1
EXHIBIT 99.1
ITEM 3. LEGAL PROCEEDINGS
LEAD PIGMENT LITIGATION
The Company was formerly involved in the manufacture of lead pigments
for use in paint and lead-based paint. The Company has been named as a
defendant or third party defendant in various legal proceedings alleging that
the Company and other manufacturers are responsible for personal injury and
property damage allegedly associated with the use of lead pigments. The
Company is vigorously defending such litigation. Considering the Company's
previous involvement in the lead pigment and lead-based paint businesses, there
can be no assurance that additional litigation, similar to that described
below, will not be filed. In addition, various legislation and administrative
regulations have, from time to time, been enacted or proposed at the state,
local and federal levels that seek
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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. One such bill that would subject lead pigment manufacturers to
civil liability for damages caused by lead- based paint on the basis of market
share, and extends certain statutes of limitations, passed the Massachusetts
House of Representatives in 1993. The same bill has been reintroduced in the
Massachusetts legislature in 1994. No legislation or regulations have been
enacted to date which are expected to have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company has not accrued any amounts for the pending lead pigment
litigation. Although no assurance can be given that the Company will not incur
future liability in respect of this litigation, based on, among other things,
the results of such litigation to date, the Company believes that the pending
lead pigment litigation is without merit. Any liability that may result is not
reasonably capable of estimation.
In 1987, an action was filed against the Company and other defendants
for injuries allegedly caused by lead pigment purportedly supplied by the
defendants (Spriggs v. Sherwin-Williams, et al., No. LE3121-5-87 Housing Court
of Massachusetts, Hampden County). The complaint sought compensatory and
punitive damages for alleged negligent product design, failure to warn, breach
of warranty, and concert of action from the Company, other alleged
manufacturers of lead pigment (together with the Company, the "pigment
manufacturers") and the Lead Industries Association (the "LIA"). In November
1993, a stipulation of dismissal with prejudice was filed with the court.
In July 1992, the Company was served with a complaint entitled Boston
Housing Authority v. Sherwin-Williams Company, C.A. No. 92-10624- Y, United
States District Court for the District of Massachusetts. The complaint
asserted a claim for contribution from the Company, other pigment manufacturers
and the LIA based on their alleged negligence in product design, manufacture
and distribution; negligent failure to warn; breach of warranty; aiding and
abetting; and conspiracy. The plaintiff sought contribution to its $1.45
million cost of settling a claim by an individual who was allegedly injured by
exposure to lead pigment in the period from 1973 to 1977. In November 1993,
the parties filed a stipulation of dismissal with prejudice with the court.
In November and December 1990, the Company and others were served with
third-party complaints in actions entitled Coren, et al. v. Cardozo v.
Sherwin-Williams, et al. (No. 29101) and Pacheco, et al. v. Ortiz v. The
Sherwin-Williams Company, et al. (No. 90-3067-B) in the Housing Court of
Massachusetts, Suffolk County. The third-party complaints against the pigment
manufacturers and the LIA contain allegations similar to those in the Spriggs
action and also seek contribution and indemnification for any relief awarded to
plaintiffs. In Coren, the third-party defendants removed the case to federal
court. In 1992, the federal court dismissed the direct claims and remanded the
indemnification and contribution claims to the housing court. Thereafter, the
housing court granted the third-party defendants' motion to stay discovery,
pending trial on the main action. The Company has answered the third-party
complaint, denying all allegations of wrongdoing. In Pacheco, plaintiffs
settled with the defendant landlords for less than $100,000. The third-party
claims are in discovery. Third-party plaintiffs have proposed a stay of this
matter pending the outcome of the appeal in another personal injury action,
which was thereafter resolved in the Company's favor.
In October 1991, the Company and others were served with a third-party
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complaint by the owner of the plaintiff's apartment in an action entitled
Barros v. Pires v. Sherwin-Williams Co., et al., (Civ. No. 01011), in the
Housing Court of Massachusetts, Suffolk County. The third party complaint
against the pigment manufacturers and the LIA alleges negligent product design,
negligent failure to warn, breach of warranty, aiding and abetting, and concert
of action, and also seeks contribution and indemnification for any relief
awarded to plaintiff for damages allegedly suffered due to exposure to
lead-based paint. In May 1992, the court granted the third-party defendants'
motion to dismiss. In June 1992, the third-party plaintiffs moved for
reconsideration or for reversal of the dismissal.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against the pigment
manufacturers and 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 are pending in the Civil District Court for the Parish of
Orleans, State of Louisiana. Subsequently, HANO agreed to dismiss all such
complaints and to consolidate them for purposes of appeal. 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 eight cases
also included in the appeal, the court of appeals reversed the lower court
decision dismissing the cases due to inadequate pleading of facts. These eight
cases have been remanded to the district court for further proceedings.
Discovery is proceeding.
In December 1991, the Company received a copy of a complaint filed in
the Civil District Court for the Parish of Orleans seeking indemnification
and/or contribution against the Company and eight other defendants for
approximately $4.5 million in settlements paid to Housing Authority residents
(Housing Authority of New Orleans v. Hoechst Celanese Corp., et al., No.
91-28067). These claims appear to be based upon the same theories which HANO
had previously filed. The Company has not been served.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess
of $50 million for monitoring and abating alleged lead paint hazards in public
and private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the
New York City Health and Hospitals Corp. v. Lead Industries Association, Inc.,
et al., No. 89-4617). In December 1991, the court granted the defendants'
motion to dismiss claims alleging negligence and strict liability and denied
the remainder of the motion. In January 1992, defendants appealed the denial.
The Company has answered the remaining portions of the complaint denying all
allegations of wrongdoing, and the case is in discovery. In December 1992,
plaintiffs filed a motion to stay the claims of the City of New York and the
New York City Health and Hospitals Corporation pending resolution of the
Housing Authority's claim. In May 1993, the Appellate Division of the Supreme
Court affirmed the denial of the motion to dismiss plaintiffs' fraud,
restitution, conspiracy and concert of action claims. In August 1993, the
defendants' motion for leave to appeal was denied. Discovery is proceeding.
In March 1992, the Company was served with a complaint in Skipworth v.
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Sherwin-Williams Co., et al. (No. 92-3069), Court of Common Pleas, Philadelphia
County. Plaintiffs are a minor and her legal guardians seeking damages from
lead paint and pigment producers, the LIA, the PHA and the owners of the
plaintiffs' premises for bodily injuries allegedly suffered by the minor from
lead-based paint. Plaintiffs' counsel asserted that approximately 200 similar
complaints would be served shortly, but no such complaints have yet been
served. Defendants moved to dismiss various claims, but the court dismissed
only the claim for loss of consortium. Defendants answered the complaint
denying allegations of wrongdoing. The case is in discovery.
In August 1992, the Company was named as a defendant and served with an
amended complaint in Jackson, et al. v. The Glidden Co., et al., Court of
Common Pleas, Cuyahoga County, Cleveland, Ohio (Case No. 236835). Plaintiffs
seek compensatory and punitive damages for personal injury caused by the
ingestion of lead, and an order directing defendants to abate lead-based paint
in buildings. Plaintiffs purport to represent a class of similarly situated
persons throughout the State of Ohio. The amended complaint identifies 18
other defendants who allegedly manufactured lead products or lead-based paint,
and asserts causes of action under theories of strict liability, negligence per
se, negligence, breach of express and implied warranty, fraud, nuisance,
restitution, and negligent infliction of emotional distress. The complaint
asserts several theories of liability including joint and several, market
share, enterprise and alternative liability. In October 1992, the Company and
the other defendants moved to dismiss the complaint with prejudice. In July
1993, the court dismissed the complaint. In September 1993, the plaintiffs
appealed.
In November 1993, the Company was served with a complaint in Brenner, et
al. v. American Cyanamid, et al., 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 products liability, fraud and
misrepresentation, concert of action, civil conspiracy, enterprise liability,
market share liability, and alternative liability. In January 1994, the
Company answered the complaint, denying liability.
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 declaratory judgment actions against various
insurance carriers seeking 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). In May
1990, the Company filed an action in the United States District Court for the
District of New Jersey against Commercial Union Insurance Company ("Commercial
Union") seeking to recover defense costs incurred in the City of New York lead
pigment case and two other cases which have since been resolved in the
Company's favor. In July 1991, the court granted the Company's motion for
summary judgment and ordered Commercial Union to pay the Company's reasonable
defense costs for such cases. In June 1992, the Company filed an amended
complaint in the United States District Court for the District of New Jersey
against Commercial Union seeking to recover costs incurred in defending four
additional lead pigment cases which have since been resolved in the Company's
favor. In August 1993, the court granted the Company's motion for summary
judgment and ordered Commercial Union to pay the reasonable costs of defending
those cases. The court has not made any rulings on defense costs or indemnity
coverage with respect to the Company's pending environmental litigation or on
indemnity coverage in the lead pigment
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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 included amounts in any accruals in anticipation of insurance coverage
for lead pigment or environmental litigation.
ENVIRONMENTAL MATTERS AND LITIGATION
The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 80 governmental and private
actions associated with waste disposal sites and facilities currently or
previously owned, operated or used by the Company, or its subsidiaries, or
their predecessors, many of which are on the U.S. Environmental Protection
Agency's ("U.S. EPA") Superfund National Priorities List or similar state
lists. These proceedings seek cleanup costs, damages for personal injury or
property damage, or both. Certain of these proceedings involve claims for
substantial amounts. Although 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 to the matters noted above, certain
current and former facilities of the Company, including several divested
secondary lead smelter and former mining locations, are the subject of
environmental investigations or litigation arising out of industrial waste
disposal practices and mining activities.
The extent of CERCLA liability cannot be determined until the Remedial
Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA issues a
record of decision and costs are allocated among PRPs. The extent of liability
under analogous state cleanup statutes and for common law equivalents are
subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 1993, the Company had accrued $70
million in respect of those environmental matters which are reasonably
estimable. The Company determines the amount of accrual on a quarterly basis
by analyzing and estimating the range of possible costs to the Company. Such
costs include, among other things, remedial investigations, monitoring,
studies, clean-up, removal and remediation. 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 $105 million. No assurance can
be given that actual costs will not exceed accrued amounts or the upper end of
the range for sites for which estimates have been made, and no assurance can be
given that costs will not be incurred with respect to sites as to which no
estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
or a determination that the Company is potentially responsible for the release
of hazardous substances at other sites could result in expenditures in excess
of amounts currently estimated by the Company to be required for such matters.
Further, there can be no assurance that additional environmental matters will
not arise in the future. More detailed descriptions of certain legal
proceedings relating to environmental matters are set forth below.
The Company has been identified as a PRP by the U.S. EPA because of its
former ownership of three secondary lead smelters (battery recycling plants) in
Pedricktown, New Jersey; Granite City, Illinois; and Portland, Oregon. In all
three matters, the Company voluntarily entered into administrative consent
orders
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with the U.S. EPA requiring the performance of a RIFS, a study with the
objective of identifying the nature and extent of the hazards, if any, posed by
the sites, and selecting a remedial action, if necessary.
At Pedricktown, the U.S. EPA divided the site into two operable units.
Operable unit one covers contaminated ground water, surface water, soils and
stream sediments. The Company submitted the final RIFS for operable unit one
to the U.S. EPA in May 1993. In July 1993, the U.S. EPA issued the proposed
remediation plan for operable unit one, which the U.S. EPA estimates will cost
approximately $24.5 million. In addition, the U.S. EPA proposed that a removal
action be performed on the soils and sediments of a stream at the site,
estimated to cost approximately $1.3 million. The U.S. EPA has not yet issued
the record of decision. The U.S. EPA issued a Unilateral Administrative Order
(Index No. II-CERCLA 20205) 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
agreed to pay approximately 50% of the operable unit two costs, up to $2.5
million.
At Granite City, the RIFS is complete, and the U.S. EPA selected a
remedy estimated to cost approximately $28 million. In July 1991, the United
States filed an action in the U.S. District Court for the Southern District of
Illinois against the Company and others (United States of America v. NL
Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to the Granite
City smelter. The complaint seeks injunctive relief to compel the defendants
to comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company
and the other parties did not comply with the order believing that the remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and not in
accordance with law. The complaint also seeks recovery of past costs of $.3
million and a declaration that the defendants are liable for future costs.
Although the action was filed against the Company and ten other defendants,
there are 330 other PRPs who have been notified by the U.S. EPA. Some of those
notified were also respondents to the administrative order. In February 1992,
the court entered a case management order directing that the remedy issues be
tried before the liability aspects are presented. At a status conference in
January 1993, the court ordered the parties to consider the submission of
proposals to a Technical Advisory Committee, whose role would be to advise the
court as to the technical issues in the case. The government has opposed the
establishment of a Technical Advisory Committee. The court has not ruled on
the matter. The government has agreed to reopen the administrative record to
receive additional public comments on the selected remedy and the court stayed
the action until the record is again closed.
Having completed the RIFS at Portland, the Company conducted predesign
studies to explore the viability of the U.S. EPA's selected remedy pursuant to
a June 1989 consent decree captioned U.S. v. NL Industries, Inc., Civ. No.
89-408, United States District Court for the District of Oregon. Subsequent to
the completion of the predesign studies, the U.S. EPA issued notices of
potential liability to approximately 20 PRPs, including the Company, directing
them to perform the remedy, which was initially estimated to cost approximately
$17 million, exclusive of administrative and overhead costs and any additional
costs for the disposition of recycled materials from the site. In January
1992, the U.S. EPA issued unilateral administrative orders Docket No.
1091-01-10-106 to the Company and six other PRPs directing the performance of
the remedy. The Company and others have commenced performance of the remedy
and, through December 31, 1993, the Company and the PRPs had spent
approximately $5.5 million. Based upon
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site operations to-date, the remedy is not proceeding in accordance with
engineering expectations or cost projections; therefore, the Company and the
other PRPs have met with the U.S. EPA to discuss alternative remedies.
Pursuant to an interim allocation, the Company's share of remedial costs is
approximately 50%. In November 1991, Gould Inc., the current owner of the site,
filed an action, Gould Inc. v. NL Industries, Inc., No. 91-1091, United States
District Court for the District of Oregon, against the Company for damages for
alleged fraud in the sale of the smelter, rescission of the sale, past CERCLA
response costs and a declaratory judgment allocating future response costs and
$5 million in punitive damages. The court granted Gould's motion to amend the
complaint to add additional defendants (adjoining current and former
landowners) and third party defendants (generators). The amended complaint
deletes the fraud and punitive damages claims asserted against NL; thus, the
pending action is essentially one for allocation of past and future cleanup
costs. In March 1993, the parties agreed to a case management order limiting
discovery until 1995, after which time full discovery will proceed. A trial
date has been tentatively set for September 1996.
There are several actions pending relating to alleged contamination at
other properties formerly owned or operated by the Company or its subsidiaries
or their predecessors. In one of those cases, suit was filed in November 1992
against the Company asserting claims arising out of the sale of a former
business of the Company to Exxon Chemical Company (Exxon Chemical Company v. NL
Industries, Inc., United States District Court for the Southern District of
Texas, No. H-92-3360). The action seeks contractual indemnification,
contribution under CERCLA for costs associated with the environmental
assessment and cleanup at nine properties included in the sale, a declaration
of liability for future environmental cleanup costs, and punitive damages for
fraud. Plaintiff has asserted that past and future cleanup costs, business
interruption, and asset value losses and legal and site assessment costs are
approximately $25 million. In February 1994, the court entered an order
referring the case to mediation which is to occur by April 1994.
The Company and other PRPs entered into an administrative consent order
with the U.S. EPA requiring the performance of a RIFS at two sites in Cherokee
County, Kansas, where the Company and others formerly mined lead and zinc. The
Company mined at the Baxter Springs subsite, where it is the largest viable
PRP. The final RIFS was submitted to the U.S. EPA in May 1993. The estimated
cost of proposed remedies at the Baxter Springs subsite ranges from
approximately $1 million to $28 million, plus annual operation and maintenance
costs.
In January 1989, the State of Illinois brought an action against the
Company and several other subsequent owners and operators of the former lead
oxide plant in Chicago, Illinois (People of the State of Illinois v. NL
Industries, et al., No. 88-CH-11618, Circuit Court, Cook County). The
complaint seeks recovery of $2.27 million of cleanup costs expended by the
Illinois Environmental Protection Agency, plus penalties and treble damages.
In October 1992, the Supreme Court of Illinois reversed the Appellate Division,
which had affirmed the trial court's earlier dismissal of the complaint, and
remanded the case for further proceedings. In December 1993, the trial court
denied the State's petition to reinstate the complaint, and dismissed the case
with prejudice. In February 1994, the State filed a notice of appeal.
In 1980, the State of New York commenced litigation against the Company
in connection with the operation of a plant in Colonie, New York formerly owned
by the Company. Flacke v. NL Industries, Inc., No. 1842-80 ("Flacke I") and
Flacke v. Federal Insurance Company and NL Industries, Inc., No. 3131-92
("Flacke II"), New York Supreme Court, Albany County. The plant manufactured
military and
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civilian products from depleted uranium and was acquired from the Company by
the U.S. Department of Energy ("DOE") in 1984. Flacke I seeks penalties for
alleged violations of New York's Environmental Conservation Law, and of a
consent order entered into to resolve these alleged violations. Flacke II
seeks forfeiture of a $200,000 surety bond posted in connection with the
consent order, plus interest from February 1980. The Company denied liability
in both actions. The litigation had been inactive since 1984. In July 1993,
the State moved for partial summary judgment for approximately $1.5 million on
certain of its claims in Flacke I and for summary judgment in Flacke II. In
January 1994, the Company cross-moved for summary judgment in Flacke I and
Flacke II.
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 and NL Industries, Inc., No.
87-4420, Court of Common Pleas, Philadelphia County. The complaint seeks
compensatory and punitive damages from the Company and the current owner of the
plant, and alleges causes of action for, among other things, negligence, strict
liability, and nuisance. A class was certified to include persons who reside,
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 has answered the complaint, denying liability. The case is in
discovery. 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 and
87-3502. The consolidated action is a putative class action seeking CERCLA
response costs, including cleanup and medical monitoring, declaratory and
injunctive relief and civil penalties for alleged violations of the Resource
Conservation and Recovery Act ("RCRA"), and also asserting pendent common law
claims for strict liability, trespass, nuisance and punitive damages. The
court dismissed the common law claims without prejudice, dismissed two of the
three RCRA claims as against the Company with prejudice, and stayed the case
pending the outcome of the state court litigation. The trial is set for June
1994.
In July 1991, a complaint was filed in the United States District Court
for the Central District of California, United States of America v. Peter Gull
and NL Industries, Inc., Civ. No. 91-4098. The complaint seeks to recover $2
million in costs incurred by the United States in response to the alleged
release of hazardous substances into the environment from a facility located in
Norco, California, treble damages and $1.75 million in penalties for the
Company's alleged failure to comply with the U.S. EPA's administrative order
No. 88-13. The order, which alleged that the Company arranged for the
treatment or disposal of materials at the Norco site, directed the immediate
removal of hazardous substances from the site. The Company carried out a
portion of the remedy at the Norco site, but did not complete the ordered
activities because it believed they were in conflict with California law. The
Company answered the complaint denying liability. The government now claims it
expended in excess of $2.7 million for this matter. Trial was held in March
and April 1993. The judge has preliminarily indicated that the Company will be
ordered to pay response costs plus an amount which is the product of a
multiplier of 1.625 to be applied to a portion of those costs, which amount has
not yet been determined. In May 1993, the government submitted Proposed
Supplemental Findings of Fact and Conclusions of Law Regarding Response Costs
and Penalty Amount stating that the amount owed is $6.7 million. The Company's
response states that the total of recoverable response costs and penalty is
$6.4 million. The Court has not yet entered final judgment in this matter.
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At a municipal and industrial waste disposal site in Batavia, New York,
the Company and six others have been identified as PRPs. The U.S. EPA has
divided the site into two operable units. Pursuant to an administrative
consent order entered into with the U.S. EPA, the Company is conducting a RIFS
for operable unit one, the closure of the industrial waste disposal section of
the landfill. The Company's RIFS costs to date are approximately $1.9 million.
With respect to the second operable unit, the extension of the municipal water
supply, the U.S. EPA estimated the costs at $1 million plus annual operation
and maintenance costs. The Company and the other PRPs are performing the work
comprising operable unit two. The U.S. EPA has also demanded approximately $.9
million in past costs from the PRPs.
In July 1990, the Company notified the U.S. EPA that it was
investigating the possibility that certain chemicals manufactured during the
period in which Kronos owned a former subsidiary were not appropriately listed
with the U.S. EPA pursuant to the Toxic Substances Control Act. The Company
believes that the manufacture of the chemicals in question was initiated by a
prior owner of the subsidiary. The Company intends to cooperate fully with the
U.S. EPA in investigating this matter and determining whether any manufacture
of non-listed chemicals occurred. If such manufacture is found to have
occurred, the U.S. EPA may levy fines against the Company and possibly others.
If any fines are levied, the Company will attempt to seek reimbursement from
the prior owner of the subsidiary.
See Item 1 - "Business - Regulatory and Environmental Matters".
OTHER LITIGATION
In April 1990, the Company filed a complaint in the United States
District Court for the Central District of California against Lockheed
Corporation and its directors in connection with Lockheed's 1990 annual meeting
of stockholders, (NL Industries, Inc. v. Lockheed Corporation, et al., No.
CV-90-1950 RMT (Bx)), which complaint was subsequently amended. In December
1992, a unanimous jury verdict was returned in the Company's favor in the
amount of $30 million, which award is a gain contingency not recorded as income
by the Company. The jury found that Lockheed violated the federal securities
laws by making false and misleading public statements about Lockheed's employee
stock ownership plan. Lockheed has appealed. The Company has cross appealed
with respect to its claims against Lockheed's directors. On February 24, 1994,
the case was settled with a cash payment to the Company by Lockheed of $27
million resulting in net proceeds to the Company of approximately $20 million.
In January 1990, an action was filed in the United States District Court
for the Southern District of Ohio against NLO, Inc., a subsidiary of the
Company, and the Company on behalf of a putative class of former NLO employees
and their families and former frequenters and invitees of the Feed Materials
Production Center ("FMPC") in Ohio (Day, et al. v. NLO, Inc., et al, No.
C-1-90-067). The FMPC is owned by the DOE and was formerly managed under
contract by NLO. The complaint seeks damages for, among other things,
emotional distress and damage to personal property allegedly caused by exposure
to radioactive and/or hazardous materials at the FMPC and punitive damages. A
trial was held separately on the defendants' defense that the statute of
limitations barred the plaintiffs' claims. In November 1991, the jury returned
a verdict against six of the ten named plaintiffs, finding that their claims
were time barred. Without denying the plaintiffs' motion to vacate the
verdict, the court certified this action as a class action. A merits trial is
expected to be held in 1994. Although no assurance can be given, the Company
believes that, consistent with a July 1987
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DOE contracting officer's decision, the DOE will indemnify NLO in the event of
an adverse decision just as it did when two previous cases relating to NLO's
management of the FMPC were settled; therefore, the resolution of the Day
matter is not expected to have a material adverse affect on the Company. In
the 1987 decision, the contracting officer affirmed NLO's entitlement to
indemnification under its contract for the operation of the FMPC for all
liability, including the cost of defense, arising out of those two previous
cases.
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.
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NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
- -------------------- ----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1992 and 1993 F-3/F-4
Consolidated Statements of Operations - Years ended
December 31, 1991, 1992 and 1993 F-5/F-6
Consolidated Statements of Shareholders' Deficit - Years ended
December 31, 1991, 1992 and 1993 F-7
Consolidated Statements of Cash Flows - Years ended
December 31, 1991, 1992 and 1993 F-8/F-10
Notes to Consolidated Financial Statements F-11/F-38
Financial Statement Schedules
- -----------------------------
Report of Independent Accountants S-1
Schedule I - Marketable securities S-2
Schedule III - Condensed financial information of Registrant S-3/S-8
Schedule V - Property and equipment S-9
Schedule VI - Accumulated depreciation and depletion of
property and equipment S-10
Schedule VIII - Valuation and qualifying accounts S-11
Schedule IX - Short-term borrowings S-12
Schedule X - Supplementary income statement information S-13
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
F-1
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
We have audited the accompanying consolidated balance sheets of NL
Industries, Inc. as of December 31, 1992 and 1993, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NL
Industries, Inc. as of December 31, 1992 and 1993, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Notes 2 and 19 to the consolidated financial statements,
in 1993 the Company changed its method of accounting for certain investments in
debt and equity securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, and in 1992 the Company changed its method of
accounting for postretirement benefits other than pensions and income taxes in
accordance with SFAS Nos. 106 and 109, respectively.
COOPERS & LYBRAND
Houston, Texas
February 9, 1994 except for
Note 21, as to which the
date is February 24, 1994
F-2
13
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1992 and 1993
(In thousands, except per share data)
1992 1993
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 87,333 $ 106,593
Marketable securities 100,607 41,045
Accounts and notes receivable, less allowance
of $2,385 and $3,008 123,020 116,355
Refundable income taxes 101,537 386
Inventories 216,232 194,167
Prepaid expenses 5,413 5,637
Deferred income taxes 1,676 3,315
---------- ----------
Total current assets 635,818 467,498
---------- ----------
Other assets:
Marketable securities 23,581 18,428
Refundable income taxes - 91,994
Investment in joint ventures 2,434 190,787
Prepaid pension cost 16,056 16,307
Deferred income taxes - 577
Other 48,241 42,355
---------- ----------
Total other assets 90,312 360,448
---------- ----------
Property and equipment:
Land 29,863 18,237
Buildings 208,056 129,582
Machinery and equipment 811,531 515,090
Mining properties 75,731 72,711
Construction in progress 21,042 30,050
---------- ----------
1,146,223 765,670
Less accumulated depreciation and depletion 400,246 387,067
---------- ----------
Net property and equipment 745,977 378,603
---------- ----------
$1,472,107 $1,206,549
========== ==========
F-3
14
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1992 and 1993
(In thousands, except per share data)
1992 1993
---- ----
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 315 $ -
Current maturities of long-term debt 43,328 35,716
Accounts payable and accrued liabilities 189,638 177,265
Payable to affiliates 4,086 9,566
Income taxes 6,825 6,353
Deferred income taxes 4,573 3,623
---------- ----------
Total current liabilities 248,765 232,523
---------- ----------
Noncurrent liabilities:
Long-term debt 991,956 835,169
Deferred income taxes 145,745 138,977
Accrued pension cost 73,956 72,606
Accrued postretirement benefits cost 71,761 68,322
Other 83,878 121,309
---------- ----------
Total noncurrent liabilities 1,367,296 1,236,383
---------- ----------
Minority interest 2,339 2,438
---------- ----------
Shareholders' deficit:
Preferred stock - 5,000 shares authorized,
no shares issued or outstanding - -
Common stock - $.125 par value; 150,000 shares
authorized; 66,839 shares issued 8,355 8,355
Additional paid-in capital 759,281 759,281
Adjustments:
Currency translation (111,820) (115,803)
Pension liabilities - (3,442)
Marketable securities (896) (2,164)
Accumulated deficit (433,250) (543,059)
---------- ----------
221,670 103,168
Less treasury stock, at cost (15,949 shares) 367,963 367,963
---------- ----------
Total shareholders' deficit (146,293) (264,795)
---------- ----------
$1,472,107 $1,206,549
========== ==========
Commitments and contingencies (Notes 14 and 18)
See accompanying notes to consolidated financial statements.
F-4
15
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1991, 1992 and 1993
(In thousands, except per share data)
1991 1992 1993
---- ---- ----
Revenues and other income:
Net sales $840,295 $893,465 $ 805,323
Interest and dividends 47,293 19,618 7,872
Securities transactions (53,092) (6,018) 4,363
Other, net 7,043 1,197 9,849
-------- -------- ---------
841,539 908,262 827,407
-------- -------- ---------
Costs and expenses:
Cost of sales 566,608 629,029 612,367
Selling, general and administrative 193,481 203,736 185,689
Interest 100,412 118,511 99,119
-------- -------- ---------
860,501 951,276 897,175
-------- -------- ---------
Loss before income taxes, minority
interest, extraordinary items and
cumulative effect of changes in
accounting principles (18,962) (43,014) (69,768)
Income tax expense 3,910 459 12,713
-------- -------- ---------
Loss before minority interest,
extraordinary items and cumulative
effect of changes in accounting
principles (22,872) (43,473) (82,481)
Minority interest 1,113 1,123 730
-------- -------- ---------
Loss before extraordinary items and
cumulative effect of changes in
accounting principles (23,985) (44,596) (83,211)
Extraordinary items 7,523 - (27,815)
Cumulative effect of changes in
accounting principles - (31,804) 1,217
-------- -------- ---------
Net loss $(16,462) $(76,400) $(109,809)
======== ======== =========
F-5
16
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 1991, 1992 and 1993
(In thousands, except per share data)
1991 1992 1993
---- ---- ----
Loss per share of common stock:
Before extraordinary items and
cumulative effect of changes in
accounting principles $(.40) $ (.88) $(1.63)
Extraordinary items .13 - (.55)
Cumulative effect of changes in
accounting principles - (.62) .02
----- ------ ------
Net loss $(.27) $(1.50) $(2.16)
===== ====== ======
Weighted average common shares
outstanding 60,233 50,907 50,890
====== ====== ======
See accompanying notes to consolidated financial statements.
F-6
17
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1991, 1992 and 1993
(In thousands, except per share data)
Adjustments
Additional ------------------------------------------
Common paid-in Currency Pension Marketable
stock capital translation liabilities securities
-------- ----------- ----------- ----------- ------------
Balance at December 31, 1990 $8,355 $759,273 $(136,277) $ - $(143,123)
Net loss - - - - -
Common dividends declared - $.60 per share - - - - -
Adjustments - - 19,637 - 137,198
Purchases of treasury stock - - - - -
Other, net - 27 - - -
------ -------- --------- ------- ---------
Balance at December 31, 1991 8,355 759,300 (116,640) - (5,925)
Net loss - - - - -
Common dividends declared - $.35 per share - - - - -
Adjustments - - 4,820 - 5,029
Purchases of treasury stock - - - - -
Other, net - (19) - - -
------ -------- --------- ------- ---------
Balance at December 31, 1992 8,355 759,281 (111,820) - (896)
Net loss - - - - -
Adjustments - - (3,983) (3,442) (51)
Cumulative effect of change in
accounting principle - - - - (1,217)
------ -------- --------- ------- ---------
Balance at December 31, 1993 $8,355 $759,281 $(115,803) $(3,442) $ (2,164)
====== ======== ========= ======= =========
Accumulated Treasury
deficit stock Total
----------- ------- --------
Balance at December 31, 1990 $(287,857) $(161,803) $38,568
Net loss (16,462) - (16,462)
Common dividends declared - $.60 per share (34,724) - (34,724)
Adjustments - - 156,835
Purchases of treasury stock - (202,519) (202,519)
Other, net - - 27
--------- --------- ---------
Balance at December 31, 1991 (339,043) (364,322) (58,275)
Net loss (76,400) - (76,400)
Common dividends declared - $.35 per share (17,807) - (17,807)
Adjustments - - 9,849
Purchases of treasury stock - (3,641) (3,641)
Other, net - - (19)
--------- --------- ---------
Balance at December 31, 1992 (433,250) (367,963) (146,293)
Net loss (109,809) - (109,809)
Adjustments - - (7,476)
Cumulative effect of change in
accounting principle - - (1,217)
--------- --------- ---------
Balance at December 31, 1993 $(543,059) $(367,963) $(264,795)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-7
18
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1991, 1992 and 1993
(In thousands)
1991 1992 1993
---- ---- ----
Cash flows from operating activities:
Net loss $(16,462) $(76,400) $(109,809)
-------- -------- ---------
Adjustments:
Depreciation, depletion and
amortization 32,581 47,829 46,340
Deferred income taxes (14,665) (18,949) (670)
Cumulative effect of changes in
accounting principles - 31,804 (1,217)
Minority interest 1,113 1,123 730
Net (gains) losses from:
Securities transactions 53,092 6,018 (4,363)
Disposition of property and equipment 1,009 1,419 199
Pension cost, net (377) (2,024) (2,134)
Other postretirement benefits, net - 1,830 (2,422)
Other, net (8,872) 3,442 (1,349)
Change in assets and liabilities:
Accounts and notes receivable (6,430) (1,776) (1,291)
Inventories 6,582 (33,814) 12,166
Prepaid expenses 4,885 207 (472)
Accounts payable and accrued
liabilities 30,218 (6,111) (1,567)
Income taxes (43,629) (13,501) 1,507
Accounts with affiliates 5,328 (4,106) 5,426
Other noncurrent assets 4,604 5,264 14,588
Other noncurrent liabilities 9,143 13,072 37,069
--------- -------- ---------
Total adjustments 74,582 31,727 102,540
-------- -------- ---------
Net cash provided (used) by
operating activities 58,120 (44,673) (7,269)
-------- -------- ---------
F-8
19
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1991, 1992 and 1993
(In thousands)
1991 1992 1993
---- ---- ----
Cash flows from investing activities:
Capital expenditures $(195,146) $ (85,150) $ (47,986)
Marketable securities:
Purchases (536,435) (156,573) (11,053)
Dispositions 623,937 473,935 79,398
Proceeds from disposition of
property and equipment 1,033 1,484 175,537
Investment in joint venture - - (14,405)
Loans to affiliates:
Loans (150,000) - (210)
Collections 150,000 - -
Other, net (2,819) 1,168 670
--------- --------- ---------
Net cash provided (used) by
investing activities (109,430) 234,864 181,951
--------- --------- ---------
Cash flows from financing activities:
Notes payable and long-term debt:
Additions 178,195 63,603 465,554
Principal payments (174,565) (263,093) (607,417)
Deferred financing costs (8,188) (1,881) (12,860)
Repayments of loans from affiliates (1,126) - -
Distributions to minority interest (869) (277) (613)
Dividends paid (34,724) (17,807) -
Purchases of treasury stock and other (202,492) (3,660) -
--------- --------- ---------
Net cash used by financing
activities (243,769) (223,115) (155,336)
--------- --------- ---------
Net change during the year from
operating, investing and
financing activities $(295,079) $ (32,924) $ 19,346
========= ========= =========
F-9
20
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1991, 1992 and 1993
(In thousands)
1991 1992 1993
---- ---- ----
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities $(295,079) $(32,924) $ 19,346
Currency translation (14,907) (5,013) (86)
---------- -------- --------
(309,986) (37,937) 19,260
Balance at beginning of year 435,256 125,270 87,333
--------- -------- --------
Balance at end of year $ 125,270 $ 87,333 $106,593
========= ======== ========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 107,638 $137,996 $ 91,576
Income taxes 54,628 31,369 11,897
See accompanying notes to consolidated financial statements.
F-10
21
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
NL Industries, Inc. is primarily a holding company and conducts its
operations through its wholly-owned subsidiaries, Kronos, Inc. (titanium
dioxide pigments ("TiO2")) and Rheox, Inc. (specialty chemicals).
At December 31, 1993, Valhi, Inc. held approximately 49% of NL's
outstanding common stock and Tremont Corporation, a 48%-owned affiliate of
Valhi, held an additional 18% of NL's outstanding common stock. Contran
Corporation holds, directly or through subsidiaries, approximately 90% of
Valhi's outstanding common stock. All of Contran's outstanding voting stock is
held by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons, the
Chairman of the Board of each of Contran, Valhi and NL and a director of
Tremont, may be deemed to control each of such companies.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
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 1993 presentation.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is
deemed to be other than the U.S. dollar are translated at year-end rates of
exchange and revenues and expenses are translated at weighted average exchange
rates prevailing during the year. Resulting translation adjustments, gains and
losses from hedges of investments in non-U.S. entities and the related income
tax effects are accumulated in the currency translation adjustments component
of shareholders' deficit. Currency transaction gains and losses are recognized
in income currently.
Cash and cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell, bank deposits, and government and commercial
notes and bills with original maturities of three months or less. Cash and
cash equivalents includes $6 million and $18 million at December 31, 1992 and
1993, respectively, which are restricted for letters of credit and certain
indebtedness agreements.
F-11
22
Marketable securities and securities transactions
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" effective December 31, 1993, and the Company's marketable
securities were classified as either "available-for-sale" or "trading" and are
carried at market. Unrealized gains and losses on trading securities are
recognized in income currently. Unrealized gains and losses on
available-for-sale securities, and the related deferred income tax effects, are
accumulated in the marketable securities adjustment component of shareholders'
deficit. See Notes 4 and 19.
SFAS No. 115 superseded SFAS No. 12 under which marketable securities
were generally carried at the lower of aggregate market or amortized cost and
unrealized net gains were not recognized.
Realized gains or losses are computed based on specific identification
of the securities sold.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Investment in joint ventures
Investments in 20% to 50%-owned entities are accounted for by the equity
method.
Intangible assets
Intangible assets, included in other noncurrent assets, are amortized by
the straight-line method over the periods expected to be benefitted.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of
construction costs. Maintenance, repairs and minor renewals are expensed;
major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to 40 years for buildings and three to 20
years for machinery and equipment. Depletion of mining properties is computed
by the unit-of-production and straight-line methods.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 11.
Net sales
Sales are recognized as products are shipped.
F-12
23
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").
Loss per share of common stock
Loss per share of common stock is based upon the weighted average
number of common shares outstanding. Common stock equivalents are excluded
from the computation because they are antidilutive.
NOTE 3 - BUSINESS AND GEOGRAPHIC SEGMENTS:
The Company's operations are conducted in two business segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox. Titanium
dioxide pigments are used to impart whiteness, brightness and opacity to a wide
variety of products, including paints, plastics, paper, fibers and ceramics.
Specialty chemicals include rheological additives which control the flow and
leveling characteristics of a variety of products, including paints, inks,
lubricants, sealants, adhesives and cosmetics. General corporate assets consist
principally of cash, cash equivalents and marketable securities.
F-13
24
Years ended December 31,
-------------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Business segments
Net sales:
Kronos $ 732,108 $ 784,568 $697,048
Rheox 108,187 108,897 108,275
--------- --------- --------
$ 840,295 $ 893,465 $805,323
========= ========= ========
Operating income:
Kronos $ 110,767 $ 81,941 $ 36,146
Rheox 28,194 28,792 26,254
--------- --------- --------
138,961 110,733 62,400
General corporate income (expense):
Interest and dividends 40,502 14,234 4,104
Securities transactions (53,092) (6,018) 4,363
Expenses, net (44,921) (43,452) (41,516)
Interest expense (100,412) (118,511) (99,119)
--------- --------- --------
$ (18,962) $ (43,014) $(69,768)
========= ========= ========
Capital expenditures:
Kronos $ 189,475 $ 81,872 $ 46,913
Rheox 5,358 3,064 1,069
General corporate 313 214 4
--------- --------- --------
$ 195,146 $ 85,150 $ 47,986
========= ========= ========
Depreciation, depletion and
amortization:
Kronos $ 29,324 $ 44,360 $ 42,877
Rheox 2,974 3,184 3,176
General corporate 283 285 287
--------- --------- --------
$ 32,581 $ 47,829 $ 46,340
========= ========= ========
F-14
25
Years ended December 31,
-----------------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Geographic areas
Net sales - point of origin:
United States $ 207,762 $ 238,170 $ 270,288
Europe 623,036 643,670 519,064
Canada 136,316 138,656 132,930
Eliminations (126,819) (127,031) (116,959)
--------- --------- ---------
$ 840,295 $ 893,465 $ 805,323
========= ========= =========
Net sales - point of destination:
United States $ 180,883 $ 204,270 $ 217,892
Europe 485,784 518,711 418,072
Canada 79,198 72,692 76,078
Other 94,430 97,792 93,281
--------- --------- ---------
$ 840,295 $ 893,465 $ 805,323
========= ========= =========
Operating income:
United States $ 16,578 $ 629 $ 20,981
Europe 99,646 81,805 19,658
Canada 22,737 28,299 21,761
--------- --------- ---------
$ 138,961 $ 110,733 $ 62,400
========= ========= =========
December 31,
-------------------------
1992 1993
---- ----
(In thousands)
Identifiable assets
Business segments:
Kronos $1,246,186 $1,008,453
Rheox 76,248 75,362
General corporate 149,673 122,734
---------- ----------
$1,472,107 $1,206,549
========== ==========
Geographic segments:
United States $ 498,029 $ 326,831
Europe 671,349 622,826
Canada 153,056 134,158
General corporate 149,673 122,734
---------- ----------
$1,472,107 $1,206,549
========== ==========
F-15
26
NOTE 4 - MARKETABLE SECURITIES AND SECURITIES TRANSACTIONS:
December 31,
-------------------
1992 1993
---- ----
(In thousands)
Current:
Marketable equity securities $ 6,996 $ -
U.S. Treasury securities 93,611 41,045
-------- -------
$100,607 $41,045
======== =======
Noncurrent:
Marketable equity securities $ 9,192 $18,428
U.S. Treasury securities 14,389 -
-------- -------
$ 23,581 $18,428
======== =======
Marketable equity securities:
Current:
Unrealized gains $ 13 $ -
Unrealized losses (4,233) -
Cost 11,216 -
-------- -------
Aggregate market $ 6,996 $ -
======== =======
Noncurrent:
Unrealized gains $ - $ 33
Unrealized losses (979) (2,951)
Cost 10,171 21,346
-------- -------
Aggregate market $ 9,192 $18,428
======== =======
Current U.S. Treasury securities:
Unrealized gains (losses) $ (59) $ 52
Cost 93,670 40,993
-------- -------
Aggregate market $ 93,611 $41,045
======== =======
Upon adoption of SFAS No. 115 as of December 31, 1993, the Company
classified its portfolio of U.S. Treasury Securities as trading securities and
its marketable equity securities as available-for-sale.
F-16
27
Net gains and losses from securities transactions are composed of:
Years ended December 31,
------------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Unrealized gains (losses):
Marketable equity securities $ (517) $ (52) $2,348
Other securities 2,337 (513) 1,172
Realized gains (losses):
Marketable equity securities (52,813) (528) (9)
Other securities 4,437 1,006 852
Writedown of noncurrent marketable
equity securities (6,536) (5,931) -
-------- ------- ------
$(53,092) $(6,018) $4,363
======== ======= ======
NOTE 5 - INVENTORIES:
December 31,
----------------------
1992 1993
---- ----
(In thousands)
Raw materials $ 43,773 $ 19,785
Work in process 9,201 7,173
Finished products 123,317 135,102
Supplies 39,941 32,107
-------- --------
$216,232 $194,167
======== ========
NOTE 6 - INVESTMENT IN JOINT VENTURES:
December 31,
----------------------
1992 1993
---- ----
(In thousands)
TiO2 manufacturing joint venture $ - $188,031
Other 2,434 2,756
------ --------
$2,434 $190,787
====== ========
In October 1993, Kronos Louisiana, Inc. ("KLA"), a wholly-owned
subsidiary of Kronos, formed a manufacturing joint venture with Tioxide Group,
Ltd., a wholly-owned subsidiary of Imperial Chemicals Industries PLC
("Tioxide"). Under the terms of the joint venture and related agreements, KLA
contributed the Louisiana plant to the joint venture, Tioxide paid an aggregate
of approximately $205 million, including its tranche of the joint venture debt,
and Kronos and certain of its subsidiaries exchanged proprietary chloride
process and product technologies with Tioxide and certain of its affiliates. Of
the total consideration paid by Tioxide, $30 million is attributable to the
exchange of technologies. The manufacturing joint venture, which was equally
owned by KLA and a subsidiary of Tioxide, owns and operates the Louisiana
chloride process TiO2 plant formerly owned by KLA. Upon formation, the
F-17
28
joint venture obtained $216 million in new financing, which is collateralized
by the partnership interests of the partners and substantially all of the
assets of the joint venture. The new financing consists of two equal tranches,
one attributable to each partner, and each tranche is serviced through (i) the
purchase of the plant's TiO2 output in equal quantities by the partners and
(ii) cash capital contributions. KLA has entered into an Offtake Agreement
which requires the purchase of one-half of the TiO2 produced by the joint
venture. Kronos' pro rata share of the joint venture debt is reflected as
outstanding indebtedness of the Company because Kronos has guaranteed the
purchase obligation relative to the debt service of its tranche. See Note 10.
The manufacturing joint venture is intended to be operated on a
break-even basis and, accordingly, Kronos' transfer price for its share of the
TiO2 produced is equal to its share of the joint venture's operating expenses
(fixed and variable costs of production and interest expense). Kronos' share
of the fixed and variable production costs are reported as cost of sales as the
related TiO2 acquired from the joint venture is sold, and its share of the
joint venture's interest expense is reported as a component of interest
expense.
A summary balance sheet of the manufacturing joint venture is shown
below.
December 31,
1993
------------
(In thousands)
ASSETS
Current assets $ 44,477
Other assets 2,376
Property and equipment, net 347,344
--------
$394,197
========
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche $104,143
Tioxide tranche 102,600
Other liabilities, primarily current 16,197
--------
222,940
Partners' equity 171,257
--------
$394,197
========
F-18
29
NOTE 7 - OTHER NONCURRENT ASSETS:
December 31,
-----------------------
1992 1993
---- ----
(In thousands)
Intangible assets, net of accumulated
amortization of $9,792 and $11,941 $19,127 $15,317
Deferred financing costs, net 20,533 18,954
Other 8,581 8,084
------- -------
$48,241 $42,355
======= =======
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
December 31,
------------------------
1992 1993
---- ----
(In thousands)
Accounts payable $ 98,990 $ 89,010
-------- --------
Accrued liabilities:
Employee benefits 38,506 32,350
Environmental costs 12,080 14,517
Interest 4,376 6,933
Miscellaneous taxes 3,980 2,240
Other 31,706 32,215
-------- --------
90,648 88,255
-------- --------
$189,638 $177,265
======== ========
NOTE 9 - OTHER NONCURRENT LIABILITIES:
December 31,
-----------------------
1992 1993
---- ----
(In thousands)
Environmental costs $59,403 $ 70,789
Insurance claims expenses 10,014 10,299
Employee benefits 10,392 10,084
Deferred technology fee income - 26,881
Other 4,069 3,256
------- --------
$83,878 $121,309
======= ========
F-19
30
NOTE 10 - NOTES PAYABLE AND LONG-TERM DEBT:
December 31,
----------------------------
1992 1993
---- ----
(In thousands)
Notes payable - non-U.S. credit agreements $ 315 $ -
========== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes $ - $250,000
13% Senior Secured Discount Notes - 102,627
7.5% sinking fund debentures 14,374 -
---------- --------
14,374 352,627
---------- --------
Kronos:
DM bank credit facility 681,560 316,032
Joint venture term loan - 104,143
Kronos Louisiana credit facility 215,000 -
Canadian bank credit agreement 3,942 -
5% to 8% bank loans payable through 2000 19,367 12,338
Other 2,230 2,175
---------- --------
922,099 434,688
---------- --------
Rheox:
Bank term loan 97,500 82,500
Other 1,311 1,070
---------- --------
98,811 83,570
---------- --------
1,035,284 870,885
Less current maturities 43,328 35,716
---------- --------
$ 991,956 $835,169
========== ========
In October 1993, NL issued $250 million principal amount of 11.75%
Senior Secured Notes due 2003 and $188 million principal amount at maturity
($100 million proceeds at issuance) of 13% Senior Secured Discount Notes due
2005 (collectively, the "Notes"). The Notes are collateralized by a series of
intercompany notes from Kronos International, Inc. ("KII"), a wholly-owned
subsidiary of Kronos, to NL, the terms of which mirror those of the respective
Notes (the "Mirror Notes"). The Senior Secured Notes are also collateralized by
a first priority lien on the stock of Kronos and a second priority lien on the
stock of Rheox. The Senior Secured Notes and the Senior Secured Discount Notes
are redeemable, at the Company's option, after October 2000 and October 1998,
respectively, except that up to one-third of the aggregate principal amount of
the Senior Secured Discount Notes are redeemable (at 113% of the then-accreted
value) upon any Common Stock Offering, as defined, prior to October 1996. For
redemptions, other than redemptions pursuant to any Common Stock Offering, the
redemption prices range from 101.5% (starting October 2000) declining to 100%
(after October 2001) of the principal amount for the Senior Secured Notes and
range from 106% (starting October 1998) declining to 100% (after October 2001)
of the then-accreted value of the Senior Secured Discount Notes. In the event
of a Change of Control, as defined, the Company would be required to make an
offer to purchase the Notes at 101% of the principal amount of the Senior
Secured Notes and 101% of the then-accreted value of the Senior Secured Discount
Notes. The Notes are issued
F-20
31
pursuant to indentures which contain a number of covenants and restrictions
which, among other things, restrict the ability of the Company and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of its assets to, another
entity. At December 31, 1993, there were no amounts available for payment for
dividends pursuant to the terms of the indentures. The Senior Secured Discount
Notes do not require cash interest payments for the first five years. At
December 31, 1993, the quoted market price per $100 principal amount at
maturity of the Senior Secured Notes and the Senior Secured Discount Notes was
$104 and $57.75, respectively.
The DM credit facility, as amended, consists of a DM 448 million term
loan due from 1997 to 1999 and a DM 250 million revolving credit facility due
no later than 2000, of which DM 100 million is outstanding and DM 150 million
was available for future borrowings by KII at December 31, 1993. During
February 1994, the Company borrowed an additional DM 25 million under the
revolving credit facility. Borrowings bear interest at DM LIBOR plus 1.625%
(8.19% at December 31, 1993). KII has entered into agreements with certain
banks in the syndicate which caps DM LIBOR at 10.5% on DM 520 million principal
amount of the loan. The principal amount subject to the cap declines as the
loan is repaid. NL and Kronos have agreed, under certain circumstances, to
provide KII with up to DM 125 million through January 1, 2001.
The DM credit facility is collateralized by pledges of the stock of
certain KII subsidiaries. The credit agreement restricts KII's ability to
incur additional indebtedness, restricts its dividends and other payments to
affiliates, requires it to maintain specified debt service coverage and other
ratios, and contains other provisions and restrictive covenants customary in
lending transactions of this type.
Borrowings under KLA's tranche of the joint venture term loan bear
interest at LIBOR plus 1.625% (5.01% at December 31, 1993) and are repayable in
quarterly installments through September 2000. See Note 6.
Rheox has a credit agreement providing for a seven-year term loan due in
quarterly installments through December 1997 and a $15 million revolving
credit/letter of credit facility due March 1994. At December 31, 1993, letters
of credit aggregating $1 million were outstanding. Borrowings bear interest,
at Rheox's option, at prime rate plus 1.5% or LIBOR plus 2.5% (5.83% at
December 31, 1993), and are collateralized by the stock of Rheox and its
domestic subsidiary and by Rheox's U.S. assets. The credit agreement restricts
Rheox's ability to incur additional indebtedness, restricts its dividend
payments and contains other provisions and restrictive covenants customary in
lending transactions of this type. The Company has initiated discussions with
the agent bank regarding the extension of the revolving credit/letter of credit
facility.
In connection with the credit agreement, Rheox has entered into interest
rate swap agreements to mitigate the impact of changes in interest rates on the
term loan. These swap agreements, which mature December 31, 1994, effectively
convert the interest rate on $60 million of the loan (at December 31, 1993)
from a variable rate to a fixed rate of 8.1% The effective interest rate on
the Rheox term loan was 7.3% at December 31, 1993, including the impact of the
swap agreements. At December 31, 1993, the fair value of the swap agreements
payable is estimated to be $1 million, which amount represents the estimated
cost to the Company if it were to terminate the swap agreements at that date.
Rheox is exposed to interest rate risk in the event of nonperformance by the
other parties to the agreements. However, Rheox does not anticipate
nonperformance by such
F-21
32
parties.
Unused lines of credit available for short-term borrowings under U.S.
and non-U.S. credit facilities approximated $14 million and $117 million,
respectively, at December 31, 1993.
Other loans consist of non-U.S. mortgage and other borrowings of the
Company's subsidiaries denominated primarily in non-U.S. currencies.
Substantially all of the long-term debt of subsidiaries, except to the
extent of the interest rate swap agreements relating to the Rheox term loan as
noted above, have variable interest rates which adjust with changes in market
interest rates or have short terms to maturity, and the book value of such
indebtedness is deemed to approximate fair value.
The aggregate maturities of long-term debt at December 31, 1993 are
shown in the table below.
Years ending December 31, Amount
------------------------- --------------
(In thousands)
1994 $ 35,716
1995 39,327
1996 40,940
1997 101,100
1998 102,186
1999 and thereafter 636,489
--------
955,758
Less unamortized original issue discount on the
Senior Secured Discount Notes 84,873
--------
$870,885
========
NOTE 11 - EMPLOYEE BENEFIT PLANS:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Personnel employed by
non-U.S. subsidiaries are covered by separate plans in their respective
countries and U.S. employees are covered by various plans including the
Retirement Programs of NL Industries, Inc. (the "NL Pension Plan").
A majority of U.S. employees are eligible to participate in a
contributory savings plan with partial matching contributions by the Company.
The Company's expense related to matching contributions was $.6 million, $1.0
million and nil in 1991, 1992 and 1993, respectively.
Defined pension benefits are generally based upon years of service and
compensation under fixed-dollar, final pay or career average formulas, and the
related expenses are based upon independent actuarial valuations. The funding
policy for U.S. defined benefit plans is to contribute amounts which satisfy
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. Non-U.S. defined benefit pension plans are funded in accordance with
applicable statutory requirements.
F-22
33
The funded status of the Company's defined benefit pension plans is set
forth below. The rates used in determining the actuarial present value of
benefit obligations were (i) discount rates - 7% to 8.5% (1992 - 8% to 9%) and
(ii) rates of increase in future compensation levels - nil to 6% (1992 - nil to
7%). The expected long-term rates of return on assets used ranged from 8% to
10% in both 1992 and 1993. Plan assets are comprised primarily of investments
in U.S. and non-U.S. corporate equity and debt securities, short-term
investments, mutual funds and group annuity contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated
pension benefit obligation exceeds the unfunded accrued pension liability.
Variances from actuarially assumed rates, including the rate of return on
pension plan assets, will result in additional increases or decreases in
accrued pension liabilities, pension expense and funding requirements in future
periods.
Assets exceed Accumulated benefits
accumulated benefits exceed assets
-------------------- ---------------------
December 31, December 31,
-------------------- ---------------------
1992 1993 1992 1993
---- ---- ---- ----
(In thousands)
Actuarial present value of benefit
obligations:
Vested benefits $27,874 $40,612 $141,909 $137,156
Nonvested benefits 933 3,160 3,297 2,893
------- ------- -------- --------
Accumulated benefit obligations 28,807 43,772 145,206 140,049
Effect of projected salary
increases 6,289 6,235 8,762 17,664
------- ------- -------- --------
Projected benefit obligations 35,096 50,007 153,968 157,713
Plan assets at fair value 50,579 63,565 102,553 88,881
------- ------- -------- --------
Plan assets over (under) projected
benefit obligations 15,483 13,558 (51,415) (68,832)
Unrecognized net loss (gain) from
experience different from
actuarial assumptions 718 774 (29,744) (4,958)
Unrecognized prior service cost
(credit) 3,646 3,121 (4,284) (3,879)
Unrecognized transition obligations
(assets) being amortized over 15
to 18 years (3,791) (1,146) 5,017 2,586
Adjustment required to recognize
minimum liability - - - (3,442)
------- ------- -------- --------
Total prepaid (accrued)
pension cost 16,056 16,307 (80,426) (78,525)
Less current portion - - (6,470) (5,919)
------- ------- -------- --------
Noncurrent prepaid (accrued)
pension cost $16,056 $16,307 $(73,956) $(72,606)
======= ======= ======== ========
F-23
34
The components of the net periodic defined benefit pension cost are
set forth below.
Years ended December 31,
--------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Service cost benefits earned during the year $ 5,151 $ 4,272 $ 4,082
Interest cost on projected benefit obligations 12,705 13,804 14,430
Actual return on plan assets (13,147) (12,248) (15,647)
Net amortization and deferrals 439 (1,346) 2,413
-------- -------- --------
$ 5,148 $ 4,482 $ 5,278
======== ======== ========
Incentive bonus programs
The Company has incentive bonus programs for certain employees providing
for annual payments, which may be in the form of NL common stock, based on
formulas involving the profitability of Kronos and Rheox in relation to the
annual operating plan of the employee's business unit and individual
performance.
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently
provides certain health care and life insurance benefits for eligible retired
employees. Certain of the Company's U.S. and Canadian employees may become
eligible for such postretirement health care and life insurance benefits if
they reach retirement age while working for the Company. In 1989, the Company
began phasing out such benefits for currently active U.S. employees over a
ten-year period. The majority of all retirees are required to contribute a
portion of the cost of their benefits and certain current and future retirees
are eligible for reduced health care benefits at age 65. The Company's policy
is to fund medical claims as they are incurred, net of any contributions by the
retirees. Effective January 1, 1993, the Company's postretirement medical
plans were revised to, among other things, increase the deductible and maximum
out-of-pocket amounts, increase the retiree copayment percentage and pass on
future cost increases to the participants through increased contributions or
decreased reimbursements.
The rates used in determining the actuarial present value of the
accumulated benefit obligations were (i) discount rate - 7% (1992 - 7.75%),
(ii) rate of increase in future compensation levels - 4% (1992 - 5%), (iii)
rate of increase in future health care costs - 11% in 1994, gradually declining
to 5% in 2000 and thereafter (1992 - 14% in 1993, gradually declining to 6% in
2000 and thereafter) and (iv) return on plan assets - 9% in both 1992 and 1993.
If the health care cost trend rate was increased by one percentage point for
each year, postretirement benefit expense would have increased approximately
$.4 million in 1993, and the actuarial present value of accumulated benefit
obligations at December 31, 1993 would have increased by approximately $3.5
million.
F-24
35
December 31,
--------------------
1992 1993
---- ----
(In thousands)
Actuarial present value of accumulated benefit
obligations:
Retiree benefits $62,696 $61,686
Other fully eligible active plan participants 1,151 1,106
Other active plan participants 2,336 1,962
------- -------
66,183 64,754
Plan assets at fair value 7,640 8,095
------- -------
Accumulated postretirement benefit obligations
in excess of plan assets 58,543 56,659
Unrecognized net gain from experience different
from actuarial assumptions 1,588 2,390
Unrecognized prior service credit 16,618 15,145
------- -------
Total accrued postretirement benefits cost 76,749 74,194
Less current portion 4,988 5,872
------- -------
Noncurrent accrued postretirement benefits cost $71,761 $68,322
======= =======
The components of the Company's net periodic postretirement benefit cost
pursuant to SFAS No. 106 for 1992 and 1993 are set forth below:
December 31,
--------------------
1992 1993
---- ----
(In thousands)
Interest cost on accumulated benefit obligations $6,189 $ 4,911
Service cost benefits earned during the year 130 127
Expected return on plan assets (650) (647)
Net amortization and deferrals - (1,473)
------ -------
$5,669 $ 2,918
====== =======
The aggregate net pay-as-you-go cost to the Company for these benefits
approximated $7 million in 1991.
NOTE 12 - SHAREHOLDERS' DEFICIT:
Common stock
Shares of common stock
-------------------------------------
Treasury
Issued stock Outstanding
------ -------- -----------
(In thousands)
Balance at December 31, 1990 66,839 2,704 64,135
Purchase of treasury shares - 12,934 (12,934)
------ ------ -------
Balance at December 31, 1991 66,839 15,638 51,201
Purchase of treasury shares - 311 (311)
------ ------ -------
Balance at December 31, 1992 and 1993 66,839 15,949 50,890
====== ====== =======
F-25
36
During 1990, NL's Board of Directors authorized the purchase of up to
five 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 1.6 million and .3 million shares
of its common stock in the open market at an aggregate cost of $21 million and
$4 million in 1991 and 1992, respectively. In September 1991, the Company
purchased 11.3 million shares of its common stock pursuant to a "Dutch auction"
self-tender offer for an aggregate cost of $181 million, including 10.9 million
shares purchased from Valhi for $175 million.
Common stock options
The 1989 Long Term Performance Incentive Plan of NL Industries, Inc.
(the "NL Option Plan") provides for the discretionary grant of restricted
common stock, stock options, stock appreciation rights ("SARs") and other
incentive compensation to officers and other key employees of the Company.
Although certain stock options and SARs granted pursuant to similar plans which
preceded the NL Option Plan ("the Predecessor Option Plans") remain outstanding
at December 31, 1993, no additional options may be granted under the
Predecessor Option Plans.
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan. 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 100% of the market price at the date of grant, vest over a five
year period and expire ten years from the date of grant. Restricted stock,
forfeitable unless certain periods of employment are completed, is held in
escrow in the name of the grantee until the restriction period expires. No
SARs have been granted under the NL Option Plan.
Changes in outstanding options granted pursuant to the NL Option Plan
and the Predecessor Option Plans are summarized in the table below. At
December 31, 1993, options to purchase 610,081 shares were exercisable and
options to purchase 259,000 shares become exercisable in 1994. At December 31,
1993, an aggregate of 3.5 million shares were available for future grants under
the NL Option Plan.
F-26
37
Amount
Exercise payable
price per upon
Shares share exercise
------ --------- --------
(In thousands, except per share amounts)
Outstanding at December 31, 1990 533 $ 8.65 - 26.17 $10,550
Granted 522 10.50 5,486
Exercised (4) 8.65 - 11.66 (44)
----- -------------- -------
Outstanding at December 31, 1991 1,051 8.65 - 26.17 15,992
Granted 237 9.31 2,207
Canceled or expired (10) 9.31 - 26.17 (126)
----- -------------- -------
Outstanding at December 31, 1992 1,278 8.65 - 24.19 18,073
Granted 451 5.00 - 7.00 2,645
Canceled or expired (3) 8.65 - 10.78 (27)
----- -------------- -------
Outstanding at December 31, 1993 1,726 $ 5.00 - 24.19 $20,691
===== ============== =======
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 - OTHER INCOME, NET:
Years ended December 31,
-------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Currency transaction gains, net $ 1,594 $ 1,735 $ 3,299
Technology fee income - - 2,048
Royalty income 2,547 1,014 2,016
Disposition of property and equipment (1,009) (1,419) (199)
Other, net 3,911 (133) 2,685
------- ------- -------
$ 7,043 $ 1,197 $ 9,849
======= ======= =======
F-27
38
NOTE 14 - INCOME TAXES:
The components of (i) loss before income taxes, minority interest,
extraordinary items and cumulative effect of changes in accounting principles
("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 34% in 1991 and
1992 and 35% in 1993, (iii) the provision for income taxes and (iv) the
comprehensive tax provision (benefit) are presented below.
Years ended December 31,
----------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Pretax income (loss):
U.S. $(25,330) $(52,724) $(41,579)
Non-U.S. 6,368 9,710 (28,189)
-------- -------- --------
$(18,962) $(43,014) $(69,768)
======== ======== ========
Expected tax benefit $ (6,447) $(14,625) $(24,419)
Non-U.S. tax rates (4,681) (11,224) (15,620)
Rate difference on capital loss carryback
and capital loss for which no carryback
was available 14,351 - -
Rate change adjustment of deferred taxes - - 6,823
Valuation allowance - 20,237 40,827
Incremental tax on income of companies not
included in the NL Tax Group 3,198 5,385 2,553
U.S. state income taxes 2,605 353 486
Other, net (5,116) 333 2,063
-------- -------- --------
$ 3,910 $ 459 $ 12,713
======== ======== ========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal $ (6,180) $ (2,103) $ (915)
U.S. state 2,604 (292) 870
Non-U.S. 14,904 21,803 14,083
-------- -------- --------
11,328 19,408 14,038
-------- -------- --------
Deferred income tax expense (benefit):
U.S. federal 7,658 (612) 244
U.S. state - 645 (384)
Non-U.S. (15,076) (18,982) (1,185)
-------- -------- --------
(7,418) (18,949) (1,325)
-------- -------- --------
$ 3,910 $ 459 $ 12,713
======== ======== ========
F-28
39
Years ended December 31,
---------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Comprehensive tax provision (benefit)
allocable to:
Pretax loss $ 3,910 $ 459 $12,713
Extraordinary items, principally
deferred income taxes (7,241) - -
Shareholders' deficit, principally deferred
income taxes allocable to currency
translation and marketable securities
adjustments 1,023 (1,196) (1,243)
------- ------- -------
$(2,308) $ (737) $11,470
======= ======= =======
Changes in deferred income taxes related to the adoption of new
accounting standards are disclosed in Note 19. During 1993, the Company's
valuation allowance, in the aggregate, increased by $47 million. The
components of the net deferred tax liability are summarized below:
December 31,
-------------------------------------------------------------
1992 1993
---- ----
Deferred tax Deferred tax
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In thousands)
Tax effect of temporary differences relating
to:
Inventories $ 3,823 $ (2,986) $ 3,965 $ (2,532)
Property and equipment 261 (101,409) 2,694 (90,356)
Accrued postretirement
benefits cost 26,112 - 25,955 -
Accrued pension cost 7,808 (9,770) 9,712 (9,224)
Accrued environmental costs 21,404 - 26,784 -
Other accrued liabilities and
deductible differences 14,484 - 22,070 -
Other taxable differences - (95,892) - (104,940)
Tax on unremitted earnings of
non-U.S. subsidiaries 619 (39,277) 577 (27,742)
Tax loss and tax credit
carryforwards 112,212 - 137,706 -
Valuation allowance (86,031) - (133,377)
-------- --------- --------- ---------
Gross deferred tax assets
(liabilities) 100,692 (249,334) 96,086 (234,794)
Reclassification, principally
netting by tax jurisdiction (99,016) 99,016 (92,194) 92,194
-------- --------- --------- ---------
Net total deferred tax assets
(liabilities) 1,676 (150,318) 3,892 (142,600)
Net current deferred tax
assets (liabilities) 1,676 (4,573) 3,315 (3,623)
-------- --------- --------- ---------
Net noncurrent deferred tax
assets (liabilities) $ - $(145,745) $ 577 $(138,977)
======== ========= ========= =========
F-29
40
The components of the provision for deferred income taxes for 1991 (a
disclosure no longer required upon the adoption of SFAS No. 109) is summarized
below.
Year ended
December 31,
1991
------------
(In thousands)
Depreciation $ 2,525
Cash basis income and expense (1,607)
Undistributed income of subsidiaries (8,747)
Other, net 411
-------
$(7,418)
=======
At December 31, 1993, the Company had $250 million of non-U.S. income
tax loss carryforwards with no expiration dates. In addition, the Company had,
for U.S. federal income tax purposes, capital loss carryforwards of $17 million
which expire during 1996, net operating loss carryforwards of $30 million, of
which $7 million expires in 2007 and $23 million expires in 2008, and an
alternative minimum tax credit carryforward of $11 million with no expiration
date.
Certain of the Company's income tax returns in various U.S. and non-U.S.
jurisdictions, including Germany are being examined and tax authorities have
proposed or may propose tax deficiencies. In June 1993, the German tax
authorities issued assessment reports in connection with examinations of the
Company's German income tax returns, disallowing the Company's claims for
refunds, primarily for 1989 and 1990, aggregating DM 160 million ($92 million
at December 31, 1993) and proposing additional taxes of DM 100 million ($58
million at December 31, 1993). The Company has applied for administrative
relief from collection procedures and may grant a lien on certain German assets
while the Company contests the proposed adjustments. Although the Company
believes it will ultimately prevail, in June 1993, the Company reclassified
refundable income tax claims of approximately DM 160 million ($92 million) from
current assets to noncurrent assets due to the uncertain timing of a
resolution. The Company believes that it has adequately provided accruals for
additional income taxes and related interest expense which may ultimately
result from such examinations and believes that the ultimate disposition of
such examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. In July
1992, the Company paid $15 million of previously accrued interest and income
taxes related to the settlement of examinations of the Company's U.S. federal
income tax returns for the years ended December 31, 1979 through 1984.
In 1991, based upon revisions in the Company's estimate of liabilities
for income taxes and related interest expense which may ultimately result from
the examinations referred to above, the Company reduced its accrual for income
tax related interest by $9 million. This change in estimate considered, among
other things, the Company's settlement with the IRS of a matter related to the
qualified status of certain of the Company's defined benefit pension plans,
which plans were determined to be qualified with respect to the periods in
question.
F-30
41
NOTE 15 - OTHER ITEMS:
Research, development and sales technical support expense approximated
$9 million in 1991, $11 million in 1992 and $10 million in 1993.
Interest capitalized in connection with long-term capital projects was
$26 million in 1991, $9 million in 1992 and $1 million in 1993.
NOTE 16 - EXTRAORDINARY ITEMS:
Years ended December 31,
------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Gain (loss) on early extinguishment of
indebtedness:
7.5% sinking fund debentures $ 282 $ - $ -
Kronos Louisiana term loan and
DM credit facility - - (27,815)
Provision for income taxes (6) - -
------ ------ --------
276 - (27,815)
Income tax benefit of utilization of tax
loss and tax credit carryforwards 7,247 - -
------ ------ --------
$7,523 $ - $(27,815)
====== ====== ========
The extraordinary loss in 1993 relates to the settlement of certain
interest rate swap agreements for $20 million in cash in conjunction with
repaying the Louisiana plant indebtedness and the write-off of deferred
financing costs related to such repayment and the paydown of a portion of the
DM bank credit facility.
Upon adoption of SFAS No. 109 in 1992, utilization of tax loss and tax
credit carryforwards are not classified as extraordinary items.
NOTE 17 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect
to the Company, 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.
F-31
42
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.
During August 1991, the Company entered into a revolving demand loan
agreement with Valhi in an amount not to exceed the lesser of $200 million or
the amount Valhi has available under bank credit agreements. The Company
advanced $150 million pursuant to this agreement which Valhi repaid in
September 1991. Interest income on the amount advanced under the demand loan
agreement was $.6 million in 1991.
Baroid Corporation, a former wholly-owned subsidiary of the Company and
currently a subsidiary of Dresser Industries, Inc., and the Company are parties
to an intercorporate services agreement (the "Baroid ISA") pursuant to which,
as amended, Baroid agreed to make certain services available to the Company on
a fee basis subject to termination or renewal by mutual agreement. Management
services fee expense pursuant to the Baroid ISA approximated $4.3 million in
1991, $2.3 million in 1992 and $.3 million in 1993.
The Company is a party to an intercorporate services agreement with
Valhi (the "Valhi ISA") whereby Valhi provides certain management, financial
and administrative services to the Company on a fee basis. Management services
fee expense related to the Valhi ISA was $1.5 million in 1991, $1.4 million in
1992 and $.7 million in 1993.
The Company was party to an intercorporate services agreement with
Tremont (the "Tremont ISA") until June 1993 when the agreement was terminated.
Under the terms of the contract, the Company provided certain management,
financial and legal services to Tremont on a fee basis. Management services
fee income related to the Tremont ISA was $.3 million in 1991, $.5 million in
1992 and $.1 million in 1993.
Purchases from Tremont in the ordinary course of business pursuant to a
long-term supply contract were $.6 million in 1991, $.6 million in 1992 and $.4
million in 1993.
Sales to Baroid in the ordinary course of business were $1.8 million in
1991, $2.1 million in 1992 and $1.8 million in 1993.
Purchases in the ordinary course of business from unconsolidated joint
ventures were approximately $9 million in 1991 and 1992 and $22 million in
1993.
Certain employees of the Company have been granted options to purchase
Valhi common stock under the terms of Valhi's stock option plans. The Company
and Valhi have agreed that the Company will pay Valhi the aggregate difference
between the option price and the market value of Valhi's common stock on the
exercise date of such options. For financial reporting purposes, the Company
accounts for the related expense (nil in 1991, 1992 and 1993) in a manner
similar to accounting for SARs. At December 31, 1993, employees of the Company
held options to purchase 365,000 shares (347,000 shares vested) of Valhi common
stock at exercise prices ranging from $5 to $15 per share.
In conjunction with the formation of Baroid, the Company and Baroid
entered into a Cross-Indemnification Agreement pursuant to which, as amended,
the Company
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agreed to indemnify Baroid with regard to all liabilities not expressly assumed
by Baroid and Baroid agreed to indemnify the Company with regard to all
liabilities assumed by Baroid.
Net amounts payable to affiliates are summarized in the following table.
December 31,
--------------------
1992 1993
---- ----
(In thousands)
Tremont Corporation $4,056 $4,777
Louisiana Pigment Company, L.P. - 4,789
Valhi, Inc. 30 -
------ ------
$4,086 $9,566
====== ======
NOTE 18 - 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. In
addition, Kronos has a governmental concession through 2007 to operate its
ilmenite mine in Norway.
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, which expired in 1991 and to which an
extension through 2011 has been agreed in principle, the lessor provides some
raw materials, auxiliary and operating materials and utilities services
necessary to operate the Leverkusen facility. Kronos and the lessor are
continuing discussions regarding a definitive agreement for the extension of
the supplies and services agreement. Both the lease and the supplies and
services agreements restrict the Company's ability to transfer ownership or use
of the Leverkusen facility.
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Net rent expense aggregated $6 million in 1991, $9 million in 1992 and
$8 million in 1993. At December 31, 1993, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Years ending December 31, Real Estate Equipment
- ------------------------- ----------- ---------
(In thousands)
1994 $ 1,234 $1,776
1995 1,306 1,413
1996 1,307 777
1997 1,291 548
1998 1,263 468
1999 and thereafter 13,193 15
------- ------
$19,594 $4,997
======= ======
Legal proceedings
Lead pigment litigation. Since 1987, the Company, other past
manufacturers of lead pigments for use in paint and lead-based paint and the
Lead Industries Association have been named as defendants in various legal
proceedings seeking damages for personal injury and property damage allegedly
caused by the use of lead-based paints. Certain of these actions have been
filed by or on behalf of large United States cities or their public housing
authorities. These legal proceedings seek recovery under a variety of
theories, including negligent product design, failure to warn, breach of
warranty, conspiracy/concert of action, enterprise liability, market share
liability, intentional tort, and fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the
defendants responsibility for lead paint abatement and asserted health concerns
associated with the use of lead-based paints, which was permitted for interior
residential use in the United States until 1973, including damages for personal
injury, contribution and/or indemnification for medical expenses, medical
monitoring expenses and costs for educational programs. Most of these legal
proceedings are in various pre-trial stages; several are on appeal.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. 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 of 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 80 governmental enforcement and private actions associated with
hazardous waste sites and former mining locations, some of which are on the
U.S. Environmental
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45
Protection Agency's Superfund National Priorities List. These actions seek
cleanup costs and/or damages for personal injury or property damage. While the
Company may be jointly and severally liable for such costs, in most cases, it
is only one of a number of PRPs who are also jointly and severally liable. In
addition, the Company is a party to a number of lawsuits filed in various
jurisdictions alleging CERCLA or other environmental claims. At December 31,
1993, the Company had accrued $70 million in respect of 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 $105 million. No assurance can be given that actual costs
will not exceed accrued amounts or the upper end of the range for sites for
which estimates have been made and no assurance can be given that costs will
not be incurred with respect to sites as to which no estimate presently can be
made. The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that
the Company is potentially responsible for the release of hazardous substances
at other sites could result in expenditures in excess of amounts currently
estimated by the Company to be required for such matters. Further, there can
be no assurance that additional environmental matters will not arise in the
future.
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As
with other companies engaged in similar businesses, certain operations and
products of the Company have the potential to cause environmental or other
damage. The Company continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to comply with
environmental laws and regulations at all of its facilities and to continually
strive to improve environmental performance in association with applicable
industry initiatives. It is possible that future developments, such as
stricter requirements of environmental laws and enforcement policies
thereunder, could affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances.
Other litigation. The Company is involved in other litigation,
including litigation regarding the Feed Materials Production Center in Ohio
owned by the U.S. Department of Energy, formerly managed under contract by NLO,
Inc., a wholly-owned subsidiary of the Company, and other matters.
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.
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46
Concentrations of credit risk
Sales of TiO2 accounted for almost 90% of net sales during the past
three years. TiO2 is sold to the paint, paper and plastics 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 5,000 customers, none of which
represents a significant portion of net sales. In the past three years,
approximately one-half of the Company's TiO2 sales by volume were to Europe and
approximately one-third in 1991 and 1992 and 38% in 1993 of sales were
attributable to North America.
Consolidated cash and cash equivalents includes $22 million and $64
million invested in U.S. Treasury securities purchased under short- term
agreements to resell at December 31, 1992 and 1993, respectively. Such
securities are held in trust for the Company by a single U.S. bank.
NOTE 19 - CHANGES IN ACCOUNTING PRINCIPLES:
In 1993, the Company adopted SFAS No. 115 (marketable securities) as of
December 31, 1993. In 1992, the Company (i) elected early compliance with both
SFAS No. 106 (OPEB) and SFAS No. 109 (income taxes) as of January 1, 1992; (ii)
elected immediate recognition of the OPEB transition obligation; and (iii)
elected to apply SFAS No. 109 prospectively and not restate prior years. The
cumulative effect of changes in accounting principles adjustments are shown
below.
Amount reflected in
-----------------------------
Equity
Earnings component
-------- ---------
(In thousands)
Increase (decrease) in net assets at
December 31, 1993 - SFAS No. 115:
Marketable securities $1,872 $(1,872)
Deferred income taxes (655) 655
------ -------
$1,217 $(1,217)
====== =======
Amount
----------
(In thousands)
Increase (decrease) in net assets at
January 1, 1992 - SFAS Nos. 106 and 109:
Accrued postretirement benefits cost $(74,918)
Deferred income taxes, net 43,114
--------
$(31,804)
========
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NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Quarter ended,
-------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(In thousands, except per share amounts)
Year ended December 31, 1992:
Net sales $226,091 $235,603 $232,297 $199,474
Cost of sales 158,891 169,896 164,133 136,109
Operating income 25,610 26,302 29,282 29,539
Loss before cumulative effect
of changes in accounting
principles $ (7,510) $ (8,467) $(11,331) $(17,288)
Cumulative effect of changes in
accounting principles (31,804) - - -
-------- -------- -------- --------
Net loss $(39,314) $ (8,467) $(11,331) $(17,288)
======== ======== ======== ========
Per share of common stock:
Loss before cumulative effect
of changes in accounting
principles $ (.15) $ (.17) $ (.22) $ (.34)
Cumulative effect of changes in
accounting principles (.62) - - -
-------- -------- -------- --------
Net loss $ (.77) $ (.17) $ (.22) $ (.34)
======== ======== ======== ========
Weighted average shares
outstanding 50,959 50,890 50,890 50,890
======== ======== ======== ========
Year ended December 31, 1993:
Net sales $198,518 $221,378 $202,096 $183,331
Cost of sales 142,506 171,671 156,894 141,296
Operating income 23,105 15,166 12,773 11,356
Loss before extraordinary item
and cumulative effect of change
in accounting principle $(13,490) $(28,002) $(18,722) $(22,997)
Extraordinary item - - - (27,815)
Cumulative effect of change in
accounting principle - - - 1,217
-------- -------- -------- --------
Net loss $(13,490) $(28,002) $(18,722) $(49,595)
======== ======== ======== ========
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Quarter ended,
------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(In thousands, except per share amounts)
Per share of common stock:
Loss before extraordinary item
and cumulative effect of change
in accounting principle $(.27) $(.55) $(.37) $(.44)
Extraordinary item - - - (.55)
Cumulative effect of change in
accounting principle - - - .02
----- ----- ----- -----
Net loss $(.27) $(.55) $(.37) $(.97)
===== ===== ===== =====
Weighted average shares
outstanding 50,890 50,890 50,890 50,890
====== ====== ====== ======
NOTE 21 - SUBSEQUENT EVENT:
On February 24, 1994, the Company settled its lawsuit against Lockheed
Corporation and its directors in connection with Lockheed's 1990 annual meeting
of stockholders. Under the terms of the settlement, Lockheed made a cash
payment to the Company of $27 million with net proceeds to the Company of
approximately $20 million.
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