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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock ($.125 par value) New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 22, 1999, 51,826,139 shares of common stock were outstanding. The
aggregate market value of the 11,475,208 shares of voting stock held by
nonaffiliates as of such date approximated $107 million.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Forward-Looking Information.
The statements contained in this Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found (i) under the captions "Kronos-Industry," "Kronos-Products and
operations," "Kronos-Manufacturing process and raw materials,"
"Kronos-Competition," "Rheox-discontinued operations," "Patents and Trademarks,"
"Foreign Operations," and "Regulatory and Environmental Matters," all contained
in Item 1. Business, (ii) under the captions "Lead pigment litigation" and
"Environmental matters and litigation," both contained in Item 3. Legal
Proceedings, (iii) under the captions "Results of Operations" and "Liquidity and
Capital Resources," both contained in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations, and (iv) under the
captions "Currency exchange rates," "Marketable equity security prices," and
"Other," all contained in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk, are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "should," "anticipates," "expects," or
comparable terminology or by discussions of strategy. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements involve risks and uncertainties, including, but not
limited to, the cyclicality of the titanium dioxide industry, global economic
conditions, global productive capacity, changes in product pricing, "Year 2000"
issues, and other risks and uncertainties included in the Company's filings with
the Securities and Exchange Commission. Should one or more of these risks
materialize (or the consequences of such a development worsen), or should the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected. The Company assumes no duty to update any
forward-looking statements.
PART I
ITEM 1. BUSINESS
General
NL Industries, Inc., organized as a New Jersey corporation in 1891,
conducts its continuing operations through its principal wholly-owned
subsidiary, Kronos, Inc. Kronos is the world's fourth largest producer of
titanium dioxide pigments ("TiO2") with an estimated 11% share of worldwide TiO2
sales volume in 1998. Approximately one-half of Kronos' 1998 sales volume was in
Europe, where Kronos is the second largest producer of TiO2.
The Company's objective is to maximize total shareholder returns by
focusing on (i) acquiring additional TiO2 production capacity, (ii) investing in
certain cost effective debottlenecking projects to increase TiO2 production
capacity and efficiency, (iii) controlling costs, (iv) enhancing its capital
structure and (v) considering mergers or acquisitions within the chemical
industry.
Kronos
Industry
Titanium dioxide pigments are chemical products used for imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics, paper, fibers and ceramics. TiO2 is considered a "quality-of-life"
product with demand affected by gross domestic product in various regions of the
world.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact the Company's earnings and
operating cash flows. The Company's average TiO2 selling prices increased during
the first three quarters of 1998, continuing the upturn in prices that began in
the second quarter of 1997. Industry-wide demand for TiO2 declined in 1998, with
second-half 1998 demand lower than first-half 1998 demand. Kronos' 1998 sales
volume decreased 4% from its record sales volume in 1997 reflecting lower sales
volume in Asia and Latin America. Kronos' European sales volume in the second
half of 1998 was lower than the first half of 1998. Kronos expects industry
demand in 1999 will be relatively unchanged from 1998, but this will depend upon
global economic conditions. Prices in the fourth quarter of 1998 were even with
prices in the third quarter of 1998 and the outlook for prices in 1999 is
uncertain. The Company's expectations as to the future prospects of the TiO2
industry and prices are based upon a number of factors beyond the Company's
control, including continued worldwide growth of gross domestic product,
competition in the market place, unexpected or earlier-than-expected capacity
additions and technological advances. If actual developments differ from the
Company's expectations, industry and Company performance could be unfavorably
affected.
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Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 12% share of North American TiO2 sales volume. Per capita consumption
of TiO2 in the United States and Western Europe far exceeds that in other areas
of the world and these regions are expected to continue to be the largest
consumers of TiO2. Significant regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these countries
develop to the point where quality-of-life products, including TiO2, are in
greater demand. Kronos believes that, due to its strong presence in Western
Europe, it is well positioned to participate in growth in consumption of TiO2 in
Eastern Europe. Geographic segment information is contained in Note 3 to the
Consolidated Financial Statements.
Products and operations
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of Kronos' markets. Generally, extenders are
used to reduce to some extent the utilization of higher-cost TiO2. The use of
extenders has not significantly changed anticipated TiO2 consumption over the
past decade because extenders generally have, to date, failed to match the
performance characteristics of TiO2. As a result, the Company believes that the
use of extenders will not materially alter the growth of the TiO2 business in
the foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos and Titanox trademarks, which provide a variety of performance properties
to meet customers' specific requirements. Kronos' major customers include
domestic and international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
North America. Kronos' international operations are conducted through Kronos
International, Inc., a Germany-based holding company formed in 1989 to manage
and coordinate the Company's manufacturing operations in Germany, Canada,
Belgium and Norway, and its sales and marketing activities in over 100 countries
worldwide. Kronos and its predecessors have produced and marketed TiO2 in North
America and Europe for over 70 years. As a result, Kronos believes that it has
developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, approximately one-half of Kronos' 1998 TiO2 sales were to Europe, with
37% to North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process described below), and
the manufacture and sale of iron-based water treatment chemicals (derived from
co-products of the pigment production processes). Water treatment chemicals are
used as treatment and conditioning agents for industrial effluents and municipal
wastewater, and in the manufacture of iron pigments.
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Manufacturing process and raw materials
TiO2 is manufactured by Kronos using both the chloride process and the
sulfate process. Approximately two-thirds of Kronos' current production capacity
is based on its chloride process which generates less waste than the sulfate
process. Although most end-use applications can use pigments produced by either
process, chloride-process pigments are generally preferred in certain coatings
and plastics applications, and sulfate-process pigments are generally preferred
for certain paper, fibers and ceramics applications. Due to environmental
factors and customer considerations, the proportion of TiO2 industry sales
represented by chloride-process pigments has increased relative to
sulfate-process pigments in the past few years, and chloride-process production
facilities in 1998 represented almost 60% of industry capacity.
Kronos produced a record 434,000 metric tons of TiO2 in 1998, compared to
the previous record of 408,000 metric tons produced in 1997 and 373,000 metric
tons in 1996. Kronos maintained near full capacity production rates throughout
1997 and 1998 in response to strong demand in 1997 and early 1998. Kronos' $36
million debottlenecking expansion of its Leverkusen, Germany chloride-process
plant increased annual production capacity by approximately 20,000 metric tons
in 1997. Kronos believes its current annual attainable production capacity is
approximately 440,000 metric tons, including its one-half interest in the joint
venture-owned Louisiana plant (see "TiO2 manufacturing joint venture").
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from beach sand ilmenite from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa) under a long-term supply
contract that expires at the end of 2000. Natural rutile ore, another chloride
feedstock, is purchased primarily from RGC Mineral Sands Limited (Australia), a
wholly-owned subsidiary of Westralian Sands Limited (Australia), under a
long-term supply contract that also expires at the end of 2000. The Company does
not expect to encounter difficulties obtaining long-term extensions to existing
supply contracts prior to the expiration of the contracts. Raw materials
purchased under these contracts and extensions thereof are expected to meet
Kronos' chloride feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of
sulfate-process pigments, Kronos operates a rock ilmenite mine in Norway which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 1998. For its Canadian plant, Kronos also purchases sulfate grade slag
from
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Q.I.T.-Fer et Titane Inc. under a long-term supply contract which expires in
2002.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
TiO2 manufacturing joint venture
Subsidiaries of Kronos and Tioxide Group, Ltd. ("Tioxide"), a wholly-owned
subsidiary of Imperial Chemicals Industries plc ("ICI"), each own a 50%-interest
in a manufacturing joint venture, Louisiana Pigment Company ("LPC"). LPC owns
and operates a chloride-process TiO2 plant located in Lake Charles, Louisiana.
Production from the plant is shared equally by Kronos and Tioxide (the
"Partners") pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
The manufacturing joint venture is intended to be operated on a break-even
basis and, accordingly, Kronos' transfer price for its share of TiO2 produced is
equal to its share of the joint venture's production costs and interest expense,
if any. Kronos' share of the production costs are reported as cost of sales as
the related TiO2 acquired from the joint venture is sold, and its share of the
joint venture's interest expense is reported as a component of interest expense.
Competition
The TiO2 industry is highly competitive. During the early 1990s, supply of
TiO2 exceeded demand, primarily due to new chloride-process capacity coming
on-stream. Relative supply/demand relationships, which had a favorable impact on
industry-wide prices during the late 1980s, had a negative impact during the
early-1990s. Prices improved in the mid-1990s with a mini-peak in the first half
of 1995. Prices declined until the first quarter of 1997, when selling prices of
TiO2 began to increase as a result of increased demand. Sales volume in Europe
remained strong in the first half of 1998, but moderated in the second half.
Sales volume in 1998 in North America was even with 1997, while sales volume to
export markets declined, especially in Asia. Average selling prices increased
16% in 1998 versus 1997, but fourth-quarter 1998 prices were even with the third
quarter of 1998 as worldwide demand softened. Kronos expects industry demand in
1999 will be relatively unchanged from 1998, but this will depend upon global
economic conditions. As a result, the outlook for prices in 1999 is uncertain.
No assurance can be given that demand or price trends will conform to the
Company's expectations. See "Industry" for a description of certain risks and
uncertainties within the TiO2 industry.
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Capacity additions that are the result of construction of greenfield
plants in the worldwide TiO2 market require significant capital and substantial
lead time, typically three to five years in the Company's experience. No
greenfield plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors debottleneck existing plants. Based on
the factors described under the caption "Kronos-Industry" above, the Company
expects that the average annual increase in industry capacity from announced
debottlenecking projects will be less than the average annual demand growth for
TiO2 during the next three to five years.
Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
Kronos' grades and substantially all of Kronos' production are considered
commodity pigments with price generally being the most significant competitive
factor. During 1998 Kronos had an estimated 11% share of worldwide TiO2 sales
volume, and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); ICI (Tioxide); Millennium Chemicals, Inc. (Millennium Inorganic
Chemicals, Inc.) ("Millennium"); Kerr-McGee Corporation; Kemira Oy; and Ishihara
Sangyo Kaisha, Ltd. In 1998 Rhone-Poulenc sold its Thann et Mulhouse Ltd. French
TiO2 operations to Millennium. Also in 1998 Bayer AG sold approximately 80% of
its European TiO2 operations to Kerr-McGee and all of its Brazilian operations
to Millennium. Kronos' six largest competitors have estimated individual shares
of TiO2 production capacity ranging from 23% to 5%, and an estimated aggregate
74% share of worldwide TiO2 production volume. DuPont has about one-half of
total U.S. TiO2 production capacity and is Kronos' principal North American
competitor.
Rheox - discontinued operations
On January 30, 1998 the specialty chemicals business of Rheox was sold to
Elementis plc for $465 million, including $20 million attributable to a
five-year agreement by the Company not to compete in the rheological products
business. As a result of the sale, the Company has reported its Rheox operation
as discontinued operations. Following the sale of its net assets, Rheox, Inc.
was renamed NL Capital Corporation ("NLCC"). The majority of the $380 million
after-tax proceeds has been used to reduce the Company's outstanding
indebtedness.
Research and Development
The Company's expenditures for research and development and certain
technical support programs, excluding discontinued operations, have averaged
approximately $7 million annually during the past three years. Research and
development activities are conducted principally at the Leverkusen, Germany
facility. Such activities are directed primarily toward improving both the
chloride and sulfate production processes, improving product quality and
strengthening Kronos' competitive position by developing new pigment
applications.
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Patents and Trademarks
Patents held for products and production processes are believed to be
important to the Company and to the continuing business activities of Kronos.
The Company continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties.
The Company's major trademarks, including Kronos and Titanox, are
protected by registration in the United States and elsewhere with respect to
those products it manufactures and sells.
Foreign Operations
The Company's chemical businesses have operated in international markets
since the 1920s. Most of Kronos' current production capacity is located in
Europe and Canada. Approximately three-quarters of the Company's 1998
consolidated sales, excluding discontinued operations, were to non-U.S.
customers, including 10% to customers in areas other than Europe and Canada.
Sales to customers in Asia accounted for 2% of 1998's consolidated net sales.
Foreign operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
Effects of fluctuations in currency exchange rates on the Company's results of
operations are discussed in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A. "Quantitative and
Qualitative Disclosures about Market Risk."
Political and economic uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. The Company
cannot predict, however, whether events of this type in the future could have a
material effect on its operations. The Company's manufacturing and mining
operations are also subject to extensive and diverse environmental regulation in
each of the foreign countries in which they operate. See "Regulatory and
Environmental Matters."
Customer Base and Seasonality
The Company believes that neither its aggregate sales nor those of any of
its principal product groups are concentrated in or materially dependent upon
any single customer or small group of customers. Neither the Company's business
as a whole nor that of any of its principal product groups is seasonal to any
significant extent. Due in part to the increase in paint production in the
spring to meet the spring and summer painting season demand, TiO2 sales are
generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.
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Employees
As of December 31, 1998 the Company employed approximately 2,500 persons,
excluding the joint venture employees and discontinued operations, with
approximately 100 employees in the United States and approximately 2,400 at
sites outside the United States. Hourly employees in production facilities
worldwide, including the TiO2 manufacturing joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
The Company believes its labor relations are good.
Regulatory and Environmental Matters
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
The Company's U.S. manufacturing operations are governed by federal
environmental and worker health and safety laws and regulations, principally the
Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. The Company believes the Louisiana plant owned and operated by the
joint venture is in substantial compliance with applicable requirements of these
laws or compliance orders issued thereunder. Following the sale of its specialty
chemicals business, the Company has no U.S. plants other than LPC. From time to
time, the Company's facilities may be subject to environmental regulatory
enforcement under such statutes. Resolution of such matters typically involves
the establishment of compliance programs. Occasionally, resolution may result in
the payment of penalties, but to date such penalties have not involved amounts
having a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
The Company's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. The Company believes that all its
plants are in substantial compliance with applicable environmental laws.
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While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that Kronos
is in substantial compliance with agreements reached with European environmental
authorities and with an EU directive to control the effluents produced by TiO2
production facilities.
The Company has a contract with a third party to treat certain of its
Leverkusen and Nordenham, Germany sulfate-process effluents. Either party may
terminate the contract after giving four years advance notice with regard to the
Nordenham plant. Under certain circumstances, Kronos may terminate the contract
after giving six months notice with respect to treatment of effluents from the
Leverkusen plant.
In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos completed the installation of
off-gas desulfurization systems in 1997 at its Norwegian and German plants at a
cost of $30 million. The manufacturing joint venture completed the installation
of a $16 million off-gas desulfurization system at the Louisiana plant in 1996.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs are currently expected to be approximately
$13 million in 1999 and $8 million in 2000.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by the
Company, or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency's ("U.S. EPA") Superfund National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."
Principal Shareholders
At December 31, 1998 Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation, held approximately 58% and 20%, respectively, of NL's
outstanding common stock, and together they may be deemed to control NL. At
December 31, 1998 Contran and its subsidiaries held approximately 92% of Valhi's
outstanding common stock, and Valhi and other entities related to Harold C.
Simmons held approximately 53% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is the sole trustee, or by Mr. Simmons directly.
Mr. Simmons, the Chairman of the Board of NL and the Chairman of the Board and
Chief Executive Officer of Contran and Valhi and a director of Tremont, may be
deemed to control each of such companies. NL and its consolidated subsidiaries
are sometimes referred to herein collectively as the "Company."
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ITEM 2. PROPERTIES
Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec, Canada and, through the
manufacturing joint venture described above, a one-half interest in a plant in
Lake Charles, Louisiana. Certain of the Company's properties collateralize a
long-term debt agreement. The Company's Nordenham TiO2 plant has liens on it
that secure claims by the City of Leverkusen and the German federal tax
authorities and its Fredrikstad TiO2 plant has a lien on it that secures a claim
by Norwegian tax authorities, pending resolution of certain tax litigation. See
Notes 10 and 13 to the Consolidated Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Kronos is the only unrelated party so situated. Under a separate supplies
and services agreement expiring in 2011, Bayer provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and the supplies and services agreement
restrict Kronos' ability to transfer ownership or use of the Leverkusen
facility.
All of Kronos' principal production facilities described above are owned,
except for the land under the Leverkusen facility. Kronos has a governmental
concession with an unlimited term to operate its ilmenite mine in Norway.
ITEM 3. LEGAL PROCEEDINGS
Lead pigment litigation
The Company was formerly involved in the manufacture of lead pigments for
use in paint and lead-based paint. The Company has been named as a defendant or
third party defendant in various legal proceedings alleging that the Company and
other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. The Company is vigorously
defending such litigation. Considering the Company's previous involvement in the
lead pigment and lead-based paint businesses, there can be no assurance that
additional litigation, similar to that described below, will not be filed. In
addition, various legislation and administrative regulations have, from time to
time, been enacted or proposed that seek to (a) impose various obligations on
present and former manufacturers of lead pigment and lead-based paint with
respect to asserted health concerns associated with the use of such products and
(b) effectively overturn court decisions in which the Company and other pigment
manufacturers have been successful. Examples of such proposed legislation
include bills which would permit civil liability for damages on the basis of
market share, rather than requiring plaintiffs to prove that the defendant's
product caused the alleged damage. While no legislation or regulations have been
enacted to date which are expected to have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity,
the imposition of market share liability could have such an effect. The Company
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has not accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that the Company will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, the Company believes that the pending lead pigment and lead-based paint
litigation is without merit. Liability that may result, if any, cannot
reasonably be estimated.
In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against the Company,
other alleged manufacturers of lead pigment (together with the Company, the
"pigment manufacturers") and the Lead Industries Association (the "LIA") in 14
actions commenced by residents of HANO units seeking compensatory and punitive
damages for injuries allegedly caused by lead pigment. The actions, which were
pending in the Civil District Court for the Parish of Orleans, State of
Louisiana, were dismissed by the district court in 1990. Subsequently, HANO
agreed to consolidate all the cases and appealed. In March 1992 the Louisiana
Court of Appeals, Fourth Circuit, dismissed HANO's appeal as untimely with
respect to three of these cases. With respect to the other cases included in the
appeal, the court of appeals reversed the lower court decision dismissing the
cases. These cases were remanded to the District Court for further proceedings.
In November 1994 the District Court granted defendants' motion for summary
judgment in one of the remaining cases and in June 1995 the District Court
granted defendants' motion for summary judgment in several of the remaining
cases. After such grant, only two cases remain pending and have been inactive
since 1992, Hall v. HANO, et al. (No. 89-3552) and Allen V. HANO, et al. (No.
89-427) Civil District Court for the Parish of Orleans, State of Louisiana.
In June 1989 a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et
al., No. 89-4617). In December 1991 the court granted the defendants' motion to
dismiss claims alleging negligence and strict liability and denied the remainder
of the motion. In January 1992 defendants appealed the denial. The Company has
answered the remaining portions of the complaint denying all allegations of
wrongdoing. In May 1993 the Appellate Division of the Supreme Court affirmed the
denial of the motion to dismiss plaintiffs' fraud, restitution and
indemnification claims. In May 1994 the trial court granted the defendants'
motion to dismiss the plaintiffs' restitution and indemnification claims, and
plaintiffs appealed. In June 1996 the Appellate Division reversed the trial
court's dismissal of plaintiffs' restitution and indemnification claims,
reinstating those claims. Defendants' motion for summary judgment on the fraud
claim was denied in August 1995. In December 1995 defendants moved for summary
-10-
judgment on the basis that the fraud claim was time-barred. In February 1996 the
motion was denied. In July 1997 the denial of defendants' two summary judgment
motions on the fraud claim were affirmed by the Appellate Division. In December
1998 plaintiffs moved for partial summary judgment on their claims of market
share, alternative liability, enterprise liability, and concert of action. In
February 1999 claims for plaintiffs New York City and New York City Health and
Hospital Corporation dismissed with prejudice all their claims and were no
longer parties to the case. Also in February 1999 the New York City Housing
Authority dismissed with prejudice all of its claims except for claims for
damages relating to two housing projects. Briefing on the December 1998 motion
and limited discovery are proceeding.
In August 1992 the Company was served with an amended complaint in
Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
purport to represent a class of similarly situated persons throughout the State
of Ohio. The amended complaint identifies 18 other defendants who allegedly
manufactured lead products or lead-based paint, and asserts causes of action
under theories of strict liability, negligence per se, negligence, breach of
express and implied warranty, fraud, nuisance, restitution, and negligent
infliction of emotional distress. The complaint asserts several theories of
liability including joint and several, market share, enterprise and alternative
liability. In October 1992 the Company and the other defendants moved to dismiss
the complaint with prejudice. In July 1993 the court dismissed the complaint. In
December 1994 the Ohio Court of Appeals reversed the trial court dismissal and
remanded the case to the trial court. In July 1996 the trial court granted
defendants' motion to dismiss the property damage and enterprise liability
claims, but denied the remainder of the motion. Discovery and briefing is
proceeding with respect to class certification.
In November 1993 the Company was served with a complaint in Brenner, et
al. v. American Cyanamid, et al., (No. 12596-93) Supreme Court, State of New
York, Erie County alleging injuries to two children purportedly caused by lead
pigment. The complaint seeks $24 million in compensatory and $10 million in
punitive damages for alleged negligent failure to warn, strict liability, fraud
and misrepresentation, concert of action, civil conspiracy, enterprise
liability, market share liability, and alternative liability. In January 1994
the Company answered the complaint, denying liability. In June 1998 defendants
moved for partial summary judgment dismissing plaintiffs' market share and
alternative liability claims. In January 1999 the trial court granted
defendants' summary judgment motion to dismiss the alternative liability and
enterprise liability claims, but denied defendants' motion to dismiss the market
share liability claim. Discovery is proceeding.
In January 1996 the Company was served with a complaint on behalf of
individual intervenors in German, et. al. v. Federal Home Loan Mortgage Corp.,
et. al., (U.S. District Court, Southern District of New York, Civil Action No.
93 Civ. 6941 (RWS)). This alleged class action lawsuit had originally been
brought against the City of New York and other landlord defendants. The
-11-
intervenors' complaint alleges claims against the Company and other former
manufacturers of lead pigment for medical monitoring, property abatement, and
other injunctive relief, based on various causes of action, including negligent
product design, negligent failure to warn, strict liability, fraud and
misrepresentation, concert of action, civil conspiracy, enterprise liability,
market share liability, breach of express and implied warranties, and nuisance.
The intervenors purport to represent a class of children and pregnant women who
reside in New York City. In May 1996 the Company and the other former
manufacturers of lead pigments filed motions to dismiss the intervenors'
complaint. In May 1997 plaintiffs moved for class certification and defendants
moved for summary judgment. In June 1997 the Court stayed all further activity
in the case pending reconsideration of its 1995 decision permitting filing of
the complaint against the manufacturer defendants and joinder of the new
complaint with the pre-existing complaint against New York City and other
landlords. In November 1998 the court dismissed without prejudice all claims
against the Company and the other pigment manufacturer defendants, finding that
such claims were improperly joined.
In April 1997 the Company was served with a complaint in Parker v. NL
Industries, et al. (Circuit Court, Baltimore City, Maryland, No. 97085060
CC915). Plaintiff, now an adult, and his wife, seek compensatory and punitive
damages from the Company, another former manufacturer of lead paint and a local
paint retailer, based on claims of negligence, strict liability and fraud, for
plaintiff's alleged ingestion of lead paint as a child. In June 1997 the Company
answered the complaint denying liability. In February 1998 the Court dismissed
the fraud claim. In July 1998 the Court granted the Company's motion for summary
judgment on all remaining claims. Plaintiffs have appealed.
In December 1998 the Company was served with a complaint on behalf of four
children and their guardians in Sabater, et al. v. Lead Industries Association,
et al. (Supreme Court of the State of New York, County of Bronx, Index No.
25533/98). Plaintiffs purport to represent a class of all persons similarly
situated. The complaint alleges against the Company, a trade association, and
other former manufacturers of lead pigment various causes of action including
negligence, strict products liability, fraud and misrepresentation, concert of
action, civil conspiracy, enterprise liability, market share liability, breach
of warranties, nuisance, and violation of New York State's consumer protection
act. The complaint seeks damages for establishment of property abatement and
medical monitoring funds and compensatory damages for alleged injuries to
plaintiffs. Defendants filed motions to dismiss the nuisance and consumer
protection act claims in the complaint in March 1999.
The Company believes that the foregoing lead pigment actions are without
merit and intends to continue to deny all allegations of wrongdoing and
liability and to defend such actions vigorously.
The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
-12-
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in the Company's favor. In July 1991 the court granted the Company's motion for
summary judgment and ordered Commercial Union to pay the Company's reasonable
defense costs for such cases. In June 1992 the Company filed an amended
complaint in the United States District Court for the District of New Jersey
against Commercial Union seeking to recover costs incurred in defending four
additional lead pigment cases which have since been resolved in the Company's
favor. In August 1993 the court granted the Company's motion for summary
judgment and ordered Commercial Union to pay the reasonable costs of defending
those cases. In July 1994 the court entered judgment on the order requiring
Commercial Union to pay previously-incurred Company costs in defending those
cases. In September 1995 the U.S. Court of Appeals for the Third Circuit
reversed and remanded for further consideration the decision by the trial court
that Commercial Union was obligated to pay the Company's reasonable defense
costs in certain of the lead pigment cases. The trial court had made its
decision applying New Jersey law; the appeals court concluded that New York and
not New Jersey law applied and remanded the case to the trial court for a
determination under New York law. On remand from the Court of Appeals, the trial
court in April 1996 granted the Company's motion for summary judgment, finding
that Commercial Union had a duty to defend the Company in the four lead paint
cases which were the subject of the Company's second amended complaint. The
court also issued a partial ruling on Commercial Union's motion for summary
judgment in which it sought allocation of defense costs and contribution from
the Company and two other insurance carriers in connection with the three lead
paint actions on which the court had granted the Company summary judgment in
1991. The court ruled that Commercial Union is entitled to receive such
contribution from the Company and the two carriers, but reserved ruling with
respect to the relative contributions to be made by each of the parties,
including contributions by the Company that may be required with respect to
periods in which it was self-insured and contributions from one carrier which
were reinsured by a former subsidiary of the Company, the reinsurance costs of
which the Company may ultimately be required to bear. In June 1997 the Company
reached a settlement in principle with its insurers regarding allocation of
defense costs in the lead pigment cases in which reimbursement of defense costs
had been sought.
Other than granting motions for summary judgment brought by two excess
liability insurance carriers, which contended that their policies contained
absolute pollution exclusion language, and certain summary judgment motions
regarding policy periods and ruling regarding choice of law issues, the Court
has not made any final rulings on defense costs or indemnity coverage with
respect to the Company's pending environmental litigation. Nor has the Court
made any final ruling on indemnity coverage in the lead pigment litigation. No
trial dates have been set. Other than rulings to date, the issue of whether
insurance coverage for defense costs or indemnity or both will be found to exist
depends upon a variety of factors, and there can be no assurance that such
insurance coverage will exist in other cases. The Company has not considered any
potential insurance recoveries for lead pigment or environmental litigation in
determining related accruals.
-13-
Environmental matters and litigation
The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 75 governmental and private
actions associated with waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, or its
subsidiaries, or their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage, and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
The extent of CERCLA liability cannot accurately be determined until the
Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 1998 the Company had accrued $126
million for those environmental matters which are reasonably estimable. The
Company determines the amount of accrual on a quarterly basis by analyzing and
estimating the range of possible costs to the Company. Such costs include, among
other things, remedial investigations, monitoring, studies, cleanup, removal and
remediation. It is not possible to estimate the range of costs for certain
sites. The Company has estimated that the upper end of the range of reasonably
possible costs to the Company for sites for which it is possible to estimate
costs is approximately $160 million. The Company's estimate of such liability
has not been discounted to present value and the Company has not recognized any
potential insurance recoveries. No assurance can be given that actual costs will
not exceed either accrued amounts or the upper end of the range for sites for
which estimates have been made, and no assurance can be given that costs will
not be incurred with respect to sites as to which no estimate presently can be
made. The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that
the Company is potentially responsible for the release of hazardous substances
at other sites could result in expenditures in excess of amounts currently
estimated by the Company to be required for such matters. Furthermore, there can
be no assurance that additional environmental matters will not arise in the
future. More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below.
In July 1991 the United States filed an action in the U.S. District Court
for the Southern District of Illinois against the Company and others (United
States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with
respect to the Granite City, Illinois lead smelter formerly owned by the
Company. The complaint seeks injunctive relief to compel the defendants to
comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties
-14-
did not implement the order, believing that the remedy selected by the U.S. EPA
was invalid, arbitrary, capricious and was not selected in accordance with law.
The complaint also seeks recovery of past costs and a declaration that the
defendants are liable for future costs. Although the action was filed against
the Company and ten other defendants, there are 330 other PRPs who have been
notified by the U.S. EPA. Some of those notified were also respondents to the
administrative order. In February 1992 the court entered a case management order
directing that the remedy issues be tried before the liability aspects are
presented. In September 1995 the U.S. EPA released its amended decision
selecting cleanup remedies for the Granite City site. The Company presently is
challenging portions of the U.S. EPA's selection of the remedy. In September
1997 the U.S. EPA informed the Company that past and future cleanup costs are
estimated to total approximately $63.5 million. There is currently no allocation
among the PRPs for these costs. The Company has been informed that the U.S. EPA
has reached an agreement in principle with certain other PRPs settling their
liabilities with respect to the site for approximately 50% of the site costs.
The Company is negotiating with the U.S. EPA to settle its liability.
At the Pedricktown, New Jersey lead smelter site formerly owned by the
Company the U.S. EPA has divided the site into two operable units. Operable unit
one addresses contaminated ground water, surface water, soils and stream
sediments. In July 1994 the U.S. EPA issued the record of decision for operable
unit one. The U.S. EPA estimates the cost to complete operable unit one is $18.7
million. In May 1996 certain PRPs, but not the Company, entered into an
administrative consent order with the U.S. EPA to perform the remedial design
phase of operable unit one. The U.S. EPA issued an order with respect to
operable unit two in March 1992 to the Company and 30 other PRPs directing
immediate removal activities including the cleanup of waste, surface water and
building surfaces. The Company has complied with the order, and the work with
respect to operable unit two is completed. The Company has paid $2.5 million,
which represents approximately 50% of operable unit two costs. In June 1998 the
Company entered into a consent decree with the U.S. EPA and other PRPs to
perform the remedial action phase of operable unit one. In addition, the Company
reached an agreement in principle with certain PRPs with respect to the
Company's liability at the site to settle this matter within previously-accrued
amounts.
Having completed the RIFS at the Company's former Portland, Oregon lead
smelter site, the Company conducted predesign studies to explore the viability
of the U.S. EPA's selected remedy pursuant to a June 1989 consent decree
captioned U.S. v. NL Industries, Inc., Civ. No. 89-408, United States District
Court for the District of Oregon. Subsequent to the completion of the predesign
studies, the U.S. EPA issued notices of potential liability to approximately 20
PRPs, including the Company, directing them to perform the remedy, which was
initially estimated to cost approximately $17 million, exclusive of
administrative and overhead costs and any additional costs, for the disposition
of recycled materials from the site. In January 1992 the U.S. EPA issued
unilateral administrative orders to the Company and six other PRPs directing the
performance of the remedy. The Company and the other PRPs commenced performance
of the remedy. In August 1994, the U.S. EPA authorized the Company and the other
PRPs to cease performing most aspects of the selected remedy. In May 1997 the
U.S. EPA issued an Amended Record of Decision ("ARD") for the soils operable
unit
-15-
changing portions of the cleanup remedy selected. The ARD requires construction
of an onsite containment facility estimated to cost between $10.5 million and
$12 million, including capital costs and operating and maintenance costs. The
Company and certain other PRPs have entered into a consent decree to perform the
remedial action in the ARD. In November 1991 Gould, Inc., the current owner of
the site, filed an action, Gould, Inc. v. NL Industries, Inc., No. 91-1091,
United States District Court for the District of Oregon, against the Company for
damages for alleged fraud in the sale of the smelter, rescission of the sale,
past CERCLA response costs and a declaratory judgment allocating future response
costs and punitive damages. In February 1998 the Company and the other
defendants reached an agreement settling the litigation by agreeing to pay a
portion of future costs, which are estimated to be within previously-accrued
amounts.
The Company and other PRPs entered into an administrative consent order
with the U.S. EPA requiring the performance of a RIFS at two sites in Cherokee
County, Kansas, where the Company and others formerly mined lead and zinc. A
former subsidiary of the Company mined at the Baxter Springs subsite, where it
is the largest viable PRP. In August 1997 the U.S. EPA issued the record of
decision for the Baxter Springs and Treece subsites. The U.S. EPA has estimated
that the selected remedy will cost an aggregate of approximately $7.1 million
for both subsites ($5.4 million for the Baxter Springs subsite). The Company is
negotiating with the U.S. EPA to resolve its liability at the Baxter Springs
subsite. In addition, the Company received a notice in March 1998 from the U.S.
EPA that it may be a PRP in three additional subsites in Cherokee County.
In January 1989 the State of Illinois brought an action against the
Company and several other subsequent owners and operators of the former plant in
Chicago, Illinois (People of the State of Illinois v. NL Industries, et al., No.
88-CH- 11618, Circuit Court, Cook County). The complaint seeks recovery of $2.3
million of cleanup costs expended by the Illinois Environmental Protection
Agency, plus penalties and treble damages. In August 1997 the trial court
dismissed the case. In June 1998 the Illinois appellate court affirmed. In
October 1998 the Supreme Court of Illinois declined the State's petition to
review the decisions in favor of the Company. The U.S. EPA has issued an order
to the Company to perform a removal action at the Company's former facility
involved in the State of Illinois case. The Company is complying with the order.
Residents in the vicinity of the Company's former Philadelphia lead
chemicals plant commenced a class action allegedly comprised of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
from the plant. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No. 87-
4420, Court of Common Pleas, Philadelphia County. The complaint sought
compensatory and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence, strict
liability, and nuisance. A class was certified to include persons who resided,
owned or rented property, or who work or have worked within up to approximately
three-quarters of a mile from the plant from 1960 through the present. The
Company answered the complaint, denying liability. In December 1994 the jury
returned a verdict in favor of the Company. Plaintiffs appealed to the
Pennsylvania Superior Court and in September 1996 the Superior Court affirmed
the
-16-
judgment in favor of the Company. In December 1996 plaintiffs filed a petition
for allowance of appeal to the Pennsylvania Supreme Court, which was declined.
Residents also filed consolidated actions in the United States District Court
for the Eastern District of Pennsylvania, Shinozaki v. Anzon, Inc. and Wagner
and Antczak v. Anzon and NL Industries, Inc. Nos. 87-3441, 87-3502, 87-4137 and
87- 5150. The consolidated action is a putative class action seeking CERCLA
response costs, including cleanup and medical monitoring, declaratory and
injunctive relief and civil penalties for alleged violations of the RCRA, and
also asserting pendent common law claims for strict liability, trespass,
nuisance and punitive damages. The court dismissed the common law claims without
prejudice, dismissed two of the three RCRA claims as against the Company with
prejudice, and stayed the case pending the outcome of the state court
litigation.
At a municipal and industrial waste disposal site in Batavia, New York,
the Company and approximately 50 others have been identified as PRPs. The U.S.
EPA has divided the site into two operable units. Pursuant to an administrative
consent order entered into with the U.S. EPA, the Company conducted a RIFS for
operable unit one, the closure of the industrial waste disposal section of the
landfill. The Company's RIFS costs were approximately $2 million. In June 1995
the U.S. EPA issued the record of decision for operable unit one, which is
estimated by the U.S. EPA to cost approximately $12.3 million. In September 1995
the U.S. EPA and certain PRPs entered into an administrative order on consent
for the remedial design phase of the remedy for operable unit one and the design
phase is proceeding. The Company and other PRPs entered into an interim cost
sharing arrangement for this phase of work. The Company and the other PRPs have
completed the work comprising operable unit two (the extension of the municipal
water supply) with the exception of annual operation and maintenance. The U.S.
EPA also has claimed it has incurred approximately $2.4 million in past costs
from the PRPs. The Company and the other PRPs have submitted to a nonbinding
allocation process, as a result of which the Company was assigned a 30% share of
future site liability.
See Item 1. "Business - Regulatory and Environmental Matters."
Other litigation
The Company has been named as a defendant in various lawsuits in a variety
of jurisdictions alleging personal injuries as a result of occupational exposure
to asbestos, silica and/or mixed dust in connection with formerly-owned
operations. Various of these actions remain pending. One such case, In re:
Monongalia Mass II, (Circuit Court of Monongalia County, West Virginia, Nos. 93-
C-362, et al.), involves the consolidated claims of approximately 3,100
plaintiffs. The Company has reached an agreement to settle this case.
Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court of Putnam
County, West Virginia, No. 95-C-261). Twelve plaintiffs brought this action
against the Company and various other defendants in July 1995. Plaintiffs allege
that they were employed by demolition and disposal contractors, and claim that
as a result of the defendants' negligence they were exposed to asbestos during
demolition and disposal of materials from defendants' premises in West Virginia.
-17-
Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive damages totaling $55.5 million. An agreement has been
reached settling this matter, with the Company being indemnified by another
party.
In March 1997 the Company was served with a complaint in Ernest Hughes, et
al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the
Fifth Judicial District Court of Cass County, Texas, on behalf of approximately
4,000 plaintiffs and their spouses alleging injury due to exposure to asbestos
and seeking compensatory and punitive damages. The Company has filed an answer
denying the material allegations. The case has been stayed, and the plaintiffs
have refiled their cases in Ohio. The Company is a defendant in various asbestos
cases pending in Ohio on behalf of approximately 8,800 personal injury
claimants. Plaintiffs have agreed to voluntarily dismiss the Company without
prejudice from approximately 7,500 of such claims.
In February 1999 the Company was served with a complaint in Cosey, et al.
v. Bullard, et al., No. 95-0069, filed in the Circuit Court of Jefferson County,
Mississippi, on behalf of approximately 1,600 plaintiffs alleging injury due to
exposure to asbestos and silica and seeking compensatory and punitive damages.
The Company intends to file an answer denying the material allegations of the
complaint.
The Company is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its present and
former businesses, and the disposition of past properties and former businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
-18-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
NL's common stock is listed and traded on the New York Stock Exchange and
the Pacific Exchange under the symbol "NL." As of March 22, 1999 there were
approximately 8,000 holders of record of NL common stock. The following table
sets forth the high and low sales prices for NL common stock on the New York
Stock Exchange ("NYSE") Composite Tape. On March 22, 1999 the closing price of
NL common stock according to the NYSE Composite Tape was $9-5/16.
Dividends
High Low Declared
--------- --------- ---------
Year ended December 31, 1997:
First quarter $ 13-1/8 $ 9-3/4 $ -
Second quarter 14-11/16 9-1/8 -
Third quarter 16-1/16 12-1/4 -
Fourth quarter 17-5/16 12-1/2 -
Year ended December 31, 1998:
First quarter $ 19-3/8 $13-11/16 $ -
Second quarter 23 17 .03
Third quarter 27-1/16 19 .03
Fourth quarter 19-3/8 12-3/4 .03
The Company's Senior Notes generally limit the ability of the Company to
pay dividends to 50% of consolidated net income, as defined in the indenture
governing the Senior Notes, since October 1993. At December 31, 1998 $47 million
was available for payment of dividends. The Company did not pay dividends in
1997. The Company reinstated a regular quarterly dividend in June 1998 and
subsequently paid three quarterly $.03 per share cash dividends in 1998. On
February 10, 1999, the Company's Board of Directors increased the regular
quarterly dividend to $.035 per share and declared a dividend to shareholders of
record as of March 17, 1999 to be paid on March 31, 1999. The declaration and
payment of future dividends is discretionary, and the amount, if any, will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Company's
Board of Directors.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Certain amounts have been reclassified to conform with the
current year's consolidated financial statement presentation.
Years ended December 31,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ----------
(In millions, except per share amounts)
INCOME STATEMENT DATA:
Net sales .............. $ 770.1 $ 894.1 $ 851.2 $ 837.2 $ 894.7
Operating income ....... 80.5 161.2 71.6 82.5 171.2
Income (loss) from
continuing operations . (38.9) 66.5 (11.7) (29.9) 89.9
Net income (loss) ...... (24.0) 85.6 10.8 (9.5) 366.7
Earnings per share:
Basic:
Income (loss) from
continuing
operations ........ $ (.76)$ 1.30 $ (.23) $ (.58) $ 1.75
Net income (loss) .. (.47) 1.68 .21 (.19) 7.13
Diluted:
Income (loss) from
continuing
operations ........ $ (.76)$ 1.29 $ (.23) $ (.58) $ 1.73
Net income (loss) .. (.47) 1.66 .21 (.19) 7.05
Cash dividends ......... $ - $ - $ .30 $ - $ .09
BALANCE SHEET DATA at
year end:
Cash, cash equivalents,
current marketable
securities and current
restricted cash
equivalents ........... $ 156.3 $ 141.3 $ 114.1 $ 106.1 $ 163.1
Current assets ......... 486.4 551.1 500.2 454.5 546.1
Total assets ........... 1,162.4 1,271.7 1,221.4 1,098.2 1,155.0
Current liabilities .... 244.9 302.4 290.3 276.4 310.0
Long-term debt including
current maturities .... 789.6 783.7 829.0 744.2 357.6
Shareholders' equity
(deficit) ............. (293.1) (209.4) (203.5) (222.3) 152.3
CASH FLOW DATA:
Operating activities ... $ 181.8 $ 71.6 $ 16.5 $ 89.2 $ 45.1
Investing activities ... (30.4) (56.7) (68.4) (11.1) 417.3
Financing activities ... (132.1) (3.3) 26.6 (82.6) (396.2)
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA (1) ............. $ 66.3 $ 170.3 $ 90.7 $ 67.6 $ 187.4
-20-
Years ended December 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(In millions, except per share amounts)
OTHER DATA:
Net debt at year end (2)... $ 633.4 $ 681.6 $ 740.7 $ 652.0 $ 230.9
Interest expense, net (3).. 71.5 69.5 64.6 63.0 43.1
Cash interest expense,
net (4) .................. 54.5 50.9 44.2 39.9 24.8
Capital expenditures ...... 34.6 60.7 64.2 28.2 22.4
TiO2 sales volumes
(metric tons in
thousands) ............... 376 366 388 427 408
Average TiO2 selling
price index (1983=100) ... 131 152 138 132 153
(1) EBITDA, as presented, represents operating income less corporate expense,
net, plus depreciation, depletion and amortization. EBITDA is presented as
a supplement to the Company's operating income and cash flow from
operations because the Company believes that EBITDA is a widely accepted
financial indicator of cash flows and the ability to service debt. EBITDA
should not be considered as an alternative to, or more meaningful than,
operating income or net income determined under generally accepted
accounting principles ("GAAP") as an indicator of the Company's operating
performance, or cash flows from operating, investing and financing
activities determined under GAAP as a measure of liquidity. EBITDA is not
intended to depict funds available for reinvestment or other discretionary
uses, as the Company has significant debt requirements and other
commitments. Investors should consider certain factors in evaluating the
Company's EBITDA, including interest expense, income taxes, noncash income
and expense items, changes in assets and liabilities, capital
expenditures, investments in joint ventures and other items included in
GAAP cash flows as well as future debt repayment requirements and other
commitments, including those described in Notes 10, 13 and 17 to the
Consolidated Financial Statements. The Company believes that the trend of
its EBITDA is consistent with the trend of its GAAP operating income,
except in 1997 when EBITDA decreased and operating income increased from
1996 amounts due to a $30 million noncash charge related to the Company's
adoption of SOP 96-1, "Environmental Remediation Liabilities." See
"Management's Discussion and Analysis" for a discussion of operating
income and cash flows during the last three years and the Company's
outlook. EBITDA as a measure of a company's performance may not be
comparable to other companies, unless substantially all companies and
analysts determine EBITDA as computed and presented herein.
(2) Net debt represents notes payable and long-term debt less cash, cash
equivalents, current marketable securities and current restricted cash
equivalents.
(3) Interest expense, net represents interest expense less general corporate
interest and dividend income.
-21-
(4) Cash interest expense, net represents interest expense, net less noncash
interest expense (deferred interest expense on the Senior Secured Discount
Notes and amortization of deferred financing costs).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company's continuing operations are conducted by Kronos in the TiO2
business segment. As discussed below, average TiO2 selling prices declined in
1997, but increased in 1998 compared to the prior year. Kronos' operating income
and margins improved in both 1997 and 1998.
Many factors influence TiO2 pricing levels, including industry capacity,
worldwide demand growth and customer inventory levels and purchasing decisions.
Kronos believes that the TiO2 industry has long-term growth potential, as
discussed in "Item 1. Business - Kronos - Industry" and "Competition."
Net sales and operating income
Years ended December 31, % Change
-------------------------------- ----------------
1996 1997 1998 1997-96 1998-97
-------- -------- -------- ------- -------
(In millions)
Net sales - Kronos ........ $ 851.2 $ 837.2 $ 894.7 -2% +7%
Operating income - Kronos.. $ 71.6 $ 82.5 $ 171.2 +15% +107%
Percent change in TiO2:
Sales volume ............ +10% -4%
Average selling prices
(in billing currencies). -4% +16%
Kronos' operating income for 1998 more than doubled due to higher average
TiO2 selling prices, partially offset by lower sales volume and $12.9 million of
1997 income from refunds of German trade capital taxes, discussed below. In
billing currency terms, Kronos' 1998 average TiO2 selling prices were 16% higher
than in 1997. Average selling prices in the fourth quarter of 1998 were 11%
higher than the fourth quarter of 1997 and even with the third quarter of 1998.
Selling prices at the end of 1998 were 10% higher than year-end 1997 levels.
Kronos' operating income in 1997 was higher than 1996, primarily due to record
production and sales volumes and the German trade capital tax income, partially
offset by 4% lower average TiO2 selling prices.
The $12.9 million of German trade capital tax refunds received in 1997
relates to years prior to 1997 and includes interest. The German tax authorities
were required to remit refunds based on (i) recent court decisions which reduced
the trade capital tax base and (ii) prior agreements between the Company and the
German tax authorities regarding payment of disputed taxes.
-22-
Kronos' cost of sales in 1998 was lower than 1997 due to lower sales
volume. Kronos' cost of sales in 1997 was lower than 1996 due to the favorable
effects of foreign currency translation and lower unit costs, primarily due to
higher production levels, partially offset by higher sales volumes. Cost of
sales, as a percentage of net sales, decreased in 1998 primarily due to the
impact on net sales of increased average selling prices and decreased in 1997
primarily due to lower unit costs.
Kronos' selling, general and administrative expenses declined in 1998 from
the previous year due to lower distribution expenses related to lower sales
volume and favorable effects of foreign currency translation, while 1997
expenses were lower than 1996 as a result of favorable effects of foreign
currency translation and German trade capital tax refunds, partially offset by
higher distribution expenses associated with higher 1997 sales volumes.
Sales volume of 408,000 metric tons of TiO2 in 1998 was 4% lower than the
record sales volume in 1997 reflecting lower sales volume in Asia and Latin
America. Approximately one-half of Kronos' 1998 TiO2 sales, by volume, were
attributable to markets in Europe with approximately 37% attributable to North
America, approximately 2% to Asia and the balance to other regions.
Industry-wide demand was lower in the first half of 1996, Kronos believes,
due to customer destocking inventories. Kronos reduced its production rates to
manage its inventory levels, and its average capacity utilization was
approximately 95% in 1996. Demand improved in the second half of 1996, and was
strong throughout 1997 and the first half of 1998, before moderating in the
second half of 1998. Kronos expects industry demand in 1999 will be relatively
unchanged from 1998, but this will depend upon global economic conditions.
Kronos produced near full capacity in 1997 and 1998, but is curtailing
production in 1999 to a level not to exceed Kronos' expected 1999 sales volume.
Kronos' outlook for average TiO2 selling prices in 1999 is uncertain.
Notwithstanding the uncertain outlook for TiO2 prices in 1999, Kronos
anticipates its 1999 operating income will be lower than 1998 due to lower
production levels.
The Company has substantial operations and assets located outside the
United States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
translated value of the Company's foreign sales and operating costs is subject
to currency exchange rate fluctuations which may impact reported earnings and
may affect the comparability of period-to-period revenues and expenses. A
significant amount of the Company's sales are denominated in currencies other
than the U.S. dollar (64% in 1998), principally major European currencies and
the Canadian dollar. Certain purchases of raw materials, primarily
titanium-containing feedstocks, are denominated in U.S. dollars, while labor and
other production costs are primarily denominated in local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies
decreased sales by $58 million and $24 million during 1997 and 1998,
respectively, compared to the year-earlier period. Fluctuation in the value of
the U.S. dollar relative to other currencies similarly impacted the Company's
operating expenses and the net impact of currency exchange rate fluctuations on
operating income comparisons was not significant in 1997 or 1998.
-23-
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Years ended December 31, Change
------------------------- ----------------
1996 1997 1998 1997-96 1998-97
------- ------- ------- ------- -------
(In millions)
Securities earnings .......... $ 4.7 $ 5.4 $ 14.9 $ .7 $ 9.5
Corporate expenses, net ...... (17.2) (49.8) (18.3) (32.6) 31.5
Interest expense ............. (69.3) (65.8) (58.1) 3.5 7.7
------- ------- ------- ------- -------
$ (81.8) $(110.2) $ (61.5) $ (28.4) $ 48.7
======= ======= ======= ======= =======
Securities earnings fluctuate in part based upon the amount of funds
invested and yields thereon. Average funds invested in 1998 was higher than 1997
primarily due to the net proceeds from the sale of Rheox in January 1998. The
Company expects security earnings in 1999 will be lower than 1998, due to lower
average levels of funds available for investment due to the repayment of certain
of the Company's debt in 1998. Corporate expenses, net in 1998 were lower than
1997, primarily due to the $30 million noncash charge taken in 1997 related to
the Company's adoption of SOP 96-1, "Environmental Remediation Liabilities." See
Note 2 to the Consolidated Financial Statements. This charge is included in
selling, general and administrative expense for 1997 in the Company's
Consolidated Statements of Income. Excluding this charge, 1998 corporate
expenses, net were slightly lower than 1997 due to the recognition of $3.7
million of income in 1998 related to the straight-line, five-year amortization
of $20 million of deferred income received in conjunction with the sale of
Rheox, partially offset by $3.0 million of expenses in 1998 related to the
unsuccessful acquisition of certain TiO2 businesses and assets of Tioxide.
Corporate expenses, net in 1997 exceeded that of 1996, primarily due to the
aforementioned $30 million noncash charge taken in 1997.
Interest expense
Interest expense in 1998 declined compared to 1997 principally due to
prepayments of outstanding indebtedness, principally the Senior Secured Discount
Notes, the joint venture term loan and a portion of Kronos' Deutsche
mark-denominated debt. Interest expense declined in 1997 from 1996 due to lower
levels of Kronos' DM-denominated debt, partially offset by higher variable
interest rates on such debt. Assuming no significant increase in interest rates,
interest expense in 1999 is expected to be lower compared to 1998 due to lower
levels of outstanding indebtedness, including required payments on the DM term
loan.
Provision for income taxes
The principal reasons for the difference between the U.S. federal
statutory income tax rates and the Company's effective income tax rates are
explained in Note 13 to the Consolidated Financial Statements. The Company's
operations are conducted on a worldwide basis and the geographic mix of income
can significantly
-24-
impact the Company's effective income tax rate. In 1996 and 1997 the geographic
mix of income, including losses in certain jurisdictions for which no current
refund was available and recognition of a deferred tax asset was not considered
appropriate, contributed to the Company's effective tax rate varying from a
normally-expected rate. In 1998 the Company's effective tax rate varied from the
normally-expected rate due predominantly to the recognition of certain
deductible tax attributes which previously did not meet the
"more-likely-than-not" recognition criteria and the one-time effect of a refund
of German withholding taxes.
The Company's deferred income tax status at December 31, 1998 is discussed
in "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities for each of the past three years are presented below.
Years ended December 31,
------------------------------
1996 1997 1998
------- ------- --------
(In millions)
Net cash provided (used) by:
Operating activities ....................... $ 16.5 $ 89.2 $ 45.1
Investing activities ....................... (68.4) (11.1) 417.3
Financing activities ....................... 26.6 (82.6) (396.2)
------- ------- --------
Net cash provided (used) by operating,
investing and financing activities .......... $ (25.3) $ (4.5) $ 66.2
======= ======= ========
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities and
Rheox, net, in 1997 and 1998 improved from the prior year primarily due to
higher operating income.
Changes in the Company's inventories, receivables and payables (excluding
the effect of currency translation) provided cash in 1996 and 1997 and used cash
in 1998 primarily due to reductions in inventory levels in 1996 and 1997 and
increases in inventory levels in 1998. Income tax payments in 1998 as a result
of the gain on sale of Rheox and certain German income tax payments in 1996,
discussed below, significantly decreased cash flows from operating activities
for each respective year.
The Company sold the net assets of its Rheox specialty chemicals business
to Elementis plc in January 1998 for $465 million cash (before fees and
expenses), including $20 million attributable to a five-year agreement by the
Company not to compete in the rheological products business. The Company
recognized an after-tax gain of approximately $286 million on the sale of this
business segment.
The Company used a majority of the $380 million after-tax net proceeds
from the sale of Rheox to (i) prepay $118 million of the Rheox term loan, (ii)
prepay
-25-
$42 million of Kronos' tranche of the LPC joint venture term loan, (iii) make
$65 million of open-market purchases of the Company's 13% Senior Secured
Discount Notes at prices ranging from $101.25 to $105.19 per $100 of their
principal amounts, (iv) purchase $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively, pursuant to a June 1998 pro rata
tender offer to Note holders as required under the terms of the indenture, and
(v) redeem the remaining $121 million 13% Senior Secured Discount Notes on
October 15, 1998 at the redemption price of 106% of the principal amount, in
accordance with the terms of the Senior Secured Discount Notes indenture.
Borrowings in 1998 included DM 35 million ($19 million when borrowed)
under the Company's short-term non-U.S. credit facilities and DM 20 million ($11
million when borrowed) under the Company's DM revolving credit facility.
Repayments in 1998 included DM 40 million ($23 million when paid) of the DM
revolving credit facility and DM 81 million ($44 million when paid) of its DM
term loan. In 1997 the Company prepaid DM 207 million ($127 million when paid)
of its DM term loan, repaid DM 43 million ($26 million when paid) of its DM
revolving credit facility, repaid $15 million of its joint venture term loan and
repaid DM 15 million ($9 million when paid) of its short-term DM-denominated
notes payable. In 1996 the Company borrowed DM 144 million ($96 million when
borrowed) under its DM revolving credit facility. It used DM 49 million ($32
million) to fund the German tax settlement payments described below, and used
the remainder of the proceeds primarily to fund operations. Repayments of
indebtedness in 1996 included payments of $15 million on the joint venture term
loan and DM 16 million ($10 million when repaid) in payments on DM-denominated
notes payable.
The Company's capital expenditures during the past three years include an
aggregate of $38 million ($6 million in 1998) for the Company's ongoing
environmental protection and compliance programs, including German and Norwegian
off-gas desulfurization systems. The Company's estimated 1999 and 2000 capital
expenditures are $38 million and $30 million, respectively, and include $13
million and $8 million, respectively, in the area of environmental protection
and compliance.
In the last three years the Company spent $27 million ($2 million in 1998)
in capital expenditures related to its debottlenecking project at its
Leverkusen, Germany chloride-process TiO2 facility. The debottlenecking project
increased the Company's annual attainable production by approximately 20,000
metric tons in 1997, and the Company estimates its worldwide annual attainable
capacity is 440,000 metric tons. Capital expenditures of the manufacturing joint
venture and the Company's discontinued operations are not included in the
Company's capital expenditures.
At December 31, 1998 the Company had cash and cash equivalents aggregating
$155 million (17% held by non-U.S. subsidiaries) and $12 million of restricted
cash equivalents. At December 31, 1998 the Company's subsidiaries had $104
million available for borrowing under non-U.S. credit facilities. At December
31, 1998 the Company had complied with all financial covenants governing its
debt agreements.
-26-
Dividends paid during 1998 totaled $4.6 million. No dividends were paid in
1997. Dividends paid during 1996 totaled $15.3 million. At December 31, 1998 the
Company had $47 million available for payment of dividends pursuant to the
Senior Notes indenture. On February 10, 1999 the Company's Board of Directors
increased the regular quarterly dividend from $.03 per share to $.035 per share
and declared a dividend to shareholders of record as of March 17, 1999 to be
paid on March 31, 1999.
In June 1998, as a result of the settlement of a shareholder derivative
lawsuit on behalf of the Company, Valhi transferred $14.4 million in cash to the
Company, and the Company agreed to pay plaintiffs' attorneys' fees and expenses
of $3.2 million.
Based upon the Company's expectations for the TiO2 industry and
anticipated demands on the Company's cash resources as discussed herein, the
Company expects to have sufficient liquidity to meet its near-term obligations
including operations, capital expenditures and debt service. To the extent that
actual developments differ from Company's expectations, the Company's liquidity
could be adversely affected.
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including non-income tax related items and interest.
The Company previously reached an agreement with the German tax authorities and
paid certain tax deficiencies of approximately DM 44 million ($28 million when
paid), including interest, which resolved significant tax contingencies for
years through 1990. In the third quarter of 1998, the Company received a DM 14
million ($8.2 million when received) refund of 1990 German dividend withholding
taxes. The German tax authorities were required to refund such amounts based on
a 1998 German Supreme Court decision in favor of another taxpayer. The refund
resulted in a reduction of the settlement amount from DM 44 million referred to
above to DM 30 million for years through 1990. No further withholding tax
refunds are expected.
Certain other significant German tax contingencies aggregating an
estimated DM 172 million ($103 million at December 31, 1998) through 1997 remain
outstanding and are in litigation. Of these, one primary issue represents
disputed amounts aggregating DM 160 million ($96 million at December 31, 1998)
for years through 1997. The Company has received tax assessments for a
substantial portion of these amounts. No payments of tax or interest
deficiencies related to these assessments are expected until the litigation is
resolved. During 1997 a German tax court proceeding involving a tax issue
substantially the same as this issue was decided in favor of the taxpayer. The
German tax authorities appealed that decision to the German Supreme Court which
in February 1999 rendered its judgment in favor of the taxpayer. The Company
believes that the German Supreme Court's judgment should determine the outcome
of the Company's primary dispute with the German tax authorities. Based on this
recent favorable judgment, the Company will request that the tax assessments be
withdrawn. The Company has granted a DM 94 million ($57 million at December 31,
1998) lien on its Nordenham, Germany TiO2 plant in favor of the City of
Leverkusen related to this tax contingency, and a DM 5 million ($3 million at
-27-
December 31, 1998) lien in favor of the German federal tax authorities for other
tax contingencies. If the German tax authorities withdraw their assessments
based on the German Supreme Court's decision, the Company expects to request the
release of the DM 94 million lien in favor of the City of Leverkusen.
In addition, during 1997 the Company reached an agreement with the German
tax authorities regarding certain other issues not in litigation for the years
1991 through 1994, and agreed to pay additional tax deficiencies of DM 9 million
($5 million at December 31, 1998), most of which was paid in the third quarter
of 1998.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1998) relating to 1994. The Company has appealed this assessment and has
begun litigation proceedings. During 1998 the Company was informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at December 31, 1998) will likely be proposed for the year 1996. The
Company intends to vigorously contest this issue and litigate, if necessary.
Although the Company believes that it will ultimately prevail, the Company has
granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant
in favor of the Norwegian tax authorities and will be required to grant security
on the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At December 31, 1998 the Company had net deferred tax liabilities of $195
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary differences that net to deferred tax assets (before valuation
allowance). The Company has provided a deferred tax valuation allowance of $134
million at December 31, 1998, principally related to the U.S. and Germany,
partially offsetting deferred tax assets which the Company believes do not
currently meet the "more-likely-than-not" recognition criteria.
In addition to the chemicals business conducted through Kronos, the
Company also has certain interests and associated liabilities relating to
certain discontinued or divested businesses, and holdings of marketable equity
securities including securities issued by Valhi and other Contran subsidiaries.
The Company has been named as a defendant, PRP, or both, in a number of
legal proceedings associated with environmental matters, including waste
disposal sites, mining locations and facilities currently or previously owned,
operated or used by the Company, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. The Company believes it has adequate accruals
for
-28-
reasonably estimable costs of such matters, but the Company's ultimate liability
may be affected by a number of factors, including changes in remedial
alternatives and costs and the allocation of such costs among PRPs. The Company
is also a defendant in a number of legal proceedings seeking damages for
personal injury and property damage arising out of the sale of lead pigments and
lead-based paints. There is no assurance that the Company will not incur future
liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, the Company believes that the pending lead pigment and paint litigation is
without merit. The Company has not accrued any amounts for such pending
litigation. Liability that may result, if any, cannot reasonably be estimated.
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. There can be no assurance that additional matters of these types will
not arise in the future. See Item 3. "Legal Proceedings" and Note 17 to the
Consolidated Financial Statements.
As discussed above, the Company has substantial operations located outside
the United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of the Company's assets and liabilities related to
its non-U.S. operations, and therefore the Company's consolidated net assets,
will fluctuate based upon changes in currency exchange rates. The carrying value
of the Company's net investment in its German operations is a net liability due
principally to its DM credit facility, while its net investment in its other
non-U.S. operations are net assets.
The Company is in the process of evaluating and upgrading its computer
systems (both information technology ("IT") systems and non-IT systems involving
embedded chip technology) and software applications (collectively referred to as
"systems") to ensure that the systems function properly beginning January 1,
2000. To achieve its year 2000 compliance plan, the Company is utilizing
internal and external resources to identify, correct or reprogram, and test its
systems.
The Company has conducted an inventory of its IT systems worldwide and is
currently testing the systems and applications that have been corrected or
reprogrammed for year 2000 compliance. The Company has completed a preliminary
inventory of its non-IT systems and is in the process of validating the
inventory and correcting or replacing date-deficient systems. The remediation
effort is well under way on all critical IT and non-IT systems, and the Company
anticipates that remediation of such critical systems will be substantially
complete by March 1999, and that remediation and testing of all remaining
systems will be complete by September 1999. Once systems undergo remediation,
they are tested for year 2000 compliance. For critical systems, the testing
process usually involves subjecting the remediated system to a simulated change
of date from the year 1999 to the year 2000 using, in many cases, computer
resources. The Company uses a number of packaged software products that have
been upgraded to a year 2000 compliant version in the normal course of business.
Excluding the cost of these software upgrades, the Company's cost of becoming
year 2000 compliant is
-29-
expected to be approximately $2 million, of which about one-half has been spent
through December 31, 1998.
The Company has identified approximately 30 major computer systems and
assessed them for year 2000 compliance. At December 31, 1998, approximately 80%
of the systems are year 2000 compliant. Each operating unit has responsibility
for its own conversion, in line with overall guidance and oversight provided by
a corporate-level coordinator, and the status of each of the remaining systems
will be specifically tracked and monitored.
As part of its year 2000 compliance plan, the Company has requested
confirmations from its major domestic and foreign software vendors, hardware
vendors, primary suppliers and major customers, that they are developing and
implementing plans to become, or are, year 2000 compliant. Confirmations
received to date from the Company's software vendors, hardware vendors, primary
suppliers and major customers, indicate that generally they are in the process
of implementing remediation plans to ensure that their systems are compliant by
December 31, 1999. The major software vendors used by the Company have already
delivered year 2000 compliant software. Notwithstanding these efforts, the
ability of the Company to affect the year 2000 preparedness of such vendors,
suppliers and customers is limited.
The Company is developing a contingency plan to address potential year
2000 related business interruptions that may occur on January 1, 2000, or
thereafter. This plan is expected to be completed in the second quarter of 1999.
Although the Company expects its systems to be year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the year 2000
compliance programs of its vendors, suppliers, and customers. The Company also
cannot predict whether its major software vendors, who continue to test for year
2000 compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, the Company cannot predict the impact on its financial condition
or results of noncompliant year 2000 systems that the Company directly or
indirectly relies upon. Should the Company's year 2000 compliance plan not be
successful or be delayed beyond January 2000, or should one or more vendors,
suppliers or customers fail to adequately address their year 2000 issues, the
consequences to the Company could be far-reaching and material, including an
inability to produce TiO2 at its manufacturing facilities, which could lead to
an indeterminate amount of lost revenue. Other potential negative consequences
could include plant malfunction, impeded communications or power supplies, or
slower transaction processing and financial reporting. Although not anticipated,
the most reasonably likely worst-case scenario of failure by the Company or its
key suppliers or customers to become year 2000 compliant would be a short-term
slowdown or cessation of manufacturing operations at one or more of the
Company's facilities and a short-term inability on the part of the Company to
process orders and billings in a timely manner, and to deliver product to
customers.
Beginning January 1, 1999, eleven of the fifteen members of the European
Union ("EU"), including Germany, Belgium, the Netherlands and France, adopted a
new European currency unit (the "euro") as their common legal currency.
-30-
Following the introduction of the euro, the participating countries' national
currencies remain legal tender as denominations of the euro from January 1, 1999
through January 1, 2002, and the exchange rates between the euro and such
national currency units are fixed.
The Company conducts substantial operations in Europe. The functional
currency of the Company's German, Belgian, Dutch and French operations will
convert to the euro from their respective national currencies over a two-year
period beginning in 1999. The euro conversion may impact the Company's
operations including, among other things, changes in product pricing decisions
necessitated by cross-border price transparencies. Such changes in product
pricing decisions could impact both selling prices and purchasing costs and,
consequently, favorably or unfavorably impact results of operations.
The Company has a significant amount of outstanding DM-denominated
indebtedness which, at the Company's option, may be repaid in euros. In 1998 the
Company assessed and evaluated the impact of the euro conversion on its business
and made the necessary system conversions. The Company spent and charged to
expense less than $1 million in evaluation and conversion costs. Because of the
inherent uncertainty of the ultimate effect of the euro conversion, the Company
cannot accurately predict the impact on its results of operations, financial
condition or liquidity.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, its debt service and capital expenditure requirements and
estimated future operating cash flows. As a result of this process, the Company
in the past has sought, and in the future may seek, to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, issue
additional securities, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, the Company may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry. In the event of any acquisition or joint venture
transaction, the Company may consider using available cash, issuing equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing the Company's existing debt. See Note 10 to the
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The Company is exposed to market risk from changes in currency exchange
rates, interest rates and equity security prices. In the past, the Company has
periodically entered into interest rate swaps or other types of contracts in
order to manage a portion of its interest rate market risk. Otherwise, the
Company has not generally entered into forward or option contracts to manage
such market risks, nor has the Company entered into any such contract or other
type of derivative instrument for trading purposes. The Company was not a party
to any forward or derivative option contracts related to currency exchange
rates,
-31-
interest rates or equity security prices at December 31, 1998. See Notes 2 and 8
to the Consolidated Financial Statements.
Interest rates
The Company is exposed to market risk from changes in interest rates,
primarily related to indebtedness.
At December 31, 1998 the Company's aggregate indebtedness was split
between 62% of fixed-rate instruments and 38% of variable-rate borrowings. The
large percentage of fixed-rate debt instruments minimizes earnings volatility
which would result from changes in interest rates. The following table presents
principal amounts and weighted average interest rates, by contractual maturity
dates, for the Company's aggregate indebtedness. At December 31, 1998 all
outstanding fixed-rate indebtedness was denominated in U.S. dollars, and all
outstanding variable-rate indebtedness was denominated in Deutsche marks.
Information shown below for such DM-denominated indebtedness is presented in its
U.S. dollar equivalent at December 31, 1998 using that date's exchange rate of
1.66 DM per U.S. dollar.
Contractual Maturity Date
-------------------------------------------------------
Fair Value
December 31,
1999 2000 2001 2002 2003 Total 1998
------- ------- ----- ----- -------- --------- ------------
(In millions)
Fixed-rate debt (U.S. dollar-
denominated):
Principal amount ................. $ -- $ -- $ -- $ -- $ 244.0 $ 244.0 $ 253.1
Weighted-average interest
rate ............................ -- -- -- -- 11.75% 11.75%
Variable rate debt (DM denominated):
Principal amount ................. $ 101.2 $ 48.4 $ .2 $ .2 $ -- $ 150.0 $ 150.0
Weighted-average interest
rate ............................ 5.4% 6.1% 9.3% 9.3% -- 5.6%
Currency exchange rates
The Company is exposed to market risk arising from changes in currency
exchange rates as a result of manufacturing and selling its products worldwide.
Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the Deutsche mark, Canadian dollar, Belgian franc, French franc,
Norwegian krone and the United Kingdom pound sterling. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of risks and uncertainties related to the conversion of certain of
these currencies to the euro.
As described above, at December 31, 1998, the Company had $150 million of
indebtedness denominated in Deutsche marks. The potential increase in the U.S.
dollar equivalent of the principal amount outstanding resulting from a
hypothetical 10% adverse change in exchange rates would be approximately $15
million.
-32-
Marketable equity security prices
The Company is exposed to market risk due to changes in prices of the
marketable securities which are owned. The fair value of such equity securities
at December 31, 1998 was $18 million. The potential change in the aggregate fair
value of these investments, assuming a 10% change in prices, would be $1.8
million.
Other
The Company believes there are certain shortcomings in the sensitivity
analyses presented above, which analyses are required under the Securities and
Exchange Commission's regulations. For example, the hypothetical effect of
changes in interest rates discussed above ignores the potential effect on other
variables which affect the Company's results of operations and cash flows, such
as demand for the Company's products, sales volumes and selling prices and
operating expenses. Contrary to the above assumptions, changes in interest rates
rarely result in simultaneous parallel shifts along the yield curve.
Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses the Company would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "NL Proxy Statement").
-33-
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 16 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and
Schedules (see page F-1) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 1998 and
thereafter through the date of this report.
October 19, 1998 - reported Items 5 and 7.
October 21, 1998 - reported Items 5 and 7.
January 4, 1999 - reported Items 5 and 7.
January 22, 1999 - reported Items 5 and 7.
February 12, 1999 - reported Items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
NL will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to NL of
furnishing the exhibits. Instruments defining the rights of
holders of long-term debt issues which do not exceed 10% of
consolidated total assets will be furnished to the Securities and
Exchange Commission upon request.
-34-
Item No. Exhibit Index
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
3.2 Certificate of Amended and Restated Certificate of Incorporation
dated June 28, 1990 - incorporated by reference to Exhibit 1 to the
Registrant's Proxy Statement on Schedule 14A for the annual meeting
held on June 28, 1990.
4.1 Registration Rights Agreement dated October 30, 1991, by and between
the Registrant and Tremont Corporation - incorporated by reference
to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.
4.2 Indenture dated October 20, 1993 governing the Registrant's 11.75%
Senior Secured Notes due 2003, including form of Senior Note
incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
4.3 Senior Mirror Notes dated October 20, 1993 - incorporated by
reference to Exhibit 4.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.4 Senior Note Subsidiary Pledge Agreement dated October 20, 1993
between Registrant and Kronos, Inc. - incorporated by reference to
Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
4.5 Third Party Pledge and Intercreditor Agreement dated October 20,
1993 between Registrant, Chase Manhattan Bank (National Association)
and Chemical Bank - incorporated by reference to Exhibit 4.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.1 Amended and Restated Loan Agreement dated as of October 15, 1993
among Kronos International, Inc., the Banks set forth therein,
Hypobank International S.A., as Agent and Banque Paribas, as
Co-agent - incorporated by reference to Exhibit 10.17 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.2 Second Amended and Restated Loan Agreement dated as of January 31,
1997 among Kronos International, Inc., Hypobank International S.A.,
as Agent, and the Banks set forth therein - incorporated by
reference to Exhibit 10.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
-35-
10.3 Amended and Restated Liquidity Undertaking dated October 15, 1993 by
the Registrant, Kronos, Inc. and Kronos International, Inc. to
Hypobank International S.A., as agent, and the Banks set forth
therein - incorporated by reference to Exhibit 10.18 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.4 Second Amended and Restated Liquidity Undertaking dated January 31,
1997 by the Registrant, Kronos, Inc. and Kronos International, Inc.
to and in favor of Hypobank International S.A., as Agent, and the
Banks set forth therein - incorporated by reference to Exhibit 10.4
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.5 Guaranty dated as of January 31, 1997 made by the Registrant in
favor of Hypobank International S.A., as Agent - incorporated by
reference to Exhibit 10.5 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
10.6 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof)
incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985.
10.7 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH
and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
10.8 Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc.
incorporated by reference to Exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.9 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.10 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.11 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
-36-
10.12 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.
10.13 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.14 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit 10.24
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.15 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated
by reference to Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.16 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc.
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.17 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.18 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by reference
to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
10.19 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos
Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.20* 1985 Long Term Performance Incentive Plan of NL Industries, Inc., as
adopted by the Board of Directors on February 27, 1985 incorporated
by reference to Exhibit A to the Registrant's Proxy
-37-
Statement on Schedule 14A for the annual meeting of shareholders
held on April 24, 1985.
10.21 Form of Director's Indemnity Agreement between NL and the
independent members of the Board of Directors of NL - incorporated
by reference to Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987.
10.22* 1989 Long Term Performance Incentive Plan of NL Industries, Inc. -
incorporated by reference to Exhibit B to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held on May 8, 1996.
10.23* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May 8,
1996.
10.24* NL Industries, Inc. Retirement Savings Plan, as amended and restated
effective April 1, 1996 - incorporated by reference to Exhibit 10.38
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.25* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
adopted by the Board of Directors on February 13, 1992 incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held April 30,
1992.
10.26 Intercorporate Services Agreement by and between Valhi, Inc. and the
Registrant effective as of January 1, 1998 - incorporated by
reference to Exhibit 10.10 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.27 Intercorporate Services Agreement by and between Contran Corporation
and the Registrant effective as of January 1, 1998 - incorporated by
reference to Exhibit 10.9 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.28 Intercorporate Services Agreement by and between Tremont Corporation
and the Registrant effective as of January 1, 1998 - incorporated by
reference to Exhibit 10.11 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
10.29 Intercorporate Service Agreement by and between Titanium Metals
Corporation and the Registrant effective January 1, 1998
incorporated by reference to Exhibit 10.12 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
-38-
10.30 Intercorporate Services Agreement by and between CompX International
Inc. and the Registrant effective as of January 1, 1998 incorporated
by reference to Exhibit 10.13 to the Registrant's Quarterly Report
of Form 10-Q for the quarter ended September 30, 1998.
10.31 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect subsidiary
of Tremont Corporation) and Baroid Corporation - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991.
10.32* Executive severance agreement effective as of March 9, 1995 by and
between the Registrant and Lawrence A. Wigdor - incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
10.33* Executive severance agreement effective as of July 24, 1996 by and
between the Registrant and J. Landis Martin - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
10.34* Supplemental Executive Retirement Plan for Executives and Officers
of NL Industries, Inc. effective as of January 1, 1991 incorporated
by reference to Exhibit 10.26 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
10.35* Agreement to Defer Bonus Payment dated February 20, 1998 between the
Registrant and Lawrence A. Wigdor and related trust agreement
incorporated by reference to Exhibit 10.48 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.36* Agreement to Defer Bonus Payment dated February 20, 1998 between the
Registrant and J. Landis Martin and related trust agreement
incorporated by reference to Exhibit 10.49 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.37 Asset Purchase Agreement dated as of December 29, 1997 by and among
NL Industries, Inc., Rheox, Inc., Rheox International, Inc.,
Harrisons and Crosfield plc, Harrisons and Crosfield (America) Inc.
and Elementis Acquisition 98, Inc. - incorporated by reference to
Exhibit 10.50 to the Registrant's Annual Report of Form 10-K for the
year ended December 31, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule for the year ended December 31, 1998.
-39-
99.1 Annual Report of NL Industries, Inc. Retirement Savings Plan (Form
11-K) to be filed under Form 10-K/A to the Registrant's Annual
Report on Form 10-K within 180 days after December 31, 1998.
* Management contract, compensatory plan or arrangement.
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NL Industries, Inc.
(Registrant)
By /s/ J. Landis Martin
J. Landis Martin, March 22, 1999
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ J. Landis Martin /s/ Harold C. Simmons
J. Landis Martin, March 22, 1999 Harold C. Simmons, March 22, 1999
Director, President and Chairman of the Board
Chief Executive Officer
/s/ Glenn R. Simmons /s/ Joseph S. Compofelice
Glenn R. Simmons, March 22, 1999 Joseph S. Compofelice, March 22, 1999
Director Director
/s/ Kenneth R. Peak /s/ Dr. Lawrence A. Wigdor
Kenneth R. Peak, March 22, 1999 Dr. Lawrence A. Wigdor, March 22, 1999
Director Director, President and Chief
Executive Officer of Kronos
/s/ Elmo R. Zumwalt, Jr. /s/ Susan E. Alderton
Elmo R. Zumwalt, Jr., March 22, 1999 Susan E. Alderton, March 22, 1999
Director Vice President and Chief Financial
Officer
/s/ Robert D. Hardy
Robert D. Hardy, March 22, 1999
Vice President and Controller
(Principal Accounting Officer)
-41-
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
-------------------------------------------
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1998 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 1996, 1997 and 1998 F-5 / F-6
Consolidated Statements of Comprehensive Income - Years
ended December 31, 1996, 1997 and 1998 F-7
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1996, 1997 and 1998 F-8
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1997 and 1998 F-9 / F-11
Notes to Consolidated Financial Statements F-12 / F-45
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I - Condensed Financial Information of Registrant S-2 / S-7
Schedule II - Valuation and qualifying accounts S-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets of NL
Industries, Inc. and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows present fairly, in all
material respects, the consolidated financial position of NL Industries, Inc. at
December 31, 1997 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for environmental remediation costs in
1997 in accordance with Statement of Position No. 96-1.
PricewaterhouseCoopers LLP
Houston, Texas
February 10, 1999
F-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(In thousands, except per share data)
ASSETS
1997 1998
---------- ----------
Current assets:
Cash and cash equivalents ...................... $ 96,394 $ 154,953
Restricted cash equivalents .................... 9,751 8,164
Accounts and notes receivable, less
allowance of $2,828 and $2,377 ................ 148,676 133,769
Refundable income taxes ........................ 1,941 15,919
Inventories .................................... 192,780 228,611
Prepaid expenses ............................... 3,348 2,724
Deferred income taxes .......................... 1,642 1,955
---------- ----------
Total current assets ....................... 454,532 546,095
---------- ----------
Other assets:
Marketable securities .......................... 17,270 17,580
Investment in joint ventures ................... 172,721 171,202
Prepaid pension cost ........................... 23,848 23,990
Deferred income taxes .......................... 110 --
Other .......................................... 18,482 13,927
---------- ----------
Total other assets ......................... 232,431 226,699
---------- ----------
Property and equipment:
Land ........................................... 19,479 19,626
Buildings ...................................... 150,090 144,228
Machinery and equipment ........................ 616,309 586,400
Mining properties .............................. 88,617 84,015
Construction in progress ....................... 2,577 4,385
---------- ----------
877,072 838,654
Less accumulated depreciation and depletion .... 465,843 456,495
---------- ----------
Net property and equipment ................. 411,229 382,159
---------- ----------
$1,098,192 $1,154,953
========== ==========
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1997 and 1998
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1998
----------- -----------
Current liabilities:
Notes payable .................................. $ 13,968 $ 36,391
Current maturities of long-term debt ........... 77,374 64,826
Accounts payable and accrued liabilities ....... 161,730 187,661
Payable to affiliates .......................... 11,512 10,625
Income taxes ................................... 10,910 9,224
Deferred income taxes .......................... 891 1,236
----------- -----------
Total current liabilities .................. 276,385 309,963
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 666,779 292,803
Deferred income taxes .......................... 132,797 196,180
Accrued pension cost ........................... 44,389 44,649
Accrued postretirement benefits cost ........... 50,951 41,659
Other .......................................... 148,903 116,732
----------- -----------
Total noncurrent liabilities ............... 1,043,819 692,023
----------- -----------
Minority interest ................................ 257 633
----------- -----------
Shareholders' equity:
Preferred stock - 5,000 shares authorized,
no shares issued or outstanding ............... -- --
Common stock - $.125 par value; 150,000
shares authorized; 66,839 shares issued ....... 8,355 8,355
Additional paid-in capital ..................... 759,281 774,288
Accumulated deficit ............................ (495,421) (133,379)
Accumulated other comprehensive income (loss):
Currency translation ......................... (133,810) (133,440)
Marketable securities ........................ 4,297 4,498
Pension liabilities .......................... -- (3,187)
Treasury stock, at cost (15,572 and 15,028
shares) ....................................... (364,971) (364,801)
----------- -----------
Total shareholders' equity (deficit) ....... (222,269) 152,334
----------- -----------
$ 1,098,192 $ 1,154,953
=========== ===========
Commitments and contingencies (Notes 13 and 17)
See accompanying notes to consolidated financial statements.
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
1996 1997 1998
--------- --------- ---------
Revenues and other income:
Net sales ............................. $ 851,179 $ 837,240 $ 894,724
Other, net ............................ 27,669 19,367 25,453
--------- --------- ---------
878,848 856,607 920,177
--------- --------- ---------
Costs and expenses:
Cost of sales ......................... 668,605 649,945 618,447
Selling, general and administrative ... 151,144 168,592 133,970
Interest .............................. 69,333 65,759 58,070
--------- --------- ---------
889,082 884,296 810,487
--------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority interest ........ (10,234) (27,689) 109,690
Income tax expense ...................... 1,496 2,244 19,788
--------- --------- ---------
Income (loss) from continuing
operations before minority
interest ........................... (11,730) (29,933) 89,902
Minority interest ....................... 5 (58) 40
--------- --------- ---------
Income (loss) from continuing
operations ......................... (11,735) (29,875) 89,862
Discontinued operations ................. 22,552 20,402 287,396
Extraordinary item - early retirement
of debt, net of tax benefit of $5,698 .. -- -- (10,580)
--------- --------- ---------
Net income (loss) ................... $ 10,817 $ (9,473) $ 366,678
========= ========= =========
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands, except per share data)
1996 1997 1998
---------- ---------- ----------
Basic earnings per share:
Continuing operations .......... $ (.23) $ (.58) $ 1.75
Discontinued operations ........ .44 .39 5.59
Extraordinary item ............. -- -- (.21)
---------- ---------- ----------
Net income (loss) ............ $ .21 $ (.19) $ 7.13
========== ========== ==========
Diluted earnings per share:
Continuing operations .......... $ (.23) $ (.58) $ 1.73
Discontinued operations ........ .44 .39 5.52
Extraordinary item ............. -- -- (.20)
---------- ---------- ----------
Net income (loss) ............ $ .21 $ (.19) $ 7.05
========== ========== ==========
Shares used in the calculation of
earnings per share:
Basic .......................... 51,103 51,152 51,460
Dilutive impact of stock options -- -- 540
---------- ---------- ----------
Diluted ........................ 51,103 51,152 52,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
------- -------- ---------
Net income (loss) ........................... $10,817 $ (9,473) $ 366,678
------- -------- ---------
Other comprehensive income (loss), net
of tax:
Marketable securities adjustment .......... 1,803 3,019 201
Minimum pension liabilities
adjustment ............................... 86 1,822 (3,187)
Currency translation adjustment ........... 8,305 (15,181) 370
------- -------- ---------
Other comprehensive income (loss) ....... 10,194 (10,340) (2,616)
------- -------- ---------
Comprehensive income (loss) ............... $21,011 $(19,813) $ 364,062
======= ======== =========
See accompanying notes to consolidated financial statements.
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ----------------------------------
Common paid-in Accumulated Currency Pension Marketable Treasury
stock capital deficit translation liabilities securities stock Total
------- ---------- ----------- ----------- ----------- ---------- --------- ---------
Balance at December 31, 1995 ..... $8,355 $759,281 $(481,432) $(126,934) $(1,908) $ (525) $(366,258) $(209,421)
Net income ....................... -- -- 10,817 -- -- -- -- 10,817
Other comprehensive income, net
of tax .......................... -- -- -- 8,305 86 1,803 -- 10,194
Common dividends declared -
$.30 per share .................. -- -- (15,333) -- -- -- -- (15,333)
Treasury stock reissued .......... -- -- -- -- -- -- 262 262
------ -------- --------- --------- ------- ------- --------- ---------
Balance at December 31, 1996 ..... 8,355 759,281 (485,948) (118,629) (1,822) 1,278 (365,996) (203,481)
Net loss ......................... -- -- (9,473) -- -- -- -- (9,473)
Other comprehensive income (loss),
net of tax ...................... -- -- -- (15,181) 1,822 3,019 -- (10,340)
Treasury stock reissued .......... -- -- -- -- -- -- 1,025 1,025
------ -------- --------- --------- ------- ------- --------- ---------
Balance at December 31, 1997 ..... 8,355 759,281 (495,421) (133,810) -- 4,297 (364,971) (222,269)
Net income ....................... -- -- 366,678 -- -- -- -- 366,678
Other comprehensive income (loss),
net of tax ...................... -- -- -- 370 (3,187) 201 -- (2,616)
Common dividends declared - $.09
per share ....................... -- -- (4,636) -- -- -- -- (4,636)
Cash received upon settlement of
shareholder derivative lawsuit,
net of $3,198 in legal fees and
expenses ........................ -- 11,211 -- -- -- -- -- 11,211
Tax benefit of stock options
exercised ....................... -- 3,796 -- -- -- -- -- 3,796
Treasury stock reissued .......... -- -- -- -- -- -- 170 170
------ -------- --------- --------- ------- ------- --------- ---------
Balance at December 31, 1998 ..... $8,355 $774,288 $(133,379) $(133,440) $(3,187) $ 4,498 $(364,801) $ 152,334
====== ======== ========= ========= ======= ======= ========= =========
See accompanying notes to consolidated financial statements.
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
-------- --------- ---------
Cash flows from operating activities:
Net income (loss) ...................... $ 10,817 $ (9,473) $ 366,678
Depreciation, depletion and
amortization .......................... 36,285 34,887 34,545
Noncash interest expense ............... 20,442 23,092 18,393
Deferred income taxes .................. 297 (5,627) 4,988
Minority interest ...................... 5 (58) 40
Net (gains) losses from:
Securities transactions .............. -- (2,657) --
Disposition of property and
equipment ........................... 2,236 (1,735) 768
Pension cost, net ...................... (8,018) (5,112) (5,566)
Other postretirement benefits, net ..... (4,962) (4,799) (6,299)
Change in accounting for environmental
remediation costs ..................... -- 30,000 --
Discontinued operations:
Net gain from sale of Rheox .......... -- -- (286,071)
Income from operations of Rheox ...... (22,552) (20,402) (1,325)
Extraordinary item ..................... -- -- 10,580
Other, net ............................. (67) -- 317
-------- --------- ---------
34,483 38,116 137,048
Rheox, net ............................. 20,705 31,506 (30,587)
Change in assets and liabilities:
Accounts and notes receivable ........ 3,083 (14,925) (2,012)
Inventories .......................... 7,192 22,872 (49,839)
Prepaid expenses ..................... (1,355) 96 436
Accounts payable and accrued
liabilities ......................... (1,949) 9,347 (2,741)
Income taxes ......................... (36,414) 12,978 (12,976)
Accounts with affiliates ............. 3,408 (3,915) 2,286
Other noncurrent assets .............. 236 (269) (178)
Other noncurrent liabilities ......... (12,851) (6,640) 3,650
-------- --------- ---------
Net cash provided by operating
activities ...................... 16,538 89,166 45,087
-------- --------- ---------
F-9
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
-------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of Rheox ............ $ -- $ -- $ 435,080
Capital expenditures ................... (64,241) (28,220) (22,392)
Proceeds from disposition of
marketable securities ................. -- 6,875 6,875
Change in restricted cash
equivalents, net ...................... (791) 1,144 (2,638)
Investment in joint venture, net ....... 3,934 8,364 (372)
Proceeds from disposition of
property and equipment ................ 76 3,049 769
Rheox, net ............................. (7,376) (2,314) (26)
-------- --------- ---------
Net cash provided (used) by
investing activities .............. (68,398) (11,102) 417,296
-------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ........................... 97,503 -- 30,491
Principal payments ................... (32,362) (182,215) (315,892)
Deferred financing costs ............. -- (2,343) --
Settlement of shareholder derivative
lawsuit, net .......................... -- -- 11,211
Dividends paid ......................... (15,333) -- (4,636)
Rheox, net ............................. (23,492) 100,940 (117,500)
Other, net ............................. 249 1,023 168
-------- --------- ---------
Net cash provided (used) by
financing activities .............. 26,565 (82,595) (396,158)
-------- --------- ---------
Net change during the year from
operating, investing and
financing activities .............. $(25,295) $ (4,531) $ 66,225
======== ========= =========
F-10
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities ......................... $ (25,295) $ (4,531) $ 66,225
Currency translation ................ (2,714) (2,295) (36)
Sale of Rheox ....................... -- -- (7,630)
--------- --------- ---------
(28,009) (6,826) 58,559
Balance at beginning of year .......... 131,229 103,220 96,394
--------- --------- ---------
Balance at end of year ................ $ 103,220 $ 96,394 $ 154,953
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 51,678 $ 55,908 $ 37,965
Income taxes ........................ 50,400 6,875 54,230
Noncash investing activities -
marketable securities exchanged
for a note receivable ................ $ -- $ 6,875 $ --
See accompanying notes to consolidated financial statements.
F-11
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations through its wholly-owned subsidiary, Kronos, Inc. In January 1998 the
specialty chemicals business of Rheox, Inc., a wholly-owned subsidiary of NL,
was sold. See Note 20.
At December 31, 1998 Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation, held approximately 58% and 20%, respectively, of NL's
outstanding common stock, and together they may be deemed to control NL. At
December 31, 1998 Contran and its subsidiaries held approximately 92% of Valhi's
outstanding common stock, and Valhi and other entities related to Harold C.
Simmons held approximately 53% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Mr.
Simmons, of which Mr. Simmons is the sole trustee, or by Mr. Simmons directly.
Mr. Simmons, the Chairman of the Board of NL and the Chairman of the Board and
Chief Executive Officer of Contran and Valhi and a director of Tremont, may be
deemed to control each of such companies.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts of
NL and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Ultimate actual results may in some instances differ from
previously estimated amounts.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is deemed
to be other than the U.S. dollar are translated at year-end rates of exchange
and revenues and expenses are translated at weighted average exchange rates
prevailing during the year. Resulting translation adjustments are included in
other comprehensive income (loss), net of related deferred income taxes.
Currency transaction gains and losses are recognized in income currently.
F-12
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
Restricted cash equivalents
At December 31, 1998 restricted cash equivalents of approximately $5
million collateralize undrawn letters of credit, and restricted cash equivalents
of approximately $7 million collateralize certain environmental remediation
obligations of the Company, of which $4 million has been classified as a
noncurrent asset. At December 31, 1997 restricted cash equivalents of
approximately $5 million collateralized undrawn letters of credit and cash
equivalents of approximately $5 million were restricted under an indebtedness
agreement, which was repaid in 1998.
Marketable securities and securities transactions
Marketable securities are classified as "available-for-sale" and are
carried at market based on quoted market prices. Unrealized gains and losses on
available-for-sale securities are included in other comprehensive income (loss),
net of related deferred income taxes. See Note 4. Gains and losses on
available-for-sale securities are recognized in income upon realization and are
computed based on specific identification of the securities sold.
Inventories
Inventories are stated at the lower of cost (principally average cost) or
market. Amounts are removed from inventories at average cost.
Investment in joint ventures
Investment in a 50%-owned joint venture is accounted for by the equity
method.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Maintenance, repairs and minor renewals are expensed; major improvements
are capitalized.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to forty years for buildings and three to twenty
years for machinery and equipment. Depletion of mining properties is computed by
the unit-of-production and straight-line methods.
F-13
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID is amortized over the period during which cash interest payments
are not required and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 11.
The Company accounts for stock-based employee compensation in accordance
with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. Compensation
cost recognized by the Company in accordance with APBO No. 25 was nil in each of
the past three years.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures are not discounted to present value. Recoveries of remediation
costs from other parties, if any, are reported as receivables when their receipt
is deemed probable. At December 31, 1997 and 1998 no receivables for recoveries
have been recognized.
The Company adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in 1997. The SOP, among other things, expands the types of costs which must be
considered in determining environmental remediation accruals. As a result of
adopting the SOP, the Company recognized a noncash cumulative charge of $30
million in 1997. The charge did not impact the Company's 1997 income tax expense
because the Company believes the resulting deferred income tax asset does not
currently satisfy the more-likely-than-not recognition criteria and,
accordingly, the Company established an offsetting valuation allowance. The $30
million noncash charge is comprised primarily of estimated future expenditures
associated with managing and monitoring existing environmental remediation
sites, and the expenditures have not been discounted to present value. The
expenditures consist principally of legal and professional fees, but exclude
litigation defense costs for matters in which the Company asserts that no
liability exists. Previously, all such expenditures were expensed as incurred.
Net sales
Sales are recognized as products are shipped.
F-14
Income taxes
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries and unconsolidated affiliates not included in the
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets and adjusts any related valuation allowance.
The Company's valuation allowance is equal to the amount of deferred tax assets
which the Company believes do not meet the "more-likely-than-not" recognition
criteria.
Interest rate swaps and contracts
The Company periodically uses interest rate swaps and contracts (such as
caps and floors) to manage interest rate risk with respect to financial assets
or liabilities. The Company has not entered into these contracts for speculative
purposes in the past, nor does it currently anticipate doing so in the future.
Any cost associated with the swap or contract designated as a hedge of assets or
liabilities is deferred and amortized over the life of the agreement as an
adjustment to interest income or expense. If the swap or contract is terminated,
the resulting gain or loss is deferred and amortized over the remaining life of
the underlying asset or liability. If the hedged instrument is disposed of, the
swap or contract agreement is marked to market with any resulting gain or loss
included with the gain or loss from the disposition. The Company held no
derivative financial instruments at December 31, 1998.
Earnings per share
Basic earnings per share is based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is based on
the weighted average common shares outstanding and the dilutive impact of
outstanding stock options. The weighted average number of shares resulting from
outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive aggregated
2,483,000, 2,709,000 and 1,942,000 in 1996, 1997 and 1998, respectively. There
were no adjustments to income (loss) from continuing operations or net income
(loss) in the computation of earnings per share.
New accounting principles not yet adopted
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
no later than the first quarter of 2000. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The Company is currently studying this
newly-issued accounting rule, and the impact of adopting SFAS No. 133, if any,
will be
F-15
dependent upon the extent to which the Company is then a party to derivative
contracts or engaged in hedging activities.
Note 3 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating business
segment - TiO2. Titanium dioxide pigments are used to impart whiteness,
brightness and opacity to a wide variety of products, including paints,
plastics, paper, fibers and ceramics. Discontinued operations consists of the
Company's specialty chemicals business owned by Rheox which was sold in January
1998. See Note 20. At December 31, 1997 and 1998 the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $287 million and
$310 million, respectively.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain nonrecurring items and certain general corporate income and
expense items (including securities transactions gains and interest and dividend
income) which are not attributable to the operations of the reportable operating
segment. The accounting policies of the reportable operating segment are the
same as those described in Note 1. Interest income included in the calculation
of segment operating income is disclosed in Note 14.
Segment assets are comprised of all assets attributable to the reportable
operating segment. The Company's investment in the TiO2 manufacturing joint
venture (see Note 6) is included in TiO2 business segment assets. Corporate
assets are not attributable to the reportable operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents and
marketable securities. For geographic information, net sales are attributed to
the place of manufacture (point-of-origin) and the location of the customer
(point-of-destination); property and equipment are attributed to their physical
location.
F-16
Years ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
Business segment - TiO2
Net sales ............................. $ 851,179 $ 837,240 $ 894,724
Other income, excluding corporate ..... 18,388 12,339 6,110
--------- --------- ---------
869,567 849,579 900,834
Cost of sales ......................... 668,605 649,945 618,447
Selling, general and
administrative, excluding
corporate ............................ 129,356 117,133 111,206
--------- --------- ---------
Operating income .................... 71,606 82,501 171,181
General corporate income (expense):
Securities earnings, net ............ 4,708 5,393 14,921
Expenses, net ....................... (17,215) (49,824) (18,342)
Interest expense .................... (69,333) (65,759) (58,070)
--------- --------- ---------
$ (10,234) $ (27,689) $ 109,690
========= ========= =========
Capital expenditures:
Kronos .............................. $ 64,201 $ 28,193 $ 22,310
General corporate ................... 40 27 82
--------- --------- ---------
$ 64,241 $ 28,220 $ 22,392
========= ========= =========
Depreciation, depletion and
amortization:
Kronos .............................. $ 36,091 $ 34,684 $ 34,341
General corporate ................... 194 203 204
--------- --------- ---------
$ 36,285 $ 34,887 $ 34,545
========= ========= =========
Geographic areas
Net sales - point of origin:
Germany ............................. $ 424,861 $ 439,926 $ 451,061
United States ....................... 245,424 250,798 289,701
Canada .............................. 134,199 145,160 158,967
Belgium ............................. 133,708 122,784 159,558
Norway .............................. 109,947 96,448 91,112
Other ............................... 89,466 88,030 96,912
Eliminations ........................ (286,426) (305,906) (352,587)
--------- --------- ---------
$ 851,179 $ 837,240 $ 894,724
========= ========= =========
Net sales - point of destination:
Europe .............................. $ 471,948 $ 442,043 $ 493,942
United States ....................... 222,710 230,923 246,209
Canada .............................. 51,292 58,231 66,843
Latin America ....................... 41,140 43,078 35,281
Asia ................................ 43,842 41,328 21,042
Other ............................... 20,247 21,637 31,407
--------- --------- ---------
$ 851,179 $ 837,240 $ 894,724
========= ========= =========
F-17
December 31,
----------------------------------------
1996 1997 1998
---------- ---------- ----------
(In thousands)
Identifiable assets
Net property and equipment:
Germany ....................... $ 238,372 $ 213,762 $ 223,605
Canada ........................ 73,616 67,247 60,574
Belgium ....................... 62,615 50,783 51,683
Norway ........................ 55,367 44,841 42,336
Other ......................... 4,640 4,289 3,961
Discontinued operations ....... 31,436 30,307 --
---------- ---------- ----------
$ 466,046 $ 411,229 $ 382,159
========== ========== ==========
Total assets:
Kronos ........................ $1,064,285 $ 961,635 $ 997,893
General corporate ............. 66,978 47,922 157,060
Discontinued operations ....... 90,095 88,635 --
---------- ---------- ----------
$1,221,358 $1,098,192 $1,154,953
========== ========== ==========
Note 4 - Marketable securities and securities transactions:
December 31,
----------------------
1997 1998
-------- --------
(In thousands)
Available-for-sale securities - noncurrent
marketable equity securities:
Unrealized gains ................................. $ 6,939 $ 8,512
Unrealized losses ................................ (328) (1,591)
Cost ............................................. 10,659 10,659
-------- --------
Aggregate market ............................. $ 17,270 $ 17,580
======== ========
In 1997 securities transactions gains of $2.7 million were realized on
sales of available-for-sale securities.
Note 5 - Inventories:
December 31,
---------------------------
1997 1998
-------- --------
(In thousands)
Raw materials ............................ $ 45,844 $ 46,114
Work in process .......................... 8,018 11,530
Finished products ........................ 107,427 136,225
Supplies ................................. 31,491 34,742
-------- --------
$192,780 $228,611
======== ========
F-18
Note 6 - Investment in joint ventures:
December 31,
------------------------
1997 1998
-------- --------
(In thousands)
TiO2 manufacturing joint venture ............... $170,830 $171,202
Other .......................................... 1,891 --
-------- --------
$172,721 $171,202
======== ========
Kronos Louisiana, Inc. ("KLA"), a wholly-owned subsidiary of Kronos, owns
a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Group, Ltd.
("Tioxide"), a wholly-owned subsidiary of Imperial Chemicals Industries plc
("ICI"). LPC owns and operates a chloride-process TiO2 plant in Lake Charles,
Louisiana.
LPC had two tranches of long-term debt, one of which was guaranteed by
KLA. LPC prepaid the KLA tranche in 1998 with cash provided by the Company.
KLA's tranche of LPC's debt was reflected as outstanding indebtedness of the
Company because Kronos had guaranteed the purchase obligation relative to the
debt service of its tranche. See Note 10.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC is
intended to be operated on a break-even basis and, accordingly, Kronos' cost for
its share of the TiO2 produced is equal to its share of LPC's production costs
and interest expense. Kronos' share of the production costs are reported as cost
of sales as the related TiO2 acquired from LPC is sold, and its share of the
interest expense, if any, is reported as a component of interest expense.
Summary balance sheets of LPC are shown below.
December 31,
----------------------
1997 1998
-------- --------
(In thousands)
ASSETS
Current assets ..................................... $ 41,602 $ 60,686
Other assets ....................................... 764 --
Property and equipment, net ........................ 309,989 294,906
-------- --------
$352,355 $355,592
======== ========
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche ................................... $ 42,429 $ --
Tioxide tranche .................................. 7,200 --
Note payable to Tioxide .......................... 9,000 --
Other liabilities, primarily current ............... 8,466 10,960
-------- --------
67,095 10,960
Partners' equity ................................... 285,260 344,632
-------- --------
$352,355 $355,592
======== ========
F-19
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
Revenues and other income:
Kronos ............................. $ 74,916 $ 82,171 $ 90,392
Tioxide ............................ 73,774 80,512 89,879
Interest income .................... 518 636 753
-------- -------- --------
149,208 163,319 181,024
-------- -------- --------
Cost and expenses:
Cost of sales ...................... 140,361 156,811 178,803
General and administrative ......... 377 355 348
Interest ........................... 8,470 6,153 1,873
-------- -------- --------
149,208 163,319 181,024
-------- -------- --------
Net income ....................... $ -- $ -- $ --
======== ======== ========
Note 7 - Other noncurrent assets:
December 31,
---------------------
1997 1998
------- -------
(In thousands)
Deferred financing costs, net ...................... $ 9,973 $ 4,124
Restricted cash equivalents ........................ -- 4,225
Intangible assets, net of accumulated
amortization of $22,366 and $23,704 ............... 4,228 1,985
Other .............................................. 4,281 3,593
------- -------
$18,482 $13,927
======= =======
Note 8 - Accounts payable and accrued liabilities:
December 31,
---------------------------
1997 1998
-------- --------
(In thousands)
Accounts payable ......................... $ 64,698 $ 55,270
-------- --------
Accrued liabilities:
Employee benefits ...................... 40,110 37,399
Environmental costs .................... 9,000 44,122
Interest ............................... 6,966 7,346
Other .................................. 40,956 43,524
-------- --------
97,032 132,391
-------- --------
$161,730 $187,661
======== ========
F-20
Note 9 - Other noncurrent liabilities:
December 31,
--------------------------
1997 1998
-------- --------
(In thousands)
Environmental costs ........................ $125,502 $ 81,454
Insurance claims expense ................... 11,436 10,872
Employee benefits .......................... 10,835 9,778
Deferred income ............................ -- 12,333
Other ...................................... 1,130 2,295
-------- --------
$148,903 $116,732
======== ========
Note 10 - Notes payable and long-term debt:
December 31,
----------------------
1997 1998
-------- --------
(In thousands)
Notes payable (DM 25,000 and DM 60,500,
respectively) ..................................... $ 13,968 $ 36,391
======== ========
Long-term debt:
NL Industries:
11.75% Senior Secured Notes .................... $250,000 $244,000
13% Senior Secured Discount Notes .............. 169,857 --
-------- --------
419,857 244,000
-------- --------
Kronos:
DM bank credit facility (DM 288,322 and
DM 187,322, respectively) ..................... 161,085 112,674
LPC term loan .................................. 42,429 --
Other .......................................... 3,282 955
-------- --------
206,796 113,629
-------- --------
Rheox - bank term loan ........................... 117,500 --
-------- --------
744,153 357,629
Less current maturities .......................... 77,374 64,826
-------- --------
$666,779 $292,803
======== ========
The Company's $244 million of 11.75% Senior Secured Notes due 2003 (the
"Notes") are collateralized by a series of intercompany notes from Kronos
International, Inc. ("KII"), a wholly-owned subsidiary of Kronos, to NL, the
interest rate and payment terms of which mirror those of the respective Notes
(the "Mirror Notes"). The Notes are also collateralized by a first priority lien
on the stock of Kronos and a second priority lien on the stock of another
wholly-owned subsidiary of the Company.
In the event of foreclosure, the holders of the Notes would have access to
the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
F-21
functional economic equivalent of a full, unconditional and joint and several
guarantee of the Notes by Kronos and the other subsidiary, whose net assets
amount to $308 million at December 31, 1998.
The Notes are redeemable, at the Company's option, starting in October
2000 at a redemption price of 101.5% of the principal amount and declining to
100% after October 2001. In the event of a Change of Control as defined in the
indenture, the Company would be required to make an offer to purchase the Notes
at 101% of the principal amount of the Notes. The Notes are issued pursuant to
an indenture which contains a number of covenants and restrictions which, among
other things, restrict the ability of the Company and its subsidiaries to incur
debt, incur liens, pay dividends or merge or consolidate with, or sell or
transfer all or substantially all of their assets to, another entity. At
December 31, 1998 $47 million was available for payment of dividends pursuant to
the terms of the indenture. The quoted market price of the Senior Secured Notes
per $100 principal amount was $111.17 and $103.73 at December 31, 1997 and 1998,
respectively.
At December 31, 1998 the DM credit facility consisted of a DM 107 million
term loan and a DM 230 million revolving credit facility, of which DM 80 million
was outstanding. Borrowings bear interest at DM LIBOR plus 2.75% (6.28% and
6.00% at December 31, 1997 and 1998, respectively), and are collateralized by
the stock of certain KII subsidiaries, pledges of certain Canadian and German
assets, and NL has guaranteed the facility. The term loan has scheduled payments
of DM 38 million ($23 million at December 31, 1998) due in March 1999 and DM 69
million ($41 million at December 31, 1998) due in September 1999. In accordance
with the provisions of the DM credit agreement and as a result of the level of
operating income in 1998 for KII, the Company prepaid the term loan in full in
March 1999, principally by drawing on its DM revolving credit facility. The
revolver's balance is scheduled to be reduced to DM 105 million in March 2000,
with the remaining balance to be repaid in September 2000.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities, including the DM facility, approximated $104 million
at December 31, 1998.
Notes payable at December 31, 1997 and 1998 consists of DM 25 million and
DM 61 million, respectively, of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 3.75% to 3.875% at December 31,
1997 and from 3.75% to 4.60% at December 31, 1998.
The Company used a portion of the net proceeds from the January 1998 sale
of Rheox's net assets to (i) prepay $118 million of the Rheox term loan, (ii)
prepay $42 million of Kronos' tranche of the LPC joint venture term loan, (iii)
make $65 million of open-market purchases of the Company's 13% Senior Secured
Discount Notes at prices ranging from $101.25 to $105.19 per $100 of their
principal amounts, (iv) purchase $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively, pursuant to a June 1998 pro rata
tender offer to Note holders as required by the indentures, and (v) redeem the
remaining 13% Senior Secured Discount Notes on October 15, 1998 at the
redemption
F-22
price of 106% of the principal amount, in accordance with the terms of the
indenture.
The aggregate maturities of long-term debt at December 31, 1998 are shown
in the table below.
Years ending December 31, Amount
- ------------------------- --------------
(In thousands)
1999 $ 64,826
2000 48,406
2001 199
2002 198
2003 244,000
--------
$357,629
========
Note 11 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Personnel employed by
non-U.S. subsidiaries are covered by separate plans in their respective
countries and U.S. employees are covered by various plans including the
Retirement Programs of NL Industries, Inc. (the "NL Pension Plan").
A majority of U.S. employees are eligible to participate in a contributory
savings plan. The Company contributes to each employee's account an amount equal
to approximately 3% of the employee's annual eligible earnings and partially
matches employee contributions to the Plan. The Company also has an unfunded,
nonqualified defined contribution plan covering certain executives, and
contributions are based on a formula involving eligible earnings. The Company's
expense related to these plans included in continuing operations was $.8 million
in 1996, $.7 million in 1997 and $.8 million in 1998. Expense related to these
plans included in discontinued operations was $.5 million in each of 1996 and
1997 and nil in 1998.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
Years ended December 31,
----------------------------------------
1996 1997 1998
---- ---- ----
(Percentages)
Discount rate ..................... 6.5 to 8.5 6.0 to 8.5 5.5 to 8.5
Rate of increase in future
compensation levels .............. 3.5 to 6.0 3.0 to 6.0 2.5 to 6.0
Long-term rate of return on
plan assets ...................... 7.0 to 9.0 6.0 to 9.0 6.0 to 9.0
During 1996 and 1998 the Company curtailed certain U.S. employee pension
benefits and recognized gains of $4.6 million and $1.5 million, respectively, of
which $2.7 million and $1.5 million, respectively, are included in discontinued
F-23
operations. Plan assets are comprised primarily of investments in U.S. and
non-U.S. corporate equity and debt securities, short-term investments, mutual
funds and group annuity contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially-assumed rates, including the rate of return on pension plan
assets, will result in additional increases or decreases in accrued pension
liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost, excluding
curtailment gain and discontinued operations, are set forth below. The net
periodic defined benefit pension cost included in discontinued operations was
$.3 million in 1996 and nil in each of 1997 and 1998.
Years ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
Net periodic pension cost:
Service cost benefits .................... $ 3,131 $ 4,067 $ 3,835
Interest cost on projected benefit
obligation ("PBO") ...................... 15,439 15,335 15,669
Expected return on plan assets ........... (15,079) (13,271) (15,172)
Amortization of prior service cost ....... 415 344 332
Amortization of net transition
obligation .............................. 319 255 173
Recognized actuarial losses (gains) ...... (719) (2,653) 385
-------- -------- --------
$ 3,506 $ 4,077 $ 5,222
======== ======== ========
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
--------------------------
1997 1998
--------- ---------
(In thousands)
Change in PBO:
Beginning of year .......................... $ 263,244 $ 251,372
Service cost ............................... 4,067 3,835
Interest ................................... 15,335 15,669
Participant contributions .................. 1,276 1,228
Plan amendments ............................ 161 --
Actuarial losses ........................... 4,035 30,768
Curtailment gain ........................... -- (1,513)
Discontinued operations:
Service cost ............................. 207 --
Interest cost on PBO ..................... 1,129 --
Benefits paid .............................. (11,811) (15,748)
Change in currency exchange rates .......... (26,271) 10,402
--------- ---------
End of year .............................. 251,372 296,013
--------- ---------
F-24
December 31,
------------------------
1997 1998
--------- ---------
(In thousands)
Change in fair value of plan assets:
Beginning of year .............................. $ 205,091 $ 199,371
Actual return on plan assets ................... 18,327 20,951
Employer contributions ......................... 9,691 10,788
Participant contributions ...................... 1,276 1,228
Benefits paid .................................. (11,811) (15,748)
Change in currency exchange rates .............. (23,203) 4,445
--------- ---------
End of year .................................. 199,371 221,035
--------- ---------
Funded status at year end:
Plan assets less than PBO ...................... (52,001) (74,978)
Unrecognized actuarial loss .................... 18,153 44,945
Unrecognized prior service cost ................ 4,198 3,341
Unrecognized net transition obligation ......... 1,003 1,215
--------- ---------
$ (28,647) $ (25,477)
========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost ........................... $ 23,848 $ 23,990
Accrued pension cost:
Current ...................................... (8,106) (8,005)
Noncurrent ................................... (44,389) (44,649)
Accumulated other comprehensive income ......... -- 3,187
--------- ---------
$ (28,647) $ (25,477)
========= =========
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 1998, 83% of the projected benefit
obligations of such plans relate to non-U.S. plans (1997 - 77%).
December 31,
-------------------------
1997 1998
-------- --------
(In thousands)
Projected benefit obligation ................. $188,724 $231,860
Accumulated benefit obligation ............... 165,998 200,269
Fair value of plan assets .................... 125,925 148,682
Incentive bonus programs
The Company has incentive bonus programs for certain employees providing
for annual payments, which may be in the form of NL common stock, based on
formulas involving the profitability of Kronos in relation to the annual
operating plan and, for most of these employees, individual performance.
F-25
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently provides
certain health care and life insurance benefits for eligible retired employees.
Certain of the Company's U.S. and Canadian employees may become eligible for
such postretirement health care and life insurance benefits if they reach
retirement age while working for the Company. In 1989 the Company began phasing
out such benefits for currently active U.S. employees over a ten-year period and
employees retiring after 1998 will not be entitled to any such benefits. The
majority of all retirees are required to contribute a portion of the cost of
their benefits and certain current and future retirees are eligible for reduced
health care benefits at age 65. The Company's policy is to fund medical claims
as they are incurred, net of any contributions by the retirees.
For measuring the OPEB liability at December 31, 1998, the expected rate
of increase in health care costs is 6% in 1999 and 5% in 2000 and years
thereafter. Other weighted average assumptions used to measure the liability and
expense are presented below.
Years ended December 31,
------------------------
1996 1997 1998
---- ---- ----
(Percentages)
Discount rate ....................................... 7.5 7.0 6.5
Long-term rate for compensation increases ........... 6.0 6.0 6.0
Long-term rate of return on plan assets ............. 9.0 9.0 9.0
Variances from actuarially-assumed rates will result in additional
increases or decreases in accrued OPEB liabilities, net periodic OPEB expense
and funding requirements in future periods. If the health care cost trend rate
was increased (decreased) by one percentage point for each year, postretirement
benefit expense would have increased approximately $.1 million (decreased by $.1
million) in 1998, and the projected benefit obligation at December 31, 1998
would have increased by approximately $.9 million (decreased by $.8 million).
During 1996 the Company curtailed certain Canadian employee OPEB benefits and
recognized a $1.3 million gain. During 1998, as a result of the sale of Rheox,
the Company settled certain U.S. employee OPEB benefits and recognized a $3.2
million gain, all of which is included in discontinued operations.
The components of the Company's net periodic postretirement benefit cost,
excluding curtailment and settlement gains and discontinued operations, are set
forth below. The net periodic postretirement benefit costs included in
discontinued operations excluding the settlement gain was $.3 million in 1996,
$.2 million in 1997 and nil in 1998.
F-26
Years ended December 31,
-------------------------------
1996 1997 1998
------- ------- -------
(In thousands)
Net periodic OPEB cost:
Service cost benefits .................... $ 52 $ 39 $ 43
Interest cost on PBO ..................... 3,777 2,972 2,393
Expected return on plan assets ........... (596) (584) (583)
Amortization of prior service cost ....... (2,075) (2,075) (2,075)
Recognized actuarial losses (gains) ...... 615 (305) (811)
------- ------- -------
$ 1,773 $ 47 $(1,033)
======= ======= =======
December 31,
-----------------------
1997 1998
-------- --------
(In thousands)
Change in PBO:
Beginning of year .............................. $ 44,760 $ 36,994
Service cost ................................... 39 43
Interest cost .................................. 2,972 2,393
Actuarial losses (gains) ....................... (5,696) 2,117
Discontinued operations:
Service cost ................................. 66 --
Interest cost on PBO ......................... 194 --
Settlement gain .............................. -- (2,354)
Benefits paid from:
Company funds ................................ (4,183) (4,179)
Plan assets .................................. (1,087) (1,087)
Change in currency exchange rates .............. (71) (115)
-------- --------
End of year ................................ 36,994 33,812
-------- --------
Change in fair value of plan assets:
Beginning of year .............................. 6,689 6,527
Actual return on plan assets ................... 450 450
Employer contributions ......................... 475 475
Benefits paid .................................. (1,087) (1,087)
-------- --------
End of year ................................ 6,527 6,365
-------- --------
Funded status at year end:
Plan assets less than PBO ...................... (30,467) (27,447)
Unrecognized actuarial loss .................... (11,722) (7,447)
Unrecognized prior service cost ................ (14,171) (12,008)
-------- --------
$(56,360) $(46,902)
======== ========
Amounts recognized in the balance sheet:
Current ........................................ $ (5,409) $ (5,243)
Noncurrent ..................................... (50,951) (41,659)
-------- --------
$(56,360) $(46,902)
======== ========
F-27
Note 12 - Shareholders' equity:
Common stock
Shares of common stock
------------------------------------
Treasury
Issued stock Outstanding
------ -------- -----------
(In thousands)
Balance at December 31, 1995 ....... 66,839 15,748 51,091
Treasury shares reissued ......... -- (27) 27
------ ------ ------
Balance at December 31, 1996 ....... 66,839 15,721 51,118
Treasury shares reissued ......... -- (149) 149
------ ------ ------
Balance at December 31, 1997 ....... 66,839 15,572 51,267
Treasury shares reissued ......... -- (544) 544
------ ------ ------
Balance at December 31, 1998 ....... 66,839 15,028 51,811
====== ====== ======
The Company reinstated a regular quarterly dividend in June 1998 and
subsequently paid three quarterly $.03 per share cash dividends in 1998. On
February 10, 1999, the Company's Board of Directors increased the regular
quarterly dividend to $.035 per share and declared a dividend to shareholders of
record as of March 17, 1999 to be paid on March 31, 1999.
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan (the "NL Option
Plan") provides for the discretionary grant of restricted common stock, stock
options, stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company. Although certain stock options
granted pursuant to a similar plan which preceded the NL Option Plan ("the
Predecessor Option Plan") remain outstanding at December 31, 1998, no additional
options may be granted under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and, at December 31, 1998, 4,990,000 shares were available for
future grants. The NL Option Plan provides for the grant of options that qualify
as incentive options and for options which are not so qualified. Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or greater than 100% of the market price at the date of grant, vest over a five
year period and expire ten years from the date of grant. Restricted stock,
forfeitable unless certain periods of employment are completed, is held in
escrow in the name of the grantee until the restriction period expires. No SARs
have been granted under the NL Option Plan.
In addition to the NL Option Plan, the Company had a stock option plan for
its nonemployee directors that expired in 1998. At December 31, 1998 there were
options to acquire 8,000 shares of common stock outstanding under this plan, all
of which were fully vested. Future grants to directors are expected to be
granted from the NL Option Plan.
F-28
Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee director plan are summarized in the
table below.
Exercise price Amount
per share payable
-------------------- upon
Shares Low High exercise
------ --------- --------- --------
(In thousands, except per share amounts)
Outstanding at December 31, 1995 2,393 $ 4.81 $ 24.19 $ 27,321
Granted ...................... 218 14.25 17.25 3,316
Exercised .................... (27) 5.00 10.78 (262)
Forfeited .................... (10) 5.00 14.25 (91)
Expired ...................... (1) 10.78 10.78 (6)
----- --------- --------- --------
Outstanding at December 31, 1996 2,573 4.81 24.19 30,278
----- --------- --------- --------
Granted ...................... 442 11.88 14.88 5,792
Exercised .................... (149) 4.81 11.81 (1,025)
Forfeited .................... (21) 5.00 22.29 (284)
----- --------- --------- --------
Outstanding at December 31, 1997 2,845 4.81 24.19 34,761
Granted ...................... 474 17.97 21.97 9,334
Exercised .................... (960) 4.81 17.25 (8,740)
Forfeited .................... (240) 5.00 19.97 (4,336)
----- --------- --------- --------
Outstanding at December 31, 1998 2,119 $ 5.00 $ 24.19 $ 31,019
===== ========= ========= ========
At December 31, 1996, 1997 and 1998 options to purchase 1,660,068,
1,801,955 and 957,861 shares, respectively, were exercisable and options to
purchase 358,220 shares become exercisable in 1999. Of the exercisable options
at December 31, 1998, options to purchase 641,621 shares had exercise prices
less than the Company's December 31, 1998 quoted market price of $14.19 per
share. Outstanding options at December 31, 1998 expire at various dates through
2008, with a weighted-average remaining life of six years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 1996, 1997 and 1998 were $8.38, $6.35 and $9.78 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1996, 1997 and 1998: stock price volatility of
42%, 37% and 51% in 1996, 1997 and 1998, respectively; risk-free rate of return
of 5% in 1996 and 1997 and 4% in 1998; no dividend yield in 1996 and 1997, and a
dividend yield of .9% in 1998; and an expected term of 10 years in 1996, 9 years
in 1997 and 8 years in 1998. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
F-29
The Company's pro forma net income (loss) and basic net income (loss) per
common share were as follows. The pro forma impact on earnings per common share
for 1996, 1997 and 1998 is not necessarily indicative of future effects on
earnings per share.
Years Ended December 31,
--------------------------------------
1996 1997 1998
----------- ----------- -----------
(In thousands except per share amounts)
Net income (loss)- as reported ........ $ 10,817 $ (9,473) $ 366,678
Net income (loss)- pro forma .......... $ 10,085 $ (11,057) $ 363,843
Net income (loss) per basic common
share - as reported .................. $ .21 $ (.19) $ 7.13
Net income (loss) per basic common
share - pro forma .................... $ .20 $ (.22) $ 7.07
Preferred stock
The Company is authorized to issue a total of five million shares of
preferred stock. The rights of preferred stock as to dividends, redemption,
liquidation and conversion are determined upon issuance.
Note 13 - Income taxes:
The components of (i) income (loss) from continuing operations before
income taxes and minority interest ("pretax income (loss)"), (ii) the difference
between the provision for income taxes attributable to pretax income (loss) and
the amounts that would be expected using the U.S. federal statutory income tax
rate of 35%, (iii) the provision for income taxes and (iv) the comprehensive tax
provision are presented below.
Years ended December 31,
----------------------------------
1996 1997 1998
-------- --------- ---------
(In thousands)
Pretax income (loss):
U.S .................................... $ 20,481 $ (9,308) $ 57,638
Non-U.S ................................ (30,715) (18,381) 52,052
-------- --------- ---------
$(10,234) $ (27,689) $ 109,690
======== ========= =========
Expected tax expense (benefit) ........... $ (3,581) $ (9,692) $ 38,391
Non-U.S. tax rates ....................... (6) (784) 339
German solidarity income taxes ........... -- 3,597 2,168
Valuation allowance ...................... 3,013 5,107 (19,143)
Incremental tax on income of companies
not included in the NL Tax Group ........ 3,423 3,886 4,277
Refund of prior-year German dividend
withholding taxes ....................... -- -- (8,219)
U.S. state income taxes .................. (569) 231 307
Other, net ............................... (784) (101) 1,668
-------- --------- ---------
$ 1,496 $ 2,244 $ 19,788
======== ========= =========
F-30
Years ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................... $ (3,539) $ (6,881) $ 850
U.S. state ............................. (460) 681 307
Non-U.S ................................ 5,198 14,071 13,643
-------- -------- --------
1,199 7,871 14,800
-------- -------- --------
Deferred income tax expense (benefit):
U.S. federal ........................... (6,493) 1,224 2,112
U.S. state ............................. (668) (450) --
Non-U.S ................................ 7,458 (6,401) 2,876
-------- -------- --------
297 (5,627) 4,988
-------- -------- --------
$ 1,496 $ 2,244 $ 19,788
======== ======== ========
Comprehensive provision (benefit) for
income taxes allocable to:
Pretax income (loss) ..................... $ 1,496 $ 2,244 $ 19,788
Discontinued operations .................. 13,337 12,475 87,000
Extraordinary item ....................... -- -- (5,698)
Additional paid-in capital ............... -- -- (3,796)
Other comprehensive income:
Marketable securities .................. 971 1,626 108
Currency translation ................... (642) 410 --
-------- -------- --------
$ 15,162 $ 16,755 $ 97,402
======== ======== ========
F-31
The components of the net deferred tax liability are summarized below:
December 31,
--------------------------------------------------
1997 1998
---- ----
Deferred tax Deferred tax
------------------------ ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- ------- -----------
(In thousands)
Tax effect of temporary
differences relating to:
Inventories .............. $ 4,223 $ (2,674) $ 3,359 $ (3,858)
Property and equipment ... -- (105,806) -- (110,189)
Accrued postretirement
benefits cost ........... 19,682 -- 16,434 --
Accrued (prepaid)
pension cost ............ 5,296 (16,697) 5,341 (18,921)
Accrued environmental
costs ................... 45,242 -- 42,666 --
Noncompete agreement ..... -- -- 5,717 --
Other accrued
liabilities and
deductible
differences ............. 42,393 -- 17,094 --
Other taxable
differences ............. -- (85,139) -- (135,487)
Tax on unremitted
earnings of
non-U.S. subsidiaries ..... -- (17,551) -- (21,351)
Tax loss and tax credit
carryforwards ............. 167,680 -- 138,211 --
Valuation allowance ........ (188,585) -- (134,477) --
--------- --------- --------- ---------
Gross deferred tax
assets (liabilities) .... 95,931 (227,867) 94,345 (289,806)
Reclassification,
principally netting by
tax jurisdiction .......... (94,179) 94,179 (92,390) 92,390
--------- --------- --------- ---------
Net total deferred tax
assets (liabilities) .... 1,752 (133,688) 1,955 (197,416)
Net current deferred
tax assets
(liabilities) ........... 1,642 (891) 1,955 (1,236)
--------- --------- --------- ---------
Net noncurrent deferred
tax assets
(liabilities) ........... $ 110 $(132,797) $ -- $(196,180)
========= ========= ========= =========
F-32
Changes in the Company's deferred income tax valuation allowance during
the past three years are summarized below. The decrease in deductible temporary
differences in 1998 includes items that have been reported as discontinued
operations.
Years ended December 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(In thousands)
Balance at the beginning of year ........ $ 195,569 $ 207,117 $ 188,585
Recognition of certain deductible tax
attributes which previously did not
meet the "more-likely-than-not"
recognition criteria ................. (10,766) (11,106) (64,274)
Increase in certain deductible
temporary differences which the
Company believes do not meet the
"more-likely-than-not" recognition
criteria ............................. 13,779 16,213 6,964
Offset to the change in gross deferred
income tax assets due to dual
residency status of a Company
subsidiary and redetermination of
certain U.S. tax attributes .......... 14,472 (11,300) (3,734)
Foreign currency translation .......... (5,937) (12,339) 6,936
--------- --------- ---------
Balance at the end of year .............. $ 207,117 $ 188,585 $ 134,477
========= ========= =========
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including non-income tax related items and interest.
The Company previously reached an agreement with the German tax authorities and
paid certain tax deficiencies of approximately DM 44 million ($28 million when
paid), including interest, which resolved significant tax contingencies for
years through 1990. In the third quarter of 1998, the Company received a DM 14
million ($8.2 million when received) refund of 1990 German dividend withholding
taxes. The German tax authorities were required to refund such amounts based on
a 1998 German Supreme Court decision in favor of another taxpayer. The refund
resulted in a reduction of the settlement amount from DM 44 million referred to
above to DM 30 million for years through 1990. No further withholding tax
refunds are expected.
Certain other significant German tax contingencies aggregating an
estimated DM 172 million ($103 million at December 31, 1998) through 1997 remain
outstanding and are in litigation. Of these, one primary issue represents
disputed amounts aggregating DM 160 million ($96 million at December 31, 1998)
for years through 1997. The Company has received tax assessments for a
substantial portion of these amounts. No payments of tax or interest
deficiencies related to these assessments are expected until the litigation is
resolved. During 1997 a German tax court proceeding involving a tax issue
substantially the same as this issue was decided in favor of the taxpayer. The
German tax authorities appealed that decision to the German Supreme Court which
in February 1999 rendered its judgment in favor of the taxpayer. The Company
F-33
believes that the German Supreme Court's judgment should determine the outcome
of the Company's primary dispute with the German tax authorities. Based on this
recent favorable judgment, the Company will request that the tax assessments be
withdrawn. The Company has granted a DM 94 million ($57 million at December 31,
1998) lien on its Nordenham, Germany TiO2 plant in favor of the City of
Leverkusen related to this tax contingency, and a DM 5 million ($3 million at
December 31, 1998) lien in favor of the German federal tax authorities for other
tax contingencies. If the German tax authorities withdraw their assessments
based on the German Supreme Court's decision, the Company expects to request the
release of the DM 94 million lien in favor of the City of Leverkusen.
In addition, during 1997 the Company reached an agreement with the German
tax authorities regarding certain other issues not in litigation for the years
1991 through 1994, and agreed to pay additional tax deficiencies of DM 9 million
($5 million at December 31, 1998), most of which was paid in the third quarter
of 1998.
During 1997 the Company received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1998) relating to 1994. The Company has appealed this assessment and has
begun litigation proceedings. During 1998 the Company was informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at December 31, 1998) will likely be proposed for the year 1996. The
Company intends to vigorously contest this issue and litigate, if necessary.
Although the Company believes that it will ultimately prevail, the Company has
granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant
in favor of the Norwegian tax authorities and will be required to grant security
on the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
The Company utilized foreign tax credit carryforwards of $2 million in
1996 and $17 million in 1997, and utilized U.S. net operating loss carryforwards
of $20 million in 1997 to reduce U.S. federal income tax expense. In 1998 the
Company utilized $13 million of alternative minimum tax credit carryforwards
(the benefit of which was recognized in discontinued operations) to reduce U.S.
federal income tax expense and $6 million of foreign tax credit carryovers
expired unutilized. At December 31, 1998 for U.S. federal income tax purposes,
the Company has approximately $2 million of unutilized foreign tax credit
carryforwards which expire in 1999. The Company also has approximately $360
million of income tax loss carryforwards in Germany with no expiration date.
F-34
Note 14 - Other income, net:
Years ended December 31,
--------------------------------
1996 1997 1998
-------- ------- --------
(In thousands)
Securities earnings:
Interest and dividends .................. $ 4,708 $ 2,736 $ 14,921
Securities transactions ................. -- 2,657 --
-------- ------- --------
4,708 5,393 14,921
Currency transaction gains, net ........... 5,890 5,919 4,157
Noncompete agreement income ............... -- -- 3,667
Trade interest income ..................... 1,613 2,983 2,115
Disposition of property and equipment ..... (2,236) 1,735 (768)
Technology fee income ..................... 8,743 -- --
Pension and OPEB curtailment gains ........ 3,240 -- --
Litigation settlement gains ............... 2,756 -- --
Other, net ................................ 2,955 3,337 1,361
-------- ------- --------
$ 27,669 $19,367 $ 25,453
======== ======= ========
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company is amortizing the fee to income
using the straight-line method over the five-year noncompete period beginning
January 30, 1998. Technology fee income was amortized by the straight-line
method over a three-year period ending October 1996.
Note 15 - Other items:
Advertising costs included in continuing operations, expensed as incurred,
were $1 million in each of 1996, 1997 and 1998.
Research, development and certain sales technical support costs included
in continuing operations is expensed as incurred and approximated $8 million in
1996 and $7 million in each of 1997 and 1998.
Interest capitalized related to continuing operations in connection with
long-term capital projects was $2 million in each of 1996 and 1997 and $1
million in 1998.
Note 16 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions)
F-35
of subsidiaries, divisions or other business units, which transactions have
involved both related and unrelated parties and have included transactions which
resulted in the acquisition by one related party of a publicly-held minority
equity interest in another related party. While no transactions of the type
described above are planned or proposed with respect to the Company other than
as set forth in this Annual Report on Form 10-K, the Company from time to time
considers, reviews and evaluates and understands that Contran, Valhi and related
entities consider, review and evaluate, such transactions. Depending upon the
business, tax and other objectives then relevant, and restrictions under the
indentures and other agreements, it is possible that the Company might be a
party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company is a party to an intercorporate services agreement with
Contran (the "Contran ISA") whereby Contran provides certain management services
to the Company on a fee basis. Management services fee expense related to the
Contran ISA was $.4 million in 1996, $.5 million in 1997 and $1.0 million in
1998.
The Company is a party to an intercorporate services agreement with Valhi
(the "Valhi ISA") whereby Valhi and the Company provide certain management,
financial and administrative services to each other on a fee basis. Net
management services fee expense (income) related to the Valhi ISA was $.1
million in 1996, $(.1) million in 1997 and nil in 1998.
The Company is party to an intercorporate services agreement with Tremont
(the "Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis. Management
services fee income related to the Tremont ISA was $.1 million in 1996, $.2
million in 1997 and $.1 million in 1998.
The Company is party to an intercorporate services agreement (the "Timet
ISA") with Titanium Metals Corporation ("Timet"), approximately 39% of the
outstanding common stock of which is currently held by Tremont. Under the terms
of the contract, the Company provides certain management and financial services
to Timet on a fee basis. Management services fee income related to the Timet ISA
was $.3 million in each of 1997 and 1998.
The Company is party to an intercorporate services agreement (the "CompX
ISA") with CompX International, Inc. ("CompX"). Under the terms of the contract,
the Company provides certain management and administrative services to CompX on
a fee basis. Management services fee income related to the CompX ISA was $.1
million in 1998.
Purchases of TiO2 from LPC were $69.8 million in 1996, $78.1 million in
1997 and $89.0 million in 1998.
An employee of the Company has been granted options to purchase Valhi
common stock under the terms of Valhi's stock option plans. Prior to March 1998,
F-36
the Company paid Valhi the aggregate difference between the option price and the
market value of Valhi's common stock on the exercise date of such options. For
financial reporting purposes, the Company accounts for the related expense of
$1,000 in 1996, $68,000 in 1997 and nil in 1998 in a manner similar to
accounting for SARs. Subsequent to March 1998, the Company no longer will pay
Valhi upon the exercise of such options.
The Company and NL Insurance, Ltd. of Vermont ("NLIV"), a wholly-owned
subsidiary of Tremont, are parties to an Insurance Sharing Agreement ("ISA")
with respect to certain loss payments and reserves established by NLIV that (i)
arise out of claims against other entities for which the Company is responsible
and (ii) are subject to payment by NLIV under certain reinsurance contracts.
Also, NLIV will credit the Company with respect to certain underwriting profits
or credit recoveries that NLIV receives from independent reinsurers that relate
to retained liabilities. In the first quarter of 1999 the Company collateralized
letters of credit issued and outstanding on behalf of NLIV pursuant to the ISA
with $9.7 million of the Company's cash, and expects to classify such amount as
current restricted cash equivalents in the first quarter of 1999.
EWI RE, Inc. ("EWI") arranges for and brokers certain of the Company's
insurance policies and those of the Company's 50%-owned joint venture. Parties
related to Contran own 90% of the outstanding common stock of EWI, and a
son-in-law of Harold C. Simmons manages the operations of EWI. Consistent with
insurance industry practices, EWI receives a commission from the insurance
underwriters for the policies that it arranges or brokers. The Company and its
joint venture paid an aggregate of approximately $3.0 million for such policies
in 1998, which amount principally included payments for reinsurance premiums
paid to third parties, but also included commissions paid to EWI.
Net amounts payable to affiliates are summarized in the following table.
December 31,
----------------------------
1997 1998
-------- --------
(In thousands)
Tremont Corporation .................... $ 3,354 $ 3,053
LPC .................................... 8,513 8,264
Other, net ............................. (355) (692)
-------- --------
$ 11,512 $ 10,625
======== ========
Amounts payable to LPC are generally for the purchase of TiO2 (see Note
6), and amounts payable to Tremont principally relate to the Company's Insurance
Sharing Agreement described above.
Note 17 - Commitments and contingencies:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values,
F-37
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreements restrict the Company's ability to transfer ownership or use of the
Leverkusen facility.
Net rent expense included in continuing operations aggregated $8 million
in 1996, $7 million in 1997 and $6 million in 1998. At December 31, 1998 minimum
rental commitments under the terms of noncancellable operating leases, excluding
discontinued operations, were as follows:
Years ending December 31, Real Estate Equipment
- ------------------------- ----------- ---------
(In thousands)
1999 $ 2,151 $1,130
2000 1,135 722
2001 1,093 300
2002 1,093 105
2003 916 32
2004 and thereafter 19,996 5
------- ------
$26,384 $2,294
======= ======
Capital expenditures
At December 31, 1998 the estimated cost to complete capital projects in
process approximated $14 million, including $7 million to complete a landfill
expansion for the Company's Belgian facility.
Purchase commitments
The Company has long-term supply contracts that provide for the Company's
chloride feedstock requirements through 2000. The agreements require the Company
to purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $98 million.
Legal proceedings
Lead pigment litigation. Since 1987, the Company, other former
manufacturers of lead pigments for use in paint and lead-based paint, and the
Lead Industries Association have been named as defendants in various legal
proceedings seeking damages for personal injury and property damage allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by or on behalf of large United States cities or their public housing
authorities
F-38
and certain others have been asserted as class actions. These legal proceedings
seek recovery under a variety of theories, including negligent product design,
failure to warn, strict liability, breach of warranty, conspiracy/concert of
action, enterprise liability, market share liability, intentional tort, and
fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Most of these legal proceedings are
in various pre-trial stages; some are on appeal.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Considering the Company's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. Some of the Company's current and
former facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company has
been named a potential responsible party ("PRP") pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act ("CERCLA") in approximately 75
governmental and private actions associated with hazardous waste sites and
former mining locations, certain of which are on the U.S. Environmental
Protection Agency's Superfund National Priorities List. These actions seek
cleanup costs, damages for personal injury or property damage and/or damages for
injury to natural resources. While the Company may be jointly and severally
liable for such costs, in most cases it is only one of a number of PRPs who are
also jointly and severally liable. In addition, the Company is a party to a
number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims. At December 31, 1998 the Company had accrued $126 million
for those environmental matters which are reasonably estimable. It is not
possible to estimate the range of costs for certain sites. The upper end of the
range of reasonably possible costs to the Company for sites which it is possible
to estimate costs is approximately $160 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries. The imposition of more stringent
standards or requirements under environmental laws or regulations, new
developments or changes respecting site cleanup costs or allocation of such
costs among PRPs, or a determination that the Company is potentially responsible
for the release of hazardous substances at other sites could result in
expenditures
F-39
in excess of amounts currently estimated by the Company to be required for such
matters. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. Further, there can be no
assurance that additional environmental matters will not arise in the future.
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
Other litigation. The Company is also involved in various other
environmental, contractual, product liability and other claims and disputes
incidental to its present and former businesses.
The Company currently believes the disposition of all claims and disputes
individually or in the aggregate, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Concentrations of credit risk
Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate pigment
production process), and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production processes). TiO2 is
sold to the paint, plastics and paper industries. Such markets are generally
considered "quality-of-life" markets whose demand for TiO2 is influenced by the
relative economic well-being of the various geographic regions. TiO2 is sold to
over 4,000 customers, none of which represents a significant portion of net
sales. In each of the past three years, approximately one-half of the Company's
TiO2 sales by volume were to Europe and approximately 37% in 1996, 36% in 1997
and 37% in 1998 of sales were attributable to North America.
Consolidated cash, cash equivalents and restricted cash equivalents
includes $53 million and $136 million invested in U.S. Treasury securities
purchased under short-term agreements to resell at December 31, 1997 and 1998,
respectively, of which $45 million and $126 million, respectively, of such
securities are held in trust for the Company by a single U.S. bank.
F-40
Note 18 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
December 31, December 31,
1997 1998
------------------ ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In millions)
Cash, cash equivalents and current
restricted cash equivalents $ 106.1 $106.1 $163.1 $163.1
Marketable securities - classified as
available-for-sale 17.3 17.3 17.6 17.6
Notes payable and long-term debt:
Fixed rate with market quotes:
Senior Secured Notes $ 250.0 $277.9 $244.0 $253.1
Senior Secured Discount Notes 169.9 186.7 - -
Variable rate debt 338.3 338.3 150.0 150.0
Common shareholders' equity (deficit) $(222.3) $698.5 $152.3 $735.1
Fair value of the Company's marketable securities and Notes are based upon
quoted market prices and the fair value of the Company's common shareholder's
equity (deficit) is based upon quoted market prices for NL's common stock at the
end of the year.
In connection with its credit facility, Rheox entered into interest rate
collar agreements in 1997 which effectively set minimum and maximum U.S. LIBOR
interest rates of 5.25% and 8%, respectively, on $50 million principal amount of
its variable-rate bank term loan through May 2001. The margin on such borrowings
ranged from .75% to 1.75%, depending upon the level of a certain Rheox financial
ratio. The Company was exposed to interest rate risk in the event of
nonperformance by the other parties to the agreements. At December 31, 1997 the
estimated fair value of such agreements was estimated to be a $.1 million
payable. Such fair value represented the amount the Company would pay if it
terminated the collar agreements at that date, and is based upon quotes obtained
from the counter party financial institutions. The Company terminated these
agreements in the first quarter of 1998 concurrently with the prepayment and
termination of the underlying credit facility. See Note 20. The Company held no
derivative financial instruments at December 31, 1998.
F-41
Note 19 - Quarterly financial data (unaudited):
Quarter ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In thousands, except per share amounts)
Year ended December 31, 1997:
Net sales .................... $ 204,389 $ 214,354 $210,343 $208,154
Cost of sales ................ 167,175 172,679 162,499 147,592
Operating income ............. 8,689 16,815 24,908 32,089
Income (loss) from
continuing operations ....... (40,180) (3,428) 3,984 9,749
Net income (loss) ............ $ (35,721) $ 2,255 $ 9,761 $ 14,232
========= ========= ======== ========
Basic and diluted
earnings per share:
Income (loss) from
continuing operations ..... $ (.79) $ (.07) $ .08 $ .19
========= ========= ======== ========
Net income (loss) .......... $ (.70) $ .04 $ .19 $ .28
========= ========= ======== ========
Weighted average common
shares and potential
common shares
outstanding:
Basic ...................... 51,140 51,144 51,146 51,175
Diluted .................... 51,140 51,144 51,585 51,717
Year ended December 31, 1998:
Net sales .................... $ 222,629 $ 241,645 $221,520 $208,930
Cost of sales ................ 156,915 167,329 151,782 142,421
Operating income ............. 39,399 46,725 45,024 40,033
Income from continuing
operations .................. 16,300 23,414 31,359 18,789
Net income ................... $ 301,015 $ 23,729 $ 28,959 $ 12,975
========= ========= ======== ========
Earnings per share:
Basic:
Income from
continuing
operations .............. $ .32 $ .46 $ .61 $ .36
========= ========= ======== ========
Net income ............... $ 5.87 $ .46 $ .56 $ .25
========= ========= ======== ========
Diluted:
Income from
continuing
operations .............. $ .31 $ .45 $ .60 $ .36
========= ========= ======== ========
Net income ............... $ 5.80 $ .46 $ .55 $ .25
========= ========= ======== ========
Weighted average common
shares and potential
common shares
outstanding:
Basic ...................... 51,282 51,341 51,444 51,805
Diluted .................... 51,852 52,030 52,194 52,014
F-42
Note 20 - Discontinued operations:
The Company sold the net assets of its Rheox specialty chemical business
to Elementis plc for $465 million cash (before fees and expenses) in January
1998, including $20 million attributable to a five-year agreement by the Company
not to compete in the rheological products business. The Company recognized an
after-tax gain of approximately $286 million on the sale of this business
segment. As a result of the sale, the Company has presented the results of this
business segment as discontinued operations for all periods presented. Following
the sale of its assets, Rheox, Inc. was renamed NL Capital Corporation.
Condensed income statements related to discontinued operations for the
years ended December 31, 1996 and 1997 and the month ended January 31, 1998 are
as follows. Interest expense has been allocated to discontinued operations based
on the amount of debt specifically attributed to Rheox's operations.
Years ended December 31, Month ended
------------------------- January 31,
1996 1997 1998
---------- --------- -----------
(In thousands)
Net sales ............................... $ 134,895 $ 147,199 $ 12,630
Other income (expense), net ............. 2,811 (200) (50)
--------- --------- ---------
137,706 146,999 12,580
--------- --------- ---------
Cost of sales ........................... 69,843 73,583 6,969
Selling, general and administrative ..... 26,310 29,231 2,737
Interest expense ........................ 5,706 11,207 771
--------- --------- ---------
101,859 114,021 10,477
--------- --------- ---------
Income before income taxes and
minority interest .................. 35,847 32,978 2,103
Income tax expense ...................... 13,337 12,475 778
Minority interest ....................... (42) 101 --
--------- --------- ---------
22,552 20,402 1,325
Gain from sale of Rheox, net of tax
expense of $86,222 ..................... -- -- 286,071
--------- --------- ---------
$ 22,552 $ 20,402 $ 287,396
========= ========= =========
F-43
A condensed balance sheet related to discontinued operations included in
the Company's consolidated balance sheet at December 31, 1997 is as follows.
December 31,
ASSETS 1997
--------------
(In thousands)
Current assets:
Cash and cash equivalents ................................. $ 9,137
Accounts and notes receivable ............................. 15,415
Inventories ............................................... 19,921
Other current assets ...................................... 6,443
---------
Total current assets .................................... 50,916
Other assets:
Property, plant and equipment, net ........................ 30,308
Other assets .............................................. 7,411
---------
$ 88,635
=========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt ...................... $ 15,000
Other current liabilities ................................. 19,129
---------
Total current liabilities ............................... 34,129
---------
Noncurrent liabilities:
Long-term debt ............................................ 102,500
Deferred income taxes ..................................... 2,485
Other noncurrent liabilities .............................. 4,489
---------
Total noncurrent liabilities ............................ 109,474
---------
Stockholder's deficit ....................................... (54,968)
---------
$ 88,635
=========
F-44
Condensed cash flow data for Rheox (excluding dividends paid to,
contributions received from and intercompany loans with NL) is presented below.
Years ended December 31, Month ended
------------------------ January 31,
1996 1997 1998
--------- --------- ---------
(In thousands)
Cash flows from operating activities .... $ 20,705 $ 31,506 $ (30,587)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................. (2,665) (2,330) (26)
Purchase of minority interests ........ (5,168) -- --
Other, net ............................ 457 16 --
--------- --------- ---------
(7,376) (2,314) (26)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness, net ..................... (23,041) 100,940 (117,500)
Other, net ............................ (451) -- --
--------- --------- ---------
(23,492) 100,940 (117,500)
--------- --------- ---------
Net change from operating,
investing and financing
activities ......................... $ (10,163) $ 130,132 $(148,113)
========= ========= =========
F-45
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 10, 1999 appearing on page F-2 of the 1998 Annual Report
on Form 10-K of NL Industries, Inc. also included an audit of the financial
statement schedules listed in Item 14(a) and (d) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statement.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for environmental remediation costs in
1997 in accordance with Statement of Position No. 96-1.
PricewaterhouseCoopers LLP
Houston, Texas
February 10, 1999
S-1
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 1997 and 1998
(In thousands)
1997 1998
--------- --------
Current assets:
Cash and cash equivalents ........................ $ 11,607 $ 13,853
Restricted cash equivalents ...................... 4,934 5,500
Accounts and notes receivable .................... 7,119 29
Receivable from subsidiaries ..................... 10,625 8,482
Refundable income taxes .......................... -- 5,713
Prepaid expenses ................................. 256 162
Deferred income taxes ............................ -- 115
--------- --------
Total current assets ......................... 34,541 33,854
--------- --------
Other assets:
Marketable securities ............................ 17,270 4,087
Notes receivable from subsidiary ................. 573,218 419,164
Investment in subsidiaries ....................... (216,264) 312,764
Other ............................................ 5,778 3,223
--------- --------
Total other assets ........................... 380,002 739,238
--------- --------
Property and equipment, net ........................ 3,221 3,011
--------- --------
$ 417,764 $776,103
========= ========
Current liabilities:
Accounts payable and accrued liabilities ......... $ 35,636 $ 28,873
Payable to affiliates ............................ 3,218 3,777
Income taxes ..................................... 5,051 --
Deferred income taxes ............................ 1,640 --
--------- --------
Total current liabilities .................... 45,545 32,650
--------- --------
Noncurrent liabilities:
Long-term debt ................................... 419,857 244,000
Notes payable to affiliates ...................... -- 265,838
Deferred income taxes ............................ 12,856 8,940
Accrued pension cost ............................. 7,019 12,351
Accrued postretirement benefits cost ............. 31,117 25,655
Other ............................................ 123,639 34,335
--------- --------
Total noncurrent liabilities ................. 594,488 591,119
--------- --------
Shareholders' equity (deficit) ..................... (222,269) 152,334
--------- --------
$ 417,764 $776,103
========= ========
Contingencies (Note 4)
S-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Income
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
-------- --------- ---------
Revenues and other income:
Equity in income (loss) from
continuing operations of
subsidiaries .......................... $ (4,316) $ (1,019) $ 73,839
Interest and dividends ................. 1,461 1,246 1,812
Interest income from subsidiaries:
Continuing ........................... 47,097 57,851 56,089
Discontinued ......................... 2,641 1,189 --
Securities transactions ................ -- 2,657 5,635
Other income, net ...................... 1,873 523 4,421
-------- --------- ---------
48,756 62,447 141,796
-------- --------- ---------
Costs and expenses:
General and administrative ............. 18,094 49,502 10,756
Interest ............................... 47,940 50,319 55,078
-------- --------- ---------
66,034 99,821 65,834
-------- --------- ---------
Income (loss) from continuing
operations before income taxes .... (17,278) (37,374) 75,962
Income tax benefit ....................... 5,543 7,499 13,900
-------- --------- ---------
Income (loss) from continuing
operations ........................ (11,735) (29,875) 89,862
Discontinued operations .................. 22,552 20,402 287,396
Extraordinary item ....................... -- -- (10,580)
-------- --------- ---------
Net income (loss) .................. $ 10,817 $ (9,473) $ 366,678
======== ========= =========
S-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
-------- -------- ---------
Cash flows from operating activities:
Net income (loss) ....................... $ 10,817 $ (9,473) $ 366,678
Equity in (income) loss of subsidiaries:
Continuing ............................ 4,316 1,019 (73,839)
Discontinued .......................... (22,552) (20,402) (287,396)
Distributions from subsidiaries:
Continuing ............................ 20,000 35,000 15,000
Discontinued .......................... -- 30,000 --
Noncash interest expense ................ 842 (7,523) (8,660)
Deferred income taxes ................... (1,443) 1,224 (3,862)
Securities transactions ................. -- (2,657) (3,711)
Change in accounting for environmental
remediation costs ...................... -- 30,000 --
Other, net .............................. (3,291) (2,544) (3,382)
-------- -------- ---------
8,689 54,644 828
Change in assets and liabilities, net ... (8,593) 789 92,018
-------- -------- ---------
Net cash provided by operating
activities ......................... 96 55,433 92,846
-------- -------- ---------
Cash flows from investing activities:
Investments in and loans to subsidiaries (12,941) (58,900) --
Proceeds from disposition of securities . -- 6,875 6,875
Change in restricted cash equivalents,
net .................................... (484) (101) (566)
Capital expenditures .................... (40) (15) (82)
Other, net .............................. 11 (12) 87
-------- -------- ---------
Net cash provided (used) by investing
activities ......................... (13,454) (52,153) 6,314
-------- -------- ---------
S-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 1996, 1997 and 1998
(In thousands)
1996 1997 1998
-------- -------- ---------
Cash flows from financing activities:
Indebtedness - principal payments ....... $ -- $ -- $(193,498)
Borrowings from affiliates .............. -- -- 89,839
Dividends ............................... (15,333) -- (4,636)
Settlement of shareholder derivative
lawsuit, net ........................... -- -- 11,211
Treasury stock reissued ................. 262 1,025 170
-------- -------- ---------
Net cash provided (used) by
financing activities ............... (15,071) 1,025 (96,914)
-------- -------- ---------
Increase (decrease) in cash and cash
equivalents from:
Operating activities .................. 96 55,433 92,846
Investing activities .................. (13,454) (52,153) 6,314
Financing activities .................. (15,071) 1,025 (96,914)
-------- -------- ---------
Net change from operating, investing ....
and financing activities ............... (28,429) 4,305 2,246
Balance at beginning of year ............ 35,731 7,302 11,607
-------- -------- ---------
Balance at end of year .................. $ 7,302 $ 11,607 $ 13,853
======== ======== =========
S-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of NL Industries, Inc. (the
"Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference. In 1997 the Company adopted a new method of
accounting for environmental remediation costs. See Note 2 to the Consolidated
Financial Statements.
Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31,
-----------------------
1997 1998
--------- ---------
(In thousands)
Current:
Kronos and NLCC:
Income taxes ................................... $ 3,381 $ 1,099
Other, net ..................................... 7,024 5,873
Other, net ....................................... 356 786
Tremont Corporation .............................. (3,354) (3,053)
--------- ---------
$ 7,407 $ 4,705
========= =========
Noncurrent:
Notes receivable from Kronos ..................... $ 573,218 $ 419,164
Notes payable to:
NLCC ........................................... -- (185,838)
NL Environmental Management Services, Inc. ..... -- (80,000)
--------- ---------
$ 573,218 $ 153,326
========= =========
Note 3 - Long-term debt:
December 31,
------------------------
1997 1998
-------- --------
(In thousands)
11.75% Senior Secured Notes .................... $250,000 $244,000
13% Senior Secured Discount Notes .............. 169,857 --
-------- --------
$419,857 $244,000
======== ========
See Note 10 of the Consolidated Financial Statements for a description of
the Notes.
S-6
The Company's $244 million of Senior Secured Notes at December 31, 1998
are due October 2003.
The Company and Kronos have agreed, under certain circumstances, to
provide Kronos' principal international subsidiary with up to DM 125 million
through January 1, 2001. The Company has guaranteed the DM credit facility.
Note 4 - Contingencies:
See Legal proceedings in Note 17 to the Consolidated Financial Statements.
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NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charges
(credits)
Balance at to costs Currency
beginning and translation Balance at
Description of year expenses Deductions adjustments end of year
----------- ---------- -------- ---------- ----------- -----------
Year ended December 31, 1998:
Allowance for doubtful accounts and notes
receivable ............................. $ 2,828 $ (208) $ (363)(a)(b) $ 120 $ 2,377
======= ======= ======= ======= =======
Amortization of intangibles ............. $22,366 $ 2,438 $(2,757)(b) $ 1,657 $23,704
======= ======= ======= ======= =======
Year ended December 31, 1997:
Allowance for doubtful accounts and notes
receivable ............................. $ 3,813 $ 382 $(1,153)(a) $ (214) $ 2,828
======= ======= ======= ======= =======
Amortization of intangibles ............. $22,207 $ 2,862 $ -- $(2,703) $22,366
======= ======= ======= ======= =======
Year ended December 31, 1996:
Allowance for doubtful accounts and notes
receivable ............................. $ 4,039 $ 1,274 $(1,331)(a) $ (169) $ 3,813
======= ======= ======= ======= =======
Amortization of intangibles ............. $20,562 $ 3,152 $ -- $(1,507) $22,207
======= ======= ======= ======= =======
(a) Amounts written off, less recoveries.
(b) Sale of Rheox's assets.
S-8