1
EXHIBIT 99.2
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Financial Statements
- --------------------
Report of Independent Accountants F-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
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1991, 1992, and 1993 F-6
Consolidated Statements of Cash Flows -- Years ended
December 31, 1991, 1992 and 1993 F-7/F-8
Notes to Consolidated Financial Statements F-9/F-33
Financial Statement Schedules
- -----------------------------
Report of Independent Accountants S-1
Schedule III -- Condensed financial information of Registrant S-2/S-6
Schedule V -- Property and equipment S-7
Schedule VI -- Accumulated depreciation and depletion of
property and equipment S-8
Schedule VIII -- Valuation and qualifying accounts S-9
Schedule X -- Supplementary income statement information S-10
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
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Tremont Corporation:
We have audited the accompanying consolidated balance sheets of
Tremont Corporation and Subsidiaries as of December 31, 1992 and 1993, and the
related consolidated statements of operations, stockholders' equity 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
Tremont Corporation and Subsidiaries as of December 31, 1992 and 1993, and the
consolidated results of their operations and 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 13 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 changed its method
of accounting for postretirement benefits other then pensions and income taxes
in accordance with Statements of Financial Accounting Standards Nos. 106 and
109, respectively.
COOPERS & LYBRAND
Denver, Colorado
January 24, 1994
F-2
3
TREMONT CORPORATION 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 $ 9,750 $ 8,898
Marketable securities 4,904 11,424
Accounts and notes receivable, less
allowance of $4,206 and $4,806 35,988 37,399
Refundable income taxes 1,995 225
Receivable from related parties 280 45
Inventories 57,326 52,640
Prepaid expenses 4,372 3,378
-------- --------
Total current assets 114,615 114,009
-------- --------
Other assets:
Investment in NL Industries 76,499 22,294
Investment in joint ventures 11,039 13,629
Investment in Bentonite 8,682 -
Receivable from related parties 4,556 5,145
Deferred income taxes 25,556 5,930
Prepaid pension cost 2,973 1,418
Other 14,869 13,425
-------- --------
Total other assets 144,174 61,841
-------- --------
Property and equipment:
Land 2,509 4,929
Buildings 8,890 18,971
Machinery and equipment 35,840 122,835
Construction in progress 99,913 8,610
-------- --------
147,152 155,345
Less accumulated depreciation 7,601 8,025
-------- --------
Net property and equipment 139,551 147,320
-------- --------
$398,340 $323,170
======== ========
F-3
4
TREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1992 and 1993
(In thousands, except per share data)
1992* 1993
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 141
Current maturities of long-term debt 6,807 6,807
Accounts payable and accrued liabilities 40,713 48,393
Payable to related parties 147 6,077
Deferred income taxes 4,619 4,457
Income taxes 117 123
-------- --------
Total current liabilities 52,403 65,998
-------- --------
Noncurrent liabilities:
Convertible subordinated debentures 75,000 -
Other long-term debt 48,951 43,484
Payable to related parties 3,051 -
Insurance claims and claim expenses 15,387 15,093
Accrued OPEB cost 51,532 51,653
Accrued pension cost 1,742 236
Other 1,019 1,038
-------- --------
Total noncurrent liabilities 196,682 111,504
-------- --------
Minority interest in TIMET - 27,246
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares
authorized; none issued - -
Common stock, $1.00 par value; 14,000 shares
authorized; 7,526 shares issued 7,526 7,526
Additional paid-in capital 200,549 231,314
Accumulated deficit (50,964) (108,529)
Adjustments:
Currency translation (4,142) (6,571)
Marketable securities (118) (298)
Pension liabilities - (1,424)
-------- --------
152,851 122,018
Less treasury stock, at cost (173 shares) 3,596 3,596
-------- --------
Total stockholders' equity 149,255 118,422
-------- --------
$398,340 $323,170
======== ========
* Reclassified
Commitments and contingencies (Notes 15 and 16).
See accompanying notes to consolidated financial statements.
F-4
5
TREMONT CORPORATION 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 $155,684 $153,869 $151,177
Other, net 6,056 (3,418) 10,744
-------- -------- --------
161,740 150,451 161,921
-------- -------- --------
Costs and expenses:
Cost of sales 136,385 151,573 153,393
Selling, general and administrative 21,590 20,456 16,223
Restructuring charge - - 4,700
Interest 3,813 3,681 4,266
-------- -------- --------
161,788 175,710 178,582
-------- -------- --------
Loss before equity in NL (48) (25,259) (16,661)
Equity in loss of NL (308) (10,925) (44,778)
-------- -------- --------
Loss before income taxes (356) (36,184) (61,439)
Income tax benefit (expense) (1,084) 2,061 1,291
-------- -------- --------
Loss from continuing operations (1,440) (34,123) (60,148)
Discontinued operations (76) 442 7,536
Extraordinary item - - (4,953)
Cumulative effect of changes in
accounting principles - (31,902) -
-------- -------- --------
Net loss $ (1,516) $(65,583) $(57,565)
======== ======== ========
Income (loss) per common share:
Continuing operations $ (.20) $ (4.64) $ (8.18)
Discontinued operations (.01) .06 1.02
Extraordinary item - - (.68)
Cumulative effect of changes in
accounting principles - (4.34) -
-------- -------- --------
Net loss $ (.21) $ (8.92) $ (7.84)
======== ======== ========
Cash dividends per share $ .60 $ .60 $ -
======== ======== ========
Weighted average common shares outstanding 7,385 7,350 7,354
======== ======== ========
* Reclassified
See accompanying notes to consolidated financial statements.
F-5
6
TREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1991, 1992, 1993
(In thousands)
Adjustments
------------------------------------
Additional Accumulated Total
Common paid-in earnings Currency Marketable Pension Treasury stockholders'
stock capital (deficit) translation securities liabilities stock equity
--------- ---------- --------- ----------- ---------- ----------- ---------- -------------
Balance at December 31, 1990 $ 7,404 $ 199,185 $ 24,984 $ 745 $ - $ - $ - $ 232,318
Net loss - - (1,516) - - - - (1,516)
Dividends declared - - (4,447) - - - - (4,447)
Common stock issued 103 1,236 - - - - - 1,339
Adjustments - - - (1,870) (106) - (1,976)
Purchase of common stock - - - - - - (3,596) (3,596)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1991 7,507 200,421 19,021 (1,125) (106) - (3,596) 222,122
Net loss - - (65,583) - - - - (65,583)
Dividends declared - - (4,402) - - - - (4,402)
Common stock issued 19 128 - - - - - 147
Adjustments - - - (3,017) (12) - (3,029)
--------- --------- --------- --------- --------- --------- --------- ----------
Balance at December 31, 1992 7,526 200,549 (50,964) (4,142) (118) - (3,596) 149,255
Net loss - - (57,565) - - - - (57,565)
UTSC conversion (Note 2) - 30,765 - 5 - 270 - 31,040
Adjustments - - - (2,434) (180) (1,694) - (4,308)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1993 $ 7,526 $ 231,314 $(108,529) $ (6,571) $ (298) $ (1,424) $ (3,596) $ 118,422
========= ========= ========= ========= ========== ========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
7
TREMONT CORPORATION 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 $ (1,516) $(65,583) $(57,565)
-------- -------- --------
Adjustments:
Depreciation and amortization 2,740 3,219 4,645
Restructuring charge - - 4,700
Noncash OPEB expense - 1,266 (13)
Deferred income taxes 3,138 32 4,108
Equity in loss of NL 308 10,925 49,731
Dividends from NL 369 2,908 -
Gain from sale of gold venture - - (5,500)
Securities transactions (2,083) (648) (217)
Loss on property and other assets 3,359 5,940 -
Discontinued operations 76 (442) (7,536)
Bentonite, net 1,082 1,186 1,375
Other, net 913 410 (2,127)
Change in assets and liabilities:
Accounts and notes receivable 15,523 (4,126) (649)
Inventories 6,465 5,503 4,577
Accounts with related parties (104) (755) (306)
Accounts payable and accrued
liabilities (4,687) 5,814 8,127
Income taxes 567 125 (1,967)
Other, net (1,351) (1,465) 134
Cumulative effect of changes
in accounting principles - 31,902 -
-------- -------- --------
26,315 61,794 59,082
-------- -------- --------
Net cash provided (used) by
operating activities 24,799 (3,789) 1,517
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (30,312) (67,712) (16,335)
Proceeds from disposition of:
Bentonite - - 20,198
Gold venture - - 5,500
Marketable securities 91,524 21,926 14,191
Property held for sale 1,615 3 336
Collection of:
Receivables 701 709 402
Loans to related parties 1,126 - -
Purchases of:
Marketable securities (114,565) (1,574) (20,077)
Interest in NL (92,000) (10,130) -
Interest in other affiliates (192) (4,308) -
Bentonite, net (1,189) (1,121) (1,050)
-------- -------- --------
Net cash provided (used) by
investing activities (143,292) (62,207) 3,165
-------- -------- --------
F-7
8
TREMONT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1991, 1992 and 1993
(In thousands)
1991* 1992* 1993
---- ---- ----
Cash flows from financing activities:
Notes payable and long-term debt:
Additions $ 92,937 $77,903 $ 1,641
Principal payments (73,989) (22,811) (6,967)
Dividends (3,747) (5,102) -
Bentonite, net (53) (58) (110)
Other, net (3,054) 185 (126)
--------- ------- -------
Net cash provided (used) by
financing activities 12,094 50,117 (5,562)
--------- ------- -------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing
activities (106,399) (15,879) (880)
Elimination of Bentonite net change (57) 37 31
Currency translation (22) (127) (3)
--------- ------- -------
(106,478) (15,969) (852)
Balance at beginning of year 132,197 25,719 9,750
--------- ------- -------
Balance at end of year $ 25,719 $ 9,750 $ 8,898
========= ======= =======
Supplemental disclosures - cash paid for:
Interest, net of amount capitalized $ 3,846 $ 1,537 $ 1,023
Income taxes (refund) (3,552) (1,760) (3,437)
* Reclassified
See accompanying notes to consolidated financial statements.
F-8
9
TREMONT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Organization and basis of presentation:
Tremont Corporation is principally a holding company with operations
conducted through its 75%-owned subsidiary, Titanium Metals Corporation
("TIMET"), and 18%-owned affiliate, NL Industries, Inc. Valhi, Inc. held
approximately 48% of Tremont's outstanding common stock and 49% of NL's
outstanding common stock at December 31, 1993. 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 sole trustee. Mr. Simmons may be deemed to
control each of Contran, Valhi and Tremont.
On October 29, 1990, Baroid Corporation ("Old Baroid") implemented a
plan of restructuring to separate its (i) petroleum services businesses and
(ii) titanium metals and bentonite mining businesses into two publicly traded
companies. The separation was effected through a prorata distribution (the
"Distribution") of 100% of the outstanding common stock of a newly formed
company holding the petroleum services businesses ("New Baroid") to Old Baroid
stockholders of record as of October 29, 1990. Old Baroid subsequently changed
its name to "Tremont Corporation" and New Baroid changed its name to "Baroid
Corporation". For financial reporting purposes the Distribution was considered
a reverse spin-off and accounted for as if Baroid had formed Tremont as a
separate company and distributed Tremont's common stock pro rata to Baroid's
stockholders. In conjunction with the Distribution, Tremont entered into
various agreements as described in Note 15.
Immediately after the Distribution, Tremont continued to conduct its
titanium metals and bentonite mining businesses. In July 1993, Tremont sold its
bentonite mining business ("Bentonite") to Baroid for $20 million cash and,
accordingly, Bentonite is reported as discontinued operations for all periods
presented. In 1994, Baroid was acquired by Dresser Industries, Inc.
Note 2 -- Summary of significant accounting policies:
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of Tremont and its majority-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is
deemed to be other than the U.S. dollar are translated at year-end rates of
exchange and revenues and expenses are translated at average exchange rates
prevailing during the year. Resulting translation adjustments and the Company's
equity in translation adjustments of less than majority-owned affiliates
accounted for by the equity method are accumulated in the currency translation
adjustments
F-9
10
component of stockholders' equity, net of related deferred income taxes.
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 similar items with original
maturities of three months or less.
Marketable and other securities and securities transactions
The Company and NL each adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" effective December 31, 1993.
Under SFAS No. 115, the Company's portfolio of marketable debt and
equity securities 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 Company's equity in unrealized gain and
loss adjustments of less than majority-owned affiliates, are accumulated in the
marketable securities adjustment component of stockholders' equity, net of
related deferred income taxes. Realized gains and losses are based upon the
specific identification of the securities sold. Upon adoption of SFAS No. 115,
the Company classified its portfolio of U. S. Treasury securities as trading
securities.
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.
Inventories and cost of sales
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to determine the cost of substantially all
titanium metals inventories. Other inventories are stated at average cost.
Sales are generally recorded when products are shipped.
Investments in NL and joint ventures
Investments in NL and more than 20%-owned but less than majority-owned
entities are accounted for by the equity method. Differences between the cost
of each such investment and the underlying equity in the historical carrying
amounts of the entity's net assets are allocated among the respective assets
and liabilities based upon estimated relative fair values. Such differences are
charged or credited to income as the entities depreciate, amortize or dispose
of the related net assets. At December 31, 1993, the unamortized net difference
relating to NL was $70 million, of which $29 million is goodwill being
amortized over 40 years, with substantially all of the remainder attributable
to NL's property and equipment. The unamortized net basis difference is greater
than the Company's $22 million net carrying amount of its investment in NL
because NL reports a shareholders' deficit on its separate historical basis of
accounting.
F-10
11
Property, equipment, depreciation and amortization
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of
construction costs and were $1.5 million in 1991, $4.9 million in 1992 and $3.1
million in 1993. Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized.
TIMET's new vacuum distillation process ("VDP") titanium sponge
facility commenced start-up in 1993. Depreciation related to the VDP plant is
computed on a units-of-production method based on the pounds of sponge
produced. Depreciation related to other assets is computed principally on the
straight-line method over the estimated useful lives of 15 to 40 years for
buildings and 5 to 18 years for machinery and equipment.
Research and development
Research and development expense approximated $2 million in each of
1991, 1992 and 1993.
Employee benefit plans
Accounting and funding policies for retirement plans and
postretirement benefits other than pensions ("OPEB") are described in Note 11.
Reduction of interest in TIMET
In December 1993, Union Titanium Sponge Corporation ("UTSC"), a
Japanese consortium, exercised its option to convert its $75 million of
debentures into 25% of TIMET's outstanding voting common stock ("UTSC
conversion"). Tremont recorded a $31 million increase in its stockholders'
equity, net of deferred income taxes, as a result of this transaction.
Income taxes
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities,
including investments in subsidiaries and unconsolidated affiliates not
included in the consolidated tax group.
TIMET was a member of Tremont's consolidated United States federal
income tax group from March 1990 until the December 1993 UTSC conversion. TIMET
is presently included in a consolidated tax group separate from Tremont.
In connection with the Distribution, Tremont and Baroid entered into a
tax sharing agreement which sets forth certain obligations of each entity with
respect to federal, state, foreign and local taxes for the periods during which
they were both included in the Old Baroid tax group. Pursuant to this
agreement, Baroid has indemnified the Company for any income taxes and related
interest paid by the Company which are attributable to a member of Baroid's
U.S. federal income tax group subsequent to the Distribution. Tremont was also
a party to a consolidated federal income tax liability sharing agreement
pursuant to which NL indemnified the Old Baroid tax group for any additional
U.S. federal income taxes
F-11
12
or related interest for periods prior to the separation of Old Baroid from NL
in December 1988.
Income (loss) per share of common stock
All share and per share information in this Annual Report on Form 10-K
reflects the May 14, 1991 one-for-ten reverse common stock split. Income (loss)
per common share is based upon the weighted average number of Tremont common
shares outstanding. Common stock equivalents and other securities are excluded
from the calculation because they are either antidilutive or because the effect
is not material.
Extraordinary item
The extraordinary item in 1993 relates to Tremont's equity in NL's
extraordinary loss resulting from NL's early extinguishment of indebtedness.
F-12
13
Note 3 -- Business and geographic segments:
Years ended December 31,
--------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Net sales $155,684 $153,869 $151,177
======== ======== ========
Operating income (loss):
Before restructuring charge $ 4,802 $ (9,727) $(12,007)
Restructuring charge - - (4,700)
-------- -------- --------
4,802 (9,727) (16,707)
General corporate income (expense):
Gain on sale of gold venture - - 5,500
Securities transactions 2,083 648 217
Interest income 8,220 1,952 845
Loss on property and other assets (3,359) (5,940) -
Other, net (7,981) (8,511) (2,250)
Interest expense (3,813) (3,681) (4,266)
-------- -------- --------
Loss before equity in NL (48) (25,259) (16,661)
Equity in loss of NL (308) (10,925) (44,778)
-------- -------- --------
Loss before income taxes $ (356) $(36,184) $(61,439)
======== ======== ========
Capital expenditures (a):
Titanium metals $ 30,094 $ 74,903 $ 13,589
Corporate 218 377 5
-------- -------- --------
$ 30,312 $ 75,280 $ 13,594
======== ======== ========
Depreciation and amortization:
Titanium metals $ 2,725 $ 3,170 $ 4,609
Corporate 15 49 36
-------- -------- --------
$ 2,740 $ 3,219 $ 4,645
======== ======== ========
______________
(a) Capital expenditures in 1993 include capitalized interest of $3.1
million ($2.6 million non-cash) and exclude payment of previously
accrued capital expenditures of $5.3 million. Capital expenditures in
1992 include $7.6 million of accrued expenditures.
F-13
14
Substantially all of the Company's sales and operating income are
derived from U.S.-based operations. Export sales were $26.5 million in 1991,
$29.6 million in 1992 and $43.9 million in 1993. Over two-thirds of such export
sales were to Europe.
TIMET recorded a $4.7 million restructuring charge in 1993 related to
the closing of certain service centers in 1993 and severance costs associated
with reductions in TIMET's workforce expected to occur principally in 1994.
Operating income for 1991, 1992 and 1993 includes pretax income of $1.3
million, $.8 million and $.2 million, respectively, resulting from the
reduction of LIFO inventory quantities.
The Company's captive insurance subsidiary ("TRE Insurance") reinsured
certain risks of the Company, Baroid, NL and their respective subsidiaries and
also participated on various third party reinsurance treaties. All of the
reinsurance business is in a runoff basis. Results of the Company's captive
insurance operations, which are not significant, are included in general
corporate income (expense). See Note 15.
Identifiable assets
December 31,
-----------------------
1992 1993
---- ----
(In thousands)
Business segments:
Titanium metals $267,024 $262,496
Corporate 66,069 59,074
Investment in NL 76,499 22,294
Investment in Bentonite 8,682 -
Eliminations (19,934) (20,694)
-------- --------
$398,340 $323,170
======== ========
Geographic segments:
United States $306,604 $290,388
Europe 6,555 10,488
Investment in NL 76,499 22,294
Investment in Bentonite 8,682 -
-------- --------
$398,340 $323,170
======== ========
Corporate assets consist principally of cash and cash equivalents,
marketable securities, deferred income taxes, property held for sale, and
intercompany receivables which principally comprise the eliminations.
F-14
15
Note 4 -- Investment in NL and joint ventures:
In December 1991, Tremont purchased 7.8 million shares of NL common
stock from Valhi in a privately-negotiated transaction at a price of $11.75 per
share, or an aggregate $92 million. Tremont purchased an additional 1.3 million
shares of NL common stock in market transactions during 1992 for an aggregate
cost of $10 million, increasing Tremont's holdings to 9.1 million shares or 18%
of NL's outstanding common stock. Valhi may be deemed to control each of NL
and Tremont and, accordingly, Tremont reports its interest in NL by the equity
method. At December 31, 1993, the net carrying amount of the Company's
investment in NL was $2.46 per share, and the NYSE quoted market price of NL
common stock was $4.50 per share. See Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Annual
Report on Form 10-K for summarized information relating to the results of
operations, financial position and cash flows of NL, which information is
incorporated herein by reference.
The Company's joint ventures' aggregate unaudited revenues and net
income in 1993 approximated $60 million and $12 million, respectively, while
the Company's related equity in earnings was $3.5 million.
Note 5 -- Inventories:
December 31,
---------------------
1992 1993
---- ----
(In thousands)
Raw materials $ 7,276 $ 5,431
In process and finished products 46,679 43,950
Supplies 3,371 3,259
------- -------
$57,326 $52,640
======= =======
The average cost of LIFO inventories exceeded the net carrying amount
of such inventories by approximately $11 million and $13 million at December
31, 1992 and 1993, respectively.
Note 6 -- Other noncurrent assets:
December 31,
-----------------------
1992 1993
---- ----
(In thousands)
Restricted securities $ 8,809 $ 7,729
Property held for sale 2,500 2,339
Other 3,560 3,357
------- -------
$14,869 $13,425
======= =======
F-15
16
Note 7 -- Accounts payable and accrued liabilities:
December 31,
----------------------
1992 1993
---- ----
(In thousands)
Accounts payable $19,764 $23,304
Accrued liabilities:
OPEB cost 3,015 2,881
Pension cost 351 1,413
Other employee benefits 10,645 9,183
Restructuring cost - 4,238
Miscellaneous taxes 1,416 1,781
Other 5,522 5,593
------- -------
$40,713 $48,393
======= =======
Note 8 -- Long-term debt:
December 31,
---------------------
1992 1993
---- ----
(In thousands)
Convertible subordinated debentures $75,000 $ -
======= =======
U.S. bank credit agreement:
Revolver $26,308 $27,648
Term 23,750 18,750
Other 5,700 3,893
------- -------
55,758 50,291
Less current maturities 6,807 6,807
------- -------
$48,951 $43,484
======= =======
TIMET's convertible subordinated debentures were issued to UTSC, and
provided the majority of the financing for TIMET's new VDP titanium sponge
facility. In December 1993, UTSC exercised its option to convert its $75
million of subordinated debentures into 25% of TIMET's outstanding Class A
common stock. The debentures accrued interest at a weighted average rate of
8.4% through May 1993 when such interest ceased accruing. UTSC allowed TIMET to
defer $6 million of interest payments, originally due prior to July 1993, until
June 1994. Such deferred interest accrues interest at 10.4% and continues to be
collateralized by VDP related equipment. The Investors' Agreement with UTSC
contains stockholder protections and other covenants customary in transactions
of this type. In connection with UTSC's conversion, Tremont made an aggregate
$9 million capital contribution of intercompany notes and accrued interest to
TIMET.
F-16
17
TIMET's U.S. bank agreement provides for (i) a $30 million revolving
credit/letter of credit facility maturing not later than March 1995, and (ii) a
term loan facility due in equal quarterly installments of $1.25 million through
1997. Borrowings under this facility, as amended in October 1993, accrue
interest at the borrower's option at the prime rate plus 1.5%, LIBOR plus 3.5%,
or a CD rate plus 3.75%. At December 31, 1993, the weighted average interest
rate on outstanding revolver and term loan borrowings was 7%. Borrowings are
limited to a formula-determined amount of accounts receivable and inventories
and are collaterized by substantially all of TIMET's assets. The bank agreement
limits TIMET's additional indebtedness, payment of dividends and transactions
with affiliates, requires the maintenance of certain financial ratios and
amounts, and contains other covenants customary in lending transactions of this
type. At December 31, 1993, TIMET was not permitted to pay dividends under this
bank agreement and restricted net assets of TIMET included in the Company's
consolidated net assets was $80 million. TIMET's bank debt reprices with
changes in market interest rates and, accordingly, the carrying amount of such
debt is deemed to approximate market value.
At December 31, 1993, the Company had approximately $9 million of
outstanding letters of credit issued under a Dresser credit agreement. The
Company reimburses Dresser for any fees and expenses related to these letters
of credit and for any amounts drawn thereunder.
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 $ 6,807
1995 34,454
1996 5,140
1997 3,890
--------
$ 50,291
========
F-17
18
Note 9 -- Income taxes:
Summarized below are (i) the components of the pretax loss from
continuing operations (ii) the difference between the income tax benefit
attributable to the pretax 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 components of the income tax benefit attributable to the pretax
loss, and (iv) the components of the comprehensive tax benefit.
Years ended December 31,
------------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Expected income tax benefit $ 121 $12,303 $21,504
Incremental tax and rate differences on
equity in income of companies not
included in the consolidated tax group (748) (736) 318
Valuation allowance - (9,371) (21,667)
U.S. state income taxes, net (133) (239) (125)
Rate change adjustment of deferred taxes - - 610
Other, net (324) 104 651
-------- ------- --------
$ (1,084) $ 2,061 $ 1,291
======== ======== ========
Income tax benefit (expense):
Currently refundable (payable):
U.S. federal $ 2,111 $ 2,225 $ 5,512
U.S. state (325) (182) (100)
Non-U.S. 268 50 (13)
-------- -------- --------
2,054 2,093 5,399
Deferred income taxes, principally U.S. (3,138) (32) (4,108)
-------- -------- --------
$ (1,084) $ 2,061 $ 1,291
========= ======== ========
Pretax income (loss):
U.S. $ 653 $(34,564) $(60,737)
Non-U.S. (1,009) (1,620) (702)
-------- -------- --------
$ (356) $(36,184) $(61,439)
======== ======== ========
Years ended December 31,
-----------------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Comprehensive tax benefit (provision)
allocable to:
Pretax income $(1,084) $ 2,061 $ 1,291
Discontinued operations 22 (195) (3,922)
Stockholders' equity, deferred taxes
allocable to foreign currency
translation - 1,304 1,358
------- ------- -------
$(1,062) $ 3,170 $(1,273)
======= ======= =======
Changes in deferred income taxes resulting from adopting new
accounting standards are discussed in Note 13.
F-18
19
Deferred income tax expense in 1991 (a disclosure not required after
adopting of SFAS No. 109 in 1992) principally relates to depreciation.
The components of deferred taxes are summarized below:
December 31,
------------------------------------------------------
1992 1993
----------------------- ------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Temporary differences relating to
net assets:
Inventories $ - $ (7.6) $ - $ (7.3)
Property and equipment - (1.3) - (3.6)
Accrued OPEB cost 19.5 - 19.7 -
Accrued liabilities 9.3 - 12.7 -
Other taxable differences - (5.0) - (6.6)
Investments in subsidiaries
and affiliates, including
foreign currency
translation adjustments 23.4 - 23.8 -
Tax loss and credit carryforwards 8.3 - 12.1 -
Valuation allowance (25.6) - (49.4) -
------ ------ ------ ------
Gross deferred tax assets
(liabilities) 34.9 (13.9) 18.9 (17.5)
Netting (9.3) 9.3 (13.0) 13.0
------- ------ ------ ------
Net noncurrent deferred tax
asset (net current deferred
tax liabilities) $ 25.6 $ (4.6) $ 5.9 $ (4.5)
====== ====== ====== ======
Subsequent to the adoption of SFAS 106 and 109, the valuation
allowance increased by $9.4 million in 1992 and $23.8 million in 1993.
At December 31, 1993, Tremont and TIMET had, for U.S. federal income
tax purposes, allocated net operating loss carryforwards of $.9 million and
$24.5 million, respectively, expiring in 2007 and 2008. However, for financial
reporting purposes, and pursuant to the tax sharing agreement, TIMET's
operating loss carryforward is $15 million. The Company has foreign tax credit
carryforwards of $3 million expiring in 1994 and 1995.
Note 10 -- Other, net:
Years ended December 31,
-------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Gain on sale of gold venture $ - $ - $ 5,500
Securities transactions 2,083 648 217
Interest income 8,220 1,952 845
Loss on property and other assets (3,359) (5,940) -
Equity in earnings (losses) of affiliates (413) 13 3,540
Other, net (475) (91) 642
------- ------- -------
$ 6,056 $(3,418) $10,744
======= ======= =======
F-19
20
Note 11 -- Employee benefit plans:
Incentive compensation plans
Substantially all of TIMET's employees, including TIMET's domestic
union employees, participate in variable compensation programs which provide
for incentive bonuses.The incentive bonuses are based upon TIMET's financial
performance and, under certain circumstances, the individual performance of the
employee. Certain of TIMET's domestic union employees are guaranteed a minimum
$1,500 award per year through July 1994. The cost of these plans was $2.6
million in 1991, $1.3 million in 1992 and $1.1 million in 1993.
Defined contribution plans
Substantially all of TIMET's domestic nonunion employees are eligible
to participate in contributory savings plans with partial matching employer
contributions based on the profitability of TIMET. Certain of TIMET's domestic
union employees are also eligible to participate in the contributory savings
plan. Substantially all of TIMET's domestic nonunion employees also participate
in a defined contribution pension plan with contributions based upon the
profitability of TIMET. The cost of these pension and savings plans was nil in
1991 and 1992 and $.1 million in 1993.
Defined benefit pension plans
TIMET maintains noncontributory defined benefit pension plans covering
substantially all of its domestic union employees and a portion of its salaried
workforce. Defined pension benefits are generally based on years of service and
compensation, and the related expense is based upon independent actuarial
valuations. TIMET's funding policy is to contribute annually amounts satisfying
the funding requirements of the Employee Retirement Income Security Act of
1974, as amended. The defined benefit pension plan for nonunion employees has
been amended so that no further benefits for years of service accrue.
The funded status of TIMET's defined benefit pension plans and the
components of net periodic defined benefit pension cost are set forth below.
The rates used in determining the actuarial present value of the benefit
obligations at December 31, 1993 were: (i) discount rate - 7.5% (8% in 1992),
and (ii) rate of increase in future compensation levels - 3% to 7.4% (nil to
8.4% in 1992). The expected long-term rate of return on assets used was 9% (10%
in 1992). Plan assets are primarily comprised of U.S. government obligations,
corporate stocks and bonds.
F-20
21
Assets exceed Accumulated
accumulated benefits
benefits exceed assets
December 31, December 31,
---------------------- ----------------------
1992 1993 1992 1993
---- ---- ---- ----
(In thousands)
Actuarial present value of benefit
obligations:
Vested benefit obligations $31,342 $15,173 $ 5,990 $26,277
Nonvested benefits 3,756 1,313 434 2,240
------- ------- ------- -------
Accumulated benefit obligations 35,098 16,486 6,424 28,517
Effect of projected salary
increases 617 208 1,428 2,227
------- ------- ------- -------
Projected benefit obligations 35,715 16,694 7,852 30,744
Plan assets at fair value 37,132 17,215 4,332 26,868
------- ------- ------- -------
Plan assets over (under) projected
benefit obligations 1,417 521 (3,520) (3,876)
Unrecognized net loss from
experience different from
actuarial assumptions 4,319 2,021 2,197 5,430
Unrecognized prior service cost 1,542 543 498 1,262
Unrecognized net assets being
amortized over 14 years (4,305) (1,667) (104) (2,112)
Adjustment to recognize
minimum liability - - (1,164) (2,353)
------- ------- ------- -------
Total prepaid (accrued)
pension cost 2,973 1,418 (2,093) (1,649)
Current portion - - (351) (1,413)
------- ------- ------- -------
Noncurrent prepaid (accrued)
pension costs $ 2,973 $ 1,418 $(1,742) $ (236)
======= ======= ======= =======
Years ended December 31,
--------------------------------
1991 1992 1993
---- ---- ----
(In thousands)
Service cost benefits earned $ 744 $ 770 $ 750
Interest cost on projected benefit obligations 3,092 3,273 3,406
Actual return on plan assets (7,182) (3,504) (4,677)
Net amortization and deferrals 3,587 (677) 839
------- ------- -------
$ 241 $ (138) $ 318
======= ======= =======
The pension liabilities component of stockholders' equity includes the
Company's equity in amounts recorded by NL.
F-21
22
Postretirement benefits other than pensions
TIMET provides certain postretirement health care and life insurance
benefits to eligible retired employees. Under plans currently in effect,
substantially all of TIMET's currently active employees would become eligible
for these benefits if they reach normal retirement age while working for TIMET.
Net pay-as-you-go expense prior to adoption of SFAS No. 106 for these
postretirement benefits was $2.3 million in 1991.
Tremont retained the obligations for certain postretirement health
care and life insurance benefits provided to eligible Old Baroid employees who
retired prior to the Distribution. Net pay-as-you-go expense prior to adoption
of SFAS No. 106 for these postretirement benefits was $1.9 million in 1991.
The components of net periodic OPEB costs and accumulated OPEB
obligations are set forth below. The rates used in determining the actuarial
present value of the accumulated OPEB obligations at December 31, 1993 were (i)
discount rate -7.5% (7.75% in 1992), (ii) rate of increase in future
compensation levels - nil to 7.4% (nil to 6% in 1992), and (iii) rate of
increase in future health care costs - 14% in 1994, gradually declining to 6%
in 2016 and thereafter. If the health care cost trend rate was increased by one
percentage point for each year, OPEB expense would have increased approximately
$.6 million in 1993, and the actuarial present value of accumulated OPEB
obligations at December 31, 1993 would have increased approximately $4 million.
Years ended
December 31,
---------------------------
1992 1993
---- ----
(In thousands)
Actuarial present value of accumulated OPEB
obligations:
Retiree benefits $ 29,603 $ 28,580
Other fully eligible active plan 10,493 4,414
participants
Other active plan participants 6,971 8,521
-------- --------
47,067 41,515
Unrecognized net gain (loss) from experience
different from actuarial assumptions (470) 5,723
Unrecognized prior service credit 7,950 7,296
-------- --------
Total accrued OPEB cost 54,547 54,534
Less current portion 3,015 2,881
------- --------
Noncurrent accrued OPEB cost $ 51,532 $ 51,653
======== ========
Years ended
December 31,
---------------------------
1992 1993
---- ----
(In thousands)
Service cost benefits earned 752 428
Interest cost on accumulated OPEB obligations 4,122 2,993
Net amortization and deferrals - (781)
-------- --------
$ 4,874 $ 2,640
======== ========
F-22
23
Note 12 -- Stockholders' equity:
Common stock
Shares of Common Stock
-------------------------------------------
Issued Reacquired Outstanding
------ ---------- -----------
(In thousands)
Outstanding at December 31, 1990 7,404 - 7,404
Exercise of options 65 - 65
Restricted shares, net 38 - 38
Reacquired - (173) (173)
------ ------- -------
Outstanding at December 31, 1991 7,507 (173) 7,334
Exercise of options 21 - 21
Restricted shares, net (2) - (2)
------- ------- -------
Outstanding at December 31, 1992 and 1993 7,526 (173) 7,353
====== ======= ======
Stock options and restricted stock
TIMET has a long-term performance incentive plan that provides for
discretionary grants of restricted stock, stock options and stock appreciation
rights covering a maximum of 10,000 shares of TIMET's nonvoting Class B common
stock. TIMET Class B shares are redeemable, at the option of the holder, at
fair value as determined by TIMET's Board of Directors. Prior to 1990, TIMET
granted certain employees options to purchase 3,050 shares of Class B common
stock at an exercise price of $200 per share. During 1990, (i) options to
purchase 125 shares were canceled, (ii) options to purchase 1,170 shares of
TIMET Class B common stock became exercisable and were exercised, and (iii)
TIMET redeemed all then outstanding Class B shares for an aggregate $1.4
million. During 1991 all remaining TIMET options were converted into Tremont
restricted stock and no TIMET options or Class B common stock are currently
outstanding.
Tremont has a long-term performance incentive plan that provides for
discretionary grants of restricted stock, stock options and stock appreciation
rights. Options generally vest ratably over a five year period and expire ten
years from the date of grant. Restricted stock, forfeitable under certain
conditions, is held in escrow in the name of the grantee until the restriction
period of up to five years expires. At December 31, 1993, 216 restricted shares
were outstanding.
Tremont's 1993 Non-Employee Director Stock Option Plan provides that
options to purchase 1,000 shares of Tremont common stock are automatically
granted once a year to each non-employee director. Options are granted at a
price equal to the fair market value of such stock on the date of grant,
generally vest one year and expire five years from date of grant.
F-23
24
Changes in options outstanding under the Company's long-term
performance incentive plan are summarized in the table below. At December 31,
1993, options to purchase 36,000 shares were exercisable and options to
purchase an additional 35,000 shares become exercisable in 1994. At December
31, 1993, 35,000 shares were available for future grant under the Company's
long term performance incentive plan and Tremont's Non- Employee Director Stock
Option Plan.
Exercise Amount payable
Shares price per share upon exercise
------ --------------- --------------
(In thousands, except per share amounts)
Outstanding at December 31, 1990 131 $4.69-22.22 $1,264
Exercised (65) 8.44-9.68 (566)
--- ----------- ------
Outstanding at December 31, 1991 66 4.69-22.22 698
Granted 88 16.00-18.75 1,650
Exercised (21) 8.44-9.68 (186)
--- ----------- ------
Outstanding at December 31, 1992 133 4.69-22.22 2,162
Granted 112 8.81 987
Canceled (15) 8.81-18.75 (245)
--- ----------- ------
Outstanding at December 31, 1993 230 $4.69-22.22 $2,904
=== =========== ======
Note 13 -- Changes in accounting principles:
Marketable securities (SFAS No. 115)
The Company and NL each elected early compliance with SFAS No. 115
effective December 31, 1993. The cumulative effect of such change in accounting
principles was not material.
OPEB (SFAS No. 106) and income taxes (SFAS No. 109)
The company and NL each elected (i) early compliance with both SFAS
No. 106 and SFAS No.109 as of January 1, 1992; (ii) to apply SFAS No. 109
prospectively and not restate prior years; and (iii) immediate recognition of
the OPEB transition obligation. The cumulative effect of changes in accounting
principles adjustment is shown in the table below. The amounts attributable to
the Company's investment in NL consists of the Company's equity in the
respective historical amounts reported by NL and applicable adjustment of
certain of the Company's purchase accounting basis differences originally
recorded net-of-tax at rates differing from current rates.
Amount
--------------
(In thousands)
Increase (decrease) in net assets at January
1, 1992:
Inventories $ 6,850
Investment in NL (5,464)
Accrued OPEB cost (53,567)
Deferred income taxes, net 20,279
---------
Loss from cumulative effect of changes in
accounting principles $ (31,902)
=========
F-24
25
Note 14 -- Discontinued operations:
The components of Tremont's discontinued bentonite mining business are
presented below:
Year ended December 31,
-----------------------------
1992 1993
---- ----
(In thousands)
Operating results of Bentonite:
Net sales $15,522 $ 8,829
======= =======
Operating income $ 642 $ 480
Interest, net 5 16
------- -------
Income before income taxes 637 464
Income tax expense 195 182
------- -------
442 282
Gain of sale of Bentonite, net of $3.7
million of related income taxes - 7,254
------- -------
$ 442 $ 7,536
======= =======
December 31,
1992
--------------
(In thousands)
Net assets of Bentonite:
Current assets $ 6,626
Property, plant and equipment, net 5,322
Other 2,668
-------
14,616
-------
Current liabilities 3,246
Noncurrent liabilities 2,688
-------
5,934
-------
$ 8,682
=======
Note 15 -- Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions with related
companies such as guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (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
F-25
26
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 (except as otherwise set forth in this Annual Report on
Form 10-K), the Company continuously considers, reviews and evaluates, and
understands that Contran, Valhi and related entities consider, review and
evaluate such transactions. Depending upon the business, tax and other
objectives then relevant, it is possible that the Company might be a party to
one or more such transactions in the future. In connection with these
activities, the Company may consider issuing additional equity securities or
incurring additional indebtedness. The Company's acquisition activities have in
the past and may in the future include participation in the acquisition or
restructuring activities conducted by Valhi, NL and other companies that may be
deemed to be controlled by Harold C. Simmons.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company and Baroid entered into an Intercorporate Services
Agreement pursuant to which Baroid made certain services available to Tremont
on a fee basis through December 31, 1993, subject to termination or renewal by
mutual agreement. Fees for services provided by Baroid were $1.9 million in
1991, $.4 million in 1992, and $.2 million in 1993. Tremont and Baroid are also
parties to a tax sharing agreement as discussed in Note 2.
The Company has entered into an Intercorporate Services Agreement with
Valhi and, commencing in 1994, Contran, pursuant to which Valhi and Contran
agreed to provide certain services to Tremont on a fee basis. Fees for services
provided by Valhi were $.4 million in each of 1991 and 1992 and $.3 million in
1993.
Tremont and NL were parties to an Intercorporate Services and
Reimbursement Agreement pursuant to which NL provided certain services to
Tremont on a fee basis. Fees for services provided by NL were $.3 million in
1991, $.5 million in 1992 and $.1 million in 1993.
Pursuant to the Distribution, Baroid agreed to indemnify Tremont with
regard to all liabilities assumed by Baroid, which generally include all
liabilities related to the petroleum services businesses, and Tremont agreed to
indemnify Baroid with respect to liabilities assumed by Tremont, which
generally include all liabilities not related to the petroleum services
businesses.
In connection with the Distribution, NL and TRE Insurance entered into
an Insurance Sharing Agreement with respect to certain loss payments and
reserves established by TRE Insurance that (i) arise out of claims against
other entities for which NL is responsible and (ii) are subject to payment by
TRE Insurance under certain reinsurance contracts. Also, TRE Insurance will
credit NL with respect to certain underwriting profits or credit recoveries
that TRE Insurance receives from independent reinsurers that relate to retained
liabilities. Baroid entered into an Insurance Sharing Agreement with TRE
Insurance containing, with respect to liabilities for which it may be
responsible, substantially the same terms and conditions as the Insurance
Sharing Agreement between NL and TRE Insurance.
F-26
27
TIMET sales to its 26% owned German distributor were $5.9 million in
1991, $4.1 million in 1992 and $3.4 million in 1993.
TIMET has committed to have THT perform a substantial percentage of
TIMET's requirements for melting certain titanium products. Purchases by TIMET
from THT were $2 million in 1992 and $6.5 million 1993.
The December 1991 purchase of NL common stock from Valhi is described
in Note 4. See also Note 16.
Aggregate payables to related parties at December 31, 1992 and 1993
principally represent accrued interest due to UTSC. Aggregate receivables from
related parties principally include amounts due under insurance loss sharing
agreements with NL and Baroid.
Note 16 -- Commitments and contingencies:
Operating leases
The Company leases certain manufacturing and office facilities and
various equipment. Most of the leases contain purchase and/or various term
renewal options at fair market and fair rental values, respectively. In most
cases management expects that, in the normal course of business, leases will be
renewed or replaced by other leases. The Company's net rent expense was
approximately $2.4 million in 1991, $1.9 million in 1992, and $1.4 million in
1993.
At December 31, 1993, future minimum payments under noncancellable
operating leases having an initial or remaining term of more than one year
were:
Years ending December 31, Amount
- ------------------------- ------
(In thousands)
1994 $ 1,384
1995 1,189
1996 744
1997 458
1998 115
1999 and thereafter -
--------
3,890
Less sublease income 422
--------
$ 3,468
========
Legal proceedings
Tremont and consolidated subsidiaries
In November 1991, a purported derivative complaint was filed in the
Court of Chancery of the State of Delaware, New Castle County, Alan Russell
Kahn v. Tremont Corporation, et. al. (No. 12339), in connection with Tremont's
agreement to purchase 7.8 million NL common shares from Valhi. In addition to
Tremont, the complaint names as defendants the members of Tremont's board of
directors and Valhi. The complaint alleges, among other things, that Tremont's
purchase of the NL shares constitutes a waste of Tremont's assets and that
Tremont's board of directors breached their fiduciary duties to Tremont's
public stockholders, and
F-27
28
seeks, among other things, to rescind Tremont's consummation of the purchase of
the NL shares and award damages to Tremont for injuries allegedly suffered as a
result of the defendants' wrongful conduct. Tremont believes, and understands
that the other defendants believe, that the action is without merit. Tremont
has denied, and understands that the other defendants have denied, all
allegations of wrongdoing and liability and intends, and understands that the
other defendants intend, to defend the action vigorously. The defendants have
moved to dismiss the complaint on the ground that the plaintiff lacks standing
to pursue this action, and oral arguments are scheduled for early 1994. The
court has granted the plaintiff limited discovery with respect to the motion to
dismiss.
TIMET, along with United Air Lines, Inc. ("UAL"), McDonnell Douglas
Corporation, General Electric Company ("General Electric"), Aluminum Company of
America ("ALCOA") and RMI Titanium Company, have been named in a number of
lawsuits arising out of the crash of a DC-10 aircraft in Iowa on July 19, 1989.
TIMET understands the National Transportation Safety Board ("NTSB") determined
the probable cause of the crash to be limitations in UAL's inspection and
quality control programs that resulted in UAL's failure to locate a fatigue
crack in a disc in one of the aircraft's engines, manufactured by ALCOA and
General Electric, which disc failed prior to the incident. Early in the
investigation, the NTSB preliminarily identified TIMET as the supplier of the
titanium which ALCOA and General Electric used to manufacture the disc. In its
final report, however, the NTSB drew no conclusion as to the identity of the
supplier of the titanium used to manufacture the disc. TIMET believes, based
upon subsequent metallurgical testing carried out under the supervision of the
NTSB, that the titanium in the disc was not supplied by TIMET but rather by one
of TIMET's competitors in the titanium industry, but that the source of such
material cannot be determined with certainty.
The majority of the cases naming TIMET have been settled without
payment by TIMET to date (although the possibility of a future claim for
contribution by one or more other defendants exists with respect to certain of
such cases). In approximately 15 other cases, TIMET was granted summary
judgment, primarily on the basis that plaintiffs could not adequately establish
the source of the titanium metal used to manufacture the disc. The balance of
approximately 25 cases, which were pending in Circuit Court in Cook County,
Illinois, were dismissed by plaintiffs in early 1993 upon their motion with the
right to refile such cases within one year of dismissal. TIMET believes
plaintiffs dismissed these cases in order to avoid certain limitations on
discovery imposed by the trial court. Given the uncertainty over whether it
would be named as a defendant in any refiled cases, TIMET, along with certain
other defendants, appealed the trial court's decision to permit dismissal. The
parties are currently awaiting the decision of the appellate court.
Plaintiffs in the dismissed cases have since refiled those actions in
the same court and recently amended the complaint in the new cases to join
TIMET and others as defendants. (Joseph Trombello, et. al. v. McDonnell Douglas
Corp., et. al., Circuit Court, Cook County, Illinois, Case No. 93 L 4325).
TIMET has filed a motion to quash in the new cases on the basis that plaintiffs
lack personal jurisdiction over TIMET in Illinois.
TIMET maintains substantial general liability insurance coverage
against claims of this nature and TIMET's insurance carrier has assumed TIMET's
defense in the litigation. TIMET's insurance carrier has notified TIMET of its
belief
F-28
29
that the laws of certain states may prohibit it from insuring TIMET against
liability for punitive damages, if any, which TIMET may incur in this matter.
TIMET has secured waivers of claims for punitive damages against it in
substantially all of the remaining cases in which TIMET is named (including the
dismissed cases now on appeal) in return for a waiver of certain jurisdictional
objections by TIMET in such cases. The complaints in the refiled cases do not
currently seek punitive damages. Based upon the information which TIMET has
obtained to date, the Company does not believe that TIMET's ultimate liability
in this matter, if any, will exceed its applicable insurance coverage.
In 1993, TIMET discovered an anomaly in certain alloyed titanium
material manufactured by the Company for shipment to a jet engine manufacturer,
resulting from tungsten-contaminated master alloy sold to TIMET by a
third-party vendor and used as an alloying addition to this titanium material.
The engine manufacturer has taken the precaution of requiring the inspection,
and, in certain cases, the remelting, reprocessing, and reinspection, of all
titanium material that might have been manufactured using potentially
contaminated master alloy from this vendor (which also includes titanium
produced by another major U.S. titanium manufacturer that purchased master
alloy from the same supplier). Certain of this titanium material was still in
the form of intermediate stock, while other material had already been
fabricated into finished parts, some of which had been installed in military
jet aircraft engines. The investigation has eliminated from concern any such
titanium that had been subjected to hearth melting at some stage in the process
owing to its superior ability over vacuum arc melting alone to remove or
disperse tungsten particles from molten titanium.
TIMET may incur additional out-of-pocket expenses in connection with
this on-going investigation, either directly or indirectly through a claim for
reimbursement by the engine manufacturer (although no such claim has been made
to date). In this regard, TIMET accrued $.6 million in 1993 for anticipated
out-of-pocket expenses in connection with the reprocessing of material;
however, TIMET believes that any such costs, along with other liability for
costs or damages incurred by TIMET and its customers in this matter should
ultimately rest with the supplier of the defective master alloy. TIMET
maintains substantial general liability insurance coverage against claims of
this nature that it currently believes would cover most of any such claims in
the event it were unable to recover from the master alloy supplier.
The Company is involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business. The
Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.
NL Industries
Lead pigment litigation. Since 1987, NL, other past manufacturers of
lead pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury and property damage allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
large United States cities or their public housing authorities. These legal
proceedings seek recovery under a variety of theories, including negligent
product design, failure to warn, breach of warranty, conspiracy/concert of
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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 understands that NL believes that these actions are
without merit, intends to continue to deny all allegations of wrongdoing and
liability and to defend all actions vigorously. Considering NL's previous
involvement in the lead and lead pigment businesses, there can be no assurance
that additional litigation similar to that currently pending will not be filed.
Environmental matters and litigation. Some of NL's current and former
facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or of investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, NL has been
named a potentially responsible party ("PRP") pursuant to 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. EPA's Superfund National Priorities List. These actions seek cleanup cost
and/or damages for personal injury or property damage. While NL may be jointly
and severally liable for such costs, in most cases, it is only one of a number
of PRP's who are also jointly and severally liable. In addition, NL is a party
to a number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims. At December 31, 1993, NL had accrued $70 million in
respect of those environmental claims which are reasonably estimable. It is not
possible to estimate the range of costs for certain sites. NL has estimated
that the upper end of the range of reasonably possible costs to NL for sites
for which it is possible to estimate costs is approximately $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 clean-up costs or allocation of such
costs among PRP's, or a determination that NL is potentially responsible for
the release of hazardous substances at other sites, could result in
expenditures in excess of amounts currently estimated by NL to be required for
such matters. Further, there can be no assurance that additional environmental
matters will not arise in the future.
Other litigation. In February 1994, NL settled its lawsuit against
Lockheed Corporation and its directors. The litigation arose out of NL's
claims, among other things, that Lockheed had violated federal securities laws
by making false and misleading public statements about its employee stock
ownership plan. The jury concluded in a December 1992 verdict that Lockheed
violated the federal securities law and awarded NL $30 million, which gain
contingency was not recorded as income by NL at the time. Both companies
appealed. Under terms of the 1994 settlement, Lockheed made a $27 million cash
payment to NL, resulting in net proceeds to NL of approximately $20 million.
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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 NL,
and NL 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 United States Department of Energy (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. The court has denied the plaintiffs' motion to
vacate the verdict, and has 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 understands that NL believes that, consistent with a July 1987 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, and, therefore, that the resolution of the
Day matter is not expected to have a material adverse impact on NL. 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.
NL is involved in various other environmental, contractual, product
liability and other claims and disputes incidental to its present and former
businesses. The Company understands that NL currently believes the disposition
of all claims and disputes, individually or in the aggregate, should not have a
material adverse effect on NL's consolidated financial position, results of
operations or liquidity.
Environmental matters
Tremont and consolidated subsidiaries. The Company's operations are
governed by various federal, state, local and foreign environmental laws and
regulations. The Company's policy is to comply with environmental laws and
regulations at all of its plants and to continually strive to improve
environmental performance. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory
enforcement under various statutes, resolution of which typically involves the
establishment of compliance programs. Occasionally, resolution of these matters
may result in the payment of penalties, but to date such penalties have not
involved amounts having a material adverse effect on the Company. The Company
incurred capital expenditures for environmental protection and compliance of
$.7 million in 1991, $1.2 million in 1992, $.5 million in 1993 and its capital
budget provides for such expenditures of less than $1 million in 1994. However,
the imposition of more strict standards or requirements under environmental
laws and resolutions could result in expenditures in excess of amounts
currently estimated to be required for such matters.
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TIMET owns approximately 32% of the outstanding common stock of Basic
Investments, Inc. ("BII"), whose subsidiaries, including Basic Management, Inc.
("BMI"), provide utility services, and own property (the "BMI Complex")
adjacent to TIMET's plant in Henderson, Nevada. The other owners of BII, Kerr
McGee Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali
Company, Inc. (successor to Stauffer Chemical Company), also operate facilities
in the BMI Complex (collectively, the "BMI Companies"). Each of such companies,
along with certain other companies who previously operated facilities in the
BMI Complex, have executed an agreement with the Nevada Division of
Environmental Protection ("NDEP") providing for a phased assessment of the
environmental condition of the BMI Complex and each of the individual company
sites. Phase I reports have been submitted to NDEP. Negotiations with NDEP and
among the BMI Companies over the scope of any necessary sampling and analysis,
and the allocation of the costs therefore, are ongoing at this time. While no
determination has been made with respect to the need for, or scope of, any
remediation of this site, there can be no assurance that TIMET will not incur
some liability for any remediation costs which may result.
NL Industries. In addition to litigation referred to above, certain
information relating to regulatory and environmental matters pertaining to NL
is included in Item 1 - "Business - Unconsolidated Affiliate - NL Industries"
of this Annual Report on Form 10-K.
Concentrations of credit risk
A majority of TIMET's sales are to customers in the aerospace industry
(including airframe and engine construction). Sales to such customers, most of
whose operations are based principally in the United States, accounted for 60%
of TIMET's net sales in 1991 and 1992 and 50% in 1993. TIMET's ten largest
customers accounted for slightly less than 40% of TIMET's sales in each of the
past three years. Such customers accounted for approximately 30% of TIMET's
accounts receivable at December 31, 1993.
Income taxes
NL is undergoing examination of certain of its income tax returns in
various U.S. and non-U.S. jurisdictions, including Germany, and tax authorities
have or may propose tax deficiencies. The Company understands that NL believes
that it has adequate accruals for additional income taxes and related interest
expense which may ultimately result from such examinations and believes that
the ultimate disposition of all such examinations should not have a material
adverse effect on its consolidated financial position, results of operations or
liquidity.
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Note 17 -- Quarterly results of operations (unaudited):
Quarter ended
------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------
(In millions, except per share data)
Year ended December 31, 1993
Net sales $ 39.6 $ 39.7 $ 34.1 $ 37.8
Operating income (loss) (1.6) .3 (10.5) (4.9)
Loss from continuing operations $ (34.2) $ (2.0) $ (12.3) $ (11.6)
Discontinued operations .1 .2 7.2 -
Extraordinary item - - - (5.0)
------- ------- ------- -------
Net loss $ (34.1) $ (1.8) $ (5.1) $ (16.6)
======= ======= ======= =======
Income (loss) per common share:
Continuing operations $ (4.64) $ (.28) $ (1.68) $ (1.58)
Discontinued operations .01 .03 .99 -
Extraordinary item - - - (.68)
------- ------- ------- --------
Net loss $ (4.63) $ (.25) $ (.69) $ (2.26)
======= ======= ======= =======
Year ended December 31, 1992
Net sales $ 32.5 $ 37.6 $ 39.1 $ 44.7
Operating loss (3.9) (3.1) (2.5) (.2)
Loss from continuing operations $ (6.6) $ (7.5) $ (7.0) $ (12.9)
Discontinued operations .3 .3 .6 (.8)
Cumulative effect of changes
in accounting principles (31.9) - - -
------- ------- ------- -------
Net loss $ (38.2) $ (7.2) $ (6.4) $ (13.7)
======= ======= ======= =======
Income (loss) per common share:
Continuing operations $ (.91) $ (1.01) $ (.96) $ (1.76)
Discontinued operations .04 .04 .09 (.11)
Cumulative effect of changes
in accounting principles (4.34) - - -
------- ------- ------- -------
Net loss $ (5.21) $ (.97) $ (.87) $ (1.87)
======= ======= ======= =======
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