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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-5467
VALHI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0110150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 233-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common stock New York Stock Exchange
($.01 par value per share) Pacific Stock Exchange
9.25% Liquid Yield Option Notes, New York Stock Exchange
due October 20, 2007
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
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.
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
AS OF FEBRUARY 28, 1997, 114,365,414 SHARES OF COMMON STOCK WERE OUTSTANDING.
THE AGGREGATE MARKET VALUE OF THE 9.6 MILLION SHARES OF VOTING STOCK HELD BY
NONAFFILIATES OF VALHI, INC. AS OF SUCH DATE APPROXIMATED $77 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED BY PART III IS INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE COMMISSION PURSUANT
TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE END OF THE FISCAL YEAR
COVERED BY THIS REPORT.
[INSIDE FRONT COVER]
A chart showing (i) Valhi's 56% ownership of NL Industries, Inc., (ii)
Valhi's 100% ownership of Valcor, Inc., (iii) Valhi's 50% ownership of Waste
Control Specialists LLC and (iv) Valcor's 100% ownership of CompX International
Inc. and Sybra, Inc.
PART I
ITEM 1. BUSINESS
Valhi, Inc. (NYSE: VHI), based in Dallas, Texas, has continuing operations
in the chemicals, component products, fast food and waste management industries.
Information regarding the Company's business segments and the operating
subsidiaries conducting such businesses is set forth below. Business and
geographic segment financial information is included in Note 2 to the Company's
Consolidated Financial Statements, which information is incorporated herein by
reference.
Chemicals NL is the world's fourth-largest producer of
NL Industries, Inc. titanium dioxide pigments ("TiO2"), used for
imparting whiteness, brightness and opacity to
a wide range of products including paints,
plastics, paper, fibers and other "quality-of-
life" products. NL had an estimated 11% share
of worldwide TiO2 sales volume in 1996. NL is
also the world's largest producer of
rheological additives for solvent-based
systems. NL has production facilities
throughout Europe and North America.
Component Products CompX International is a leading North
CompX International Inc. American manufacturer of ergonomic office
(formerly National Cabinet workstation components, mechanical locks and
Lock, Inc.) precision ball bearing drawer slides for
furniture and other markets.
Fast Food Sybra is the third-largest franchisee of
Sybra, Inc. Arby's restaurants with 150 stores clustered
principally in Texas, Michigan, Pennsylvania
and Florida.
Waste Management Waste Control Specialists, formed in late
Waste Control Specialists LLC 1995, recently completed construction of the
initial phase of its West Texas facility for
the processing, treatment, storage and
disposal of hazardous and toxic wastes. The
first wastes were received for disposal in
February 1997. Waste Control Specialists is
also seeking authorizations for, among other
things, the treatment, storage and disposal of
low-level and mixed radioactive wastes.
Valhi, a Delaware corporation, is the successor of the 1987 merger of The
Amalgamated Sugar Company and LLC Corporation. Contran Corporation holds,
directly or through subsidiaries, approximately 91% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held
by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons is
Chairman of the Board, President and Chief Executive Officer of Contran and
Valhi and may be deemed to control such companies.
In September 1996, Medite Corporation, the Company's wholly-owned building
products subsidiary, signed three separate letters of intent involving the sale
of substantially all of its assets. The first transaction, involving the sale
of Medite's timber and timberlands, closed in October 1996 for approximately
$118 million cash consideration, of which approximately $53 million of the cash
proceeds were used to pay off and terminate Medite's U.S. bank credit
facilities. The second transaction, involving the sale of Medite's Irish medium
density fiberboard ("MDF") subsidiary, closed in November 1996 for approximately
$61.5 million cash consideration plus the assumption of approximately $21
million of Irish bank debt. The third transaction, involving the sale of
Medite's Oregon MDF facility, closed in February 1997 for approximately $36
million cash consideration plus the assumption of approximately $3.7 million of
Medite indebtedness. These three transactions generated total consideration to
Medite of approximately $240 million. Medite has also determined to permanently
close its two small Oregon timber conversion facilities. The stud lumber
facility, closed in December 1996, is being dismantled and Medite will sell the
salvageable machinery and equipment. Medite continues to operate the veneer
facility on a short-term basis and expects to either sell or close this facility
in 1997. See Note 19 to the Consolidated Financial Statements.
On January 3, 1997, the Company completed the transfer of control of the
refined sugar operations previously conducted by the Company's wholly-owned
subsidiary, The Amalgamated Sugar Company, to Snake River Sugar Company, an
Oregon agricultural cooperative formed by certain sugarbeet growers in
Amalgamated's areas of operations. Pursuant to the transaction, Amalgamated
contributed substantially all of its net assets to the Amalgamated Sugar Company
LLC, a limited liability company controlled by Snake River, on a tax-deferred
basis in exchange for a non-voting ownership interest in the LLC. As part of
the transaction, Snake River made certain loans to Valhi aggregating $250
million in January 1997. Snake River's sources of funds for its loans to Valhi,
as well as for the $14 million it contributed to the LLC for its voting
ownership interest in the LLC, included cash capital contributions by the grower
members of Snake River and $192 million in debt financing provided by Valhi in
January 1997. See Note 20 to the Consolidated Financial Statements.
The Company has executed agreements involving the sale of its fast food
operations conducted by the Company's wholly-owned subsidiary, Sybra, Inc. The
proposed sale would be accomplished in simultaneous transactions that would
include the sale of certain restaurant real estate owned by Sybra to one party
for $45 million cash consideration, and Valcor's sale of 100% of the stock of
Sybra to another party for approximately $39.7 million cash consideration, of
which approximately $23.7 million would be used to repay Sybra bank
indebtedness. These transactions are subject to, among other things, completion
of customary due diligence procedures, the purchaser of Sybra's stock obtaining
necessary financing for the transaction and certain consents from third parties.
If completed, the transactions are expected to close in the second quarter of
1997, at which time the Company estimates it would report a pre-tax gain on
disposal in excess of $24 million. There can be no assurance that any such
transactions will be completed.
During 1994, Valhi purchased additional NL common shares in market
transactions and thereby increased its direct ownership of NL from 49% to more
than 50% in mid-December 1994. Accordingly, the Company ceased to report its
interest in NL by the equity method and commenced reporting NL as a consolidated
subsidiary. The Company consolidated NL's financial position at December 31,
1994 and consolidated NL's results of operations and cash flows beginning in
1995. Tremont Corporation, a Contran affiliate, holds an additional 18% of NL's
outstanding common stock. See Note 3 to the Consolidated Financial Statements.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts including, but not limited to, statements found in this
Item 1 - "Business", in Item 3 - "Legal Proceedings", and in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", are forward-looking statements that involve risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward-looking statements include, but
are not limited to, future supply and demand for the Company's products
(including cyclicality thereof), general economic conditions, competitive
products, customer and competitor strategies, the impact of pricing and
production decisions, environmental matters, government regulations and possible
changes therein, the ultimate resolution of pending litigation and possible
future litigation, completion of pending asset/business unit dispositions and
other risks and uncertainties discussed elsewhere herein in this Annual Report,
including, without limitation, the sections referenced above.
CHEMICALS - NL INDUSTRIES, INC.
NL Industries (NYSE: NL) is an international producer and marketer of TiO2
and specialty chemicals to customers in over 100 countries from facilities
located throughout Europe and North America. Kronos, Inc., the largest of NL's
two principal operating subsidiaries, is the world's fourth-largest TiO2
producer, with an estimated 11% share of worldwide TiO2 sales volume in 1996.
Approximately one-half of Kronos' 1996 sales volume was in Europe, where Kronos
is the second-largest producer of TiO2. Specialty chemicals, primarily
rheological additives, are produced through NL's Rheox, Inc. subsidiary. In
1996, Kronos accounted for 86% of NL's sales and Rheox accounted for 14%.
NL's objective is to maximize its total shareholder returns by (i) focusing
on continued cost control, (ii) investing in certain cost effective
debottlenecking projects to increase TiO2 production capacity and productivity
and (iii) deleveraging as excess liquidity becomes available.
TiO2 products and operations. Titanium dioxide pigments are chemical
products used for imparting whiteness, brightness and opacity to a wide range of
products, including paints, paper, plastics, fibers and ceramics. TiO2 is
considered to be a "quality-of-life" product with demand affected by the gross
domestic product in various regions of the world.
Demand, supply and pricing within the TiO2 industry is cyclical, and
changes in industry economic conditions can significantly impact NL's earnings
and operating cash flows. NL's average TiO2 selling prices have been declining
since the last half of 1995, which followed an upturn in TiO2 prices that began
in the third quarter of 1993. NL expects TiO2 prices will begin to increase
during the second quarter of 1997 as the impact of recently-announced price
increases takes effect. Despite the recent decline in TiO2 selling prices,
industry wide demand for TiO2 grew in 1996, and Kronos' record 1996 sales volume
was about 6% higher than 1995. NL's expectations as to the future prospects of
the TiO2 industry are based on several factors beyond NL's control, principally
continued worldwide growth of gross domestic product and the absence of
technological advancements in or modifications to TiO2 processes that would
result in material and unanticipated increases in production efficiencies. To
the extent that actual developments differ from NL's expectations, NL and the
TiO2 industry's future performance could be unfavorably affected.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 12% share of North American TiO2 sales volume. Consumption per capita
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. A significant market for TiO2 could emerge in Eastern Europe, the Far
East and 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 the Eastern European market.
NL believes that there are no effective substitutes for TiO2. However,
extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used in a number of Kronos' markets. Generally, extenders are used to reduce to
some extent the utilization of higher cost TiO2. The use of extenders has not
significantly affected TiO2 consumption over the past decade because extenders
generally have, to date, failed to match the performance characteristics of
TiO2. NL believes that the use of extenders will not materially alter the
growth of the TiO2 business in the foreseeable future.
NL 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. Major TiO2 customers include
international paint, paper and plastics manufacturers. 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 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, about one-half of Kronos' 1996 TiO2 sales were to Europe, with 37% to
North America and the balance to export markets. Kronos' international
operations are conducted through Kronos International, Inc. ("KII"), a German-
based holding company formed in 1989 to manage and coordinate NL's manufacturing
operations in Europe and Canada.
Kronos is also engaged in 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 pigment production processes). Water treatment chemicals are used as
treatment and conditioning agents for industrial effluents and municipal
wastewater and in the manufacture of iron pigments.
TiO2 manufacturing process, properties 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 segments of the 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 1996
represented approximately 56% of industry capacity.
Kronos currently has four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec and, through a manufacturing
joint venture discussed below, a one-half interest in a plant in Lake Charles,
Louisiana. Kronos' principal German operating subsidiary leases the land under
its Leverkusen production facility pursuant to a lease expiring in 2050. The
Leverkusen plant, with almost one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG, and 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 plant. Both the lease and supplies and services
agreement restrict NL's ability to transfer ownership or use of the Leverkusen
plant. Kronos also has a governmental concession with an unlimited term to
operate its ilmenite mine in Norway.
Kronos' TiO2 production in 1996 was 373,000 metric tons, compared to the
record 393,000 metric tons produced in 1995 and 357,000 tons in 1994. Kronos
reduced its production rates in early 1996 in response to softening demand and
its high inventory levels at the end of 1995. As demand increased during 1996
and inventories declined, Kronos' production rates were increased to near full
capacity in late 1996. Kronos believes its annual attainable production
capacity is approximately 400,000 metric tons, including its one-half interest
in the Louisiana plant. Following completion of its $35 million debottlenecking
expansion of its Leverkusen, Germany chloride-process facility in late 1997,
Kronos' expects its worldwide annual attainable production capacity will
increase to about 410,000 metric tons.
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, Africa, Canada, India and the United States. Kronos
purchases slag refined from beach sand ilmenite from Richards Bay Iron and
Titanium (Proprietary) Ltd. (South Africa), approximately 50% of which is owned
by Q.I.T. Fer et Titane Inc. ("QIT"), an indirect subsidiary of RTZ Corp., under
a long-term supply contract expiring in 2000. Natural rutile ore, another
chloride feedstock, is purchased primarily from RGC Mineral Sands Limited
(Australia) under a long-term supply contract that also expires in 2000. Raw
materials under these contracts are expected to meet Kronos' chloride feedstock
requirements over the next several years. NL does not expect to encounter
difficulties in obtaining new long-term supply contracts prior to expiration of
its existing contracts.
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 Norwegian rock ilmenite mine which provided
all of Kronos' feedstock for its European sulfate process pigment plants in
1996. Kronos also purchases sulfate grade slag under contracts negotiated
annually with RTZ and, through 1997, with Tinfos Titanium and Iron K/S.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate through the remainder of the
decade. Kronos does not anticipate experiencing any interruptions of its raw
material supplies because of its long-term supply contracts. However, political
and economic instability in the countries where NL 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. The joint venture owns and operates a chloride process TiO2 plant in
Lake Charles, Louisiana. Production from the plant is shared equally by Kronos
and Tioxide 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 the joint
venture, including production and output decisions. Two general managers, one
appointed and compensated by each partner, manage the day-to-day 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 the TiO2 produced
is equal to its share of the joint venture's production costs and interest
expense. Kronos' share of the production costs are reported as part of cost of
sales as the related TiO2 acquired from the joint venture is sold, and Kronos'
share of the joint venture's interest expense is reported as a component of
interest expense.
Specialty chemicals products and operations. Rheological additives
produced by Rheox control the flow and leveling characteristics of a variety of
products, including paints, inks, lubricants, sealants, adhesives and cosmetics.
Organoclay rheological additives are clays which have been chemically reacted
with organic chemicals and compounds. Rheox produces rheological additives for
both solvent-based and water-based systems. Rheox is the world's largest
producer of rheological additives for solvent-based systems, and is also a
supplier for rheological additives used in water-based systems. Rheological
additives for solvent-based systems accounted for 80% of Rheox's sales in 1996,
with the remainder being principally rheological additives for water-based
systems. Rheox has introduced a number of new products during the past three
years, the majority of which are for water-based systems, which are sold into a
larger market than solvent-based systems. Rheox believes water-based additives
will account for an increasing portion of its sales in the long term. Rheox's
plants are in Charleston, West Virginia, Newberry Springs, California, St.
Louis, Missouri, Livingston, Scotland and Nordenham, Germany.
Sales of rheological additives generally follow growth in gross domestic
product in Rheox's principal markets and are influenced by the volume of
shipments of the worldwide coatings industry. Since Rheox's rheological
additives are used in industrial coatings, plant and equipment spending has an
influence on demand for this product line.
The primary raw materials for rheological additives are bentonite clays,
hectorite clays, quaternary amines, polyethylene waxes and castor oil
derivatives. Bentonite clays are currently purchased under a three-year
contract, renewable through 2004, with a subsidiary of Dresser Industries, Inc.,
which has significant bentonite reserves in Wyoming. This contract assures
Rheox the right to purchase its anticipated requirements of bentonite clays for
the foreseeable future, and Dresser's reserves are believed to be sufficient for
such purpose. Hectorite clays are mined from company-owned reserves in Newberry
Springs, California, which NL believes are adequate to supply its needs for the
foreseeable future. The Newberry Springs ore body contains the largest known
commercial deposit of hectorite clays in the world. Quaternary amines are
purchased primarily from a joint venture company 50%-owned by Rheox and are also
generally available on the open market from a number of suppliers. Castor oil-
based rheological additives are purchased from sources outside the United
States. Rheox has a supply contract with a manufacturer of these products,
which may not be terminated without 180 days notice by either party.
Competition. The TiO2 industry is highly competitive. During the early
1990's, TiO2 supply 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 1980's, had a negative
impact during the subsequent downturn. During 1994 and the first half of 1995,
strong growth in demand improved industry capacity utilization and resulted in
increases in worldwide TiO2 prices. Kronos believes that the increased demand
during such period was partially due to customers stocking inventories. In the
second half of 1995 and first half of 1996, customers reduced inventory levels,
which reduced industry-wide demand. Demand improved in the second half of 1996,
indicating, Kronos believes, that customer inventories had returned to more-
normal levels. Price increases were announced in late 1996 by most major
producers, including Kronos, and the results of such announcements are expected
to impact second-quarter 1997 operating results. However, no assurance can be
given that price trends will conform to NL's expectations.
Worldwide capacity additions in the TiO2 market resulting from construction
of grassroot plants require significant capital expenditures and substantial
lead time (typically three to five years in NL's experience) for, among other
things, planning, obtaining environmental approvals and construction. No
grassroot plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors complete debottlenecking projects at
existing facilities. Based on factors described under "TiO2 products and
operations" above, NL expects that the average annual increase in industry
capacity from announced debottlenecking projects will be less than the average
annual demand growth for TiO2 during the next few 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
grades and substantially all of Kronos' production are considered commodity
pigments with price generally being a most significant competitive factor.
Kronos has an estimated 11% share of worldwide TiO2 sales volume, and believes
that it is the leading marketer of TiO2 in a number of countries, including
Germany and Canada. Kronos' principal competitors are E.I. du Pont de Nemours &
Co.; Tioxide; Millennium Chemicals, Inc., formerly a unit of Hanson PLC; Kemira
Oy; Ishihara Sangyo Kaisha, Ltd; Bayer AG; Thann et Mulhouse and Kerr-McGee
Corporation. These eight competitors have estimated individual worldwide shares
of TiO2 sales volume ranging from 3% to 21%, and an aggregate estimated 75%
share of TiO2 sales volume. Du Pont has about one-half of total U.S. TiO2
production capacity and is Kronos' principal North American competitor. ICI
announced in January 1997 that it intends to spin-off its Tioxide unit to its
shareholders in the next six to 18 months.
Competition in the specialty chemicals industry generally focuses on
product uniqueness, quality and availability, technical service, knowledge of
end-use applications and price. Rheox's principal competitors for rheological
additives for solvent-based systems are LaPorte PLC and Sud-Chemie AG.
Principal competitors for water-based systems are Rohm and Haas Company,
Hercules Incorporated and Union Carbide Corporation.
Research and development. NL's expenditures for research and development
and certain technical support programs have averaged approximately $11 million
during the past three years, with Kronos accounting for about three-fourths of
the annual spending. TiO2 research and development activities are conducted
principally at KII's Leverkusen, Germany facility. Such activities are directed
primarily towards improving both the chloride and sulfate production processes,
improving product quality and strengthening Kronos' competitive position by
developing new pigment applications. Activities relating to rheological
additives are conducted primarily in the U.S. and are directed towards the
development of new products for water-based systems, environmental applications
and new end-use applications for existing product lines.
Patents and trademarks. Patents held for products and production processes
are believed to be important to NL and contribute to the continuing business
activities of Kronos and Rheox. NL continually seeks patent protection for its
technical developments, principally in the United States, Canada and Europe, and
from time to time enters into licensing arrangements with third parties. In
connection with the formation of the manufacturing joint venture with Tioxide,
Kronos and certain of its subsidiaries exchanged proprietary chloride process
and product technologies with Tioxide and certain of its affiliates, and use by
each recipient of the other's technology in Europe was restricted until October
1996. NL does not expect that the technology sharing arrangement with Tioxide
will materially impact its competitive position within the TiO2 industry. See
"-- TiO2 manufacturing joint venture." NL's major trademarks, including Kronos,
Titanox and Rheox, are protected by registration in the United States and
elsewhere with respect to those products it manufactures and sells.
Customer base and seasonality. NL believes that neither its aggregate
sales nor those of any of its principal product groups are concentrated in or
materially dependent upon any single customer or small group of customers.
Neither NL's business as a whole nor that of any of its principal product groups
is seasonal to any significant extent. Due in part to the increase in paint
production in the spring to meet 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. Sales of rheological additives are
influenced by the worldwide industrial protective coatings industry, where
second calendar quarter sales are generally the strongest.
Employees. As of December 31, 1996, NL employed approximately 3,100
persons (excluding the joint venture employees), with 400 employees in the
United States and 2,700 at non-U.S. sites. Hourly employees in production
facilities worldwide, including the TiO2 joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
NL believes its labor relations are satisfactory.
Regulatory and environmental matters. Certain of NL's businesses are and
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws. As with other companies engaged in similar businesses,
certain past and current operations and products of NL have the potential to
cause environmental or other damage. NL has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
NL's policy is to achieve compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect NL's production, handling, use, storage, transportation, sale
or disposal of such substances as well as NL's financial position, results of
operations or liquidity.
NL's U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act, the Occupational Safety and Health Act, the Clean
Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substances
Control Act, and the Comprehensive Environmental Response, Compensation and
Liability Act, as amended by the Superfund Amendments and Reauthorization Act
("CERCLA"), as well as the state counterparts of these statutes. NL believes
that all of its U.S. plants and the Louisiana plant owned and operated by the
joint venture are in substantial compliance with applicable requirements of
these laws or compliance orders issued thereunder. From time to time, NL
facilities may be subject to environmental regulatory enforcement under such
statutes. Resolution of such matters typically involves the establishment of
compliance programs. Occasionally, resolution may result in the payment of
penalties, but to date such penalties have not involved amounts having a
material adverse effect on NL's consolidated financial position, results of
operations or liquidity.
NL's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. NL believes all of its European and
Canadian plants are in substantial compliance with applicable environmental
laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union ("EU"). Germany, Belgium and the United Kingdom, each a member of
the EU, follow the initiatives of the EU; Norway, although not a member,
generally patterns its environmental regulatory actions after the EU. Kronos
believes it 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. Rheox also believes it is in
substantial compliance with environmental regulations in Germany and the United
Kingdom.
NL has a contract with a third party to treat certain German sulfate-
process effluents. Either party may terminate the contract after giving four
years notice with regard to the Nordenham plant. After December 1998, and only
under certain circumstances, Kronos may terminate the contract after giving six
months notice with regard to the Leverkusen plant.
In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos is completing the installation
of off-gas desulfurization systems at its Norwegian and German plants at a cost
of approximately $30. The Louisiana manufacturing joint venture installed a $16
million off-gas desulfurization system, and Kronos completed an $11 million
wastewater treatment chemical purification project at its Leverkusen, Germany
facility in 1996.
The Quebec provincial government has environmental regulatory authority
over Kronos' Canadian chloride and sulfate-process TiO2 production facility.
The provincial government regulates discharges into the St. Lawrence River. In
May 1992, the Quebec provincial government extended Kronos' right to discharge
effluents from its sulfate process TiO2 plant into the St. Lawrence River until
June 1994. Kronos completed a waste acid neutralization facility and
discontinued discharging untreated effluents into the St. Lawrence River in June
1994. Notwithstanding the foregoing, in March 1993 Kronos' Canadian subsidiary
and two of its directors were charged by the Canadian federal government with
five violations of the Canadian Fisheries Act relating to discharges into the
St. Lawrence River from the Varennes sulfate TiO2 plant. The penalty for these
violations, if proven, could be up to Canadian $15 million. Additional charges,
if brought, could involve additional penalties. NL believes that this charge is
inconsistent with the extension granted by provincial authorities, referred to
above, and is vigorously contesting the charge. A trial date has been set for
May 1997.
NL's capital expenditures related to its ongoing environmental protection
and compliance programs, including those described above, are currently expected
to approximate $3 million in 1997 and $5 million in 1998.
NL has been named as a defendant, potentially responsible party ("PRP") or
both, pursuant to CERCLA and similar state laws in approximately 75 governmental
and private actions associated with waste disposal sites, mining locations and
facilities currently or previously owned, operated or used by NL, many of which
are on the U.S. Environmental Protection Agency's Superfund National Priorities
List or similar state lists. See Item 3 - "Legal Proceedings."
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
Products, operations and properties. CompX International Inc. (formerly
National Cabinet Lock, Inc.) manufactures ergonomic office workstation
components, precision ball bearing drawer slides and low and medium-security
mechanical locks for furniture and a variety of other applications. In 1996,
ergonomic workstation products accounted for 34% of the Company's total
component products sales, with drawer slides at 38% and locks at 28%. Drawer
slides and office workstation components are produced in two separate facilities
in Kitchener, Ontario under the Waterloo Furniture Components, Limited name.
Locks are produced in Mauldin, South Carolina under the National Cabinet Lock
name. The Company believes its component products compete in relatively well-
defined niche markets and believes that it is (i) the largest supplier of
ergonomic office workstation components to the North American office furniture
manufacturing market, (ii) the largest Canadian producer of drawer slides and
(iii) the largest U.S. cabinet lock producer.
Strip steel is the major raw material used in the manufacture of drawer
slides and office workstation products. Purchased components, including zinc
castings, are the principal raw materials used in the manufacture of latching
and security products. These raw materials, purchased from several suppliers
and readily available, are machined, electroplated, assembled and packaged for
shipment to customers. One of the Kitchener facilities and the Mauldin facility
are ISO 9001-registered.
Strategy. CompX's strategy is to continue to improve manufacturing
efficiency and cost control, to develop specialty, patented products focused on
niche markets and to capitalize on future opportunities which may emerge with
targeted original equipment manufacturers. The Company will also search for
synergistic acquisitions or product licensing to expand its product base and
seek to expand its established market positions by emphasizing customer service,
promoting its distribution programs and seeking greater penetration of current
markets.
Competition and customer base. CompX competes primarily on the basis of
product features, customer service, quality, distribution channels, consumer
brand preferences and price. The primary market for drawer slides and
workstation products is office furniture manufacturers in the United States and
Canada. Approximately 30% of lock sales are made through the Company's STOCK
LOCKS distribution program, a program believed to offer a competitive advantage
because delivery generally is made within 48 hours. Most remaining lock sales
are to original equipment manufacturers' specifications. Component products are
marketed primarily through the Company's own sales organization as well as
select manufacturers' representatives.
Major competitors include Weber Knapp (workstations), Accuride and Knape &
Vogt (drawer slides) and Chicago Lock, Hudson Lock and Fort Lock (locks). CompX
also competes with a large number of other manufacturers, and the variety of
relatively small competitors generally makes significant price increases
difficult. The Company does not believe it is dependent upon one or a few
customers, the loss of which would have a material adverse effect on its
component products operations. The ten largest customers accounted for about
one-third of component products sales in each of the past three years, with the
largest customer less than 10% in each year. In 1996, six of the ten largest
customers were located in the U.S. with four located in Canada. Of such
customers, all were primarily purchasers of Waterloo Furniture Components'
products.
Patents and trademarks. CompX holds a number of patents relating to its
component products operations, none of which by itself is considered
significant, and owns a number of trademarks, including National Cabinet Lock,
STOCK LOCKS and Waterloo Furniture Components, Limited, which the Company
believes are well recognized in the component products industry.
Employees. As of December 31, 1996, CompX employed approximately 820
persons, of which 260 were in the United States and 560 were in Canada.
Approximately two-thirds of Canadian employees are covered by a new three-year
collective bargaining agreement expiring February 2000. CompX believes that its
labor relations are satisfactory.
Regulatory and environmental matters. CompX's operations are subject to
various federal, state, provincial and local provisions regulating, among other
things, worker and product safety and protection, the discharge of materials
into the environment and other environmental protection matters. CompX believes
it is in substantial compliance with existing permits and regulations and does
not believe future expenditures to comply with these regulations will be
material.
FAST FOOD - SYBRA, INC.
Products and operations. Sybra (Arby's spelled backwards) operated 150
Arby's restaurants at December 31, 1996 clustered in four regions, principally
in Michigan (46 stores), Texas (57), Pennsylvania (27) and Florida (20),
pursuant to licenses with Arby's, Inc. According to information provided by
Arby's, Sybra is the third-largest franchisee in the Arby's restaurant system
based upon the number of restaurants operated and gross sales. Arby's is a
well-established fast food restaurant chain and features a menu that highlights
roast beef sandwiches along with a variety of chicken sandwiches and products,
deli sandwiches, potato products and soft drinks. Sybra's menu selections have
expanded over the past few years whereby roast beef accounts for approximately
two-thirds of sandwich sales compared to 80% five years ago.
Sybra's 150 Arby's restaurants at the end of 1996 represent a net decrease
of ten stores in the past three years (17 opened; 27 closed), during which
period Sybra also remodeled several of its older stores. The stores closed in
the past three years all represented underperforming leased units which
generally were closed at the end of their respective lease terms. Sybra
currently expects a net increase of about three stores in 1997, as it plans to
open six new restaurants and close at least three more underperforming stores.
The Company has executed agreements involving the sale of Sybra's fast food
operations. See "Business-General" and Note 18 to the Consolidated Financial
Statements.
Strategy. Given the extremely competitive environment in which Sybra
operates, Sybra will continue its strong emphasis on operational details and
routinely review the profit contribution of each restaurant with a view toward
closing those stores which do not meet expectations.
Properties. At the end of 1996, approximately 80% of Sybra's 150 Arby's
restaurants were free-standing stores with the remainder located within shopping
malls or strip shopping centers. Approximately 60% of total locations are
leased, with most leases being on a long-term basis and providing for base
monthly rents plus contingent rents based on sales. In most cases, Sybra
expects that leases could be renewed or replaced by other leases, although
rental rates may increase. Contingent rentals based upon various percentages of
gross sales of individual restaurants were less than 10% of Sybra's total rent
expense in each of the past three years. Sybra also leases corporate or
regional office space in five states.
Under the terms of Sybra's current Development Agreement with Arby's, Sybra
has been given the exclusive right to open new Arby's units within certain
counties in Pennsylvania, in return for which Sybra has agreed to open a minimum
of 25 new stores during 1997 through 2001 in its existing regions (four in 1997,
six in 1998 and five each in 1999, 2000 and 2001), of which ten must be located
in Pennsylvania. Sybra currently plans to open six new units in 1997, or two
more than the minimum required. Sybra does not have any other exclusive
territorial or development agreements which would prohibit others from operating
an Arby's restaurant in the general geographic markets in which Sybra now
operates, although each store is given certain narrow geographical protection
(generally a one to four mile radius) from other Arby's units.
Food products and supplies. Sybra and other Arby's franchisees are members
of ARCOP, Inc., a non-profit cooperative purchasing organization which
facilitates negotiations of national contracts for food and distribution, taking
advantage of the larger purchasing requirements of the member franchisees.
Since Arby's franchisees are not required to purchase any food products or
supplies from Arby's, Inc., ARCOP facilitates control over food supply costs and
avoids franchisor conflicts of interest.
License terms and royalty fees. Generally, franchise agreements relating
to each restaurant location require that Sybra comply with certain requirements
as to business operations and facility maintenance. Currently, Sybra pays an
initial franchise fee of $25,000 and a royalty rate equal to 4% of sales for a
standard 20-year license. Because some of Sybra's licenses were issued at times
when license terms were perpetual and lower royalty rates were in effect, 43% of
Sybra's franchise agreements have no fixed termination date and royalties for
all locations aggregated 2.8% to 2.9% of sales in each of the past three years.
Sybra's average royalty rate would be expected to increase over time if new
stores are opened, older stores are closed and existing 20-year licenses are
renewed at then-prevailing higher royalty rates. The first of Sybra's 20-year
licenses expires in 2003.
Advertising and marketing. Sybra directs about 8% of sales towards
marketing. All franchisees of Arby's, Inc. must belong to AFA Service
Corporation ("AFA"), a non-profit association of Arby's restaurant operators,
and must contribute a specified portion (currently .7%) of their gross revenues
as dues to AFA. In return, AFA provides franchisees with creative materials
such as television and radio commercials, ad mats for newspapers, point-of-
purchase graphics and other advertising materials. Sybra also devotes
approximately 3% of sales to coupon sales promotions, including the direct cost
of discounted food, and newspaper and direct mail inserts, and approximately 4%
of its restaurant sales to local advertising.
Competition and seasonality. The fast food industry is extremely
competitive and subject to pressures from major business cycles and competition
from many established and new restaurant concepts. According to industry data,
there is a significant disparity in the revenues and number of restaurants
operated by the largest restaurant systems and the Arby's system. As a result,
some organizations and franchised restaurant systems have significantly greater
resources for advertising and marketing than the Arby's restaurant system or
Sybra, which is an important competitive factor. Sybra's response to these
competitive factors has been to cluster its stores in certain geographic areas
where it can achieve economies of scale in advertising and other activities.
Operating results of Sybra's restaurants have been affected by both retail
shopping patterns and weather conditions. Accordingly, Sybra has experienced
its most favorable results during the fourth calendar quarter (which includes
the holiday shopping season) and its least favorable results during the first
calendar quarter (which includes winter weather that can be adverse in certain
markets).
Employees. As of December 31, 1996, Sybra had approximately 3,700
employees, of which 3,100 were part-time employees. Approximately 3,600
employees work in Sybra's restaurants with the remainder in its corporate or
regional offices. Employees are not covered by collective bargaining agreements
and Sybra believes that its employee relations are satisfactory.
Governmental regulation. A significant portion of Sybra's restaurant
employees work on a part-time basis and are paid at rates related to the minimum
wage rate. Restaurant labor costs currently approximate 29% of sales. The two-
step, 90-cent increase in the minimum wage rate which became effective October
1, 1996 increased Sybra's labor costs. Sybra concurrently implemented certain
price increases to offset the impact of the first step of the October 1, 1996
wage rate increase. Any further increase in the minimum wage rate or
legislation requiring mandatory medical insurance benefits to part-time
employees would further increase Sybra's labor costs. Although Sybra's
competitors would likely experience similar increases, there can be no assurance
that further increases in sales prices can be implemented to offset future
increases in these costs.
Various federal, state and local laws affect Sybra's restaurant business,
including laws and regulations relating to minimum wages, overtime and other
working conditions, health, sanitation, employment and safety standards and
local zoning ordinances. Sybra has not experienced and does not anticipate
unusual difficulties in complying with such laws and regulations.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC
Waste Control Specialists LLC, formed in November 1995, recently completed
construction of the initial phase of its facility in West Texas for the
processing, treatment, storage and disposal of certain hazardous and toxic
wastes, and the first wastes were received for disposal in February 1997. Valhi
contributed $25 million to Waste Control Specialists through early 1997 for its
50% interest, which was used primarily to fund construction of the facility.
The other 50%-owner (controlled by the Chief Executive Officer of Waste Control
Specialists) contributed certain assets, primarily land and operating permits
for the facility site, and Waste Control Specialists also assumed certain
indebtedness of the other owner.
Facility, operations, services and customers. Waste Control Specialists
has been issued permits by the Texas Natural Resource Conservation Commission
("TNRCC") and the U.S. EPA to accept hazardous and toxic wastes governed by The
Resource Conservation and Recovery Act ("RCRA") and the Toxic Substances Control
Act ("TSCA"). The ten-year RCRA and TSCA permits initially expire in 2004, but
are subject to renewal by the TNRCC assuming Waste Control Specialists remains
in compliance with the provisions of the permits. While there can be no
assurance, Waste Control Specialists believes it will be able to obtain
extensions to continue operating the facility for the foreseeable future.
Waste Control Specialists is also seeking additional authorizations to
accept wastes regulated under various other environmental laws and regulations,
including low-level and mixed low-level radioactive wastes. Waste Control
Specialists has an application pending with the Texas Department of Health for a
permit authorizing the treatment and storage of low-level and mixed low-level
radioactive wastes, and expects to receive such permit in 1997. Waste Control
Specialists has also presented a proposal to the U.S. Department of Energy
("DOE") that seeks DOE authorization for the facility as a disposal site for
much of the low-level and mixed low-level radioactive wastes generated from the
DOE's weapons complex sites. Under the proposal, an independent private
sector/academia body led by Texas Tech University would provide oversight and
monitoring of the operations. The DOE is reviewing the proposal. There can be
no assurance that any such additional permits or authorizations will be
obtained.
The facility is located on a 1,338 acre site in West Texas owned by Waste
Control Specialists. The 1,338 acres are permitted for 11.3 million cubic yards
of airspace landfill capacity for RCRA and TSCA wastes. Following the initial
phase of the construction, Waste Control Specialists has approximately 100,000
cubic yards of airspace landfill capacity in which customers' wastes can be
disposed. As part of its current permits, Waste Control Specialists has the
authorization to construct separate "condominium" landfills, in which individual
customer's wastes can be segregated from wastes accepted from other customers.
Waste Control Specialists owns approximately 15,000 additional acres of land
surrounding the permitted site, a small portion of which is located in New
Mexico. This presently undeveloped additional acreage is available for future
expansion assuming appropriate permits could be obtained.
The 1,338 acre facility site has, in Waste Control Specialists' opinion,
superior geological characteristics which make it an environmentally-desirable
location. The site is located in a relatively remote and arid section of West
Texas. The ground is composed of triassic red bed clay for which the
possibility of leakage into any underground water table is considered remote.
While the West Texas facility will operate as a final repository for wastes
that cannot be further reclaimed and recycled, it will also serve as a staging
and processing location for material that requires other forms of treatment
prior to final disposal as mandated by the U.S. EPA or other regulatory bodies.
The facility, as constructed, provides for waste treatment/stabilization,
warehouse storage, treatment facilities for hazardous, toxic and dioxin wastes,
drum to bulk, and bulk to drum materials handling and repackaging capabilities.
The Company intends to conduct these operations in compliance with the current
RCRA and TSCA permits. Treatment operations will involve processing wastes
through one or more thermal, chemical or other treatment methods, depending upon
the particular waste being disposed and regulatory and customer requirements.
Thermal treatment will use a thermal destruction technology as the primary
mechanism for waste destruction. Physical treatment methods may include
distillation, evaporation and separation, all of which result in the separation
or removal of solid materials from liquids. Chemical treatment uses chemical
oxidation and reduction, chemical precipitation of heavy metals, hydrolysis and
neutralization of acid and alkaline wastes, and basically results in the
transformation of wastes into inert materials through one or more chemical
processes. Certain of such treatment operations will involve technology which
Waste Control Specialists will acquire or license from third parties.
Once treated and stabilized, wastes will either be (i) placed in the
landfill disposal site, (ii) stored onsite in drums or other specialized
containers or (iii) shipped to third-party facilities for final disposition.
Only wastes which meet certain specified regulatory requirements can be placed
in the landfill, which landfill is fully-lined and includes a leachate
collection system.
Waste Control Specialists will take delivery of wastes collected from
customers and transported on behalf of customers, via rail or highway, by
independent contractors to the West Texas site. Such transportation is subject
to regulations governing the transportation of hazardous wastes issued by the
U.S. Department of Transportation.
In the U.S., the major federal statutes governing management, and
responsibility for clean-up, of hazardous and toxic wastes include RCRA, TSCA
and CERCLA. Waste Control Specialists' business is heavily dependent upon the
extent to which regulations promulgated under these or other similar statutes
and their enforcement require wastes to be managed and disposed of at facilities
of the type constructed by Waste Control Specialists.
Waste Control Specialists' target customers are industrial companies,
including chemical, aerospace and electronics businesses and governmental
agencies, including the DOE, which generate hazardous and other wastes. A
majority of the customers are expected to be located in the southwest United
States, although customers outside a 500-mile radius can be handled via rail
lines. Waste Control Specialists employs a salesforce to market its services to
potential customers. The DOE could become a significant customer if Waste
Control Specialists is successful in obtaining permits for low-level and mixed
low-level radioactive waste.
Waste Control Specialists also intends to enter into partnership or other
joint venture arrangements with other entities in the waste management industry
to assist Waste Control Specialists in research and development and other
aspects of customer service. In this regard, Waste Control Specialists has
entered into a joint venture with Battelle Memorial Institute, a leader in the
waste management technology industry, to identify and commercialize
environmental technologies in the waste management industry. Along these lines,
Waste Control Specialists has a permit application pending with the Texas
Department of Health for a Research, Development and Demonstration facility.
Third parties would be permitted to use the facility for the development and
demonstration of new technologies in the waste management industry, including
those involving low-level and mixed radioactive wastes. While there can be no
assurance, Waste Control Specialists believes the permit will be issued by mid-
1997.
Competition. The hazardous waste industry (other than low-level and mixed
low-level radioactive waste) currently has excess industry capacity caused by a
number of factors, including a relative decline in the number of environmental
remediation projects generating hazardous wastes and efforts on the part of
generators to reduce the volume of waste and/or manage it onsite at their
facilities. These factors have led to reduced demand and increased price
pressure for non-radioactive hazardous waste management services. Consequently,
Waste Control Specialists believes its long-term future potential in the waste
management industry is significantly dependent upon its ability to obtain
permits for low-level and mixed low-level radioactive wastes.
Competition within the hazardous waste industry is diverse. Competition is
based primarily on pricing and customer service. Price competition is expected
to be intense with respect to RCRA and TSCA-related wastes. Principal
competitors are Chemical Waste Management (a wholly-owned subsidiary of WMX
Technologies, Inc.), Laidlaw, Inc., American Ecology Corporation, U.S.
Pollution Control, Inc. and Envirosafe Services, Inc. These competitors are
well-established and have significantly greater resources than Waste Control
Specialists, which could be important competitive factors. However, Waste
Control Specialists believes it may have certain competitive advantages,
including its environmentally-desirable location, broad level of local community
support, a public transportation network leading to the facility and capability
for future site expansion.
Employees. At December 31, 1996, Waste Control Specialists employed 45
persons, and currently expects to have approximately 50 to 75 employees by the
end of 1997.
Regulatory and environmental matters. While the waste management industry
has benefitted from increased governmental regulation, the industry itself has
become subject to extensive and evolving regulation by federal, state and local
authorities. The regulatory process requires businesses in the waste management
industry to obtain and retain numerous operating permits covering various
aspects of their operations, any of which could be subject to revocation,
modification or denial. Regulations also allow public participation in the
permitting process. Individuals as well as companies may oppose the grant of
permits. In addition, governmental policies are by their nature subject to
change and the exercise of broad discretion by regulators, and it is possible
that Waste Control Specialists' ability to obtain any desired applicable permits
on a timely basis, and to retain those permits, could in the future be impaired.
The loss of any individual permit could have a significant impact on Waste
Control Specialists' financial condition, results of operations and liquidity,
especially because Waste Control Specialists owns only one disposal site. For
example, adverse decisions by governmental authorities on permit applications
submitted by Waste Control Specialists could result in the abandonment of
projects, premature closing of a facility or operating restrictions. Waste
Control Specialists' ten-year RCRA and TSCA permits expire in 2004, although
such permits are subject to renewal if Waste Control Specialists is in
compliance with the required operating provisions of the permits.
Federal, state and local authorities have, from time to time, proposed or
adopted other types of laws and regulations with respect to the waste management
industry, including laws and regulations restricting or banning the interstate
or intrastate shipment of certain wastes, imposing higher taxes on out-of-state
waste shipments compared to in-state shipments, reclassifying certain categories
of hazardous wastes as non-hazardous and regulating disposal facilities as
public utilities. Certain states have issued regulations which attempt to
require that all waste generated within that particular state must be sent to
disposal sites within that state. The U.S. Congress has also, from time to
time, considered legislation which would enable or facilitate such bans,
restrictions, taxes and regulations. Due to the complex nature of the waste
management industry regulation, implementation of existing or future laws and
regulations by different levels of government could be inconsistent and
difficult to foresee. Waste Control Specialists will attempt to monitor and
anticipate regulatory, political and legal developments which affect the waste
management industry, but there can be no assurance that Waste Control
Specialists will be able to do so. Nor can Waste Control Specialists predict
the extent to which legislation or regulations that may be enacted, or any
failure of legislation or regulations to be enacted, may affect its operations
in the future.
The demand for certain hazardous waste services expected to be provided by
Waste Control Specialists is dependent in large part upon the existence and
enforcement of federal, state and local environmental laws and regulations
governing the discharge of hazardous wastes into the environment. The waste
management industry would be adversely affected to the extent such laws or
regulations are amended or repealed or their enforcement is lessened.
Because of the high degree of public awareness of environmental issues,
companies in the waste management business may be, in the normal course of their
business, subject to judicial and administrative proceedings. Governmental
agencies may seek to impose fines or revoke, deny renewal of, or modify any
applicable operating permits or licenses. In addition, private parties and
special interest groups could bring actions against Waste Control Specialists
alleging, among other things, violation of operating permits.
DISCONTINUED OPERATIONS - MEDITE CORPORATION
In September 1996, Medite determined to dispose of substantially all of its
assets in three separate transactions. Medite sold its U.S. timber and
timberlands in October 1996, its Irish MDF subsidiary in November 1996 and its
Oregon MDF facility in February 1997. Medite has also determined to permanently
close its two small Oregon timber conversion facilities. The stud lumber
facility, closed in December 1996, is being dismantled and Medite will sell the
salvageable machinery and equipment. Medite continues to operate the veneer
facility on a short-term basis and expects to either sell or close this facility
in 1997. After the sale of the Oregon MDF facility and the sale or closure of
the two Oregon timber conversion facilities, Medite will have no remaining
operating assets. See Note 19 to the Consolidated Financial Statements.
At December 31, 1996, Medite employed approximately 270 persons in the U.S.
Following the sale of the Oregon MDF facility and the sale or closure of the
veneer facility, Medite will have a nominal number of employees remaining.
OTHER
Foreign operations. The Company has substantial operations and assets
located outside the United States, principally chemicals operations in Germany,
Belgium, Norway and the United Kingdom and chemicals and component products
operations in Canada. See Note 2 to the Consolidated Financial Statements.
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.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CompX's Canadian component products subsidiary has, from time to time,
entered into forward currency contracts to mitigate exchange rate fluctuation
risk for a portion of its future sales denominated in various currencies, and
the Company has in the past used currency forward contracts to fix the dollar
equivalent of specific commitments. Otherwise, the Company does not generally
engage in currency derivative transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company 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, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
18 to the Consolidated Financial Statements under the captions "Legal
proceedings -- Lead pigment litigation and -- Environmental matters and
litigation" is incorporated herein by reference.
Acquisition and restructuring activities. The Company routinely compares
its liquidity requirements and alternative uses of capital against the estimated
future cash flows to be received from its subsidiaries and unconsolidated
affiliates, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, business units, marketable securities or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies. From time to time,
the Company also evaluates the restructuring of ownership interests among its
subsidiaries and related companies and expects to continue this activity in the
future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage, and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.
Other. Through June 1989, Valmont Insurance Company, a wholly-owned
captive insurance subsidiary, reinsured workers' compensation and employers'
liability, auto liability, and comprehensive general liability risks of Valhi
and certain affiliates. Through April 1989, Valmont assumed certain third-party
reinsurance business, primarily property, marine and casualty risks from
insurance subsidiaries of other industrial firms, and a small amount of U.S.
quota share property and casualty risks. Valmont currently writes certain
direct coverages of Valhi and affiliates. All of Valmont's third-party
reinsurance risks are on a runoff basis.
The Company, through a general partnership, has an interest in certain
medical-related research and development activities pursuant to sponsored
research agreements. See Note 17 to the Consolidated Financial Statements.
ITEM 2. PROPERTIES
Valhi leases approximately 34,000 square feet of office space for its
principal executive offices in a building located at 5430 LBJ Freeway, Dallas,
Texas, 75240-2697.
The principal properties used in the operations of the Company, including
certain risks and uncertainties related thereto, are described in the applicable
business sections of Item 1 - "Business." The Company believes that its
facilities are generally adequate and suitable for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 18 to the Consolidated Financial Statements under the
caption "Legal proceedings -- Other litigation," which information is
incorporated herein by reference.
Lead pigment litigation. NL was formerly involved in the manufacture of
lead pigments for use in paint and lead-based paint. NL has been named as a
defendant or third party defendant in various legal proceedings alleging that NL
and other manufacturers are responsible for personal injury and property damage
allegedly associated with the use of lead pigments. NL is vigorously defending
such litigation. Considering NL's previous involvement in the lead pigment and
lead-based paint businesses, there can be no assurance that additional
litigation, similar to that described below, will not be filed. In addition,
various legislation and administrative regulations have, from time to time, been
enacted or proposed that seek to (a) impose various obligations on present and
former manufacturers of lead pigment and lead-based paint with respect to
asserted health concerns associated with the use of such products and (b)
effectively overturn court decisions in which NL and other pigment manufacturers
have been successful. Examples of such proposed legislation include bills which
would permit civil liability for damages on the basis of market share. No
legislation or regulations have been enacted to date which are expected to have
a material adverse effect on NL's consolidated financial position, results of
operations or liquidity. NL has not accrued any amounts for the pending lead
pigment and lead-based paint litigation. There is no assurance that NL will not
incur future liability in respect of this litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, NL believes that the pending lead pigment and lead-based paint litigation
is without merit. Liability, if any, that may result is not reasonably capable
of estimation.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against NL, other
alleged manufacturers of lead pigment (together with NL, the "pigment
manufacturers") and the Lead Industries Association (the "LIA") in 14 actions
commenced by residents of HANO units seeking compensatory and punitive damages
for injuries allegedly caused by lead pigment. The actions, which were 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 remained pending.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the pigment manufacturers and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating alleged lead paint hazards in public and
private residential buildings, diagnosing and treating children allegedly
exposed to lead paint in city buildings, the costs of educating city residents
to the hazards of lead paint, and liability in personal injury actions against
the City and the Housing Authority based on alleged lead poisoning of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et
al., No. 89-4617). In December 1991, the court granted the defendants' motion
to dismiss claims alleging negligence and strict liability and denied the
remainder of the motion. In January 1992, defendants appealed the denial. NL
has answered the remaining portions of the complaint denying all allegations of
wrongdoing, and the case is in discovery. 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, the plaintiffs appealed, and in June 1996 the appeals
court reversed the trial court's dismissal of the restitution and
indemnification claims, reinstating those claims. Defendants' motion for
summary judgment on the remaining fraud claim was denied in August 1995;
defendants have appealed. In February 1996, the court denied the defendants
motion for summary judgment on the basis that the fraud claim was time-barred,
and defendants have appealed. Discovery is proceeding.
In March 1992, NL was served with a complaint in Skipworth v. Sherwin-
Williams Co., et al. (No. 92-3069), Court of Common Pleas, Philadelphia County.
Plaintiffs are a minor and her legal guardians seeking damages from lead paint
and pigment producers, the LIA, the Philadelphia Housing Authority and the
owners of the plaintiffs' premises for bodily injuries allegedly suffered by the
minor from lead-based paint. Plaintiffs' counsel has asserted that
approximately 200 similar complaints would be served shortly, but no such
complaints have yet been served. In April 1994, the court granted defendants'
motion for summary judgment and the dismissal was affirmed by the Superior Court
in October 1995. In February 1997, the Pennsylvania Supreme Court unanimously
affirmed the Superior Court's decision.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The amended complaint identifies 18 other defendants who allegedly manufactured
lead products or lead-based paint, and asserts causes of action under theories
of strict liability, negligence per se, negligence, breach of express and
implied warranty, fraud, nuisance, restitution, and negligent infliction of
emotional distress. The complaint asserts several theories of liability
including joint and several, market share, enterprise and alternative liability.
In October 1992, NL and the other defendants moved to dismiss the complaint with
prejudice. In July 1993, the court dismissed the complaint. In December 1994,
the Ohio Court of Appeals reversed the trial court dismissal and remanded the
case to the trial court. In July 1996, the trial court granted defendants'
motion to dismiss the property damage and enterprise liability claims, but
denied the remainder of the motion. Discovery is proceeding with respect to
class certification.
In November 1993, NL was served with a complaint in Brenner, et al. v.
American Cyanamid, et al. (No. 12596-93), Supreme Court, State of New York, Erie
County alleging injuries to two children purportedly caused by lead pigment.
The complaint seeks $24 million in compensatory and $10 million in punitive
damages for alleged negligent failure to warn, strict liability, fraud and
misrepresentation, concert of action, civil conspiracy, enterprise liability,
market share liability, and alternative liability. In January 1994, NL answered
the complaint, denying liability. Discovery is proceeding.
In January 1995, NL was served with complaints in Wright (Alvin) and Wright
(Allen) v. Lead Industries, et. al., (Nos. 94-363042 and 363043), Circuit Court,
Baltimore City, Maryland. Plaintiffs are two brothers (one deceased) who allege
injuries due to exposure to lead pigment. The complaints, as amended in April
1995, seek more than $100 million in compensatory and punitive damages for
alleged strict liability, negligence, conspiracy, fraud and unfair and deceptive
trade practices claims. In July 1995, the trial court granted, in part, the
defendants' motion to dismiss, and dismissed the plaintiffs' fraud and unfair
and deceptive trade practices claims. In June 1996 the trial court granted
defendants' motion for summary judgment on plaintiffs' conspiracy claim, and
dismissed NL and certain other defendants from the cases. The court granted
summary judgment in favor of the remaining defendants in September 1996, and
plaintiffs have appealed as to all defendants.
In November 1995, NL was served with a complaint in Jefferson v. Lead
Industry Association, et al. (No. 95-2835) filed in the U.S. District Court for
the Eastern District of Louisiana. The complaint asserts claims against the LIA
and the lead pigment defendants on behalf of a putative class of allegedly
injured children in Louisiana. The complaint purports to allege claims for
strict liability, negligence, failure to warn, breach of alleged warranties,
fraud and misrepresentation and conspiracy, and seeks actual and punitive
damages. The complaint asserts several theories of liability, including joint
and several and market share liability. In June 1996, the trial court granted
defendants' motions to dismiss the complaint and entered judgment in favor of
all defendants. Plaintiffs appealed to the Fifth Circuit Court of Appeals,
which affirmed the judgment in favor of all the defendants in March 1997.
In January 1996, NL was served with a complaint on behalf of individual
intervenors in German, et.al. v. Federal Home Loan Mortgage Corp., et. al. (U.S.
District Court, Southern District of New York, Civil Action No. 93 Civ. 6941
(RWS)). This class action lawsuit had originally been brought against the City
of New York and other landlord defendants. The intervenors' complaint alleges
claims against NL and other former manufacturers of lead pigment for medical
monitoring, property abatement and other injunctive relief, based on various
causes of action, including negligent product design, negligent failure to warn,
strict liability, fraud and misrepresentation, concert of action, civil
conspiracy, enterprise liability, market share liability, breach of express and
implied warranties, and nuisance. The intervenors purport to represent a class
of children and pregnant women who reside in New York City. In May 1996 NL and
the other defendants filed motions to dismiss the intervenors complaint. Class
discovery is proceeding.
In April 1996, NL was served with a complaint filed in New York state court
which seeks compensatory and punitive damages for personal injury purportedly
caused by lead paint and alleges causes of action against NL and other former
lead pigment manufacturers and the LIA for negligence, strict products
liability, fraud, concert of action, civil conspiracy, enterprise liability,
market share liability and alternative liability (Gates v. American Cyanamid
Co., et al. - I1996-2114). The complaint also asserts causes of action against
the landlords of the apartments in which plaintiff has lived since 1977. In
July 1996, NL filed an answer denying plaintiff's allegations. Discovery is
proceeding.
In September 1996, NL was served with a complaint filed in Circuit Court of
Marshall County, West Virginia, that seeks compensatory and punitive damages for
alleged personal injury caused by lead paint and asserts causes of action
against NL and five other former manufacturers of lead pigment for negligence,
strict liability, breach of warranty, fraud, conspiracy, market share liability
and alternative liability (Ritchie v. NL Industries, et al. - No. 96-C-179M).
In October 1996, defendants removed the case to federal court and filed motions
to dismiss. Plaintiff has filed a motion to remand to state court. The motions
are pending.
NL believes that the foregoing lead pigment actions are without merit and
intends to continue to deny all allegations of wrongdoing and liability and to
defend such actions vigorously.
NL has filed actions seeking declaratory judgment and other relief against
various insurance carriers with respect to costs of defense and indemnity
coverage for certain of its environmental and lead pigment litigation. NL
Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124, -2125
(HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs, filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in NL's favor. In July 1991, the court granted NL's motion for summary judgment
and ordered Commercial Union to pay NL's reasonable defense costs for such
cases. In June 1992, NL filed an amended complaint in the United States
District Court for the District of New Jersey against Commercial Union seeking
to recover costs incurred in defending four additional lead pigment cases which
have since been resolved in NL's favor. In August 1993, the court granted NL's
motion for summary judgment and ordered Commercial Union to pay the reasonable
costs of defending those cases. In July 1994, the court entered judgment on the
order requiring Commercial Union to pay previously-incurred NL costs in
defending those cases. In September 1995, the U.S. Court of Appeals for the
Third Circuit reversed and remanded for further consideration the decision by
the trial court that Commercial Union was obligated to pay the Company's
reasonable defense costs in certain of the lead pigment cases. The trial court
made its decision applying New Jersey law; the Court of Appeals concluded that
New York law, and not New Jersey law, applied and remanded the case to the trial
court for a determination under New York law. On remand from the Court of
Appeals, the trial court in April 1996 granted NL's motion for summary judgment,
finding that Commercial Union had a duty to defend NL in the four lead paint
cases which are the subject of NL's second amended complaint. The court also
issued a partial ruling on Commercial Union's motion for summary judgment in
which it sought allocation of defense costs and contribution from NL and two
other insurance carriers in connection with three lead paint actions on which
the court had granted NL summary judgment in 1991. The court ruled that
Commercial Union is entitled to receive contribution from NL and the two
carriers, but reserved ruling with respect to the relative contributions to be
made by each of the parties, including contributions by NL that may be required
with respect to periods in which NL was self-insured and contributions from one
carrier which were reinsured by a former subsidiary of NL, the reinsurance costs
of which NL may ultimately be required to bear. Other than granting motions for
summary judgment brought by two excess liability insurance carriers, which
contended their policies contained unique pollution exclusion language, and
certain summary judgment motions regarding policy periods, the court has not
made any final rulings on defense costs or indemnity coverage with respect to
NL's pending environmental litigation. The Court has not made any final ruling
on indemnity coverage in the lead pigment litigation. No trial dates have been
set. Other than ruling to date, the issue of whether insurance coverage for
defense costs or indemnity or both will be found to exist depends upon a variety
of factors, and there can be no assurance that such insurance coverage will
exist in other cases. NL has not considered any potential insurance recoveries
for lead pigment or environmental litigation in determining related accruals.
Environmental matters and litigation. NL 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 NL,
or its subsidiaries, or their predecessors, many of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage, or both. Certain of these proceedings involve claims for
substantial amounts. Although NL may be jointly and severally liable for such
costs, in most cases, it is only one of a number of PRPs who are also jointly
and severally liable.
The extent of CERCLA liability cannot be determined until the Remedial
Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA issues a
record of decision and costs are allocated among PRPs. The extent of liability
under analogous state cleanup statutes and for common law equivalents are
subject to similar uncertainties. NL believes it has provided adequate accruals
for reasonably estimable costs for CERCLA matters and other environmental
liabilities. At December 31, 1996, NL had accrued $113 million with respect to
those environmental matters which are reasonably estimable. NL determines the
amount of accrual on a quarterly basis by analyzing and estimating the range of
possible costs to NL. Such costs include, among other things, remedial
investigations, monitoring, studies, clean-up, removal and remediation. In the
first quarter of 1997, NL's accrual will be increased to include legal fees and
other costs of managing and monitoring certain environmental remediation sites
as required by the adoption of the AICPA's Statement of Position 96-1. See Note
18 to the Consolidated Financial Statements. It is not possible to estimate the
range of costs for certain sites. NL has estimated that the upper end of the
range of reasonably possible costs to NL for sites for which it is possible to
estimate costs is approximately $160 million. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs, or
a determination that NL is potentially responsible for the release of hazardous
substances at other sites could result in expenditures in excess of amounts
currently estimated by NL to be required for such matters. Further, there can
be no assurance that additional environmental matters will not arise in the
future. More detailed descriptions of certain legal proceedings relating to
environmental matters are set forth below.
At Pedricktown, the U.S. EPA divided the site into two operable units.
Operable unit one covers contaminated ground water, surface water, soils and
stream sediments. In July 1994, the U.S. EPA issued the Record of Decision for
operable unit one. The U.S. EPA estimates the cost to complete operable unit
one is $18.7 million. In May 1996, certain PRPs, but not NL, entered into an
administrative consent order with the U.S. EPA to perform the remedial phase of
operable unit one. In addition, the U.S. EPA incurred past costs in the
estimated amount of $5 million. The U.S. EPA issued an order with respect to
operable unit two in March 1992 to NL and 30 other PRPs directing immediate
removal activities including the cleanup of waste, surface water and building
surfaces. NL has complied with the order, and the work with respect to operable
unit two is completed. NL has paid approximately 50% of operable unit two
costs, or $2.5 million.
At Granite City, the RIFS is complete, and in 1990 the U.S. EPA selected a
remedy estimated to cost approximately $28 million. In July 1991, the United
States filed an action in the U.S. District Court for the Southern District of
Illinois against NL and others (United States of America v. NL Industries, Inc.,
et al., Civ. No. 91-CV 00578) with respect to the Granite City smelter. The
complaint seeks injunctive relief to compel the defendants to comply with an
administrative order issued pursuant to CERCLA, and fines and treble damages for
the alleged failure to comply with the order. NL and the other parties did not
comply with the order believing that the remedy selected by the U.S. EPA was
invalid, arbitrary, capricious and not in accordance with law. The complaint
also seeks recovery of past costs and a declaration that the defendants are
liable for future costs. Although the action was filed against NL and ten other
defendants, there are 330 other PRPs who have been notified by the U.S. EPA.
Some of those notified were also respondents to the administrative order. In
February 1992, the court entered a case management order directing that the
remedy issues be tried before the liability aspects are presented. In September
1995, the U.S. EPA released its decision selecting cleanup remedies for the
Granite City site. At that time, the cost of the remedies selected by the U.S.
EPA aggregated, in its estimation, $40.8 million to $67.8 million, although its
decision stated that the higher amount was not considered to be representative
of expected costs. NL is presently challenging portions of the U.S. EPA's
selection of the remedy. The U.S. EPA's current estimate for the completion of
the cleanup is $24.3 million, and in January 1997, NL was informed that the U.S.
EPA incurred past costs approximating $30 million. There is currently no
allocation among the PRPs for these costs.
Having completed the RIFS at Portland, NL conducted predesign studies to
explore the viability of the U.S. EPA's selected remedy pursuant to a June 1989
consent decree captioned U.S. v. NL Industries, Inc., Civ. No. 89-408, United
States District Court for the District of Oregon. Subsequent to the completion
of the predesign studies, the U.S. EPA issued notices of potential liability to
approximately 20 PRPs, including NL, directing them to perform the remedy, which
was initially estimated to cost approximately $17 million, exclusive of
administrative and overhead costs and any additional costs, for the disposition
of recycled materials from the site. In January 1992, the U.S. EPA issued
unilateral administrative orders to NL and six other PRPs directing the
performance of the remedy. NL and the other PRPs commenced performance of the
remedy. In August 1994, the U.S. EPA authorized NL and other PRPs to cease
performing most aspects of the selected remedy. The U.S. EPA has issued a
Record of Decision Amendment changing portions of the remedy. The U.S. EPA
currently estimates the cost of the proposed remedy to be from $10 million to
$13 million. Pursuant to an interim allocation, NL's share of remedial costs is
approximately 50%. In November 1991, Gould, Inc., the current owner of the
site, filed an action, Gould Inc. v. NL Industries, Inc., No. 91-1091, United
States District Court for the District of Oregon, against NL for damages for
alleged fraud in the sale of the smelter, rescission of the sale, past CERCLA
response costs and a declaratory judgment allocating future response costs and
punitive damages. The court granted Gould's motion to amend the complaint to
add additional defendants (adjoining current and former landowners and
generators). The amended complaint deletes the fraud and punitive damages
claims asserted against NL; thus, the pending action is essentially one for
reallocation of past and future cleanup costs. Discovery is proceeding. A
trial date has been set for September 1997. NL and the other PRPs performing
the cleanup have reached a settlement in principle with many of the generators
and adjoining landowner defendants.
NL and other PRPs entered into an administrative consent order with the
U.S. EPA requiring the performance of a RIFS at two sites in Cherokee County,
Kansas, where NL and others formerly mined lead and zinc. A former NL
subsidiary mined at the Baxter Springs subsite, where it is the largest viable
PRP. The final RIFS was submitted to the U.S. EPA in May 1993. In August
1994, the U.S. EPA issued its proposed plan for the cleanup of the Baxter
Springs and Treece sites in Cherokee County. The proposed remedy is estimated
by the U.S. EPA to cost $6 million.
In January 1989, the State of Illinois brought an action against NL and
several other subsequent owners and operators of a former NL facility 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 October 1992, the Supreme Court
of Illinois reversed the Appellate Division, which had affirmed the trial
court's earlier dismissal of the complaint, and remanded the case for further
proceedings. In December 1993, the trial court denied the State's petition to
reinstate the complaint, and dismissed the case with prejudice. In November
1996, the appeals court reversed the dismissal. The U.S. EPA has issued an
order to NL to perform a removal action at the site, and NL has notified the
U.S. EPA that it intends to comply with the order.
In 1980, the State of New York commenced litigation against NL in
connection with the operation of a plant in Colonie, New York formerly owned by
NL. Flacke v. NL Industries, Inc., No. 1842-80 ("Flacke I") and Flacke v.
Federal Insurance Company and NL Industries, Inc., No. 3131-92 ("Flacke II"),
New York Supreme Court, Albany County. The plant manufactured military and
civilian products from depleted uranium and was acquired from NL by the U.S.
Department of Energy ("DOE") in 1984. Flacke I seeks penalties for alleged
violations of New York's Environmental Conservation Law, and of a consent order
entered into to resolve these alleged violations. Flacke II seeks forfeiture of
a $200,000 surety bond posted in connection with the consent order, plus
interest from February 1980. NL denied liability in both actions. The
litigation had been inactive from 1984 until July 1993 when the State moved for
partial summary judgment for approximately $1.5 million on certain of its claims
in Flacke I and for summary judgment in Flacke II. In January 1994, NL cross-
moved for summary judgment in Flacke I and Flacke II. All summary judgment
motions have been denied. NL has reached a settlement in principle with the
State.
Residents in the vicinity of NL's former Philadelphia lead chemicals plant
commenced a class action allegedly comprised of over 7,500 individuals seeking
medical monitoring and damages allegedly caused by emissions from the plant.
Wagner, et al v. Anzon and NL Industries, Inc., No. 87-4420, Court of Common
Pleas, Philadelphia County. The complaint sought compensatory and punitive
damages from NL and the current owner of the plant, and alleged causes of action
for, among other things, negligence, strict liability, and nuisance. A class
was certified to include persons who resided, owned or rented property, or who
work or have worked within up to approximately three-quarters of a mile from the
plant from 1960 through the present. NL answered the complaint, denying
liability. In December 1994, the jury returned a verdict in favor of NL.
Plaintiffs appealed, and in September 1996 the Superior Court of Pennsylvania
affirmed the jury verdict in favor of NL. In December 1996, plaintiffs filed a
petition for allowance of appeal to the Pennsylvania Supreme Court. Plaintiff's
petition is pending. 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 Resource Conservation and Recovery Act ("RCRA"), and also asserting pendent
common law claims for strict liability, trespass, nuisance and punitive damages.
The court dismissed the common law claims without prejudice, dismissed two of
the three RCRA claims as against NL with prejudice, and stayed the case pending
the outcome of the state court litigation.
In July 1991, a complaint was filed in the United States District Court for
the Central District of California, United States of America v. Peter Gull and
NL Industries, Inc., Civ. No. 91-4098, seeking recovery of $2 million in costs
incurred by the United States in response to the alleged release of hazardous
substances into the environment from a facility located in Norco, California,
treble damages and $1.75 million in penalties for NL's alleged failure to comply
with the U.S. EPA's administrative order No. 88-13. The order, which alleged
that NL arranged for the treatment or disposal of materials at the Norco site,
directed the immediate removal of hazardous substances from the site. NL
carried out a portion of the remedy at the Norco site, but did not complete the
ordered activities because it believed they were in conflict with California
law. The court ruled that NL was liable for approximately $2.7 million in
response costs plus approximately $3.6 million in penalties for failure to
comply with the administrative order. In April 1994, the court entered final
judgment in this matter directing NL to pay $6.3 million plus interest. Both NL
and the government have appealed. In August 1994, this matter was referred to
mediation, which is pending.
At a municipal and industrial waste disposal site in Batavia, New York, NL
and six others have been identified as PRPs. The U.S. EPA has divided the site
into two operable units. Pursuant to an administrative consent order entered
into with the U.S. EPA, NL conducted a RIFS for operable unit one, the closure
of the industrial waste disposal section of the landfill. NL's RIFS costs to
date are 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 (including NL), entered into an administrative order on consent for the
remedial design phase of the remedy for operable unit one and the design phase
is proceeding. NL and other PRPs entered into an interim cost sharing
arrangement for this phase of the work. With respect to the second operable
unit, the extension of the municipal water supply, the U.S. EPA estimated the
costs at $1.2 million plus annual operation and maintenance costs. NL and the
other PRPs are performing the work comprising operable unit two. The U.S. EPA
has also demanded approximately $.9 million in past costs from the PRPs.
See also Item 1 - "Business - Chemicals - Regulatory and environmental
matters."
At December 31, 1996, Medite has accrued approximately $4.6 million for the
estimated cost to complete environmental remediation efforts at certain of its
current and former facilities, including amounts included in accrued plant
closure costs. Costs for future environmental remediation efforts are not
discounted to their present value, and no recoveries for remediation costs from
third parties have been recognized. Such accruals will be adjusted, if
necessary, as further information becomes available or as circumstances change.
No assurance can be given that the actual costs will not exceed accrued amounts.
None of these facilities are the subject of any litigation, administrative
proceeding or investigation.
The Company has also been named as a PRP pursuant to CERCLA at one
Superfund site in Indiana and has also undertaken a voluntary cleanup program
approved by state authorities at another Indiana site, both of which involve
operations no longer conducted by the Company. The total estimated cost for
cleanup and remediation at the Indiana Superfund site is $40 million, of which
the Company's share is currently estimated to be approximately $2 million. The
Company's estimated cost to complete the voluntary cleanup program at the other
Indiana site, which involves both surface and groundwater remediation, is
relatively nominal. The Company believes it has adequately provided accruals
for reasonably estimable costs for CERCLA matters and other environmental
liabilities. At December 31, 1996, the Company had accrued $2 million in
respect of such matters, which accrual is near the Company's estimate of the
upper end of range of possible costs. No recoveries for remediation costs have
been recognized. No assurance can be given that actual costs will not exceed
accrued amounts or the upper end of the range. 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 related to current or former operations will
not arise in the future.
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, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Valhi's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: VHI). As of March 15, 1997, there were approximately 5,000
holders of record of Valhi common stock. The following table sets forth the
high and low sales prices for Valhi common stock for the years indicated,
according to the New York Stock Exchange Composite Tape, and dividends paid
during such periods. On March 14, 1997 the closing price of Valhi common stock
according to the NYSE Composite Tape was $8.
DIVIDENDS
HIGH LOW PAID
Year ended December 31, 1995
First Quarter $8 3/8 $6 5/8 $.03
Second Quarter 8 5/8 6 3/4 .03
Third Quarter 8 1/8 6 3/4 .03
Fourth Quarter 7 1/2 5 3/4 .03
Year ended December 31, 1996
First Quarter $7 3/4 $6 1/8 $.05
Second Quarter 7 3/8 5 7/8 .05
Third Quarter 7 6 .05
Fourth Quarter 6 5/8 5 7/8 .05
Valhi's regular quarterly dividend is currently $.05 per share.
Declaration and payment of future dividends and the amount thereof will be
dependent upon the Company's results of operations, financial condition, cash
requirements for its businesses, contractual requirements and restrictions and
other factors deemed relevant by the Board of Directors. There are currently no
contractual restrictions on the ability of Valhi to declare or pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals $ - $ - $ - $1,023.9 $ 986.1
Component products 54.0 64.4 70.0 80.2 88.7
Fast food 103.8 111.6 115.5 115.4 116.0
$ 157.8 $ 176.0 $ 185.5 $1,219.5 $1,190.8
Operating income:
Chemicals $ - $ - $ - $ 178.5 $ 92.0
Component products 10.7 17.5 20.9 19.9 22.1
Fast food 8.5 9.7 9.0 7.5 8.9
$ 19.2 $ 27.2 $ 29.9 $ 205.9 $ 123.0
Equity in Amalgamated Sugar Company $ 20.5 $ 19.6 $ 13.9 $ 8.9 $ 10.0
Equity in Waste Control Specialists $ (.5) $ (6.4)
Equity in NL prior to consolidation:
Operations $ (37.4) $ (52.4) $ (25.1)
Provision for market value impairment - (84.0) -
$ (37.4) $(136.4) $ (25.1)
Income (loss) from continuing operations $ (15.4) $ (74.2) $ 1.3 $ 57.9 $ 4.2
Discontinued operations (6.8) 10.1 10.3 10.6 37.8
Extraordinary items (6.3) (15.4) - - -
Cumulative effect of changes in
accounting principles (1) (69.8) .4 - - -
Net income (loss) $ (98.3) $ (79.1) $ 11.6 $ 68.5 $ 42.0
PER SHARE DATA:
Income (loss) from continuing operations $ (.14) $ (.65) $ .01 $ .51 $ .04
Net income (loss) $ (.86) $ (.69) $ .10 $ .60 $ .37
Cash dividends $ .20 $ .05 $ .08 $ .12 $ .20
Weighted average common shares
outstanding 113.9 114.1 114.3 114.4 114.6
BALANCE SHEET DATA (at year end):
Total assets $1,077.0 $ 903.9 $2,480.7 $2,572.2 $2,145.0
Long-term debt 288.7 302.5 1,086.7 1,084.3 844.5
Stockholders' equity 259.1 207.5 198.4 274.3 303.9
(1) Relates to OPEB and income tax accounting in 1992 and marketable
securities
in 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
The Company reported income from continuing operations of $4.2 million, or
$.04 per share, in 1996 compared to income from continuing operations of $58
million, or $.51 per share, in 1995. A major factor in the decline in earnings
was due to lower average selling prices for TiO2 at NL Industries.
Discontinued operations represent the results of operations of Medite
Corporation, and in 1996 includes (i) an aggregate fourth quarter $48 million
after-tax gain on disposition ($75 million pre-tax) related principally to its
U.S. timber and timberland assets and its Irish MDF subsidiary and (ii) a $15
million first quarter after-tax charge ($24 million pre-tax) related to closure
of its New Mexico MDF operations. See Note 19 to the Consolidated Financial
Statements.
The Company currently expects to report a loss from continuing operations
in 1997 due to (i) the Company's $30 million pre-tax charge associated with the
first quarter 1997 adoption of AICPA Statement of Position No. 96-1, "Accounting
for Environmental Liabilities," for NL's remediation sites (see Note 18 to the
Consolidated Financial Statements) and (ii) expected lower average selling
prices for TiO2 in 1997 compared with 1996. TiO2 prices declined throughout
1996, and while NL currently expects TiO2 prices will begin to increase during
1997, the average price for 1997 is expected to be lower than the average price
in 1996.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts, including, but not limited to, statements found in
Item 1 - "Business" and Item 3 - "Legal Proceedings" as well as in this Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", are forward-looking statements that involve a number of risks and
uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward-looking statements include, but
are not limited to, future supply and demand for the Company's products
(including cyclicality thereof), general economic conditions, competitive
products, customer and competitor strategies, the impact of pricing and
production decisions, environmental matters, government regulations and possible
changes therein, the ultimate resolution of pending litigation and possible
future litigation, completion of pending asset/business unit dispositions and
other risks and uncertainties discussed elsewhere herein including, without
limitation, the sections referenced above.
CHEMICALS
Selling prices for TiO2, NL's principal product, declined during 1996.
NL's TiO2 operations are conducted through Kronos while its specialty chemicals
operations are conducted through Rheox.
YEARS ENDED DECEMBER 31,
1994
NL PRO % CHANGE (B)
HISTORICAL FORMA(A) 1995(A) 1996(A) 1994-1995 1995-1996
(IN MILLIONS)
Net sales:
Kronos $770.1 $770.1 $ 894.1 $ 851.2 + 16% - 5%
Rheox 117.9 117.9 129.8 134.9 + 10% + 4%
$888.0 $888.0 $1,023.9 $ 986.1 + 15% - 4%
Operating income:
Kronos $ 80.5 $ 62.6 $ 141.6 $ 51.9 +126% -63%
Rheox 30.9 29.3 36.9 40.1 + 26% + 9%
$111.4 $ 91.9 $ 178.5 $ 92.0 + 94% -48%
Operating income
margins:
Kronos 10% 8% 16% 6%
Rheox 26% 25% 28% 30%
TiO2 data:
Sales volume
(thousands of
metric tons) 376 376 366 388 - 3% + 6%
Average price
index
(1983=100) 132 132 152 139 + 15% - 9%
(A) Operating income in 1996, 1995 and 1994 pro forma is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction
with the acquisitions of its interest in NL, which adjustments result in
additional depreciation, depletion and amortization expense beyond amounts
separately reported by NL. Such additional non-cash expenses reduce
chemicals operating income, as reported by Valhi, by approximately $20
million annually as compared to amounts separately reported by NL.
(B)% change 1994 pro forma to 1995 amounts.
Kronos' TiO2 operating income declined in 1996 primarily due to lower
average selling prices, partially offset by higher sales volume. In billing
currency terms, average TiO2 selling prices in 1996 were 9% lower than 1995.
TiO2 selling prices began declining in the last half of 1995, and selling prices
at the end of 1996 were 17% lower than at the end of 1995 and 8% below the
average for 1996. While TiO2 prices declined in 1996, industry wide demand for
TiO2 has grown, as Kronos' TiO2 sales volume increased 6% in 1996 to a record
388,000 metric tons, with improved sales volumes worldwide. Sales volumes in
the second half of 1996 were 16% higher than the same period in 1995. In
response to softening demand in the first half of 1996 and its high inventory
levels at the end of 1995, Kronos curtailed production rates in early 1996. As
demand increased during the last half of 1996 and inventories returned to more-
normal levels, Kronos' production rates were increased to near full capacity in
late 1996 and the average capacity utilization was 95% for the year. Kronos'
production rates were 94% of its capacity in 1994 and at full capacity in 1995.
Approximately one-half of Kronos' 1996 TiO2 sales, by volume, were attributable
to markets in Europe, with 37% attributable to North America and the balance to
export markets.
The improvement in Kronos' 1995 TiO2 results was primarily due to higher
average selling prices and production volume, partially offset by lower sales
volume. In billing currency terms, average TiO2 selling prices in 1995 were
approximately 15% higher than 1994. TiO2 sales volume in 1995 was 3% lower than
the record levels of 1994, with declines in both Europe and North America, due
to softening demand in the second half of 1995 and customers building
inventories during 1994 and early 1995.
Demand, supply and pricing within the TiO2 industry is cyclical, and
changes in industry economic conditions can significantly impact NL's earnings
and operating cash flows. The average TiO2 selling price index (using 1983 =
100) of 139 in 1996 was 9% lower than the 1995 index of 152 (1995 was 15% above
the 1994 level). In comparison, the 1996 index was 21% below the 1990 price
index of 175 and 9% higher than the 1993 price index of 127. Many factors
influence TiO2 pricing levels, including industry capacity, worldwide demand
growth and customer inventory levels and purchasing decisions. NL believes that
the TiO2 industry has long-term growth potential, as a result of certain
barriers to entry which inhibit industry capacity growth. The decline in TiO2
prices in 1996, NL believes, was due in part to the impact of recent
debottlenecking projects increasing capacity, TiO2 customers de-stocking
inventories in a period of declining prices, and greater competition for sales
volume with more industry capacity available.
NL expects its TiO2 operating margins will begin to improve during the
second quarter of 1997 as the impact of recently-announced price increases takes
effect. However, NL expects its 1997 TiO2 operating income to be below that of
1996, primarily because of anticipated lower average selling prices for TiO2 and
lower technology fee income. While NL expects TiO2 prices will begin to
increase during 1997, the average for 1997 is expected to be lower than the 1996
average price. NL expects demand for TiO2 to remain strong in 1997, and the
continued growth in demand should result in significant improvement in average
selling prices for TiO2 over the longer run.
Rheox's 1996 operating results include a $2.7 million gain related to the
reduction of certain U.S. employee pension benefits. Rheox's operating results
improved in 1995 compared to 1994 primarily as a result of higher sales volume
and higher average selling prices.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway, the United Kingdom and Canada). The U.S.
dollar value of NL's foreign sales and operating results are subject to currency
exchange rate fluctuations which may favorably or adversely impact reported
earnings and affect the comparability of period to period operating results. A
significant amount of NL's sales are denominated in currencies other than the
U.S. dollar (61% in 1996), principally major European currencies and the
Canadian dollar. Certain raw materials, primarily titanium-containing
feedstocks, are purchased in U.S. dollars, while labor and other production
costs are denominated primarily in the local currencies. Fluctuations in the
value of the U.S. dollar relative to other currencies decreased 1996 sales by
$14 million compared to 1995 and increased 1995 sales by $54 million compared to
1994.
COMPONENT PRODUCTS
YEARS ENDED DECEMBER 31, % CHANGE
1994 1995 1996 1994-95 1995-96
(IN MILLIONS)
Net sales $70.0 $80.2 $88.7 +15% +11%
Operating income 20.9 19.9 22.1 - 5% +11%
Operating income margin 30% 25% 25%
Sales increased in both 1995 and 1996 compared to the respective prior year
due primarily to higher volumes in the office workstation component and drawer
slide lines. Drawer slide sales increased 18% in 1996 compared to 1995 and
workstation component products were up 14%. Both office workstation components
and drawer slide lines reported new highs in sales in each of the past three
years. Lock volumes from a government contract completed in early 1995 have
only been partially replaced, and consequently lock sales declined about 5% in
1996 compared to 1995. The Company signed a new $650,000 contract with the same
government agency in December 1996, with shipments scheduled to be delivered in
the first nine months of 1997. Operating income margins in 1995 were impacted
by higher raw material costs, as competitive pressures prevented full recovery
through higher selling prices, as well as costs associated with integrating the
operations of a Canadian competitor acquired in August 1995.
The new three-year collective bargaining agreement effective February 1997
covering CompX's Canadian employees provides for, among other things, wage rate
increases of 2.5% to 3% per year.
About 60% of the Company's component products sales are generated by its
Canadian operations. About two-thirds of these Canadian-produced sales are
denominated in U.S. dollars while substantially all of the related costs are
incurred in Canadian dollars. Consequently, relative changes in the U.S.
dollar/Canadian dollar exchange rate impact operating results. Fluctuations in
the value of the U.S. dollar relative to the Canadian dollar favorably impacted
operating results in 1995 compared with 1994 and unfavorably impacted 1996
operating results compared with 1995.
FAST FOOD
YEARS ENDED DECEMBER 31, % CHANGE
1994 1995 1996 1994-95 1995-96
(IN MILLIONS)
Net sales $115.5 $115.4 $116.0 - 0% + 1%
Operating income 9.0 7.5 8.9 -17% +18%
Operating income margin 8% 7% 8%
Arby's units operated:
At end of year 162 158 150 - 2% - 5%
Average during the year 159 158 152 - 1% - 4%
Comparable store sales increased 2% in 1996 compared to 1995. Operating
income and margins improved due to successful marketing promotions, reduced
training and recruiting costs associated with the slower rate of opening new
stores in 1996 and closure of certain under-performing units. Excluding the
effect of a 53rd week in 1994, comparable store sales were relatively flat in
1995 compared to 1994, and margins in 1995 were adversely impacted by higher
labor costs and discounts associated with competitive promotions.
A significant portion of Sybra's restaurant employees work on a part-time
basis and are paid at rates related to the minimum wage rate. Restaurant labor
costs currently approximate 29% of sales. The two-step, 90-cent increase in the
minimum wage rate which became effective October 1, 1996 increased Sybra's labor
costs. Sybra concurrently implemented certain price increases to offset the
impact of the first step of the October 1, 1996 wage rate increase. Any further
increase in the minimum wage rate or legislation requiring mandatory medical
insurance benefits to part-time employees would further increase Sybra's labor
costs. Although Sybra's competitors would likely experience similar increases,
there can be no assurance that further increases in sales prices can be
implemented to offset future increases in these costs.
Sybra opened 17 new stores during the past three years (one in 1996).
Sybra continually evaluates the profitability of its individual restaurants,
closed 27 stores during the past three years (9 in 1996) and intends to continue
to close unprofitable stores when appropriate. Costs associated with store
closings were $1.4 million in 1994, $.9 million in 1995 and $1.2 million in
1996. Sybra currently expects a net increase of about three stores in 1997 as
it plans to open six new stores and close at least three underperforming units.
The first new unit for 1997 is currently under construction and is scheduled to
open by the end of the first quarter.
The Company has executed agreements involving the sale of its fast food
operations conducted by Sybra. See Note 18 to the Consolidated Financial
Statements. If completed, the transactions are expected to close in the second
quarter of 1997, at which time the Company estimates it would report a pre-tax
gain on disposal in excess of $24 million. There can be no assurance that any
such transactions will be completed.
WASTE MANAGEMENT
Waste Control Specialists LLC, formed in November 1995, was constructing
its West Texas facility during 1995 and 1996. Waste Control Specialists
reported a loss of $.5 million during the last two months of 1995 and a $6.4
million loss in 1996 during its development stage. The Company received its
first wastes for disposal in February 1997.
Valhi is entitled to a 20% cumulative preferential return on its $25
million investment in Waste Control Specialists after which earnings are
generally split 50/50. The liabilities assumed by Waste Control Specialists
exceeded the carrying value of the assets contributed by the other 50%-owner by
approximately $3 million. Accordingly, all of Waste Control Specialists' income
or loss will accrue to Valhi until Waste Control Specialists reports positive
equity attributable to the other 50%-owner.
GENERAL CORPORATE AND OTHER ITEMS
General corporate. Net general corporate expenses in 1996 were lower than
in 1995 due primarily to lower provisions for environmental remediation costs as
well as the effect of a $2.8 million litigation settlement gain and a $2.3
million gain on disposition of a surplus grain facility in 1996. Net general
corporate expenses in 1995 declined compared to the 1994 pro forma amount as
lower environmental remediation and litigation costs at NL in 1995 more than
offset NL's 1994 $20 million litigation settlement gain. General corporate
expenses in 1997 are expected to be significantly higher than in 1996 due
principally to the $30 million pre-tax charge from adoption of the new standard
regarding accounting for environmental remediation liabilities. See Note 18 to
the Consolidated Financial Statements. Securities earnings in 1994 were reduced
by a first quarter 1994 decline in the market value of certain fixed-income
investments, while average balances available for investment were lower in 1996
compared with 1995. Securities earnings is expected to increase significantly
in 1997 due principally to the impact of (i) distributions to be received from
The Amalgamated Sugar Company LLC, which will be reported as dividend income,
and (ii) interest earned on Valhi's loans to Snake River Sugar Company. See
Note 20 to the Consolidated Financial Statements.
Interest expense. Interest expense declined in 1996 due primarily to lower
average variable interest rates, principally NL's DM-denominated debt, partially
offset by higher average levels of such debt. Interest expense in 1995
approximated the 1994 pro forma amount as lower borrowing levels associated with
NL's DM and other bank loans and lower average interest rates on NL's DM-
denominated debt were offset by changes in currency exchange rates and higher
average U.S. variable borrowing rates. Interest expense is expected to increase
significantly in 1997 due to, among other things, Valhi's $250 million in loans
from Snake River Sugar Company. See Note 20 to the Consolidated Financial
Statements.
At December 31, 1996, approximately $650 million of consolidated
indebtedness, principally publicly-traded debt, bears interest at fixed interest
rates averaging 11.1%. The weighted average interest rate on $469 million of
outstanding variable rate borrowings at December 31, 1996 was 5.3%, down from
6.4% on outstanding variable rate borrowings at December 31, 1995 and 7.4% at
December 31, 1994. These declines in average interest rates are due in large
part to lower rates on NL's DM-denominated borrowings.
NL has significant DM-denominated variable interest rate borrowings and,
accordingly, NL's interest expense is also subject to currency fluctuations.
Periodic cash interest payments are not required on Valhi's 9.25% deferred
coupon LYONs, and NL's 13% Discount Notes do not require periodic interest
payments until 1998. As a result, current cash interest expense payments are
lower than accrual basis interest expense.
Minority interest. Minority interest in earnings in 1996 consists
principally of NL dividends paid to stockholders other than Valhi. Based on the
continuing decline in TiO2 selling prices and the current TiO2 industry pricing
outlook, NL's Board of Directors suspended its quarterly dividend in the fourth
quarter of 1996. Because NL did not pay any dividends in 1995, all of NL's net
income in 1995 accrued to Valhi for financial reporting purposes. Minority
interest in earnings in 1995 (and pro forma 1994) relates to certain partially-
owned foreign subsidiaries of NL, certain of which minority interest was
purchased by Rheox in early 1996. At December 31, 1996, NL separately reported
a shareholders' deficit of approximately $203 million and, as a result, no
minority interest in NL Industries is recorded in the Company's consolidated
balance sheet. Until such time as NL reports positive shareholders' equity in
its separate financial statements, all of NL's undistributed earnings will
accrue to the Company for financial reporting purposes.
PROVISION FOR INCOME TAXES
The principal reasons for the difference between the Company's effective
income tax rates and the U.S. federal statutory income tax rates are explained
in Note 15 to the Consolidated Financial Statements. Income tax rates vary by
jurisdiction (country and/or state), and relative changes in the geographic mix
of the Company's pre-tax earnings can result in fluctuations in the Company's
consolidated effective income tax rate. As discussed in Note 20 to the
Consolidated Financial Statements, The Amalgamated Sugar Company's results of
operations are presented on the equity method during 1994, 1995 and 1996.
Amalgamated is a member of the consolidated U.S. tax group of which Valhi and
Contran are members, and consequently the Company did not provide any
incremental income taxes related to such earnings. Certain subsidiaries,
including NL, are not members of the consolidated U.S. tax group, and the
Company does provide incremental income taxes on such earnings. Both of these
factors impact the Company's overall effective tax rate.
The provision for income taxes in 1995 includes net deferred income tax
benefits resulting from changes in the U.S./Canada income tax treaty and the
reduction of NL's deferred income tax valuation allowance to recognize the
future benefit of certain tax credits. In both 1994 and 1996, the geographic
mix of pre-tax income included losses in certain of NL's tax jurisdictions for
which no current refund was available and for which recognition of a deferred
tax asset was not considered appropriate. All of these factors also impacted
the Company's overall effective tax rate. See Note 15 to the Consolidated
Financial Statements.
EQUITY IN EARNINGS OF AMALGAMATED
As discussed in Note 20 to the Consolidated Financial Statements, The
Amalgamated Sugar Company's results of operations are presented on the equity
method during 1994, 1995 and 1996. Amalgamated's sales, operating income and
net earnings for each of the past three years are presented in Note 20 to the
Consolidated Financial Statements. Beginning in 1997, the Company will report
distributions received from The Amalgamated Sugar Company LLC as dividend
income.
Average sugar selling prices in 1996 were 6% higher than in 1995.
Reflecting a smaller crop size, refined sugar sales volume in 1996 (15.9 million
cwt) decreased 13% from the record levels of 1995. An increased extraction rate
in 1996, in part due to the implementation of certain recently-completed
productivity improvement capital projects, along with a higher sugar content of
the beets have resulted in a lower beet cost per hundredweight ("cwt")of sugar
produced, lower aggregate sugar processing costs and improved FIFO-based
earnings in 1996 compared to 1995.
Refined sugar sales volume in 1995 (18.2 million cwt) was an all-time
record. Due primarily to an abnormally high yield per acre, Amalgamated's sugar
production from the crop harvested in the fall of 1994 was approximately 10%
higher than its previous record crop. The record volume was aided by expiration
of the U.S. government-imposed restrictive marketing allotments at the end of
the third quarter of 1995, and fourth quarter 1995 volume was almost 50% higher
than the same period in 1994 when marketing allotments were in effect.
Average refined sugar selling prices in 1995 increased slightly (1%)
compared to 1994 and were aided in part by the effect of marketing allotments
imposed on domestic producers during the crop year ended September 30, 1995. To
help reduce the relatively high level of sugar inventories resulting from the
record crop, Amalgamated made limited sales into foreign markets during the
first nine months of 1995, which sales were excluded from the domestic
allotments. Net returns from foreign sales are typically lower than from
domestic sales. The large sugarbeet crop harvested in the fall of 1994 and
adverse weather conditions resulted in a long and difficult processing campaign.
These factors, along with a lower sugar content of the beets, contributed to a
10% increase in per hundredweight ("cwt") crop processing costs.
Sugarbeet purchase cost is the largest cost component of producing refined
sugar and the price paid for sugarbeets is, under the terms of contracts with
the sugarbeet growers, a function of the average selling price of Amalgamated's
refined sugar. As a result, changes in sugar selling prices impact sugarbeet
purchase costs as well as revenues and serve as a partial hedge against changing
prices. However, the impact of related LIFO inventory adjustments can
significantly affect operating income and margin comparisons relative to FIFO
basis comparisons.
EQUITY IN EARNINGS OF NL PRIOR TO CONSOLIDATION
As discussed in Note 3 to the Consolidated Financial Statements, the
Company's interest in NL was reported by the equity method during 1994. As
discussed above and in Note 3, the Company consolidated NL's results of
operations beginning in 1995. The Company's equity in NL's separately-reported
results of operations for 1994, summarized below, differs from its effective
percentage interest in NL's separate results. Amortization of basis differences
arising from purchase accounting adjustments made by the Company in conjunction
with the acquisition of its interests in NL generally reduces earnings, or
increases losses, as reported by the Company compared to amounts separately
reported by NL. NL's sales and operating income are discussed under
"Chemicals" above.
AMOUNT
(IN MILLIONS)
Net sales $888.0
Operating income $111.3
Corporate, net (40.8)
Interest expense (83.9)
(13.4)
Income tax expense (9.8)
Minority interest (.8)
Loss from continuing operations $(24.0)
The Company's equity in NL's losses, including
amortization of basis differences
$(25.1)
DISCONTINUED OPERATIONS
See Note 19 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
CONSOLIDATED CASH FLOWS
General. The consolidation of NL's cash flows beginning in 1995
significantly impacts cash flow comparisons with 1994.
Operating activities. Cash provided by operating activities before changes
in assets and liabilities was $23 million in 1994, $126 million in 1995 and $88
million in 1996. Changes in assets and liabilities result primarily from the
timing of production, sales and purchases. Under the terms of Internal Revenue
Code and similar state regulations regarding the timing of estimated tax
payments, the Company is not required to pay income taxes (approximately $39
million) related to Medite's 1996 asset sales of its timber and timberlands and
Irish MDF subsidiary to such tax authorities until 1997. At that time, the
payment of such cash income taxes will be shown as a reduction in cash flows
from operating activities even though the pre-tax proceeds from disposition of
such assets are shown as part of cash flow from investing activities. Cash flow
from operating activities comparisons are also impacted by relatives changes in
the Company's portfolio of marketable trading securities. Changes in such
portfolio generated approximately $4 million of cash in 1994 and $51 million in
1995. Noncash interest expense consists of amortization of original issue
discount on certain Valhi and NL indebtedness and amortization of deferred
financing costs.
Investing activities. Capital expenditures are disclosed by business
segment in Note 2 to the Consolidated Financial Statements.
At December 31, 1996, the estimated cost to complete capital projects in
process approximated $10 million, most of which relates to environmental
protection and compliance programs and productivity-enhancing equipment at NL.
The Company's total capital expenditures for 1997 are estimated at approximately
$51 million, down from $76 million in 1996 due principally to lower planned
spending by NL. Capital expenditures in 1997 are expected to be financed
primarily from operations or existing cash resources and credit facilities.
During 1996, Valhi purchased $15 million of NL common stock, Rheox acquired
the minority interest of certain of its non-U.S. subsidiaries for $5 million and
Valhi contributed $17 million to Waste Control Specialists. During 1995, CompX
International purchased the assets of a Canadian workstation/drawer slide
competitor for an aggregate of $6 million, Valhi purchased $13 million of NL
common stock and Valhi invested $5 million in Waste Control Specialists. During
1994, Valhi purchased $15 million of NL common stock.
Financing activities. Net borrowings in 1996 include (i) DM 144 million
($96 million when borrowed) under NL's DM credit facility used primarily to both
fund NL's operations and fund the German income tax settlement payments
discussed below and (ii) $13 million under Valhi short-term credit facilities.
Repayments of indebtedness include scheduled principal payments on NL term
loans.
Net repayments of indebtedness in 1995 relate primarily to (i) $39 million
of net short-term borrowings under NL DM-denominated short-term credit lines and
(ii) principal repayments under NL term loans, including a $10 million
prepayment under Rheox's term loan.
After giving effects to the amendments to the DM credit facility and the
Rheox term loan discussed below, unused lines of credit available for borrowing
under revolving credit facilities at December 31, 1996, including the DM
facility, approximated $124 million.
CHEMICALS - NL INDUSTRIES
Demand, supply and pricing within the TiO2 industry is cyclical, and
changes in industry economic conditions can significantly impact NL's earnings
and operating cash flows. During 1996, declining TiO2 prices unfavorably
impacted NL's operating income and cash flows from operations comparisons with
1995. NL generated $58 million in cash flows from operating activities before
changes in assets and liabilities in 1996 compared to $105 million in 1995 and
$39 million in 1994. Relative changes in NL's inventories, receivables and
payables (excluding the effect of foreign currency translation), including
relative changes in NL's portfolio of marketable trading securities, used $42
million of net cash in 1996, compared to a $33 million use of net cash in 1995.
Average TiO2 selling prices began a downward trend in the last half of
1995, which trend continued throughout 1996. NL expects TiO2 prices will begin
to increase during 1997, although NL's average TiO2 selling price in 1997 is
expected to be lower than the 1996 average. However, no assurance can be given
that price trends will conform to NL's expectations and future cash flows will
be adversely affected should price trends be lower than NL's expectations. In
order to improve its near-term liquidity, NL refinanced Rheox's term loan in
January 1997, generating approximately $125 million cash, and used the net cash
proceeds, along with other available funds, to prepay a portion of the DM credit
facility. See Note 9 to the Consolidated Financial Statements. In addition, NL
and its lenders modified certain financial covenants of the DM credit facility,
and NL has guaranteed the facility. As a result of the refinancing and
prepayment, NL's aggregate scheduled debt payments for 1997 and 1998 decreased
by $103 million ($64 million in 1997 and $39 million in 1998).
Based upon NL's expectations for the TiO2 industry and anticipated demands
on NL's cash resources as discussed herein, NL expects to have sufficient
liquidity to meet its near-term obligations including operations, capital
expenditures and debt service. To the extent that actual developments differ
from NL's expectations, NL's liquidity could be adversely affected.
NL's capital expenditures during the past three years aggregated $168
million, including $67 million ($26 million in 1996) for NL's ongoing
environmental protection and compliance programs, including a Canadian waste
acid neutralization facility, a Norwegian onshore tailings disposal system and
various off-gas desulfurization systems. NL's estimated 1997 capital
expenditures are $35 million and include $3 million in the area of environmental
protection and compliance, primarily related to the off-gas desulfurization and
water treatment chemical purification systems. NL spent $9 million in 1995 and
$18 million in 1996, and plans to spend an additional $8 million in 1997, in
capital expenditures related to a debottlenecking project at its Leverkusen,
Germany chloride process TiO2 facility that is expected to increase NL's
worldwide annual attainable TiO2 production capacity to about 410,000 metric
tons in 1997. The capital expenditures of the TiO2 manufacturing joint venture
are not included in NL's capital expenditures.
NL and its subsidiaries held $114 million of cash and cash equivalents (44%
held by non-U.S. subsidiaries at December 31, 1996), of which $11 million is
restricted. At December 31, 1996, after giving effect for the refinancing
discussed above, NL had cash and cash equivalents of $87 million and had $9
million and $102 million available for borrowing under existing U.S. and non-
U.S. credit facilities, respectively. The terms of intercompany notes from KII
payable to NL mirror the terms of NL's publicly-traded debt and are designed to
facilitate the flow of funds from NL's subsidiaries to service such
indebtedness. At December 31, 1996, NL had complied with, or had obtained a
waiver for, all financial covenants governing its debt agreements.
Certain of NL's U.S. and non-U.S. income tax returns, including Germany,
are being examined and tax authorities have or may propose tax deficiencies. NL
has reached an agreement with the German tax authorities regarding examinations
which resolve certain significant tax contingencies for years through 1990. NL
received certain final assessments and paid approximately DM 50 million ($32
million when paid), including interest, in 1996 in final settlement of the
agreed issues. Certain other German tax contingencies remain outstanding and
will continue to be litigated. Although NL believes that it will ultimately
prevail in the litigation, NL has granted a DM 100 million ($64 million at
December 31, 1996) lien on its Nordenham, Germany TiO2 plant in favor of the
German tax authorities until the litigation is resolved. No assurance can be
given that this litigation will be resolved in NL's favor in view of the
inherent uncertainties involved in court rulings. NL believes that it has
adequately provided accruals for additional income 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 its consolidated financial position, results of operations or
liquidity.
At December 31, 1996, NL had recorded net deferred tax liabilities of $152
million. NL, which is not a member of the Contran Tax Group, operates in
numerous tax jurisdictions, in certain of which it has temporary differences
that net to deferred tax assets (before valuation allowance). NL has provided a
deferred tax valuation allowance of $207 million at December 31, 1996,
principally related to the U.S. and Germany, offsetting deferred tax assets
which NL believes do not currently meet the "more-likely-than-not" recognition
criteria.
In addition to the chemicals businesses conducted through Kronos and Rheox,
NL also has certain interests and associated liabilities relating to certain
discontinued or divested businesses.
NL has been named as a defendant, PRP, or both, in a number of legal
proceedings associated with environmental matters, including waste disposal
sites, mining locations and facilities currently or previously owned, operated
or used by NL, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. On a quarterly basis, NL evaluates the
potential range of its liability at sites where it has been named as a PRP or
defendant. NL believes it has provided adequate accruals ($113 million at
December 31, 1996) for reasonably estimable costs of such matters, but NL's
ultimate liability may be affected by a number of factors, including changes in
remedial alternatives and costs and the allocation of such costs among PRPs. NL
is also a defendant in a number of legal proceedings seeking damages for
personal injury and property damage arising out of the sale of lead pigments and
lead-based paints. NL has not accrued any amounts for the pending lead pigment
and lead-based paint litigation. There is no assurance that NL will not incur
future liability in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, NL believes that the pending lead pigment and lead-based paint litigation
is without merit. Liability that may result, if any, cannot reasonably be
estimated. NL currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its 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 18 to the Consolidated
Financial Statements.
As discussed in "Results of Operations - Chemicals," NL has substantial
operations located outside the United States for which the functional currency
is not the U.S. dollar. As a result, the reported amount of NL's assets and
liabilities related to its non-U.S. operations, and therefore NL's consolidated
net assets, will fluctuate based upon changes in currency exchange rates. The
carrying value of NL's net investment in its German operations is a net
liability due principally to its DM bank credit facility, while its net
investment in its other non-U.S. operations are net assets.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past
and may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, issue additional securities, modify its
dividend policy, restructure ownership interests, sell interests in subsidiaries
or other assets, or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business, NL
may review opportunities for the acquisition, divestiture, joint venture or
other business combinations in the chemicals industry. In the event of any
future acquisition, NL may consider using its available cash, issuing its equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing NL's existing debt. In this regard, the Indentures
governing NL's publicly-traded debt contain provisions which limit the ability
of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS
Waste Control Specialists capital expenditures from its November 1995
formation through 1996 approximated $12 million. Estimated capital expenditures
for projects in process, substantially all of which relate to the West Texas
facility, are approximately $4 million and are expected to be incurred
principally in 1997. Such capital expenditures, along with its development
stage operating losses, will be funded primarily from Valhi's $25 million of
capital contributions ($5 million in 1995, $17 million in 1996 and the remaining
$3 million in 1997) as well as certain debt financing provided to Waste Control
Specialists by Valhi. See Note 8 to the Consolidated Financial Statements.
OTHER
The Company continues to explore additional expansion and/or acquisition
opportunities for its component products business. At December 31, 1996, CompX
had $5 million of borrowing availability under existing Canadian credit
agreements, and Sybra had $28 million of borrowing availability under its
existing revolving credit agreements.
Condensed cash flow data for Medite and Amalgamated is presented in Notes
19 and 20, respectively, to the Consolidated Financial Statements.
Medite has made certain representations and warranties to the purchasers of
its timber and timberlands, Irish MDF subsidiary and Oregon MDF facility
concerning, among other things, the assets sold. Such representations are
customary in transactions of these types. Medite has agreed to indemnify the
three purchasers for up to an aggregate of $6.5 million for certain breaches of
these representations and warranties. As part of the transactions, Valhi has
agreed to guarantee Medite's indemnification obligations. The Company does not
currently expect to be required to perform under any of these indemnification
obligations.
GENERAL CORPORATE - VALHI AND VALCOR
Valhi's operations are conducted principally through subsidiaries and
affiliates (NL Industries, Valcor and Waste Control Specialists). Valcor is an
intermediate parent company with operations conducted through its subsidiaries
(CompX International and Sybra). Accordingly, Valhi's and Valcor's long-term
ability to meet their respective corporate obligations are dependent in large
measure on the receipt of dividends or other distributions from their respective
subsidiaries. NL, which paid dividends in the first three quarters of 1996,
suspended its dividend in the fourth quarter. Suspension of NL's dividend is
not currently expected to materially adversely impact Valhi's financial position
or liquidity. Various credit agreements to which subsidiaries are parties
contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions have not
significantly impacted the Company's ability to service parent company level
obligations. Neither Valhi nor Valcor has guaranteed any indebtedness of their
respective subsidiaries.
Valhi's LYONs do not require current cash debt service. Valhi owns 5.5
million shares of Dresser common stock, which shares are held in escrow for the
benefit of holders of the LYONs. The LYONs are exchangeable at any time, at the
option of the holder, for the Dresser shares owned by Valhi. Exchanges of LYONs
for Dresser stock would result in the Company reporting income related to the
disposition of the Dresser stock for both financial reporting and income tax
purposes, although no cash proceeds would be generated by such exchanges. Cash
income taxes that would have been triggered at December 31, 1996 by exchanges of
all of the outstanding LYONs for Dresser stock at such date were approximately
$33 million. Valhi continues to receive regular quarterly Dresser dividends
(presently $.17 per quarter) on the escrowed shares. In addition, the Company
is required, at the option of the holder, to purchase the LYONs in October 1997
at the accreted value of approximately $405 per $1,000 principal amount at
maturity (approximately $153 million in October 1997). Such redemption price
may be paid, at the option of Valhi, in cash, Dresser common stock, or a
combination thereof. At December 31, 1996, the LYONs had an accreted value
equivalent to approximately $26 per Dresser share, and the market price of the
Dresser common stock was $31 per share. As long as the value of the underlying
Dresser shares exceeds the accreted value of the LYONS, the Company does not
expect a significant number of LYONs holder to seek redemption. Because the
LYONS are redeemable at the option of the LYON holder in October 1997, the LYONS
are classified as a current liability and the Dresser shares are classified as a
current asset at December 31, 1996.
During 1995 and 1996, Valhi purchased an additional $13 million and $15
million, respectively, of NL common stock. In January 1997, Valhi made its
final $3 million contribution to Waste Control Specialists, following $5 million
contributed in 1995 and $17 million in 1996.
In February 1997, the Company entered into a $4 million revolving credit
facility with Waste Control Specialists. Borrowings by Waste Control
Specialists bear interest at prime plus 1% and are due no later than December
31, 1997.
The after-tax proceeds from the disposition of Medite, net of repayments of
Medite's U.S. bank debt, is available for Valcor's general corporate purposes,
subject to compliance with certain covenants contained in the Valcor Senior Note
Indenture. At December 31, 1996, Valcor had cash, cash equivalents and demand
loans to subsidiaries of approximately $140 million, a portion of which will be
used to pay cash income taxes in 1997 related to Medite's 1996 asset disposals
as discussed above. Also under the terms of the Indenture, Valcor is required
to tender for a portion of the Valcor Notes, at par, to the extent that a
specified amount of these proceeds is not used to either permanently paydown
senior indebtedness of Valcor or its subsidiaries or invest in related
businesses, both as defined in the Indenture, within one year of disposition.
While Valcor is not yet required to execute a tender offer related to Medite's
asset dispositions, on March 20, 1997, Valcor announced it had initiated a
tender offer whereby Valcor would purchase up to $86.7 million principal amount
of Valcor Notes on a pro-rata basis, at par value, in satisfaction of the
covenant contained in the Indenture. Pursuant to its terms, the tender offer
will expire on April 24, 1997, unless extended by Valcor. The amount of Valcor
Notes which will ultimately be purchased by Valcor pursuant to the tender offer
is dependent upon the amount of Valcor Notes properly tendered. Consequently,
there can be no assurance as to the amount of Valcor Notes which will ultimately
be purchased by Valcor. The net proceeds from any disposition of the Company's
fast food operations, net of repayments of Sybra's bank indebtedness, would
similarly be available for Valcor's general corporate purposes. If the
disposition of the Company's fast food operations is completed and none of those
net proceeds are used as provided in the Indenture, a portion of the Notes would
be subject to a subsequent tender offer.
Valhi received approximately $73 million cash in early 1997 at the transfer
of control of its refined sugar business to Snake River Sugar Company, including
a net $11.5 million received from Amalgamated as a pre-closing dividend. As
part of the transaction, Snake River made certain loans to Valhi aggregating
$250 million in January 1997. Snake River's sources of funds for its loans to
Valhi, as well as for the $14 million it contributed to The Amalgamated Sugar
Company LLC for its voting interest in the LLC, included cash capital
contributions by the grower members of Snake River and $192 million in debt
financing provided by Valhi in January 1997. See Note 20 to the Consolidated
Financial Statements. Valhi currently expects that distributions received from
the LLC, which are dependent in part upon the future operations of the LLC, will
exceed its debt service requirements under its $250 million loans from Snake
River. The cash proceeds to Valhi upon the transfer of control of Amalgamated's
operations to Snake River, including amounts to be collected in the future from
Valhi's $192 million loans to Snake River, will be available for Valhi's general
corporate purposes. The Company understands that Snake River intends to
refinance at least $100 million of such loans with a third party lender during
1997; however there can be no assurance that any such refinancing will occur.
As discussed in Note 20 to the Consolidated Financial Statements, the
Company may, at its option, require the LLC to redeem the Company's interest in
the LLC beginning in January 2002, and the LLC has the right to redeem the
Company's interest in the LLC beginning in January 2027. In addition, beginning
in January 2002 the Company has the right to require Snake River to purchase the
Company's interest in the LLC. The redemption/purchase price is generally $250
million plus the amount of any deferrals of cash distributions from the LLC. In
the event the Company either requires the LLC to redeem the Company's interest
in the LLC or requires Snake River to purchase the Company's interest in the
LLC, Snake River has the right to accelerate the maturity of and call the $250
million of Valhi loans. If the Company requires the LLC to redeem the Company's
interest in the LLC, then Snake River is required, under the terms of the LLC
Company Agreement, to contribute to the LLC the cash received from calling the
Valhi loans. Redemption or purchase of the interest in the LLC as discussed
above would result in the Company reporting income related to the disposition of
its LLC interest for both financial reporting and income tax purposes, although
the net cash proceeds that would be generated from such a disposition would
likely be less than the specified redemption/purchase price due to Snake River's
ability to call its $250 million loans to Valhi. In addition, such net cash
proceeds could be less than the income taxes that would become payable as a
result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company routinely evaluates acquisitions of interests in, or
combinations with, companies, including related companies, perceived by
management to be undervalued in the marketplace. These companies may or may not
be engaged in businesses related to the Company's current businesses. The
Company intends to consider such acquisition activities in the future and, in
connection with this activity, may consider issuing additional equity securities
and increasing the indebtedness of the Company, its subsidiaries and related
companies. From time to time, the Company and related entities also evaluate
the restructuring of ownership interests among their respective subsidiaries and
related companies. In this regard, the Indentures governing the publicly-traded
debt of NL and Valcor contain provisions which limit the ability of NL, Valcor
and their respective subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi'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 "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. See Note 17 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d)Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules listed on the
accompanying Index of Financial Statements and Schedules (see page F)
are filed as part of this Annual Report.
50%-or-less owned persons or subsidiaries not consolidated.
Consolidated financial statements of Waste Control Specialists LLC and
The Amalgamated Sugar Company are filed as part of this Annual Report
pursuant to Rule 3.09 of Regulation S-X.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
1996.
October 25, 1996 - Reported Items 5 and 7.
October 28, 1996 - Reported Items 5 and 7.
October 31, 1996 - Reported Items 5 and 7.
November 20, 1996 - Reported Items 5 and 7.
December 31, 1996 - Reported Items 2 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. Valhi will furnish a copy of any of the exhibits listed
below upon payment of $4.00 per exhibit to cover the costs to
Valhi of furnishing the exhibits. Instruments defining the
rights of holders of long-term debt issues which do not exceed
10% of consolidated total assets will be furnished to the
Commission upon request.
Item No. Exhibit Index
3.1 Restated Articles of Incorporation of the Registrant -
incorporated by reference to Appendix A to the
definitive Prospectus/Joint Proxy Statement of The
Amalgamated Sugar Company and LLC Corporation (File
No. 1-5467) dated February 10, 1987.
3.2 By-Laws of the Registrant as amended - incorporated by
reference to Exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1992.
4.1 Form of Indenture between the Registrant and
NationsBank of Georgia, N.A., as Trustee, governing
Liquid Yield Option Notes due 2007 - incorporated by
reference to Exhibit 4.1 to a Registration Statement on
Form S-2 (No. 33-49866) filed by the Registrant.
4.2 Indenture dated November 1, 1993 governing Valcor's
9 5/8% Senior Notes due 2003, including form of note -
incorporated by reference to Exhibit 4.1 of Valcor's
Quarterly Report on Form 10-Q (File No. 33-63044) for
the quarter ended September 30, 1993.
4.3 Indenture dated October 20, 1993 governing NL's 11 3/4%
Senior Secured Notes due 2003, including form of note,
- incorporated by reference to Exhibit 4.1 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
4.4 Indenture dated October 20, 1993 governing NL's 13%
Senior Secured Discount Notes due 2005, including form
of note - incorporated by reference to Exhibit 4.6 of
NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.1 Form of Intercorporate Services Agreement between the
Registrant and Contran Corporation - incorporated by
reference to Exhibit 10.1 of the Registrant's Annual
Report on Form 10-K (File No. 1-5467) for the year
ended December 31, 1992.
10.2 Intercorporate Services Agreement by and between
Contran Corporation and NL effective as of January 1,
1996 - incorporated by reference to Exhibit 10.41 to
NL's Annual Report on Form 10-K (File No. 1-640) for
the year ended December 31, 1996.
10.3 Asset Purchase Agreement between Medite Corporation and
Rogue Resources LLC dated October 7, 1996 -
incorporated by reference to Exhibit 10.1 of Valcor's
Quarterly Report on Form 10-Q (File No. 33-63044) for
the quarter ended September 30, 1996.
10.4 Form of Guarantee between Valhi, Inc. and Rogue
Resources LLC.
10.5 Share Subscription and Redemption Agreement among
Medite Corporation, Willamette Industries, Inc. and
Medford International Holdings dated November 4, 1996 -
incorporated by reference to Exhibit 10.1 of Valcor's
Quarterly Report on Form 10-Q (File No. 33-63044) for
the quarter ended September 30, 1996.
10.6 Form of Guarantee between Valhi, Inc. and Willamette
Industries, Inc.
10.7 Asset Purchase Agreement between Medite Corporation and
SierraPine, a California limited partnership, dated
January 31, 1997 - incorporated by reference to Exhibit
10.6 of Valcor's Annual Report on Form 10-K (File No.
33-63044) for the year ended December 31, 1996.
10.8 Form of Guarantee between Valhi, Inc. and SierraPine.
10.9 Asset Purchase Agreement between Sybra, Inc., Valcor,
Inc. and U.S. Restaurant Properties Master L.P. dated
December 23, 1996 - incorporated by reference to
Exhibit 10.7 of Valcor's Annual Report on Form 10-K
(File No. 33-63044) for the year ended December 31,
1996.
10.10 Stock Purchase Agreement between Valcor, Inc. and
I.C.H. Corporation dated February 7, 1997 -
incorporated by reference to Exhibit 10.8 of Valcor's
Annual Report on Form 10-K (File No. 33-63044) for the
year ended December 31, 1996.
10.11* Valhi, Inc. 1987 Incentive Stock Option - Stock
Appreciation Rights Plan, as amended - incorporated by
reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1994.
10.12* Valhi, Inc. 1997 Stock Option Plan.
10.13* Valhi, Inc. 1990 Non-Employee Director Stock Option
Plan - incorporated by reference to Exhibit 4.1 of a
Registration Statement on Form S-8 (No. 33-41508) filed
by the Registrant.
10.14* Executive Severance Agreement effective as of February
16, 1994 by and between Joseph S. Compofelice
(Executive Vice President of the Registrant) and NL -
incorporated by reference to Exhibit 10.2 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1996.
10.15* 1989 Long Term Performance Incentive Plan of NL
Industries, Inc. - incorporated by reference to Exhibit
B to NL's Proxy Statement on Schedule 14A (File No. 1-
640) for the annual meeting held on May 8, 1996.
10.16* 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 NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1992.
10.17* NL Industries, Inc. Variable Compensation Plan -
incorporated by reference to Exhibit A of NL's Proxy
Statement on Schedule 14A (File No. 1-640) for the
annual meeting held on May 8, 1996.
10.18 Second Amended and Restated Loan Agreement dated
January 31, 1997 among Kronos International, Inc., the
banks set forth therein and Hypobank International
S.A., as Agent - incorporated by reference to Exhibit
10.2 of NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1996.
10.19 Formation Agreement dated January 3, 1997 (to be
effective December 31, 1996) between Snake River Sugar
Company and The Amalgamated Sugar Company of The
Amalgamated Sugar Company LLC.
10.20 Company Agreement of The Amalgamated Sugar Company LLC
dated January 3, 1997 (to be effective December 31,
1996).
10.21 Subordinated Promissory Note in the principal amount of
$37.5 million between Valhi, Inc. and Snake River Sugar
Company, and the related Pledge Agreement, both dated
January 3, 1997.
10.22 Limited Recourse Promissory Note in the principal
amount of $212.5 million between Valhi, Inc. and Snake
River Sugar Company, and the related Limited Recourse
Pledge Agreement, both dated January 3, 1997.
10.23 Loan and Security Agreement between Snake River Sugar
Company, as Borrower, and Valhi, Inc., as Lender, dated
January 3, 1997.
10.24 Formation Agreement dated as of October 18, 1993 among
Tioxide Americas Inc., Kronos Louisiana, Inc. and
Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.2 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
10.25 Joint Venture Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana,
Inc. - incorporated by reference to Exhibit 10.3 of
NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.26 Amendment No. 1 to Joint Venture Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and
Kronos Louisiana, Inc. - incorporated by reference to
Exhibit 10.20 of NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31 1995.
10.27 Kronos Offtake Agreement dated as of October 18, 1993
by and between Kronos Louisiana, Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to
Exhibit 10.4 of NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended September 30,
1993.
10.28 Amendment No. 1 to Kronos Offtake Agreement dated as of
December 20, 1995 between Kronos Louisiana, Inc. and
Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.22 of NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December
31 1995.
10.29 Master Technology and Exchange Agreement dated as of
October 18, 1993 among Kronos, Inc., Kronos Louisiana,
Inc., Kronos International, Inc., Tioxide Group Limited
and Tioxide Group Services Limited - incorporated by
reference to Exhibit 10.8 of NL's Quarterly Report on
Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
10.30 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 NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.31 Lease Contract dated June 21, 1952, between
Farbenfabrieken Bayer Aktiengesellschaft and
Titangesellschaft mit beschrankter Haftung (German
language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 of NL's
Annual Report on Form 10-K (File No. 1-640) for the
year ended December 31, 1985.
10.32 Agreement dated February 8, 1984 between Bayer AG and
Kronos Titan GmbH (German language version and English
translation thereof) - incorporated by reference to
Exhibit 10.16 of NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31, 1985.
10.33 Contract on Supplies and Services among Bayer AG,
Kronos Titan GmbH and Kronos International, Inc. dated
June 30, 1995 (English translation from German language
document) - incorporated by reference to Exhibit 10.1
of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1995.
10.34 Richards Bay Slag Sales Agreement dated May 1, 1995
between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to
Exhibit 10.17 to NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31, 1995.
10.35 Registration Rights Agreement dated October 30, 1991,
by and between NL and Tremont - incorporated by
reference to Exhibit 4.3 of NL's Annual Report on Form
10-K (File No. 1-640) for the year ended December 31,
1991.
10.36 Insurance Sharing Agreement, effective January 1, 1990,
by and between NL, NL Insurance, Ltd. (an indirect
subsidiary of Tremont Corporation) and Baroid
Corporation - incorporated by reference to Exhibit
10.20 to NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1991.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule for the year ended December 31,
1996.
27.2 Reclassified Financial Data Schedule for the (i) three-
month period ended March 31, 1996, (ii) six-month
period ended June 30, 1996 and (iii) nine-month period
ended September 30, 1996.
27.3 Reclassified Financial Data Schedule for the (i) three-
month period ended March 31, 1995, (ii) six-month
period ended June 30, 1995, (iii) nine-month period
ended September 30, 1995 and (iv) year ended December
31, 1995.
27.4 Reclassified Financial Data Schedule for the year ended
December 31, 1994.
* Management contract, compensatory plan or agreement.
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.
VALHI, INC.
(Registrant)
By: /s/ Harold C. Simmons
Harold C. Simmons, March 20, 1997
(President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Norman S. Edelcup /s/ Harold C. Simmons
Norman S. Edelcup, March 20, 1997 Harold C. Simmons, March 20, 1997
(Director) (Chairman of the Board, President
and Chief Executive Officer)
/s/ Kenneth R. Ferris /s/ Glenn R. Simmons
Kenneth R. Ferris, March 20, 1997 Glenn R. Simmons, March 20, 1997
(Director) (Vice Chairman of the Board)
/s/ J. Walter Tucker, Jr. /s/ Bobby D. O'Brien
J. Walter Tucker, Jr., March 20, 1997 Bobby D. O'Brien, March 20, 1997
(Director) (Vice President,
Principal Financial Officer)
/s/ Gregory M. Swalwell
Gregory M. Swalwell, March 20, 1997
(Controller,
Principal Accounting Officer)
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(A) AND 14(D)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS PAGE
Reports of Independent Accountants F-1/F-3
Consolidated Balance Sheets - December 31, 1995 and 1996 F-4/F-5
Consolidated Statements of Income -
Years ended December 31, 1994, 1995 and 1996 F-6/F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 1994, 1995 and 1996 F-8/F-10
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1994, 1995 and 1996 F-11
Notes to Consolidated Financial Statements F-12/F-53
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule I - Condensed financial information of Registrant S-2/S-9
Schedule II - Valuation and qualifying accounts S-10/S-11
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Valhi, Inc.:
We have audited the accompanying consolidated balance sheets of Valhi, Inc.
and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of income, cash flows and stockholders' equity for each of the three
years in the period ended December 31, 1996. 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 did not audit the
financial statements of The Amalgamated Sugar Company as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996,
which constituted approximately 15% and 2% of consolidated assets as of December
31, 1995 and 1996, respectively, and whose results of operations are presented
on the equity method in the accompanying consolidated statements of income. We
also did not audit the financial statements of Medite Corporation as of December
31, 1995 and for each of the two years in the period ended December 31, 1995,
which constituted approximately 8% of consolidated assets as of December 31,
1995 and whose results of operations are reported as discontinued operations in
the accompanying consolidated statements of income. These statements were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion, insofar as it relates to amounts included for such companies, is
based solely upon their reports.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Valhi, Inc. and Subsidiaries as
of December 31, 1995 and 1996, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 7, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of The Amalgamated Sugar Company:
We have audited the balance sheets of The Amalgamated Sugar Company as of
December 31, 1995 and 1996, and the related statements of income and
shareholder's equity and cash flows for each of the years in the three year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Amalgamated Sugar
Company at December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
January 31, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Medite Corporation:
We have audited the consolidated balance sheet of Medite Corporation as of
December 31, 1995, and the related consolidated statements of income, redeemable
preferred stock and common stockholder's equity and cash flows for each of the
two years in the period ended December 31, 1995 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements (not presented
separately herein) referred to above present fairly, in all material respects,
the consolidated financial position of Medite Corporation as of December 31,
1995, and the consolidated results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 27, 1996
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
1995 1996
Current assets:
Cash and cash equivalents $ 170,908 $ 255,679
Marketable securities - 142,478
Accounts and other receivables 228,940 164,844
Receivable from affiliates 3,529 13,931
Inventories 518,304 251,597
Prepaid expenses 7,249 7,537
Deferred income taxes 2,636 1,597
Total current assets 931,566 837,663
Other assets:
Marketable securities 144,256 17,258
Investment in joint ventures 190,518 196,697
Investment in Amalgamated Sugar Company - 34,070
Natural resource properties 95,774 36,441
Prepaid pension cost 24,767 25,313
Goodwill 252,773 258,359
Deferred income taxes 788 223
Other assets 57,084 48,719
Total other assets 765,960 617,080
Property and equipment:
Land 43,313 37,538
Buildings 212,729 189,875
Equipment 913,763 610,545
Construction in progress 20,709 15,723
1,190,514 853,681
Less accumulated depreciation 315,827 163,442
Net property and equipment 874,687 690,239
$2,572,213 $2,144,982
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1996
Current liabilities:
Notes payable $ 145,932 $ 38,732
Current maturities of long-term debt 63,752 235,648
Accounts payable and accrued liabilities 393,119 203,242
Payable to affiliates 10,188 47,387
Income taxes 44,849 8,148
Deferred income taxes 4,496 30,523
Total current liabilities 662,336 563,680
Noncurrent liabilities:
Long-term debt 1,084,284 844,468
Accrued pension cost 70,040 59,215
Accrued OPEB cost 78,410 56,257
Accrued environmental costs 115,577 109,908
Deferred income taxes 239,444 178,049
Other 44,765 29,237
Total noncurrent liabilities 1,632,520 1,277,134
Minority interest in NL Industries - -
Minority interest in NL foreign subsidiaries 3,066 249
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 124,633 and 124,768 shares issued 1,246 1,248
Additional paid-in capital 34,604 35,258
Retained earnings 263,777 282,766
Adjustments:
Marketable securities 55,629 65,105
Currency translation (7,430) (6,210)
Pension liabilities (2,881) (3,160)
Treasury stock, at cost - 10,103 and 10,126 shares (70,654) (71,088)
Total stockholders' equity 274,291 303,919
$2,572,213 $2,144,982
Commitments and contingencies (Notes 3, 15, 18, 19 and 20)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
1994* 1994* 1995* 1996
(UNAUDITED)
Revenues and other income:
Net sales $185,522 $1,073,476 $1,219,547 $1,190,791
Other, net 5,332 48,359 28,970 41,441
190,854 1,121,835 1,248,517 1,232,232
Costs and expenses:
Cost of sales 142,807 803,231 841,847 909,287
Selling, general and
administrative 23,932 243,542 221,371 211,699
Interest 21,468 105,394 105,222 100,195
188,207 1,152,167 1,168,440 1,221,181
2,647 (30,332) 80,077 11,051
Equity in earnings (losses) of:
Amalgamated Sugar Company 13,889 13,889 8,900 10,009
Waste Control Specialists - - (554) (6,407)
NL prior to consolidation (25,078) - - -
Income (loss) from
continuing operations
before taxes (8,542) (16,443) 88,423 14,653
Income taxes (benefit) (9,864) (9,590) 29,893 3,511
Minority interest - 843 622 6,915
Income (loss) from
continuing operations 1,322 $ (7,696) 57,908 4,227
Discontinued operations 10,278 10,607 37,819
Net income $ 11,600 $ 68,515 $ 42,046
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
1994* 1994* 1995* 1996
(UNAUDITED)
Earnings per common share:
Continuing operations $.01 $(.07) $.51 $.04
Discontinued operations .09 .09 .33
Net income $.10 $.60 $.37
Cash dividends per share $.08 $.12 $.20
Weighted average common shares
outstanding 114,303 114,303 114,437 114,622
* Reclassified.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994* 1995* 1996
Operating activities:
Net income $ 11,600 $ 68,515 $ 42,046
Depreciation, depletion and
amortization 7,843 68,640 69,915
Noncash interest expense 10,780 31,186 33,790
Deferred income tax benefits (9,785) (11,976) (9,581)
Minority interest - 622 6,915
Other, net 2,110 (11,920) (13,615)
Equity in:
Medite Corporation (18,347) (10,607) (37,819)
Amalgamated Sugar Company (13,889) (8,900) (10,009)
Waste Control Specialists - 554 6,407
NL prior to consolidation 25,078 - -
Tremont Corporation, net 8,069 - -
23,459 126,114 88,049
Medite, net 33,096 18,464 24,882
Amalgamated Sugar Company, net 14,735 41,692 24,587
Change in assets and liabilities:
Accounts and other receivables (765) (3,381) 1,617
Inventories (2,244) (57,503) 6,723
Accounts payable and accrued
liabilities 3,972 (20,169) (3,241)
Income taxes (1,328) 14,987 (40,199)
Accounts with affiliates (2,495) (2,789) (5,959)
Other, net (972) 5,704 (15,244)
Trading securities:
Sale proceeds 29,375 51,286 -
Purchases (25,000) (762) -
Net cash provided by
operating activities 71,833 173,643 81,215
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994* 1995* 1996
Investing activities:
Capital expenditures $(14,420) $ (78,267) $ (75,896)
Purchases of minority interest:
NL common stock (15,060) (13,250) (14,627)
Subsidiaries of NL - - (5,168)
Investment in Waste Control
Specialists - (5,000) (17,000)
Purchase of business unit - (5,982) -
Loans to affiliates:
Loans (16,550) (62,000) (7,800)
Collections 16,550 59,000 10,800
Medite, net (32,728) (12,527) 165,935
Amalgamated Sugar Company, net (26,633) (24,013) (13,460)
Other, net 4,645 1,108 7,117
Net cash provided (used) by
investing activities (84,196) (140,931) 49,901
Financing activities:
Indebtedness:
Borrowings 37,203 161,233 253,261
Principal payments (45,982) (154,516) (214,762)
Loans from affiliates:
Loans - - 7,844
Repayments - - (600)
Valhi dividends (9,145) (13,809) (23,057)
Distributions to minority interest - (14) (7,416)
Medite, net 29,772 (10,940) (64,018)
Amalgamated Sugar Company, net 18,140 (20,208) 4,329
Other, net 229 1,153 916
Net cash provided (used)
by financing activities 30,217 (37,101) (43,503)
Net increase (decrease) $ 17,854 $ (4,389) $ 87,613
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994* 1995* 1996
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and
financing activities $ 17,854 $ (4,389) $ 87,613
Currency translation (420) 4,550 (2,842)
Consolidation of NL 131,124 - -
148,558 161 84,771
Balance at beginning of year 22,189 170,747 170,908
Balance at end of year $170,747 $170,908 $255,679
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized:
Continuing operations -
consolidated companies $ 10,612 $ 73,881 $ 65,228
Amalgamated, net 6,971 13,073 9,205
Discontinued operations 5,824 8,010 8,014
Eliminations (210) (720) (257)
$ 23,197 $ 94,244 $ 82,190
Income taxes:
Continuing operations -
consolidated companies, net $ 3,665 $ 29,588 $ 58,013
Amalgamated, net 10,507 2,623 6,631
Discontinued operations, net 9,135 6,461 (100)
$ 23,307 $ 38,672 $ 64,544
* Reclassified.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
Balance at December 31, 1993 $1,244 $33,409 $222,810
Net income - - 11,600
Cash dividends - - (9,145)
Dividend - Tremont common stock - - (16,194)
Adjustments, net - - -
Other, net 1 (68) -
Balance at December 31, 1994 1,245 33,341 209,071
Net income - - 68,515
Cash dividends - - (13,809)
Adjustments, net - - -
Other, net 1 1,263 -
Balance at December 31, 1995 1,246 34,604 263,777
Net income - - 42,046
Cash dividends - - (23,057)
Adjustments, net - - -
Other, net 2 654 -
Balance at December 31, 1996 $1,248 $35,258 $282,766
ADJUSTMENTS TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIES TRANSLATION LIABILITIES STOCK EQUITY
Balance at December 31, 1993 $41,075 $(17,776) $(1,619) $(71,642) $207,501
Net income - - - - 11,600
Cash dividends - - - - (9,145)
Dividend - Tremont common stock 73 1,439 445 - (14,237)
Adjustments, net (3,479) 4,209 668 - 1,398
Other, net - - - 1,374 1,307
Balance at December 31, 1994 37,669 (12,128) (506) (70,268) 198,424
Net income - - - - 68,515
Cash dividends - - - - (13,809)
Adjustments, net 17,960 4,698 (2,375) - 20,283
Other, net - - - (386) 878
Balance at December 31, 1995 55,629 (7,430) (2,881) (70,654) 274,291
Net income - - - - 42,046
Cash dividends - - - - (23,057)
Adjustments, net 9,476 1,220 (279) - 10,417
Other, net - - - (434) 222
Balance at December 31, 1996 $65,105 $ (6,210) $(3,160) $(71,088) $303,919
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization. Valhi, Inc. (NYSE: VHI) is a subsidiary of Contran
Corporation which holds, directly or through subsidiaries, approximately 91%
of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of the
children and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole
trustee. Mr. Simmons, the Chairman of the Board and Chief Executive Officer
of Valhi and Contran, may be deemed to control such companies.
Management's estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Ultimate actual results may, in some
instances, differ from previously estimated amounts.
Principles of consolidation. The consolidated financial statements
include the accounts of Valhi and its majority-owned subsidiaries
(collectively, the "Company"). All material intercompany accounts and
balances have been eliminated. The Company has not consolidated the
financial position of its refined sugar operations conducted by The
Amalgamated Sugar Company at December 31, 1996 because control of such
operations was temporary at that date. Certain prior year amounts have been
reclassified to conform to the current year presentation. See Notes 19 and
20.
Pro forma information (unaudited). The accompanying consolidated
financial statements include certain pro forma financial information as if
the Company's December 31, 1994 consolidation of NL Industries, Inc. (see
Note 3) had occurred as of January 1, 1994. All such pro forma information
is unaudited.
Translation of foreign currencies. Assets and liabilities of
subsidiaries whose functional currency is deemed to be other than the U.S.
dollar are translated at year-end rates of exchange and revenues and expenses
are translated at average exchange rates prevailing during the year.
Resulting translation adjustments, net of related deferred income tax
effects, are accumulated in the currency translation adjustments component of
stockholders' equity. Currency transaction gains and losses are recognized
in income currently.
Net sales. Sales are recorded when products are shipped (fast food
sales at the time of retail sale).
Inventories and cost of sales. Inventories are stated at the lower of
cost or market. The last-in, first-out method is used to determine the cost
of approximately 3% of total inventories at December 31, 1996 (1995 - 43%).
Other inventory costs are generally based on average cost or the first-in,
first-out method.
Cash and cash equivalents. Cash equivalents, including restricted
cash, include bank time deposits and government and commercial notes and
bills with original maturities of three months or less. Restricted cash at
December 31, 1995 and 1996 represents amounts restricted pursuant to
outstanding letters of credit and certain indebtedness agreements ($10
million and $11 million, respectively).
Marketable securities and securities transactions. Marketable debt
and equity securities are carried at market, based upon quoted market prices.
Unrealized gains and losses on trading securities are recognized in income
currently. Unrealized gains and losses on available-for-sale securities are
accumulated in the marketable securities adjustment component of
stockholders' equity, net of related deferred income taxes. Realized gains
and losses are based upon the specific identification of the securities sold.
Investment in joint ventures. Investments in more than 20%-owned but
less than majority-owned companies are accounted for by the equity method.
Differences between the cost of each investment and the Company's pro rata
share of the entity's separately-reported net assets, if any, are allocated
among the assets and liabilities of the entity based upon estimated relative
fair values. Such differences, which were not material at December 31, 1996,
are charged or credited to income as the entities depreciate, amortize or
dispose of the related net assets.
Natural resource properties and depletion. Timber and timberlands and
mining properties are stated at cost less accumulated depletion. Depletion
is computed primarily by the unit-of-production method.
Intangible assets and amortization. Goodwill, representing the excess
of cost over fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized by the
straight-line method over not more than 40 years (weighted average remaining
life of 29.5 years at December 31, 1996) and is stated net of accumulated
amortization of $18.1 million at December 31, 1996 (1995 - $9.4 million).
Substantially all goodwill relates to NL Industries. The Company's criteria
for evaluating the recoverability of goodwill includes consideration of the
fair value of the applicable subsidiary. At December 31, 1996, the quoted
market price of NL common stock ($10.88 per share) was in excess of the
Company's net investment in NL at that date ($5.21 per NL share held).
Fast food restaurant franchise fees and other intangible assets are
amortized by the straight-line method over the periods (10 to 20 years)
expected to be benefited and are stated net of accumulated amortization of
$15.2 million at December 31, 1996 (1995 - $11.5 million).
Property, equipment and depreciation. Property and equipment are
stated at cost. Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized. Interest costs related to major long-term
capital projects are capitalized as a component of construction costs.
Interest costs capitalized related to the Company's consolidated business
segments and comprising continuing operations were nil in 1994 (pro forma
1994 - $1 million), $1 million in 1995 and $2 million in 1996.
Depreciation is computed principally by the straight-line and unit-of-
production methods over the estimated useful lives of ten to 40 years for
buildings and three to 20 years for equipment.
Long-term debt. Long-term debt is stated net of unamortized original
issue discount ("OID"). OID is amortized over the period during which
interest is not paid and deferred financing costs are amortized over the term
of the applicable issue, both by the interest method. Capital lease
obligations are stated net of imputed interest.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated United States federal income tax group (the "Contran
Tax Group"). The policy for intercompany allocation of federal income taxes
provides that subsidiaries included in the Contran Tax Group compute the
provision for income taxes on a separate company basis. Subsidiaries make
payments to or receive payments from Contran in the amounts they would have
paid to or received from the Internal Revenue Service had they not been
members of the Contran Tax Group. The separate company provisions and
payments are computed using the tax elections made by Contran. NL is a
separate U.S. taxpayer and is not a member of the Contran Tax Group. Waste
Control Specialists LLC is treated as a partnership for federal income tax
purposes.
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 the Company's subsidiaries and affiliates not
included in the Contran Tax Group. The Company periodically evaluates its
deferred tax assets and adjusts any related valuation allowance based on the
estimate of the amount of such deferred tax assets which the Company believes
does not meet the "more-likely-than-not" realization criteria.
Earnings per share. Earnings per share of common stock is based upon
the weighted average number of common shares outstanding. Common stock
equivalents are excluded from the computation because the dilutive effect is
either not material or antidilutive.
Other. Advertising costs related to the Company's consolidated
business segments and charged to continuing operations, expensed as incurred,
aggregated $9 million in 1994 (pro forma 1994 - $11 million), and $12 million
in each of 1995 and 1996.
Research and development costs related to the Company's consolidated
business segments and charged to continuing operations, expensed as incurred,
were $400,000 in 1994 (pro forma 1994 - $10 million) and $11 million in each
of 1995 and 1996.
Deferred technology fee income was amortized by the straight-line
method over three years through October 1996.
The Company accounts for stock-based employee compensation in
accordance with Accounting Principles Board Opinion 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
has not been significant in any of the past three years.
Accounting and funding policies for retirement and postretirement
benefits other than pensions ("OPEB") plans are described in Note 16, and
accounting policies for environmental remediation costs are described in Note
18.
NOTE 2 - BUSINESS AND GEOGRAPHIC SEGMENTS:
% OWNED AT
BUSINESS SEGMENT PRINCIPAL ENTITIES DECEMBER 31, 1996
Chemicals NL Industries, Inc. 56%
Component products CompX International Inc. 100%
Fast food Sybra, Inc. 100%
Waste management* Waste Control Specialists LLC 50%
* Unconsolidated equity affiliate
YEARS ENDED DECEMBER 31,
PRO FORMA
1994 1994 1995 1996
(UNAUDITED)
(IN MILLIONS)
Net sales:
Chemicals $ - $ 888.0 $1,023.9 $ 986.1
Component products 70.0 70.0 80.2 88.7
Fast food 115.5 115.5 115.4 116.0
$185.5 $1,073.5 $1,219.5 $1,190.8
Operating income:
Chemicals $ - $ 91.9 $ 178.5 $ 92.0
Component products 20.9 20.9 19.9 22.1
Fast food 9.0 9.0 7.5 8.9
29.9 121.8 205.9 123.0
General corporate items:
Securities earnings 4.1 8.0 13.6 10.2
General expenses and other, net (9.9) (54.7) (34.3) (22.0)
Interest expense (21.5) (105.4) (105.2) (100.2)
2.6 (30.3) 80.0 11.0
Equity in:
Amalgamated Sugar Company 13.9 13.9 8.9 10.0
Waste Control Specialists - - (.5) (6.4)
NL prior to consolidation (25.1) - - -
Income (loss) from continuing
operations before taxes $ (8.6) $ (16.4) $ 88.4 $ 14.6
YEARS ENDED DECEMBER 31,
PRO FORMA
1994 1994 1995 1996
(UNAUDITED)
(IN MILLIONS)
Depreciation, depletion and
amortization:
Chemicals $ - $ 60.0 $ 60.9
Component products 1.8 2.2 2.5
Fast food 5.9 6.0 6.0
Corporate .1 .4 .5
$ 7.8 $ 68.6 $ 69.9
Capital expenditures:
Chemicals $ - $ 64.2 $ 66.9
Component products 3.4 2.0 2.3
Fast food 10.8 12.0 6.1
Corporate .2 .1 .6
$ 14.4 $ 78.3 $ 75.9
Geographic segments
Net sales - point of origin:
United States $139.4 $ 442.9 $ 477.1 $ 487.0
Europe - 587.3 703.2 653.8
Canada 46.1 169.1 197.4 205.1
Eliminations - (125.8) (158.2) (155.1)
$185.5 $1,073.5 $1,219.5 $1,190.8
Net sales - point of
destination:
United States $166.4 $ 404.9 $ 429.7 $ 447.2
Canada 17.2 81.5 83.3 84.2
Europe .5 469.4 581.2 524.4
Other 1.4 117.7 125.3 135.0
$185.5 $1,073.5 $1,219.5 $1,190.8
Operating income:
United States $ 16.8 $ 64.9 $ 88.4 $ 85.1
Europe - 33.9 85.0 10.0
Canada 13.1 23.0 32.5 27.9
$ 29.9 $ 121.8 $ 205.9 $ 123.0
Identifiable assets DECEMBER 31,
1995 1996
(IN MILLIONS)
Business segments:
Chemicals $1,586.6 $1,576.5
Refined sugar 386.7 -
Building products 200.4 44.2
Component products 44.4 48.4
Fast food 74.4 75.6
Waste management 4.6 15.2
2,297.1 1,759.9
Corporate and eliminations 275.1 385.1
$2,572.2 $2,145.0
Geographic segments:
United States $ 971.6 $ 506.5
Europe 1,100.7 1,039.8
Canada 224.8 213.6
2,297.1 1,759.9
Corporate and eliminations 275.1 385.1
$2,572.2 $2,145.0
NL's chemicals operations are conducted through Kronos, Inc. (titanium
dioxide pigments or "TiO2") and Rheox, Inc. (specialty chemicals). The
Company's component products (CompX International) and fast food (Sybra)
subsidiaries are owned by Valcor, Inc., a wholly-owned subsidiary of Valhi.
Each of NL (NYSE: NL) and Valcor are subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended.
Capital expenditures exclude amounts attributable to business units
acquired in business combinations accounted for by the purchase method.
Corporate assets consist principally of cash, cash equivalents and
marketable securities. At December 31, 1996, approximately 11% of corporate
assets were held by NL (1995 - 27%). Valhi has a wholly-owned captive insurance
company ("Valmont") registered in Vermont. Valmont's operations, which are not
significant, are included in general expenses and other, net.
At December 31, 1996, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $460 million.
NOTE 3 - BUSINESS COMBINATIONS:
NL Industries, Inc. (NYSE: NL). At the beginning of 1994, Valhi held 48%
of NL's outstanding common stock and accounted for its interest in NL by the
equity method during the year ended December 31, 1994. During 1994, Valhi
purchased additional NL shares in market transactions for an aggregate of
approximately $15 million, and thereby increased its direct ownership of NL to
more than 50% in mid-December 1994. The Company accounted for such increase in
its interest in NL by the purchase method (step purchase) and, accordingly,
consolidated NL's financial position as of December 31, 1994 and consolidated
NL's results of operations and cash flows beginning in 1995. During 1995 and
1996, the Company purchased additional NL shares in market transactions for an
aggregate of approximately $28 million and increased its ownership of NL to 56%
at December 31, 1996. NL's separate financial statements reflect a
stockholders' deficit of approximately $203 million at December 31, 1996 and,
accordingly, no minority interest in NL is reported in the Company's
consolidated balance sheet. Until such time as NL reports positive
stockholders' equity, all undistributed income or loss and other undistributed
changes in NL's reported stockholders' equity will accrue to the Company for
financial reporting purposes. Minority interest in earnings in 1996 consists
principally of NL dividends paid to NL stockholders other than Valhi.
Waste Control Specialists LLC. In November 1995, Valhi acquired a 50%
interest in newly-formed Waste Control Specialists LLC. See Note 8. Valhi
committed to contribute $25 million to Waste Control Specialists for its 50%
interest ($22 million contributed through December 31, 1996 and the remaining $3
million contributed in January 1997). The other 50%-owner contributed certain
assets, primarily land and certain operating permits for the facility site, and
Waste Control Specialists also assumed certain indebtedness of the other owner.
Valhi accounts for its interest in Waste Control Specialists by the equity
method.
Valhi is entitled to a 20% cumulative preferential return on its $25
million investment after which earnings are generally split 50/50. The
liabilities of the other 50%-owner assumed by Waste Control Specialists exceeded
the carrying value of the assets contributed. Accordingly, all of Waste Control
Specialists' net income or loss will accrue to the Company for financial
reporting purposes until Waste Control Specialists reports positive equity
attributable to the other 50%-owner.
Other. In 1995, CompX's Canadian subsidiary purchased certain assets,
principally property, equipment and inventory, of a Canadian competitor for
approximately $6 million cash.
NOTE 4 - INVENTORIES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Raw materials:
Chemicals $ 35,075 $ 43,284
Sugarbeets 47,420 -
Building products 12,404 4,306
Component products 1,927 2,556
Fast food 1,379 1,406
98,205 51,552
In process products:
Chemicals 9,132 10,356
Refined sugar 57,967 -
Building products 2,187 83
Component products 4,320 4,974
73,606 15,413
Finished products:
Chemicals 173,195 142,956
Refined sugar and by-products 90,492 -
Building products 6,131 1,096
Component products 2,921 3,300
272,739 147,352
Supplies 73,754 37,280
$518,304 $251,597
The current cost of LIFO inventories (all of which relate to Medite and
The Amalgamated Sugar Company) exceeded the net carrying value of such
inventories by approximately $3 million at December 31, 1996 (1995 - $36
million).
NOTE 5 - ACCOUNTS AND OTHER RECEIVABLES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Accounts receivable $225,385 $157,089
Notes receivable 3,400 1,500
Accrued interest 149 928
Refundable income taxes 4,978 9,414
Allowance for doubtful accounts (4,972) (4,087)
$228,940 $164,844
NOTE 6 - MARKETABLE SECURITIES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Current asset (available-for-sale) -
Dresser Industries common stock $ - $142,478
Noncurrent assets (available-for-sale):
Dresser Industries common stock $130,366 $ -
Other common stocks 13,890 17,258
$144,256 $ 17,258
Valhi holds 5.5 million shares of Dresser common stock (cost - $44
million) with a quoted market price of $31 at December 31, 1996, or an aggregate
market value of $169 million (1995 - $24.38 per share, or $133 million). The
Company's Dresser stock is exchangeable for the Company's LYONs at the option of
the LYONs holder, and the carrying value of the Dresser stock is limited to the
accreted LYONs obligation. The Dresser common stock is classified as a current
asset at December 31, 1996 because the LYONs, which are redeemable at the option
of the holder in October 1997, are classified as a current liability as of such
date. See Note 9. Dresser is a supplier of products, services and project
management for hydrocarbon energy-related activities utilized primarily in the
oil and gas industry. Dresser (NYSE: DI) files periodic reports with the
Securities and Exchange Commission. The other available-for-sale common stocks
have an aggregate cost of $15.8 million at December 31, 1995 and 1996.
NOTE 7 - NATURAL RESOURCE PROPERTIES AND OTHER NONCURRENT ASSETS:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Natural resource properties:
Timber and timberlands $53,099 $ -
Mining properties 42,675 36,441
$95,774 $36,441
Other assets:
Franchise fees and other intangible assets $24,786 $19,215
Deferred financing costs 19,537 15,273
Other 12,761 14,231
$57,084 $48,719
NOTE 8 - INVESTMENT IN JOINT VENTURES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Ti02 manufacturing joint venture $183,129 $179,195
Waste Control Specialists LLC 4,625 15,218
Other 2,764 2,284
$190,518 $196,697
TiO2 manufacturing joint venture. A Kronos TiO2 subsidiary (Kronos
Louisiana, Inc., or "KLA") and Tioxide Group, Ltd., a wholly-owned subsidiary of
Imperial Chemicals Industries PLC ("Tioxide"), are equal owners of a
manufacturing joint venture (Louisiana Pigment Company, L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. LPC has long-term debt which is
collateralized by the partnership interests of the partners and substantially
all joint venture assets. The long-term debt consists of two tranches, one
attributable to each partner, and each tranche is serviced through (i) the
purchase of the plant's TiO2 output in equal quantities by the partners and (ii)
cash capital contributions. KLA is required to purchase one-half of the TiO2
produced by LPC. Kronos' tranche of LPC's debt is reflected as outstanding
indebtedness of the Company because Kronos has guaranteed the purchase
obligation relative to the debt service of such tranche. See Note 9.
The manufacturing joint venture is intended to be operated on a break-
even basis and, accordingly, Kronos' acquisition transfer price for its share of
the TiO2 produced is equal to its share of the joint venture's production costs
and interest expense. Kronos' share of the production costs is reported as TiO2
cost of sales while Kronos' share of joint venture interest expense is reported
as a component of interest expense.
Summary income statements of the TiO2 joint venture are shown below.
YEARS ENDED DECEMBER 31,
1995 1996
(IN THOUSANDS)
Revenues and other income:
Kronos $ 76,365 $ 74,916
Tioxide 75,241 73,774
Interest income 653 518
152,259 149,208
Cost and expenses:
Cost of sales 140,103 140,361
General and administrative 385 377
Interest 11,771 8,470
152,259 149,208
Net income $ - $ -
Summary balance sheets of the TiO2 joint venture are shown below.
DECEMBER 31,
1995 1996
ASSETS (IN THOUSANDS)
Current assets $ 49,398 $ 47,861
Other assets 1,553 1,224
Property and equipment, net 335,254 325,617
$386,205 $374,702
LIABILITIES AND PARTNERS' EQUITY
Long-term debt, including current portion:
Kronos tranche $ 73,286 $ 57,858
Tioxide tranche 59,400 16,800
Note payable to Tioxide - 21,000
Other liabilities, primarily current 17,719 14,084
150,405 109,742
Partners' equity 235,800 264,960
$386,205 $374,702
Waste Control Specialists LLC. Waste Control Specialists, formed in
November 1995, recently completed construction of the initial phase of its
facility in West Texas for the processing, treatment, storage and disposal of
certain hazardous and toxic wastes. Waste Control Specialists has been issued
permits by the Texas Natural Resource Conservation Commission covering
acceptance of wastes governed by the Resource Conservation Recovery Act ("RCRA")
and the Toxic Substances Control Act ("TSCA"), and received its first wastes for
disposal in February 1997. Waste Control Specialists is also seeking permits
for, among other things, the treatment and disposal of low-level and mixed
radioactive wastes.
Waste Control Specialists is equally owned by Valhi and KNB Holdings, Ltd.,
a limited partnership controlled by the Chief Executive Officer of Waste Control
Specialists.
Waste Control Specialists reported a net loss of $.5 million during the
last two months of 1995 and $6.4 million for 1996, all of which accrued to Valhi
for financial reporting purposes. See Note 3. At December 31, 1996, total
assets were $19.1 million and total Members' equity was $12.0 million (1995 -
$7.3 million and $1.4 million, respectively.) Waste Control Specialists' assets
consist principally of property and equipment related to the West Texas
facility, and its liabilities consist principally of bank indebtedness.
In February 1997, the Company entered into a $4 million revolving credit
facility with Waste Control Specialists. Borrowings by Waste Control
Specialists bear interest at prime plus 1% and are due no later than December
31, 1997.
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Notes payable:
Amalgamated:
United States Government loans $ 64,685 $ -
Bank credit agreements 42,000 -
106,685 -
Valhi - bank credit agreement - 13,000
Kronos - bank credit agreements (DM 56,000 and
DM 40,000)
39,247 25,732
$ 145,932 $ 38,732
Long-term debt:
Valhi - Liquid Yield Option NotesTM ("LYONsTM") $ 130,366 $ 142,478
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 132,034 149,756
Deutsche mark bank credit facility (DM 397,610
and DM 539,971) 276,895 347,362
Joint venture term loan 73,286 57,858
Rheox bank term loan 37,263 14,659
Other 14,225 9,411
783,703 829,046
Amalgamated - bank term loan 24,000 -
Valcor:
Valcor - Senior Notes* 99,000 98,910
Medite:
U.S. and Irish bank term loans 73,770 -
U.S. and Irish bank working capital facilities 10,830 -
Other 4,117 3,895
88,717 3,895
Other:
Sybra bank credit agreements 16,770 1,081
Sybra capital lease obligations 5,382 4,540
Other 98 166
22,250 5,787
1,148,036 1,080,116
Less current maturities 63,752 235,648
$1,084,284 $ 844,468
* Stated net of approximately $1 million principal amount of Senior Notes held
by Valhi.
Valhi. The zero coupon Senior Secured LYONs, $379 million principal amount
at maturity in October 2007, were issued with significant OID to represent a
yield to maturity of 9.25%. No periodic interest payments are required. Each
$1,000 in principal amount at maturity of the LYONs is exchangeable, at any
time, for 14.4308 shares of Dresser common stock held by Valhi. The LYONs are
redeemable, at the option of the holder, in October 1997 or October 2002 at
$404.84 or $636.27, respectively, per $1,000 principal amount (the issue price
plus accrued OID through such purchase dates) and, accordingly, the LYONs are
classified as a current liability at December 31, 1996. Such redemptions may be
paid, at Valhi's option, in cash, Dresser common stock, or a combination
thereof. The LYONs are not redeemable at Valhi's option prior to October 1997
unless the market price of Dresser common stock exceeds $35.70 per share for
specified time periods. At December 31, 1995 and 1996, the net carrying value
of the LYONs per $1,000 principal amount at maturity was $344 and $376,
respectively, and the quoted market price was $378 and $451, respectively.
The LYONs are secured by the 5.5 million shares of Dresser common stock
held by Valhi, which shares are held in escrow for the benefit of holders of the
LYONs. Valhi receives the regular quarterly dividend on the escrowed Dresser
shares.
Valhi also has a $15 million revolving bank credit facility which matures
in March 1998, generally bears interest at LIBOR plus 1.5% and is collateralized
by 4.8 million shares of NL common stock held by Valhi. Borrowings under this
facility can only be used to fund purchases of additional shares of NL common
stock. The agreement limits additional indebtedness of Valhi and contains other
provisions customary in lending transactions of this type.
NL Industries. NL's $250 million principal amount of 11.75% Senior Secured
Notes due 2003 and $188 million principal amount at maturity ($100 million
proceeds at issuance) of 13% Senior Secured Discount Notes due 2005
(collectively, the "NL Notes") are collateralized by a series of intercompany
notes from Kronos International, Inc. ("KII"), a wholly-owned subsidiary of
Kronos, to NL, the terms of which mirror those of the respective NL Notes (the
"NL Mirror Notes"). The 11.75% Notes are also collateralized by a first
priority lien on the stock of Kronos and a second priority lien on the stock of
Rheox. In the event of foreclosure, the Note holders would have access to the
consolidated assets, earnings and equity of NL and NL believes the
collateralization of the NL Notes, as described above, is the functional
economic equivalent to a full, unconditional and joint and several guarantee by
Kronos and Rheox.
The 11.75% Notes and the 13% Discount Notes are redeemable, at NL's option,
after October 2000 and October 1998, respectively, at redemption prices starting
at 101.5% and declining to 100% (after October 2001) of the principal amount for
the 11.75% Notes and starting at 106% and declining to 100% (after October 2001)
of the accreted value of the 13% Discount Notes. In the event of an NL change
of control, as defined, NL would be required to make an offer to purchase the NL
Notes at 101% of the principal amount of the 11.75% Notes and 101% of the
accreted value of the 13% Discount Notes. The NL Notes are issued pursuant to
indentures which contain a number of covenants and restrictions which, among
other things, restrict the ability of NL 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. The 13% Discount Notes
do not require cash interest payments until April 1999. At December 31, 1995
and 1996, the net carrying value of the 13% Discount Notes per $1,000 principal
amount of maturity was $704 and $799, respectively, (quoted market price - $809
and $863, respectively) and the quoted market price of the 11.75% Notes was
$1,071 and $1,061, respectively, per $1,000 principal amount.
At December 31, 1996, the DM credit facility consisted of a DM 396 million
term loan and a DM 250 million revolving credit facility (DM 396 million and DM
144 million outstanding, respectively). Borrowings bear interest at DM LIBOR
plus 1.625% (5.5% and 4.8% at December 31, 1995 and 1996, respectively), and are
collateralized by the stock of certain KII subsidiaries. In January 1997, NL
completed an amendment to the DM credit facility in which NL prepaid a net DM
207 million ($127 million) of the term loan and DM 43 million ($26 million) of
the revolver, leaving DM 188 million and DM 100 million outstanding,
respectively. In addition, the aggregate available for borrowing under the
revolver was reduced to DM 230 million. The majority of the cash generated from
a refinancing of the Rheox term loan, discussed below, was used for a portion of
such prepayments. As amended, the term loan is due in 1998 and 1999 and the
revolver is due in 2000, borrowings bear interest at DM LIBOR plus 2.75%,
additional collateral in the form of pledges of certain Canadian and German
assets was granted and NL guaranteed the facility.
Borrowings under KLA's tranche of the joint venture term loan bear interest
at LIBOR plus 1.625% (7.3% and 7.2% at December 31, 1995 and 1996, respectively)
and are repayable in quarterly installments through September 2000. See Note 8.
At December 31, 1996, Rheox's term loan is due in quarterly installments
through December 1997, is collateralized principally by the stock of Rheox and
its U.S. subsidiaries and bears interest, at Rheox's option, at the prime rate
plus 1.5% or LIBOR plus 2.5% (1995 - 8.3% with LIBOR rate borrowings; 1996 -
9.8% with prime rate borrowings). In January 1997, NL completed a refinancing
of this facility which increased the term loan to $125 million and provided for
a $25 million revolving facility, generating a net $135 million in cash proceeds
and credit availability. As amended, the term loan in due in quarterly
installments commencing September 1997 through January 2004 and the revolver is
due no later than January 2004, and the margin on LIBOR-based borrowings will
now range from .75% to 1.75%, depending upon the level of a certain Rheox
financial ratio.
Notes payable consists of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 3.2% to 3.7% (1995 - 4.3% to
4.9%).
After giving effect to the amendments to the DM credit facility and the
Rheox term loan, unused lines of credit available for borrowing under the Rheox
U.S. facility and under NL's non-U.S. credit facilities, including the DM
facility, approximated $9 million and $102 million, respectively, at December
31, 1996.
Valcor. Valcor's unsecured 9 5/8% Senior Notes Due November 2003 are
redeemable at the Company's option beginning November 1998, initially at
104.813% of principal amount declining to 100% after November 2000. In the
event of a change of control of Valcor or certain asset dispositions, as
defined, Valcor would be required to make an offer to purchase the Valcor Notes
at 101% and 100%, respectively, of principal amount. At both December 31, 1995
and 1996, the quoted market price of the Valcor Notes was $990 per $1,000
principal amount. The indenture governing the Valcor Notes, among other things,
limits dividends and additional indebtedness, and prohibits Valcor from co-
investing with affiliates.
The after-tax proceeds from the disposition of Medite, net of repayments of
Medite's U.S. bank debt, will be available for Valcor's general corporate
purposes, subject to compliance with certain covenants contained in the Valcor
Senior Note Indenture. Also under the terms of the Indenture, Valcor is
required to tender for a portion of the Valcor Notes, at par, to the extent that
a specified amount of these proceeds are not used to either permanently paydown
senior indebtedness of Valcor or its subsidiaries or invest in related
businesses, both as defined in the Indenture, within one year of disposition.
While Valcor is not yet required to execute a tender offer related to Medite's
asset dispositions, on March 20, 1997, Valcor announced it had initiated a
tender offer whereby Valcor would purchase up to $86.7 million principal amount
of Valcor Notes on a pro-rata basis, at par value, in satisfaction of the
covenant contained in the Indenture. Pursuant to its terms, the tender offer
will expire on April 24, 1997, unless extended by Valcor. The amount of Valcor
Notes which will ultimately be purchased by Valcor pursuant to the tender offer
is dependent upon the amount of Valcor Notes properly tendered. Consequently,
there can be no assurance as to the amount of Valcor Notes which will ultimately
be purchased by Valcor. The net proceeds from any disposition of the Company's
fast food operations, net of repayments of Sybra's bank indebtedness, would
similarly be available for Valcor's general corporate purposes. If the
disposition of the Company's fast food operations is completed and none of those
net proceeds are used as provided in the Indenture, a portion of the Notes would
be subject to a subsequent tender offer. See Notes 18 and 19.
Other. Medite's U.S. bank term and working capital facilities were repaid
and terminated in October 1996 following the sale of its timber and timberlands,
and the Irish bank term and working capital facilities were assumed by the
purchaser upon the sale of Medite's Irish subsidiary in November 1996. See Note
19.
Other Medite indebtedness consists principally of a State of Oregon term
loan that was assumed by the purchaser of Medite's Oregon MDF facility in
February 1997. See Note 19.
Sybra's revolving bank credit agreements provide for unsecured credit
facilities aggregating $29 million with interest generally at LIBOR plus 1.5%.
Borrowings under these agreements mature through July 1998. At December 31,
1996, the weighted average interest rate on outstanding revolving borrowings was
6.9% (1995 - 7.5%), and $28 million was available for borrowing. Future minimum
payments under Sybra's capital lease obligations at December 31, 1996, including
amounts representing interest, are approximately $1.4 million in each of the
next two years, $.6 million in each of the following three years and an
aggregate of $2.6 million thereafter.
CompX has a Canadian bank credit agreement which currently provides for
approximately $5 million of U.S. or the equivalent Canadian dollar borrowings,
with interest generally at LIBOR plus .5% and collateralized by substantially
all of CompX International's Canadian assets. At December 31, 1996, the full
amount of these facilities was available for borrowing.
Aggregate maturities of long-term debt at December 31, 1996
Years ending December 31, Amount
(In thousands)
1997 $ 247,146
1998 106,673
1999 134,271
2000 12,721
2001 1,081
2002 and thereafter 629,591
1,131,483
Less:
Unamortized Valhi LYONs OID (10,973)
Unamortized NL Senior Secured Discount Notes OID (37,744)
Amounts representing interest on capital leases (2,650)
$1,080,116
The LYONs are reflected in the above table as due October 1997, the first
of the two dates they are redeemable at the option of the holder, at the
aggregate redemption price on such date of $153 million ($404.84 per $1,000
principal amount at maturity in October 2007).
Other. In addition to the NL Notes and the Valcor Notes discussed above,
credit agreements of subsidiaries typically require the respective subsidiary to
maintain minimum levels of equity, require the maintenance of certain financial
ratios, limit dividends and additional indebtedness and contain other provisions
and restrictive covenants customary in lending transactions of this type. At
December 31, 1996, the restricted net assets of consolidated subsidiaries
approximated $243 million.
NOTE 10 - OTHER NONCURRENT LIABILITIES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Insurance claims and expenses $15,354 $13,380
Employee benefits 16,626 12,050
Deferred technology fee income 8,456 -
Other 4,329 3,807
$44,765 $29,237
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Accounts payable:
Sugarbeet purchases $ 83,027 $ -
Other 153,946 75,307
236,973 75,307
Accrued liabilities:
Employee benefits 63,067 47,331
Sugar processing costs 21,569 -
Plant closure costs - 7,669
Environmental costs 6,109 6,126
Interest 13,208 11,157
Miscellaneous taxes 4,275 5,262
Other 47,918 50,390
156,146 127,935
$393,119 $203,242
NOTE 12 - OTHER INCOME:
YEARS ENDED DECEMBER 31,
PRO FORMA
1994 1994 1995 1996
(UNAUDITED)
(IN THOUSANDS)
Securities earnings:
Dividends and interest $ 6,128 $11,203 $12,172 $10,090
Securities transactions (2,054) (3,274) 1,225 138
4,074 7,929 13,397 10,228
Litigation settlement gains, net - 22,978 - 2,756
Technology fee income - 10,344 10,660 8,743
Currency transactions, net 491 2,226 586 5,774
Pension and OPEB curtailment
gains - - - 5,900
Disposal of property and
equipment 4
(6) (1,987) (2,695)
Other, net 773 6,869 7,022 8,036
$ 5,332 $48,359 $28,970 $41,441
The litigation settlement gains relate to settlement of certain
litigation in which NL was a plaintiff, and the pension and OPEB curtailment
gains resulted from NL's 1996 reduction of certain U.S. and Canadian,
respectively, employee benefits.
NOTE 13 - STOCKHOLDERS' EQUITY:
SHARES OF COMMON STOCK
ISSUED TREASURY OUTSTANDING
(IN THOUSANDS)
Balance at December 31, 1993 124,435 (10,182) 114,253
Issued 40 32 72
Other - 73 73
Balance at December 31, 1994 124,475 (10,077) 114,398
Issued 158 - 158
Other - (26) (26)
Balance at December 31, 1995 124,633 (10,103) 114,530
Issued 135 - 135
Other - (23) (23)
Balance at December 31, 1996 124,768 10,126 114,642
Treasury stock includes the Company's proportional interest in 1.2
million Valhi shares held by NL. Under Delaware Corporation Law, all shares
held by a majority-owned company are considered to be treasury stock. As a
result, shares outstanding for financial reporting purposes differ from those
outstanding for legal purposes.
Options and restricted stock. Valhi has an incentive stock option plan
that provides for the discretionary grant of qualified incentive stock options,
nonqualified stock options, restricted stock and stock appreciation rights. Up
to nine million shares of Valhi common stock may be issued pursuant to this
plan. Options are granted at a price not less than 85% of fair market value on
the date of grant, generally vest ratably over a five-year period beginning one
year from the date of grant and expire 10 years from the date of grant.
Authorized future grants under this plan expire in March 1997. 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
stock appreciation rights have been granted. In February 1997, the Company's
Board of Directors adopted, subject to shareholder approval, a new stock option
plan which provides for the discretionary grant of up to 5 million options to
purchase Valhi common stock.
Pursuant to Valhi's Non-Employee Director Stock Option Plan, under which
authorized future grants expired in 1995, options were automatically granted
once a year to each non-employee director of Valhi at a price equal to the fair
market value on the date of grant. Such options vested one year from the date
of grant and expire five years from the date of grant.
AMOUNT
EXERCISE PAYABLE
PRICE PER UPON
SHARES SHARE EXERCISE
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Outstanding at December 31, 1993 4,524 $3.51-15.00 $34,040
Granted 2,308 5.21- 6.89 13,520
Exercised (40) 3.51- 5.63 (172)
Cancelled (1,456) 5.00-12.50 (7,724)
Outstanding at December 31, 1994 5,336 5.00-15.00 39,664
Adjustment for Tremont Distribution - - (1,603)
Granted 103 7.75- 8.00 822
Exercised (158) 4.76- 7.75 (873)
Cancelled (69) 4.76-14.66 (745)
Outstanding at December 31, 1995 5,212 4.76-14.66 37,265
Granted 295 6.38 1,881
Exercised (135) 4.76-5.72 (653)
Cancelled (44) 5.48-14.66 (423)
Outstanding at December 31, 1996 5,328 $4.76-14.66 $38,070
Outstanding options at December 31, 1996 expire at various dates through
2006, with a weighted-average remaining life of 4 years. At December 31, 1996,
options to purchase 4.4 million Valhi shares were exercisable at prices ranging
from $4.76 to $14.66 per share, or an aggregate amount payable upon exercise of
$32 million. Of such exercisable options, 2.1 million options are exercisable
at various dates through 2004 at prices lower than the December 31, 1996 market
price of $6.38 per share for an aggregate amount payable upon exercise of $10.8
million. At December 31, 1996, options to purchase 301,000 shares are scheduled
to become exercisable in 1997, and an aggregate of 2.6 million shares were
available for future grants. During 1994, options to purchase 1.4 million
shares at fixed prices ranging from $5.21 to $6.89 per share were granted in
exchange for cancellation of an equal number of variable price options
previously granted at initial prices ranging from $5.00 to $5.50 per share.
During 1995, under terms of the incentive stock option plan, the exercise price
of all options outstanding at December 31, 1994 was reduced by amounts ranging
from $.24 to $.34 per share as a result of the Tremont Distribution discussed in
Note 19.
NL maintains incentive stock option plans that provide for the
discretionary grant of NL restricted common stock, stock options and stock
appreciation rights. At December 31, 1996, there were an aggregate of 2.6
million options outstanding to purchase NL common stock at prices ranging from
$4.81 per share to $24.19 per share (aggregate amount payable to NL upon
exercise - $30 million). At December 31, 1996, options to purchase 1.2 million
NL shares were exercisable at prices lower than the December 31, 1996 quoted
market price of $10.88 per NL share. The aggregate number of outstanding
options to purchase NL common stock at December 31, 1996 represented
approximately 5% of NL's outstanding common shares at that date.
Had the Company and NL each elected to account for stock-based employee
compensation for all awards granted after 1994 in accordance with the fair value
based accounting method of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the impact on the Company's reported
income from continuing operations and related per share amounts for 1995 and
1996 would not be material.
NOTE 14 - FINANCIAL INSTRUMENTS:
DECEMBER 31,
1995 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(IN MILLIONS)
Cash and cash equivalents $170.9 $170.9 $255.7 $255.7
Marketable securities (available-for-sale) 144.3 147.2 159.7 186.6
Notes payable and long-term debt (excluding
capitalized leases):
Publicly-traded fixed rate debt:
Valhi LYONs $130.4 $143.1 $142.5 $170.8
NL Senior Secured Notes 250.0 267.7 250.0 265.2
NL Senior Secured Discount Notes 132.0 151.8 149.8 161.9
Valcor Senior Notes 99.0 98.0 98.9 97.9
Medite debt with rates fixed via interest rate swaps 26.0 26.0 - -
Other fixed-rate debt 18.9 19.2 3.9 4.0
Variable rate debt 632.3 632.3 469.2 469.2
Minority interest in NL common stock $ - $289.6 $ - $246.9
Valhi common stockholders' equity $274.3 $730.1 $303.9 $730.8
Fair values of marketable securities and publicly-traded debt are based
upon quoted market prices. See Notes 6 and 9. The fair value of the 44%
minority interest in NL Industries and of Valhi's common stockholders' equity
are based upon quoted market prices for NL common stock (1995 - $12.13 per
share; 1996 - $10.88 per share) and Valhi common stock (1995 and 1996 - $6.38
per share). Medite had entered into interest rate swaps to mitigate the impact
of changes in interest rates for $26 million of its U.S. bank term loan. The
interest rate swaps were terminated in October 1996 when the related loans were
repaid. See Note 19. The fair value of Medite debt on which interest rates had
been effectively fixed through the use of interest rate swaps was deemed to
approximate the book value of the debt plus or minus the fair value of the
related swaps. See Note 9. The fair value of Medite's interest rate swaps was
estimated to approximate the contract amount at December 31, 1995. Such fair
values represented the estimated amount Medite would have received if it
terminated the swap agreements at that date, and were based upon quotes obtained
from the counter party financial institution. Fair values of other fixed rate
debt have been estimated based upon relative changes in the Company's variable
borrowing rates since the dates the interest rates were fixed. Fair values of
variable interest rate debt are deemed to approximate book value.
NOTE 15 - INCOME TAXES:
YEARS ENDED DECEMBER 31,
PRO FORMA
1994 1994 1995 1996
(UNAUDITED)
(IN MILLIONS)
Components of pre-tax income:
United States:
Contran Tax Group $(10.5) $(10.4) $(11.6) $(16.0)
NL Tax Group - (7.5) 41.8 49.0
Equity in:
Amalgamated 13.9 13.9 8.9 10.0
NL prior to consolidation (25.1) - - -
(21.7) (4.0) 39.1 43.0
Non-U.S. subsidiaries 13.1 (12.4) 49.3 (28.4)
$ (8.6) $(16.4) $ 88.4 $ 14.6
Expected tax expense (benefit),
at U.S. federal statutory income
tax rate of 35% $ (3.0) $ (5.8) $ 30.9 $ 5.1
Non-U.S. tax rates - (7.5) (7.5) (.6)
Incremental U.S. tax and rate
differences on equity in
earnings of non-tax group
companies (5.6) (18.4) 19.7 (5.3)
U.S. state income taxes, net (.6) - 1.4 (.2)
Change in NL's deferred income
tax valuation allowance - 24.3 (9.6) 3.0
No tax benefit for goodwill
amortization .1 2.7 2.9 3.1
Settlement of U.S. tax audits - (5.4) - -
Rate change adjustment of
deferred taxes - - (7.6) -
Other, net (.8) .5 (.3) (1.6)
$ (9.9) $ (9.6) $ 29.9 $ 3.5
Components of income tax expense:
Currently payable:
U.S. federal and state $ (4.8) $ (9.6) $ (3.6) $ (.6)
Non-U.S. 4.7 7.3 45.5 13.7
(.1) (2.3) 41.9 13.1
Deferred income taxes:
U.S. federal and state (9.7) (10.4) 12.3 (13.2)
Non-U.S. (.1) 3.1 (24.3) 3.6
(9.8) (7.3) (12.0) (9.6)
$ (9.9) $ (9.6) $ 29.9 $ 3.5
Comprehensive provision for
income taxes allocable to:
Continuing operations $ (9.9) $ (9.6) $ 29.9 $ 3.5
Discontinued operations 6.8 6.4 22.7
Stockholders' equity,
principally deferred taxes
allocable to adjustments
components .5 10.7 6.6
$ (2.6) $ 47.0 $ 32.8
The components of the net deferred tax liability are summarized in the
following table. At December 31, 1995 and 1996, all of the deferred tax
valuation allowance relates to NL tax jurisdictions, principally the U.S. and
Germany. During 1995, NL's gross deferred tax assets and the offsetting
valuation allowance were both increased by $34 million as a result of
recharacterization of certain tax attributes due primarily to changes in certain
tax return elections. In addition, the valuation allowance increased during
1995 by $6 million due to foreign currency translation and was reduced by $10
million due to a change in estimate of the future tax benefit of certain tax
credits which NL believe satisfied the "more-likely-than-not" recognition
criteria. During 1996, NL's gross deferred tax assets and the offsetting
valuation allowance were both increased by $14 million as a result of certain
non-U.S. tax losses of its dual resident subsidiary. In addition, the valuation
allowance decreased during 1996 by $6 million due to foreign currency
translation and was increased by $3 million as a result of certain deductible
temporary differences generated during the year which NL believes do not
currently satisfy the "more-likely-than-not" recognition criteria.
DECEMBER 31
1995 1996
ASSETS LIABILITIES ASSETS LIABILITIES
(IN MILLIONS)
Tax effect of temporary differences relating to:
Inventories $ 5.3 $ (14.0) $ 4.1 $ (6.1)
Marketable securities - (28.7) - (34.1)
Natural resource properties - (17.8) - (6.6)
Property and equipment .6 (195.6) .5 (172.6)
Accrued OPEB cost 30.7 - 21.5 -
Accrued environmental liabilities and
other deductible differences 89.7 - 97.3 -
Other taxable differences - (137.1) - (144.1)
Investments in subsidiaries and affiliates not
members of the consolidated tax group 54.9 (22.2) 53.1 (18.1)
Tax loss and tax credit carryforwards 189.3 - 205.5 -
Valuation allowance (195.6) - (207.1) -
Adjusted gross deferred tax assets (liabilities) 174.9 (415.4) 174.9 (381.6)
Netting of items by tax jurisdiction (171.5) 171.5 (173.1) 173.1
3.4 (243.9) 1.8 (208.5)
Less net current deferred tax asset (liability) 2.6 (4.5) 1.6 (30.5)
Net noncurrent deferred tax asset (liability) $ .8 $(239.4) $ .2 $(178.0)
Certain U.S. and non-U.S. income tax returns of the Contran Tax Group
(including non-U.S. subsidiaries thereof) are being examined and tax authorities
have or may propose tax deficiencies. The Company believes that it has
adequately provided accruals for additional income taxes and related interest
expense which may ultimately result from such examinations and believes that the
ultimate disposition of all such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Certain of NL's U.S. and non-U.S. income tax returns, including Germany,
are being examined and tax authorities have or may propose tax deficiencies. NL
received certain final assessments and paid tax deficiencies during 1996 of
approximately DM 50 million ($32 million when paid), including interest, in
final settlement of the agreed issues. The DM 50 million paid to settle these
issues was within previously-accrued amounts. Certain other German tax
contingencies of NL remain outstanding and will continue to be litigated. No
assurance can be given that this litigation will be resolved in NL's favor in
view of the inherent uncertainties involved in court rulings. Although NL
believes that it will ultimately prevail in the litigation, NL has granted a DM
100 million ($64 million at December 31, 1996) lien on its Nordenham, Germany
TiO2 plant until the litigation is resolved. The Company believes that NL has
adequately provided accruals for additional income 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 its consolidated financial position, results of operations or
liquidity.
During 1995, NL utilized $14 million of foreign tax credit carryforwards
and U.S. net operating loss carryforwards to reduce its current year U.S.
federal income tax expense. At December 31, 1996, for U.S. federal income tax
purposes, NL had approximately $27 million of foreign tax credit carryforwards
expiring during 1997 through 2001 and approximately $10 million of alternative
minimum tax credit carryforwards with no expiration date. NL also had
approximately $400 million of income tax loss carryforwards in Germany with no
expiration date.
NOTE 16 - EMPLOYEE BENEFIT PLANS:
Defined contribution plans. A majority of the Company's full-time U.S.
employees are eligible to participate in various defined contribution pension
plans with Company contributions based on matching or other formulas. Defined
contribution plan expense related to the Company's consolidated business
segments and charged to continuing operations approximated $1.5 million in 1994
(pro forma 1994 - $2.3 million) and $2.5 million in 1995 and $2.6 million in
1996.
Defined benefit plans. The Company maintains various defined benefit
pension plans covering substantially all full-time employees. Defined pension
benefits are generally based on years of service and compensation under fixed
dollar, final pay or career average formulas and the related expenses are based
on independent actuarial valuations. The funding policies for U.S. defined
benefit plans are to contribute amounts satisfying funding requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Non-U.S.
defined benefit plans are funded in accordance with applicable statutory
requirements. Medite maintained a defined benefit pension plan covering
substantially all of its full-time Irish employees, which plan was assumed by
the purchaser upon sale of Medite's Irish subsidiary in November 1996. Medite
maintains a plan covering its U.S. employees, and substantially all remaining
employees will cease to accrue benefits in 1997 upon the sale of Medite's Oregon
MDF and timber conversion facilities. See Note 19. Variances from actuarially
assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods. A one
percentage point decrease in the discount rate would increase the aggregate
actuarial present value of accumulated benefit obligations at December 31, 1996
by approximately $39 million.
The rates used in determining the actuarial present value of benefit
obligations are presented in the table below.
DECEMBER 31,
1994 1995 1996
Discount rate 8.5% 7.5%-8.5% 6.5%-8.5%
Rate of increase in future
compensation levels 4%-6% 3.5%-6% 3.5%-6%
Long-term rate of return on assets 7.5%-10% 7.5%-10% 7%-10%
Plan assets are primarily investments in U.S. and non-U.S. corporate
equity and debt securities, short-term investments, mutual funds and group
annuity contracts. A nominal amount of the aggregate plan assets at December
31, 1996 (1995 - 13%) consists of units in a combined investment fund for
employee benefit plans sponsored by Valhi and its affiliates, including Contran
and certain Contran affiliates. Assets of the combined investment fund are
primarily investments in corporate equity and debt securities, short-term cash
investments and notes collateralized by residential and commercial real estate.
The funded status of the Company's defined benefit pension plans and the
components of net periodic defined benefit pension cost are set forth below.
Approximately 76% of the unfunded amounts of plans for which plan assets are
less than the accumulated benefit obligation at December 31, 1996 relate to
certain of NL's non-U.S. plans, and substantially all of the remainder relates
to certain of NL's U.S. plans. Net periodic pension cost related to the
Company's consolidated business segments and charged to continuing operations is
presented in the table below. Net periodic pension cost related to
Amalgamated's plans approximated $2 million in each of the past three years, and
net periodic pension cost related to Medite's plans, included in discontinued
operations, was not material in any of the past three years.
PLAN ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED PLAN
BENEFITS ASSETS
December 31, December 31,
1995 1996 1995 1996
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits $ 73,309 $ 48,953 $176,659 $191,939
Nonvested benefits 8,579 4,075 3,032 9,966
Accumulated benefit obligations 81,888 53,028 179,691 201,905
Effect of projected salary increases 18,183 7,598 22,758 26,311
Projected benefit obligations ("PBO") 100,071 60,626 202,449 228,216
Plan assets at fair value 108,559 78,511 144,408 149,660
Plan assets over (under) PBO 8,488 17,885 (58,041) (78,556)
Unrecognized net loss (gain) from experience different
from actuarial assumptions 14,769 3,567 (16,313) 16,696
Unrecognized prior service cost (credit), net 3,751 3,838 (2,308) 791
Unrecognized net obligations (assets) being amortized
over periods of 9 to 18 years 263 (469) 2,175 1,966
Adjustment to recognize minimum liability - - (5,914) (6,167)
Total prepaid (accrued) pension cost 27,271 24,821 (80,401) (65,270)
Current portion and reclassification, net (2,504) 492 10,361 6,055
Noncurrent prepaid (accrued) pension cost $ 24,767 $ 25,313 $(70,040) $(59,215)
YEARS ENDED DECEMBER 31,
PRO FORMA
1994 1994 1995 1996
(UNAUDITED)
(IN THOUSANDS)
Net periodic pension cost:
Service cost benefits $ 136 $ 5,041 $ 4,457 $ 3,642
Interest cost on PBO 156 15,527 18,008 16,795
Actual return on plan assets 44 (7,995) (16,943) (16,700)
Net amortization and deferral (192) (6,132) (2,208) 219
$ 144 $ 6,441 $ 3,314 $ 3,956
Postretirement benefits other than pensions. Certain subsidiaries
currently provide certain health care and life insurance benefits for eligible
retired employees. Medical claims are funded as incurred, net of any
contributions by the retirees. Under plans currently in effect, some currently
active employees of NL may become eligible for postretirement health care
benefits if they reach retirement age while working for the applicable
subsidiary. At December 31, 1996, substantially all of the Company's aggregate
accrued OPEB cost relates to NL (1995 - about three-fourths related to NL and
substantially all of the remainder related to Amalgamated). In 1989, NL began
phasing out OPEB benefits for currently active U.S. employees over a ten-year
period. The majority of NL retirees are required to contribute a portion of the
cost of their benefits. Health care benefits for certain current and future NL
retirees are reduced at age 65.
The rates used in determining the actuarial present value of benefit
obligations are presented in the table below. At December 31, 1996, the
expected rate of increase in future health care costs is 8% in 1997, gradually
declining to 5% in 2000 and thereafter.
DECEMBER 31,
1994 1995 1996
Discount rate 8.5% 7.5% 7.5%
Rate of increase in future
compensation levels 4%-6% 4%-4.5% 6%
Long-term rate of return on assets 9% 9% 9%
The components of the periodic OPEB cost and accumulated OPEB obligation
are set forth below. Variances from actuarially-assumed rates will result in
additional increases or decreases in accumulated OPEB obligations, net periodic
OPEB cost and funding requirements in future periods. If the health care cost
trend rate was increased by one percentage point for each year, OPEB expense
would have increased $200,000 in 1996, and the actuarial present value of
accumulated OPEB obligations at December 31, 1996 would have increased $2.2
million. A one percentage point decrease in the discount rate would increase
the aggregate actuarial present value of accumulated benefit obligations at
December 31, 1996 by approximately $3 million. Net periodic OPEB cost related
to the Company's consolidated business segments and charged to continuing
operations is presented in the table below. Net periodic OPEB cost related to
Amalgamated approximated $1.5 million in each of the past three years.
YEARS ENDED DECEMBER 31,
PRO FORMA
1994 1994 1995 1996
(UNAUDITED)
(IN MILLIONS)
Service cost benefits earned
during the year $ - $ 99 $ 101 $ 112
Interest cost on accumulated
OPEB obligation - 4,338 4,415 3,995
Return on plan assets - (688) (637) (596)
Net amortization and deferral - (1,495) (1,870) (1,473)
$ - $ 2,254 $ 2,009 $ 2,038
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $60,373 $41,826
Other fully eligible active plan participants 4,906 865
Other active plan participants 8,329 2,394
73,608 45,085
Plan assets at fair value 7,103 6,689
66,505 38,396
Unrecognized net gain from experience different
from actuarial assumptions 6,957 7,096
Unrecognized prior service credit 12,199 16,259
Total accrued OPEB cost 85,661 61,751
Less current portion 7,251 5,494
Noncurrent accrued OPEB cost $78,410 $56,257
NOTE 17 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (a) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran and related entities consider, review and evaluate such transactions.
Depending upon the business, tax and other objectives then relevant, it is
possible that the Company might be a party to one or more such transactions in
the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Receivables from and payables to affiliates are summarized in the table
below.
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Receivables from affiliates:
Demand loan to Contran $ 3,000 $ -
Net dividend receivable from Amalgamated - 11,518
Income taxes receivable from Contran 506 -
Other 23 2,413
$ 3,529 $13,931
Payables to affiliates:
Demand loan from Contran $ - $ 7,244
Income taxes payable to Contran - 29,633
Tremont Corporation 3,525 3,529
Louisiana Pigment Company 6,677 6,677
Other, net (14) 304
$10,188 $47,387
Amounts receivable from Amalgamated were collected in January 1997. See
Note 20. Payables to Louisiana Pigment Company are primarily for the purchase
of TiO2 (see Note 8), and amounts payable to Tremont Corporation relate to NL's
Insurance Sharing Agreement discussed below.
Loans are made between the Company and related parties, including
Contran, pursuant to term and demand notes, principally for cash management
purposes. Related party loans generally bear interest at rates related to
credit agreements with unrelated parties. Interest income on loans to related
parties was $398,000 in 1994, $1.1 million in 1995 and $101,000 in 1996; related
party interest expense was nominal in 1996.
Contran has a bank credit agreement which includes a letter of credit
facility. Pursuant to such agreement, Contran may authorize the banks to issue
letters of credit on behalf of the Company ($731,000 outstanding at December 31,
1996). Obligations under this Contran credit agreement are collateralized by
certain securities held by Contran.
Under the terms of Intercorporate Services Agreements ("ISAs") with
Contran, Contran provides certain management, administrative and aircraft
maintenance services to the Company, and the Company provides various
administrative and other services to Contran, on a fee basis. The net ISA fees
charged by Contran to the Company (including amounts charged to Tremont prior to
1995 and to NL) were approximately $480,000 in 1994, $560,000 in 1995 and
$500,000 in 1996. Purchases in the ordinary course of business from
unconsolidated joint ventures, principally the TiO2 manufacturing joint venture,
were $79 million in 1995 and $81 million in 1996. Other charges from corporate
related parties for services provided in the ordinary course of business were
less than $250,000 in each of the past three years. Such charges are
principally pass-through in nature and, in the Company's opinion, are not
materially different from those that would have been incurred on a stand-alone
basis. The Company has established a policy whereby the Board of Directors will
consider the payment of additional management fees to Contran for certain
financial advisory and other services provided by Contran beyond the scope of
the ISAs. No such payments were made in the past three years.
NL and a wholly-owned insurance subsidiary of Tremont that was a
subsidiary of NL prior to 1988 ("NLI Insurance"), are parties to an Insurance
Sharing Agreement with respect to certain loss payments and reserves established
by NLI Insurance that (i) arise out of claims against other entities for which
NL is responsible and (ii) are subject to payment by NLI Insurance under certain
reinsurance contracts. Also, NLI Insurance will credit NL with respect to
certain underwriting profits or credit recoveries that NLI Insurance receives
from independent reinsurers that relate to retained liabilities.
COAM Company is a partnership, formed prior to 1993, which has sponsored
research agreements with the University of Texas Southwestern Medical Center at
Dallas (the "University") to develop and commercially market a safe and
effective treatment for arthritis (the "Arthritis Research Agreement") and to
develop and commercially market patents and technology resulting from a cancer
research program (the "Cancer Research Agreement"). At December 31, 1996, COAM
partners are Contran, Valhi and another Contran subsidiary. Harold C. Simmons
is the manager of COAM. The Arthritis Research Agreement, as amended, provides
for payments by COAM of up to $6 million over the next eight years and the
Cancer Research Agreement, as amended, provides for funds of up to $16.2 million
over the next 14 years. Funding requirements pursuant to the Arthritis and
Cancer Research Agreements are without recourse to the COAM partners and the
partnership agreement provides that no partner shall be required to make capital
contributions. The Company's contributions to COAM were approximately $2
million in 1994 and nil in each of 1995 and 1996.
NOTE 18 - COMMITMENTS AND CONTINGENCIES:
Legal proceedings
Lead pigment litigation. Since 1987, NL, other past manufacturers of
lead pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury and property damage allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
large United States cities or their public housing authorities and certain
others have been asserted as class actions. These legal proceedings seek
recovery under a variety of theories, including negligent product design,
failure to warn, 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; several are on appeal.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend all actions
vigorously. NL has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Considering NL's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. The Company's operations are
governed by various federal, state, local and foreign environmental laws and
regulations. The Company's policy is to comply with environmental laws and
regulations at all of its plants and to continually strive to improve
environmental performance in association with applicable industry initiatives.
The Company believes that its operations are in substantial compliance with
applicable requirements of environmental laws. From time to time, the Company
may be subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. Recoveries of remediation costs from other parties, if
any, are recognized as assets when their receipt is deemed probable. At
December 31, 1995 and 1996, no assets for recoveries have been recognized.
The Company will adopt the recognition and disclosure requirements of
Statement of Position No. 96-1, "Environmental Remediation Liabilities" in the
first quarter of 1997. The new rule, among other things, expands the types of
costs that must be considered in determining environmental remediation accruals.
As a result of adopting the new Statement of Position, the Company expects to
recognize a non-cash pre-tax charge of $30 million in the first quarter of 1997
related to NL's environmental matters. Such charge is comprised primarily of
estimated future undiscounted expenditures associated with managing and
monitoring existing environmental remediation sites. The expenditures consist
principally of legal and professional fees associated with such sites, but
exclude litigation defense costs with respect to situations in which the Company
asserts that no liability exists. Currently, such expenditures are expensed as
incurred.
Some of NL's current and former facilities, including several divested
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or of investigations arising under
federal and state environmental laws. Additionally, in connection with past
disposal practices, NL has been named a potentially responsible party ("PRP")
pursuant to CERCLA in approximately 75 governmental and private actions
associated with hazardous waste sites and former mining locations, some of which
are on the U.S. EPA's Superfund National Priorities List. These actions seek
cleanup costs and/or damages for personal injury or property damage. While NL
may be jointly and severally liable for such costs, in most cases, it is only
one of a number of PRPs who are also jointly and severally liable. In addition,
NL is a party to a number of lawsuits filed in various jurisdictions alleging
CERCLA or other environmental claims. At December 31, 1996, NL had accrued $113
million with respect to those environmental matters which are reasonably
estimable. It is not possible to estimate the range of costs for certain sites.
The upper end of range of reasonably possible costs to NL for sites for which it
is possible to estimate costs is approximately $160 million. No assurance can
be given that actual costs will not exceed accrued amounts or the upper end of
the range for sites for which estimates have been made, and no assurance can be
given that costs will not be incurred with respect to sites as to which no
estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs, or
a determination that NL is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated by NL to be required for such matters. Further, there can
be no assurance that additional environmental matters will not arise in the
future.
Certain other information relating to regulatory and environmental matters
pertaining to NL is included in Item 1 - "Business - Chemicals" of this Annual
Report on Form 10-K.
At December 31, 1996, Medite has accrued approximately $4.6 million for the
estimated cost to complete environmental remediation efforts at certain of its
current and former facilities, including amounts included in accrued plant
closure costs. Costs for future environmental remediation efforts are not
discounted to their present value, and no recoveries for remediation costs from
third parties have been recognized. Such accruals will be adjusted, if
necessary, as further information becomes available or as circumstances change.
No assurance can be given that the actual costs will not exceed accrued amounts.
None of these facilities are the subject of any litigation, administrative
proceeding or investigation.
The Company has also accrued approximately $2 million at December 31, 1996
in respect of other environmental cleanup matters, principally related to one
Superfund site in Indiana where the Company, as a result of former operations,
has been named as a PRP. Such accrual does not reflect any amounts which the
Company could potentially recover from insurers or other third parties and is
near the upper end of the range of the Company's estimate of reasonably possible
costs for such matters. The imposition of more strict standards or requirements
under environmental laws or regulations, new developments or changes in site
cleanup costs or allocations of such costs could result in expenditures in
excess of amounts currently estimated to be required for such matters.
Other litigation. In November 1992, a complaint was filed in the U.S.
District Court for the District of Utah against Valhi, Amalgamated and the
Amalgamated Retirement Plan Committee (American Federation of Grain Millers
International, et al. v. Valhi, Inc. et al., No. 29-NC-129J). The complaint, a
purported class action on behalf of certain current and retired hourly employees
of Amalgamated, alleges, among other things, that the defendants breached their
fiduciary duties under ERISA by amending certain provisions of a retirement plan
for hourly employees maintained by Amalgamated to permit the reversion of excess
plan assets to Amalgamated in 1986. The complaint seeks a variety of remedies,
including, among other things, orders requiring a return of all reverted funds
(alleged to be in excess of $8 million) and any profits earned thereon, a
distribution of such funds to the plan participants, retirees and their
beneficiaries and enhancement of the benefits under the plan, and an award of
costs and expenses, including attorney fees. In January 1996, the Court granted
the Company's motion for summary judgment with respect to certain counts and
denied the Company's motion for summary judgment with respect to other counts.
The court also granted plaintiffs' permission to amend their complaint to
include new allegations. Plaintiffs subsequently amended their complaint, and a
hearing was held in September 1996 on defendants motion for partial summary
judgment to dismiss the new counts. The Company believes it has adequately
accrued for the estimated effect of the ultimate resolution of this matter.
In November 1991, a purported derivative complaint was filed in the Court
of Chancery of the State of Delaware, New Castle County (Alan Russell Kahn v.
Tremont Corporation, et al., No. 12339), in connection with Tremont's agreement
to purchase 7.8 million NL common shares from Valhi. In addition to Tremont,
the complaint names as defendants the members of Tremont's board of directors
and Valhi. The complaint alleges, among other things, that Tremont's purchase
of the NL shares constitutes a waste of Tremont's assets and that Tremont's
board of directors breached their fiduciary duties to Tremont's public
stockholders and seeks, among other things, to rescind Tremont's consummation of
the purchase of the NL shares and award damages to Tremont for injuries
allegedly suffered as a result of the defendants' wrongful conduct. In March
1996, the court ruled in favor of the defendants, including Valhi, and concluded
that Tremont's purchase did not constitute an overreaching of Tremont by the
controlling shareholder (Valhi), that Tremont's purchase price for the NL shares
was fair and that in all other respects the transaction was fair to Tremont. In
June 1996, the plaintiffs filed an appeal, with the Delaware Supreme Court. A
hearing before a three-judge panel of the Supreme Court was held in December
1996, and an en banc hearing before the full Supreme Court was held in February
1997. Valhi believes, and understands that Tremont and the other defendants
believe, that the action is without merit.
In July 1996, Medite filed a complaint in U.S. District Court in New Mexico
(Medite Corporation v. Public Service Company of New Mexico, CIV 96-0929LH)
regarding termination of the electricity supply contract for its New Mexico MDF
facility permanently closed in May 1996. The complaint seeks, among other
things, to declare the contract terminated under New Mexico common law and/or
the force majeure provisions of the agreement. Defendant filed a motion to
dismiss, and also filed a counterclaim demanding that Medite pay an
approximately $5 million termination penalty contained in the contract. Medite
does not believe the termination penalty clause applies due to, among other
things, the force majeure provisions of the contract. Discovery is proceeding.
The Company does not expect the resolution of this matter to have a material
adverse impact on its consolidated results of operations, financial position or
liquidity.
In November 1995, a complaint was filed against Medite in the U.S. District
Court for the Western District of Oklahoma (Midgard Corporation v. Medite of New
Mexico, Inc., et al., CIV 95-1807-A) alleging, among other things, that Medite
breached Midgard's purportedly exclusive territorial supply contract by
purchasing certain raw materials from a third party located in Oklahoma City.
The complaint seeks, among other things, $4 million in compensatory damages and
$100 million in punitive damages. Medite has answered the complaint denying
liability. Discovery is proceeding. The Company believes the complaint is
without merit, intends to defend the action vigorously and does not expect the
resolution of this matter to have a material adverse impact on its consolidated
results of operations, financial position or liquidity.
In September 1996, a complaint was filed in the Superior Court of New York,
Bergen County, Chancery Division (Frank D. Seinfeld v. Harold C. Simmons, et
al., No. C-336-96) against Valhi, NL and certain current and former members of
NL's board of directors. The complaint, a derivative action on behalf of NL,
alleges, among other things, that NL's August 1991 "Dutch auction" tender offer
was an unfair and wasteful expenditure of NL's funds. The complaint seeks,
among other things, to rescind NL's purchase of approximately 10.9 million
shares of its common stock from Valhi pursuant to the Dutch auction, and the
plaintiff has stated that damages sought are $149 million. The Company and the
other defendants have answered the complaint and have denied all allegations of
wrongdoing. The Company believes, and understands each of the other defendants
believe, the complaint is without merit and that each intends to defend the
action vigorously. Trial is scheduled to begin in November 1997.
NL has been named as a defendant in various lawsuits alleging personal
injuries as a result of exposure to asbestos in connection with formerly-owned
operations. Various of these actions remain pending. Discovery is proceeding
in one such case, In re: Monongalia Mass II, (Circuit Court of Monongalia
County, West Virginia Nos. 93-C-362, et al.), involving approximately 3,100
plaintiffs. NL intends to defend these matters vigorously.
In July 1995, twelve plaintiffs brought an action against NL and various
other defendants, Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court
of Putnam County, West Virginia, No. 95-C-261). 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 the defendants' premises in West Virginia.
Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive damages totaling $55.5 million. NL has filed an answer
denying plaintiffs' allegations. Discovery is proceeding.
In addition to the litigation described above, 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 that the disposition of all claims and disputes, individually
or in the aggregate, should not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for approximately
90% of NL's sales in each of the past three years. TiO2 is sold to the paint,
paper and plastics industries, which 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 NL's sales. In each of the past
three years, approximately one-half of NL's TiO2 sales volume were to Europe
with approximately one-third attributable to North America.
Component products are sold primarily to original equipment manufacturers
in the U.S. and Canada. In each of the past three years, the ten largest
customers accounted for approximately one-third of component products sales with
at least five of such customers in each year located in the U.S.
Sybra's restaurants are clustered in four regions, principally Texas,
Michigan, Pennsylvania and Florida. All fast food sales are for cash.
At December 31, 1996, consolidated cash and cash equivalents includes $53
million invested in U.S. Treasury securities purchased under short-term
agreements to resell (1995 - $103 million), of which $41 million are held in
trust for the Company by a single U.S. bank (1995 - $88 million). In addition,
at December 31, 1996, consolidated cash and cash equivalents included
approximately $120 million invested in A1 or P1-grade commercial paper issued by
various third parties having a maturity of three months or less.
Operating 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 NL's ability to transfer ownership or
use of the Leverkusen facility.
The Company also leases various fast food retail and other manufacturing
facilities and equipment. Most of the leases contain purchase and/or various
term renewal options at fair market and fair rental values, respectively. In
most cases the Company expects that, in the normal course of business, such
leases will be renewed or replaced by other leases.
Net rent expense related to the Company's consolidated business segments
charged to continuing operations approximated $6 million in 1994 (pro forma 1994
- - $14 million), $15 million in 1995 and $17 million in 1996. Contingent rentals
based upon gross sales of individual fast food restaurants were less than $.5
million in each of the past three years. At December 31, 1996, future minimum
payments under noncancellable operating leases having an initial or remaining
term of more than one year were as follows:
Years ending December 31, AMOUNT
(IN THOUSANDS)
1997 $ 9,834
1998 8,380
1999 6,537
2000 4,560
2001 3,671
2002 and thereafter 32,122
65,104
Less minimum rentals due under
noncancellable subleases 891
Net minimum commitments $64,213
Capital expenditures. At December 31, 1996, the estimated cost to
complete capital projects in process approximated $16 million, most of which
relates to environmental protection and compliance programs and productivity-
enhancing equipment at certain of NL's TiO2 facilities.
TiO2 raw material supply contract. NL has long-term supply contracts
that provide for NL's chloride-process TiO2 feedstock requirements through 2000.
The agreements require NL to purchase certain minimum quantities of feedstock
with average minimum annual purchase commitments aggregating approximately $115
million.
Royalties. Royalty expense, which relates principally to fast food
operations, approximated $4 million in each of the past three years. Fast food
royalties are paid to the franchisor based upon a percentage of gross sales, as
specified in the franchise agreement related to each individual restaurant.
Development agreement. Under the terms of Sybra's Market Development
Agreement with Arby's, Sybra has the exclusive right to open new Arby's units
within certain counties in Pennsylvania. The Agreement requires Sybra to open
an aggregate of 25 new stores in its existing regions during 1997 through 2001
(four in 1997, six in 1998 and five each in 1999, 2000 and 2001), with at least
ten of the stores in the Pennsylvania region.
Disposal of fast food operations. The Company has executed agreements
involving the sale of its fast food operations conducted by Sybra. The proposed
sale would be accomplished in simultaneous transactions that would include the
sale of certain restaurant real estate owned by Sybra to one party for $45
million cash consideration, and Valcor's sale of 100% of the stock of Sybra to
another party for approximately $39.7 million cash consideration, of which
approximately $23.7 million would be used to repay Sybra bank indebtedness.
These transactions are subject to, among other things, completion of customary
due diligence procedures, the purchaser of Sybra's stock obtaining necessary
financing for the transaction and certain consents from third parties. If
completed, the transactions are expected to close in the second quarter of 1997,
at which time the Company estimates it would report a pre-tax gain on disposal
in excess of $24 million. There can be no assurance that any such transactions
will be completed.
NOTE 19 - DISCONTINUED OPERATIONS:
Discontinued operations are comprised of the following:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Medite Corporation $18,347 $10,607 $37,819
Tremont Corporation, net (8,069) - -
$10,278 $10,607 $37,819
Medite. In September 1996, Medite Corporation signed three separate
letters of intent involving the sale of substantially all of its assets. The
first transaction, involving the sale of Medite's timber and timberlands, closed
in October 1996 for approximately $118 million cash consideration, of which
approximately $53 million of the cash proceeds were used to pay off and
terminate Medite's U.S. bank credit facilities. The second transaction,
involving the sale of Medite's Irish MDF subsidiary, closed in November 1996 for
approximately $61.5 million cash consideration plus the assumption of
approximately $21 million of Irish bank debt. The third transaction, involving
the sale of Medite's Oregon MDF facility, closed in February 1997 for
approximately $36 million cash consideration plus the assumption of
approximately $3.7 million of Medite indebtedness. The letter of intent with
the purchaser of the Oregon MDF facility originally contemplated the purchase of
Medite's two small Oregon timber conversion facilities, but in December 1996
negotiations regarding a definitive agreement for the timber conversion
facilities were terminated, and Medite determined to permanently close these
facilities. The stud lumber facility, closed in December 1996, is being
dismantled and Medite will sell the salvageable machinery and equipment. Medite
continues to operate the veneer facility on a short-term basis and expects to
either sell or close this facility in 1997. Accordingly, the accompanying
financial statements present the results of operations of Medite's building
products business segment as discontinued operations for all periods presented.
As is customary in transactions of these types, Medite has made certain
representations and warranties to the respective purchasers concerning, among
other things, the assets sold. Medite has agreed to indemnify the three
purchasers for up to an aggregate of $6.5 million for certain breaches of these
representations and warranties. As part of the transactions, Valhi has agreed
to guarantee Medite's indemnification obligations. The Company does not
currently expect to be required to perform under any of these indemnification
obligations.
Medite's 1996 results include a first quarter pre-tax charge of $24 million
for the estimated costs of permanently closing its New Mexico MDF plant, and a
$13 million fourth-quarter pre-tax charge for the estimated costs of permanently
closing its two Oregon timber conversion facilities. Approximately $26 million
of such charges represented non-cash costs, most of which related to the net
carrying value of property and equipment in excess of estimated net realizable
value. These non-cash costs were deemed utilized upon adoption of the
respective closure plans. Approximately $11 million of the charge represents
workforce, environmental and other estimated cash costs associated with the
closure of the facilities, of which approximately $3 million had been paid at
December 31, 1996. In August 1996, Medite completed the sale of substantially
all of the building and equipment of the New Mexico facility for $5.5 million
cash consideration, which approximated the previously-estimated net realizable
value.
Condensed income statement data for Medite is presented below. The $24
million pre-tax New Mexico MDF plant charge is included in Medite's operating
income for 1996 because the decision to close the New Mexico MDF facility
occurred prior to the decision to permanently dispose of the entire business
segment. The aggregate net gain on disposal in 1996 includes the $13 million
charge associated with the closure of the two Oregon timber conversion
facilities, and a nominal charge associated with a curtailment of its U.S.
defined benefit plan. Medite expects to report a pre-tax gain on disposal of
approximately $20 million in the first quarter of 1997 relating to the sale of
its Oregon MDF facility. Interest expense included in discontinued operations
represents interest on indebtedness of Medite and its subsidiaries.
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN MILLIONS)
Operations of Medite:
Net sales $189.9 $200.0 $171.1
Operating income $ 36.4 $ 25.2 $ (7.9)
Interest expense and other, net (6.9) (8.2) (6.7)
Pre-tax income (loss) 29.5 17.0 (14.6)
Income tax expense (benefit) 11.2 6.4 (4.1)
18.3 10.6 (10.5)
Net gain on disposal:
Pre-tax gain - - 75.1
Income tax expense - - 26.8
- - 48.3
$ 18.3 $ 10.6 $ 37.8
Condensed balance sheets for Medite, included in the Company's consolidated
balance sheets, are presented below.
DECEMBER 31,
1995 1996
(IN MILLIONS)
Current assets $ 56.1 $21.2
Timber and timberlands 53.1 -
Property and equipment, net 84.8 18.2
Other assets 6.4 4.8
$200.4 $44.2
Current liabilities $ 33.9 $17.6
Long-term debt 77.2 3.7
Deferred income taxes 22.1 1.6
Loan from Valcor (*) 5.0 -
Other liabilities 2.9 3.0
Stockholder's equity (*) 59.3 18.3
$200.4 $44.2
(*) Eliminated in consolidation.
Condensed cash flow data for Medite (excluding dividends paid to and
intercompany loans with Valcor) is presented below.
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN MILLIONS)
Cash flows from operating activities $ 33.1 $ 18.5 $ 24.9
Cash flows from investing activities:
Capital expenditures (32.0) (12.3) (13.3)
Proceeds from disposal of business units - - 179.1
Other, net (.7) (.2) .1
(32.7) (12.5) 165.9
Cash flows from financing activities:
Indebtedness, net 28.6 (13.8) (64.0)
Other, net 1.2 2.9 -
29.8 (10.9) (64.0)
$ 30.2 $ (4.9) $126.8
Tremont Corporation. At the beginning of 1994, Valhi held 48% of
Tremont's outstanding common stock and accounted for its interest in Tremont by
the equity method. In December 1994, Valhi's Board of Directors declared a
special dividend on its common stock of all of its 48% interest in Tremont (3.5
million Tremont shares) (the "Distribution"). Valhi stockholders received
approximately .03 (three one-hundreds) of a share of Tremont for each Valhi
share held. The Distribution of Tremont common stock was accounted for as a
spin-off (recorded at book value, net of tax). The Distribution was currently
taxable for federal income tax purposes to both Valhi and Valhi stockholders
based upon the aggregate fair market value ($11.19 per Tremont share) of the
Tremont common stock distributed. The Company's equity in losses of Tremont's
titanium metals operations during 1994, net of allocable deferred income tax
benefits of $4.3 million, is reported as discontinued operations.
Contran and certain of its subsidiaries, which held approximately 90% of
Valhi's outstanding common stock at the time of the Distribution, received
approximately 3.2 million Tremont shares in the Distribution (44% of Tremont's
outstanding common stock), and may be deemed to control Tremont. Tremont holds
18% of NL's outstanding common stock and accounts for its interest in NL by the
equity method due to the common control of Contran and certain of its
subsidiaries. As discussed above, Valhi continues to own an interest in NL,
and, accordingly, the Company's pro rata portion of Tremont's equity in NL is
included, for all periods presented prior to the Distribution, in continuing
operations as a component of the Company's equity in losses of NL prior to
consolidation.
NOTE 20 - TRANSFER OF CONTROL OF THE AMALGAMATED SUGAR COMPANY:
On January 3, 1997, the Company completed the transfer of control of the
refined sugar operations previously conducted by the Company's wholly-owned
subsidiary, The Amalgamated Sugar Company, to Snake River Sugar Company, an
Oregon agricultural cooperative formed by certain sugarbeet growers in
Amalgamated's areas of operations. Pursuant to the transaction, which by its
terms was to be effective December 31, 1996 for both financial reporting and
income tax purposes, Amalgamated contributed substantially all of its net assets
to the Amalgamated Sugar Company LLC, a limited liability company controlled by
Snake River, on a tax-deferred basis in exchange for a non-voting ownership
interest in the LLC. The Company received approximately $11.5 million net of
pre-closing cash dividends from Amalgamated in 1997.
Also as part of the transaction, Snake River made certain loans to Valhi
aggregating $250 million in January 1997. These loans bear interest at a
weighted average fixed interest rate of 9.4%, are collateralized by the
Company's interest in the LLC and are due in January 2027. Currently, these
loans are nonrecourse to Valhi.
Snake River's sources of funds for its loans to Valhi, as well as for the
$14 million it contributed to the LLC for its voting ownership interest in the
LLC, included cash capital contributions by the grower members of Snake River
and $192 million in debt financing provided by Valhi in January 1997. Valhi's
debt financing included $180 million of loans to Snake River, of which (i) $100
million bears interest at a fixed rate of 9.99% with monthly payments of
principal and interest through December 2003 and (ii) $80 million bears interest
at a fixed rate of 10.99% in 1997 and 1998 and 12.99% for 1999 through December
2003, with all principal due in December 2003 ($40 million pays interest
monthly, while interest on the other $40 million compounds annually with payment
deferred until maturity). All $180 million of such loans are collateralized by
substantially all of Snake River's assets, including its $250 million loan to
Valhi and Snake River's interest in the LLC. The loans may be prepaid, at Snake
River's option, and the Company understands that Snake River intends to
refinance at least $100 million of such loans with a third-party lender during
1997, but there is no assurance that any such refinancing will occur. When
Valhi's loans to Snake river have been reduced to less than $37.5 million, then
up to 15% of Valhi's $250 million loans from Snake River will become recourse to
Valhi. Valhi's debt financing also included a $12 million loan to a member of
Snake River. This loan bears interest at a fixed rate of 10%, is due in
December 1998, is guaranteed by Snake River and is collateralized by the
member's interest in Snake River.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in January 2002, and the LLC has the right to
redeem the Company's interest in the LLC beginning in January 2027. In
addition, beginning in January 2002 the Company has the right to require Snake
River to purchase the Company's interest in the LLC. The redemption/purchase
price is generally $250 million plus the amount of any deferrals of cash
distributions from the LLC discussed below. In the event the Company either
requires the LLC to redeem the Company's interest in the LLC or requires Snake
River to purchase the Company's interest in the LLC, Snake River has the right
to accelerate the maturity of and call the $250 million of Valhi loans. If the
Company requires the LLC to redeem the Company's interest in the LLC, then Snake
River is required, under the terms of the LLC Company Agreement, to contribute
to the LLC the cash received from calling such loans.
The LLC Company Agreement provides that, among other things, the Company is
entitled to receive certain distributions of Distributable Cash, as defined,
from the LLC. The Company and Snake River share in any Distributable Cash up to
an aggregate of $26.7 million per year, with a preferential 95% of such
aggregate amount going to the Company and the remaining 5% going to Snake River.
This $26.7 million annual distribution is referred to as the LLC's "base
distribution." The Company generally is entitled to receive 5% (10% after 2002)
of any Distributable Cash in excess of this base distribution amount, with
additional Distributable Cash potentially being received through 2002 if certain
levels of Distributable Cash are reached. However, (i) a portion of the
Company's base distribution each year will be deferred and instead paid to Snake
River to the extent Snake River pays interest currently on $40 million of its
$180 million in loans from Valhi discussed above and (ii) the Company's share of
any Distributable Cash above the base distribution amount is also deferred and
instead paid to Snake River. Both of these deferrals will continue until the
$180 million of Snake River's loans from Valhi are completely repaid, at which
time any distributions of Distributable Cash which Snake River would otherwise
be entitled to receive in excess of its base distribution amount will instead be
paid to the Company until the Company has recouped these deferrals, including
interest.
The LLC's Management Committee is comprised of seven persons, all of which
are appointed by Snake River. Generally, the Company has no representation on
the Management Committee and has no ability to influence the operations or
management of the LLC. There are some restrictive covenants in the LLC Company
Agreement intended to protect the Company's interest in the LLC, such as limits
on capital expenditures and additional indebtedness of the LLC. In addition,
the Company has the ability to temporarily take control of the LLC, via election
of a majority of the members of the Management Committee, if its cumulative
"base distributions" become $10 million in arrears (excluding any of the
deferrals discussed above). Once any such arrearages have been paid, the
Company ceases to have any representation on the Management Committee.
Neither the Company nor Snake River can sell or otherwise dispose of their
LLC interest without the consent of the other party. Admission of new members
to the LLC requires the consent of both the Company and Snake River.
As part of the formation of the LLC, Amalgamated's existing $85 million
revolving bank credit facility was terminated and replaced with a new $100
million facility. The new facility is collateralized by the LLC's working
capital assets and one of the LLC's four processing facilities. This agreement
contains provisions and restrictive covenants customary in lending transactions
of this type. In addition, the agreement contains cross-default provisions with
both Valhi's loans from and to Snake River.
Because the Company no longer controls the operations contributed to the
LLC, the Company ceased consolidating the net assets, results of operations and
cash flows of such business effective December 31, 1996. At December 31, 1996,
the Company has reported the net assets contributed to the LLC at cost. Because
the Company receives preferential distributions from the LLC and has the right
to require the LLC to redeem its interest in the LLC for a fixed and
determinable amount, the Company's interest in the LLC is deemed equivalent to a
mandatory redeemable preferred stock which, under generally accepted accounting
principles, is carried at estimated fair value. Accordingly, beginning in 1997,
the Company will classify its investment in the LLC as an available-for-sale
marketable security carried at estimated fair value. In determining estimated
fair value of the Company's interest in the LLC, the Company will consider,
among other things, the outstanding balance of the Company's loans to Snake
River and the outstanding balance of the Company's loans from Snake River. Also
beginning in 1997, the Company will commence reporting the cash distributions
received from the LLC as dividend income. The amount of such future
distributions is dependent upon, among other things, the future performance of
the LLC's operations. For comparative purposes, Amalgamated's results of
operations and cash flows are reported by the equity method for all periods
presented.
Condensed income statement data for Amalgamated is presented below.
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN MILLIONS)
Net sales:
Refined sugar $422.0 $492.6 $455.7
By-products and other 35.3 48.7 38.3
$457.3 $541.3 $494.0
Operating income:
FIFO basis $ 29.3 $ 26.0 $ 39.3
LIFO adjustment 2.3 .8 (15.5)
31.6 26.8 23.8
General corporate items, net (2.2) .3 -
Interest expense (7.3) (13.4) (8.6)
22.1 13.7 15.2
Income tax expense 8.2 4.8 5.2
Net income $ 13.9 $ 8.9 $ 10.0
Condensed cash flow data for Amalgamated (excluding dividends paid to and
intercompany loans with Valhi) is presented below.
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN MILLIONS)
Cash flows from operating activities $ 14.7 $ 41.7 $ 24.6
Cash flows from investing activities:
Capital expenditures (26.8) (24.0) (13.7)
Other, net .2 - .2
(26.6) (24.0) (13.5)
Cash flows from financing activities -
Indebtedness, net 18.1 (20.2) 4.3
$ 6.2 $ (2.5) $ 15.4
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995
Net sales $297.8 $331.5 $304.3 $285.9
Operating income 43.5 59.0 51.7 51.7
Income from continuing operations $ 7.5 $ 13.1 $ 12.2 $ 25.1
Discontinued operations 4.9 4.3 1.5 (.1)
Net income $ 12.4 $ 17.4 $ 13.7 $ 25.0
Per common share:
Continuing operations $ .07 $.11 $.11 $.22
Discontinued operations .04 .04 .01 -
Net income $ .11 $.15 $.12 $.22
YEAR ENDED DECEMBER 31, 1996
Net sales $289.2 $314.2 $299.3 $288.1
Operating income 42.6 38.2 21.5 20.7
Income (loss) from continuing
operations $ 9.2 $ 6.6 $ (6.9) $ (4.7)
Discontinued operations (14.9) 2.2 2.0 48.5
Net income (loss) $ (5.7) $ 8.8 $ (4.9) $ 43.8
Per common share:
Continuing operations $ .08 $.06 $(.06) $(.04)
Discontinued operations (.13) .02 .02 .42
Net income (loss) $(.05) $.08 $(.04) $ .38
Net income in the fourth quarter of 1995 includes an aggregate of $13
million ($.11 per share) of net deferred income tax benefits resulting from
changes in the U.S./Canada income tax treaty and a reduction of NL's deferred
income tax valuation allowance to recognize the future benefit of certain tax
credits.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Valhi, Inc.:
Our report on the consolidated financial statements of Valhi, Inc. and
Subsidiaries as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996, which report is based in part upon the
reports of other auditors, is herein included on this Annual Report on Form 10-
K. In connection with our audits of such financial statements, we have also
audited the related financial statement schedules listed in the index on page F-
1 of this Annual Report on Form 10-K. These consolidated financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statement schedules based on our audits.
In our opinion, based upon our audits and the reports of other auditors,
the financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 7, 1997
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS)
1995 1996
Current assets:
Cash and cash equivalents $ 8,411 $ 5,510
Marketable securities - 142,478
Net dividend receivable from Amalgamated - 11,518
Accounts and notes receivable 1,398 1,522
Demand loans to affiliates 3,000 -
Other receivables from subsidiaries and affiliates 751 3,414
Deferred income taxes 1,101 -
Other 534 1,377
Total current assets 15,195 165,819
Other assets:
Marketable securities 130,873 1,101
Investment in subsidiaries and affiliates 244,832 258,660
Investment in Amalgamated - 34,070
Deferred income taxes 20,807 48,595
Other assets 4,373 3,971
Property and equipment, net 3,110 3,064
Total other assets 403,995 349,461
$419,190 $515,280
Current liabilities:
Current debt - LYONs $ - $142,478
Note payable to bank - 13,000
Accounts payable and accrued liabilities 5,400 10,268
Demand loan from affiliates - 7,244
Other payables to subsidiaries and affiliates 3,169 151
Income taxes 1,466 1,414
Deferred income taxes - 32,461
Total current liabilities 10,035 207,016
Noncurrent liabilities:
Long-term debt - LYONs 130,366 -
Other 4,498 4,345
Total noncurrent liabilities 134,864 4,345
Stockholders' equity 274,291 303,919
$419,190 $515,280
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
Revenues and other income:
Securities earnings, net $ 3,348 $ 4,034 $ 4,075
Other, net 1,317 1,991 4,844
4,665 6,025 8,919
Costs and expenses:
General and administrative 9,449 6,845 9,012
Interest 10,437 11,892 13,579
Other, net 843 231 (59)
20,729 18,968 22,532
(16,064) (12,943) (13,613)
Equity in subsidiaries and affiliates 1,562 86,824 3,025
Income (loss) before income taxes (14,502) 73,881 (10,588)
Income taxes (benefit) (15,824) 15,973 (14,815)
Income from continuing operations 1,322 57,908 4,227
Discontinued operations 10,278 10,607 37,819
Net income $ 11,600 $ 68,515 $ 42,046
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
Cash flows from operating activities:
Net income $ 11,600 $ 68,515 $ 42,046
Noncash interest expense 10,437 11,421 12,492
Deferred income taxes (13,531) 23,153 (6,163)
Equity in subsidiaries & affiliates:
Continuing operations (1,562) (86,824) (3,025)
Discontinued operations (5,933) (10,607) (37,819)
Dividends from subsidiaries
and affiliates 25,707 8,298 25,764
Other, net 1,045 2,371 (1,911)
27,763 16,327 31,384
Net change in assets and liabilities 2,368 (7,044) (7,374)
Net sales of trading securities 4,375 24,184 -
Net cash provided by
operating activities 34,506 33,467 24,010
Cash flows from investing activities:
Purchases of NL common stock (15,060) (13,250) (14,627)
Capital contribution to subsidiaries
and affiliates (10,000) (10,000) (17,000)
Loans to subsidiaries and affiliates:
Loans (34,550) (132,000) (10,800)
Collections 34,550 129,000 13,800
Other, net 3,906 (1,164) 3,875
Net cash used by
investing activities (21,154) (27,414) (24,752)
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
1994 1995 1996
Cash flows from financing activities:
Indebtedness:
Borrowings $ - $ 60,000 $ 127,000
Principal payments - (60,000) (114,000)
Loans from affiliates:
Loans - - 7,844
Repayments - - (600)
Dividends (9,145) (13,809) (23,057)
Other, net 229 875 654
Net cash used by
financing activities (8,916) (12,934) (2,159)
Cash and cash equivalents:
Net increase (decrease) 4,436 (6,881) (2,901)
Balance at beginning of year 10,856 15,292 8,411
Balance at end of year $15,292 $ 8,411 $ 5,510
Supplemental disclosures-cash paid for:
Interest $ - $ 470 $ 2,270
Income taxes (received) (6,171) (4,154) (3,121)
VALHI, 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 Valhi, Inc. and Subsidiaries are
incorporated herein by reference.
NOTE 2 - MARKETABLE SECURITIES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Current asset (available-for-sale):
Dresser Industries common stock $ - $142,478
Noncurrent assets (available-for-sale):
Dresser Industries common stock $103,366 $ -
Other 507 1,101
$103,873 $ 1,101
NOTE 3 - INVESTMENT IN SUBSIDIARIES AND AFFILIATES:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Subsidiaries:
NL Industries $150,743 $147,962
Amalgamated 44,240 -
Valcor 45,224 95,480
Waste Control Specialists 4,625 15,218
$244,832 $258,660
NOTE 4 - LONG-TERM DEBT:
Long-term debt consists of Valhi's zero coupon LYONs, $379 million
principal amount at maturity in October 2007. The LYONs were issued with
significant original issue discount ("OID") to represent a yield to maturity of
9.25%. No periodic interest payments are required. The LYONs are secured by
the 5.5 million shares of Dresser common stock held by Valhi, which shares are
held in escrow for the benefit of holders of the LYONs. Each $1,000 in
principal amount at maturity of the LYONs is exchangeable, at any time, for
14.4308 shares of Dresser common stock held by the Company. The LYONs are
redeemable, at the option of the holder, in October 1997 or October 2002 at the
issue price plus accrued OID through such purchase date and, accordingly, the
LYONs are classified as a current liability at December 31, 1996. The aggregate
redemption price in October 1997 approximates $153 million. Such redemptions
may be paid, at Valhi's option, in cash, Dresser common stock, or a combination
thereof. The LYONs are not redeemable at Valhi's option prior to October 1997
unless the market price of Dresser common stock exceeds $35.70 per share for
specified time periods.
Valhi also has a $15 million revolving bank credit facility which matures
in March 1998, generally bears interest at LIBOR plus 1.5% and is collateralized
by 4.8 million shares of NL common stock held by Valhi. Borrowings under this
facility can only be used to fund Valhi's purchases of additional shares of NL
common stock. The agreement limits additional indebtedness of Valhi and
contains other provisions customary in lending transactions of this type.
NOTE 5 - DIVIDENDS FROM SUBSIDIARIES AND AFFILIATES:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Amalgamated $16,137 $ - $17,000
Valcor 9,570 8,298 383
NL Industries - - 8,381
Waste Control Specialists - - -
$25,707 $8,398 $25,764
NOTE 6 - INCOME TAXES:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Income tax benefit attributable to
continuing operations:
Currently refundable $ (6,638) $(7,180) $ (8,652)
Deferred income taxes (9,186) 23,153 (6,163)
$(15,824) $15,973 $(14,815)
Cash received for income taxes, net:
Received from subsidiaries $ 20,479 $ 8,828 7,119
Paid to Contran (14,425) (4,623) (3,445)
Paid to tax authorities, net 117 (51) (553)
$ 6,171 $ 4,154 $ 3,121
Waste Control Specialists LLC is treated as a partnership for federal
income tax purposes. NL is a separate U.S. taxpayer and is not a member of the
Contran Tax Group.
DEFERRED TAX
ASSET (LIABILITY)
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Components of the net deferred tax asset:
Tax effect of temporary differences related to:
Marketable securities $(31,190) $(35,659)
Investment in subsidiaries and affiliates not
members of the Contran Tax Group 55,983 52,962
Accrued liabilities and other deductible differences 5,514 7,282
Other taxable differences (8,399) (8,451)
$ 21,908 $ 16,134
Current deferred tax asset (liability) $ 1,101 $(32,461)
Noncurrent deferred tax asset 20,807 48,595
$ 21,908 $ 16,134
NOTE 7 - EQUITY IN EARNINGS OF SUBSIDIARIES AND AFFILIATES:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Continuing operations:
NL Industries $(25,078) $69,539 $(12,592)
Valcor 12,751 8,939 12,015
Amalgamated 13,889 8,900 10,009
Waste Control Specialists - (554) (6,407)
$ 1,562 $86,824 $ 3,025
Discontinued operations:
Valcor $ 18,347 $10,607 $ 37,819
Tremont (12,414) - -
$ 5,933 $10,607 $ 37,819
NOTE 8 - DISCONTINUED OPERATIONS:
The components of discontinued operations are presented below.
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Equity in Valcor $ 18,347 $10,607 $37,819
Tremont:
Equity in losses (12,414) - -
Allocable deferred income tax benefit 4,345 - -
(8,069) - -
$ 10,278 $10,607 $37,819
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS
Year ended December 31, 1994:
Allowance for doubtful accounts $ 974 $ 213 $(502)
Amortization of intangibles:
Goodwill $ 1,008 $ 172 $ -
Franchise fees and other 6,848 1,423 (900)
$ 7,856 $ 1,595 $(900)
Deferred income tax valuation
allowance
$ - $ - $ -
Year ended December 31, 1995:
Allowance for doubtful accounts $ 4,434 $ 665 $(294)
Amortization of intangibles:
Goodwill $ 1,180 $ 8,172 $ -
Franchise fees and other 7,371 4,549 (453)
$ 8,551 $12,721 $(453)
Deferred income tax valuation
allowance
$164,500 $(9,588) $ -
BALANCE
CURRENCY AT END
DESCRIPTION TRANSLATION OTHER(A) OF YEAR
Year ended December 31, 1994:
Allowance for doubtful accounts $ - $ 3,749 $ 4,434
Amortization of intangibles:
Goodwill $ - $ - $ 1,180
Franchise fees and other - - 7,371
$ - $ - $ 8,551
Deferred income tax valuation
allowance
$ - $164,500 $164,500
Year ended December 31, 1995:
Allowance for doubtful accounts $ 167 $ - $ 4,972
Amortization of intangibles:
Goodwill $ - $ - $ 9,352
Franchise fees and other (8) - 11,459
$ (8) $ - $ 20,811
Deferred income tax valuation
allowance
$ 6,451 $ 34,206 $195,569
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (CONTINUED)
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS
Year ended December 31, 1996:
Allowance for doubtful accounts $ 4,972 $ 1,860 $(1,987)
Amortization of intangibles:
Goodwill $ 9,352 $ 8,779 $ -
Franchise fees and other 11,459 4,447 (372)
$ 20,811 $13,226 $ (372)
Deferred income tax valuation
allowance
$195,569 $ 3,013 $ -
BALANCE
CURRENCY AT END
DESCRIPTION TRANSLATION OTHER(A) OF YEAR
Year ended December 31, 1996:
Allowance for doubtful accounts $ (169) $ (589) $ 4,087
Amortization of intangibles:
Goodwill $ - $ - $ 18,131
Franchise fees and other (332) - 15,202
$ (332) $ - $ 33,333
Deferred income tax valuation
allowance
$(5,937) $14,472 $207,117
(a)1994 - Consolidation of NL Industries, Inc. effective December 31, 1994.
1995 - Direct offset to the increase in gross deferred tax assets resulting
from rechartization of
certain tax attributes primarily due to changes in certain tax return
elections of NL.
1996 - Elimination of amounts attributable to (i) the Amalgamated Sugar
Company, which is no longer
consolidated, and (ii) Medite's Irish subsidiary, which was sold, and
direct offset to the increase in gross
deferred tax assets resulting from the dual residency status of certain NL
subsidiaries.
Waste Control Specialists LLC
(A DEVELOPMENT STAGE ENTERPRISE)
Financial Statements
December 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members and Management Committee of Waste Control Specialists LLC:
We have audited the accompanying balance sheets of Waste Control
Specialists LLC as of December 31, 1995 and 1996, and the
related statements of operations, members equity and cash flows
for the year ended December 31, 1996 and for the period from
inception to December 31, 1995. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Waste Control Specialists LLC as of December 31, 1995 and
1996, and the results of its operations and cash flows for the
year ended December 31, 1996 and for the period from inception to
December 31, 1995 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 12, 1997
Waste Control Specialists LLC
(A Development Stage Enterprise)
BALANCE SHEETS
(In thousands)
December 31, December 31,
1995 1996
ASSETS
Current assets:
Cash and cash equivalents $3,349 $545
Prepaid insurance 6 104
Receivable from officer - 250
Other current assets 22 111
Total current assets 3,377 1,010
Property and equipment:
Land 2,134 2,134
Building 247 255
Furniture and equipment 80 288
Construction in progress 75 12,912
2,536 15,589
Less accumulated depreciation 2 41
Net property and equipment 2,534 15,548
Other assets:
Organization costs, net 194 153
Landfill and other operating permits 1,145 1,841
Restricted deposits and other - 556
Total other assets 1,339 2,550
$7,250 $19,108
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of long-term debt $274 $300
Accounts payable and accrued liabili 105 1,360
Accrued payroll and payroll taxes 31 408
Payable to member 100 -
Total current liabilities 510 2,068
Long-term debt 5,308 5,015
Members' equity, including deficit accumulated
during the development stage of $554 1,432 12,025
$7,250 $19,108
Commitments and contingencies (Note 2)
Waste Control Specialists LLC
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(In thousands)
Period from Period from
November 8, 1995 November 8, 1995
(inception) to Year ended (inception) to
December 31, December 31, December 31,
1995 1996 1996
Interest income $17 $277 $294
Costs and expenses:
Operating and startup 465 6,090 6,555
Interest 106 594 700
571 6,684 7,255
Net loss ($554) ($6,407) ($6,961)
Waste Control Specialists LLC
(A Development Stage Enterprise)
STATEMENTS OF MEMBERS' EQUITY
(In thousands)
Period from November 8, 1995 (inception) to December 31, 1995
and year ended December 31, 1996
ACH KNB Total
Contributions $5,000 ($3,014) $1,986
Net loss (554) - (554)
Members' equity at December 31, 1995 4,446 (3,014) 1,432
Contributions 17,000 - 17,000
Net loss (6,407) - (6,407)
Members' equity at December 31, 1996 $15,039 ($3,014) $12,025
Waste Control Specialists LLC
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(In thousands)
Period from Period from
November 8, 1995 November 8, 1995
(inception) to Year ended (inception) to
December 31, December 31, December 31,
1995 1996 1996
Cash flows from operating activities:
Net loss ($554) ($6,407) ($6,961)
Depreciation and amortization 9 80 89
Changes in assets and liablities:
Other current assets (28) (187) (215)
Accounts payable and accrued expen (358) 800 442
Net cash used by operating (931) (5,714) (6,645)
Cash flows used by investing activities :
Capital expenditures (153) (12,238) (12,391)
Permitting and other - (1,485) (1,485)
Net cash used by investing (153) (13,723) (13,876)
Cash flows from financing activities:
Capital contribution received 5,000 17,000 22,000
Principal repayments of:
Payable to members (100) (100) (200)
'Long-term debt (467) (267) (734)
Net cash provided by financi 4,433 16,633 21,066
Net increase (decrease) in cash 3,349 (2,804) 545
Cash at beginning of period - 3,349 -
Cash at end of period $3,349 $545 $545
Supplemental disclosures - cash paid fo $106 $594 $700
Waste Control Specialists LLC
(A DEVELOPMENT STAGE ENTERPRISE)
Notes To Financial Statements
Note 1 - Organization and basis of presentation:
Waste Control Specialists LLC (the "Company"), a Delaware limited
liability company formed in November 1995, is a development stage
enterprise. The Company is currently completing construction of
the initial phase of a waste disposal facility in West Texas for
the processing, treatment, storage and disposal of certain
hazardous and toxic wastes. The Company has been issued permits by
the Texas Natural Resource Conservation Commission ("TNRCC") and
the U.S. Environmental Protection Agency ("U.S. EPA"), pending
facility construction and certification, to accept wastes governed
by the Resource Conservation and Recovery Act ("RCRA") and the
Toxic Substances Control Act ("TSCA"). The facility is expected to
receive its first wastes for processing in the first quarter of
1997. The Company is also seeking permits for the processing,
treatment and disposal of low-level and mixed-level radioactive
wastes.
The Company is equally owned by Andrews County Holdings, Inc.
("ACH") and KNB Holdings, Ltd. ("KNB"). ACH, a Delaware
corporation, is a wholly-owned subsidiary of Valhi, Inc. (NYSE:
VHI). KNB, a Texas limited partnership, is controlled by Kenneth
N. Bigham, Chief Executive Officer of the Company, as general
partner of KNB. Collectively, ACH and KNB are referred to as
"Members" of the Company. See Notes 3 and 6.
Contran Corporation owns, directly or indirectly, approximately 91%
of Valhis outstanding common stock. Substantially all of
Contrans outstanding voting stock is held by trusts established
for the benefit of the children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the
Chairman of the Board and Chief Executive Officer of each of Valhi
and Contran, may be deemed to control each of Contran and Valhi.
Note 2 - Summary of significant accounting policies:
Management estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during
the reporting period. Ultimate actual results may, in some
instances, differ from previously estimated amounts.
Cash and cash equivalents. Cash equivalents include bank time
deposits with maturities of three months or less.
Organizational costs. Capitalized organizational costs are
amortized by the straight-line method over five years and are
stated net of accumulated amortization of $6,000 and $47,000 at
December 31, 1995 and 1996, respectively.
Operating permits. Costs related to the acquisition of operating
permits are capitalized. Such costs will be amortized by the
straight-line method, beginning when operations commence, through
the initial expiration date of the permits. The permits currently
held by the Company expire in 2004 and are subject to renewal at
the option of the issuing governmental agency.
Property and equipment. Property and equipment are stated at cost.
Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized.
Depreciation is computed principally by the straight-line method
over the estimated useful lives of ten to 40 years for buildings
and three to 20 years for machinery and equipment.
Income taxes. The Company, a limited liability company, is not a
federal tax paying entity. Income and losses of the Company are
included in the federal income tax returns of the Members and any
resulting income taxes are the responsibility of the Members.
Note 3 - Summary of significant Member agreements:
Significant agreements entered into by the Company and its Members
in conjunction with formation of the Company are summarized below.
See Note 5 for other related party agreements transactions.
Formation Agreement. ACH agreed to contribute $25 million in cash
(the "ACH Initial Capital Contribution") to the Company at various
dates through 1997 in return for its 50% Membership Interest in the
Company. ACH contributed $5 million in 1995, $17 million in 1996
and the remaining $3 million in January 1997
KNB contributed certain assets, principally all of the outstanding
common stock of Waste Control Specialists, Inc. ("WCSI") and
approximately 16,073 acres of land including the 1,338 acre
facility site, for its 50% Membership Interest. In addition, the
Company assumed certain liabilities of Mr. Bigham, principally bank
indebtedness aggregating $6.1 million. The net assets of WCSI
consisted primarily of the land for the facility site and
operating permits issued by the TNRCC and U.S. EPA covering
acceptance of wastes governed by RCRA and TSCA. WCSI was
subsequently merged into the Company.
The assets contributed by KNB were recorded by the Company at
predecessor carryover basis of $3.1 million (net liability of $3
million including the carryover basis of $6.1 million of debt of
Mr. Bigham assumed).
Company Agreement. The Companys business shall be to conduct a
broad array of waste management services at the West Texas
facility, including the treatment, storage and/or disposal of
wastes and other materials regulated under RCRA and TSCA.
The business and affairs of the Company are directed by the Members
through a five-member Management Committee, of which ACH appoints
three members and KNB appoints two members. The Chief Executive
Officer is given the authority to manage the Companys affairs in
accordance with the Annual Operating Plan approved by the
Management Committee. Among other things, most capital
expenditures, contracts which obligate the Company to pay for or
provide services valued at more than $1 million, transactions
outside the ordinary course of business and distributions to
Members (except for required distributions) must be approved by
the Management Committee.
The Members themselves, by majority vote (one vote per Member),
must approve certain transactions including (i) the sale or
disposition of all or substantially all of the Companys assets
pursuant to a sale or merger, (ii) engaging the Company in any
business other than the environmental waste business, (iii)
borrowing more than $10 million prior to the time ACH has completed
its ACH Initial Capital Contribution and (iv) most related party
transactions. Other than ACHs completion of funding of the ACH
Initial Capital Contribution, no Member is obligated to loan,
invest or otherwise provide any funds or property to the Company
unless a majority of the Members agree.
ACH is generally entitled to a preferential distribution (the "ACH
Preferential Distribution") equal to 20% per annum of the invested
ACH Initial Capital Contribution. Distributions to Members of
Distributable Cash, as defined, shall generally (i) first be paid
to ACH up to the ACH Preferential Distribution and (ii) second
split ratably among the Members based upon their Membership
Interest. ACH is also generally entitled to a preferential return
of the ACH Initial Capital Contribution in the event of the
liquidation and winding up of the Company.
For federal income tax purposes, the net profits and losses of the
Company are generally allocated (i) first in an amount up to the
Distributable Cash paid to Members, as discussed above, and (ii)
second ratably among the Members based on their respective
Membership Interest. Generally, to the extent a Member has a
negative capital account for federal income tax purposes, such
Member shall not be allocated any net losses.
Members are generally given a right of first refusal or
participation rights in the event a Member wishes to sell all or a
portion of his Membership Interest. Following any initial public
offering of ownership interests in the Company, each Member may
exercise up to two additional demand registrations, subject to
certain conditions.
Consulting Agreement. The Company agreed to assume the obligations
of WCSI under a consulting agreement entered into in October 1995.
See Note 6.
Note 4 - Long-term debt:
Approximately $450,000 of bank indebtedness assumed by the Company
at formation was repaid in November 1995. The remaining bank
indebtedness consists of a term loan repayable through December
1999, with interest at the greater of (i) prime plus 3.75% or (ii)
12% (12% at December 31, 1995 and 1996) and collateralized by
substantially all of the Companys assets. The term loan
agreement contains provisions and restrictive covenants customary
in lending transactions of this type. The fair value of the bank
debt at December 31, 1995 and 1996 is assumed to approximate its
book value.
The maturities of the bank term loan at December 31, 1996 are shown
in the table below.
Years ending December 31, Amount
(In thousands)
1997 $300
1998 338
1999 4,677
$5,315
Note 5 - Related party transactions:
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.
Certain significant agreements were entered into in conjunction
with formation of the Company. See Note 3.
Mr. Bigham, a member of the Management Committee and the general
partner of KNB, was appointed Chief Executive Officer of the
Company pursuant to a five-year employment agreement through 2000.
In addition to terms customary for such agreements, the agreement
specifies certain special bonuses aggregating up to $1 million
payable if, and only if, the Company is issued various new
operating permits within specified time periods no later than
August 1997.
The Company agreed to reimburse ACH and KNB an aggregate of
$100,000 each for costs incurred by the respective Member in
connection with formation of the Company. Such costs have been
capitalized as organizational costs. See Note 2. Payable to
member at December 31, 1995 consists of $100,000 owed to ACH in
connection with this agreement.
The Company has entered into a five-year lease for its corporate
office facility with an entity controlled by Mr. Bigham at a rate
of $42,000 per year. Rent expense related to this lease was $6,000
in 1995 and $42,000 in 1996.
Loans to officers at December 31, 1996 consists of a 6.02% demand
note receivable from Mr. Bigham. Interest income on such loan was
nominal in 1996. This loan was repaid in February 1997 using a
portion of the proceeds of a $1.5 million loan made by Valhi to Mr.
Bigham, which loan is collateralized by Mr. Bighams interest in
the Company.
In February 1997, the Company entered into a $4.0 million revolving
credit facility with ACH. Borrowings bear interest at prime plus
1% and are due December 31, 1997.
Note 6 - Commitments and contingencies:
Environmental. The Companys waste management operations
currently involve wastes and other materials regulated under RCRA
and TSCA. The Company intends to seek other operating permits to
accept wastes, including low-level radioactive or mixed wastes,
regulated under other environmental laws and regulations. The
Company expects, in the normal course of its business, to expend
funds for environmental protection and remediation; however its
business is based upon compliance with environmental laws and
regulations, and its services are expected to be priced accordingly.
Concentrations of credit risk. At December 31, 1995 and 1996,
substantially all of the Companys cash and cash equivalents were
held by a single U.S. bank.
Cost to complete capital projects in process. At December 31,
1996, the estimated cost to complete the initial phase of the
facility so that it will be ready to accept RCRA and TSCA-regulated
wastes approximated $3.9 million. Such capital expenditures,
including approximately $1.2 million included in accrued
liabilities at December 31, 1996, are expected to be financed by
funds on hand and the $3.0 million contributed to the Company by
ACH in January 1997.
Consulting agreement. Under the terms of an agreement entered into
in October 1995 by WCSI and assumed by the Company at formation,
the Company has agreed to pay an independent consultant up to an
aggregate of $18.4 million for performing services as a
governmental relations representative and consultant. Such fees
are based on variable rates of not more than 2% of the revenue
generated and will be payable only when the Company receives
revenues pursuant to contracts for the disposal of low-level
radioactive or mixed wastes generated by, or under the supervision
or control of, the U.S. federal government. The agreement
currently provides for a security interest in the facility under
construction in West Texas to collateralize the Companys
obligation under the agreement when the obligation becomes payable.
Bonus program. The Company has adopted a bonus program whereby up
to $6.3 million may be paid to certain employees of the Company,
excluding Mr. Bigham, if certain operating and permitting targets
are met within specified time periods. A payment of $700,000 is
payable if the initial phase of the facility is completed at a
total cost of less than $15.8 million, $1.4 million is payable if
operating permits for the treatment and storage of low-level
radioactive wastes are received before January 2000, $1.4 million
is payable if operating permits for the disposal of low-level
radioactive wastes are received before January 2000, and $2.8
million is payable if the Company achieves specified sales and
operating profit targets by the end of 1999. If paid, bonuses
with respect to the facility costs will be capitalized as part of
the cost of the facility and bonuses with respect to the receipt
of permits for low-level radioactive waste treatment and storage or
disposal will be capitalized as part of the cost of the permit.
Bonuses with respect to the sales and operating profit targets will
be accrued through 1999 beginning when it becomes probable that
such bonuses will be paid.
THE AMALGAMATED SUGAR COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
WITH
INDEPENDENT AUDITORS' REPORT THEREON
INDEPENDENT AUDITORS' REPORT
To the Shareholder of The Amalgamated Sugar Company:
We have audited the accompanying balance sheets of The Amalgamated Sugar
Company as of December 31, 1995 and 1996, and the related statements of income
and shareholder's equity and cash flows for each of the years in the three year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Amalgamated Sugar
Company at December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Salt Lake City, Utah
January 31, 1997
THE AMALGAMATED SUGAR COMPANY
BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except share data)
ASSETS
1995 1996
---- ----
Current assets:
Cash and cash equivalents $ 3,546 $ 2,002
Accounts and notes receivable 44,861 38,626
Inventories 229,424 233,713
Prepaid expenses 916 1,079
-------- --------
Total current assets 278,747 275,420
-------- --------
Other assets 26 27
-------- --------
Property and equipment:
Land 2,628 2,628
Buildings 11,704 11,732
Equipment 248,627 262,720
Construction in progress 1,129 256
-------- --------
264,088 277,336
Less accumulated depreciation 156,139 170,922
-------- --------
Net property and equipment 107,949 106,414
-------- --------
$386,722 $381,861
======== ========
THE AMALGAMATED SUGAR COMPANY
BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except share data)
LIABILITIES AND SHAREHOLDER'S EQUITY
1995 1996
---- ----
Current liabilities:
Notes payable $106,685 $119,014
Current maturities of long-term debt 8,000 8,000
Dividends payable - 13,000
Accounts payable and accrued liabilities 182,072 183,551
Income taxes 1,020 493
Deferred income taxes 4,010 2,212
-------- --------
Total current liabilities 301,787 326,270
-------- --------
Noncurrent liabilities:
Long-term debt 16,000 8,000
Accrued OPEB cost 17,853 18,319
Deferred income taxes 2,635 3,855
Other 4,207 1,168
-------- --------
Total noncurrent liabilities 40,695 31,342
-------- --------
Shareholder's equity:
Common stock, $1 par value; 100,000 shares
authorized; 1,000 shares issued and outstanding 1 1
Additional paid-in capital 35,000 22,000
Retained earnings 9,239 2,248
-------- --------
Total shareholder's equity 44,240 24,249
-------- --------
$386,722 $381,861
======== ========
Commitments and contingencies (Note 11).
THE AMALGAMATED SUGAR COMPANY
STATEMENTS OF INCOME AND SHAREHOLDER'S EQUITY
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
---- ---- ----
Revenues and other income:
Net sales $457,278 $541,303 $493,996
Interest and other 3,115 3,316 1,857
-------- -------- --------
460,393 544,619 495,853
-------- -------- --------
Costs and expenses:
Cost of sales 345,841 420,260 378,643
Selling, general and administrative 85,165 97,272 93,359
Interest 7,339 13,371 8,611
-------- -------- --------
438,345 530,903 480,613
-------- -------- --------
Income before income taxes 22,048 13,716 15,240
Provision for income taxes 8,159 4,816 5,231
-------- -------- --------
Net income 13,889 8,900 10,009
Shareholder's equity at beginning of year 25,245 32,997 44,240
Capital contribution 10,000 5,000 -
Dividends paid in:
Cash (16,137) - (17,000)
Stock of subsidiary - (2,657) -
Dividends accrued - - (13,000)
-------- -------- --------
Shareholder's equity at end of year $ 32,997 $ 44,240 $ 24,249
======== ======== ========
THE AMALGAMATED SUGAR COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 13,889 $ 8,900 $ 10,009
Depreciation 12,167 13,828 14,995
Deferred income taxes (1,417) 426 (578)
Other, net (524) (937) 1,227
--------- --------- ---------
24,115 22,217 25,653
Change in assets and liabilities:
Accounts and notes receivable (1,492) (9,347) 6,101
Inventories (33,518) 51,619 (4,289)
Accounts payable and accrued
liabilities 25,088 (25,114) 1,274
Other, net 542 2,317 (4,152)
--------- --------- ---------
Net cash provided by operating
activities 14,735 41,692 24,587
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (26,768) (24,036) (13,679)
Other, net 135 23 219
--------- --------- ---------
Net cash used by investing
activities (26,633) (24,013) (13,460)
--------- --------- ---------
Cash flows from financing activities:
Notes payable, long-term debt and
loans from Valhi:
Additions 421,847 651,928 648,911
Principal payments (403,707) (672,136) (644,582)
Capital transactions 10,000 5,000 -
Cash dividends (16,137) - (17,000)
--------- --------- ---------
Net cash provided (used) by
financing activities 12,003 (15,208) (12,671)
--------- --------- ---------
Net increase (decrease) in cash $ 105 $ 2,471 $ (1,544)
========= ========= =========
THE AMALGAMATED SUGAR COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
---- ---- ----
Cash and cash equivalents:
Net increase (decrease) $ 105 $ 2,471 $ (1,544)
Balance at beginning of year 970 1,075 3,546
--------- --------- ---------
Balance at end of year $ 1,075 $ 3,546 $ 2,002
========= ========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 6,971 $ 13,073 $ 9,205
Income taxes 10,507 2,623 6,631
THE AMALGAMATED SUGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 -Organization:
The Amalgamated Sugar Company (the `Company''), a Utah corporation and an
indirect wholly-owned subsidiary of Valhi, Inc. (NYSE: VHI), is engaged in the
production and sale of refined sugar and by-products from sugarbeets. Contran
Corporation holds, directly or through subsidiaries, approximately 91% of
Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of the children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr.
Simmons, the Chairman of the Board of each of Amalgamated, Valhi and Contran,
may be deemed to control each of such companies.
Effective December 1, 1995, Amalgamated contributed certain assets that
were primarily used in research and development activities to a newly formed,
wholly-owned subsidiary, Amalgamated Research Inc. and distributed all of the
outstanding stock of Amalgamated Research to its parent. Such dividend was
recorded at net carrying value.
Subsequent to December 31, 1996, the Company contributed substantially all
of its net assets to The Amalgamated Sugar Company LLC. See Note 13.
Note 2 -Summary of significant accounting policies:
Management's estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
Cash and cash equivalents. Cash equivalents include temporary cash
investments with original maturities of three months or less.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. The last-in, first-out method is used to determine the cost of
refined sugar, sugarbeets and by-products, and the average-cost method is used
to determine the cost of supplies.
Under the terms of its contracts with sugarbeet growers, the Company's cost
of sugarbeets is based on average sugar sales prices during the beet crop
purchase contract year, which begins in October and ends the following
September. Any differences between the sugarbeet cost estimated at the end of
the fiscal year and the amount ultimately paid is an element of cost of sales in
the succeeding year.
Property, equipment and depreciation. Property and equipment are stated at
cost. Maintenance, repairs and minor renewals are expensed; major improvements
capitalized. Interest costs related to major, long-term capital projects
capitalized as a component of construction costs were $167,000 in 1994, $360,000
in 1995 and nil in 1996.
Depreciation is computed primarily on the straight-line method over the
estimated useful lives of 20 to 40 years for buildings and five to 20 years for
equipment.
Income taxes. Valhi and Amalgamated are members of Contran's consolidated
United States federal income tax group (the "Contran Tax Group"). The policy
for intercompany allocation of federal income taxes provides that subsidiaries
included in the Contran Tax Group compute the provision for federal income taxes
on a separate company basis. Subsidiaries of Valhi make payments to, or receive
payments from, Valhi in the amount they would have paid to or received from the
Internal Revenue Service had they not been members of the Contran Tax Group.
The separate company provisions and payments are computed using the tax
elections made by Contran.
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.
Other. Sales are recorded when products are shipped.
Accounting and funding policies for retirement plans and for postretirement
benefits other than pensions ("OPEB") are described in Note 9.
Note 3 -Operations:
The Company's operations consist of one business and geographic segment,
the production of refined sugar from sugarbeets in the United States.
Years ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Net sales:
Refined sugar $421,953 $492,564 $455,717
By-products and other 35,325 48,739 38,279
-------- -------- --------
$457,278 $541,303 $493,996
======== ======== ========
Operating income:
FIFO basis $ 29,299 $ 26,057 $ 39,285
LIFO adjustment 2,330 772 (15,437)
-------- -------- --------
Operating income 31,629 26,829 23,848
General corporate items, net (2,242) 258 3
Interest expense (7,339) (13,371) (8,611)
-------- -------- --------
Income before income taxes $ 22,048 $ 13,716 $ 15,240
======== ======== ========
Export sales were $8,765,000 in 1994, $21,067,000 in 1995 and $14,885,000
in 1996. General corporate items in 1994 consist principally of legal and
related expenses.
Note 4 -Notes payable and long-term debt:
December 31,
-------------------
1995 1996
---- ----
(In thousands)
Notes payable:
United States Government loans $ 64,685 $ 69,014
Bank credit agreements 42,000 50,000
-------- --------
$106,685 $119,014
======== ========
Long-term debt:
Bank term loan $ 24,000 $ 16,000
Less current maturities 8,000 8,000
-------- --------
$ 16,000 $ 8,000
======== ========
The Government loans are made under the sugar price support loan program,
which program currently extends through the 2002 crop year ending September 30,
2003. These short-term loans have historically been nonrecourse and will
continue to be nonrecourse if foreign sugar import quotas exceed a specific
level. At December 31, 1996, all outstanding Government loans are nonrecourse,
and such Government loans will continue to be nonrecourse throughout the
remainder of the current crop year which ends September 30, 1997. These loans
are collateralized by refined sugar inventories and payable at the earlier of
the date the refined sugar is sold or upon maturity. At December 31, 1996, the
weighted average interest rate on Government loans was 6.5% (1995 - 5.6%).
The Company's principal bank credit agreement (the "Sugar Credit
Agreement") provides for a revolving credit facility in varying amounts up to
$80 million, with advances limited to formula-determined amounts of accounts
receivable and inventories, and a term loan. Borrowings under the revolving
credit facility bear interest, at the Company's option, at the prime rate or
LIBOR plus 1.25% and mature not later than September 30, 1998. The term loan
bears interest, at the Company's option, at the prime rate plus .25% or LIBOR
plus 1.5%, and matures in annual installments of $8 million through July 1998.
The Sugar Credit Agreement may be terminated by the lenders in the event the
sugar price support loan program is abolished or is materially and adversely
modified. The Company also has a $5 million unsecured line of credit with the
agent bank for the Sugar Credit Agreement (nil outstanding at December 31,
1996). At December 31, 1996, the weighted average interest rate on outstanding
bank borrowings was 8.3% (1995 - 7.2%). See Note 13.
At December 31, 1996, unused credit available to the Company under its bank
credit agreements and the sugar price support loan program aggregated
approximately $20 million.
The Sugar Credit Agreement (i) requires the Company to maintain minimum
levels of tangible net worth, earnings and net cash flow, as defined, (ii)
limits dividend payments and additional indebtedness, (iii) is collateralized by
substantially all of the Company's assets and (iv) contains other provisions and
restrictive covenants customary in lending transactions of this type. At
December 31, 1996, there was no dividend availability under the existing Sugar
Credit Agreement. See Note 13.
Note 5 -Inventories:
December 31,
-------------------
1995 1996
---- ----
(In thousands)
Sugarbeets $ 47,420 $ 46,864
In process sugar 57,967 66,375
Refined sugar and by-products 90,492 89,636
Supplies 33,545 30,838
-------- --------
$229,424 $233,713
======== ========
Had the Company used the first-in, first-out method of accounting for the
cost of sugar, sugarbeets and by-products, the net carrying value of inventories
would have increased by approximately $31.8 million and $47.2 million at
December 31, 1995 and 1996, respectively.
Note 6 -Accounts payable and accrued liabilities:
December 31,
-------------------
1995 1996
---- ----
(In thousands)
Accounts payable:
Sugarbeets $ 83,027 $ 83,391
Other 64,526 58,588
-------- --------
147,553 141,979
-------- --------
Payable to affiliates 1,202 937
-------- --------
Accrued liabilities:
Sugar processing costs 21,569 25,538
Employee benefits 5,428 9,710
Interest 1,658 1,064
Other 4,662 4,323
-------- --------
33,317 40,635
-------- --------
$182,072 $183,551
======== ========
Note 7 -Income taxes:
Years ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Expected tax expense, at federal statutory
income tax rate of 35% $ 7,717 $ 4,801 $ 5,334
State income taxes, net 726 170 247
Other, net (284) (155) (350)
------- -------- --------
$ 8,159 $ 4,816 $ 5,231
======= ======== ========
Provision for income taxes:
Currently payable:
Federal $ 8,236 $ 3,928 $ 5,107
State 1,340 462 702
------- -------- --------
9,576 4,390 5,809
Deferred income taxes (benefit) (1,417) 426 (578)
------- -------- --------
$ 8,159 $ 4,816 $ 5,231
======= ======== ========
December 31,
---------------------
1995 1996
---- ----
(In thousands)
Components of the net deferred tax benefit (liability):
Tax effect of temporary differences relating to:
Inventories $ (7,219) $ (7,163)
Property and equipment (10,302) (10,594)
Accrued OPEB cost 7,328 7,514
Accrued liabilities and other 3,548 4,176
-------- --------
Net liability $ (6,645) $ (6,067)
======== ========
Net balance comprised of:
Gross deferred tax assets $ 10,876 $ 11,690
Gross deferred tax liabilities (17,521) (17,757)
-------- --------
Net liability $ (6,645) $ (6,067)
======== ========
Current liability $ (4,010) $ (2,212)
Noncurrent liability (2,635) (3,855)
-------- --------
$ (6,645) $ (6,067)
======== ========
Note 8 -Accounts and notes receivable:
December 31,
--------------------
1995 1996
---- ----
(In thousands)
Accounts receivable $43,212 $37,286
Notes receivable from sugarbeet growers 1,161 651
Allowance for doubtful accounts (133) (89)
------- -------
44,240 37,848
Receivable from affiliates 621 778
------- -------
$44,861 $38,626
======= =======
Note 9 -Employee benefit plans:
Defined contribution plan. Substantially all of the Company's full time
employees are eligible to participate in a contributory savings plan with
partial matching Company contributions. Defined contribution plan expense was
$625,000 in 1994, $583,000 in 1995 and $588,000 in 1996.
Company-sponsored defined benefit pension plans. The Company maintains
defined benefit pension plans covering substantially all full-time employees.
Benefits are based on years of service and average compensation and the related
expenses are based on independent actuarial valuations. The Company's funding
policy is to contribute amounts equal to or exceeding the amounts required by
the funding requirements of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). The plans' assets at December 31, 1995 and 1996 consist
principally of units in a combined investment fund for employee benefit plans
sponsored by Valhi and its affiliates.
The rates used in determining the actuarial present value of the projected
benefit obligations were (i) discount rate - 7.5%, (ii) expected long-term rate
of return on assets - 10% and (iii) increase in future compensation levels - 4%
to 4.5%. Variances from actuarially assumed rates will result in increases or
decreases in pension liabilities, pension expense and funding requirements in
future periods. A one percentage point decrease in the discount rate would
increase the actuarial present value of the accumulated benefit obligations at
December 31, 1996 by approximately $4.0 million.
December 31,
---------------------
1995 1996
---- ----
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits obligations $22,079 $25,559
Nonvested benefits 3,667 3,879
------- -------
Accumulated benefit obligations 25,746 29,438
Effect of projected future salary increases 8,805 10,352
------- -------
Projected benefit obligations ("PBO") 34,551 39,790
Plan assets at fair value 30,686 38,187
------- -------
Plan assets less than PBO (3,865) (1,603)
Unrecognized net loss from experience different from
actuarial assumptions 5,565 3,180
Unrecognized prior service cost 269 223
Unrecognized net obligations being amortized over
15 years
535 428
------- -------
Net pension asset $ 2,504 $ 2,228
======= =======
Years ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits earned $ 1,862 $ 1,612 $ 2,149
Interest cost on PBO 1,996 2,249 2,663
Actual loss (return) on plan assets 615 (4,734) (6,407)
Net amortization and deferral (2,625) 2,467 3,728
------- ------- -------
$ 1,848 $ 1,594 $ 2,133
======= ======= =======
Postretirement benefits other than pensions. The Company currently
provides certain life insurance and health care benefits to eligible retirees.
Substantially all retirees contribute to the cost of their benefits. Certain
current and all future retirees either cease to be eligible for health care
benefits at age 65 or are thereafter eligible only for limited benefits.
The rates used in determining the actuarial present value of the
accumulated OPEB obligations were (i) discount rate - 7.5%, (ii) rate of annual
increases in future compensation levels - 4% to 5% in 1996 (4% to 4.5% in 1995)
and (iii) rate of increase in future health care costs - 10.8% for 1997,
gradually declining to approximately 5.8% in 2017 and thereafter. If the health
care cost trend rate was increased by one percentage point for each year, OPEB
expense would have increased approximately $187,000 in 1996, and the actuarial
present value of accumulated OPEB obligations at December 31, 1996 would have
increased approximately $1.6 million. In addition, a one percentage point
decrease in the discount rate would increase the actuarial present value of the
accumulated OPEB obligations at December 31, 1996 by approximately $1.6 million.
December 31,
-----------------
1995 1996
---- ----
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $ 7,104 $ 6,625
Other fully eligible active plan participants 3,653 3,744
Other active plan participants 5,765 6,025
------- -------
16,522 16,394
Unrecognized net gain from experience different
from actuarial assumptions 2,268 2,874
------- -------
Total accrued OPEB cost 18,790 19,268
Less current portion 937 949
------- -------
Noncurrent accrued OPEB cost $17,853 $18,319
======= =======
Years ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Net periodic OPEB cost:
Service cost $ 475 $ 447 $ 539
Interest cost 1,097 1,171 1,137
Net amortization and deferral (110) (181) (121)
------ ------ ------
$1,462 $1,437 $1,555
====== ====== ======
Multiemployer pension plans. A small minority of employees are covered by
union-sponsored, collectively-bargained multiemployer defined benefit pension
plans. Contributions to multiemployer plans are based upon collective
bargaining agreements and were $47,000 in 1994, $55,000 in 1995 and $56,000 in
1996. The multiemployer plans' administrators have estimated that the Company's
share of the unfunded benefit obligation of such plans was insignificant at
December 31, 1995 (the most recent information available to the Company).
Note 10 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See
Note 1. 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.
Loans are made between the Company and Valhi with interest at rates related
to the Company's other credit arrangements. Such loans reprice with changes in
market interest rates and book value is deemed to approximate fair value.
Interest expense on loans from Valhi was $93,000 in 1994, $417,000 in 1995 and
$17,000 in 1996.
Under the terms of an Intercorporate Service Agreement with Valhi, Valhi
performs certain management, financial and administrative services for the
Company on a fee basis. Fees pursuant to this agreement were $284,000 in 1994,
$260,000 in 1995 and $220,000 in 1996.
Certain employees of the Company have been awarded shares of restricted
Valhi common stock and/or granted options to purchase Valhi common stock under
the terms of Valhi's stock option plans. The Company will pay Valhi the
aggregate difference between the option price and the market value of Valhi's
common stock on the exercise date of such options. For financial reporting
purposes, the Company accounts for the related expense (credit) of $269,000 in
1994, $(68,000) in 1995 and $5,000 in 1996 in a manner similar to accounting for
stock appreciation rights. At December 31, 1996, employees of the Company held
options to purchase 272,000 Valhi shares at prices ranging from $4.76 to $14.66
per share (149,000 shares at prices less than the December 31, 1996 quoted
market price of $6.375 per share).
Restricted stock is forfeitable unless certain periods of employment are
completed. The Company pays Valhi the market value of the restricted shares on
the dates the restrictions expire, and accrues the related expense over the
restriction period. Expense related to restricted stock was $191,000 in 1994,
$58,000 in 1995 and $19,000 in 1996. At December 31, 1996, there was no
restricted stock held for employees of the Company.
Effective December 1, 1995, Amalgamated entered into a renewable, one-year
agreement to provide administrative services to Amalgamated Research for an
annual fee of $288,000 and a ten-year Service and Sharing Agreement whereby
Amalgamated Research will provide certain research, laboratory and quality
control services to Amalgamated for a fee of $1,659,000 per year to be adjusted
annually based on a composite index. The Sharing Agreement also (i) grants
Amalgamated a non-exclusive, perpetual royalty-free license to use currently
existing or hereafter developed technology applicable to sugar operations and
(ii) provides for certain royalties to Amalgamated from future sales or licenses
of Amalgamated Research's technology. Aggregate net expense under these
agreements was $215,000 in 1995 and $1,532,000 in 1996. See Note 13.
Amalgamated also leases its corporate office facility from Amalgamated
Research for annual rentals of $256,000 through the year 2000. The office lease
can be extended for up to ten additional years at the then prevailing market
rental rates.
Charges (revenues) from other related parties for services provided in the
ordinary course of business aggregated $73,000 in 1994, ($48,000) in 1995 and
$101,000 in 1996.
Note 11 - Commitments and contingencies:
Legal proceedings. In November 1992, a complaint was filed in the United
States District Court for the District of Utah against Valhi, Amalgamated and
the Amalgamated Retirement Plan Committee (American Federation of Grain Millers
International, et al. v. Valhi, Inc. et al., No. 29-NC-129J). The complaint, a
purported class action on behalf of certain current and retired hourly employees
of Amalgamated, alleges, among other things, that the defendants breached their
fiduciary duties under ERISA by amending certain provisions of a retirement plan
for hourly employees maintained by Amalgamated to permit the reversion of excess
plan assets to Amalgamated in 1986. The complaint seeks a variety of remedies,
including, among other things, orders requiring a return of all reverted funds
(alleged to be in excess of $8 million) and any profits earned thereon, a
distribution of such funds to the plan participants, retirees and their
beneficiaries and enhancement of the benefits under the plan, and an award of
costs and expenses, including attorney fees. In January 1996, the court granted
the Company's motion for summary judgment with respect to certain counts and
denied the Company's motion for summary judgment with respect to other counts.
The court also granted plaintiffs permission to amend their complaint to include
new allegations. The plaintiffs subsequently amended their complaint and, in
June 1996, the Company made a motion for summary judgment on the new
allegations. In September 1996, the court heard the defendants' motion. The
parties are awaiting a decision on the motion. See Note 13.
The Company is also involved in routine legal proceedings incidental to its
normal business activities and environmental related matters. The Company
believes the disposition of all such proceedings, individually or in the
aggregate, including Grain Millers, should not have a material adverse effect on
the Company's consolidated financial condition, results of operations or
liquidity.
Concentration of credit risks. The Company sells sugar primarily in the
North Central and Intermountain Northwest regions of the United States. The
Company does not believe it is dependent upon one or a few customers; however,
major food processors are substantial customers and represent an important
portion of sales. The Company's ten largest customers account for approximately
one-third of sales with the largest single customer accounting for approximately
4% to 5% of sales in each of the past three years. The ten major customers
accounted for 41% of accounts receivable at December 31, 1996 (1995 - 29%).
At December 31, 1995 and 1996, substantially all of the Company's cash and
cash equivalents was on deposit with three U.S. banks.
Capital expenditures. At December 31, 1996, the estimated cost to complete
approved capital projects in process was approximately $650,000.
Note 12 - Other items:
The fair value of all financial instruments is deemed to approximate
carrying value as they reprice with changes in market interest rates and/or have
short terms to maturity.
Research and development costs, expensed as incurred, were $487,000 in
1994, $823,000 in 1995 and $1,517,000 in 1996. Advertising costs, expensed as
incurred, were $306,000 in 1994, $365,000 in 1995 and $125,000 in 1996.
Rent expense under operating leases, principally for facilities, was
$269,000 in 1994, $350,000 in 1995 and $603,000 in 1996. At December 31, 1996,
commitments for future minimum rentals under noncancellable operating leases
consist principally of the office lease with Amalgamated Research. See Note 10.
Note 13 - Subsequent events:
On January 3, 1997, Amalgamated completed the transfer of control of
substantially all of its operations to Snake River Sugar Company, an Oregon
agricultural cooperative formed by the farmers in Amalgamated's areas of
operations. Pursuant to the transaction, Amalgamated contributed substantially
all of its net assets to the Amalgamated Sugar Company LLC (the `LLC''), a
limited liability company controlled by Snake River, on a tax-deferred basis, in
exchange for a non-voting ownership interest in the LLC. Also, as part of the
transaction, Snake River loaned Valhi $250 million and Valhi provided certain
debt financing for the transaction both to Snake River and a related entity.
Valhi's loans from Snake River are collateralized by Amalgamated's interest in
the LLC.
Amalgamated may, at its option, require the LLC to redeem its interest in
the LLC beginning in January 2002, and the LLC has the right to redeem
Amalgamated's interest beginning in January 2027. In addition, beginning in
January 2002 Amalgamated has the right to require Snake River to purchase its
interest in the LLC. The redemption/purchase price is generally $250 million
plus the amount of any deferrals of cash distributions from the LLC discussed
below. In the event Amalgamated either requires the LLC to redeem its LLC
interest or requires Snake River to purchase its LLC interest, Snake River has
the right to accelerate the maturity and call the loans made to Valhi in
connection with the transaction. If Amalgamated requires the LLC to redeem its
LLC interest, then Snake River is required, under the terms of the LLC Company
Agreement, to contribute to the LLC the cash received from calling the Valhi
loans.
The LLC Company Agreement provides that, among other things, Amalgamated is
entitled to receive certain distributions of Distributable Cash, as defined,
from the LLC. Amalgamated and Snake River share in any Distributable Cash up to
an aggregate of $26.7 million per year, with 95% going to Amalgamated and 5%
going to Snake River. This $26.7 million distribution is referred to as the
LLC's `base distribution.'' Amalgamated generally is entitled to receive 5%
(10% after 2002) of any Distributable Cash above this base distribution amount,
with additional Distributable Cash potentially being received through 2002 if
certain Distributable Cash levels are reached. The Company's share of any
Distributable Cash above the base distribution will be deferred and instead paid
to Snake River until Snake River's loans from Valhi are completely repaid.
As part of the formation of the LLC, the LLC terminated the existing $80
million Sugar Credit Agreement and replaced it with a new $100 million facility
collateralized by the LLC's working capital assets and one of the LLC's four
processing facilities. In addition, the LLC prepaid the remaining $16 million
outstanding balance of the bank term loan, primarily with the $14 million cash
contribution to the LLC by Snake River for its voting interest in the LLC.
The Company's net assets contributed to the LLC include the rights and
obligations associated with the agreements between the Company and Amalgamated
Research discussed in Note 10. However, the LLC did not assume any obligation
arising out of the American Federation of Grain Millers International case
discussed in Note 11.
In December 1996, Amalgamated declared, and in January 1997 paid, $13
million in pre-closing cash dividends to Valhi.