0 $ (0.8)
NL 46.8 3.4 4.8 2.8
Income before extraordinary item 51.1 5.9 7.9 10.8
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
<FN>
* Antidilutive
</FN>
</TABLE>
F-27
<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 February 11, 2000, except for the second paragraph of Note 11, as
to which the date is March 21, 2000, appearing in the 1999 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
February 11, 2000
S-1
<PAGE>
<TABLE>
<CAPTION>
TREMONT CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
charged
Balance at (credited) to Balance
Description beginning costs and at end
-----------
of year expenses Deductions Other of year
------------- --------------- -------------- ------------ --------------
Year ended December 31, 1999:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 2,663 $ - $ - $ - $ 2,663
============= =============== ============== =========== =============
Valuation allowance for deferred
income taxes $ 14,568 $ (1,180) $ - $ 229 (a) $ 13,617
============= =============== ============== =========== =============
Year ended December 31, 1998:
Allowance for doubtful accounts $ 2,663 $ - $ - $ - $ 2,663
============= =============== ============== =========== =============
Valuation allowance for deferred
income taxes $ 38,794 $ (26,876) $ - $ 2,650 (b) $ 14,568
============= =============== ============== =========== =============
Year ended December 31, 1997:
Allowance for doubtful accounts $ 2,663 $ - $ - $ - $ 2,663
============= =============== ============== =========== =============
Valuation allowance for deferred
income taxes $ 37,899 $ 895 $ - $ - $ 38,794
============= =============== ============== =========== =============
<FN>
(a) Represents increase in valuation allowance principally attributable to the redetermination of net
operating loss carryforwards generated in 1998.
(b) Represents increase in valuation allowance principally attributable to the
redetermination of the deferred tax asset related to the Company's
investment in NL.
</FN>
</TABLE>
S-2
Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of % of Voting
Incorporation or Securities Held at
Name of Corporation Organization December 31, 1999
- ---------------------------- ----------------- --------------------
<S> <C> <C>
TRECO L.L.C. Nevada 75
Basic Management, Inc. Nevada 32
The Landwell Company LP Delaware 50
The Landwell Company LP Delaware 12
TRE Holding Corporation Delaware 100
TRE Management Company Delaware 100
TRE Colorado Corporation Delaware 100
NL Insurance Limited of Vermont Vermont 100
Titanium Metals Corporation Delaware 39
NL Industries, Inc. New Jersey 20
</TABLE>
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 February 11, 2000, except for the second paragraph of Note 11,
as to which the date is March 21, 2000, on our audits of the consolidated
financial statements and the financial statement schedule of Tremont Corporation
as of December 31, 1999 and 1998, and for the years ended December 31 1999, 1998
and 1997, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000842718
<NAME> Tremont Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,002
<SECURITIES> 0
<RECEIVABLES> 4,461
<ALLOWANCES> 2,663
<INVENTORY> 0
<CURRENT-ASSETS> 9,251
<PP&E> 1,422
<DEPRECIATION> 834
<TOTAL-ASSETS> 232,574
<CURRENT-LIABILITIES> 18,792
<BONDS> 0
0
0
<COMMON> 7,781
<OTHER-SE> 155,887
<TOTAL-LIABILITY-AND-EQUITY> 232,574
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 917
<INCOME-PRETAX> (47,075)
<INCOME-TAX> 18,871
<INCOME-CONTINUING> (28,204)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,204)
<EPS-BASIC> (4.41)
<EPS-DILUTED> 0
</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
16 of the Consolidated Financial Statements, which information is incorporated
herein by reference.
<TABLE>
<CAPTION>
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
<S> <C>
FINANCIAL STATEMENTS PAGE
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1998 and 1999 F-2/F-3
Consolidated Statements of Operations - Years ended F-4
December 31, 1997, 1998 and 1999
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1998 and 1999 F-6/F-7
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1998 and 1999 F-8
Notes to Consolidated Financial Statements F-9/F-31
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II - Valuation and qualifying accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
</TABLE>
F
<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 and Subsidiaries as of
December 31, 1998 and 1999 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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 28, 2000, except for the fourth and fifth paragraphs of Note 10, as
to which the date is February 25, 2000, and the second paragraph of Note 16,
as to which the date is March 21, 2000.
F-1
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
(In thousands, except per share data)
ASSETS 1998 1999
-------------- ---------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 15,464 $ 20,671
Accounts and other receivables, less
Allowance of $1,932 And $3,330 126,098 106,204
Receivable from related parties 8,119 4,071
Refundable income taxes 6,819 10,651
Inventories 225,880 191,535
Prepaid expenses and other 10,650 7,177
Deferred income taxes 1,900 2,250
-------------- ---------------
Total current assets 394,930 342,559
-------------- ---------------
Other assets:
Investment in joint ventures 32,633 26,938
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 890 6,530
Goodwill 59,547 54,789
Other intangible assets 19,894 16,326
Deferred income taxes - 9,600
Other 14,129 12,979
-------------- ---------------
Total other assets 207,093 207,162
-------------- ---------------
Property and equipment:
Land 5,974 6,230
Buildings 25,610 24,647
Information technology systems 56,089 55,226
Manufacturing and other 278,669 331,591
Construction in progress 52,651 8,122
-------------- ---------------
418,993 425,816
Less accumulated depreciation 67,770 92,432
-------------- ---------------
Net property and equipment 351,223 333,384
-------------- ---------------
$ 953,246 $ 883,105
============== ===============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1998 and 1999
(In thousands, except per share data)
LIabilities, Minority Interest and Stockholders' Equity 1998 1999
-------------- ---------------
Current liabilities:
<S> <C> <C>
Notes payable $ 5,134 $ 9,635
Current maturities of long-term debt and
Capital lease obligations 771 85,679
Accounts payable 69,302 48,679
Accrued liabilities 50,628 42,879
Payable to related parties 3,223 1,984
Income taxes 5,391 516
Deferred income taxes 2,500 5,049
-------------- ---------------
Total current liabilities 136,949 194,421
-------------- ---------------
Noncurrent liabilities:
Long-term debt 99,950 22,425
Capital lease obligations 10,069 9,776
Payable to related parties 1,395 1,332
Accrued OPEB Cost 24,065 19,961
Accrued pension cost 8,754 5,634
Deferred income taxes 14,200 12,950
-------------- ---------------
Total noncurrent liabilities 158,433 72,078
-------------- ---------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities ("convertible preferred securities") 201,250 201,250
other minority interest 8,237 7,275
Stockholders' equity:
Preferred stock $.01 par value; 1,000 shares authorized,
None outstanding - -
Common stock, $.01 par value; 99,000 shares authorized,
31,459 and 31,461 shares issued, respectively 315 315
Additional paid-in capital 347,972 347,984
Retained earnings 99,981 64,827
Accumulated other comprehensive income (loss) 1,317 (3,837)
Treasury stock, at cost (90 Shares) (1,208) (1,208)
-------------- ---------------
Total stockholders' equity 448,377 408,081
-------------- ---------------
$ 953,246 $ 883,105
============== ===============
</TABLE>
Commitments and contingencies (Note 16)
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999
(In thousands, except per share data)
1997 1998 1999
--------------- --------------- ---------------
Revenues and other income:
<S> <C> <C> <C>
Net sales $ 733,577 $ 707,677 $ 480,029
Equity in earnings (losses) of joint ventures (1,013) 351 (1,709)
Other, net 4,530 6,859 4,952
--------------- --------------- ---------------
737,094 714,887 483,272
--------------- --------------- ---------------
Costs and expenses:
Cost of sales 554,546 542,285 454,506
Selling, general, administrative and development 45,319 59,837 48,577
Special charges - 24,000 6,834
Interest 2,066 2,916 7,093
--------------- --------------- ---------------
601,931 629,038 517,010
--------------- --------------- ---------------
Income (loss) before income taxes and minority interest 135,163 85,849 (33,738)
Income tax expense (benefit) 41,004 29,197 (12,021)
Minority interest - convertible preferred securities 8,840 8,840 8,667
Other minority interest 2,309 2,060 1,006
--------------- --------------- ---------------
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
=============== =============== ===============
Diluted net income (loss) $ 91,850 $ 54,592 $ (22,723)
=============== =============== ===============
Earnings (loss) per share:
Basic $ 2.64 $ 1.46 $ (1.00)
Diluted 2.49 * *
Weighted average shares outstanding:
Basic 31,457 31,435 31,371
Diluted 36,955 36,846 36,782
<FN>
* Antidilutive.
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------------- --------------- --------------
<S> <C> <C> <C>
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
Other comprehensive income (loss), net of tax:
Currency translation adjustment (1,727) 1,692 (5,637)
Pension liabilities adjustment 858 (4,283) 483
--------------- --------------- --------------
Comprehensive income (loss) $ 82,141 $ 43,161 $ (36,544)
=============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
-------------- --------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
Depreciation and amortization 28,384 32,514 42,693
Special charges - non cash portion - 15,425 3,936
Earnings of joint ventures, net of distributions 1,013 170 3,730
Deferred income taxes 6,578 13,172 (464)
Other minority interest 2,309 2,060 1,006
Other, net (36) (433) 4,447
Change in assets and liabilities, net of acquisitions:
Receivables (41,781) 37,454 17,406
Inventories 294 (62,990) 23,598
Prepaid expenses 1,600 2,539 3,137
Accounts payable and accrued liabilities 1,231 (9,497) (24,151)
Accrued restructuring charges - 6,727 (5,042)
Income taxes 5,526 (12,213) (16,220)
Accounts with related parties, net (13,292) 9,650 2,409
Accrued dividends on preferred securities - (890) (5,640)
Other, net (2,266) (3,323) 88
-------------- --------------- --------------
Net cash provided by operating activities 72,570 76,117 19,543
-------------- --------------- --------------
Cash flows from investing activities:
Capital expenditures (66,295) (115,155) (24,772)
Business acquisitions and joint ventures (13,496) (27,413) -
Purchase of preferred securities - (80,000) -
Disposition of fixed assets - - 2,900
Other, net - (647) 209
-------------- --------------- --------------
Net cash used by investing activities (79,791) (223,215) (21,663)
-------------- --------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings - 153,765 111,900
Repayments (4,833) (56,670) (99,284)
Deferred financing costs (2,230) - -
Repayment of related parties loans (930) - -
Dividends paid - (3,772) (3,764)
Treasury stock purchased - (1,208) -
Other, net (1,830) 117 (289)
-------------- --------------- --------------
Net cash provided (used) by financing activities (9,823) 92,232 8,563
-------------- --------------- --------------
$ (17,044) $ (54,866) $ 6,443
============== =============== ==============
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
-------------- --------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
<S> <C> <C> <C>
Operating, investing and financing activities $ (17,044) $ (54,866) $ 6,443
Cash acquired - 1,187 -
Currency translation (525) 186 (1,236)
-------------- --------------- --------------
(17,569) (53,493) 5,207
Balance at beginning of year 86,526 68,957 15,464
-------------- --------------- --------------
Balance at end of year $ 68,957 $ 15,464 $ 20,671
============== =============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,159 $ 2,215 $ 6,669
Convertible preferred securities dividends 13,332 13,332 13,332
Income taxes, net 22,483 23,737 148
Business acquisitions and joint ventures:
Cash acquired $ - $ 1,187 $ -
Receivables 736 6,574 -
Inventories 769 15,352 -
Property, equipment and other 1,998 21,765 -
Investments in joint ventures 24,307 8,460 -
Goodwill and other intangibles 577 8,566 -
Liabilities assumed (3,604) (18,117) -
-------------- --------------- --------------
24,783 43,787 -
Less noncash consideration, principally
Property and equipment (11,287) (16,374) -
-------------- --------------- --------------
Cash paid $ 13,496 $ 27,413 $
-
============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
(In thousands)
Accumulated Other
Additional Retained Comprehensive Income (Loss)
---------------------------
Common Common Paid-in Earnings Currency Pension Treasury
Shares Stock Capital (Deficit) Translation Liabilities Stock Total
-------- ------- ----------- --------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 31,455 $ 315 $ 346,133 $(25,009) $ 5,635 $ (858) $ $ 326,216
-
Comprehensive income - - - 83,010 (1,727) 858 - 82,141
Other, net 3 - 590 - - - - 590
--------- -------- ----------- --------- ----------- --------- -------- ----------
Balance at December 31, 1997 31,458 315 346,723 58,001 3,908 - - 408,947
Comprehensive income - - - 45,752 1,692 (4,283) - 43,161
Dividends paid ($.12 per share) - - - (3,772) - - - (3,772)
Treasury stock purchases (90) - - - - - (1,208) (1,208)
Other, net 1 - 1,249 - - - - 1,249
--------- -------- ----------- --------- ---------- ---------- -------- ----------
Balance at December 31, 1998 31,369 315 347,972 99,981 5,600 (4,283) (1,208) 448,377
Comprehensive income (loss) - - - (31,390) (5,637) 483 - (36,544)
Dividends paid ($.12 per share) - - - (3,764) - - - (3,764)
Other, net 2 - 12 - - - - 12
--------- -------- ---------- --------- ---------- ----------- -------- ----------
Balance at December 31, 1999 31,371 $ 315 $ 347,984 $ 64,827 $ (37) $ (3,800) $(1,208) $ 408,081
========= ======== =========== ========= ========== =========== ======== ==========
</TABLE>
F-8
<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 other comprehensive income (loss), net of related income taxes.
Currency transaction gains and losses are recognized in income currently, and
were nominal in 1997, a net gain of $.4 million in 1998 and a net loss of $1.2
million in 1999.
NET SALES. Sales are generally recognized when products are shipped.
Sales may occasionally be recognized before shipment when, among other things,
the title has passed, the customer has assumed substantial risks of ownership
and the Company has substantially met its performance obligations.
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 primarily costed using an
average 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
and are considered to be "held-to-maturity" securities.
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 and $15.2 million at December 31, 1998 and 1999, respectively.
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.
F-9
<PAGE>
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 $1.0
million in 1997, $2.6 million in 1998 and $1.3 million in 1999. Software
development costs are capitalized; training, reengineering and similar costs are
expensed as incurred.
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.
LONG-LIVED ASSETS. When events or changes in circumstances indicate
that long-lived assets, including goodwill or other intangible assets, may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or circumstances include, among other things, significant current and
prior periods or current and projected periods with operating losses related to
the applicable business unit. All relevant factors are considered in determining
whether impairment exists. If an impairment is determined to exist, the
underlying long-lived assets and the associated goodwill are written down to
reflect the estimated future discounted cash flows expected to be generated by
the underlying business.
STOCK-BASED COMPENSATION. The Company has elected the disclosure
alternative prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," and to account for the
Company's stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB No. 25, no compensation
cost is generally recognized for fixed stock options for which the exercise
price is not less than the market price of the Company's common stock on the
grant date. See Note 12.
EMPLOYEE BENEFIT PLANS. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 14. 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
$3.6 million in 1997, $3.4 million in 1998 and $2.5 million in 1999.
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 13.
COMPREHENSIVE INCOME. The Company retroactively adopted SFAS No. 130,
"Reporting Comprehensive Income" in 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company currently expects that
it will be able to realize the carrying value of its investment in nonmarketable
preferred securities, purchased in October 1998, and as such believes the
carrying value of the securities approximate fair 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 and $46 million at December 31,
1998 and 1999, respectively (net carrying value at both dates - $201 million).
F-10
<PAGE>
NEW ACCOUNTING PRINCIPLES NOT YET ADOPTED. The Company will adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," no
later than the first quarter of 2001. 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.
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, 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".
In 1997 and 1998, the "Other" segment consisted primarily of the
Company's titanium castings operations, which were combined in a joint venture
during 1998 and subsequently sold in January 2000 (see Note 4). In 1999, the
"Other" segment consists of the Company's nonintegrated joint ventures.
Operating income, inventory and receivables are the key management
measures used to evaluate segment performance. Segment operating income is
defined as income before income taxes, minority interest and interest expense,
exclusive of certain general corporate income and expense items (including
dividends and interest income). Operating income of the "Titanium melted and
mill products" segment includes special charges of $19.5 million and $4.7
million in 1998 and 1999, respectively. In 1999, the operating loss of this
segment also included $4.3 million of charges for slow-moving inventory (see
Note 7). Operating income of the "Other" segment includes special charges of
$4.5 million and $2.1 million in 1998 and 1999, respectively. The special
charges are more fully described in Note 6.
F-11
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
(In thousands)
OPERATING SEGMENTS:
Net sales:
<S> <C> <C> <C>
Titanium melted and mill products $ 700,427 $ 686,677 $ 479,466
Other 36,217 23,936 2,233
Eliminations (3,067) (2,936) (1,670)
---------------- --------------- ----------------
$ 733,577 $ 707,677 $ 480,029
================ =============== ================
Mill product shipments:
Volume (metric tons) 15,100 14,800 11,400
Average price ($ per kilogram) $ 35.00 $ 35.25 $ 33.00
Operating income (loss):
Titanium melted and mill products $ 139,252 $ 87,411 $ (27,685)
Other (6,290) (4,706) (3,748)
---------------- --------------- ----------------
132,962 82,705 (31,433)
Dividends and interest income 1,407 6,303 6,034
General corporate income (expense), net 2,860 (243) (1,246)
Interest expense (2,066) (2,916) (7,093)
---------------- --------------- ----------------
Income (loss) before income taxes
And minority interest $ 135,163 $ 85,849 $ (33,738)
================ =============== ================
Depreciation and amortization:
Titanium melted and mill products $ 26,463 $ 31,599 $ 42,693
Other 1,921 915 -
================ ============== ================
$ 28,384 $ 32,514 $ 42,693
================ ============== ================
Capital expenditures:
Titanium melted and mill products $ 62,869 $ 115,103 $ 24,770
Other 3,426 52 2
================ ============== ================
$ 66,295 $ 115,155 $ 24,772
================ ============== ================
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1998 1999
---------------- -------------- ----------------
(In thousands)
Inventories:
<S> <C> <C> <C>
Titanium melted and mill products $ 146,782 $ 225,073 $ 190,390
Other 7,165 871 1,209
Eliminations (129) (64) (64)
---------------- -------------- ----------------
$ 153,818 $ 225,880 $ 191,535
================ ============== ================
Accounts receivable:
Titanium melted and mill products $ 149,293 $ 124,010 $ 105,202
Other 6,385 2,088 1,002
---------------- -------------- ----------------
$ 155,678 $ 126,098 $ 106,204
================ ============== ================
Investment in joint ventures:
Titanium melted and mill products $ 20,114 $ 22,044 $ 21,143
Other 3,156 10,589 5,795
---------------- -------------- ----------------
$ 23,270 $ 32,633 $ 26,938
================ ============== ================
Equity in earnings (losses) of joint ventures:
Titanium melted and mill products $ (517) $ 1,869 $ 549
Other (496) (1,518) (2,258)
---------------- -------------- ----------------
$ (1,013) $ 351 $ (1,709)
================ ============== ================
Geographic segments:
Net sales - point of origin:
United states $ 534,440 $ 465,519 $ 365,652
United kingdom 223,573 217,709 160,765
Other europe 96,659 109,347 89,433
Eliminations (121,095) (84,898) (135,821)
---------------- --------------- ----------------
$ 733,577 $ 707,677 $ 480,029
================ =============== ================
Net sales - point of destination:
United states $ 401,217 $ 354,001 $ 239,797
Europe 276,419 290,988 203,858
Other 55,941 62,688 36,374
---------------- --------------- ----------------
$ 733,577 $ 707,677 $ 480,029
================ =============== ================
Operating income (loss):
United states $ 76,434 $ 45,760 $ (31,636)
Europe 56,528 36,945 203
---------------- --------------- ----------------
$ 132,962 $ 82,705 $ (31,433)
================ =============== ================
Long-lived assets - property and equipment, net:
United states $ 188,564 $ 264,856 $ 246,744
United kingdom 69,470 78,731 81,607
Other europe 4,392 7,636 5,033
---------------- --------------- ----------------
$ 262,426 $ 351,223 $ 333,384
================ =============== ================
</TABLE>
Export sales from U.S. based operations approximated $97 million in 1997,
$81 million in 1998 and $65 million in 1999.
F-13
<PAGE>
Geographic segment operating income of the U.S. includes special
charges in 1998 and 1999 of $14.5 million and $3.2 million, respectively.
Operating income of the Europe segment in 1998 and 1999 includes special charges
of $9.5 million and $3.6 million, respectively. The 1999 geographic segment
operating income also includes a charge for slow-moving inventory of $2.4
million and $1.9 million in U.S. and Europe, respectively.
Note 3 - Business combinations:
In January 1997, the Company purchased LASAB Laser Applikations-und
Bearbeitungs GmbH, 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, based in Italy, of titanium pipe and fittings primarily to the
offshore oil and gas drilling and production markets. The cost of the Loterios
acquisition, accounted for by the purchase method, was approximately $19 million
in cash. Additional consideration of up to approximately $7 million is
contingent upon Loterios' achieving certain operating targets through 2000. No
additional consideration has been earned to date based upon Loterios' operating
results. The results of Loterios' operations have been reflected in the
consolidated financial statements from the date of acquisition. Net sales in
1998 subsequent to the acquisition approximated $23 million; net sales in 1999
approximated $20 million.
Note 4 - Joint ventures:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
-------------- --------------
(In thousands)
Joint ventures:
<S> <C> <C>
Valtimet $ 21,658 $ 20,863
Wyman-gordon titanium castings 6,158 5,795
Other 4,817 280
-------------- --------------
$ 32,633 $ 26,938
============== ==============
</TABLE>
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. During the six months ended December 31, 1997 and the years
ended December 31, 1998 and 1999, ValTimet reported sales of $56.6 million,
$119.3 million and $71.2 million and net income of $.1 million, $4.1 million and
$.5 million, respectively. At December 31, 1998 and 1999, ValTimet reported
total assets of $69.1 million and $57.8 million and equity of $31.8 million and
$29.9 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, Massachusetts 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
F-14
<PAGE>
on the transaction. For the five months ended December 31, 1998 and the year
ended December 31, 1999, Wyman-Gordon Titanium Castings reported sales of $16.6
million and $37.7 million, respectively, and net income (loss) of ($.4) million
and less than $.1 million, respectively. At December 31, 1998 and 1999,
Wyman-Gordon Titanium Castings reported total assets of $29.2 million and $20
million, respectively, and equity of $25.3 million and $19.4 million,
respectively. In the first quarter of 2000, the Company sold its interest in the
castings joint venture to Wyman-Gordon for approximately $7 million and recorded
a pretax gain of approximately $1.2 million.
TIMET's strategy for developing new markets and uses for titanium has
included providing funds to third parties to potentially prove out a new use or
uses of titanium. Other joint ventures consist principally of such investments.
During the fourth quarter 1999, the Company recorded a $2.3 million charge to
earnings for the write-down associated with an impairment of the Company's
investment in certain start-up joint ventures.
Note 5 - Preferred securities:
In October 1998, the Company purchased for cash $80 million of
non-voting preferred securities of Special Metals Corporation ("SMC"), 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. The Company is accruing dividends on the SMC preferred
securities, although dividends cannot currently be paid by SMC due to
limitations imposed by an amendment of SMC's bank credit agreement.
Note 6 - Special charges:
In 1998 and 1999, the Company implemented plans of action designed to
address current market and operating conditions, which resulted in recognizing
$24 million of restructuring charges in 1998 and $4.5 million of such charges in
1999. The plans included the permanent closure or disposition of four plants,
permanent or temporary closure of three other plants and termination of an
aggregate of 700 people, or approximately 23% of TIMET's worldwide workforce
prior to the restructurings. Additionally, in 1999, the Company recorded a $2.3
million charge to earnings associated with the write-downs of the Company's
investment in certain start-up joint ventures. The components of the 1998 and
1999 restructuring charges are summarized below.
<TABLE>
<CAPTION>
1998 1999
-------------------------------- ------------------------------
SEGMENT SEGMENT
-------------------------------- ------------------------------
MELTED AND MELTED AND
MILL PRODUCTS OTHER MILL PRODUCTS OTHER
----------------- ----------- ---------------- ----------
(In millions)
<S> <C> <C> <C> <C>
Property and equipment $ 7.1 $ 2.6 $ .3 $ -
Disposition of german subsidiary - - 2.0 -
Pension and opeb costs, net 5.7 - (.1) -
Personnel severance and benefits 5.3 .5 2.5 -
Other exit costs, principally
Related to leased facilities 1.4 1.4 - (.2)
----------------- ----------- ---------------- ----------
$ 19.5 $ 4.5 $ 4.7 $ (.2)
================= =========== ================ ==========
</TABLE>
F-15
<PAGE>
Substantially all of the property and equipment loss relates to items
sold, scrapped or abandoned. Depreciation of equipment temporarily idled but not
impaired was not suspended. The disposition of the German subsidiary is expected
to be completed in the first quarter of 2000. The pension and OPEB costs relate
to actuarial valuations of accelerated defined benefits of employees terminated
and curtailment of OPEB liabilities.
At December 31, 1999, substantially all of the planned 1998-1999
aggregate personnel reductions had been accomplished, with the remainder to be
accomplished in the first quarter of 2000. Of the aggregate $10.9 million
personnel and other exit costs accrued, $1.9 million was paid in 1998 and $7.5
million was paid in 1999. Substantially all of the remaining $1.5 million of
accrued costs is expected to be paid during the first half of 2000.
The Company is implementing additional personnel reductions and
production rationalization which will result in additional restructuring charges
in 2000. Such charges are currently estimated to be up to $10 million,
principally related to personnel severance and benefits for the approximately
250 employees to be terminated.
Note 7 - Inventories:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
-------------- ---------------
(In thousands)
<S> <C> <C>
Raw materials $ 62,820 $ 45,004
Work-in-process 110,096 69,809
Finished products 70,353 83,893
Supplies 10,611 18,329
-------------- ---------------
253,880 217,035
Less adjustment of certain
inventories to LIFO basis 28,000 25,500
-------------- ---------------
$ 225,880 $ 191,535
============== ===============
</TABLE>
During 1999, the Company recorded a $4.3 million charge to cost of
sales for slow-moving inventory.
Note 8 - Intangible and other noncurrent assets:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
-------------- --------------
(In thousands)
Intangible assets:
<S> <C> <C>
Patents $ 14,381 $ 13,934
Covenants not to compete 8,759 8,881
Intangible pension assets 2,783 3,190
-------------- --------------
25,923 26,005
Less accumulated amortization 6,029 9,679
-------------- --------------
$ 19,894 $ 16,326
============== ==============
Other noncurrent assets:
Deferred financing costs $ 9,911 $ 9,417
Notes receivable from officers 580 489
Other 3,638 3,073
-------------- --------------
$ 14,129 $ 12,979
============== ==============
</TABLE>
F-16
<PAGE>
Note 9 - Accrued liabilities:
<TABLE>
<CAPTION> December 31,
-------------------------------
1998 1999
-------------- -------------
(In thousands)
<S> <C> <C>
OPEB cost $ 2,371 $ 3,269
Pension cost 1,482 1,287
Other employee benefits 20,881 14,375
Deferred income - 9,295
Environmental costs 2,273 1,238
Restructuring costs 6,727 1,490
Taxes, other than income 1,292 1,209
Accrued dividends - convertible preferred securities 1,111 1,111
Other 14,491 9,605
-------------- -------------
$ 50,628 $ 42,879
============== =============
</TABLE>
During 1999, the Company had customer orders for approximately $16
million of titanium ingot for which the customer had not yet determined the
final mill product specifications. At the customer's request, the Company
manufactured the ingots and is storing the material at the Company's facilities.
It is anticipated that most of this ingot will be shipped or converted into mill
products and delivered during 2000. As agreed with the customer, they were
billed for and took title to the ingots in 1999. The ingots continue to be
stored at the Company's facilities and the Company is obligated to perform
additional processing of this metal at the customer's request. Accordingly, the
revenue and cost of sales on this product was not recognized in 1999. The income
has been deferred until the related sale is recorded. See Note 1 for the
Company's revenue recognition policy.
F-17
<PAGE>
Note 10 - Notes payable, long-term debt and capital lease obligations:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
-------------- --------------
(In thousands)
<S> <C> <C>
Notes payable - european credit agreements $ 5,134 $ 9,635
============== ==============
Long-term debt:
Bank credit agreement - U.S. $ 80,000 $ 85,000
Bank credit agreement - U.K. 18,781 21,867
Other 1,740 922
-------------- --------------
100,521 107,789
Less current maturities 571 85,364
-------------- --------------
$ 99,950 $ 22,425
============== ==============
Capital lease obligations $ 10,269 $ 10,091
Less current maturities 200 315
-------------- --------------
$ 10,069 $ 9,776
============== ==============
</TABLE>
EUROPEAN CREDIT AGREEMENTS. At December 31, 1999, aggregate unused
borrowing availability under short-term bank credit agreements in France and
Italy approximated $5 million. The weighted average interest rate on borrowings
outstanding under these credit agreements at December 31, 1998 and 1999 was
6.88% and 4.58%, respectively.
LONG-TERM BANK CREDIT AGREEMENTS. At December 31, 1999, TIMET had a
$200 million revolving bank credit facility expiring in July 2002. Borrowings
accrued interest at LIBOR plus 1.50% (7.50% at December 31, 1999) and were
collateralized by substantially all of TIMET's assets. The credit agreement
generally limited dividends on TIMET's common stock to 25% of net income,
limited additional indebtedness and transactions with affiliates, required the
maintenance of certain financial ratios and contained other covenants customary
in transactions of this type. At December 31, 1999, the Company had received a
waiver of compliance through February 2000 with certain financial covenants
contained in its U.S. bank credit facility.
At December 31, 1999, TIMET UK had an (pound)18 million ($29 million)
overdraft/revolving bank credit facility maturing in April 2001. Borrowings may
be in any major currency and at December 31, 1999 were in British pounds and
U.S. dollars. These borrowings are collateralized by TIMET UK's inventories and
receivables, and accrued interest at a base rate plus 0.75% (6.75% at December
31, 1999).
In February 2000, the Company completed a new $125 million, three-year
U.S.-based revolving credit agreement replacing its previous U.S. bank credit
facility. Borrowings under the new facility are limited to a formula-determined
borrowing base derived from the value of accounts receivable, inventory and
equipment. Interest generally accrues at rates that vary from LIBOR plus 2% to
LIBOR plus 2.5%. Borrowings are collateralized by substantially all of the
Company's U.S. assets. The credit agreement limits additional indebtedness,
prohibits the payment of common stock dividends, and contains other covenants
customary in lending transactions of this type. In addition, the credit
agreement prohibits the payment of dividends on TIMET's Convertible Preferred
Securities if "excess availability," as determined under the agreement, is less
than $25 million. Borrowings outstanding under this new U.S. facility will be
classified as a current liability.
F-18
<PAGE>
The Company's subsidiary, TIMET UK, also increased its U.K. credit
agreement from (pound)18 million ($29 million) to (pound)30 million ($48
million) with its existing U.K. lender. Borrowings under the U.K. facility
accrue interest at rates that vary from LIBOR plus 1% to LIBOR plus 1.25% and
borrowings are collateralized by TIMET UK's accounts receivable, inventories,
buildings and equipment and shares in certain European subsidiaries. This
facility also contains covenants customary in lending transactions of this type.
Borrowings under these U.S. and U.K. credit agreements at closing were used to
repay the $58 million in then-outstanding borrowings under the prior U.S. credit
agreement, which was terminated. As a result of entering into these new
agreements, the Company recorded a $1.3 million charge to earnings in the first
quarter of 2000 related to the deferred financing costs associated with the
previous U.S. credit facility.
At December 31, 1999, the Company had approximately $16 million of
unused borrowing availability under its U.S. and U.K. bank credit agreements.
Upon closing of the new credit facilities on February 25, 2000, as discussed
above, the Company had approximately $96 million of borrowing availability under
these agreements.
CAPITAL LEASE OBLIGATIONS. Certain of the Company's U.K. production
facilities are under long-term leases. The Company's French subsidiary has
entered into long-term leases with Compagnie Europeenne du Zirconium-CEZUS, S.A.
("CEZUS") (the 30% minority shareholder) covering machinery and equipment. The
terms of these capital leases range from 10-30 years. The U.K. 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, 1999 were $9.4 million and $1.3 million, respectively, with related
aggregate accumulated depreciation of $1.7 million.
Aggregate maturities of long-term debt and capital lease obligations:
<TABLE>
<CAPTION>
Capital Long-term
Leases Debt
---------------- ----------------
(In thousands)
Years ending December 31,
<S> <C> <C>
2000 $ 1,190 $ 85,364
2001 1,124 558
2002 1,118 21,867
2003 1,118 -
2004 1,110 -
2005 and thereafter 20,305 -
Less amounts representing interest 15,874) -
---------------- ----------------
$ 10,091 $ 107,789
================ ================
</TABLE>
F-19
<PAGE>
Note 11 - 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, currently at approximately 104.6% of
principal amount declining to 100% from December 2006. The Company's new U.S.
credit agreement prohibits the payment of dividends on these securities if
"excess availability," as determined under the agreement, is less than $25
million. The Company also 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 Statements of Operations as minority interest, net of allocable
income tax benefit.
OTHER. Other minority interest relates principally to TIMET Savoie. The
Company has the right to purchase from CEZUS the remaining 30% interest in TIMET
Savoie for 30% of TIMET Savoie's equity determined under French accounting
principles ($7.5 million and $7.3 million at December 31, 1998 and 1999,
respectively), 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 and $2.5 million at December 31, 1998
and 1999, respectively).
Note 12 - Stockholders' equity:
PREFERRED STOCK. The Company is authorized to issue 1 million shares of
preferred stock. The rights of preferred stock as to, among other things,
dividends, liquidation, redemption, conversions, and voting rights are
determined by the Board of Directors.
COMMON STOCK. The Company's new U.S. credit agreement prohibits the payment
of common stock dividends (see Note 10).
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 5,000 shares of
the Company's common stock (1,500 prior to 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).
F-20
<PAGE>
The weighted average remaining life of options outstanding at December
31, 1999 was 7.9 years (1998 - 8.2 years). At December 31, 1997, 1998 and 1999
options to purchase approximately 2,500, 199,000 and 431,000 shares,
respectively, were exercisable at average exercise prices of $23.00, $25.89 and
$25.85, respectively. Options to purchase 318,000 shares become exercisable in
2000. At December 31, 1999, approximately 1.5 million shares and 30,350 shares
were available for future grant under the TIMET Incentive Plan and the
nonemployee director plan, respectively.
<TABLE>
<CAPTION>
The following table summarizes information about the Company's stock
options.
Amount
payable Weighted
Exercise upon Weighted average fair
price per exercise average value at
Shares share (thousands) exercise price grant date
----------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 536,275 $23.00-$31.25 $ 13,679 $ 25.51
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 11.99
Exercised (1,250) 23.00-29.50 (33) 26.25
Canceled (79,100) 23.00-34.00 (2,045) 25.86
----------- -------------- -------------- ---------------
Outstanding at December 31, 1997 820,000 23.00-34.00 22,370 27.28
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 December 31, 1998 1,217,700 23.00-35.31 34,686 28.48
Granted:
At market 433,000 7.38-7.97 3,445 7.96 3.98
Above market 206,000 8.97-9.97 1,951 9.47 3.59
Canceled (118,500) 7.97-35.31 (3,023) 25.51
----------- -------------- -------------- ---------------
Outstanding at December 31, 1999 1,738,200 $7.38-$35.31 $ 37,059 $ 21.32
=========== ============== ============== ===============
</TABLE>
Weighted average fair values of options at grant date were estimated
using the Black-Scholes model and assumptions listed below.
<TABLE>
<CAPTION>
Assumptions at date of grant: 1997 1998 1999
-------------- --------------- --------------
<S> <C> <C> <C>
Expected life (years) 6 6 6
Risk-free interest rate 6.00% 5.56% 5.14%
Volatility 35% 40% 45%
Dividend yield 0% 0% 0%
</TABLE>
Had stock-based compensation cost been determined based on the
estimated fair values of options granted and recognized as compensation expense
over the vesting period of the grants in accordance with SFAS No. 123, the
Company's net income and earnings per share would have been reduced in 1997 by
$2.4 million and $.06 per share, respectively, in 1998 by $3.5 million and $.11
per share, respectively, and in 1999 by $3.1 million and $.10 per share,
respectively.
F-21
<PAGE>
Note 13 - Income taxes:
Summarized below are (i) the components of income (loss) before income
taxes and minority interest ("pretax income (loss)"), (ii) the difference
between the income tax expense (benefit) attributable to pretax income (loss)
and the amounts that would be expected using the U.S. federal statutory income
tax rate of 35%, (iii) the components of the income tax expense (benefit)
attributable to pretax income (loss), and (iv) the components of the
comprehensive tax provision (benefit).
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
(In thousands)
Pretax income (loss):
<S> <C> <C> <C>
U.S. $ 81,766 $ 51,090 $ (30,485)
NON-U.S. 53,397 34,759 (3,253)
-------------- -------------- --------------
$135,163 $ 85,849 $ (33,738)
============== ============== ==============
Expected income tax expense (benefit), at 35% $ 47,307 $30,047 $ (11,809)
Non-U.S. tax rates (464) 41 893
U.S. State income taxes, net 126 472 (1,705)
Dividends received deduction - (218) (1,382)
Export sales credit (361) (979) -
Adjustment of deferred tax valuation allowance (5,785) - 1,869
Other, net 181 (166) 113
-------------- -------------- --------------
$ 41,004 $ 29,197 $ (12,021)
============== ============== ==============
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ 17,146 $ 4,617 $ (11,225)
Non-U.S. 17,280 11,408 (332)
-------------- -------------- --------------
34,426 16,025 (11,557)
-------------- -------------- --------------
Deferred income taxes (benefit):
U.S. 5,998 12,374 (1,850)
Non-U.S. 580 798 1,386
-------------- -------------- --------------
6,578 13,172 (464)
-------------- -------------- --------------
$ 41,004 $ 29,197 $ (12,021)
============== ============== ==============
Comprehensive tax provision (benefit) allocable to:
Pretax income (loss) $ 41,004 $ 29,197 $ (12,021)
Minority interest - convertible preferred securities (4,760) (4,703) (4,666)
Stockholders' equity, including amounts allocated
to other comprehensive income (533) (3,520) (55)
-------------- -------------- --------------
$ 35,711 $ 20,974 $ (16,742)
============== ============== ==============
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1998 1999
-------------------------- ---------------------------
Assets Liabilities Assets Liabilities
---------- ------------ ---------- -------------
(In millions)
Temporary differences relating to net assets:
<S> <C> <C> <C> <C>
Inventories $ .1 $ (5.1) $ .2 $ (5.5)
Property and equipment, including software 1.4 (30.5) - (30.7)
Accrued opeb cost 11.0 - 11.3 -
Accrued liabilities and other deductible differences 11.1 - 12.6 (1.0)
Other taxable differences - (7.7) 4.7 (8.8)
Tax loss and credit carryforwards 4.9 - 13.1 -
Valuation allowance - - (1.9) -
---------- ------------ ---------- -------------
Gross deferred tax assets (liabilities) 28.5 (43.3) 40.0 (46.0)
Netting (26.6) 26.6 (28.1) 28.1
---------- ------------ ---------- -------------
Total deferred taxes 1.9 (16.7) 11.9 (17.9)
Less current deferred taxes 1.9 (2.5) 2.3 (5.0)
---------- ------------ ---------- -------------
Net noncurrent deferred taxes $ - $ (14.2) $ 9.6 $ (12.9)
========== ============ ========== =============
</TABLE>
The Company's valuation allowance decreased in the aggregate (including
amounts allocated to items other than pretax income) by $5.8 million in 1997 and
$.4 million in 1998. The increase in valuation allowance during 1999 relates to
deferred taxes related to certain capital losses and certain non-U.S. losses
that do not currently meet the "more-likely-than-not" recognition criteria.
At December 31, 1999, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $18.5 million, of which $6.8 million and $11.7
million expire in 2010 and 2019, respectively. At December 31, 1999, the Company
had an AMT credit carryforward of approximately $5.8 million, which can be
utilized to offset regular income taxes payable in future years. The AMT credit
carryforward has an indefinite carryforward period.
Note 14 - 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 $11 million in 1997, $6 million in 1998 and $1 million in 1999.
DEFINED CONTRIBUTION PLANS. All of the Company's domestic hourly and
salaried employees (65% of total worldwide employees at December 31, 1999) 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 44% of
the Company's total employees at December 31, 1999 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 1997 and 1998 and $2 million in 1999.
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.
F-23
<PAGE>
The rates used in determining the actuarial present value of benefit
obligations at December 31, 1999 were: (i) discount rates - 6% to 7.5% (1998 -
6% to 6.5%), and (ii) rates of increase in future compensation levels - 3% (1998
- - 3%). The expected long-term rates of return on assets used was 7.5% to 9%
(1998 - 7.5% 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, 1999, the assets of the plans are primarily comprised of
government obligations, corporate stocks and bonds. The funded status of the
Company's defined benefit pension plans is set forth below.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1999
-------------- ---------------
(In thousands)
Change in projected benefit obligations:
<S> <C> <C>
Balance at beginning of year $ 136,367 $ 152,292
Service cost 5,462 4,053
Interest cost 9,377 8,939
Plan amendments - 977
Curtailment loss (gain) 5,725 (103)
Actuarial loss (gain) 553 (5,353)
Benefits paid (5,334) (8,917)
Change in currency exchange rates 142 (3,200)
-------------- ---------------
Balance at end of year $ 152,292 $ 148,688
============== ===============
Change in plan assets:
Fair value at beginning of year $ 136,827 $ 133,100
Actual return on plan assets (3,039) 28,516
Contributions 4,606 6,345
Benefits paid (5,334) (8,917)
Change in currency exchange rates 40 (2,408)
-------------- ---------------
Fair value at end of year $ 133,100 $ 156,636
============== ===============
Funded status:
Plan assets over (under) projected benefit obligations $ (19,192) $ 7,948
Unrecognized:
Actuarial loss (gain) 16,154 (9,029)
Prior service cost 2,783 3,190
Transition obligation (615) -
-------------- ---------------
Total prepaid (accrued) pension cost $ (870) $ 2,109
============== ===============
Amounts recognized in balance sheet:
Intangible pension asset $ 2,783 $ 3,190
Current pension liability (1,482) (1,287)
Noncurrent pension liability (8,754) (5,634)
Accumulated other comprehensive income 6,583 5,840
-------------- ---------------
$ (870) $ 2,109
============== ===============
</TABLE>
F-24
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999
-------------- ---------------
(In thousands)
<S> <C> <C>
Projected benefit obligation $ 63,123 $ 59,129
Accumulated benefit obligation 62,831 59,129
Fair value of plan assets 56,707 54,154
</TABLE>
The components of the net periodic defined benefit pension cost,
excluding curtailment, are set forth below.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned $ 3,906 $ 5,462 $ 4,053
Interest cost on projected benefit obligations 9,201 9,519 8,939
Expected return on plan assets (20,555) (12,247) (10,650)
Net amortization 9,724 (2,030) 120
--------------- -------------- --------------
Net pension expense $ 2,276 $ 704 $ 2,462
=============== ============== ==============
</TABLE>
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, 1999
were: (i) discount rate - 7.5% (1998 - 6.5%), (ii) rate of increase in health
care costs for the following period - 9.2% (1998 - 8.9%) (iii) ultimate health
care trend rate (achieved in 2016) - 6.0% (1998 - 4.75%). 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 1999, and the
actuarial present value of accumulated OPEB obligations at December 31, 1999
would have increased approximately $2.7 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.
F-25
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
------------- -------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
<S> <C> <C>
Balance at beginning of year $ 22,297 $ 22,637
Service cost 326 252
Interest cost 1,553 1,577
Actuarial loss 1,648 3,754
Curtailment gain - (115)
Benefits paid, net of participant contributions (3,187) (3,919)
------------- -------------
Balance at end of year 22,637 24,186
Unrecognized net actuarial gain (loss) 900 (3,411)
Unrecognized prior service credits 2,899 2,455
------------- -------------
Total accrued OPEB cost 26,436 23,230
Less current portion 2,371 3,269
------------- -------------
Noncurrent accrued OPEB cost $ 24,065 $ 19,961
============= =============
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1998 1999
----------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Service cost benefits earned $ 357 $ 326 $ 252
Interest cost on accumulated OPEB obligations 1,613 1,553 1,577
Curtailment gain - - (115)
Net amortization and deferrals (635) (550) (364)
----------- ------------ ------------
Net OPEB expense $ 1,335 $ 1,329 $ 1,350
=========== ============ ============
</TABLE>
Note 15 - Related party transactions:
At December 31, 1996, Tremont Corporation held 36% of the Company's
outstanding common stock. During 1998 and 1999, Tremont purchased additional
shares of the Company's common stock in market or private transactions,
increasing its ownership of TIMET common stock to 39% at December 31, 1999.
During 1999, the Combined Master Retirement Trust ("CMRT"), a trust formed by
Valhi, Inc. to permit the collective investment by trusts that maintain the
assets of certain employee benefit plans adopted by Valhi and related companies,
purchased shares of TIMET common stock in market transactions. At December 31,
1999, the CMRT held 8% of TIMET's common stock. At December 31, 1999, Valhi and
other entities related to Harold C. Simmons held 55% of Tremont's outstanding
common stock, and Contran Corporation held, directly or through subsidiaries,
approximately 93% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting common stock is held either by trusts established
for the benefit of certain children and grandchildren of Mr. Simmons, of which
Mr. Simmons is sole trustee, or by Mr. Simmons directly. In addition, Mr.
Simmons is the sole trustee of the CMRT and a member of the trust investment
committee for the CMRT. Mr. Simmons may be deemed to control each of Contran,
Valhi, Tremont and TIMET.
F-26
<PAGE>
Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (i) intercorporate transactions with related
companies such as guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (ii) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran, Tremont and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms which are, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
TIMET supplies titanium strip product to ValTimet under a long-term
contract as the preferred supplier and supplied castings ingot to Wyman-Gordon
Titanium Castings. Sales to these joint ventures were $40 million in 1998 and
$19 million in 1999. Receivables from related parties at December 31, 1998 and
1999 relate principally to sales to these joint ventures. In January 2000, TIMET
sold its interest in the castings joint venture.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, Union Titanium Sponge
Corporation ("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
$17 million in 1997, $7 million in 1998 and $5 million in 1999.
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 1997 and 1998 and approximately
$.2 million in 1999, subject to renewal for future years.
The Company has an intercorporate services agreement with NL
Industries, Inc., a majority-owned subsidiary of Valhi. Under the terms of the
agreement, NL provides certain management, financial and other services to TIMET
for approximately $.3 million in each of 1997, 1998 and 1999.
The Company extended market-rate loans in 1998 and 1999 to certain
officers pursuant to a Board-approved program to facilitate the purchase of
Company stock and 6.625% Convertible Preferred Securities. The loans are
generally 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. For certain executive officers whose positions have been eliminated,
the Board has approved the deferral of interest (to be added to principal
quarterly) and principal payments for a period of up to five years commencing on
the date of each such officer's severance. At December 31, 1999, the outstanding
balance of officer notes receivable was approximately $.5 million.
F-27
<PAGE>
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 and $2.0 million for
such policies in 1998 and 1999, respectively, 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 2000.
Note 16 - Commitments and contingencies:
LONG-TERM AGREEMENTS. The Company has long-term agreements with certain
major aerospace customers, including Boeing, Rolls-Royce plc, United
Technologies Corporation (and related companies) and Wyman-Gordon Company,
pursuant to which the Company expects to be a 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
were effective in 1999. 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.
The Boeing contract requires Boeing to purchase a minimum percentage of
their titanium requirements from TIMET. Although Boeing placed orders and
accepted delivery of certain volumes in 1999, TIMET believes the level of orders
was significantly below the contractual volume requirements. Although Boeing has
informed the Company that it will either order the required contractual volume
under the contract in 2000 or pay the liquidated damages provided for in the
agreement, TIMET has received virtually no Boeing-related orders under the
contract for the year 2000. Boeing has also informed the Company that it is
unwilling to commit to the contract beyond the year 2000. On March 21, 2000 the
Company filed a lawsuit against Boeing in a Colorado state court seeking damages
for Boeing's repudiation and breach of the Boeing contract. TIMET's complaint
seeks damages from Boeing that TIMET believes are in excess of $600 million and
a declaration from the court of TIMET's rights under the contract.
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 agreed to reduced minimums for 1999 and 2000.
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). As
described above, the Company has long-term agreements with certain major
aerospace customers, including Boeing, Rolls-Royce plc, United Technologies
Corporation (and related companies) and Wyman-Gordon Company. These agreements
and others accounted for approximately 44% of aerospace revenues in 1999. 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. While no customer accounts
for more than 10% of the Company's direct sales, the Company's ten largest
customers accounted for about one-third of net sales in 1997, about 40% of net
sales in 1998 and about 30% of net sales in 1999.
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 $3.6 million in 1997, $5.0 million in 1998 and $5.9 million in
1999.
F-28
<PAGE>
At December 31, 1999, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
<TABLE>
<CAPTION>
Amount
------------------
(In thousands)
Years ending December 31,
<S> <C>
2000 $ 5,495
2001 3,461
2002 1,781
2003 1,048
2004 97
2005 and thereafter 48
-------------------
$ 11,930
===================
</TABLE>
ENVIRONMENTAL MATTERS.
BMI COMPLEX. In the early 1990s, TIMET and certain other companies (the
"Steering Committee Companies") that currently have or formerly had operations
within a Henderson, Nevada industrial complex (the "BMI Complex") began
environmental assessments of the BMI Complex and each of the individual company
sites located within the BMI Complex pursuant to a series of consent agreements
entered into with the Nevada Division of Environmental Protection ("NDEP"). Most
of this assessment work has now been completed, although some of the assessment
work with respect to TIMET's property is continuing. In 1999, TIMET entered into
a series of agreements with Basic Management, Inc. (together with its
subsidiaries, "BMI") and, in certain cases, other Steering Committee Companies,
pursuant to which, among other things, BMI assumed responsibility for the
conduct of soils remediation activities on the properties described, including,
subject to final NDEP approval, the responsibility to complete all outstanding
requirements under the consent agreements with NDEP insofar as they relate to
the investigation and remediation of soils conditions on such properties. BMI
also agreed to indemnify TIMET and the other Steering Committee Companies
against certain future liabilities associated with any soils contamination on
such properties. The Company contributed $2.8 million to the cost of this
remediation (which payment was charged against accrued liabilities). The Company
also agreed to convey to BMI, at no additional cost, certain lands owned by the
Company adjacent to its plant site (the "TIMET Pond Property") upon payment by
BMI of the cost to design, purchase, and install the technology and equipment
necessary to allow the Company to stop discharging liquid and solid effluents
and co-products onto the TIMET Pond Property (BMI will pay 100% of the first
$15.9 million cost for this project, and TIMET will contribute 50% of the cost
in excess of $15.9 million, up to a maximum payment by TIMET of $2 million; the
Company does not currently expect to incur any cost in connection with this
project). The Company, BMI and the other Steering Committee Companies are
continuing investigation with respect to certain additional issues associated
with the properties described above, including any possible groundwater issues.
In addition, the Company is continuing assessment work with respect to its own
active plant site.
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
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. A
settlement agreement in this case was approved by the court in February 2000,
pursuant to which TIMET will make cash payments totaling approximately $.4
million from 2000 through 2002 and undertake certain additional monitoring and
emissions controls at a primarily capital cost of approximately $1.5 million.
F-29
<PAGE>
At December 31, 1999, the Company had accrued an aggregate of
approximately $1.2 million primarily for THE ENVIRONMENTAL MATTERS DISCUSSED
ABOVE UNDER BMI COMPANIES 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.
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 17 - Quarterly results of operations (unaudited):
<TABLE>
<CAPTION>
Quarters ended
--------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------------- ------------- -------------- -------------
(In millions, except per share data)
Year ended december 31, 1999:
<S> <C> <C> <C> <C>
Net sales $ 134.1 $ 127.6 $ 112.7 $ 105.5
Operating income (loss) (1.4) 1.1 (7.8) (23.2)
Net loss (3.9) (2.5) (7.5) (17.5)
Net loss per share:
Basic $ (.12) $ (.08) $ (.24) $ (.56)
Diluted * * * *
Year ended december 31, 1998:
Net sales $ 187.1 $ 190.8 $ 173.5 $ 156.3
Operating income (loss) 31.6 23.9 27.3 (.2)
Net income (loss) 18.3 13.8 16.1 (2.5)
Net income (loss) per share:
Basic $ .58 $ .44 $ .51 $ (.08)
Diluted .56 .44 .50 *
<FN>
* Antidilutive.
</FN>
</TABLE>
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.
F-30
<PAGE>
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. In 1998
and 1999, the effect of the assumed conversion of the Convertible Preferred
Securities was antidilutive. Stock options omitted from the denominator because
they were antidilutive approximated: not material in 1997, 1.2 million in 1998
and 1.7 million in 1999.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1998 1999
--------------- -------------- ---------------
(In thousands)
Numerator:
<S> <C> <C> <C>
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
Minority interest - Convertible
Preferred Securities 8,840 8,840 8,667
--------------- -------------- ---------------
Diluted net income (loss) $ 91,850 $ 54,592 $ (22,723)
=============== ============== ===============
Denominator:
Average common shares outstanding 31,457 31,435 31,371
Convertible Preferred Securities 5,389 5,389 5,389
Average dilutive stock options 109 22 22
--------------- -------------- ---------------
Diluted shares 36,955 36,846 36,782
=============== ============== ===============
</TABLE>
F-31
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, property damage and
governmental expenditures 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 and bills which would
revive actions barred by the statute of limitations. 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 or other
legislation could have such an effect. The Company has not accrued any amounts
for the pending lead pigment and lead-based paint litigation. There is no
assurance that the Company will not incur future liability in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases. However, based on, among
other things, the results of such litigation to date, the Company believes that
the pending lead pigment and lead-based paint litigation is without merit.
Liability that may result, if any, cannot reasonably be estimated.
In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against the Company,
other alleged manufacturers of lead pigment (together with the Company, the
"pigment manufacturers") and the Lead Industries Association (the "LIA") in 14
actions commenced by residents of HANO units seeking compensatory and punitive
damages for injuries allegedly caused by lead pigment. The actions, which were
pending in the Civil District Court for the Parish of Orleans, State of
Louisiana, were dismissed by the district court in 1990. Subsequently, HANO
agreed to consolidate all the cases and appealed. In March 1992 the Louisiana
Court of Appeals, Fourth Circuit, dismissed HANO's appeal as untimely with
respect to three of these cases. With respect to the other cases included in the
appeal, the court of appeals reversed the lower court decision dismissing the
cases. These cases were remanded to the District Court for further proceedings.
In November 1994 the District Court granted defendants' motion for summary
judgment in one of the remaining cases and in June 1995 the District Court
granted defendants' motion for summary judgment in several of the remaining
cases. After such grant, only two cases remain pending and have been inactive
since 1992, Hall
-10-
<PAGE>
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. 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. 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. In September 1999 the trial court
denied the plaintiffs' motions for summary judgment on market share and
conspiracy issues and denied defendants' April 1999 motion for summary judgment
on statute of limitations grounds. Plaintiffs have appealed the denial of their
motions. Discovery has resumed.
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 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. Plaintiffs
moved for class certification in October 1998, and all briefing on the issue was
completed in April 1999. No decision regarding class certification has been
issued by the trial court.
-11-
<PAGE>
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 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. In May 1999 defendants appealed the denial of their
motion to dismiss the market share liability claim. The Fourth Department
intermediate appellate court in December 1999 reversed the trial court and
dismissed the market share claim. The case has been remanded to the trial court
for further proceedings on the remaining claims. Plaintiffs are seeking review
in the Court of Appeals.
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 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. In September 1999 the
Special Court of Appeals reversed the grant of summary judgment to defendants.
The Court of Appeals denied review of this decision in December 1999. Trial has
been set for May 2000.
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, the LIA, 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. In
February 2000 the trial court granted defendants' motions to dismiss the product
defect, express warranty, nuisance and consumer fraud statute claims.
In April 1999 the Company was served with an amended complaint in Sweet,
et al. v. Sheahan, et al., (U.S. District Court, Northern District of New York,
Civil Action No. 97-CV-1666/LEK-DNH), adding the Company and other defendants to
a suit originally filed against plaintiffs' landlord. Plaintiffs, a parent and
child, allege injuries purportedly caused by lead pigment, and seek recovery of
actual and punitive damages from their landlord, alleged former manufacturers of
lead pigment, and the LIA, and purport to allege causes of action against the
-12-
<PAGE>
former pigment manufacturers based on negligence, strict products liability,
fraud and misrepresentation, concert of action, civil conspiracy, and market
share liability. In November 1999 the trial court denied defendants' October
1999 motion arguing for dismissal due to absence of Federal jurisdiction. In
January 2000 the court certified for interlocutory review the issue of Federal
jurisdiction. Defendants have requested such review from the U.S. Court of
Appeals for the Second Circuit.
In September 1999 an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the Company and seven other companies alleged
to have manufactured lead products in paint to a suit originally filed against
plaintiff's landlords. Plaintiff, a minor, alleges injuries purportedly caused
by lead on the surfaces of premises in homes in which he resided. Plaintiff
seeks compensatory and punitive damages. Plaintiff alleges strict liability,
negligence, negligent misrepresentation and omissions, fraudulent
misrepresentations and omissions, concert of action, civil conspiracy, and
enterprise liability causes of action against the Company, seven other alleged
former manufacturers of lead products contained in paint, and the LIA. In
January 2000 the Company filed an answer denying all wrongdoing and liability,
and all manufacturer defendants filed a motion to dismiss the product defect
claim and to strike the demand for relief under the Wisconsin consumer
protection statute.
In October 1999 the Company was served with a complaint in State of Rhode
Island v. Lead Industries Association, et al. (Superior Court of Rhode Island,
No. 99-5226). Rhode Island, by and through its Attorney General, seeks
compensatory and punitive damages for medical, school, and public and private
building abatement expenses that the State alleges were caused by lead paint,
and for funding of a public education campaign and screening programs. Plaintiff
seeks judgments of joint and several liability against the Company, seven other
companies alleged to have manufactured lead products in paint, and the LIA.
Plaintiffs allege public nuisance, violation of the Rhode Island Unfair Trade
Practices and Consumer Protection Act, strict liability, negligence, negligent
misrepresentation and omissions, fraudulent misrepresentation and omissions,
civil conspiracy, unjust enrichment, indemnity, and equitable relief to protect
children. In January 2000 defendants moved to dismiss all claims. Plaintiffs'
response is not yet due.
In October 1999 the Company was served with a complaint in Cofield, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to
represent a class of all owners of nonrental residential properties in Maryland.
Plaintiffs seek compensatory and punitive damages for the existence of
lead-based paint in their homes, including funds for monitoring, detecting and
abating lead-based paint in those residences. Plaintiffs allege that the
Company, fourteen other companies alleged to have manufactured lead pigment,
paint and/or gasoline additives, the LIA, and the National Paint and Coatings
Association are jointly and severally liable for alleged negligent product
design, negligent failure to warn, supplier negligence, strict
liability/defective design, strict liability/failure to warn, nuisance,
indemnification, fraud and deceit,
-13-
<PAGE>
conspiracy, concert of action, aiding and abetting, and enterprise liability.
Plaintiffs seek damages in excess of $20,000 per household. In October 1999
defendants removed the case to Maryland federal court. In February 2000
defendants moved to dismiss the design defect, fraud and deceit, indemnification
and nuisance claims.
In October 1999 the Company was served with a complaint in Smith, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004490). Plaintiffs, six minors, each seek
compensatory damages of $5 million and punitive damages of $10 million.
Plaintiffs allege that the Company, fourteen other companies alleged to have
manufactured lead pigment, paint and/or gasoline additives, the LIA, and the
National Paint and Coatings Association are jointly and severally liable for
alleged negligent product design, negligent failure to warn, supplier
negligence, fraud and deceit, conspiracy, concert of action, aiding and
abetting, strict liability/ failure to warn, and strict liability/defective
design. In October 1999 defendants removed the case to Maryland federal court
and in November 1999 the case was remanded to state court. In February 2000 the
Company answered the complaint and denied all wrongdoing and liability, and all
defendants filed motions to dismiss the product defect and fraud and deceit
claims.
In February 2000 the Company was served with a complaint in City of St.
Louis v. Lead Industries Association, et al. (Missouri Circuit Court 22nd
Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). The City of
St. Louis seeks compensatory and punitive damages for its expenses discovering
and abating lead, detecting lead poisoning and providing medical care,
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the Company, eight other companies alleged to have
manufactured lead products for paint, and the LIA. Plaintiff alleges claims of
public nuisance, product liability, negligence, negligent misrepresentation,
fraudulent misrepresentation, civil conspiracy, unjust enrichment, and
indemnity. The Company intends to deny all allegations of wrongdoing and
liability and to defend the case vigorously.
The Company believes that the foregoing lead pigment actions are without
merit and intends to continue to deny all allegations of wrongdoing and
liability and to defend such actions vigorously.
The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in the Company's favor. In July 1991 the court granted the Company's motion for
summary judgment and ordered Commercial Union to pay the Company's reasonable
defense costs for such cases. In June 1992 the Company filed an amended
-14-
<PAGE>
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.
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
-15-
<PAGE>
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, 1999, the Company had accrued $112
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, expenditures for remedial investigations, monitoring, managing,
studies, certain legal fees, 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
$150 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 with respect to 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 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
-16-
<PAGE>
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. In 1999 the U.S. EPA and certain
other PRPs entered into a consent decree settling their liability at the site
for approximately 50% of the site costs. The Company and the U.S. EPA reached an
agreement in principle in 1999 to settle the Company's liability at the site for
$31.5 million. The Company and the U.S. EPA are negotiating a consent decree
embodying the terms of this agreement in principle.
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 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. In May 1997 the U.S. EPA issued an Amended
Record of Decision ("ARD") for the soils operable unit changing portions of the
cleanup remedy selected. The ARD requires construction of an onsite containment
facility estimated to cost between $11.5 million and $13.5 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 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 capital construction for the
remediation is expected to be completed during 2000.
-17-
<PAGE>
In 1999 the Company and other PRPs entered into an administrative consent
order with the U.S. EPA requiring the performance of a RIFS at two subsites 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). In 1999
the Company entered into a consent decree with the U.S. EPA resolving its
liability at the Baxter Springs subsite, and has reached an agreement in
principle with the other PRPs with respect to allocation of site costs. In
addition, the Company and other PRPs are performing an investigation in four
additional subsites in Cherokee County.
In 1996 the U.S. EPA ordered the Company to perform a removal action at a
formerly owned facility in Chicago, Illinois. The Company is complying with the
order and has completed the on-site work at the facility. Offsite contamination
is being investigated.
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 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 75 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
-18-
<PAGE>
the U.S. EPA issued the record of decision for operable unit one, which is
estimated by the U.S. EPA to cost approximately $17.3 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 alleges it has incurred approximately $4 million in past costs. The Company
and other PRPs have concluded a nonbinding allocation process, as a result of
which the Company was assigned 30% of future site costs. The Company and other
PRPs currently are negotiating a consent decree based on this allocation.
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.
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 2,000 personal injury
claimants.
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 case was removed to federal court and has been transferred to the eastern
district of Pennsylvania for consolidated proceedings. The Company has filed 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, 1998 and 1999 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 1997, 1998 and 1999 F-5 / F-6
Consolidated Statements of Comprehensive Income - Years
ended December 31, 1997, 1998 and 1999 F-7
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1997, 1998 and 1999 F-8
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1998 and 1999 F-9 / F-11
Notes to Consolidated Financial Statements F-12 / F-42
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 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, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 29, 2000
F-2
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
1998 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 154,953 $ 134,224
Restricted cash equivalents ...................... 8,164 17,565
Accounts and notes receivable, less
allowance of $2,377 and $2,075 .................. 133,769 143,768
Receivable from affiliates ....................... 692 747
Refundable income taxes .......................... 15,919 4,473
Inventories ...................................... 228,611 191,184
Prepaid expenses ................................. 2,724 2,492
Deferred income taxes ............................ 1,955 11,974
---------- ----------
Total current assets ......................... 546,787 506,427
---------- ----------
Other assets:
Marketable securities ............................ 17,580 15,055
Investment in TiO2 manufacturing joint venture ... 171,202 157,552
Prepaid pension cost ............................. 23,990 23,271
Other ............................................ 13,927 5,410
---------- ----------
Total other assets ........................... 226,699 201,288
---------- ----------
Property and equipment:
Land ............................................. 19,626 23,678
Buildings ........................................ 144,228 133,682
Machinery and equipment .......................... 586,400 550,842
Mining properties ................................ 84,015 71,952
Construction in progress ......................... 4,385 6,805
---------- ----------
838,654 786,959
Less accumulated depreciation and depletion ...... 456,495 438,501
---------- ----------
Net property and equipment ................... 382,159 348,458
---------- ----------
$1,155,645 $1,056,173
========== ==========
</TABLE>
F-3
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1998 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1999
----------- -----------
<S> <C> <C>
Current liabilities:
Notes payable .................................. $ 36,391 $ 57,076
Current maturities of long-term debt ........... 64,826 212
Accounts payable and accrued liabilities ....... 187,661 190,360
Payable to affiliates .......................... 11,317 11,240
Income taxes ................................... 9,224 5,605
Deferred income taxes .......................... 1,236 326
----------- -----------
Total current liabilities .................. 310,655 264,819
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 292,803 244,266
Deferred income taxes .......................... 196,180 108,226
Accrued pension cost ........................... 44,649 32,946
Accrued postretirement benefits cost ........... 41,659 37,105
Other .......................................... 116,732 93,821
----------- -----------
Total noncurrent liabilities ............... 692,023 516,364
----------- -----------
Minority interest ................................ 633 3,903
----------- -----------
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 ..................... 774,288 774,304
Retained earnings (deficit) .................... (133,379) 19,150
Accumulated other comprehensive income (loss):
Currency translation ......................... (133,440) (160,022)
Marketable securities ........................ 4,498 2,857
Pension liabilities .......................... (3,187) (1,756)
Treasury stock, at cost (15,028 and 15,555
shares) ....................................... (364,801) (371,801)
----------- -----------
Total shareholders' equity ................. 152,334 271,087
----------- -----------
$ 1,155,645 $ 1,056,173
=========== ===========
</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, 1997, 1998 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues and other income:
Net sales .............................. $ 837,240 $ 894,724 $ 908,387
Other, net ............................. 19,367 25,453 23,646
--------- --------- ---------
856,607 920,177 932,033
--------- --------- ---------
Costs and expenses:
Cost of sales .......................... 649,945 618,447 662,315
Selling, general and administrative .... 168,592 133,970 134,342
Interest ............................... 65,759 58,070 36,884
--------- --------- ---------
884,296 810,487 833,541
--------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority interest ......... (27,689) 109,690 98,492
Income tax benefit (expense) ............. (2,244) (19,788) 64,601
--------- --------- ---------
Income (loss) from continuing
operations before minority
interest ............................ (29,933) 89,902 163,093
Minority interest ........................ (58) 40 3,322
--------- --------- ---------
Income (loss) from continuing
operations .......................... (29,875) 89,862 159,771
Discontinued operations .................. 20,402 287,396 --
Extraordinary item - early
extinguishment of debt, net of tax
benefit of $5,698 ....................... -- (10,580) --
--------- --------- ---------
Net income (loss) .................... $ (9,473) $ 366,678 $ 159,771
========= ========= =========
</TABLE>
F-5
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
Continuing operations ............... $ (.58) $ 1.75 $ 3.09
Discontinued operations ............. .39 5.59 --
Extraordinary item .................. -- (.21) --
---------- ---------- ----------
Net income (loss) ................. $ (.19) $ 7.13 $ 3.09
========== ========== ==========
Diluted earnings per share:
Continuing operations ............... $ (.58) $ 1.73 $ 3.08
Discontinued operations ............. .39 5.52 --
Extraordinary item .................. -- (.20) --
---------- ---------- ----------
Net income (loss) ................. $ (.19) $ 7.05 $ 3.08
========== ========== ==========
Shares used in the calculation of
earnings per share:
Basic ............................... 51,152 51,460 51,774
Dilutive impact of stock options .... -- 540 93
---------- ---------- ----------
Diluted ............................. 51,152 52,000 51,867
========== ========== ==========
</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, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) ............................ $ (9,473) $ 366,678 $ 159,771
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment ........... 3,019 201 (1,641)
Minimum pension liabilities
adjustment ................................ 1,822 (3,187) 1,431
Currency translation adjustment ............ (15,181) 370 (26,582)
--------- --------- ---------
Total other comprehensive loss ........... (10,340) (2,616) (26,792)
--------- --------- ---------
Comprehensive income (loss) ................ $ (19,813) $ 364,062 $ 132,979
========= ========= =========
</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, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive income (loss)
Additional Retained -----------------------------------
Common paid-in earnings 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, 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
Net income ....................... -- -- 159,771 -- -- -- -- 159,771
Other comprehensive income (loss),
net of tax ...................... -- -- -- (26,582) 1,431 (1,641) -- (26,792)
Common dividends declared -
$.14 per share .................. -- -- (7,242) -- -- -- -- (7,242)
Tax benefit of stock options
exercised ....................... -- 16 -- -- -- -- -- 16
Treasury stock:
Acquired ....................... -- -- -- -- -- -- (7,210) (7,210)
Reissued ....................... -- -- -- -- -- -- 210 210
------ -------- --------- --------- ------- -------- --------- ---------
Balance at December 31, 1999 ..... $8,355 $774,304 $ 19,150 $(160,022) $(1,756) $ 2,857 $(371,801) $ 271,087
====== ======== ========= ========= ======= ======== ========= =========
</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, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ..................... $ (9,473) $ 366,678 $ 159,771
Depreciation, depletion and
amortization ......................... 34,887 34,545 33,730
Noncash interest expense .............. 23,092 18,393 1,682
Deferred income taxes ................. (5,627) 4,988 (86,772)
Minority interest ..................... (58) 40 3,322
Net (gains) losses from:
Securities transactions ............. (2,657) -- --
Disposition of property and
equipment .......................... (1,735) 768 429
Pension cost, net ..................... (5,112) (5,566) (4,702)
Other postretirement benefits, net .... (4,799) (6,299) (5,459)
Distribution from TiO2 manufacturing
joint venture ........................ -- -- 13,650
Change in accounting for environmental
remediation costs .................... 30,000 -- --
Discontinued operations:
Net gain from sale of Rheox ......... -- (286,071) --
Income from operations of Rheox ..... (20,402) (1,325) --
Extraordinary item .................... -- 10,580 --
Other, net ............................ -- 317 --
--------- --------- ---------
38,116 137,048 115,651
Rheox, net ............................ 31,506 (30,587) --
Change in assets and liabilities:
Accounts and notes receivable ....... (14,925) (2,012) (22,289)
Inventories ......................... 22,872 (49,839) 20,663
Prepaid expenses .................... 96 436 (463)
Accounts payable and accrued
liabilities ........................ 9,347 (2,741) 7,315
Income taxes ........................ 12,978 (12,976) 6,729
Accounts with affiliates ............ (3,915) 2,286 (3,572)
Other noncurrent assets ............. (269) (178) 1,090
Other noncurrent liabilities ........ (6,640) 3,650 (16,816)
--------- --------- ---------
Net cash provided by operating
activities ..................... 89,166 45,087 108,308
--------- --------- ---------
F-9
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures .................. $ (28,220) $ (22,392) $ (35,559)
Change in restricted cash
equivalents, net ..................... 1,144 (2,638) (5,176)
Proceeds from disposition of
property and equipment ............... 3,049 769 2,344
Proceeds from disposition of
marketable securities ................ 6,875 6,875 --
Investment in joint venture, net ...... 8,364 (372) --
Proceeds from sale of Rheox ........... -- 435,080 --
Rheox, net ............................ (2,314) (26) --
--------- --------- ---------
Net cash provided (used) by
investing activities ............. (11,102) 417,296 (38,391)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings .......................... -- 30,491 82,038
Principal payments .................. (182,215) (315,892) (155,787)
Deferred financing costs ............ (2,343) -- --
Dividends paid ........................ -- (4,636) (7,242)
Treasury stock purchased .............. -- -- (7,210)
Settlement of shareholder derivative
lawsuit, net ......................... -- 11,211 --
Rheox, net ............................ 100,940 (117,500) --
Other, net ............................ 1,023 168 204
--------- --------- ---------
Net cash used by financing
activities ....................... (82,595) (396,158) (87,997)
--------- --------- ---------
Net change during the year from
operating, investing and
financing activities ............. $ (4,531) $ 66,225 $ (18,080)
========= ========= =========
</TABLE>
F-10
<PAGE>
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities ......................... $ (4,531) $ 66,225 $ (18,080)
Currency translation ................ (2,295) (36) (2,649)
Sale of Rheox ....................... -- (7,630) --
--------- --------- ---------
(6,826) 58,559 (20,729)
Balance at beginning of year .......... 103,220 96,394 154,953
--------- --------- ---------
Balance at end of year ................ $ 96,394 $ 154,953 $ 134,224
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized. $ 55,908 $ 37,965 $ 35,540
Income taxes ........................ 6,875 54,230 14,963
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. At December 31,
1999, Valhi, Inc. and Tremont Corporation, each affiliates of Contran
Corporation, held approximately 59% and 20%, respectively, of NL's outstanding
common stock. At December 31, 1999, Contran and its subsidiaries held
approximately 93% of Valhi's outstanding common stock, and Valhi and other
entities related to Harold C. Simmons held approximately 55% 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 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 income taxes. Currency transaction gains and
losses are recognized in income currently.
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.
F-12
<PAGE>
Restricted cash equivalents
At December 31, 1999, restricted cash equivalents of approximately $18
million collateralized undrawn letters of credit. At December 31, 1998,
restricted cash equivalents of approximately $5 million collateralized undrawn
letters of credit, and restricted cash equivalents of approximately $7 million
collateralized certain environmental remediation obligations of the Company, of
which $4 million was classified as a noncurrent asset.
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 venture
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. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for 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.
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.
F-13
<PAGE>
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 generally 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, 1998 and 1999, 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, expanded 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 believed the resulting deferred income tax asset did not
then satisfy the "more-likely-than-not" recognition criteria and, accordingly,
the Company established an offsetting valuation allowance.
Net sales
Sales are recognized as products are shipped.
Income taxes
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries and unconsolidated affiliates not included in the
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.
F-14
<PAGE>
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 or 1999.
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 outstanding stock
options which were excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated 2,709,000,
1,942,000 and 2,185,000 in 1997, 1998 and 1999, 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,
as amended, no later than the first quarter of 2001. 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 impact of adopting SFAS
No. 133, if any, has not been determined but will be dependent upon the extent
to which the Company is then a party to derivative contracts or engaged in
hedging activities, including derivatives embedded in non-derivative host
contracts.
Note 3 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating business
segment - the production and sale of 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, 1998 and 1999, the net
F-15
<PAGE>
assets of non-U.S. subsidiaries included in consolidated net assets approximated
$310 million and $375 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 as "Trade interest income."
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.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Business segment - TiO2
Net sales ............................. $ 837,240 $ 894,724 $ 908,387
Other income, excluding corporate ..... 12,339 6,110 12,484
--------- --------- ---------
849,579 900,834 920,871
Cost of sales ......................... 649,945 618,447 662,315
Selling, general and administrative,
excluding corporate .................. 117,133 111,206 112,888
--------- --------- ---------
Operating income .................... 82,501 171,181 145,668
General corporate income (expense):
Securities earnings, net ............ 5,393 14,921 6,597
Expenses, net ....................... (49,824) (18,342) (16,889)
Interest expense .................... (65,759) (58,070) (36,884)
--------- --------- ---------
$ (27,689) $ 109,690 $ 98,492
========= ========= =========
Capital expenditures:
Kronos .............................. $ 28,193 $ 22,310 $ 32,703
General corporate ................... 27 82 2,856
--------- --------- ---------
$ 28,220 $ 22,392 $ 35,559
========= ========= =========
Depreciation, depletion and
amortization:
Kronos .............................. $ 34,684 $ 34,341 $ 33,047
General corporate ................... 203 204 683
--------- --------- ---------
$ 34,887 $ 34,545 $ 33,730
========= ========= =========
</TABLE>
F-16
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Geographic areas
Net sales - point of origin:
Germany ............................. $ 439,926 $ 451,061 $ 459,467
United States ....................... 250,798 289,701 299,520
Canada .............................. 145,160 158,967 162,746
Belgium ............................. 122,784 159,558 138,671
Norway .............................. 96,448 91,112 88,277
Other ............................... 88,030 96,912 90,442
Eliminations ........................ (305,906) (352,587) (330,736)
--------- --------- ---------
$ 837,240 $ 894,724 $ 908,387
========= ========= =========
Net sales - point of destination:
Europe .............................. $ 442,043 $ 493,942 $ 478,652
United States ....................... 230,923 246,209 268,037
Canada .............................. 58,231 66,843 60,834
Latin America ....................... 43,078 35,281 35,308
Asia ................................ 41,328 21,042 41,612
Other ............................... 21,637 31,407 23,944
--------- --------- ---------
$ 837,240 $ 894,724 $ 908,387
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Identifiable assets
Net property and equipment:
Germany ....................... $ 213,762 $ 223,605 $ 190,292
Canada ........................ 67,247 60,574 62,334
Belgium ....................... 50,783 51,683 49,146
Norway ........................ 44,841 42,336 39,845
Other ......................... 4,289 3,961 6,841
Discontinued operations ....... 30,307 -- --
---------- ---------- ----------
$ 411,229 $ 382,159 $ 348,458
========== ========== ==========
Total assets:
Kronos ........................ $ 961,635 $ 997,893 $ 972,549
General corporate ............. 47,922 157,752 83,624
Discontinued operations ....... 88,635 -- --
---------- ---------- ----------
$1,098,192 $1,155,645 $1,056,173
========== ========== ==========
</TABLE>
F-17
<PAGE>
Note 4 - Marketable securities and securities transactions:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 8,512 $ 6,700
Unrealized losses ................................ (1,591) (2,304)
Cost ............................................. 10,659 10,659
-------- --------
Aggregate market ............................. $ 17,580 $ 15,055
======== ========
</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,
----------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Raw materials $ 46,114 $ 54,861
Work in process 11,530 8,065
Finished products 136,225 100,824
Supplies 34,742 27,434
-------- --------
$228,611 $191,184
======== ========
</TABLE>
Note 6 - Investment in TiO2 manufacturing joint venture:
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 Americas Inc.
("Tioxide"). Effective June 30, 1999, Imperial Chemicals Industries plc ("ICI")
sold its titanium dioxide business, including Tioxide and its 50% ownership
interest in LPC, to Huntsman ICI Holdings, a newly formed company that is 70%-
owned by Huntsman Corporation and 30%-owned by ICI. LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates 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 is 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.
During 1999 LPC made cash distributions of $27.3 million, equally split
between the partners.
F-18
<PAGE>
Summary balance sheets of LPC are shown below.
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
-------- --------
(In thousands)
ASSETS
<S> <C> <C>
Current assets ................................... $ 60,686 $ 55,999
Property and equipment, net ...................... 294,906 279,567
-------- --------
$355,592 $335,566
======== ========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current ............. $ 10,960 $ 18,234
Partners' equity ................................. 344,632 317,332
-------- --------
$355,592 $335,566
======== ========
</TABLE>
Summary income statements of LPC are shown below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenues and other income:
Kronos ............................. $ 82,171 $ 90,392 $ 85,304
Tioxide ............................ 80,512 89,879 86,309
Interest income .................... 636 753 569
-------- -------- --------
163,319 181,024 172,182
-------- -------- --------
Cost and expenses:
Cost of sales ...................... 156,811 178,803 171,829
General and administrative ......... 355 348 353
Interest ........................... 6,153 1,873 --
-------- -------- --------
163,319 181,024 172,182
-------- -------- --------
Net income ....................... $ -- $ -- $ --
======== ======== ========
</TABLE>
Note 7 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
------- ------
(In thousands)
<S> <C> <C>
Deferred financing costs, net ..................... $ 4,124 $2,278
Intangible assets, net of accumulated
amortization of $23,704 and $22,095 .............. 1,985 120
Restricted cash equivalents ....................... 4,225 --
Deferred income taxes ............................. -- 41
Other ............................................. 3,593 2,971
------- ------
$13,927 $5,410
======= ======
</TABLE>
F-19
<PAGE>
Note 8 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Accounts payable ......................... $ 55,270 $ 56,597
-------- --------
Accrued liabilities:
Employee benefits ...................... 37,399 35,243
Environmental costs .................... 44,122 47,228
Interest ............................... 7,346 6,761
Deferred income ........................ 4,000 4,000
Other .................................. 39,524 40,531
-------- --------
132,391 133,763
-------- --------
$187,661 $190,360
======== ========
</TABLE>
Note 9 - Other noncurrent liabilities:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
-------- -------
(In thousands)
<S> <C> <C>
Environmental costs ......................... $ 81,454 $64,491
Insurance claims expense .................... 10,872 11,688
Employee benefits ........................... 9,778 7,816
Deferred income ............................. 12,333 8,333
Other ....................................... 2,295 1,493
-------- -------
$116,732 $93,821
======== =======
</TABLE>
Note 10 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Notes payable ........................................ $ 36,391 $ 57,076
======== ========
Long-term debt:
NL Industries - 11.75% Senior Secured Notes ........ $244,000 $244,000
-------- --------
Kronos:
DM bank credit facility (DM 187,322) ............. 112,674 --
Other ............................................ 955 478
-------- --------
113,629 478
-------- --------
357,629 244,478
Less current maturities ............................ 64,826 212
-------- --------
$292,803 $244,266
======== ========
</TABLE>
F-20
<PAGE>
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
functional economic equivalent of a full, unconditional and joint and several
guarantee of the Notes by Kronos and the other subsidiary, whose net assets
aggregated $559 million at December 31, 1999.
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, merge or consolidate with, or sell or transfer
all or substantially all of their assets to another entity. At December 31,
1999, $114 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 $103.73 and $103.75 at December 31, 1998 and 1999,
respectively.
The Company prepaid in full its DM 107 million ($60 million when paid)
term loan in the first quarter of 1999, principally by drawing DM 100 million
($56 million when drawn) on its DM revolving credit facility. In the second and
third quarters of 1999, the Company repaid DM 60 million ($33 million when paid)
of the DM revolving credit facility with cash provided from operations. The
revolver's outstanding balance of DM 120 million was further reduced in October
1999 by DM 20 million ($11 million when paid). In December 1999 the Company
borrowed $26 million of short-term unsecured euro-denominated bank debt and used
the proceeds along with cash on hand to prepay the remaining balance of DM 100
million ($52 million when paid). The DM facility was then terminated, releasing
collateral and eliminating all related loan covenants.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $19 million at December 31, 1999.
Notes payable at December 31, 1998 and 1999 consist of DM 61 million ($36
million at December 31, 1998) and euro 57 million ($57 million at December 31,
1999), respectively, of short-term borrowings due within one year from non-U.S.
banks with interest rates ranging from 3.75% to 4.60% at December 31, 1998 and
from 3.03% to 4.30% at December 31, 1999.
F-21
<PAGE>
During 1998 the Company redeemed (i) $6 million principal amount of its
Senior Secured Notes at par value pursuant to a tender offer; and (ii) the
entire issue of its 13% Senior Secured Discount Notes ($187.5 million principal
amount at maturity) with premiums ranging between 1.25% and 6% in market
transactions or pursuant to a tender offer.
The aggregate maturities of long-term debt at December 31, 1999 are shown
in the table below.
<TABLE>
<CAPTION>
Years ending December 31, Amount
- ------------------------- --------------
(In thousands)
<S> <C>
2000 $ 212
2001 133
2002 133
2003 244,000
--------
$244,478
========
</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. Non-U.S. employees are
covered by plans in their respective countries and 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 $.7 million
in 1997, $1.3 million in 1998 and $1.1 million in 1999. Expense related to these
plans included in discontinued operations was $.5 million in 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,
-----------------------------------------
1997 1998 1999
---- ---- ----
(Percentages)
<S> <C> <C> <C>
Discount rate 6.0 to 8.5 5.5 to 8.5 5.8 to 7.5
Rate of increase in future
compensation levels 3.0 to 6.0 2.5 to 6.0 2.5 to 4.5
Long-term rate of return on
plan assets 6.0 to 9.0 6.0 to 9.0 6.0 to 9.0
</TABLE>
During 1998 the Company curtailed certain U.S. employee pension benefits
and recognized a gain of $1.5 million, which is included in discontinued
operations. Plan assets are comprised primarily of investments in U.S. and
F-22
<PAGE>
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 will change accrued pension liabilities, pension
expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost, excluding
curtailment (gain) loss and discontinued operations, are set forth below.
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net periodic pension cost:
Service cost benefits .................... $ 4,067 $ 3,835 $ 3,942
Interest cost on projected benefit
obligation ("PBO") ...................... 15,335 15,669 16,170
Expected return on plan assets ........... (13,271) (15,172) (15,567)
Amortization of prior service cost ....... 344 332 267
Amortization of net transition
obligation .............................. 255 173 578
Recognized actuarial losses (gains) ...... (2,653) 385 1,144
-------- -------- --------
$ 4,077 $ 5,222 $ 6,534
======== ======== ========
</TABLE>
The funded status of the Company's defined benefit pension plans is set
forth below.
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
--------- ---------
(In thousands)
<S> <C> <C>
Change in PBO:
Beginning of year .......................... $ 251,372 $ 296,013
Service cost ............................... 3,835 3,942
Interest ................................... 15,669 16,170
Participant contributions .................. 1,228 939
Actuarial (gain) loss ...................... 30,768 (14,303)
Curtailment gain ........................... (1,513) --
Benefits paid .............................. (15,748) (16,345)
Change in currency exchange rates .......... 10,402 (26,230)
--------- ---------
End of year .............................. 296,013 260,186
--------- ---------
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
--------- ---------
(In thousands)
<S> <C> <C>
Change in fair value of plan assets:
Beginning of year .............................. $ 199,371 $ 221,035
Actual return on plan assets ................... 20,951 21,444
Employer contributions ......................... 10,788 11,236
Participant contributions ...................... 1,228 939
Benefits paid .................................. (15,748) (16,345)
Change in currency exchange rates .............. 4,445 (19,367)
--------- ---------
End of year .................................. 221,035 218,942
--------- ---------
Funded status at year end:
Plan assets less than PBO ...................... (74,978) (41,244)
Unrecognized actuarial loss .................... 44,945 21,603
Unrecognized prior service cost ................ 3,341 2,137
Unrecognized net transition obligation ......... 1,215 514
--------- ---------
$ (25,477) $ (16,990)
========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost ........................... $ 23,990 $ 23,271
Accrued pension cost:
Current ...................................... (8,005) (9,071)
Noncurrent ................................... (44,649) (32,946)
Accumulated other comprehensive income ......... 3,187 1,756
--------- ---------
$ (25,477) $ (16,990)
========= =========
</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, 1999, 75% of the projected benefit
obligations of such plans relate to non-U.S. plans (1998 - 83%).
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Projected benefit obligation ................. $231,860 $194,204
Accumulated benefit obligation ............... 200,269 164,262
Fair value of plan assets .................... 148,682 146,435
</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-24
<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 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 U.S.
employees retiring after 1998 are not 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, 1999, the expected rate
of increase in health care costs is 9% in 2000 decreasing to 5.5% in 2007. Other
weighted-average assumptions used to measure the liability and expense are
presented below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1998 1999
---- ---- ----
(Percentages)
<S> <C> <C> <C>
Discount rate ....................................... 7.0 6.5 7.5
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 change 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 1999, and the
projected benefit obligation at December 31, 1999 would have increased by
approximately $1.6 million (decreased by $1.4 million). 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 $.2 million in 1997
and nil in 1998.
F-25
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1997 1998 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net periodic OPEB cost (benefit):
Service cost benefits .................... $ 39 $ 43 $ 40
Interest cost on PBO ..................... 2,972 2,393 2,069
Expected return on plan assets ........... (584) (583) (526)
Amortization of prior service cost ....... (2,075) (2,075) (2,075)
Recognized actuarial gains ............... (305) (811) (573)
------- ------- -------
$ 47 $(1,033) $(1,065)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Change in PBO:
Beginning of year ................................ $ 36,994 $ 33,812
Service cost ..................................... 43 40
Interest cost .................................... 2,393 2,069
Actuarial losses ................................. 2,117 5,714
Discontinued operations - settlement gain ........ (2,354) --
Benefits paid from:
Company funds .................................. (4,179) (3,316)
Plan assets .................................... (1,087) (1,078)
Change in currency exchange rates ................ (115) 113
-------- --------
End of year .................................. 33,812 37,354
-------- --------
Change in fair value of plan assets:
Beginning of year ................................ 6,527 6,365
Actual return on plan assets ..................... 450 206
Employer contributions ........................... 475 475
Benefits paid .................................... (1,087) (1,078)
-------- --------
End of year .................................. 6,365 5,968
-------- --------
Funded status at year end:
Plan assets less than PBO ........................ (27,447) (31,386)
Unrecognized actuarial loss ...................... (7,447) (575)
Unrecognized prior service cost .................. (12,008) (9,933)
-------- --------
$(46,902) $(41,894)
======== ========
Amounts recognized in the balance sheet:
Current .......................................... $ (5,243) $ (4,789)
Noncurrent ....................................... (41,659) (37,105)
-------- --------
$(46,902) $(41,894)
======== ========
</TABLE>
F-26
<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, 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
Treasury shares acquired ............. -- 552 (552)
Treasury shares reissued ............. -- (25) 25
------ ------- -------
Balance at December 31, 1999 ........... 66,839 15,555 51,284
====== ======= =======
</TABLE>
During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an unspecified period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization, the Company purchased 552,000 shares of its common stock
in the open market at an aggregate cost of $7.2 million in 1999 and 575,000
shares at an aggregate cost of $8.3 million in January and February 2000.
The Company reinstated a regular quarterly dividend in June 1998 and
subsequently paid three quarterly $.03 per share cash dividends in 1998. In
February 1999 the Company increased the regular quarterly dividend to $.035 per
share and subsequently paid four quarterly $.035 per share cash dividends in
1999. On February 9, 2000, the Company's Board of Directors increased the
regular quarterly dividend to $.15 per share and declared a dividend to
shareholders of record as of March 16, 2000 to be paid on March 31, 2000.
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, 1999, 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, 1999, 4,588,000 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
F-27
<PAGE>
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, 1999, there were
options to acquire 6,000 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.
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, 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
Granted .............................. 410 11.28 15.19 5,377
Exercised ............................ (25) 5.00 11.81 (209)
Forfeited ............................ (67) 8.69 22.63 (1,244)
----- -------- -------- --------
Outstanding at December 31, 1999 ....... 2,437 $ 5.00 $ 24.19 $ 34,943
===== ======== ======== ========
</TABLE>
At December 31, 1997, 1998 and 1999 options to purchase 1,801,955, 957,861
and 1,255,901 shares, respectively, were exercisable and options to purchase
305,200 shares become exercisable in 2000. Of the exercisable options at
December 31, 1999, options to purchase 977,141 shares had exercise prices less
than the Company's December 31, 1999 quoted market price of $15.06 per share.
Outstanding options at December 31, 1999 expire at various dates through 2009,
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 1997, 1998 and 1999 were $6.35, $9.78 and $6.94 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 1997, 1998 and 1999: stock price volatility
F-28
<PAGE>
of 37%, 51% and 50% in 1997, 1998 and 1999, respectively; risk-free rate of
return of 5% in 1997, 4% in 1998 and 6% in 1999; no dividend yield in 1997, and
a dividend yield of .9% in 1998 and 1.2% in 1999; and an expected term of 9
years in 1997, 8 years in 1998 and 9 years in 1999. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
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 1997, 1998 and 1999 is not necessarily indicative of future effects on
earnings per share.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
(In thousands except per share amounts)
<S> <C> <C> <C>
Net income (loss)- as reported ....... $ (9,473) $ 366,678 $ 159,771
Net income (loss)- pro forma ......... $ (11,057) $ 363,843 $ 156,868
Net income (loss) per basic common
share - as reported ................. $ (.19) $ 7.13 $ 3.09
Net income (loss) per basic common
share - pro forma ................... $ (.22) $ 7.07 $ 3.03
</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,
---------------------------------------
1997 1998 1999
--------- -------- -------
(In thousands)
<S> <C> <C> <C>
Pretax income (loss):
U.S ............................ $ (9,308) $ 57,638 $23,642
Non-U.S ........................ (18,381) 52,052 74,850
--------- -------- -------
$ (27,689) $109,690 $98,492
========= ======== =======
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Expected tax benefit (expense) ............. $ 9,692 $(38,391) $(34,472)
Non-U.S. tax rates ......................... 784 (339) 541
German solidarity and trade income
taxes ..................................... (3,597) (2,168) (6,660)
Resolution of German income tax audits ..... -- -- 36,490
Change in valuation allowance:
Corporate restructuring in Germany
and other ............................... -- -- 77,580
Change in German income tax law .......... -- -- (24,070)
Recognition of certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria .................... -- 19,143 15,807
Increase in certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria .................... (5,107) -- --
Incremental tax on income of companies
not included in the NL Tax Group .......... (3,886) (4,277) (2,747)
Refund of prior-year German dividend
withholding taxes ......................... -- 8,219 --
U.S. state income taxes .................... (231) (307) 680
Other, net ................................. 101 (1,668) 1,452
-------- -------- --------
Income tax benefit (expense) ........... $ (2,244) $(19,788) $ 64,601
======== ======== ========
Provision for income taxes:
Current income tax benefit (expense):
U.S. federal ........................... $ 6,881 $ (850) $ (193)
U.S. state ............................. (681) (307) 2,489
Non-U.S ................................ (14,071) (13,643) (24,467)
-------- -------- --------
(7,871) (14,800) (22,171)
-------- -------- --------
Deferred income tax benefit (expense):
U.S. federal ........................... (1,224) (2,112) 47,426
U.S. state ............................. 450 -- (1,809)
Non-U.S ................................ 6,401 (2,876) 41,155
-------- -------- --------
5,627 (4,988) 86,772
-------- -------- --------
$ (2,244) $(19,788) $ 64,601
======== ======== ========
Comprehensive benefit (provision) for
income taxes allocable to:
Pretax income (loss) ..................... $ (2,244) $(19,788) $ 64,601
Discontinued operations .................. (12,475) (87,000) --
Extraordinary item ....................... -- 5,698 --
Additional paid-in capital ............... -- 3,796 16
Other comprehensive income:
Marketable securities .................. (1,626) (108) 883
Currency translation ................... (410) -- --
-------- -------- --------
$(16,755) $(97,402) $ 65,500
======== ======== ========
</TABLE>
F-30
<PAGE>
The components of the net deferred tax liability are summarized below:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1999
---- ----
Deferred tax Deferred tax
------------------------ ------------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Tax effect of temporary
differences relating to:
Inventories .............. $ 3,359 $ (3,858) $ 4,025 $ (2,086)
Property and equipment ... -- (110,189) 96,548 (53,313)
Accrued postretirement
benefits cost ........... 16,434 -- 14,575 --
Accrued (prepaid)
pension cost ............ 5,341 (18,921) 6,288 (24,830)
Accrued environmental
costs ................... 42,666 -- 37,439 --
Noncompete agreement ..... 5,717 -- 4,317 --
Other accrued
liabilities and
deductible
differences ............. 17,094 -- 16,878 --
Other taxable
differences ............. -- (135,487) -- (87,041)
Tax on unremitted
earnings of
non-U.S. subsidiaries ..... -- (21,351) -- (20,727)
Tax loss and tax credit
carryforwards ............. 138,211 -- 144,985 --
Valuation allowance ........ (134,477) -- (233,595) --
--------- --------- --------- ---------
Gross deferred tax
assets (liabilities) .... 94,345 (289,806) 91,460 (187,997)
Reclassification,
principally netting by
tax jurisdiction .......... (92,390) 92,390 (79,445) 79,445
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) .... 1,955 (197,416) 12,015 (108,552)
Net current deferred
tax assets
(liabilities) ........... 1,955 (1,236) 11,974 (326)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets
(liabilities) ........... $ -- $(196,180) $ 41 $(108,226)
========= ========= ========= =========
</TABLE>
F-31
<PAGE>
Changes in the Company's deferred income tax valuation allowance are
summarized below. The deductible temporary differences in 1998 include items
that have been reported as discontinued operations.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance at the beginning of year ........ $ 207,117 $ 188,585 $ 134,477
Recognition of certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria ................. (11,106) (64,274) (70,946)
Increase in certain deductible
temporary differences which the
Company believes do not meet the
"more-likely-than-not" recognition
criteria ............................. 16,213 6,964 1,629
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax
attributes and implementation of
certain tax planning
strategies ........................... (11,300) (3,734) 183,150
Foreign currency translation .......... (12,339) 6,936 (14,715)
--------- --------- ---------
Balance at the end of year .............. $ 188,585 $ 134,477 $ 233,595
========= ========= =========
</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.
Certain significant German tax contingencies aggregating an estimated DM 188
million ($100 million when resolved) through 1998 were resolved in the Company's
favor in 1999.
The Company recognized a $90 million noncash income tax benefit in 1999
related to (i) a favorable resolution of the Company's previously reported tax
contingency in Germany ($36 million) and (ii) a net reduction in the Company's
deferred income tax valuation allowance due to a change in estimate of the
Company's ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($54 million).
With respect to the favorable resolution of the German tax contingency,
the German government has conceded substantially all of its income tax claims
against the Company and has released a DM 94 million ($50 million) lien on the
Company's Nordenham, Germany TiO2 plant that secured the government's claim.
The $54 million net reduction in the Company's deferred income tax
valuation allowance is comprised of (i) a $78 million decrease in the valuation
allowance to recognize the benefit of certain deductible income tax attributes
which the Company now believes meets the recognition criteria as a result of,
among other things, a corporate restructuring of the Company's German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to
F-32
<PAGE>
reduce the previously recognized benefit of certain other deductible income tax
attributes which the Company now believes do not meet the recognition criteria
due to a change in German tax law.
During 1999 the German government enacted certain income tax law changes
that were retroactively effective as of January 1, 1999. Based on these changes,
the Company's ongoing current (cash) income tax rate in Germany increased in
1999.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at December
31, 1999) relating to 1994. The Company appealed this assessment and, in
February 2000, the Fredrikstad City Court ruled in favor of the Norwegian tax
authorities on the primary issue, but asserted that such tax authorities'
assessment was overstated by NOK 34 million ($4 million at December 31, 1999).
The tax authorities' response to the Court's assertion is expected by the end of
March 2000. The Company is considering its appeals options. During 1998 the
Company was informed by the Norwegian tax authorities that additional tax
deficiencies of NOK 39 million ($5 million at December 31, 1999) will likely be
proposed for the year 1996 on an issue similar to the aforementioned 1994 case.
The outcome of the 1996 case is dependent on the eventual outcome of the 1994
case. 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 the Company's tax matters will be favorably
resolved due to 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.
In 1997 the Company utilized foreign tax credit carryforwards of $17
million and U.S. net operating loss carryforwards of $20 million 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. Unutilized foreign tax credit carryovers of $6 million and $2 million
expired in 1998 and 1999, respectively. The Company also has approximately $370
million of income tax loss carryforwards in Germany with no expiration date.
F-33
<PAGE>
Note 14 - Other income, net:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Securities earnings:
Interest and dividends ................. $ 2,736 $ 14,921 $ 6,597
Securities transactions ................ 2,657 -- --
-------- -------- --------
5,393 14,921 6,597
Currency transaction gains, net .......... 5,919 4,157 10,161
Noncompete agreement income .............. -- 3,667 4,000
Trade interest income .................... 2,983 2,115 2,365
Disposition of property and equipment .... 1,735 (768) (429)
Other, net ............................... 3,337 1,361 952
-------- -------- --------
$ 19,367 $ 25,453 $ 23,646
======== ======== ========
</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.
Note 15 - Other items:
Advertising expense included in continuing operations is expensed as
incurred and was $1 million in each of 1997, 1998 and 1999.
Research, development and certain sales technical support costs included
in continuing operations is expensed as incurred and approximated $7 million in
each of 1997, 1998 and 1999.
Interest capitalized related to continuing operations in connection with
long-term capital projects was $2 million in 1997, $1 million in 1998 and nil in
1999.
Note 16 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly held minority equity interest in another related party. While no
transactions of the type
F-34
<PAGE>
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 $.5 million in 1997 and $1.0 million in each of 1998 and 1999.
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 1997, nil in 1998 and $.1 million in 1999.
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 $.2 million in 1997 and $.1
million in each of 1998 and 1999.
The Company is party to an intercorporate services agreement (the "Timet
ISA") with Titanium Metals Corporation ("Timet"), approximately 47% of the
outstanding common stock of which is currently held by Tremont and another
entity related to Harold C. Simmons. 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, 1998 and 1999.
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 each of 1998 and 1999.
Purchases of TiO2 from LPC were $78.1 million in 1997, $89.0 million in
1998 and $85.3 million in 1999.
F-35
<PAGE>
The Company and NL Insurance, Ltd. of Vermont ("NLIV"), a wholly owned
subsidiary of Tremont, are parties to an Insurance Sharing Agreement 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. At December 31, 1999, the Company has $9.7 million of
restricted cash that collateralizes certain of NLIV's outstanding letters of
credit.
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 and $3.7 million
for such policies in 1998 and 1999, respectively, which amount principally
included payments for reinsurance premiums paid to third parties, but also
included commissions paid to EWI.
Amounts receivable from and payable to affiliates are summarized in the
following table.
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Receivable from affiliates:
Timet ...................................... $ 428 $ 310
CompX ...................................... 142 176
Other ...................................... 122 261
------- -------
$ 692 $ 747
======= =======
Payable to affiliates:
Tremont Corporation ........................ $ 3,053 $ 2,859
LPC ........................................ 8,264 8,381
------- -------
$11,317 $11,240
======= =======
</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.
F-36
<PAGE>
Note 17 - Commitments and contingencies:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen 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 $7 million
in each of 1997 and 1998 and $9 million in 1999. At December 31, 1999, 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>
2000 $ 2,191 $1,503
2001 1,988 815
2002 1,791 433
2003 1,603 193
2004 1,533 122
2005 and thereafter 20,971 1
------- ------
$30,077 $3,067
======= ======
</TABLE>
Capital expenditures
At December 31, 1999, the estimated cost to complete capital projects in
process approximated $11 million, including $2 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 2003. The agreements require the Company
to purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $114 million.
F-37
<PAGE>
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 states, 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.
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, 1999, the Company had accrued $112 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 $150 million. The Company's estimates of such
F-38
<PAGE>
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that
the Company is potentially responsible for the release of hazardous substances
at other sites could result in expenditures in excess of amounts currently
estimated by the Company to be required for such matters. No assurance can be
given that actual costs will not exceed accrued amounts or the upper end of the
range for sites for which estimates have been made and no assurance can be given
that costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
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
generally 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. Approximately one-half of the Company's TiO2
sales by
F-39
<PAGE>
volume were to Europe in each of the past three years and approximately 36% in
1997 and 37% in each of 1998 and 1999 of sales were attributable to North
America.
Consolidated cash, cash equivalents and restricted cash equivalents
includes $136 million and $78 million invested in U.S. Treasury securities
purchased under short-term agreements to resell at December 31, 1998 and 1999,
respectively, of which $126 million and $58 million, respectively, of such
securities are held in trust for the Company by a single U.S. bank.
Note 18 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In millions)
<S> <C> <C> <C> <C>
Cash, cash equivalents and current
restricted cash equivalents ............... $ 163.1 $ 163.1 $ 151.8 $ 151.8
Marketable securities - classified as
available-for-sale ........................ 17.6 17.6 15.1 15.1
Notes payable and long-term debt:
Fixed rate with market quotes -
Senior Secured Notes .................... $ 244.0 253.1 $ 244.0 $ 253.2
Variable rate debt ....................... 150.0 150.0 57.6 57.6
Common shareholders' equity ................ $ 152.3 $ 735.1 $ 271.1 $ 774.1
</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 is based upon quoted market prices for NL's common stock at the end of
the year. The Company held no derivative financial instruments at December 31,
1998 or 1999.
F-40
<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, 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
Year ended December 31, 1999:
Net sales ........................ $201,569 $232,658 $242,621 $231,629
Cost of sales .................... 147,040 167,779 181,745 165,751
Operating income ................. 30,961 44,136 34,759 35,812
Net income ....................... 13,940 111,823 17,146 16,862
Earnings per share - net
income:
Basic .......................... $ .27 $ 2.16 $ .33 $ .33
======== ======== ======== ========
Diluted ........................ $ .27 $ 2.16 $ .33 $ .33
======== ======== ======== ========
Weighted average common
shares and potential
common shares outstanding:
Basic .......................... 51,819 51,826 51,835 51,614
Diluted ........................ 51,870 51,883 51,943 51,758
</TABLE>
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.
F-41
<PAGE>
Condensed income statements related to discontinued operations for the
year ended December 31, 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>
Year ended Month ended
December 31, January 31,
1997 1998
------------ -----------
(In thousands)
<S> <C> <C>
Net sales .................................... $ 147,199 $ 12,630
Other expense, net ........................... (200) (50)
--------- ---------
146,999 12,580
--------- ---------
Cost of sales ................................ 73,583 6,969
Selling, general and administrative .......... 29,231 2,737
Interest expense ............................. 11,207 771
--------- ---------
114,021 10,477
--------- ---------
Income before income taxes and
minority interest ....................... 32,978 2,103
Income tax expense ........................... 12,475 778
Minority interest ............................ 101 --
--------- ---------
20,402 1,325
Gain from sale of Rheox, net of tax
expense of $86,222 .......................... -- 286,071
--------- ---------
$ 20,402 $ 287,396
========= =========
</TABLE>
Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below.
<TABLE>
<CAPTION>
Year ended Month ended
December 31, January 31,
1997 1998
------------ -----------
(In thousands)
<S> <C> <C>
Cash flows from operating activities ........... $ 31,506 $ (30,587)
--------- ---------
Cash flows from investing activities:
Capital expenditures ......................... (2,330) (26)
Other, net ................................... 16 --
--------- ---------
(2,314) (26)
--------- ---------
Cash flows from financing activities -
indebtedness, net ............................. 100,940 (117,500)
--------- ---------
Net change from operating,
investing and financing
activities ................................ $ 130,132 $(148,113)
========= =========
</TABLE>
F-42
