SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002 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
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
Number of shares of common stock outstanding on October 31, 2002: 115,118,917
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2001 and September 30, 2002 3
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2001 and 2002 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 2001 and 2002 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2002 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2002 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 23
Item 4. Controls and Procedures 46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 48
Item 6. Exhibits and Reports on Form 8-K. 49
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2001 2002
Current assets:
Cash and cash equivalents .................... $ 154,413 $ 189,690
Restricted cash equivalents .................. 63,257 52,832
Marketable securities ........................ 18,465 17,795
Accounts and other receivables ............... 162,310 193,057
Refundable income taxes ...................... 3,564 2,404
Receivable from affiliates ................... 844 7,760
Inventories .................................. 262,733 202,596
Prepaid expenses ............................. 11,252 19,232
Deferred income taxes ........................ 12,999 14,039
---------- ----------
Total current assets ..................... 689,837 699,405
---------- ----------
Other assets:
Marketable securities ........................ 186,549 177,562
Investment in affiliates ..................... 211,115 172,060
Receivable from affiliate .................... 20,000 20,000
Loans and other receivables .................. 105,940 109,927
Mining properties ............................ 12,410 13,562
Prepaid pension costs ........................ 18,411 21,991
Unrecognized net pension obligations ......... 5,901 5,901
Goodwill ..................................... 349,058 359,961
Other intangible assets ...................... 2,440 4,653
Deferred income taxes ........................ 3,818 5,237
Other ........................................ 30,109 35,048
--------- ----------
Total other assets ....................... 945,751 925,902
--------- ----------
Property and equipment:
Land ......................................... 28,721 30,206
Buildings .................................... 163,995 174,081
Equipment .................................... 569,001 634,810
Construction in progress ..................... 9,992 15,655
771,709 854,752
Less accumulated depreciation ................ 253,450 313,079
---------- ----------
Net property and equipment ............... 518,259 541,673
---------- ----------
$2,153,847 $2,166,980
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2001 2002
Current liabilities:
Notes payable .............................. $ 46,201 $ --
Current maturities of long-term debt ....... 64,972 35,541
Accounts payable ........................... 114,474 73,271
Accrued liabilities ........................ 166,488 166,823
Payable to affiliates ...................... 38,148 32,034
Income taxes ............................... 9,578 9,789
Deferred income taxes ...................... 1,821 2,223
----------- -----------
Total current liabilities .............. 441,682 319,681
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 497,215 621,361
Accrued OPEB costs ......................... 50,146 46,996
Accrued pension costs ...................... 33,823 32,321
Accrued environmental costs ................ 54,392 53,453
Deferred income taxes ...................... 268,468 280,729
Other ...................................... 32,642 31,002
----------- -----------
Total noncurrent liabilities ........... 936,686 1,065,862
----------- -----------
Minority interest ............................ 153,151 148,586
----------- -----------
Stockholders' equity:
Common stock ............................... 1,258 1,262
Additional paid-in capital ................. 44,982 47,657
Retained earnings .......................... 656,408 631,063
Accumulated other comprehensive income:
Marketable securities .................... 86,654 86,469
Currency translation ..................... (79,404) (43,817)
Pension liabilities ...................... (11,921) (14,134)
Treasury stock ............................. (75,649) (75,649)
----------- ------------
Total stockholders' equity ............. 622,328 632,851
----------- ------------
$ 2,153,847 $ 2,166,980
=========== ============
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
Revenues and other income:
Net sales ........................... $ 262,488 $ 284,110 $827,593 $ 816,908
Other, net .......................... 16,011 12,340 123,742 44,073
--------- --------- -------- ---------
278,499 296,450 951,335 860,981
--------- --------- -------- ---------
Costs and expenses:
Cost of sales ....................... 193,252 224,151 595,953 648,197
Selling, general and administrative . 46,236 50,485 144,186 141,200
Interest ............................ 14,910 15,033 47,686 45,396
--------- --------- -------- ---------
254,398 289,669 787,825 834,793
--------- --------- -------- ---------
24,101 6,781 163,510 26,188
Equity in earnings of:
Titanium Metals Corporation ("TIMET") 3,170 (17,153) 16,172 (31,710)
Other ............................... (76) (14) 446 298
--------- --------- -------- ---------
Income (loss) before income taxes . 27,195 (10,386) 180,128 (5,224)
Provision for income taxes (benefit) .. 11,246 (2,101) 66,921 (1,707)
Minority interest in after-tax
earnings (losses) .................... 5,639 (1,172) 23,668 935
--------- --------- -------- ---------
Net income (loss) ................. $ 10,310 $ (7,113) $ 89,539 $ (4,452)
========= ========= ======== =========
Earnings per share:
Basic ............................... $ .09 $ (.06) $ .78 $ (.04)
========= ========= ======== =========
Diluted ............................. $ .09 $ (.06) $ .77 $ (.04)
========= ========= ======== =========
Cash dividends per share .............. $ .06 $ .06 $ .18 $ .18
========= ========= ======== =========
Shares used in the calculation of per
share amounts:
Basic earnings per common share ..... 115,201 115,583 115,177 115,361
Dilutive impact of outstanding
stock options ...................... 934 -- 903 --
------- ------- ------- -------
Diluted earnings per share .......... 116,135 115,583 116,080 115,361
======= ======= ======= =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
Net income (loss) .................................... $ 89,539 $ (4,452)
-------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized gains (losses) arising during
the period ...................................... (8,028) (185)
Less reclassification for gains included in
net income ...................................... (33,887) --
-------- ---------
(41,915) (185)
Currency translation adjustment .................... (7,617) 35,587
Pension liabilities adjustment ..................... (332) (2,213)
-------- ---------
Total other comprehensive income (loss), net ..... (49,864) 33,189
-------- ---------
Comprehensive income ........................... $ 39,675 $ 28,737
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
Cash flows from operating activities:
Net income (loss) ....................................... $ 89,539 $ (4,452)
Depreciation, depletion and amortization ................ 56,054 46,075
Legal settlement gains, net ............................. (10,307) --
Insurance gain .......................................... (4,551) --
Securities transaction gains, net ....................... (51,874) (1,915)
Proceeds from disposal of marketable securities (trading) -- 8,659
Noncash interest expense ................................ 4,893 3,057
Deferred income taxes ................................... 16,257 463
Minority interest ....................................... 23,668 935
Other, net .............................................. (1,380) (9,549)
Equity in:
TIMET ................................................. (16,172) 31,710
Other ................................................. (446) (298)
Distributions from:
Manufacturing joint venture ........................... 5,513 6,350
Other ................................................. 1,300 361
-------- --------
112,494 81,396
Change in assets and liabilities:
Accounts and other receivables ........................ (10,181) (24,414)
Inventories ........................................... 15,985 73,039
Accounts payable and accrued liabilities .............. (8,970) (44,490)
Accounts with affiliates .............................. 11,012 (9,056)
Income taxes .......................................... 12,241 1,227
Other, net ............................................ (13,768) (6,389)
-------- --------
Net cash provided by operating activities ......... 118,813 71,313
-------- --------
Cash flows from investing activities:
Capital expenditures .................................... (45,248) (28,384)
Purchases of:
Business unit ......................................... -- (9,149)
NL common stock ....................................... (9,853) (10,559)
CompX common stock .................................... (2,650) --
Tremont common stock .................................. (198) --
Proceeds from disposal of marketable securities
(available-for-sale) ................................... 16,802 --
Loans to affiliate ...................................... (20,000) --
Property damaged by fire:
Insurance proceeds .................................... 10,500 --
Other, net ............................................ (2,100) --
Change in restricted cash equivalents, net .............. 838 3,045
Other, net .............................................. (239) 2,472
-------- --------
Net cash used by investing activities ............. (52,148) (42,575)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
Cash flows from financing activities:
Indebtedness:
Borrowings ....................................... $ 46,356 $ 331,800
Principal payments ............................... (101,671) (291,254)
Deferred financing costs paid .................... -- (10,590)
Loans from affiliate:
Loans ............................................ 76,666 10,914
Repayments ....................................... (73,731) (12,825)
Valhi dividends paid ............................... (20,863) (20,893)
Distributions to minority interest ................. (7,950) (7,275)
Other, net ......................................... 1,217 3,154
-------- --------
Net cash provided (used) by financing
activities .................................... (79,976) 3,031
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (13,311) 31,769
Currency translation ............................... 232 3,312
Business unit acquired ............................. -- 196
Cash and equivalents at beginning of period .......... 135,017 154,413
-------- --------
Cash and equivalents at end of period ................ $ 121,938 $ 189,690
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 36,770 $ 40,754
Income taxes, net ................................ 26,880 10,156
Business unit acquired - net assets consolidated:
Cash and cash equivalents ........................ $ -- $ 196
Restricted cash .................................. -- 2,685
Goodwill and other intangible assets ............. -- 9,007
Other noncash assets ............................. -- 1,259
Liabilities ...................................... -- (3,998)
-------- --------
Cash paid ........................................ $ -- $ 9,149
========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2002
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
Balance at December 31, 2001 $1,258 $44,982 $ 656,408 $ 86,654 $(79,404) $(11,921) $(75,649) $ 622,328
Net loss .................... -- -- (4,452) -- -- -- -- (4,452)
Dividends ................... -- -- (20,893) -- -- -- -- (20,893)
Other comprehensive income
(loss), net ................ -- -- -- (185) 35,587 (2,213) -- 33,189
Other, net .................. 4 2,675 -- -- -- -- -- 2,679
------ ------- --------- -------- -------- -------- -------- ---------
Balance at September 30, 2002 $1,262 $47,657 $ 631,063 $ 86,469 $(43,817) $(14,134) $(75,649) $ 632,851
====== ======= ========= ======== ======== ======== ========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2002, and the consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the interim periods ended September 30, 2001 and 2002, have been
prepared by the Company, without audit, in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the
"2001 Annual Report").
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 2001 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
93% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board of Valhi and Contran, may
be deemed to control such companies.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002, and
adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, effective April 1, 2002.
See Note 14.
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity September 30, 2002
Chemicals NL Industries, Inc. 62%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group is a holding company which owns 80% of Tremont Corporation
("Tremont") at September 30, 2002. NL owns the other 20% of Tremont Group.
Tremont is also a holding company and owns an additional 21% of NL and 39% of
Titanium Metals Corporation at September 30, 2002.
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions)
Net sales:
Chemicals ............................ $207.0 $234.0 $653.2 $663.3
Component products ................... 51.5 48.8 164.4 148.4
Waste management ..................... 4.0 1.3 10.0 5.2
------ ------ ------ ------
Total net sales .................... $262.5 $284.1 $827.6 $816.9
====== ====== ====== ======
Operating income:
Chemicals ............................ $ 29.9 $ 26.5 $114.1 $ 67.5
Component products ................... 4.7 1.3 17.0 5.6
Waste management ..................... (3.1) (2.5) (10.7) (6.6)
------ ------ ------ ------
Total operating income ............. 31.5 25.3 120.4 66.5
General corporate items:
Legal settlements gains, net ......... -- -- 30.7 2.4
Securities transaction
gains, net .......................... 1.1 -- 51.9 1.9
Interest and dividend income ......... 9.3 9.0 29.0 25.9
Foreign currency transaction gain
-- -- -- 6.3
Gain on disposal of fixed assets
-- -- -- 1.6
Insurance gain ....................... 3.8 -- 4.5 --
Expenses, net ........................ (6.7) (12.5) (25.3) (33.0)
Interest expense ....................... (14.9) (15.0) (47.7) (45.4)
------ ------ ------ ------
24.1 6.8 163.5 26.2
Equity in:
TIMET ................................ 3.2 (17.2) 16.2 (31.7)
Other ................................ (.1) -- .4 .3
------ ------ ------ ------
Income (loss) before
income taxes ...................... $ 27.2 $(10.4) $180.1 $ (5.2)
====== ====== ====== ======
During the first nine months of 2002, NL purchased shares of its common
stock in market transactions for an aggregate of $10.6 million, increasing
Valhi's ownership of NL to 62%. As previously reported in the 2001 Annual
Report, in January 2002 NL purchased the insurance brokerage operations
conducted by EWI Re, Inc. and EWI Re, Ltd. for an aggregate cash purchase price
of $9 million. The pro forma impact assuming the acquisition of EWI had occurred
as of January 1, 2001 is not material.
In July 2002, Valhi proposed a merger of Valhi and Tremont pursuant to
which stockholders of Tremont (including NL, to the extent of NL's ownership
interest in the Tremont shares held by Tremont Group), other than Valhi, would
receive shares of Valhi common stock for each Tremont share held. Tremont formed
a special committee of its board of directors consisting of members unrelated to
Valhi to review the proposal. The special committee retained their own
independent financial and legal advisors. After performing due diligence and
evaluating the merits of Valhi's proposal, the special committee and their
advisors negotiated the financial and other terms of a definitive merger
agreement with Valhi. In November 2002, Tremont, based upon the recommendation
of their special committee, and Valhi reached an agreement on the terms of the
definitive merger agreement in which, among other things, the Tremont
stockholders referred to above would receive 3.4 shares of Valhi common stock
for each share of Tremont common stock held in a tax-free exchange. The
transaction has been approved by the board of directors of both Valhi and
Tremont. The financial advisors to the special committee have issued an opinion
to the special committee stating that the exchange ratio is fair, from a
financial point of view, to Tremont stockholders other than Valhi and its
affiliates. The transaction is subject to customary closing conditions and will
require approval by a majority of the outstanding shares of Tremont. Tremont
Group has indicated that it intends to vote its shares in favor of the merger.
Valhi will file a registration statement with the SEC in connection with the
transaction. The date of the Tremont stockholders meeting will be established as
soon as practical following completion of the filing with the SEC.
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET (NYSE: TIE)
each file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended.
Note 3 - Marketable securities:
December 31, September 30,
2001 2002
(In thousands)
Current assets:
Halliburton Company common stock
(available-for-sale) .............................. $ 8,138 $ 8,020
Halliburton Company common stock (trading) ......... 6,744 --
Restricted debt securities (available-for-sale) .... 3,583 9,775
-------- --------
$ 18,465 $ 17,795
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .................. $170,000 $170,000
Restricted debt securities ......................... 16,121 7,204
Other common stocks ................................ 428 358
-------- --------
$186,549 $177,562
======== ========
At September 30, 2002, Valhi held approximately 621,000 shares of
Halliburton common stock (aggregate cost of $5 million) with a quoted market
price of $12.91 per share, or an aggregate market value of $8 million. Valhi's
LYONs debt obligations are exchangeable at any time, at the option of the LYON
holder, for such shares of Halliburton common stock, and the carrying value of
such Halliburton shares is limited to the accreted LYONs obligations. At
September 30, 2002, such Halliburton shares are held in escrow for the benefit
of the holders of the LYONs. Valhi receives the regular quarterly dividend on
all of the Halliburton shares held, including shares held in escrow. In October
2002, following the redemption of substantially all of the remaining LYONs,
substantially all of such Halliburton shares were released to the Company from
escrow and were sold in market transactions for aggregate proceeds of $9.5
million. During the first nine months of 2002, the Company sold an additional
515,000 Halliburton shares classified as trading securities in market
transactions for aggregate proceeds of $8.7 million. See Notes 9 and 12.
See the 2001 Annual Report for a discussion of the Company's investment in
The Amalgamated Sugar Company LLC. The aggregate cost of the debt securities,
restricted pursuant to the terms of one of NL's environmental special purpose
trusts discussed in the 2001 Annual Report, approximates their net carrying
value at September 30, 2002. The aggregate cost of other noncurrent
available-for-sale securities is nominal at September 30, 2002.
Note 4 - Inventories:
December 31, September 30,
2001 2002
(In thousands)
Raw materials:
Chemicals .................................. $ 79,162 $ 33,835
Component products ......................... 9,677 7,206
-------- --------
88,839 41,041
-------- --------
In process products:
Chemicals .................................. 9,675 11,304
Component products ......................... 12,619 14,242
-------- --------
22,294 25,546
-------- --------
Finished products:
Chemicals .................................. 117,976 97,563
Component products ......................... 8,494 11,892
-------- --------
126,470 109,455
-------- --------
Supplies (primarily chemicals) ............... 25,130 26,554
-------- --------
$262,733 $202,596
======== ========
Note 5 - Accrued liabilities:
December 31, September 30,
2001 2002
(In thousands)
Current:
Employee benefits .......................... $ 39,974 $ 41,841
Environmental costs ........................ 64,165 56,066
Interest ................................... 5,162 6,720
Deferred income ............................ 9,479 9,792
Other ...................................... 47,708 52,404
-------- --------
$166,488 $166,823
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 19,182 $ 18,263
Employee benefits .......................... 8,616 8,899
Deferred income ............................ 1,333 1,885
Other ...................................... 3,511 1,955
-------- --------
$ 32,642 $ 31,002
======== ========
Note 6 - Accounts and other receivables:
December 31, September 30,
2001 2002
(In thousands)
Accounts receivable .......................... $ 166,126 $ 197,095
Notes receivable ............................. 2,484 2,438
Accrued interest ............................. 26 106
Allowance for doubtful accounts .............. (6,326) (6,582)
--------- ---------
$ 162,310 $ 193,057
========= =========
Note 7 - Other assets:
December 31, September 30,
2001 2002
(In thousands)
Investment in affiliates:
TiO2 manufacturing joint venture ............. $138,428 $132,078
TIMET ........................................ 60,272 27,630
Other ........................................ 12,415 12,352
-------- --------
$211,115 $172,060
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal .................................. $ 80,000 $ 80,000
Interest ................................... 22,718 26,612
Other ........................................ 5,706 5,753
-------- --------
108,424 112,365
Less current portion ......................... 2,484 2,438
-------- --------
Noncurrent portion ........................... $105,940 $109,927
======== ========
Other noncurrent assets:
Deferred financing costs ..................... $ 1,120 $ 10,268
Restricted cash equivalents .................. 4,713 5,014
Waste disposal operating permits ............. 2,527 1,947
Refundable insurance deposits ................ 1,609 1,864
Other ........................................ 20,140 15,955
-------- --------
$ 30,109 $ 35,048
======== ========
The Company's equity in losses of TIMET in the third quarter of 2002
includes a $15.7 million impairment provision for an other than temporary
decline in the value of Tremont's investment in TIMET. In determining the amount
of the impairment charge, Tremont considered, among other things, recent ranges
of TIMET's NYSE market price and current estimates of TIMET's future operating
losses that would further reduce Tremont's carrying value of its investment in
TIMET as it records additional equity in losses of TIMET. At September 30, 2002,
Tremont held 12.3 million shares of TIMET common stock with a quoted market
price of $1.66 per share, or an aggregate of $20 million. At September 30, 2002,
TIMET reported total assets of $582.4 million and stockholders' equity of $205.6
million. TIMET's total assets at September 30, 2002 include current assets of
$278.8 million, property and equipment of $258.6 million and other intangible
assets of $8.4 million. TIMET's total liabilities at September 30, 2002 include
current liabilities of $111.3 million, long-term debt of $10.5 million, accrued
OPEB and pension costs of $35.9 million and convertible preferred securities of
$201.2 million. During the first nine months of 2002, TIMET reported net sales
of $281.5 million, an operating loss of $16.1 million and a loss before
cumulative effect of change in accounting principle of $57.6 million (first nine
months of 2001 - net sales of $370.5 million, operating income of $56.8 million
and net income of $30.3 million).
Note 8 - Goodwill and other intangible assets:
Goodwill.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 2001 ................ $307.2 $ 41.9 $349.1
Goodwill acquired during the period ......... 9.9 -- 9.9
Changes in foreign exchange rates ........... -- 1.0 1.0
------ ------ ------
Balance at September 30, 2002 ............... $317.1 $ 42.9 $360.0
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 14), the
goodwill related to the chemicals operating segment was assigned to the
reporting unit (as that term is defined in SFAS No. 142) consisting of NL in
total, and the goodwill related to the component products operating segment was
assigned to two reporting units within that operating segment, one consisting of
CompX's security products operations and the other consisting of CompX's
ergonomic and slide products operations.
Other intangible assets.
December 31, September 30,
2001 2002
(In millions)
Patents:
Cost ............................................. $3.4 $3.5
Less accumulated amortization .................... 1.0 1.2
---- ----
Net ............................................ 2.4 2.3
---- ----
Customer list:
Cost ............................................. -- 2.6
Less accumulated amortization .................... -- .3
---- ----
Net ............................................ -- 2.3
---- ----
$2.4 $4.6
==== ====
The patent intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed in Note 2. The patent intangible asset was, and will continue to be
after adoption of SFAS No. 142 effective January 1, 2002, amortized by the
straight-line method over the lives of the patents (approximately 10.5 years
remaining at September 30, 2002), with no assumed residual value at the end of
the life of the patents. The customer list intangible asset will be amortized by
the straight-line method over the estimated seven-year life of such intangible
asset (approximately 6.3 years remaining at September 30, 2002), with no assumed
residual value at the end of the life of the intangible asset. Amortization
expense of intangible assets was approximately $180,000 and $460,000 in the
first nine months of 2001 and 2002, respectively, and amortization expense of
intangible assets is expected to be approximately $620,000 in each of calendar
2002 through 2006.
Note 9 - Notes payable and long-term debt:
December 31, September 30,
2001 2002
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements ......... $ 46,201 $ --
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ...................... $250,000 $250,000
LYONs .......................................... 25,472 27,256
Bank credit facility ........................... 35,000 35,000
Other .......................................... 2,880 2,880
-------- --------
313,352 315,136
-------- --------
Subsidiaries:
NL Senior Secured Notes ........................ 194,000 --
Kronos International:
Senior Secured Notes ......................... -- 278,673
Bank credit facility ......................... -- 26,993
CompX bank credit facility ..................... 49,000 31,000
Valcor Senior Notes ............................ 2,431 2,431
Other .......................................... 3,404 2,669
-------- --------
248,835 341,766
-------- --------
562,187 656,902
Less current maturities .......................... 64,972 35,541
-------- --------
$497,215 $621,361
======== ========
In June 2002, Kronos International ("KII"), which conducts NL's TiO2
operations in Europe, issued euro 285 million principal amount ($280 million
when issued) of its 8.875% Senior Secured Notes due 2009. The KII Senior Secured
Notes are collateralized by a pledge of the stock or other ownership interests
of KII's first-tier operating subsidiaries. The KII Senior Secured Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII 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 KII Senior Secured Notes are redeemable, at KII's option, on or
after December 30, 2005 at redemption prices ranging from 104.437% of the
principal amount, declining to 100% on or after December 30, 2008. In addition,
on or before June 30, 2005, KII may redeem up to 35% of its Senior Secured Notes
with the net proceeds of a qualified public equity offering at 108.875% of the
principal amount. In the event of a change of control of KII, as defined, KII
would be required to make an offer to purchase its Senior Secured Notes at 101%
of the principal amount. KII would also be required to make an offer to purchase
a specified portion of its Senior Secured Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway entered into a new three-year euro 80 million revolving bank credit
facility. Borrowings under this facility were used in part to repay and
terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may be
demoninated in euros, Norwegian kroner or U.S. dollars, and bear interest at the
applicable interbank market rate plus 1.75%. The facility also provides for the
issuance of letters of credit up to euro 5 million. The new KII bank credit
agreement is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The new KII bank credit agreement contains certain restrictive
covenants which, among other things, restricts the ability of the borrowers 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.
In March 2002, NL redeemed $25 million principal amount of the NL Senior
Secured Notes at par value, using available cash on hand. In addition, NL used a
portion of the net proceeds from the issuance of the KII Senior Secured Notes to
redeem in full the remaining $169 million principal amount of the NL Senior
Secured Notes. In accordance with the terms of the indenture governing the NL
Senior Secured Notes, on June 28, 2002, NL irrevocably placed on deposit with
the NL Senior Secured Note trustee funds in an amount sufficient to pay in full
the redemption price plus all accrued and unpaid interest due on the July 28,
2002 redemption date. Immediately thereafter, NL was released from its
obligations under such indenture, the indenture was discharged and all
collateral was released to NL. Because NL had been released as the primary
obligor under the indenture as of June 30, 2002, the NL Senior Secured Notes
were eliminated from the balance sheet as of that date along with the funds
placed on deposit with the trustee to effect the July 28, 2002 redemption. NL
recognized a loss on the early extinguishment of debt of approximately $2
million in the second quarter of 2002, consisting primarily of the interest on
the NL Senior Secured Notes for the period from July 1 to July 28, 2002. Such
loss is recognized as a component of interest expense.
In September 2002, certain of NL's U.S. subsidiaries entered into a new
three-year $50 million revolving credit facility (nil outstanding at September
30, 2002) collateralized by the accounts receivable, inventories and certain
fixed assets of the borrowers. Borrowings under this facility are limited to the
lesser of $45 million or a formula-determined amount based upon the accounts
receivable and inventories of the borrowers. Borrowings bear interest at either
the prime rate or rates based upon the eurodollar rate. The facility contains
certain restrictive covenants which, among other things, restricts the abilities
of the borrowers to incur debt, incur liens, pay dividends in certain
circumstances, sell assets or enter into mergers.
In October 2002, holders representing substantially all of the Company's
LYONs exercised their right to require the Company to redeem their LYONs for a
cash redemption price of $27.3 million. Funds to pay the redemption price were
provided by borrowings under Valhi's bank credit agreement, the maturity date of
which was extended to October 31, 2003 in November 2002. Accordingly, both the
LYONs and Valhi's revolving bank credit facility are classified as noncurrent
debt at September 30, 2002. Also in November 2002, the size of Valhi's bank
credit facility was reduced from $72.5 million to $70 million. In November 2002,
the Company called the remaining normal amount of LYONs for redemption in
December 2002.
Note 10 - Accounts with affiliates:
December 31, September 30,
2001 2002
(In thousands)
Current receivables from affiliates:
Income taxes receivable from Contran ............. $ -- $ 7,185
TIMET ............................................ 677 43
Other ............................................ 167 532
------- -------
$ 844 $ 7,760
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ...................... $20,000 $20,000
======= =======
Payables to affiliates:
Valhi demand loan from Contran ................... $24,574 $22,663
Income taxes payable to Contran .................. 6,410 --
Louisiana Pigment Company ........................ 6,362 8,377
Contran - trade items ............................ 501 932
TIMET ............................................ 286 --
Other, net ....................................... 15 62
------- -------
$38,148 $32,034
======= =======
Note 11 - Provision for income taxes (benefit):
Nine months ended
September 30,
2001 2002
(In millions)
Expected tax expense (benefit) .......................... $63.0 $(1.8)
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .......... 2.7 (.2)
Non-U.S. tax rates ...................................... (4.8) (1.3)
Change in NL's and Tremont's deferred income tax
valuation allowance, net ............................... (2.1) .9
No tax benefit for goodwill amortization ................ 4.4 --
U.S. state income taxes, net ............................ 2.7 .3
Other, net .............................................. 1.0 .4
----- -----
$66.9 $(1.7)
===== =====
Comprehensive provision for income taxes
(benefit) allocated to:
Net income (loss) ..................................... $66.9 $(1.7)
Other comprehensive income:
Marketable securities ............................... (22.5) (.2)
Currency translation ................................ (1.3) 2.7
Pension liabilities ................................. (.3) (1.5)
----- -----
$42.8 $ (.7)
===== =====
Note 12 - Other income:
Nine months ended
September 30,
2001 2002
(In thousands)
Securities earnings:
Dividends and interest ........................ $ 29,045 $25,866
Securities transaction gains, net ............. 51,874 1,915
-------- -------
80,919 27,781
Legal settlement gains, net ..................... 30,723 2,360
Noncompete agreement income ..................... 3,000 3,000
Currency transactions, net ...................... 543 4,583
Pension settlement gain ......................... -- 677
Insurance gain .................................. 4,551 --
Other, net ...................................... 4,006 5,672
-------- -------
$123,742 $44,073
======== =======
The securities transaction gains in 2002 are discussed in Note 3. The legal
settlement gains in 2002 relates to NL's settlement with certain additional
former insurance carriers from whom NL had been seeking reimbursement for legal
defense expenditures and indemnity coverage claims. The pension settlement gain
relates to a defined benefit plan previously sponsored by CompX in the
Netherlands. The net currency transaction gain in 2002 includes $6.3 million
related to the extinguishment of certain intercompany indebtedness of NL.
Note 13 - Minority interest:
December 31, September 30,
2001 2002
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 68,566 $ 67,946
Tremont Corporation ...................... 32,610 27,384
CompX International ...................... 44,767 44,944
Subsidiaries of NL ....................... 7,208 8,312
-------- --------
$153,151 $148,586
======== ========
Nine months ended
September 30,
2001 2002
(In thousands)
Minority interest in net earnings (losses):
NL Industries ............................. $15,562 $ 5,074
Tremont Corporation ....................... 4,500 (5,975)
CompX International ....................... 2,653 752
Subsidiaries of NL ........................ 953 1,084
------- -------
$23,668 $ 935
======= =======
As previously reported, all of Waste Control Specialists aggregate,
inception-to-date net losses have accrued to the Company for financial reporting
purposes, and all of Waste Control Specialists future net income or net losses
will also accrue to the Company until Waste Control Specialists reports positive
equity attributable to its other owner. Accordingly, no minority interest in
Waste Control Specialists' net assets or net earnings (losses) is reported at
September 30, 2002.
Note 14 - Accounting principles newly adopted in 2002:
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), is no longer
amortized on a periodic basis. Goodwill (other than equity method goodwill) is
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142; rather, the overall carrying amount of an equity method investee
will continue to be reviewed for impairment in accordance with existing GAAP.
There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 ceased to be periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.
As discussed in Note 8, the Company has assigned its goodwill to three
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of NL in total. Goodwill attributable to the component products operating
segment was assigned to two reporting units within that operating segment, one
consisting of CompX's security products operations and the other consisting of
CompX's ergonomic products and slide products operations. Under SFAS No. 142,
such goodwill will be deemed to not be impaired if the estimated fair value of
the applicable reporting unit exceeds the respective net carrying value of such
reporting unit, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL common stock, as adjusted for
an appropriate control premium. The Company will also use other appropriate
valuation techniques, such as discounted cash flows, to estimate the fair value
of the two CompX reporting units.
The Company completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist as of such date. In accordance with the requirements of
SFAS No. 142, the Company will review the goodwill of its three reporting units
for impairment during the third quarter of each year starting in 2002. Goodwill
will also be reviewed for impairment at other times during each year when events
or changes in circumstances indicate that an impairment might be present. No
goodwill impairments were deemed to exist as a result of the Company's
impairment review completed during the third quarter of 2002.
As shown in the following table, the Company would have reported net income
of $101.3 million, or $.87 per diluted share, in the first nine months of 2001
($14.2 million, or $.12 per diluted share, in the third quarter of 2001) if the
goodwill amortization included in the Company's reported net income had not been
recognized.
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions, except per share amounts)
Net income (loss) as reported ........... $ 10.3 $ (7.1) $ 89.5 $ (4.4)
Adjustments:
Goodwill amortization ................. 4.2 -- 12.7 --
Incremental income taxes .............. -- -- (.1) --
Minority interest in goodwill
amortization ......................... (.3) -- (.8) --
------- ------- ------- -------
Adjusted net income (loss) .......... $ 14.2 $ (7.1) $ 101.3 $ (4.4)
======= ======= ======= =======
Diluted net income (loss) per share
as reported ............................ $ .09 $ (.06) $ .77 $ (.04)
Adjustments:
Goodwill amortization ................. .04 -- .11 --
Incremental income taxes .............. -- -- -- --
Minority interest in goodwill
amortization ......................... (.01) -- (.01) --
------- ------- ------- -------
Adjusted diluted net income
(loss) per share ................... $ .12 $ (.06) $ .87 $ (.04)
======= ======= ======= =======
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that net assets to be
disposed of by sale are to be reported at the lower of carrying value or fair
value less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company.
Debt extinguishment gains and losses. The Company adopted SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Board Opinion ("APBO") No. 30. In addition,
upon adoption of SFAS No. 145, all gains and losses from the early
extinguishment of debt that had previously been classified as an extraordinary
item are to be reassessed to determine if they would have met the "unusual and
infrequent" criteria of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria is retroactively reclassified and reported as a
component of income before extraordinary item. The Company has concluded that
all of its previously-recognized gains and losses from the early extinguishment
of debt that occurred on or after January 1, 1998 would not have met the APBO
No. 30 criteria for classification as an extraordinary item, and accordingly
such previously-reported gains and losses from the early extinguishment of debt
have been retroactively reclassified and are now reported as a component of
income before extraordinary item.
Note 15 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations which are covered under the
scope of SFAS No. 143, and the effect, if any, on the Company of adopting SFAS
No. 143 has not yet been determined.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
- -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
General
The Company reported a net loss of $7.1 million, or $.06 per diluted share,
in the third quarter of 2002 compared to net income of $10.3 million, or $.09
per diluted share, in the third quarter of 2001. Excluding the effects of the
items discussed below, the Company would have reported net income of $900,000 in
the third quarter of 2002 compared to net income of $11.8 million in the third
quarter of 2001. For the first nine months of 2002, the Company reported a net
loss of $4.4 million, or $.04 per diluted share, compared to net income of $89.5
million, or $.77 per diluted share, in the first nine months of 2001. Excluding
the effects of the items discussed below, the Company would have reported net
income of $1.9 million in the first nine months of 2002 compared to net income
of $39.5 million in the first nine months of 2001.
The Company's equity in losses of TIMET in the third quarter of 2002
includes a $15.7 million impairment provision ($8 million net of income taxes
and minority interest) related to Tremont's impairment provision for an other
than temporary decline in the value of its investment in TIMET. The Company's
equity in losses of TIMET in the first nine months of 2002 includes losses in
the first quarter of $10.6 million ($5.4 million net of income taxes and
minority interest), related to the Company's pro-rata share of TIMET's $27.5
million impairment charge for an other than temporary decline in value of
certain preferred securities held by TIMET. Legal settlement gains in the first
nine months of 2002 of $2.4 million ($1.2 million, net of income taxes and
minority interest, respectively) related to prior-quarter legal settlements with
certain of NL's former insurance carriers, and securities transactions gains in
the first nine months of 2002 of $1.9 million ($1.2 million net of income taxes)
related to the first quarter disposal of certain shares of Halliburton Company
common stock held by the Company. Currency transaction gains in the first nine
months of 2002 included a gain that occurred during the second quarter of 2002
of $6.3 million ($4.7 million net of income taxes and minority interest) related
to the extinguishment of certain intercompany indebtedness of NL. Net securities
transaction gains in the third quarter and first nine months of 2001 of $1.1
million and $51.9 million, respectively ($700,000 and $33.9 million,
respectively, net of income taxes and minority interest) related principally to
the disposal of additional Halliburton shares. Insurance gains in the third
quarter and first nine months of 2001 of $3.8 million and $4.5 million,
respectively ($1.8 million and $2.0 million, respectively, net of income taxes
and minority interest) related to insurance recoveries received by NL resulting
from the March 2001 fire at one of NL's facilities, as insurance recoveries
exceeded the carrying value of the property destroyed and clean-up costs
incurred. The Company's equity in earnings of TIMET in the first nine months of
2001 included earnings in the second quarter of $15.7 million ($7.5 million net
of income taxes and minority interest) related to TIMET's previously-reported
settlement with Boeing. The Company's results in the first nine months of 2001
included the previously-reported first quarter legal settlement gains
aggregating $30.7 million ($18.4 million net of income taxes and minority
interest).
As discussed in Note 14 to the Consolidated Financial Statements, beginning
in 2002 the Company no longer recognizes periodic amortization of goodwill in
its results of operations. The Company would have reported net income of
approximately $14.2 million in the third quarter of 2001 and approximately
$101.3 million in the first nine months of 2001, or about $3.9 million and $11.8
million higher, respectively, if the goodwill amortization included in the
Company's reported net income had not been recognized. Of such $11.8 million
difference in the first nine months of 2001, approximately $10.8 million and
$1.9 million relates to amortization of goodwill attributable to the Company's
chemicals and component products operating segments, respectively, approximately
$100,000 relates to incremental income taxes and approximately $800,000 relates
to minority interest associated with the goodwill amortization recognized by
certain of the Company's less-than-wholly-owned subsidiaries.
Total operating income in the third quarter and first nine months of 2002
was lower as compared to the same periods in 2001 due to lower chemicals
earnings at NL and lower component products earnings at CompX, offset in part by
lower waste management operating losses at Waste Control Specialists.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "could," "anticipates," "expected" or comparable terminology, or by
discussions of strategies or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements. While
it is not possible to identify all factors, the Company continues to face many
risks and uncertainties. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission including, but not limited
to, future supply and demand for the Company's products, the extent of the
dependence of certain of the Company's businesses on certain market sectors
(such as the dependence of TIMET's titanium metals business on the aerospace
industry), the cyclicality of certain of the Company's businesses (such as NL's
TiO2 operations and TIMET's titanium metals operations), the impact of certain
long-term contracts on certain of the Company's businesses (such as the impact
of TIMET's long-term contracts with certain of its customers and such customers'
performance thereunder and the impact of TIMET's long-term contracts with
certain of its vendors on its ability to reduce or increase supply or achieve
lower costs), customer inventory levels (such as the extent to which NL's
customers may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of anticipated
price decreases, or the relationship between inventory levels of TIMET's
customers and such customer's current inventory requirements and the impact of
such relationship on their purchases from TIMET), changes in raw material and
other operating costs (such as energy costs), the possibility of labor
disruptions, general global economic and political conditions (such as changes
in the level of gross domestic product in various regions of the world and the
impact of such changes on demand for, among other things, TiO2), competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, competitive technology positions, the
introduction of trade barriers, fluctuations in currency exchange rates (such as
changes in the exchange rate between the U.S. dollar and each of the euro and
the Canadian dollar), operating interruptions (including, but not limited to,
labor disputes, leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions), recoveries from insurance claims and the timing
thereof, potential difficulties in integrating completed acquisitions, the
ability of the Company to renew or refinance credit facilities, uncertainties
associated with new product development (such as TIMET's ability to develop new
end-uses for its titanium products), environmental matters (such as those
requiring emission and discharge standards for existing and new facilities),
government laws and regulations and possible changes therein (such as a change
in Texas state law which would allow the applicable regulatory agency to issue a
permit for the disposal of low-level radioactive wastes to a private entity such
as Waste Control Specialists, or changes in government regulations which might
impose various obligations on present and former manufacturers of lead pigment
and lead-based paint, including NL, with respect to asserted health concerns
associated with the use of such products), the ultimate resolution of pending
litigation (such as NL's lead pigment litigation and litigation surrounding
environmental matters of NL, Tremont and TIMET) and possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Chemicals
Selling prices for titanium dioxide pigments ("TiO2"), NL's principal
product, were generally decreasing during all of 2001 and the first quarter of
2002, were generally flat during the second quarter of 2002 and were generally
increasing during the third quarter of 2002. NL's TiO2 operations are conducted
through its wholly-owned subsidiary Kronos, Inc.
Three months ended Nine months ended
September 30, % September 30, %
2001 2002 Change 2001 2002 Change
(In millions, except percentages)
Net sales $207.0 $234.0 +13% $653.2 $663.3 +2%
Operating income 29.9 26.5 -11% 114.1 67.5 -41%
Chemicals operating income declined in the third quarter and first nine
months of 2002 compared to the same periods of 2001 due primarily to lower
average selling prices for titanium dioxide pigments ("TiO2"), offset in part by
higher TiO2 sales and production volumes. Excluding the effect of fluctuations
in the value of the U.S. dollar relative to other currencies, NL's average TiO2
selling prices in the third quarter of 2002 were 7% lower than the third quarter
of 2001, and were 12% lower in the first nine months of 2002 compared to the
same period in 2001. While NL's average TiO2 selling prices had generally been
declining during all of 2001 and the first quarter of 2002, and were flat during
the second quarter of 2002, average TiO2 selling prices increased during the
third quarter of the year. NL's average TiO2 selling prices in the third quarter
of 2002 were 3% higher compared to the second quarter of the year, with
increases in all major markets.
NL's TiO2 sales volumes in the third quarter of 2002 were 14% higher than
the third quarter of 2001, with higher volumes in European and North American
markets and lower volumes in export markets. NL's TiO2 sales volumes in the
first nine months of 2002 were 13% higher than the first nine months of 2001.
NL's TiO2 production volumes in the third quarter of 2002 were 7% higher than
the third quarter of 2001, with operating rates near full capacity in 2002. NL's
TiO2 production volumes in the first nine months of 2002 were 6% higher compared
to the same period in 2001. The increases in NL's TiO2 sales and production
volumes in 2002 were due in part to the effect of the previously-reported fire
at NL's Leverkusen, Germany TiO2 facility in March 2001, as well as in part due
to customer restocking their inventory levels in 2002 in advance of
previously-announced TiO2 price increases. As previously reported, NL settled
its insurance claim related to the Leverkusen fire during the fourth quarter of
2001. NL recognized $19.3 million of business interruption insurance proceeds
during the fourth quarter of 2001, of which $16.6 million was attributable to
recovery of unallocated period costs and lost margin related to the first,
second and third quarters of 2001.
The damages to property and the business interruption losses caused by the
previously-reported Leverkusen fire were covered by insurance. Chemicals
operating income in the third quarter and first nine months of 2001 include $3
million and $8 million, respectively, of business interruption insurance
proceeds as partial payments for losses caused by the fire.
In January 2002, NL announced price increases in all major markets of
approximately 5% to 8% above existing December 2001 prices, a portion of which
NL realized in the second and third quarters of 2002. In May 2002, NL announced
a second round of price increases in all major markets of approximately 7% to
11% above June 2002 prices. Assuming demand for TiO2 remains at reasonable
levels, NL expects to achieve further price improvement in the fourth quarter of
this year, but the extent to which NL can realize any price increases during the
remainder of 2002 will depend on economic and competitive conditions. Because
TiO2 prices were generally declining during all of 2001 and the first quarter of
2002, NL believes that its average TiO2 selling prices in 2002 will be
significantly below its average 2001 prices, even if price increases continue to
be realized. NL expects its TiO2 sales and production volumes in 2002 should be
higher as compared to 2001, in part due to the effects in 2001 of the
previously-reported fire at its Leverkusen, Germany facility. NL expects its
sales volumes in 2002 will exceed its production volumes. While NL expects its
TiO2 sales volumes in the fourth quarter of 2002 will be seasonally lower than
the third quarter of this year, NL expects its sales volumes in the fourth
quarter of 2002 will exceed its sales volumes in the fourth quarter of 2001.
Overall, NL expects its TiO2 operating income in 2002 will be significantly
lower than 2001, primarily due to lower average TiO2 selling prices. NL's
expectations as to the future prospects of NL and the TiO2 industry are based
upon a number of factors beyond NL's control, including worldwide growth of
gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from NL's expectations, NL's results of operations could be
unfavorably affected.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway and Canada). A significant amount of NL's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, primarily the euro, other major European currencies and
the Canadian dollar. In addition, a portion of NL's sales generated from its
non-U.S. operations are denominated in the U.S. dollar. Certain raw materials,
primarily titanium-containing feedstocks, are purchased in U.S. dollars, while
labor and other production costs are denominated primarily in local currencies.
Consequently, the translated 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 may affect the comparability
of period-to-period operating results. Including the effect of fluctuations in
the value of the U.S. dollar relative to other currencies, NL's average TiO2
selling prices (in billing currencies) in the third quarter of 2002 decreased 2%
compared to the third quarter of 2001, and decreased 11% during the first nine
months of 2002. Overall, fluctuations in the value of the U.S. dollar relative
to other currencies, primarily the euro, increased TiO2 sales in the third
quarter and first nine months of 2002 by approximately $14 million and $10
million, respectively, as compared to the same periods in 2001. Fluctuations in
the value of the U.S. dollar relative to other currencies similarly impacted
NL's foreign currency-denominated operating expenses. NL's operating costs that
are not denominated in the U.S. dollar, when translated into U.S. dollars, were
higher during 2002 as compared to 2001. Overall, the net impact of currency
exchange rate fluctuations increased TiO2 operating income by $2.2 million in
the third quarter of 2002 compared to the third quarter of 2001, and slightly
decreased operating income in the first nine months of 2002 compared to the same
period in 2001.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $19.2 million in the first nine
months of 2001 and approximately $9.0 million in the first nine months of 2002
as compared to amounts separately reported by NL. The decline from 2001 to 2002
in such additional non-cash expenses relates primarily to ceasing to
periodically amortize goodwill beginning in 2002 (the 2001 amount included $10.8
million related to goodwill amortization). See Note 14 to the Consolidated
Financial Statements.
Component Products
Three months ended Nine months ended
September 30, % September 30, %
2001 2002 Change 2001 2002 Change
(In millions, except percentages)
Net sales $51.5 $48.8 -5% $164.4 $148.4 -10%
Operating income 4.7 1.3 -71% 17.0 5.6 -67%
Component products sales and operating income decreased in the third
quarter and first nine months of 2002 compared to the same periods in 2001 due
to continued weak demand for CompX's component products sold to the office
furniture market resulting from the continued weak economic conditions in the
manufacturing sectors in North America and Europe. Sales of slide and ergonomic
products decreased 6% and 18%, respectively, in the third quarter of 2002
compared to the third quarter of 2001, with year-to-date declines of 13% and
19%, respectively. While sales of security products increased 2% in the third
quarter of 2002 compared to the same period in 2001, in part due to price
increases implemented in July 2002, sales of security products were down 2% in
the first nine months of 2002 compared to the same period in 2001 due primarily
to lower volumes. Operating income comparisons were negatively impacted by
increases in certain raw material costs, primarily steel, as well as the adverse
impact of reduced selling prices primarily with respect to slide products
resulting from competitive pressures. Operating income comparisons were
favorably impacted by ceasing to periodically amortize goodwill, which amounted
to approximately $600,000 and $1.9 million in the third quarter and first nine
months of 2001, respectively (none in 2002), as well as the impact of certain
cost reductions that were implemented. See Note 14 to the Consolidated Financial
Statements.
CompX has substantial operations and assets located outside the United
States (principally in Canada, the Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the euro and the New
Taiwan dollar. In addition, a portion of CompX's sales generated from its
non-U.S. operations (principally in Canada) are denominated in the U.S. dollar.
Most raw materials, labor and other production costs for such non-U.S.
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar value of CompX's foreign sales and operating results are
subject to currency exchange rate fluctuations which may favorably or
unfavorably impact reported earnings and may affect comparability of
period-to-period operating results. Excluding the effect of currency, component
products sales decreased 6% in the third quarter of 2002 as compared to the same
period in 2001, and operating income decreased 72%. Excluding the effect of
currency, component products sales decreased 9% in the first nine months of 2002
as compared to the same period in 2001, and operating income decreased 62%.
CompX currently expects to record a pre-tax charge in the fourth quarter of
2002 of between $1.7 million and $2.2 million, the majority of which will be
non-cash in nature, related to the retooling of one if its manufacturing
facilities. The cost savings resulting from this retooling are currently
expected to begin to be reflected in CompX's operating results in the first
quarter of 2003. CompX is also finalizing a plan to consolidate its two Canadian
facilities into one facility. A final decision on implementing this activity is
expected prior to the end of 2002, and if implemented such consolidation would
be expected to be substantially completed by the end of the first quarter of
2003. CompX is also reviewing other facility rationalizations. These activities
could result in charges for asset impairment and other related costs in addition
to the charge referred to above.
CompX currently expects that soft market conditions will continue in the
office furniture market, the primary end-use market for CompX's products. As a
result, sales volumes are expected to remain at depressed levels for at least
the remainder of the first half of 2003, and competitive pricing pressures are
also expected to continue. In addition, the worldwide steel price increase that
followed the steel tariff imposed this year by the United States government is
expected to continue to negatively impact component products margins on CompX's
slide and ergonomic products, where steel is the primary raw material. CompX has
initiated price increases on certain products and will continue to focus on cost
improvement initiatives in order to minimize the impact of lower sales to the
office furniture industry and to develop value-added customer relationships to
improve its operating results.
Waste Management
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions)
Net sales $ 4.0 $ 1.3 $ 10.0 $ 5.2
Operating loss (3.1) (2.5) (10.7) (6.6)
Waste Control Specialists' sales decreased in the third quarter and first
nine months of 2002 compared to the same periods in 2001 due primarily to the
effect of weak demand for its waste management services. Waste management's
operating losses declined during 2002 as the effect of certain cost controls
implemented in 2002 more than offset the effects of the decline in sales.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The waste
management industry currently is experiencing a relative decline in the number
of environmental remediation projects generating wastes. In addition, efforts on
the part of generators to reduce the volume of waste and/or manage wastes onsite
at their facilities also has resulted in weak demand for Waste Control
Specialists waste management services. These factors have led to reduced demand
and increased downward price pressure for waste management services. While Waste
Control Specialists' believes its broad range of permits for the treatment and
storage of low-level and mixed radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of a broad range of low-level and mixed radioactive wastes.
Waste Control Specialists is continuing its attempts to increase its sales
volumes from waste streams that conform to permits it currently has in place.
Waste Control Specialists is also continuing to identify certain waste streams,
and attempt to obtain modifications to its current permits, that would allow for
treatment, storage and disposal of additional types of wastes. The ability of
Waste Control Specialists to achieve increased sales volumes of these waste
streams, together with improved operating efficiencies through further cost
reductions and increased capacity utilization, are important factors in Waste
Control Specialists' ability to achieve improved cash flows. The Company
currently believes Waste Control Specialists can become a viable, profitable
operation. However, there can be no assurance that Waste Control Specialists'
efforts will prove successful in improving its cash flows. Valhi has in the
past, and may in the future, consider strategic alternatives with respect to
Waste Control Specialists. Depending on the form of the transaction that any
such strategic alternative might take, there can be no assurance that the
Company would not report a loss with respect to such a transaction.
TIMET
Tremont accounts for its interest in TIMET by the equity method. Tremont's
equity in earnings (losses) of TIMET differs from the amounts that would be
expected by applying Tremont's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by Tremont in conjunction with Tremont's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by Tremont.
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
(In millions)
TIMET historical:
Net sales ............................. $126.4 $ 82.8 $370.5 $281.5
====== ====== ====== ======
Operating income (loss):
Boeing settlement, net .............. $ -- $ -- $ 62.7 $ --
Fixed asset impairment .............. -- -- (10.8) --
Tungsten accrual .................... -- -- (3.8) --
Boeing take-or-pay income ........... -- 10.5 -- 12.7
Other, net .......................... 9.9 (14.8) 8.7 (28.8)
----- ----- ----- ------
9.9 (4.3) 56.8 (16.1)
Impairment of convertible
preferred securities ................. -- -- -- (27.5)
Other general corporate, net .......... 1.3 (.9) 5.3 (1.7)
Interest expense ...................... (.7) (.9) (3.3) (2.4)
----- ----- ----- ------
10.5 (6.1) 58.8 (47.7)
Income tax benefit (expense) .......... (3.7) .5 (20.7) 1.3
Minority interest ..................... (2.5) (3.5) (7.8) (11.2)
----- ----- ----- ------
Income (loss) before cumulative
effect of change in accounting
principle .......................... $ 4.3 $ (9.1) $ 30.3 $(57.6)
====== ====== ====== ======
Equity in earnings (losses)
of TIMET ............................... $ 3.2 $(17.2) $ 16.2 $(31.7)
====== ====== ====== ======
Tremont periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At September 30, 2002, after considering what it believes to be
all relevant factors, including, among other things, TIMET's recent NYSE stock
prices, and TIMET's operating results, financial position, estimated asset
values and prospects, Tremont recorded a $15.7 million impairment provision for
an other than temporary decline in value of its investment in TIMET. Such
impairment provision is reported as part of the Company's equity in losses of
TIMET in the third quarter of 2002. After that writedown, at September 30, 2002,
Tremont's net carrying value of its investment in TIMET was $2.25 per share
compared to a NYSE market price at that date of $1.66 per share. In determining
the amount of the impairment charge, Tremont considered, among other things,
recent ranges of TIMET's NYSE market price and current estimates of TIMET's
future operating losses that would further reduce Tremont's carrying value of
its investment in TIMET as it records additional equity in losses of TIMET.
Tremont will continue to monitor and evaluate the value of its investment in
TIMET. In the event Tremont determines any further decline in value of its
investment in TIMET below its net carrying value has occurred which is other
than temporary, Tremont would report an additional write-down at that time.
Excluding the effect of TIMET's previously-reported legal settlement with
Boeing, its impairment charge related to certain equipment, its accruals for the
tungsten matter discussed below and the effect of the Boeing take-or-pay income,
TIMET reported lower sales and worse operating results in the third quarter and
first nine months of 2002 compared to the same periods in 2001. During the third
quarter of 2002, TIMET's mill and melted products sales volumes decreased 33%
and 54%, respectively, compared to the same period in 2001. During the first
nine months of 2002, TIMET's mill products sales volumes decreased 26% compared
to the same period in 2001, and its sales volumes of melted products decreased
45%. Excluding the effect of fluctuations in the value of the U.S. dollar
relative to other currencies, TIMET's average selling prices for mill products
in the third quarter of 2002 were 1% lower compared to the third quarter of
2001, while selling prices for its melted products decreased 5%. TIMET's average
selling prices for mill products in the first nine months of 2002 were 4% higher
compared to the same period in 2001, while selling prices for its melted
products increased 2%. TIMET's operating income comparisons were favorably
impacted by TIMET ceasing to periodically amortize goodwill recognized on its
separate-company books, which amounted to approximately $1.1 million and $3.5
million in the third quarter and first nine months of 2001 (none in 2002).
TIMET's results in 2002 were negatively impacted by an increase in TIMET's
provision for excess inventories and severance costs related to TIMET's program
to reduce its global employment levels. TIMET's operating income comparisons
were also negatively impacted in 2002 by lower operating rates in 2002, with
estimated capacity utilization declining from 85% to 45% in the third quarter of
2002 compared to the third quarter of 2001 (year-to-date decline from 75% to
55%).
Under TIMET's previously-reported amended long-term agreement with Boeing,
Boeing has advanced TIMET $28.5 million for 2002, and Boeing is required to
advance TIMET $28.5 million annually from 2003 through 2007. The agreement is
structured as a take-or-pay agreement such that Boeing, beginning in calendar
year 2002, will forfeit a proportionate part of the $28.5 million annual
advance, or effectively $3.80 per pound, in the event that its orders for
delivery for such calendar year are less than 7.5 million pounds. TIMET can only
be required, however, to deliver up to 3 million pounds per quarter. Based on
TIMET's actual deliveries to Boeing of approximately 1.2 million pounds during
the first nine months of 2002 (including 300,000 pounds during the third
quarter) and TIMET's contractual maximum obligation of delivering 3 million
pounds during the remainder of 2002, TIMET recognized income of $10.5 million
and $12.7 million in the third quarter and first nine months of 2002,
respectively, related to the take-or-pay provisions for the 3.3 million pounds
of material that TIMET is no longer obligated to provide to Boeing under the
agreement. TIMET currently expects to recognize about $10 million of additional
income during the fourth quarter of 2002 related to the take-or-pay provisions
of the contract. These earnings related to the take-or-pay provisions distort
TIMET's operating income percentages as there is no corresponding amount
reported in TIMET's sales.
TIMET's results in the first nine months of 2002 also includes a $27.5
million first quarter provision for an other than temporary impairment of
TIMET's investment in the convertible preferred securities of Special Metals
Corporation ("SMC"). In addition, TIMET's effective income tax rate in the 2002
periods varies from the 35% U.S. federal statutory income tax rate because TIMET
has concluded it is not currently appropriate to recognize an income tax benefit
related to its U.S. losses under the "more-likely-than-not" recognition
criteria.
As previously reported, in March 2001, TIMET was notified by one of its
customers that a product manufactured from standard grade titanium produced by
TIMET contained what has been confirmed to be a tungsten inclusion. TIMET
accrued $3.3 million during 2001, and an additional $200,000 during the second
quarter of 2002, for its best estimate of the most likely amount of loss it will
incur with respect to this matter. However, it does not represent the maximum
possible loss, which TIMET is not presently able to estimate, and the amount
accrued may be periodically revised in the future as more facts become known. As
of September 30, 2002, TIMET has received claims aggregating approximately $5
million, and TIMET had settled claims totaling $500,000. Pending claims are
being investigated and negotiated, and TIMET believes certain of the claims are
without merit and can be settled for less than the amount of the claim. There is
no assurance that all potential claims have yet been submitted to TIMET. TIMET
has filed suit seeking full recovery from its silicon supplier for any liability
TIMET might incur, although no assurances can be given that TIMET will
ultimately be able to recover all or any portion of such amounts. TIMET has not
recorded any recoveries related to this matter as of September 30, 2002.
The economic slowdown that began in 2001 in the economies of the U.S. and
other regions of the world combined with the events of September 11, 2001 have
resulted in the major commercial airframe and jet engine manufacturers
substantially reducing their forecast of engine and aircraft deliveries over the
next few years and their production levels in 2002. TIMET expects that aggregate
industry mill product shipments will decrease in 2002 by approximately 18% to
about 45,000 metric tons and that demand for mill products for the commercial
aerospace sector could decline by up to 40% in 2002, primarily due to a
combination of reduced aircraft production rates and excess inventory
accumulated throughout the aerospace supply chain. Excess inventory accumulation
typically leads to order demand for titanium products falling below actual
consumption. Based on The Airline Monitor's July 2002 forecast and TIMET's
projected changes in supply chain inventory levels, TIMET anticipates a cyclical
trough in titanium demand may occur in 2003 with a gradual recovery beginning
thereafter. Adverse world events, including terrorist activities and conflicts
in the Middle East or elsewhere, could have a significant adverse impact on the
financial health of commercial airlines and economic growth in the U.S. and
other regions of the world. Any such events, which are not contemplated in
TIMET's outlook, could prolong and exacerbate the current commercial aerospace
slowdown.
Although the current business environment makes it particularly difficult
to predict TIMET's future financial performance, TIMET expects its sales revenue
for the fourth quarter of 2002 to range between $75 million and $85 million.
Mill product sales volumes are expected to be about 2,200 metric tons with
melted product shipments of about 700 metric tons. Interest expense should be
about $1 million while minority interest on TIMET's Convertible Preferred
Securities should approximate $3.3 million. With these estimates, TIMET expects
an operating loss in the fourth quarter of 2002 before special items of between
$5 million and $10 million, and a net loss before special items of between $10
million and $15 million.
TIMET expects its sales for all of 2002 will range from $360 million to
$370 million, reflecting the combined effects of decreases in sales volumes,
softening of market selling prices and changes in customer and product mix. Mill
product sales volumes are expected to decline approximately 25% relative to 2001
to about 9,000 metric tons, and melted product sales volumes are expected to
decline by 40% to about 2,600 metric tons. The sales volumes decline in 2002 is
principally driven by an anticipated reduction in TIMET's commercial aerospace
sales volumes of about 40% compared to 2001, partly offset by sales volume
growth to other markets. TIMET expects its selling prices on new orders for
titanium products will continue to soften throughout the remainder of 2002.
Overall, TIMET currently expects to report an operating loss before special
items for all of 2002 of between $25 million and $30 million in 2002, and a net
loss before special items of between $45 million and $50 million.
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, TIMET believes
assessments of the recoverability of its long-lived assets, that may also result
in special charges for asset impairments, could occur in the balance of 2002.
Such potential future charges, if any, could be material to TIMET.
TIMET's outlook for 2003 is for a continuing difficult business environment
reflecting the severe downturn in the commercial aerospace industry and sluggish
economy. The commercial aerospace sector is the major source of demand for
TIMET's products. Although workforce reduction actions undertaken by TIMET in
2002 are expected to result in annual savings of between $12 million and $15
million, TIMET's early expectations are that its sales and financial results
during 2003 may be similar to 2002. However, TIMET is conscious of the
meaningful risks posed by the continuing war on terrorism, and potential
conflicts in the Middle East, Iraq and elsewhere. These and other adverse world
events could prolong and exacerbate the downturn in the commercial aerospace
industry and have broader economic consequences.
In addition to its agreement with Boeing, TIMET has long-term supply
agreements with certain other major aerospace customers, including, but not
limited to, Rolls-Royce plc, United Technologies Corporation (Pratt & Whitney
and related companies) and Wyman-Gordon Company (a unit of Precision Castparts
Corporation). These agreements initially became effective in 1998 and 1999 and
expire in 2007 through 2008, subject to certain conditions. The agreements
generally provide for (i) minimum market shares of the customers' titanium
requirements or firm annual volume commitments and (ii) fixed or
formula-determined prices generally for at least the first five years of the
contract term. Generally, the agreements require TIMET's service and product
performance to meet specified criteria, and also contain a number of other terms
and conditions customary in transactions of these types. In certain events of
nonperformance by TIMET, the agreements may be terminated early. Additionally,
under a group of related agreements (which group represents approximately 15% of
TIMET's 2001 sales revenue), which currently have fixed prices that convert to
formula-derived prices in 2004, the customer may terminate the agreement as of
the end of 2003 if the effect of the initiation of formula-derived pricing would
cause such customer "material harm." If any of such agreements were to be
terminated by the customer on this basis, it is possible that some portion of
the business represented by that agreement would continue on a non-agreement
basis. However, the termination of one or more of such agreements by the
customer in such circumstances could result in a material and adverse effect on
TIMET's business, results of operations, consolidated financial condition or
liquidity.
In September 2002, TIMET entered into a long-term agreement, effective from
January 1, 2002 through December 31, 2007, for the purchase of titanium sponge.
This agreement replaced and superceded a previous agreement entered into in by
TIMET in 1997. The new agreement requires annual minimum purchases by TIMET of
approximately $10 million.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in the third quarter and first nine months of 2002
compared to the same periods in 2001 due to a lower average level of invested
funds and lower average yields. Aggregate general corporate interest and
dividend income is currently expected to continue to be lower during the
remainder of 2002 compared to the same period in 2001 due primarily to a lower
amount of funds available for investment and lower average interest rates.
Legal settlement gains. The legal settlement gains in the first nine months
of 2002 relate to NL's settlements with certain former insurance carriers. See
Note 12 to the Consolidated Financial Statements. These settlements, similar to
certain previously-reported NL legal settlements recognized during 2000 and
2001, resolved court proceedings in which NL had sought reimbursement from the
carriers for legal defense costs and indemnity coverage for certain of its
environmental remediation expenditures. No further material settlements relating
to litigation concerning environmental remediation insurance coverages are
expected.
Securities transactions. Securities transactions gains in the first nine
months of 2002 relate to the first quarter disposal of certain shares of
Halliburton Company common stock held by the Company that were classified as
trading securities. See Notes 3 and 12 to the Consolidated Financial Statements.
The remaining Halliburton shares held by the Company at September 30, 2002 were
held in escrow for the benefit of the holders of the Company's LYONs debt
obligation, which are exchangeable at any time, at the option of the holder, for
such Halliburton shares. In October 2002, following the redemption of
substantially all of the remaining LYONs, substantially all of such Halliburton
shares were released to the Company from escrow and were sold in market
transactions aggregate proceeds of $9.5 million. The Company expects to report a
securities transaction gain in the fourth quarter of 2002 of $4.5 million
related to the sale of these Halliburton shares.
Other general corporate income items. The $6.3 million foreign currency
transaction gain in the second quarter of 2002 relates to the extinguishment of
certain intercompany indebtedness of NL. The gain on disposal of fixed assets
relates to the sale of certain real estate held by Tremont.
General corporate expenses. Net general corporate expenses in the third
quarter and first nine months of 2002 were higher than the same periods in 2001,
as higher environmental and legal expenses of NL were only partially offset by
the effect of lower compensation-related expenses of Tremont. NL's $20 million
of proceeds from the disposal of its specialty chemicals business unit related
to its agreement not to compete in the rheological products business is being
recognized as a component of general corporate income (expense) ratably over the
five-year non-compete period ending in the first quarter of 2003 ($3 million
recognized in the first nine months of 2001 and 2002). See Note 12 to the
Consolidated Financial Statements. Net general corporate expenses in the
remainder of 2002 are currently expected to continue to be somewhat higher
compared to the same periods in 2001.
Interest expense. Interest expense in the first nine months of 2002
includes $2.0 million related to the second quarter loss on the early
extinguishment of NL's Senior Secured Notes. See Note 9 to the Consolidated
Financial Statements. Interest expense declined in the first nine months of 2002
compared to the same periods in 2001 due primarily to lower average levels of
outstanding indebtedness as well as lower average U.S. variable interest rates.
Assuming interest rates do not increase significantly from year-end 2001 levels,
interest expense in the remainder of 2002 is currently expected to continue to
be somewhat lower compared to the same periods in 2001 due to lower anticipated
interest rates on variable-rate borrowings in the U.S. and a lower average level
of outstanding debt.
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 11 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 effective income tax rate. In addition, the
absolute level of pre-tax earnings can impact the Company's effective income tax
rate due to income items included in pre-tax earnings which are not subject to
tax or expense items for which there is no tax benefit.
During the first nine months of 2002, NL reduced its deferred income tax
asset valuation allowance by approximately $2.7 million, primarily as a result
of utilization of certain income tax attributes for which the benefit had not
previously been recognized. In this regard, no income tax was recognized on NL's
$6.3 million general corporate foreign currency transaction gain, as NL offset
such income tax by utilizing certain income tax attributes, the benefit of which
had not previously been recognized. During the first nine months of 2002,
Tremont increased its deferred income tax asset valuation allowance (at the
Valhi consolidated level) by a net $3.6 million primarily because Tremont
concluded certain tax attributes do not currently meet the
"more-likely-than-not" recognition criteria.
As discussed in Note 14 to the Consolidated Financial Statements, effective
January 1, 2002, the Company no longer recognizes periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 impacted the
Company's overall effective income tax rate in 2002 as compared to 2001.
At September 30, 2002, NL had the equivalent of approximately $371 million
of income tax loss carryforwards in Germany with no expiration date. However, NL
has provided a deferred tax valuation allowance against substantially all of
these income tax loss carryforwards because NL currently believes they do not
meet the "more-likely-than-not" recognition criteria. The German federal
government has proposed certain changes to its income tax law, including certain
changes that would impose limitations on utilization of income tax loss
carryforwards, that as proposed would become effective January 1, 2003. Since NL
has provided a deferred income tax asset valuation allowance against
substantially all of these German tax loss carryforwards, any limitation on NL's
ability to utilize such carryforwards resulting from enactment of any of these
proposals would not have a material impact on NL's net deferred income tax
liability. However, if enacted, the proposed changes could have a material
impact on NL's ability to fully utilize its German income tax loss
carryforwards, which would significantly affect the Company's future income tax
expense and future German income tax payments. NL does not currently expect any
enactment of these proposals would occur prior to January 1, 2003.
Minority interest. See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes, and all of Waste Control Specialists
future net income or net losses will also accrue to the Company until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets or
net earnings (losses) is reported during the first nine months of 2001 and 2002.
In July 2002, Valhi proposed a merger of Valhi and Tremont pursuant to
which stockholders of Tremont (including NL, to the extent of NL's ownership
interest in the Tremont shares held by Tremont Group), other than Valhi, would
receive shares of Valhi common stock for each Tremont share held. See Note 2 to
the Consolidated Financial Statements. Tremont formed a special committee of its
board of directors consisting of directors unrelated to Valhi to review the
proposal. The special committee retained their own independent financial and
legal advisors. After performing due diligence and evaluating the merits of
Valhi's proposal, the special committee and their advisors negotiated the
financial and other terms of a definitive merger agreement with Valhi. In
November 2002, Tremont, based upon the recommendation of their special
committee, and Valhi reached an agreement on the terms of the definitive merger
agreement in which, among other things, the Tremont stockholders referred to
above would receive 3.4 shares of Valhi common stock for each share of Tremont
common stock held in a tax-free exchange. The transaction has been approved by
the board of directors of both Valhi and Tremont. The financial advisors to the
special committee have issued an opinion to the special committee stating that
the exchange ratio is fair, from a financial point of view, to Tremont
stockholders other than Valhi and its affiliates. The transaction is subject to
customary closing conditions and will require approval by a majority of the
outstanding shares of Tremont. Tremont Group has indicated that it intends to
vote its shares in favor of the merger. Valhi will file a registration statement
with the SEC in connection with the transaction. The date of the Tremont
stockholders meeting will be established as soon as practical following
completion of the filing with the SEC. Once the merger is completed, the Company
will no longer report minority interest in Tremont's net assets or net earnings
(losses).
Accounting principles not yet adopted. See Note 15 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Trends in cash flows from operating annual activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Certain items included in the determination of net income are non-cash, and
therefore such items have no impact on cash flows from operating activities.
Non-cash items included in the determination of net income include depreciation,
depletion and amortization expense, non-cash interest expense, asset impairment
charges and unrealized securities transactions gains and losses. Non-cash
interest expense relates principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred financing costs. In addition, substantially all of the proceeds
resulting from NL's legal settlements in 2001 are shown as restricted cash, and
therefore such settlements had no impact on cash flows from operating
activities.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in a current cash outlay paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Investing and financing activities. Approximately 64% of the Company's
consolidated capital expenditures in the first nine months of 2002 relate to NL,
35% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. Approximately $2.6 million of NL's capital expenditures
relates to the ongoing reconstruction of NL's Leverkusen, Germany TiO2
production facility that was damaged by fire during 2001. NL expects such
reconstruction will be completed by the end of 2002. During the first nine
months of 2002, NL purchased $10.6 million of its common stock in market
transactions, and NL purchased the EWI insurance brokerage services operations
for $9 million. See Note 2 to the Consolidated Financial Statements.
During the first nine months of 2002, (i) Valhi repaid a net $1.9 million
of its short-term demand loans from Contran, (ii) CompX repaid a net $18 million
of its revolving bank credit facility, (iii) NL repaid all of its existing
short-term notes payable denominated in euros and Nowegian kroner ($53 million
when repaid) using primarily proceeds from borrowings ($39 million) under KII's
new revolving bank credit facility, (iv) NL redeemed $194 million principal
amount of its Senior Secured Notes, primarily using the proceeds from the new
euro 285 million ($280 million when issued) borrowing of KII and (v) NL repaid
an aggregate of euro 13 million ($12 million when repaid) of borrowings under
KII's revolving bank credit facility. See Note 9 to the Consolidated Financial
Statements.
At September 30, 2002, unused credit available under existing credit
facilities approximated $195.4 million, which was comprised of $69 million
available to CompX under its revolving credit facility, $90 million available to
NL (primarily under KII's new revolving credit facility and a new $50 million
facility collateralized by certain of NL's U.S. assets) and $36.4 million
available to Valhi under its revolving bank credit facility. Provisions
contained in certain of the Company's credit agreements could result in the
acceleration of the applicable indebtedness prior to its stated maturity for
reasons other than payment defaults or defaults from failing to comply with
typical financial covenants. For example, certain credit agreements allow the
lender to accelerate the maturity of the indebtedness upon a change of control
(as defined) of the borrower. The terms of Valhi's revolving bank credit
facility could require Valhi to either reduce outstanding borrowings or pledge
additional collateral in the event the fair value of the existing pledged
collateral falls below specified levels. In addition, certain credit agreements
could result in the acceleration of all or a portion of the indebtedness
following a sale of assets outside the ordinary course of business. Other than
operating leases, neither Valhi nor any of its subsidiaries or affiliates are
parties to any off-balance sheet financing arrangements.
Chemicals - NL Industries
At September 30, 2002, NL had cash, cash equivalents and marketable debt
and other securities of $243 million, including restricted balances of $72
million, and NL had $90 million available for borrowing under its existing
credit facilities.
NL's board of directors has authorized NL to purchase up to an aggregate of
6.0 million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time, including 1.5 million shares
authorized by NL's board in October 2002. Through September 30, 2002, NL had
purchased 4 million of its shares pursuant to such authorizations for an
aggregate of $64.2 million, including approximately 719,000 shares purchased
during the first nine months of 2002 for an aggregate of $10.6 million.
In addition to its regular quarterly dividend of $.20 per share, in
November 2002, NL's board of directors declared an additional dividend of $2.50
per share, payable in December 2002. Based on the approximately 47.7 million NL
shares outstanding as of November 12, 2002, NL's special dividend would
aggregate approximately $119 million, including $75.3 million that will be paid
to Valhi and $25.5 million that will be paid to Tremont.
In March 2002, NL redeemed $25 million principal amount of its Senior
Secured Notes, and in June 2002 NL redeemed the remaining $169 million principal
amount of such Senior Secured Notes. See Note 9 to the Consolidated Financial
Statements.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL's and EMS' 1998 U.S. federal income tax returns are
currently being examined by the U.S. tax authorities, and NL and EMS have
granted extensions of the statute of limitations for assessments until September
30, 2003. Based on the course of the examination to date, NL anticipates that
the U.S. tax authorities may propose a substantial tax deficiency. NL has
received preliminary tax assessments for the years 1991 to 1997 from the Belgian
tax authorities proposing tax deficiencies, including related interest, of
approximately euro 10.4 million ($10 million at September 30, 2002). NL has
filed protests to the assessments for the years 1991 to 1997. NL is in
discussions with the Belgian tax authorities and believes that a significant
portion of the assessments are without merit. No assurance can be given that
these tax matters will be resolved in NL's favor in view of the inherent
uncertainties involved in court and tax proceedings. NL believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
NL has been named as a defendant, potentially responsible party ("PRP"), or
both, in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
NL evaluates the potential range of its liability at sites where it has been
named as a PRP or defendant, including sites for which EMS has contractually
assumed NL's obligation. NL believes it has provided adequate accruals ($100
million at September 30, 2002) 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. It is not possible to estimate the range of costs for certain sites.
The upper end of the range of reasonably possible costs to NL for sites for
which it is possible to estimate costs is approximately $140 million. NL's
estimates of such liabilities have not been discounted to present value, and
other than certain previously-reported settlements with respect to certain of
NL's former insurance carriers, NL has not recognized any insurance recoveries.
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. NL is also a defendant in a number
of legal proceedings seeking damages for personal injury and property damage
allegedly arising from the sale of lead pigments and lead-based paints,
including cases in which plaintiffs purport to represent a class and cases
brought on behalf of government entities. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance that
NL will not incur future liability in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, NL believes that the pending lead pigment and
lead-based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to 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 to effectively overturn the
precedent set by court decisions in which NL and other pigment manufacturers
have been successful. Examples of such proposed legislation include bills which
would permit civil liability for damages on the basis of market share, rather
than requiring plaintiffs to prove that the defendant's product caused the
alleged damage, and bills which would revive actions currently barred by
statutes of limitations. 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.
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, repurchase shares of its common stock,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals industry or other
industries, as well as the acquisition of interests in, and loans to, related
entities. In the event of any such transaction, NL may consider using its
available cash, issuing its equity securities or refinancing or increasing its
indebtedness to the extent permitted by the agreements governing NL's existing
debt.
Component products - CompX International
CompX expects to replace its existing revolving bank credit facility prior
to its expiration in February 2003 with a new credit facility. CompX anticipates
voluntarily reducing the new facility from $100 million to $50 million in line
with CompX's current credit needs. A $50 million facility is currently expected
to be adequate to meet CompX's liquidity and working capital requirements. CompX
expects the new facility will be secured and bear interest at a higher rate than
its existing facility, which in part reflects current market conditions. There
can be no assurance that CompX will be able to successfully negotiate a
replacement credit facility, or that the terms of any replacement facility
obtained will be on the terms as described above.
Certain of CompX's sales generated by its Canadian operations are
denominated in U. S. dollars. To manage a portion of the foreign exchange rate
risk associated with such receivables or similar exchange rate risk associated
with future sales, CompX periodically enters into short-term forward currency
exchange contracts. At each balance sheet date, any such outstanding currency
forward contracts are marked-to-market with any resulting gain or loss
recognized in income currently. These contracts are not accounted for as hedging
instruments under GAAP. At September 30, 2002, CompX held contracts to exchange
$9 million for an equivalent amount of Canadian dollars at an average exchange
rate of Cdn. $1.57 per U.S. dollar. Such contracts mature through January 2003.
The actual exchange rate at September 30, 2002 was Cdn. $1.58 per U.S. dollar,
and the estimated fair value of such contracts was not material.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, CompX
has in the past and may in the future seek to raise additional capital,
refinance or restructure indebtedness, issue additional securities, modify its
dividend policy, repurchase shares of its common stock or take a combination of
such steps or other steps to manage its liquidity and capital resources. In the
normal course of business, CompX may review opportunities for acquisitions,
divestitures, joint ventures or other business combinations in the component
products industry. In the event of any such transaction, CompX may consider
using available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At September 30, 2002, Waste Control Specialists' indebtedness, as amended,
consists principally of (i) a $4.6 million term loan due in November 2004 and
(ii) $16.7 million of other borrowings under a $17.5 million revolving credit
facility that, as amended, also matures in 2004. All of such indebtedness is
owed to a wholly-owned subsidiary of Valhi, and is therefore eliminated in the
Company's consolidated financial statements. Waste Control Specialists may
borrow additional amounts during the remainder of 2002 under its $17.5 million
revolving credit facility.
TIMET
At September 30, 2002, TIMET had net debt of approximately $14.1 million
($18.7 million of debt and $4.6 million of cash and equivalents).
As previously-reported, in March 2002 SMC and its U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. As a result, TIMET, with the assistance of an external valuation
specialist, undertook a further assessment of its investment in SMC and recorded
an additional $27.5 million impairment charge to general corporate expense in
the first quarter of 2002 for an other than temporary decline in the fair value
of its investment in SMC, reducing TIMET's carrying amount of its investment in
SMC to zero.
TIMET is involved in various environmental, contractual, product liability
and other claims, disputes and litigation incidental to its business including
those discussed above. While TIMET's management, including internal counsel,
currently believes that the outcome of these matters, individually and in the
aggregate, will not have a material adverse effect on TIMET's financial
position, liquidity or overall trends in results of operations, all such matters
are subject to inherent uncertainties. Were an unfavorable outcome to occur in
any given period, it is possible that it could have a material adverse impact on
TIMET's results of operations or cash flows in a particular period.
At September 30, 2002, TIMET had accrued an aggregate of $3.7 million for
environmental matters, including the previously-reported matter relating to the
site at its Nevada facility. TIMET records liabilities related to environmental
remediation obligations when estimated future expenditures are probable and
reasonably estimable. Such accruals are adjusted as further information becomes
available or circumstances change. Estimated future expenditures are not
discounted to their present value. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by TIMET at its operating facilities, or a
determination that TIMET is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
At September 30, 2002, TIMET had accrued an aggregate of $600,000 for
expected costs related to various legal proceedings. TIMET records liabilities
related to legal proceedings when estimated losses, including estimated legal
fees, are probable and reasonably estimable. Such accruals are adjusted as
further information becomes available or circumstances change. Estimated future
costs are not discounted to their present value. It is not possible to estimate
the range of costs for certain matters. No assurance can be given that actual
costs will not exceed accrued amounts or that costs will not be incurred with
respect to matters as to which no problem is currently known or where no
estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
TIMET is the primary obligor on two worker compensation bonds issued on
behalf of a former subsidiary of TIMET. Each of the bonds has a maximum
obligation of $1.5 million. The bonds were provided as part of the conditions
imposed upon the former subsidiary in order to self-insure its workers
compensation obligations. In July 2001, the former subsidiary filed for Chapter
11 bankruptcy protection. During the third quarter of 2002, TIMET received
notices that the issuers of the bonds have been required to make payments on one
of the bonds in respect to certain of these claims and have requested
reimbursement from TIMET for claims paid through September 17, 2002 in the
amount of approximately $.3 million, which TIMET has accrued as of September 30,
2002. In addition, TIMET may be liable for up to an additional $1.2 million on
this bond if further claims on this bond are filed. Based upon current loss
projections, TIMET anticipates payouts of at least an additional $.6 million
under the bond and has accrued such amount at September 30, 2002. At this time
the insurance company has not paid any claims under the other bond, and no such
payments are currently anticipated. Accordingly, no accrual has been recorded
for potential claims that could be filed under the other bond. TIMET may revise
its estimated liability under these bonds in the future.
In October 2002, TIMET amended its existing U.S. asset-based revolving
credit agreement extending the maturity date to February 2006. Under the terms
of the amendment, borrowings are limited to the lesser of $90 million or a
formula-determined borrowing base derived from the value of TIMET's accounts
receivable, inventory and equipment. This facility requires TIMET's U.S. daily
cash receipts to be used to reduce outstanding borrowings, which may then be
reborrowed, subject to the terms of the agreement. Borrowings are collateralized
by substantially all of TIMET's U.S. assets. The credit agreement prohibits the
payment of dividends on TIMET's convertible preferred securities if excess
availability, as defined, is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on TIMET's common stock if
excess availability is less than $40 million, requires compliance with certain
financial covenants and contains other covenants customary in lending
transactions of this type. Excess availability is defined as unused borrowing
availability less certain contractual commitments such as letters of credit. As
of the October 2002 amendment date, unused borrowing availability was
approximately $69 million.
TIMET's U.S. credit agreement allows the lender to modify the borrowing
base formulas at its discretion, subject to certain conditions. During the
second quarter of 2002, TIMET's lender elected to exercise such discretion and
modified TIMET's borrowing base formulas, which reduced the amount that TIMET
could borrow against its inventory and equipment by approximately $7 million. In
the event the lender exercises such discretion in the future, such event could
have a material adverse impact on TIMET's liquidity.
TIMET's United Kingdom subsidiary also has a credit agreement that provides
for borrowings limited to the lesser of pound sterling 30 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment. As of September 30, 2002, the outstanding balance of
this facility was approximately $1.3 million with unused borrowing availability
was approximately $37 million.
TIMET also has overdraft and other credit facilities at certain of its
other European subsidiaries. These facilities accrue interest at various rates
and are payable on demand. Unused borrowing availability as of September 30,
2002 under these facilities was approximately $13 million.
In September 2002, Moody's Investor Service downgraded its rating on
TIMET's convertible preferred securities to Caa2 from B3, and Standard & Poor's
Ratings Services lowered its rating on such securities to CCC- from CCC. S&P has
further indicated that it will lower its credit rating on such securities to D
after the dividend payment due on December 1, 2002 is actually deferred. TIMET's
ability to obtain additional capital in the future, or its ability to obtain
capital on terms TIMET deemed appropriate, could be negatively affected by these
downgrades.
In October 2002, TIMET exercised its right to defer future dividend
payments on its convertible preferred securities for a period of up to 20
consecutive quarters. Dividends will continue to accrue and interest will
continue to accrue at the coupon rate on the principal and unpaid dividends.
This deferral is effective for TIMET's December 1, 2002 scheduled dividend
payment. TIMET may consider resuming payment of dividends on the convertible
preferred securities once the outlook for TIMET's results from operations
improves substantially`. Since TIMET exercised its right to defer dividend
payments, it is unable to, among other things, pay dividends on or reacquire its
capital stock during the deferral period.
In November 2002, TIMET announced that its board of directors had
unanimously approved a reverse split of TIMET's common stock at a ratio ranging
from one-for-eight up to and including one-for-ten. The reverse stock split
proposal will be submitted to TIMET's stockholders for approval at an upcoming
special meeting called for that purpose. TIMET will announce the date, time and
place of its special meeting once it has been determined. Assuming stockholder
approval, the TIMET board of directors will determine the applicable reverse
split ratio and implement the reverse stock split at that ratio, but will retain
the discretion not to proceed with this transaction if it determines that it is
not in the best interest of TIMET or its stockholders. Implementing such TIMET
reverse stock split would have no financial statement impact to the Company, and
Tremont's ownership interest in TIMET would not change as a result of the
reverse stock split. TIMET also announced that its board of directors also
approved a reduction in the number of shares of TIMET common stock that it is
authorized to issue from 100 million to 10 million. Such reduction, also subject
to TIMET stockholder approval, would become effective upon implementation of the
reverse split.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and may in the future seek to raise additional capital, modify
its common and preferred dividend policies, restructure ownership interests,
incur, refinance or restructure indebtedness, repurchase shares of capital
stock, sell assets, or take a combination of such steps or other steps to
increase or manage its liquidity and capital resources. In the normal course of
business, TIMET investigates, evaluates, discusses and engages in acquisition,
joint venture, strategic relationship and other business combination
opportunities in the titanium, specialty metal and other industries. In the
event of any future acquisition or joint venture opportunities, TIMET may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
Tremont Corporation
Tremont is primarily a holding company which, at September 30, 2002, owned
approximately 39% of TIMET and 21% of NL. At September 30, 2002, the market
value of the 12.3 million shares of TIMET and the 10.2 million shares of NL held
by Tremont was approximately $20 million and $148 million, respectively.
As previously reported, in July 2000 Tremont entered into a voluntary
settlement agreement with the Arkansas Department of Environmental Quality and
certain other PRPs pursuant to which Tremont and the other PRPs will undertake
certain investigatory and interim remedial activities at a former mining site
located in Hot Springs County, Arkansas. Tremont currently believes that it has
accrued adequate amounts ($4.0 million at September 30, 2002) to cover its share
of probable and reasonably estimable environmental obligations for these
activities. No reasonable estimate can currently be made of any final
remediation measures which might be imposed.
Tremont has received a demand from Halliburton to assume the defense of,
and indemnify Halliburton with respect to, the alleged liability of Atlas
Bradford Corporation as one of several PRPs in connection with a Texas State
Superfund Site known as the Force Road Oil and Vacuum Truck Company Site located
in Arcola, Texas. Atlas Bradford allegedly disposed of wastes from its Bryan,
Texas petroleum services operations at the Force Road Site. As part of a 1990
restructuring resulting in the separation of Tremont from Baroid Corporation, a
wholly-owned subsidiary of Tremont received title to the Bryan property.
Halliburton is the successor to Baroid. Tremont has declined to assume the
defense of the Force Road Site matter and has rejected Halliburton's indemnity
claim with respect thereto. Tremont believes that any liability in the Force
Road Site matter represents an obligation retained by Baroid in connection with
its historical petroleum services business. A subsidiary of Halliburton, along
with 15 other respondents, executed an Agreed Administrative Order with the
Texas Natural Resource Conservation Commission dated August 29, 2002, pursuant
to which the Respondents agreed to perform a site investigation and feasibility
study of the site. Tremont has not been provided any information or basis to
believe that it might have any liability for the Force Road Site, but has been
informed that present cost estimates for the site investigation are currently
expected to be less than $1 million. Tremont intends to vigorously defend itself
against any and all allegations of such liability in this matter. Tremont
presently believes, based upon the relatively small volume of material disposed
of at the site from the Bryan, Texas operations, that, any associated liability
would not be material. Tremont sold the Bryan property in 1994. Tremont's
Chairman and Chief Executive Officer is also a member of the board of directors
of Halliburton and intends to recuse himself from any involvement in this
matter. NL is one of the named respondents at the site, as well.
Tremont records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites, including the Hot Springs County, Arkansas site discussed above.
The imposition of more stringent standards or requirements under environmental
laws or regulations, the results of future testing and analysis undertaken by
Tremont at its non-operating facilities, or a determination that Tremont is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future. Environmental exposures are difficult to assess
and estimate for numerous reasons including the complexity and differing
interpretations of governmental regulations; the number of PRPs and the PRPs
ability or willingness to fund such allocation of costs, their financial
capabilities, the allocation of costs among PRPs; the multiplicity of possible
solutions; and the years of investigatory, remedial and monitoring activity
required. It is possible that future developments could adversely affect
Tremont's business, results of operations, financial condition or liquidity.
There can be no assurances that some, or all, of these risks would not result in
liabilities that would be material to Tremont's business, results of operations,
financial position or liquidity.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS, NL's majority-owned environmental management
subsidiary. Such intercompany loan between EMS and Tremont ($11.9 million
outstanding at September 30, 2002), collateralized by 10.2 million shares of NL
common stock owned by Tremont, is eliminated in Valhi's consolidated financial
statements. In October 2002, Tremont entered into a new $15 million revolving
credit facility with NL, also collateralized by the shares of NL common stock
owned by Tremont, which replaced its loan from EMS. The new facility, which
matures in December 2004, will also be eliminated in Valhi's consolidated
financial statements.
Tremont expects to receive approximately $25.5 million from NL's additional
dividend in the fourth quarter of 2002, as discussed above. Tremont expects to
use approximately $12 million of such dividend to repay the outstanding balance
of its revolving loan from NL, which revolving credit facility Tremont expects
to maintain. The remainder of such dividend will be available for Tremont's
general corporate purposes.
In April 2002, Tremont reached an agreement with the U.S. Internal Revenue
Service ("IRS") pursuant to which the IRS's previously-reported $8.3 million
assessment related to Tremont's 1998 federal income tax return was settled. The
settlement resulted in no additional cash income tax payment by Tremont but did
result in a reduction of the amount of Tremont's U.S. net operating loss
carryforwards that arose in periods prior to the time when Tremont became a
member of the same U.S. federal income tax group of which Valhi is a member.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to obtain financing from
related parties or third parties, raise additional capital, modify its dividend
policy, restructure ownership interests of subsidiaries and affiliates, incur,
refinance or restructure indebtedness, purchase shares of its common stock,
consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
then-available cash, issuing equity securities or incurring indebtedness.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries (NL,
CompX, Tremont and Waste Control Specialists). Accordingly, Valhi's long-term
ability to meet its parent company level corporate obligations is dependent in
large measure on the receipt of dividends or other distributions from its
subsidiaries. NL increased its regular quarterly dividend from $.035 per share
to $.15 per share in the first quarter of 2000, and NL further increased its
regular quarterly dividend to $.20 per share in the fourth quarter of 2000. At
the current $.20 per share quarterly rate, and based on the 30.1 million NL
shares held by Valhi at September 30, 2002, Valhi would receive aggregate annual
regular dividends from NL of approximately $24.1 million. NL also expects to pay
a special dividend in the fourth quarter of 2002, as discussed below. Tremont
Group, Inc. owns 80% of Tremont Corporation. Tremont Group is owned 80% by Valhi
and 20% by NL. Tremont's regular quarterly dividend is currently $.07 per share.
At that rate, and based upon the 5.1 million Tremont shares owned by Tremont
Group at September 30, 2002, Tremont Group would receive aggregate annual
regular dividends from Tremont of approximately $1.4 million. Tremont Group
intends to pass-through the regular dividends it receives from Tremont to its
shareholders (Valhi and NL). Based on Valhi's 80% ownership of Tremont Group,
Valhi would receive $1.2 million in annual regular dividends from Tremont Group
as a pass-through of Tremont Group's dividends from Tremont. CompX's regular
quarterly dividend is currently $.125 per share. At this current rate and based
on the 10.4 million CompX shares held by Valhi and its wholly-owned subsidiary
Valcor at September 30, 2002, Valhi/Valcor would receive annual regular
dividends from CompX of $5.2 million. Various credit agreements to which certain
subsidiaries or affiliates are parties contain customary limitations on the
payment of dividends, typically a percentage of net income or cash flow;
however, such restrictions in the past have not significantly impacted Valhi's
ability to service its parent company level obligations. Valhi has not
guaranteed any indebtedness of its subsidiaries or affiliates. To the extent
that one or more of Valhi's subsidiaries were to become unable to maintain its
current level of dividends, either due to restrictions contained in the
applicable subsidiary's credit agreements or otherwise, Valhi parent company's
liquidity could become adversely impacted. In such an event, Valhi might
consider reducing or eliminating its dividend or selling interests in
subsidiaries or other assets.
At September 30, 2002, Valhi had $5.2 million of parent level cash and cash
equivalents, had $35 million of outstanding borrowings under its revolving bank
credit agreement and had $23 million of short-term demand loans payable to
Contran. In addition, Valhi had $36.4 million of borrowing availability under
its bank credit facility. During the first quarter of 2002, Valhi sold in market
transactions 515,000 shares of Halliburton common stock that had been classified
as trading securities for an aggregate of $8.7 million, and used a majority of
the proceeds to reduce its outstanding borrowings from Contran. In January and
February 2002, the size of Valhi's bank credit facility was increased by an
aggregate of $17.5 million to $72.5 million. In October 2002, holders
representing substantially all of the Company's LYONs exercised their right to
require the Company to redeem their LYONs for a cash redemption price of $27.3
million. Funds to pay the redemption price were provided by borrowings under
Valhi's revolving bank credit facility. Following the redemption of
substantially all of Valhi's remaining LYONs, approximately 619,000 shares of
Halliburton common stock were released to the Company from the LYONs escrow and
were sold in market transactions for aggregate proceeds of $9.5 million. The
Company has called the remaining nominal amount of LYONs for redemption in
December 2002.
In November 2002, the maturity date of Valhi's bank credit facility was
extended to October 31, 2003. At the same time, the size of the facility was
reduced to $70 million.
Valhi expects to receive approximately $75.3 million from NL's additional
dividend in the fourth quarter of 2002, as discussed above. Valhi expects to use
a portion of such dividend to repay the outstanding balance of its revolving
bank credit facility ($62 million), which revolving bank credit facility Valhi
expects to maintain. Valhi expects to use the remainder of such dividend to
reduce the outstanding balance of its short-term demand loan payable to Contran.
The terms of The Amalgamated Sugar Company LLC provide for annual "base
level" of cash dividend distributions (sometimes referred to as distributable
cash) by the LLC of $26.7 million, from which the Company is entitled to a 95%
preferential share. Distributions from the LLC are dependent, in part, upon the
operations of the LLC. The Company records dividend distributions from the LLC
as income upon receipt, which occurs in the same month in which they are
declared by the LLC. To the extent the LLC's distributable cash is below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributable cash in excess of the
base level until such shortfall is recovered. Based on the LLC's current
projections for 2002, Valhi currently expects that distributions received from
the LLC in 2002 will approximate its debt service requirements under its $250
million loans from Snake River Sugar Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt. At
September 30, 2002, the accrued and unpaid interest on the $80 million loan to
Snake River aggregated $26.6 million. Such accrued and unpaid interest is
classified as a noncurrent asset at September 30, 2002. The Company currently
believes it will ultimately realize both the $80 million principal amount and
the accrued and unpaid interest, whether through cash generated from the future
operations of Snake River and the LLC or otherwise (including any liquidation of
Snake River or the LLC). Following the repayment of Snake River's third-party
senior debt in April 2009, Valhi believes it will receive significant debt
service payments on its loan to Snake River as the cash flows that Snake River
previously would have been using to fund debt service on its third-party senior
debt ($14.5 million in 2002) would then become available, and would be required,
to be used to fund debt service payments on its loan from Valhi. Prior to the
repayment of the third-party senior debt, Snake River might also make debt
service payments to Valhi, if permitted by the terms of the senior debt.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for both financial reporting and
income tax purposes. However, because of Snake River's ability to call its $250
million loans to Valhi upon redemption of the Company's interest in the LLC, the
net cash proceeds (after repayment of the debt) generated by redemption of the
Company's interest in the LLC 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 policies, 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 and related entities 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. 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. Each of
Steven L. Watson, the Company's President and Chief Executive Officer, and Bobby
D. O'Brien, the Company's Vice President, Chief Financial Officer and Treasurer,
have evaluated the Company's disclosure controls and procedures as of a date
within 90 days of the filing date of this Form 10-Q. Based upon their
evaluation, these executive officers have concluded that the Company's
disclosure controls and procedures are effective as of the date of such
evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 2001 Annual Report and prior 2002 periodic reports
for descriptions of certain legal proceedings.
In late July 2002, following the announcement of the proposed merger of
Tremont and Valhi, four separate complaints were filed in the Court of Chancery
of the State of Delaware, New Castle County, against Tremont, Valhi and members
of Tremont's board of directors (Crandon Capital Partners, et al. v. J. Landis
Martin, et al., Andrew Neyman v. J. Landis Martin, et al., Herman M. Weisman
Revocable Trust v. J. Landis Martin, et al. and Alice Middleton v. J. Landis
Martin, et al.). In August 2002, at the request of the parties, the court
ordered that these actions be consolidated under the caption In Re Tremont
Corporation Shareholders Litigation (Consolidated C.A. No. 19785-NC) and that by
November 21, 2002, or such later date as the parties may agree, counsel for the
plaintiffs must file and serve a consolidated amended shareholder complaint. The
complaints, purported class actions, generally allege, among other things, that
the terms of the proposed merger of Valhi and Tremont are unfair, and that
defendants have violated their fiduciary duties. The complaints seek, among
other things, an order enjoining consummation of the proposed merger and the
award of unspecified damages, including attorney's fees and other costs. The
Company believes, and understands that each of the other defendants believe,
that the complaint is without merit, and intends, and understands that each of
the other defendants intend, to defend against the action vigorously.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). Trial began in phase I of this
previously-reported case before a Rhode Island state court jury in September
2002. On October 29, 2002, the trial judge declared a mistrial in the case when
the jury was unable to reach a verdict on the question of whether lead pigment
in paint on Rhode Island buildings is a public nuisance. No date has been set
for any further proceedings, including any possible retrial of the public
nuisance issue. Other claims made by the Attorney General, including violation
of the Rhode Island Unfair Trade Practices and Consumer Protection Act, strict
liability, negligence, negligent and fraudulent misrepresentation, civil
conspiracy, indemnity, and unjust enrichment remain pending and were not the
subject of this trial. Post trial motions by plaintiff and defendants for
judgment notwithstanding the mistrial are pending.
In September 2002, NL was served with a complaint in City of Chicago v.
American Cyanamid, et al. (Circuit Court of Cook County, Illinois, No.
02CH16212). The City of Chicago seeks damages to abate lead paint in a
single-count complaint alleging public nuisance against NL and seven other
former manufacturers of lead pigment. The time to respond to the complaint has
not yet occurred.
In October 2002, NL was served with a complaint in Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002). A
single individual seeks compensatory and punitive damages from NL and five other
former manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges causes of action in negligence and strict product liability
and seeks joint and several liability with claims of civil conspiracy, concert
of action, enterprise liability, and market share or alternative liability. The
time to respond to the complaint has not yet occurred.
Borden, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). In October 2002, the
court set a June 2003 trial date in this previously-reported matter.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175). Plaintiff has
filed an appeal of the grant of summary judgment in favor of NL.
In the previously reported cases of Houston Independent School District,
Harris County, Brownsville Independent School District, and Liberty Independent
School District, pending in various Texas state courts, each court has entered
an order abating, or staying, the case pending the result of the appeal in the
Spring Branch Independent School District case.
Gaines, et al., v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-0604). Plaintiffs have
voluntarily dismissed NL with prejudice in this previously-reported case.
In re Lead Paint Litigation (Superior Court of New Jersey, Law Division,
Middlesex County Civil Action Docket No. Mid-L-2754-01, Case Code 247). In
November 2002, the court entered an order dismissing this previously-reported
action with prejudice. The time for the filing of an appeal has not run.
Jefferson County School District v. Lead Industries Association, et al.
(District Court of Jefferson County, Mississippi, Case No. 2001-69). In November
2002, plaintiffs agreed to voluntarily dismiss with prejudice this
previously-reported case.
El Paso Independent School District v. Lead Industries Association, et al.
(District Court of El Paso County, Texas, No. 2002-2675). In November 2002, the
plaintiff in this previously-reported case dismissed its case without prejudice.
Since the filing of NL's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002, NL has been named as a defendant in asbestos and/or silica
cases in various jurisdictions brought on behalf of approximately 2,700
additional personal injury claimants. Included in the foregoing total is one
case in Mississippi state court involving approximately 2,100 plaintiffs (Jones
v. A. O. Smith, et al., Circuit Court, Judicial District, Jasper County,
Mississippi). NL anticipates that various of these cases will be set for trial
from time-to-time for the foreseeable future. In addition, cases on behalf of
approximately 2,600 such personal injury plaintiffs have been dismissed or
settled for immaterial amounts.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 - Agreement and Plan of Merger dated November 4, 2002 by
and among Valhi, Inc., Valhi Acquisition Corp. and
Tremont Corporation.
10.2 - Amendment No. 1 to the Agreement and Plan of Merger by
and among Valhi, Inc., Valhi Acquisition Corp. and
Tremont Corporation dated November 12, 2002.
10.3 - Agreement and Plan of Merger dated November 4, 2002 by
and among Valhi, Inc., Tremont Group, Inc. and Valhi
Acquisition Corp. II.
10.4 - Intercorporate Services Agreement between Contran
Corporation and Valhi, Inc. effective as of January 1,
2002.
*10.5 - Agreement between Sachtleben Chemie GmbH and Kronos
Titan-GmbH effective as of December 30, 1988 -
incorporated by reference to Exhibit No. 10.1 to Kronos
International's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
*10.6 - Supplementary Agreement dated as of May 3, 1996 to the
Agreement effective as of December 30, 1986 between
Sachtleben Chemie GmbH and Kronos Titan-GmbH. -
incorporated by reference to Exhibit No. 10.2 to Kronos
International's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
*10.7 - Second Supplementary Agreement dated as of January 8,
2002 to the Agreement effective as of December 30, 1986
between Sachtleben Chemie GmbH and Kronos Titan-GmbH. -
incorporated by reference to Exhibit No. 10.3 to Kronos
International's Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Portions of these exhibit have been omitted pursuant to a request for
confidential treatment made by NL.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2002.
None.
SIGNATURES
Pursuant to the requirements 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)
Date November 14, 2002 By /s/ Bobby D. O'Brien
---------------------------------
Bobby D. O'Brien
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date November 14, 2002 By /s/ Gregory M. Swalwell
------------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)
I, Steven L. Watson, the President and Chief Executive Officer of Valhi, Inc.,
certify that:
I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
1) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Steven L. Watson
- ---------------------------------------
Steven L. Watson
President and Chief Executive Officer
I, Bobby D. O'Brien, the Vice President, Chief Financial Officer and Treasurer
of Valhi, Inc., certify that:
I have reviewed this quarterly report on Form 10-Q of Valhi, Inc.;
1) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
2) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
5) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Bobby D. O'Brien
- ---------------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer
AGREEMENT AND PLAN OF MERGER
by and among
VALHI, INC.,
VALHI ACQUISITION CORP.
and
TREMONT CORPORATION
Dated as of November 4, 2002
Table of Contents
Page
ARTICLE I THE MERGER..................................................1
Section 1.1 The Merger......................................................1
Section 1.2 Effective Time..................................................1
Section 1.3 Certificate of Incorporation and Bylaws of the
Surviving Corporation.. ......................1
Section 1.4 Directors and Officers of the Surviving Corporation.............1
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES 1
Section 2.1 Effect on Capital Stock.........................................1
Section 2.2 Exchange of Certificates........................................1
Section 2.3 Certain Adjustments.............................................1
ARTICLE III REPRESENTATIONS AND WARRANTIES OF VALHI AND SUB.............1
Section 3.1 Organization....................................................1
Section 3.2 Capitalization..................................................1
Section 3.3 Authority.......................................................1
Section 3.4 No Violations: Consents and Approvals...........................1
Section 3.5 SEC Documents...................................................1
Section 3.6 Financial Statements............................................1
Section 3.7 Absence of Certain Changes......................................1
Section 3.8 Proxy Statement/Registration Statement..........................1
Section 3.9 State Anti-Takeover Statutes....................................1
Section 3.10 Brokers' Fees...................................................1
Section 3.11 Compliance with Laws............................................1
Section 3.12 No Litigation...................................................1
Section 3.13 Employee Matters................................................1
Section 3.14 Environmental Liability.........................................1
Section 3.15 Certain Tax Matters.............................................1
Section 3.16 Interim Operations of Sub.......................................1
Section 3.17 Knowledge.......................................................1
Section 3.18 No Undisclosed Information......................................1
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TREMONT...................1
Section 4.1 Organization....................................................1
Section 4.2 Capitalization..................................................1
Section 4.3 Authority.......................................................1
Section 4.4 No Violations: Consents and Approvals...........................1
Section 4.5 SEC Documents...................................................1
Section 4.6 Financial Statements............................................1
Section 4.7 Absence of Certain Changes......................................1
Section 4.8 Proxy Statement/Registration Statement..........................1
Section 4.9 State Anti-Takeover Statutes....................................1
Section 4.10 Brokers' Fees...................................................1
Section 4.11 Compliance with Laws............................................1
Section 4.12 No Litigation...................................................1
Section 4.13 Employee Matters................................................1
Section 4.14 Intellectual Property...........................................1
Section 4.15 Required Vote of Tremont Stockholders...........................1
Section 4.16 Certain Contracts...............................................1
Section 4.17 Environmental Liability.........................................1
Section 4.18 Taxes...........................................................1
Section 4.19 Knowledge.......................................................1
Section 4.20 No Undisclosed Information......................................1
ARTICLE V COVENANTS...................................................1
Section 5.1 Conduct of Business of Tremont..................................1
Section 5.2 Conduct of Business of Valhi....................................1
Section 5.3 Tremont Board Recommendation....................................1
Section 5.4 Access to Information...........................................1
Section 5.5 Registration Statement and Proxy Statement......................1
Section 5.6 Tremont Stockholders' Meeting...................................1
Section 5.7 Reasonable Efforts; Other Actions...............................1
Section 5.8 Public Announcements............................................1
Section 5.9 Notification of Certain Matters.................................1
Section 5.10 Expenses........................................................1
Section 5.11 Rule 145 Affiliates.............................................1
Section 5.12 Stock Exchange Listing..........................................1
Section 5.13 State Anti-Takeover Laws........................................1
Section 5.14 Tax-Free Transaction............................................1
ARTICLE VI CONDITIONS PRECEDENT........................................1
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger......1
Section 6.2 Conditions to the Obligations of Valhi and
Sub to Effect the Merger..... ....................1
Section 6.3 Conditions to the Obligations of Tremont to Effect the Merger...1
ARTICLE VII CLOSING.....................................................1
Section 7.1 Time and Place..................................................1
Section 7.2 Filings at the Closing..........................................1
ARTICLE VIII TERMINATION AND ABANDONMENT.................................1
Section 8.1 Termination by Valhi and/or Tremont.............................1
Section 8.2 Termination by Valhi............................................1
Section 8.3 Termination by Tremont..........................................1
Section 8.4 Procedure for Termination.......................................1
Section 8.5 Effect of Termination and Abandonment...........................1
ARTICLE IX SURVIVABILITY; INVESTIGATION................................1
Section 9.1 Survival of Representations and Warranties......................1
Section 9.2 Investigation...................................................1
ARTICLE X MISCELLANEOUS...............................................1
Section 10.1 Notices.........................................................1
Section 10.2 Binding Effect..................................................1
Section 10.3 Consent to Jurisdiction.........................................1
Section 10.4 Headings........................................................1
Section 10.5 Exhibits and Schedules..........................................1
Section 10.6 Certain Definitions.............................................1
Section 10.7 Governing Law...................................................1
Section 10.8 Waivers.........................................................1
Section 10.9 Counterparts....................................................1
Section 10.10Time Periods....................................................1
Section 10.11Amendment.......................................................1
Section 10.12Entire Agreement................................................1
Section 10.13Severability....................................................1
Exhibits
Exhibit A Directors and Officers of the Surviving Corporation
Exhibit B Form of Rule 145 Affiliate Letter
Schedules
Schedule 3.13 Valhi Employee Matters
Schedule 4.7 Absence of Certain Changes
Schedule 4.11 Compliance with Laws
Schedule 4.12 Litigation
Schedule 4.13 Tremont Employee Matters
Schedule 4.16 Certain Contracts
Schedule 5.1 Conduct of Business of Tremont
Schedule 5.1 Conduct of Business of Valhi
Index of Defined Terms
Term Section
---- -------
Acquisition Proposal.......................................................10.6
Affiliate..................................................................10.6
Agreement..........................................................Introduction
CERCLA.....................................................................3.14
Certificate of Merger...................... ................................1.2
Certificates.............................................................2.2(a)
Closing..................................... ...............................7.1
Closing Date................................. ..............................7.1
Code...................................................................Recitals
Constituent Corporations.................................................1.1(a)
DGCL.....................................................................1.1(a)
Effective Time............................ .................................1.2
ERISA...................................................................3.13(a)
Exchange Act............................... ............................ 3.4(b)
Exchange Agent...........................................................2.2(a)
Exchange Ratio...........................................................2.1(b)
Fairness Opinion...........................................................4.10
GAAP........................................ ..............................3.6
Governmental Authority.....................................................10.6
Intellectual Property......................................................4.14
Law......................................................................3.4(a)
Liens....................................................................3.3(a)
LLC Merger.................................................................10.6
Merger...................................................................1.1(a)
NL SEC Documents...........................................................10.6
NYSE.....................................................................2.2(f)
Person.....................................................................10.6
Proxy Statement..........................................................3.4(b)
Registration Statement...................................................3.4(b)
Rule 145 Affiliate.........................................................5.11
SEC......................................................................3.4(b)
Securities Act................................ .............................3.5
Sub................................................................Introduction
Sub Common Stock........................................................ 2.1(c)
Surviving Corporation....................................................1.1(a)
Taxes.................................................................... 4.18
TGI....................................................................Recitals
TGI Merger................................................................ 10.6
Tremont............................................................Introduction
Tremont Benefit Plans...................................................4.13(a)
Tremont Common Stock........................... .........................2.1(a)
Tremont Contracts..........................................................4.18
Tremont ERISA Affiliate.................................................4.13(a)
Tremont Financial Advisor..................................................4.10
Tremont Interim Balance Sheet................... ...........................4.6
Tremont LLC................................................................10.6
Tremont Material Adverse Effect.................. ..........................4.1
Tremont Preferred Stock........................... .........................4.3
Tremont SEC Documents.............................. ........................4.5
Tremont Stockholder Meeting......................... .......................3.8
Tremont Stockholders' Approval...........................................3.4(b)
Valhi............................................................. Introduction
Valhi Benefit Plans.....................................................3.13(a)
Valhi Common Stock............................... .......................2.1(b)
Valhi ERISA Affiliate...................................................3.13(a)
Valhi Interim Balance Sheet............................................... 3.6
Valhi Material Adverse Effect...............................................3.1
Valhi Preferred Stock....................................................3.2(a)
Valhi SEC Documents............................... .........................3.5
Valhi Subsidiaries.........................................................10.6
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger, dated as of November 4, 2002 (this
"Agreement"), by and among Valhi, Inc., a Delaware corporation ("Valhi"), Valhi
Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary
of Valhi ("Sub"), and Tremont Corporation, a Delaware corporation ("Tremont").
WHEREAS, the board of directors of each of Tremont, Valhi and Sub deem it
advisable and in the best interests of its respective corporation and
stockholders that Tremont become a wholly-owned subsidiary of Valhi pursuant to
the Merger (as defined below) on the terms and subject to the conditions of this
Agreement; and
WHEREAS, it is intended that, for Federal income tax purposes, the Merger
(or if the LLC Merger (as defined below) occurs, the Merger followed by the LLC
Merger) shall be a tax-free reorganization as described in the Internal Revenue
Code of 1986, as amended (the "Code"), with respect to the holders of common
stock, par value $1.00 per share ("Tremont Common Stock"), of Tremont, other
than Valhi and Tremont Group, Inc., a Delaware corporation ("TGI").
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1.......The Merger.
(a) In accordance with the provisions of this Agreement and the
Delaware General Corporation Law, as amended (the "DGCL"), at the Effective Time
(as defined below), Sub shall be merged (the "Merger") with and into Tremont,
and Tremont shall be the surviving corporation (hereinafter sometimes called the
"Surviving Corporation") in the Merger and shall continue its corporate
existence under the DGCL. At the Effective Time, the separate existence of Sub
shall cease, and the Surviving Corporation shall succeed to and assume all of
the rights and obligations of Sub. Tremont and Sub are hereinafter sometimes
collectively referred to as the "Constituent Corporations."
(b) The Merger shall have the effects on Tremont and Sub, as
Constituent Corporations of the Merger, provided for under the DGCL.
Section 1.2 Effective Time. The Merger shall become effective at the time
of filing of a certificate of merger with the Secretary of State of the State of
Delaware in accordance with the provisions of Section 252 of the DGCL (the
"Certificate of Merger"). The date and time when the Merger shall become
effective is herein referred to as the "Effective Time."
Section 1.3 Certificate of Incorporation and Bylaws of the Surviving
Corporation.
(a) At the Effective Time, the Certificate of Incorporation of
Tremont, as in effect immediately prior to the Effective Time, shall be amended
so that the operative provisions read in their entirety exactly as the
Certificate of Incorporation of Sub as in effect immediately prior to the
Effective Time, except that the name of the corporation specified therein shall
be Tremont Corporation.
(b) At the Effective Time, the Bylaws of Tremont, as in effect
immediately prior to the Effective Time, shall be amended so that the operative
provisions read in their entirety exactly as the Bylaws of Sub as in effect
immediately prior to the Effective Time, except that the name of the corporation
specified therein shall be Tremont Corporation.
Section 1.4 Directors and Officers of the Surviving Corporation. The
directors and officers of the Surviving Corporation shall be the Persons named
on Exhibit A hereto, all of whom will hold office from and after the Effective
Time until their respective successors are duly elected or appointed and qualify
in the manner provided in the Certificate of Incorporation and Bylaws of the
Surviving Corporation or as otherwise provided by Law (as defined below) or
their earlier resignation or removal.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES
Section 2.1 Effect on Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of Valhi, Sub, Tremont or the
holder of any shares of the following securities:
(a) Cancellation of Treasury Stock and Valhi-Owned Stock. Each share
of Tremont Common Stock (i) that is owned by Valhi, (ii) that is held by Tremont
as treasury stock and (iii) assuming the effective time of the TGI Merger (as
defined below) has occurred prior to the Effective Time, that is owned by TGI
shall, in each case, automatically be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
(b) Conversion of Tremont Common Stock. Subject to Section 2.2(f),
each issued and outstanding share of Tremont Common Stock (other than shares to
be canceled in accordance with Section 2.1(a) above) shall be converted into 3.4
shares of common stock, par value $.01 per share ("Valhi Common Stock"), of
Valhi (the "Exchange Ratio").
(c) Sub Common Stock. Each share of common stock, par value $.01 per
share, of Sub ("Sub Common Stock") shall be converted into and become one share
of common stock, par value $1.00 per share, of the Surviving Corporation.
Section 2.2 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Valhi shall appoint
Computershare Investor Services LLC or such other exchange agent mutually
agreeable to Valhi and Tremont to act as exchange agent (the "Exchange Agent")
in the Merger. At or prior to the Effective Time, Valhi shall provide to the
Exchange Agent, for the benefit of holders of shares of Tremont Common Stock,
certificates representing Valhi Common Stock issuable in exchange for
certificates representing shares of Tremont Common Stock pursuant to Section
2.1(b) ("Certificates") and an estimated amount in cash sufficient to satisfy
Valhi's obligations under Sections 2.2(e) and (f)
(b) As soon as reasonably practicable after the Effective Time,
Valhi shall cause the Exchange Agent to mail to each holder of record of shares
of Tremont Common Stock whose shares were converted into shares of Valhi Common
Stock pursuant to Section 2.1(b) (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in a form and have such other provisions as Valhi may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates evidencing Valhi Common Stock.
Upon surrender of a Certificate for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by Valhi, together with such
letter of transmittal, duly executed, and such other documents as may reasonably
be required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing the number
of whole shares of Valhi Common Stock to which the holder is entitled and an
amount of cash in lieu of any fractional share of Valhi Common Stock in
accordance with Section 2.2(f), and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of shares of
Tremont Common Stock that is not registered in the transfer records of Tremont,
payment may be made to a Person other than the Person in whose name the
Certificate so surrendered is registered if such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the Person requesting
such payment either shall pay any transfer or other taxes required by reason of
such payment being made to a Person other than the registered holder of such
Certificate or establish to the satisfaction of Valhi that such tax or taxes
have been paid or are not applicable. Until surrendered as contemplated by this
Section 2.2, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender such whole
number of shares of Valhi Common Stock provided by Section 2.1(b) and an amount
in cash in lieu of any fractional share of Valhi Common Stock in accordance with
Section 2.2(f). No interest will be paid or will accrue on the consideration
payable upon the surrender of any Certificate or on any cash payable pursuant to
Sections 2.2(e) or (f).
(c) All shares of Valhi Common Stock delivered, and cash in lieu of
any fractional shares thereof paid, upon the surrender of Certificates in
accordance with the terms of this Article II shall be deemed to have been paid
in full satisfaction of all rights pertaining to such shares. There shall be no
further registration of transfers on the stock transfer books of Tremont or its
transfer agent of the shares of Tremont Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article II.
(d) None of Valhi, Tremont, Sub or the Exchange Agent shall be
liable to any Person in respect of any shares or funds delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
All Certificates and funds held by the Exchange Agent for payment to the holders
of unsurrendered Certificates that remain unclaimed for twelve months after the
Effective Time shall be redelivered by the Exchange Agent to Valhi, upon demand,
and any holders of Certificates who have not theretofore complied with Section
2.2(b) shall thereafter look only to the Surviving Corporation for delivery of
any shares or funds, subject to applicable escheat and other similar Laws.
(e) Distributions With Respect to Unexchanged Shares. No dividends
or other distributions with respect to Valhi Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the Valhi Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.2(f), in each case until the surrender of such Certificate
in accordance with this Article II. Subject to the effect of applicable escheat
Laws, as soon as reasonably practicable following surrender of any such
Certificate there shall be paid to the holder of such Certificate, without
interest, (i) at the time of such surrender, the amount of any cash payable in
lieu of any fractional share of Valhi Common Stock to which such holder is
entitled pursuant to Section 2.2(f) and (ii) if such Certificate is exchangeable
for one or more whole shares of Valhi Common Stock, (x) at the time of such
surrender the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Valhi Common Stock and (y) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to such surrender and with a payment date subsequent to such surrender
payable with respect to such whole shares of Valhi Common Stock.
(f) No Fractional Shares. Notwithstanding anything to the contrary
contained herein, no certificates or scrip representing fractional shares of
Valhi Common Stock shall be issued upon the surrender for exchange of
Certificates, no dividend or distribution of Valhi shall relate to such
fractional share interests and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Valhi. In lieu of
the issuance of such fractional shares, Valhi shall pay each former holder of
Tremont Common Stock an amount in cash equal to the product obtained by
multiplying (A) the fractional share interest to which such former holder would
otherwise be entitled by (B) the average closing price per share for shares of
Valhi Common Stock as reported by the New York Stock Exchange (the "NYSE") (as
reported in The Wall Street Journal, or, if not reported therein, any other
authoritative source) during the ten trading days ending on the business day
that immediately precedes the Closing Date. The parties acknowledge and agree
that any such cash is not separately bargained-for consideration in the Merger,
but is being paid solely to avoid the inconvenience of issuing fractional
shares.
(g) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such Person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity against
any claim that may be made against it with respect to such Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificate the number of whole shares of Valhi Common Stock to which the holder
is entitled and, if applicable, any unpaid dividends and distributions
deliverable in respect thereof and any cash in lieu of fractional shares, in
each case pursuant to this Agreement.
Section 2.3 Certain Adjustments. If between the date hereof and the
Effective Time, the outstanding shares of Valhi Common Stock or of Tremont
Common Stock shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of shares,
or any dividend or distribution shall be declared thereon with a record date
within such period (other than normal quarterly cash dividends), the Exchange
Ratio shall be adjusted accordingly to provide to the holders of Tremont Common
Stock the same economic effect as contemplated by this Agreement prior to such
reclassification, recapitalization, split-up, combination, exchange or dividend
provided, however, that no portion of the consideration paid to holders of
Tremont Common Stock shall be in the form of anything other than voting stock
(within the meaning of Sections 368(a)(2)(B) and 368(a)(1)(C) of the Code) of
Valhi (except as provided in Section 2.2(f) above).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VALHI AND SUB
Valhi and Sub jointly and severally represent and warrant to Tremont as
follows:
Section 3.1 Organization. Each of Valhi and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Valhi owns directly all of the outstanding capital stock of Sub. Each
of Valhi and Sub has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
Each of Valhi and Sub is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualifications or
licenses necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
business, operations, financial condition or results of operations of Valhi or
would not reasonably be expected to delay or prevent the consummation of the
transactions contemplated hereby (a "Valhi Material Adverse Effect"). Valhi
previously has delivered to Tremont accurate and complete copies of its
Certificate of Incorporation and Bylaws, and Sub's Certificate of Incorporation
and Bylaws, each as currently in effect.
Section 3.2 Capitalization.
(a) The authorized capital stock of Valhi consists of 150,000,000
shares of Valhi Common Stock and 5,000,000 shares of Valhi preferred stock, par
value $.01 per share ("Valhi Preferred Stock"). As of the date hereof, there are
115,118,917 shares of Valhi Common Stock issued and outstanding and no shares of
Valhi Preferred Stock outstanding. As of the date hereof, there are outstanding
options to purchase 1,180,900 shares of Valhi Common Stock, and 4,065,000 shares
of Valhi Common Stock were reserved for future issuance under Valhi's 1997
Long-Term Incentive Plan. As of the date hereof, except as set forth in this
Section 3.2(a), no capital shares or other voting securities of Valhi were
outstanding or reserved for issuance. All shares of Valhi Common Stock to be
issued in the Merger at the Effective Time shall be, when issued, duly
authorized and validly issued, fully paid and nonassessable and free from all
pledges, claims, liens, charges, encumbrances and security interests of any kind
or nature whatsoever (collectively, "Liens"). There are no bonds, debentures,
notes or other indebtedness of Valhi having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any matter on
which stockholders of Valhi may vote. Except as set forth in this Section 3.2(a)
and for the transactions contemplated by this Agreement (including, without
limitation, the TGI Merger), there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which Valhi is a party or bound, obligating Valhi to issue,
deliver or sell, or cause to be issued, delivered or sold, additional capital
shares, voting securities or other ownership interests of Valhi or obligating
Valhi to issue, grant, extend or enter into any such security, option, warrant,
call, right, commitment, agreement, arrangement or undertaking. There are no
outstanding contractual obligations of Valhi to repurchase, redeem or otherwise
acquire any capital shares of Valhi.
(b) The authorized capital stock of Sub consists of 1,000 shares of
Sub Common Stock, all of which are issued and outstanding and are validly
issued, fully paid and nonassessable. As of the date hereof, there are no
outstanding options entitling the holders thereof to purchase shares of Sub
Common Stock.
Section 3.3 Authority. Each of Valhi and Sub has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized and approved by the boards of directors of Valhi and Sub and
by Valhi as the sole stockholder of Sub, and no other corporate proceedings on
the part of Valhi or Sub are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by each of Valhi and Sub and, assuming this
Agreement constitutes a legal, valid and binding agreement of Tremont,
constitutes a legal, valid and binding agreement of Valhi and Sub, as the case
may be, enforceable against each of them in accordance with its terms.
Section 3.4 No Violations: Consents and Approvals.
(a) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby nor compliance by Valhi and
Sub with any of the provisions hereof conflicts with, violates or results in any
breach of (i) any provision of the Certificate of Incorporation or Bylaws of
either of Valhi or Sub, (ii) any contract, agreement, instrument or
understanding to which Valhi or Sub is a party or by which Valhi, Sub or any of
their respective assets or properties is bound, or (iii) any law, judgment,
decree, order, statute, rule or regulation (a "Law") of any jurisdiction or
Governmental Authority (as defined below) applicable to Valhi or Sub or any of
their respective assets or properties, other than, in the case of the foregoing
clauses (ii) and (iii), such conflicts, violations or breaches that would not
reasonably be expected to have a Valhi Material Adverse Effect or for which
Valhi or Sub have received or, prior to the Merger, shall have received
appropriate consents or waivers.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
by or with respect to Valhi in connection with the execution and delivery of
this Agreement by Valhi or Sub or the consummation by Valhi or Sub of the
transactions contemplated hereby, except for (i) the filing with the Securities
and Exchange Commission (the "SEC") of (x) a proxy statement relating to the
approval by Tremont's stockholders as set forth in Section 4.15 (the "Tremont
Stockholders' Approval") of this Agreement and the transactions contemplated
hereby (as amended or supplemented from time to time, the "Proxy Statement"),
(y) a registration statement on Form S-4 (or other appropriate form) in
connection with the registration of the Valhi Common Stock to be issued in the
Merger (as amended or supplemented from time to time, the "Registration
Statement") and (z) such reports under Section 13(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as may be required in connection
with this Agreement and the transactions contemplated hereby, (ii) the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware
and (iii) such other consents, approvals, orders, authorizations, registrations,
declarations, licenses and filings (A) as may be required under (1) federal,
state or local environmental laws or (2) the "blue sky" laws of various states
or (B) that, if not obtained or made, would reasonably be expected to have a
Valhi Material Adverse Effect.
Section 3.5 SEC Documents. Valhi has timely filed or will timely file with
the SEC all documents (the "Valhi SEC Documents") required to be filed under the
Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act,
in each case since December 31, 1999. As of their respective dates, the Valhi
SEC Documents (other than preliminary materials) complied in all material
respects with the requirements of the Securities Act and the Exchange Act, as
the case may be, and in each case the rules and regulations promulgated
thereunder applicable to such Valhi SEC Documents. None of the Valhi SEC
Documents at the time of filing and effectiveness contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later Valhi SEC Documents.
Section 3.6 Financial Statements. As of their respective dates, the
financial statements of Valhi (including, in each case, any related notes)
included in the Valhi SEC Documents complied as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") (except,
in the case of unaudited financial statements, as permitted by Form 10-Q of the
SEC) applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and present fairly the consolidated
financial position of Valhi as at the dates thereof and the consolidated results
of its operations and statements of cash flows for the periods then ended.
Valhi's balance sheet included in its Form 10-Q for the quarter ended June 30,
2002 shall be referred to as the "Valhi Interim Balance Sheet."
Section 3.7 Absence of Certain Changes. Except as disclosed in the Valhi
SEC Documents and for the transactions contemplated hereby, since the date of
the Valhi Interim Balance Sheet, there has not been any change or event that
would have, or would reasonably be expected to have, a Valhi Material Adverse
Effect.
Section 3.8 Proxy Statement/Registration Statement. None of the information
regarding Valhi or Sub to be supplied by Valhi or Sub for inclusion or
incorporation by reference in the Registration Statement or the Proxy Statement
will, in the case of the Registration Statement, at the time it becomes
effective and at the Effective Time, and, in the case of the Proxy Statement, at
the time of its mailing to stockholders of Tremont and at the time of Tremont's
stockholders meeting for the purpose of obtaining the Tremont Stockholders'
Approval (the "Tremont Stockholder Meeting"), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading in light of
the circumstances when made. If at any time prior to the Effective Time any
event with respect to Valhi or Sub shall occur that is required to be described
in the Proxy Statement or the Registration Statement, such event shall be so
described, and an amendment or supplement shall be promptly filed with the SEC
and, as required by Law, disseminated to the stockholders of Tremont. The Proxy
Statement and the Registration Statement will (with respect to Valhi and Sub)
comply as to form in all material respects with the provisions of the Securities
Act and the Exchange Act.
Section 3.9 State Anti-Takeover Statutes. Each of Valhi and Sub has taken
all action necessary, if any, to exempt the transactions contemplated hereby
from the operation of any "business combination," "moratorium," "control share,"
"fair price," "interested stockholder," "affiliated transactions" or other state
anti-takeover statute or regulation.
Section 3.10 Brokers' Fees. Neither Valhi nor Sub nor any of Valhi's
Affiliates (other than Tremont) or their respective officers, directors or
agents has employed any broker, finder or financial advisor or incurred any
liability for any broker's fees, commissions, or financial advisory or finder's
fees in connection with any of the transactions contemplated by this Agreement,
other than McDonald Investments Inc.
Section 3.11 Compliance with Laws. Except as disclosed in the Valhi SEC
Documents or the NL SEC Documents (as defined below) filed with the SEC prior to
the date hereof, to the knowledge of Valhi, none of Valhi nor any of the Valhi
Subsidiaries (as defined below) has violated or failed to comply with any Law of
any Governmental Authority applicable to its business, properties or operations,
and Valhi has not received notification of asserted present or past violation or
failure to comply, except for violations and failures to comply that would not
reasonably be expected to have a Valhi Material Adverse Effect.
Section 3.12 No Litigation. Except as set forth in the Valhi SEC Documents
or the NL SEC Documents, there is no claim, litigation, investigation or
proceeding by any Person or Governmental Authority pending or, to Valhi's
knowledge, threatened, against Valhi or the Valhi Subsidiaries that would
reasonably be anticipated to have a Valhi Material Adverse Effect, nor is there
any judgment, decree, injunction, rule or order of any Governmental Authority or
arbitrator outstanding against Valhi or the Valhi Subsidiaries having, or that,
insofar as reasonably can be foreseen, in the future would reasonably be
anticipated to have a Valhi Material Adverse Effect.
Section 3.13 Employee Matters. Except as set forth on Schedule 3.13:
(a) With respect to each employee benefit plan, policy or agreement
covering employees, former employees or directors (or their beneficiaries ) of
Valhi or of any trade or business, whether or not incorporated that would be
deemed a "single employer" within the meaning of Section 4001(b) of ERISA (a
"Valhi ERISA Affiliate"), including without limitation any employee benefit
plans within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and any employment, retention,
severance or change in control agreement, in each case that is sponsored,
maintained or contributed to or required to be contributed to by Valhi or a
Valhi ERISA Affiliate (collectively, the "Valhi Benefit Plans"), since the date
of the Valhi Interim Balance Sheet, there have been no new plans adopted, nor
changes, additions or modification to any Valhi Benefit Plan, nor as of the date
hereof, any plans to adopt, change, add or modify any Valhi Benefit Plan which
either individually or in the aggregate would have a Valhi Material Adverse
Effect.
(b) All contributions and other payments required to have been made
by Valhi or any Valhi ERISA Affiliate to any Valhi Benefit Plan (or to any
Person pursuant to the terms thereof) have been made or the amount of such
payment or contribution obligation has been reflected in the financial
statements in Valhi's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
(c) Each of the Valhi Benefit Plans intended to be "qualified"
within the meaning of Section 401(a) of the Code and any trust that forms a part
of any of the Valhi Benefit Plans that is intended to be exempt under Section
501(a) or Section 501(c)(9) of the Code has been determined by the IRS to be so
qualified or exempt, as the case may be, and no circumstances exist that could
reasonably be expected to result in the revocation of any such determination.
Each of the Valhi Benefit Plans is and has been operated in all material
respects in compliance with its terms and all applicable laws, rules and
regulations governing such plan, including, without limitation, ERISA and the
Code.
(d) With respect to the Valhi Benefit Plans, individually and in the
aggregate, no event has occurred, there does not now exist any condition or set
of circumstances, that could reasonably be expected to subject Valhi or any
Valhi ERISA Affiliate to any material liability arising under the Code, ERISA or
any other applicable Law, or under any indemnity agreement to which Valhi or any
Valhi ERISA Affiliate is a party, excluding liability relating to benefit claims
and funding obligations payable in the ordinary course.
Section 3.14 Environmental Liability. Except as disclosed in the Valhi SEC
Documents or the NL SEC Documents, there are no legal, administrative, arbitral
or other proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature pending or, to Valhi's knowledge, threatened against Valhi or the Valhi
Subsidiaries seeking to impose, or that could reasonably be expected to result
in the imposition of any liability or obligation arising under common law or
under any local, state or federal environmental Law, including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), which liability or obligation could
reasonably be expected to result in a Valhi Material Adverse Effect. To Valhi's
knowledge, there is no reasonable basis for any such proceeding, claim, action
or governmental investigation that would impose any liability or obligation that
could reasonably be expected to result in a Valhi Material Adverse Effect.
Section 3.15 Certain Tax Matters. Neither Valhi nor, to Valhi's knowledge,
any other person, has taken or agreed to take any action that could reasonably
be expected to prevent the Merger (or, if the LLC Merger occurs, the Merger
followed by the LLC Merger) from constituting a "reorganization" under Section
368(a) of the Code with respect to the holders of Tremont Common Stock other
than Valhi and TGI. Valhi is not aware of any agreement, plan or other
circumstance that could reasonably be expected to prevent such qualification.
Section 3.16 Interim Operations of Sub. Sub was formed solely for the
purpose of engaging in the Merger and has not engaged in any business activities
or conducted any operations other than in connection with the Merger.
Section 3.17 Knowledge.
The phrases "to Valhi's knowledge" or "to the knowledge of Valhi"
shall mean the actual knowledge of any executive officer of Valhi.
Section 3.18 No Undisclosed Information. To Valhi's knowledge, Valhi has
not failed to disclose to Tremont any fact material to the business, properties,
prospects, operations, financial condition or results of operations of Valhi. To
Valhi's knowledge, no representation or warranty by Valhi or Sub contained in
this Agreement and no statement contained in any document (including historical
financial statements and the Schedules to this Agreement), certificate or other
writing furnished or to be furnished by Valhi to Tremont or any of its
representatives pursuant to the provisions hereof or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was made, in order to make the
statements herein or therein not misleading. Notwithstanding the foregoing or
any other provision herein, Valhi has made no representation or warranty with
respect to any financial or other projections made by Valhi.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TREMONT
Tremont represents and warrants to Valhi and Sub as follows:
Section 4.1 Organization. Tremont is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Tremont
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Tremont is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualifications or licenses necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the business, operations,
financial condition or results of operations of Tremont or would not reasonably
be expected to delay or prevent the consummation of the transactions
contemplated hereby (a "Tremont Material Adverse Effect"). Tremont previously
has delivered to Valhi accurate and complete copies of its Certificate of
Incorporation and Bylaws, each as currently in effect.
Section 4.2 Capitalization. The authorized capital stock of Tremont
consists of 14,000,000 shares of Tremont Common Stock and 1,000,000 shares of
Tremont preferred stock, par value $1.00 per share ("Tremont Preferred Stock").
As of the date hereof, there are 6,424,858 shares of Tremont Common Stock issued
and outstanding (net of 1,392,101 shares held in Tremont's treasury) and no
shares of Tremont Preferred Stock outstanding. As of the date hereof, there are
outstanding no options to purchase shares of Tremont Common Stock. As of the
date hereof, except as set forth in this Section 4.2, no capital shares or other
voting securities of Tremont were issued, reserved for issuance or outstanding.
There are no bonds, debentures, notes or other indebtedness of Tremont having
the right to vote (or convertible into, or exchangeable for, securities having
the right to vote) on any matter on which stockholders of Tremont may vote.
There are no outstanding securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which
Tremont is a party or bound, obligating Tremont to issue, deliver or sell, or
cause to be issued, delivered or sold, additional capital shares, voting
securities or other ownership interests of Tremont or obligating Tremont to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking. There are no
outstanding contractual obligations of Tremont to repurchase, redeem or
otherwise acquire any capital shares of Tremont.
Section 4.3 Authority. Tremont has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized and approved by the board of directors of Tremont, and, except for
the requisite approval of this Agreement and the transactions contemplated
hereby, no other corporate proceedings on the part of Tremont are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Tremont and,
assuming this Agreement constitutes a legal, valid and binding agreement of
Valhi, constitutes a legal, valid and binding agreement of Tremont enforceable
against it in accordance with its terms.
Section 4.4 No Violations: Consents and Approvals.
(a) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby nor compliance by Tremont
with any of the provisions hereof conflicts with, violates or results in any
breach of (i) any provision of the Certificate of Incorporation or Bylaws of
Tremont, (ii) any contract, agreement, instrument or understanding to which
Tremont is a party or by which Tremont or any of its assets or properties is
bound, or (iii) any Law of any jurisdiction or Governmental Authority applicable
to Tremont or any of its assets or properties, other than, in the case of the
foregoing clauses (ii) and (iii), such conflicts, violations or breaches that
would not reasonably be expected to have a Tremont Material Adverse Effect or
for which Tremont has received or, prior to the Merger, shall have received
appropriate consents or waivers.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
by or with respect to Tremont in connection with the execution and delivery of
this Agreement by Tremont or the consummation by Tremont of the transactions
contemplated hereby, except for (i) the filing with the SEC of (x) the Proxy
Statement, (y) the Registration Statement and (z) such reports under Section
13(a) of the Exchange Act as may be required in connection with this Agreement
and the transactions contemplated hereby, (ii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and (iii) such other
consents, approvals, orders, authorizations, registrations, declarations,
licenses and filings (A) as may be required under (1) federal, state or local
environmental laws or (2) the "blue sky" laws of various states or (B) that, if
not obtained or made, would reasonably be expected to have a Tremont Material
Adverse Effect.
Section 4.5 SEC Documents. Tremont has timely filed or will timely file
with the SEC all documents (the "Tremont SEC Documents") required to be filed
under the Securities and the Exchange Act, in each case since December 31, 1999.
As of their respective dates, the Tremont SEC Documents (other than preliminary
materials) complied in all material respects with the requirements of the
Securities Act and the Exchange Act, as the case may be, and in each case the
rules and regulations promulgated thereunder applicable to such Tremont SEC
Documents. None of the Tremont SEC Documents at the time of filing and
effectiveness contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except to the extent such statements have been modified or
superseded by later Tremont SEC Documents.
Section 4.6 Financial Statements. As of their respective dates, the
financial statements of Tremont (including, in each case, any related notes)
included in the Tremont SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP (except, in the case of unaudited financial statements, as permitted by
Form 10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto) and present fairly
the consolidated financial position of Tremont as at the dates thereof and the
consolidated results of its operations and statements of cash flows for the
periods then ended. Tremont's balance sheet included in its Form 10-Q for the
quarter ended June 30, 2002 shall be referred to as the "Tremont Interim Balance
Sheet."
Section 4.7 Absence of Certain Changes. Except as disclosed in the Tremont
SEC Documents or on Schedule 4.7 and for the transactions contemplated hereby,
since the date of the Tremont Interim Balance Sheet, there has not been any
change or event that would have, or would reasonably be expected to have, a
Tremont Material Adverse Effect.
Section 4.8 Proxy Statement/Registration Statement. None of the information
regarding Tremont to be supplied by Tremont for inclusion or incorporation by
reference in the Registration Statement or the Proxy Statement will, in the case
of the Registration Statement, at the time it becomes effective and at the
Effective Time, and, in the case of the Proxy Statement, at the time of its
mailing to stockholders of Tremont and at the time of the Tremont Stockholder
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading in light of the circumstances when made. If at
any time prior to the Effective Time any event with respect to Tremont shall
occur that is required to be described in the Proxy Statement or the
Registration Statement, such event shall be so described, and an amendment or
supplement shall be promptly filed with the SEC and, as required by Law,
disseminated to the stockholders of Tremont. The Proxy Statement and the
Registration Statement will (with respect to Tremont) comply as to form in all
material respects with the provisions of the Securities Act and the Exchange
Act.
Section 4.9 State Anti-Takeover Statutes. Tremont has taken all action
necessary, if any, to exempt the transactions contemplated hereby from the
operation of any "business combination," "moratorium," "control share," "fair
price," "interested stockholder," "affiliated transactions" or other state
anti-takeover statute or regulation.
Section 4.10 Brokers' Fees. Neither Tremont nor Sub nor any of Tremont's
Affiliates (other than Valhi) or their respective officers, directors or agents
has employed any broker, finder or financial advisor or incurred any liability
for any broker's fees, commissions, or financial advisory or finder's fees in
connection with any of the transactions contemplated by this Agreement, other
than Morgan Joseph & Co. Inc. (the "Tremont Financial Advisor"). Substantially
concurrently herewith, Tremont's board of directors or the special committee
thereof has received the opinion of the Tremont Financial Advisor to the effect
that, on the date thereof, the consideration to be received by holders (other
than Valhi and its Affiliates) of shares of Tremont Common Stock pursuant to
this Agreement is fair from a financial point of view to such holders (the
"Fairness Opinion").
Section 4.11 Compliance with Laws. Except as disclosed in the Tremont SEC
Documents filed with the SEC prior to the date hereof or on Schedule 4.11, to
the knowledge of Tremont, Tremont has not violated or failed to comply with any
Law of any Governmental Authority applicable to its business, properties or
operations, and Tremont has not received notification of asserted present or
past violation or failure to comply, except for violations and failures to
comply that would not reasonably be expected to have a Tremont Material Adverse
Effect.
Section 4.12 No Litigation. Except as set forth in the Tremont SEC
Documents or on Schedule 4.12, there is no claim, litigation, investigation or
proceeding by any Person or Governmental Authority pending or, to Tremont's
knowledge threatened, against Tremont that would reasonably be anticipated to
have a Tremont Material Adverse Effect, nor is there any judgment, decree,
injunction, rule or order of any Governmental Authority or arbitrator
outstanding against Tremont having, or that, insofar as reasonably can be
foreseen, in the future would reasonably be anticipated to have a Tremont
Material Adverse Effect.
Section 4.13 Employee Matters.
(a) Schedule 4.13 contains a true and complete list of each employee
benefit plan, policy or agreement covering employees, former employees or
directors of any of Tremont or their beneficiaries, or providing benefits to
such persons in respect of services provided to any such entity, including
without limitation any employee benefit plans within the meaning of Section 3(3)
of ERISA, and any employment, retention, severance or change in control
agreement, in each case that is sponsored, maintained or contributed to or
required to be contributed to by Tremont or by any trade or business, whether or
not incorporated (a "Tremont ERISA Affiliate") that would be deemed a "single
employer" within the meaning of Section 4001(b) of ERISA (collectively, the
"Tremont Benefit Plans"). Other than as set forth on Schedule 4.13, since
December 31, 1999, there have been no new plans adopted, nor changes, additions
or modification to any Tremont Benefit Plan. As of the date hereof, Tremont has
no plans to adopt, change, add or modify any Tremont Benefit Plan.
(b) With respect to each Tremont Benefit Plan, Tremont has
previously delivered or made available to Valhi or its representatives true and
complete copies of the following: (i) the plan document and all amendments
thereto (or, if such plan is unwritten, a true and complete summary of its
terms); (ii) any related trust or other funding vehicle; (iii) if applicable,
the two most recent Internal Revenue Service Forms 5500 and related attachments;
(iv) if applicable, the most recent Internal Revenue Service determination
letter; and (v) any material correspondence or employee communications.
(c) Except as set forth on Schedule 4.13, all contributions and
other payments required to have been made by Tremont or any Tremont ERISA
Affiliate to any Tremont Benefit Plan (or to any Person pursuant to the terms
thereof) have been made or the amount of such payment or contribution obligation
has been reflected in the financial statements in Tremont's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
(d) Except as set forth on Schedule 4.13, each of the Tremont
Benefit Plans intended to be "qualified" within the meaning of Section 401(a) of
the Code and any trust that forms a part of any of the Tremont Benefit Plans
that is intended to be exempt under Section 501(a) or Section 501(c)(9) of the
Code has been determined by the IRS to be so qualified or exempt, as the case
may be, and no circumstances exist that could reasonably be expected to result
in the revocation of any such determination. Each of the Tremont Benefit Plans
is and has been operated in all material respects in compliance with its terms
and all applicable laws, rules and regulations governing such plan, including,
without limitation, ERISA and the Code.
(e) Except as set forth on Schedule 4.13, with respect to the
Tremont Benefit Plans, individually and in the aggregate, no event has occurred,
there does not now exist any condition or set of circumstances, that could
reasonably be expected to subject Tremont or any Tremont ERISA Affiliate to any
material liability arising under the Code, ERISA or any other applicable Law, or
under any indemnity agreement to which Tremont or any Tremont ERISA Affiliate is
a party, excluding liability relating to benefit claims and funding obligations
payable in the ordinary course.
(f) Other than continuation coverage required to be provided under
Section 4980B of the Code or Part 6 of Title I of ERISA or otherwise as provided
by state law or as set forth on Schedule 4.13, none of the Tremont Benefit Plans
that are "welfare plans," within the meaning of Section 3(1) of ERISA, provides
for any benefits with respect to current or former employees for periods
extending beyond their retirement or other termination of service, other than
benefits the full cost of which is borne by such former employees.
(g) Except as otherwise disclosed to Valhi, the consummation of the
Merger will not, either alone or in combination with another event undertaken by
Tremont prior to the date hereof, (i) entitle any current or former employee,
agent, independent contractor or officer of Tremont to severance pay,
unemployment compensation or any other payment, (ii) accelerate the time of
payment or vesting or increase the amount of compensation due any such employee,
officer, agent or independent contractor or (iii) constitute a "change in
control" under any Tremont Benefit Plan.
Section 4.14 Intellectual Property. Title to all registered Intellectual
Property is recorded on records in the name of Tremont and, to the extent
applicable, all affidavits of continued use and incontestability in respect of
such registered intellectual property have been timely filed. Tremont owns or
possesses licenses or other valid rights to use, and upon consummation of the
transactions contemplated by this Agreement, the Surviving Corporation shall own
or possess licenses or other valid rights to use (without the making of any
payment to others or the obligation to grant rights to others in exchange), all
Intellectual Property necessary to the conduct of the business of Tremont as
currently conducted, including, without limitation, all releases required in
connection with quotes, testimonials or likenesses utilized in editorial or
promotional material. Tremont's right title and interest in such Intellectual
Property is not being opposed by any claim or demand or in any proceeding,
action, litigation or order to which Tremont or any Person who has granted a
license or other right to use Intellectual Property to Tremont or who has been
granted a license or other right to use Intellectual Property by Tremont, is a
party or subject, nor to the knowledge of Tremont, is any such claim, demand,
proceeding, action, litigation, or court order threatened. The conduct of the
business of Tremont as currently conducted does not materially infringe or
conflict with any intellectual property of others. As used in this Agreement,
"Intellectual Property" means (i) all U.S. and foreign trademarks, patents,
service marks, trade names, copyrights, mask works and designs that are pending,
applied for, granted, or registered in any country or jurisdiction of the world
and that are owned by Tremont and used in connection with its business; (ii) all
unregistered trademarks, patents, service marks, and trade names that are owned
by Tremont and used in connection with its business; and (iii) all licenses,
contracts, permissions and other agreements relating to the business to which
Tremont is a party relating in any way to rights in any of the foregoing.
Section 4.15 Required Vote of Tremont Stockholders. The affirmative vote of
the holders of a majority of the outstanding shares of Tremont Common Stock is
required to approve the Merger. No other vote of the stockholders of Tremont is
required by Law, the Certificate of Incorporation or the Bylaws of Tremont or
otherwise in order for Tremont to consummate the Merger and the transactions
contemplated hereby.
Section 4.16 Certain Contracts. Except as disclosed in the Tremont SEC
Documents, Tremont is not a party to or bound by (i) any "material contract" (as
such term is defined in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any
non-competition agreement or any other agreement or obligation that purports to
limit in any material respect the manner in which, or the localities in that,
all or any material portion of the business of Tremont is or would be conducted,
(iii) any exclusive supply or purchase contracts or any exclusive requirements
contracts or (iv) any contract or other agreement that would prohibit or
materially delay the consummation of the Merger or any of the transactions
contemplated by this Agreement (collectively, the "Tremont Contracts"). Tremont
has delivered to Valhi or provided to Valhi for review, prior to the execution
of this Agreement, complete and correct copies of all Tremont Contracts not
filed as exhibits to the Tremont SEC Documents. Each Tremont Contract is valid
and binding on Tremont and is in full force and effect, and Tremont has
performed in all material respects all obligations required to be performed by
it to date under each Tremont Contract, except where such noncompliance would
not reasonably be expected to result in a Tremont Material Adverse Effect. To
Tremont's knowledge, Tremont has not received notice of any violation or default
under (nor does there exist any condition that with the passage of time or the
giving of notice or both would result in such a violation or default under) any
Tremont Contract.
Section 4.17 Environmental Liability. Except as disclosed in the Tremont
SEC Documents, there are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature pending or, to Tremont's knowledge, threatened against Tremont seeking to
impose, or that could reasonably be expected to result in the imposition of any
liability or obligation arising under common law or under any local, state or
federal environmental Law, including, without limitation, CERCLA, which
liability or obligation could reasonably be expected to result in a Tremont
Material Adverse Effect. To Tremont's knowledge, there is no reasonable basis
for any such proceeding, claim, action or governmental investigation that would
impose any liability or obligation that could reasonably be expected to result
in a Tremont Material Adverse Effect.
Section 4.18 Taxes. Except as set forth on Schedule 4.18, Tremont has (i)
filed all Tax returns and reports required to be filed by it (after giving
effect to any filing extension properly granted by a Governmental Authority
having authority to do so) and all such returns and reports are accurate and
complete in all material respects; and (ii) paid all Taxes shown on such returns
and reports as required to be paid by it, and, except as disclosed in the
Tremont SEC Documents, the most recent financial statements contained in the
Tremont SEC Documents reflect an adequate reserve for all material Taxes payable
by Tremont for all taxable periods and portions thereof through the date of such
financial statements. Since the date of the Tremont Interim Balance Sheet,
Tremont has not incurred any material liability for Taxes other than in the
ordinary course of business. To Tremont's knowledge, no deficiencies for any
Taxes have been proposed, asserted or assessed against Tremont, and no requests
for waivers of the time to assess any such Taxes are pending. As used in this
Agreement, "Taxes" shall include all federal, state, local and foreign income,
property, sales, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, together with penalties, interest or additions to Tax with
respect thereto.
Section 4.19 Knowledge.
The phrases "to Tremont's knowledge" or "to the knowledge of
Tremont" shall mean the actual knowledge of any executive officer of Tremont.
Section 4.20 No Undisclosed Information. To Tremont's knowledge, Tremont
has not failed to disclose to Valhi any fact material to the business,
properties, prospects, operations, financial condition or results of operations
of Tremont. To Tremont's knowledge, no representation or warranty by Tremont
contained in this Agreement and no statement contained in any document
(including historical financial statements and the Schedules to this Agreement),
certificate or other writing furnished or to be furnished by Tremont to Valhi or
any of its representatives pursuant to the provisions hereof or in connection
with the transactions contemplated hereby, contains or will contain any untrue
statement of material fact or omits or will omit to state any material fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading. Notwithstanding the
foregoing or any other provision herein, Tremont has made no representation or
warranty with respect to any financial or other projections made by Tremont.
ARTICLE V
COVENANTS
Section 5.1 Conduct of Business of Tremont. During the period from the date
of this Agreement to the Effective Time, Tremont shall carry on its businesses
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact its current business organization,
goodwill and ongoing businesses; provided, however, and without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, except as expressly permitted or contemplated by this
Agreement, as shall be consented by Valhi (which consent shall not be
unreasonably withheld or delayed) or as set forth on Schedule 5.1, Tremont shall
not and shall not authorize or commit or agree to:
(a) (i) except for dividends paid on Tremont Common Stock in the
ordinary course of Tremont's business, consistent with past practice, declare,
set aside or pay any dividends on, or make any other distributions in respect of
any of Tremont's capital shares, (ii) split, combine or reclassify any capital
stock or other partnership interests or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of such
capital shares or partnership interests or (iii) purchase, redeem or otherwise
acquire any capital shares of Tremont or any options, warrants or rights to
acquire, or security convertible into, such capital shares or partnership
interests;
(b) issue, deliver or sell, or grant any option or other right in
respect of, any capital shares, any other voting securities (including
partnership interests) of Tremont or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, voting securities or
convertible securities;
(c) except as otherwise contemplated by this Agreement, amend the
certificate or articles of incorporation, bylaws, partnership agreement or other
comparable charter or organizational documents of Tremont;
(d) merge or consolidate with any Person;
(e) (i) acquire or agree to acquire by merging or consolidating
with, or by purchasing all or a substantial portion of the equity securities or
all or substantially all of the assets of, or by any other manner, any business
or any corporation, partnership, limited liability company, joint venture,
association, business trust or other business organization or division thereof
or interest therein; (ii) subject to any Lien or sell, lease or otherwise
dispose of any material assets or assign or encumber the right to receive
income, dividends, distributions and the like except pursuant to contracts or
agreements in effect at the date of this Agreement and set forth on Schedule
5.1; (iii) make or agree to make any new capital expenditures, except in
accordance with budgets relating to Tremont that have been previously delivered
to and approved by Valhi; or (iv) incur any indebtedness for borrowed money or
guarantee any such indebtedness of another Person, issue or sell any debt
securities or warrants or other rights to acquire any debt securities of
Tremont, guarantee any debt securities of another Person, enter into any "keep
well" or other agreement to maintain any financial statement condition of
another Person or enter into any arrangement having the economic effect of any
of the foregoing, prepay or refinance any indebtedness or make any loans,
advances or capital contributions to, or investments in, any other Person;
(f) make or rescind any Tax election (unless required by Law or
necessary to preserve any of Tremont's subsidiaries as a partnership for federal
income tax purposes);
(g) (i) change in any material manner any of its methods, principles
or practices of accounting for GAAP or (ii) settle or compromise any claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, or change any of its methods of reporting income
or deductions for Tax purposes from those employed in the preparation of the
applicable Tax return for the most recently completed taxable year except, in
the case of clause (i), as may be required by the SEC, applicable Law or GAAP;
(h) adopt any new employee benefit plan, incentive plan, severance
plan, bonus plan, stock option or similar plan, grant new stock options or stock
appreciation rights or amend any existing plan or rights, except such changes as
are required by Law or that are not more favorable to participants than
provisions presently in effect;
(i) except as contractually required pursuant to the terms of
agreements existing on the date hereof, pay, discharge, settle or satisfy any
claims, liabilities or objections (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice or in accordance
with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the notes
thereto) of Tremont included in the Tremont SEC Documents or incurred in the
ordinary course of business consistent with past practice;
(j) settle any stockholder derivative or class action claims arising
out of or in connection with any of the transactions contemplated hereby; or
(k) take any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "knowledge" qualification) that are not so
qualified becoming untrue in any material respect or (iii) any of the conditions
to the Merger set forth in Sections 6.1 or 6.2 not being satisfied.
Section 5.2 Conduct of Business of Valhi. During the period from the date
of this Agreement to the Effective Time, Valhi shall carry on its businesses in
the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve intact its current business organization,
goodwill and ongoing businesses; provided, however, and without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, except as expressly permitted or contemplated by this
Agreement, as shall be consented by Tremont (which consent shall not be
unreasonably withheld or delayed) or as set forth on Schedule 5.2, Valhi shall
not and shall not authorize or commit or agree to:
(a) (i) except for dividends paid on Valhi Common Stock in the
ordinary course of Valhi's business, consistent with past practice, declare, set
aside or pay any dividends on, or make any other distributions in respect of any
of Valhi's capital shares, (ii) split, combine or reclassify any capital stock
or other partnership interests or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of such
capital shares or partnership interests or (iii) purchase, redeem or otherwise
acquire any capital shares of Valhi or any options, warrants or rights to
acquire, or security convertible into, such capital shares or partnership
interests;
(b) except as otherwise contemplated by this Agreement, amend the
certificate or articles of incorporation, bylaws, partnership agreement or other
comparable charter or organizational documents of Valhi;
(c) merge or consolidate with any Person;
(d) acquire or agree to acquire by merging or consolidating with, or
by purchasing all or a substantial portion of the equity securities or all or
substantially all of the assets of, or by any other manner, any business or any
corporation, partnership, limited liability company, joint venture, association,
business trust or other business organization or division thereof or interest
therein; or
(e) take any action that would result in (i) any of the
representations and warranties of such party (without giving effect to any
"knowledge" qualification) set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
(without giving effect to any "knowledge" qualification) that are not so
qualified becoming untrue in any material respect or (iii) any of the conditions
to the Merger set forth in Sections 6.1 or 6.3 not being satisfied.
Section 5.3 Tremont Board Recommendation. In connection with the Merger and
the Tremont Stockholders' Approval, the board of directors of Tremont shall (i)
unless this Agreement is earlier terminated in accordance with its terms,
recommend to the holders of Tremont Common Stock that they vote in favor of
approval of this Agreement and the transactions contemplated hereby and use all
commercially reasonable efforts to obtain the necessary approvals by the
stockholders of Tremont of this Agreement and the transactions contemplated
hereby and (ii) otherwise comply with all legal requirements applicable to such
approval.
Section 5.4 Access to Information.
(a) From the date of this Agreement until the Effective Time, (i)
each of Valhi and Tremont, upon reasonable notice, will provide to the other and
their respective lenders and authorized representatives (including counsel,
environmental and other consultants, accountants and auditors) full access
during normal business hours to all facilities, personnel and operations and to
all books and records of Tremont, Valhi and Sub, (ii) each of Valhi and Tremont
will permit the other to make such inspections as it may reasonably require
(including without limitation any air, water or soil testing or sampling deemed
necessary) and (iii) each of Tremont and Valhi will cause its officers to
furnish the other party with such financial and operating data and other
information with respect to its business and properties as the other party may
from time to time reasonably request.
(b) Valhi and Tremont will hold and will cause their representatives
to hold in confidence, all documents and information furnished in connection
with this Agreement. Other than documents or information (i) available to the
public, (ii) that are or become known by Valhi or Tremont from a source other
than Tremont or Valhi, as the case may be, other than by a breach of a
confidentiality obligation owed to Tremont or Valhi, respectively, or (iii)
required by Law to be disclosed.
Section 5.5 Registration Statement and Proxy Statement. As soon as
practicable following the date of this Agreement, Tremont shall prepare and file
with the SEC a preliminary Proxy Statement in form and substance reasonably
satisfactory to each of Valhi and Tremont, and Valhi shall prepare and file with
the SEC the Registration Statement, in which the Proxy Statement will be
included. Each of Valhi and Tremont shall use its reasonable commercial efforts
to (i) respond to any comments of the SEC and (ii) have the Registration
Statement declared effective under the Securities Act and the rules and
regulations promulgated thereunder as promptly as practicable after such filing
and to keep the Registration Statement effective as long as is reasonably
necessary to consummate the Merger. Tremont will use its reasonable commercial
efforts to cause the Proxy Statement to be mailed to its stockholders as
promptly as practicable after the Registration Statement is declared effective
under the Securities Act. Each party will notify the other promptly of the
receipt of any comments from the SEC and of any request by the SEC for
amendments or supplements to the Registration Statement or the Proxy Statement
or for additional information and will supply the other with copies of all
correspondence between such party or any of its representatives and the SEC,
with respect to the Registration Statement or the Proxy Statement. Whenever any
event occurs that is required to be set forth in an amendment or supplement to
the Registration Statement or the Proxy Statement, Valhi or Tremont, as the case
may be, shall promptly inform the other of such occurrences and cooperate in
filing with the SEC and/or mailing to the stockholders of Tremont such amendment
or supplement. The Proxy Statement shall, subject to Section 5.3, include the
recommendation of the board of directors of Tremont in favor of approval of this
Agreement and the transactions contemplated hereby. The Proxy Statement shall
also include the Fairness Opinion of the Tremont Financial Advisor. Valhi shall
take any action required to be taken under any applicable state securities or
"blue sky" laws in connection with the issuance of the Valhi Common Stock
pursuant to the Merger, and Tremont shall furnish all information concerning
Tremont and the holders of shares of Tremont Common Stock and rights to acquire
such shares pursuant to the Tremont Option Plans as may be reasonably requested
in connection with any such action. Valhi will use its reasonable commercial
efforts to obtain, prior to the effective date of the Registration Statement,
all necessary state securities or "blue sky" permits or approvals required to
carry out the transactions contemplated hereby.
Section 5.6 Tremont Stockholders' Meeting. Tremont will, as soon as
practicable following the date of this Agreement (but in no event sooner than 30
days following the date the Proxy Statement is mailed to the stockholders of
Tremont), duly call, give notice of, convene and hold the Tremont Stockholder
Meeting for the purpose of obtaining the Tremont Stockholders' Approval as set
forth in Section 4.15. Subject to Section 5.3, Tremont will, through its board
of directors, recommend to its stockholders approval of this Agreement and the
transactions contemplated hereby.
Section 5.7 Reasonable Efforts; Other Actions. Tremont, Valhi and Sub each
shall use all commercially reasonable efforts promptly to take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate under applicable Law to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, (i) the taking of any actions required to qualify the Merger
treatment as a tax-free reorganization within the meaning of Code Section 368(a)
and (ii) the obtaining of all necessary consents, approvals or waivers under its
material contracts. If, at any time after the Effective Time, any further action
is necessary or desirable to carry out the purposes of this Agreement, the
officers and directors of the parties hereto shall use reasonable commercial
efforts to take all such action.
Section 5.8 Public Announcements. Before issuing any press release or
otherwise making any public statements with respect to the Merger, Valhi, Sub
and Tremont will consult with each other as to its form and substance and shall
not issue any such press release or make any such public statement prior to such
consultation, except as may be required by Law or the rules of the NYSE.
Section 5.9 Notification of Certain Matters. Each of Tremont and Valhi
shall give prompt notice to the other party of (i) any notice of, or other
communication relating to, a default or event that, with notice of lapse of time
or both, would become a default, received by it subsequent to the date of this
Agreement and prior to the Effective Time, under any contract to which it is a
party or is subject that could reasonably be expected to result in a Valhi
Material Adverse Effect or a Tremont Material Adverse Effect, as the case may
be, (ii) any notice or other communication from any third party alleging that
the consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement, (iii) any change in their
respective financial condition, properties, businesses or results of operations,
or the occurrence of any event that is reasonably expected to result in any such
change, that in any such event could reasonably be expected to result in a Valhi
Material Adverse Effect or Tremont Material Adverse, as the case may be, (iv)
the occurrence or existence of any event that would, or could with the passage
of time or otherwise, make any representation or warranty contained herein that
is qualified as to materiality untrue in any respect or any such representation
or warranty that is not so qualified becoming untrue in any material respect or
(v) the failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that the delivery of notice pursuant to this
Section 5.9 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice. Each party shall use its reasonable
commercial efforts to prevent or promptly remedy the same.
Section 5.10 Expenses. Valhi and Sub, on the one hand, and Tremont, on the
other hand, shall bear their respective expenses incurred in connection with
this Agreement and the transactions contemplated hereby, except that Valhi and
Tremont shall each pay one-half of the expenses incurred in connection with the
printing and mailing of the Proxy Statement and the Registration Statement.
Section 5.11 Rule 145 Affiliates. Tremont shall deliver to Valhi a letter
identifying all Persons who, as of the date hereof, may be deemed to be an
"affiliate" thereof for purposes of Rule 145 under the Securities Act (a "Rule
145 Affiliate") and shall advise Valhi in writing of any Persons who become Rule
145 Affiliates prior to the Effective Time. Tremont shall use all reasonable
efforts to cause each Person who is so identified as a Rule 145 Affiliate to
deliver to Valhi, no later than the earlier of the 30th day prior to the
Effective Time or the date such Person becomes a Rule 145 Affiliate, a written
agreement substantially in the form of Exhibit B hereto.
Section 5.12 Stock Exchange Listing. Valhi shall file a listing application
on or before the Closing and thereafter shall take all action to effect approval
to list on the NYSE, the Valhi Common Stock to be issued pursuant to the Merger.
Section 5.13 State Anti-Takeover Laws. If any "fair price" or "control
share acquisition" statute or other similar anti-takeover regulation shall
become applicable to the transactions contemplated hereby, Valhi and Tremont and
their respective board of directors shall use their reasonable commercial
efforts to grant such approvals and to take such other actions as are necessary
so that the transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and shall otherwise use their
reasonable commercial efforts to eliminate the effects of any such statute or
regulation on the transactions contemplated hereby.
Section 5.14 Tax-Free Transaction. From and after the date of this
Agreement, each party hereto shall use its reasonable commercial efforts to
cause the Merger (or, if the LLC Merger occurs, the Merger followed by the LLC
Merger) to qualify, and shall not take, or cause to be taken, any actions that
could reasonably be expected to prevent the Merger (or, if the LLC Merger
occurs, the Merger followed by the LLC Merger) from qualifying as a
"reorganization" under Section 368(a) of the Code with respect to the holders of
Tremont Common Stock other than Valhi and TGI.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions:
(a) Registration Statement. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act. No
stop order suspending the effectiveness of the Registration Statement shall have
been issued by the SEC and remain in effect. All necessary state securities or
blue sky authorizations shall have been received.
(b) Stockholder Approval. The requisite vote of the stockholders of
Tremont necessary to consummate the transactions contemplated by this Agreement
shall have been obtained.
(c) Consents and Approvals. All necessary consents and approvals of
any United States or any other Governmental Authority required for the
consummation of the transactions contemplated by this Agreement shall have been
obtained.
(d) Listing. The Valhi Common Stock issued in the Merger shall have
been authorized for listing on the NYSE.
(e) No Orders. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger or any of the other transactions contemplated hereby shall be in
effect.
(f) "Blue Sky" Permits. Valhi shall have received all state
securities or "blue sky" permits and other authorizations necessary to issue the
Valhi Common Stock pursuant to this Agreement.
Section 6.2 Conditions to the Obligations of Valhi and Sub to Effect the
Merger. The obligation of Valhi and Sub to effect the Merger and to perform
under this Agreement is subject to the fulfillment on or before to the Closing
Date of the following additional conditions, any one or more of which may be
waived, in writing, by Valhi and Sub:
(a) Representations Accurate. The representations and warranties of
Tremont contained herein shall be true and correct on the date of this Agreement
and at and on the Closing Date as though such representations and warranties
were made at and on such date, except to the extent that the representation or
warranty is expressly limited by its terms to another date. This condition shall
be deemed satisfied unless any or all breaches of Tremont's representations and
warranties in this Agreement (without giving effect to any materiality
qualification or limitation) is reasonably expected to result in a Tremont
Material Adverse Effect or is reasonably expected to prevent or materially to
burden or impair the ability of Tremont to consummate the transactions
contemplated by this Agreement. In addition, a representation or warranty of
Tremont shall not be deemed to be untrue or incorrect if (i) any of Valhi's
executive officers had actual and conscious (and not constructive, imputed or
implied) knowledge on the date hereof that such representation or warranty was
untrue or incorrect or (ii) such representation or warranty was true on the date
hereof and Valhi caused such representation or warranty to subsequently become
untrue or incorrect.
(b) Performance. Tremont shall have complied, in all material
respects, with all agreements, obligations and conditions required by this
Agreement to be complied with by it on or prior to the Closing Date.
(c) Certificates. Valhi and Sub shall have received (i) a duly
executed certificate signed by the President or a Vice President of Tremont
certifying as to compliance with the conditions set forth in Sections 6.2(a),
(b) and (h) and (ii) a duly executed certificate signed by the Secretary of
Tremont certifying the accuracy and completeness of the resolutions of the board
of directors of Tremont approving this Agreement, the Merger and the
transactions contemplated hereby.
(d) Certified Certificate of Incorporation. Valhi and Sub shall have
received a certificate of the Secretary of State of the State of Delaware
certifying the Certificate of Incorporation of Tremont and all amendments
thereof, dated not more than ten days prior to the Closing Date.
(e) Good Standing. Valhi and Sub shall have received a certificate
of good standing, or its equivalent, dated no more than ten days prior to the
Closing Date, from the State of Delaware and each other state in which Tremont
is qualified to do business.
(f) Consents. Valhi and Sub shall have received copies of consents
of all third parties necessary for Tremont to execute, deliver and perform this
Agreement and consummate the Merger.
(g) Tax Opinion. Valhi and Sub shall have received an executed copy
of a tax opinion of Locke Liddell & Sapp LLP, Valhi's legal counsel, to the
effect that the Merger (or, if the LLC Merger occurs, the Merger followed by the
LLC Merger) will constitute a reorganization within the meaning of Section
368(a) of the Code with respect to the holders of Tremont Common Stock other
than Valhi and TGI and, if the LLC Merger occurs, a complete liquidation of
Tremont under Section 332 of the Code with respect to Valhi.
(h) No Material Adverse Change. Since the date of this Agreement,
there shall have been no change that could reasonably be expected to result in a
Tremont Material Adverse Effect.
(i) Agreements with Rule 145 Affiliates. Valhi and Sub shall have
received from each Person who is a Rule 145 Affiliate under Section 5.11 an
executed copy of the written agreement referred to in Section 5.11 and such
agreements shall be in full force and effect and there shall be no breach, or in
existence any facts that with passage of time or otherwise could constitute a
breach, thereof.
(j) Certificate of Merger. Tremont shall have delivered to Valhi the
Certificate of Merger as executed by duly authorized officers of Tremont.
Section 6.3 Conditions to the Obligations of Tremont to Effect the Merger.
The obligation of Tremont to effect the Merger and to perform under this
Agreement is subject to the fulfillment on or before the Closing Date of the
following additional conditions, any one or more of which may be waived, in
writing, by Tremont:
(a) Representations Accurate. The representations and warranties of
Valhi contained herein shall be true and correct on the date of this Agreement
and at and on the Closing Date as though such representations and warranties
were made at and on such date, except to the extent that the representation or
warranty is expressly limited by its terms to another date. This condition shall
be deemed satisfied unless any or all breaches of Valhi's representations and
warranties in this Agreement (without giving effect to any materiality
qualification or limitation) is reasonably expected to result in a Valhi
Material Adverse Effect or is reasonably expected to prevent or materially to
burden or impair the ability of Valhi to consummate the transactions
contemplated by this Agreement. In addition, a representation or warranty of
Valhi shall not be deemed to be untrue or incorrect if any of Tremont's
executive officers had actual and conscious (and not constructive, imputed or
implied) knowledge on the date hereof that such representation or warranty was
untrue or incorrect.
(b) Performance. Valhi and Sub shall have complied, in all material
respects, with all agreements, obligations and conditions required by this
Agreement to be complied with by them on or prior to the Closing Date.
(c) Certificates. Tremont shall have received (i) a duly executed
certificate signed by the President or a Vice President of each of Valhi and Sub
certifying as to compliance with the conditions set forth in Sections 6.3(a),
(b) and (h) and (ii) a duly executed certificate signed by the Secretary of each
of Valhi and Sub certifying the accuracy and completeness of the resolutions of
the board of directors of each of Valhi and Sub approving this Agreement, the
Merger and the transactions contemplated hereby.
(d) Certified Certificates of Incorporation. Tremont shall have
received certificates of the Secretary of State of the State of Delaware
certifying the Certificate of Incorporation of Valhi and the Certificate of
Incorporation of Sub and all amendments thereof, dated not more than ten days
prior to the Closing Date.
(e) Good Standing. Tremont shall have received a certificate of good
standing, or its equivalent, dated no more than ten days prior to the Closing
Date, from the State of Delaware and each other state in which Valhi and Sub are
qualified to do business.
(f) Consents. Tremont shall have received copies of consents of all
third parties necessary for Valhi and Sub to execute, deliver and perform this
Agreement and consummate the Merger.
(g) Tax Opinion. Tremont shall have received an executed copy of a
tax opinion of Piper Rudnick LLP, legal counsel to the Special Committee of the
Board of Directors of Tremont, to the effect that the Merger (or, if the LLC
Merger occurs, the Merger followed by the LLC Merger) will constitute a
reorganization within the meaning of Section 368(a) of the Code with respect to
shareholders of Tremont other than Valhi or TGI.
(h) No Material Adverse Change. Since the date of this Agreement,
there shall have been no change that could reasonably be expected to result in a
Valhi Material Adverse Effect.
(i) Certificate of Merger. Sub shall have delivered to Tremont the
Certificate of Merger, executed by duly authorized officers of Sub.
ARTICLE VII
CLOSING
Section 7.1 Time and Place. Subject to the provisions of Articles VI and
VIII, the closing of the Merger (the "Closing") shall take place at the offices
of Locke Liddell & Sapp LLP, 2200 Ross Avenue, Suite 2200, Dallas, Texas, as
soon as practicable, but in no event later than the second business day after
the date on which each of the conditions set forth in Article VI (other than
those conditions that by their nature are to be satisfied at the Closing but
subject to such conditions) have been satisfied or waived, in writing, by the
party or parties entitled to the benefit of such conditions; or at such other
place or on such other date as Valhi, Sub and Tremont may, in writing, mutually
agree. The date on which the Closing actually occurs is herein referred to as
the "Closing Date."
Section 7.2 Filings at the Closing. Subject to the provisions of Articles
VI and VIII, Tremont, Valhi and Sub shall cause to be executed and filed at the
Closing the Certificate of Merger and shall cause the Certificate of Merger to
be recorded in accordance with the applicable provisions of the DGCL and shall
take any and all other lawful actions and do any and all other lawful things
necessary to cause the Merger to become effective.
ARTICLE VIII
TERMINATION AND ABANDONMENT
Section 8.1 Termination by Valhi and/or Tremont. This Agreement may be
terminated at any time prior to the Effective Time, whether before or after
approval of this Agreement and the transactions contemplated hereby by the
stockholders of Tremont:
(a) by the mutual consent of Valhi and Tremont;
(b) by either Valhi or Tremont, if any court of competent
jurisdiction or other Governmental Authority shall have issued an order (other
than a temporary restraining order), decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger, and such order,
decree, ruling or other action shall have become final and nonappealable;
(c) by either Valhi or Tremont, if the Tremont Stockholders'
Approval is not obtained at the Tremont Stockholder Meeting;
(d) by either Valhi or Tremont, if the Tremont Financial Advisor
shall have withdrawn, modified or changed its Fairness Opinion in a manner
adverse to the holders of Tremont Common Stock; or
(e) by either Valhi or Tremont, if the Merger shall not have been
consummated by February 28, 2003, provided that a party in material breach of
this Agreement may not terminate this Agreement pursuant to this Section 8.1(e).
Section 8.2 Termination by Valhi. This Agreement may be terminated by Valhi
at any time prior to the Effective Time, whether before or after approval of
this Agreement and the transactions contemplated hereby by the stockholders of
Tremont if:
(a) (i) Tremont shall have failed to comply in any material respect
with any of the covenants or agreements contained in this Agreement to be
complied with by Tremont at or prior to such date of termination or (ii) there
exists a breach of any representation or warranty of Tremont contained in this
Agreement such that the closing conditions set forth in Section 6.2(a) would not
be satisfied, provided, however, that with respect to either (i) or (ii), if
such failure or breach is capable of being cured, such failure or breach shall
not have been cured within 15 days of delivery to Tremont of written notice of
such failure or breach; or
(b) the board of directors of Tremont shall have failed to
recommend, or shall have withdrawn, modified or changed its recommendation of
this Agreement or the Merger in a manner adverse to Valhi or shall have
recommended or issued a neutral recommendation with respect to any proposal in
respect of an Acquisition Proposal with a Person other than Valhi or any
Affiliate of Valhi (or the Tremont board of directors or any committee thereof
shall have resolved to do any of the foregoing).
Section 8.3 Termination by Tremont. This Agreement may be terminated by
Tremont at any time prior to the Effective Time, whether before or after
approval of this Agreement and the transactions contemplated hereby by the
stockholders of Tremont if:
(a) (i) Valhi or Sub shall have failed to comply in any material
respect with any of the covenants or agreements contained in this Agreement to
be complied with by Valhi or Sub at or prior to such date of termination or (ii)
there exists a breach of any representation or warranty of Valhi or Sub
contained in this Agreement such that the closing conditions set forth in
Section 6.3(a) would not be satisfied, provided, however, that, with respect to
either (i) or (ii), if such failure or breach is capable of being cured, such
failure or breach shall not have been cured within 15 days of delivery to Valhi
or Sub of written notice of such failure or breach;
(b) the board of directors of Tremont shall have failed to
recommend, or shall have withdrawn, modified or changed its recommendation of,
this Agreement or the Merger in a manner adverse to Valhi or shall have
recommended or issued a neutral recommendation with respect to any proposal in
respect of an Acquisition Proposal with a Person other than Valhi or any
Affiliate of Valhi (or the Tremont board of directors or any committee thereof
shall have resolved to do any of the foregoing), in each case in order to permit
Tremont to execute a definitive agreement for a transaction contemplated by an
Acquisition Proposal from a third party that the board of directors of Tremont
determines in its good faith judgment (based on, among other things, the written
advice of an independent financial advisor) to be no less favorable to its
stockholders than the Merger, taking into account all relevant factors.
Section 8.4 Procedure for Termination. In the event of termination and
abandonment of the Merger by Valhi or Tremont pursuant to this Article VIII,
written notice thereof shall forthwith be given to the other.
Section 8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article VIII, no party hereto (or any of its directors or officers) shall have
any liability or further obligation to any other party to this Agreement, except
as provided in this Section 8.5 and in Sections 5.4(b), 5.8 and 5.10. Nothing in
this Section 8.5 shall relieve any party from liability for willful breach of
this Agreement.
ARTICLE IX
SURVIVABILITY; INVESTIGATION
Section 9.1 Survival of Representations and Warranties. None of the
representations, warranties and covenants of Tremont, Valhi or Sub will survive
the Effective Time.
Section 9.2 Investigation. The respective representations and warranties of
Valhi, Sub and Tremont contained herein or in any certificate or other documents
delivered prior to or at the Closing shall not be deemed waived or otherwise
affected by any investigation made by any party hereto.
ARTICLE X
MISCELLANEOUS
Section 10.1 Notices.
All notices shall be in writing delivered as follows: If to Valhi or
Sub, to:
Valhi, Inc.
5430 LBJ Freeway, Suite 1700
Dallas, TX 75240
Attention: J. Mark Hollingsworth
Vice President and General Counsel
Facsimile No.: (972) 448-1445
With a copy (which copy shall not constitute notice) to:
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, TX 75206
Attention: Don M. Glendenning, Esq.
Facsimile No.: (214) 740-8800
If to Tremont, to:
Tremont Corporation
1999 Broadway, Suite 4300
Denver, CO 80202
Attention: Robert E. Musgraves
Vice President, General Counsel and Secretary
Facsimile No.: (303) 296-9645
With a copy (which copy shall not constitute notice) to:
Piper Rudnick LLP
1251 Avenue of the Americas
New York, NY 10020-1104
Attention: Theodore Altman, Esq.
Facsimile No.: (212) 835-6001
or to such other address as may have been designated in a prior notice pursuant
to this Section 10.1. Notices shall be deemed to be effectively served and
delivered (a) when delivered personally, (b) when sent by telephone facsimile
(with a copy mailed by first-class U.S. mail), (c) one business day following
deposit with a recognized national air courier service or (d) three business
days after being deposited in the United States mail in a sealed envelope,
postage prepaid, return receipt requested, to the appropriate party.
Section 10.2 Binding Effect. Except as may be otherwise provided herein,
this Agreement will be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but neither this
Agreement nor any of the rights or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties. Except as otherwise specifically provided in this Agreement, nothing in
this Agreement is intended or will be construed to confer on any Person other
than the parties hereto any rights or benefits hereunder.
Section 10.3 Consent to Jurisdiction. Each of the parties hereto (a)
consents to submit itself to the personal jurisdiction of any federal court
located in the State of Delaware or any Delaware state court in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court
and (c) agrees that it will not bring any action relating to this Agreement or
any of the transactions contemplated by this Agreement in any court other than a
federal court sitting in the State of Delaware or a Delaware state court.
Section 10.4 Headings. The headings and table of contents contained in this
Agreement are intended solely for convenience of reference and will be given no
effect in the construction or interpretation of this Agreement.
Section 10.5 Exhibits and Schedules.
The Exhibits and Schedules referred to in this Agreement will be
deemed to be a part of this Agreement.
Section 10.6 Certain Definitions.
For purposes of this Agreement:
"Acquisition Proposal" means any bona fide proposal with respect to
a merger, consolidation, share exchange, tender offer or similar transaction
involving Tremont or any purchase or other acquisition of all or any significant
portion of the assets of or any equity interest in Tremont.
An "Affiliate" of any Person means another Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person.
"Governmental Authority" means any federal, state or local
government or any court, administrative or regulatory agency or commission or
other governmental authority or agency, domestic or foreign federal, state or
local government or agency, domestic or foreign.
"LLC Merger" means the merger of the Surviving Corporation and TGI
with and into a limited liability company ("Tremont LLC") all of the interests
in which are wholly-owned directly by Valhi, with Tremont LLC surviving the
mergers, provided that (i) immediately following such mergers Tremont LLC is
treated as a disregarded entity pursuant to Treas. Reg. ss. 1.7701-3(b)(1)(ii),
and (ii) at such time, Valhi has no plan or intention to cause Tremont LLC to
make an election pursuant to Treas. Reg. ss. 1.7701-3(c) or to take any other
action which would result in Tremont LLC not being treated as a disregarded
entity.
"NL SEC Documents" means all documents required to be filed under
the Securities Act and the Exchange Act by NL Industries, Inc.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, associations, trust, unincorporated
organization or other entity.
"TGI Merger" means the merger of Valhi Acquisition Corp. II, a
Delaware corporation and a wholly-owned subsidiary of Valhi, with and into TGI
pursuant to the Agreement and Plan of Merger, of even date herewith, among
Valhi, TGI and Valhi Acquisition Corp. II.
"Valhi Subsidiaries" means NL Industries, Inc., CompX International,
Inc. and Waste Control Specialists LLC.
Section 10.7 Governing Law.
This Agreement will be governed by the laws of the State of Delaware
without regard to conflict of laws principles thereof.
Section 10.8 Waivers. Compliance with the provisions of this Agreement may
be waived only by means of a written instrument specifically referring to this
Agreement and signed by the party waiving compliance. No course of dealing, nor
any failure or delay in exercising any right, will be construed as a waiver, and
no single or partial exercise of a right will preclude any other or further
exercise of that or any other right.
Section 10.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 10.10 Time Periods. Unless "business days" is specified, any action
required hereunder to be taken within a certain number of days will be taken
within that number of calendar days; provided, however, that if the last day for
taking such action falls on a weekend or a holiday, the period during which such
action may be taken will be automatically extended to the next business day.
Section 10.11 Amendment. Subject to compliance with applicable Law, this
Agreement may be amended by the parties at any time before or after the approval
of Tremont's stockholders; provided, however, that after any such approval,
there may not be, without further approval of such the stockholders of Tremont,
any amendment of this Agreement that changes the amount or the form of the
consideration to be delivered to the holders of Tremont Common Stock hereunder,
or which by Law otherwise expressly requires the further approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
Section 10.12 Entire Agreement. This Agreement and the agreements and
documents referred to in this Agreement or delivered hereunder are the exclusive
statement of the agreement among the parties concerning the subject matter
hereof. All negotiations among the parties are merged into this Agreement, and
there are no representations, warranties, covenants, understandings, or
agreements, oral or otherwise, in relation thereto among the parties other than
those incorporated herein and to be delivered hereunder.
Section 10.13 Severability. If any one or more of the provisions of this
Agreement shall be held to be invalid, illegal or unenforceable, the validity,
legality or enforceability of the remaining provisions of this Agreement shall
not be affected thereby. To the extent permitted by applicable Law, each party
waives any provision of Law that renders any provision of this Agreement
invalid, illegal or unenforceable in any respect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
VALHI, INC.
By: /s/ Bobby D. O'Brien
----------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer
and Treasurer
VALHI ACQUISITION CORP.
By: /s/ Bobby D. O'Brien
----------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer
and Treasurer
TREMONT CORPORATION
By: /s/ Robert E. Musgraves
----------------------------------------
Robert E. Musgraves
Vice President, General Counsel
and Secretary
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to Agreement and Plan of Merger, dated November 12,
2002 (this "Amendment"), by and among Valhi, Inc., a Delaware corporation
("Valhi"), Valhi Acquisition Corp., a Delaware corporation and a direct
wholly-owned subsidiary of Valhi ("Sub"), and Tremont Corporation, a Delaware
corporation ("Tremont"), and will amend the Agreement and Plan of Merger, dated
as of November 4, 2002, among Valhi, Sub and Tremont (the "Merger Agreement").
WHEREAS, the parties to the Merger Agreement desire to amend the Merger
Agreement to clarify their mutual intent relating thereto.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
hereby agree as follows:
1. The second recital of the Merger Agreement is restated to read in its
entirety as follows:
"WHEREAS, it is intended that, for Federal income tax purposes, the
Merger followed by the LLC Merger (as defined below) shall be a tax-free
reorganization as described in the Internal Revenue Code of 1986, as
amended (the "Code"), with respect to the holders of common stock, par
value $1.00 per share ("Tremont Common Stock"), of Tremont, other than
Valhi and Tremont Group, Inc., a Delaware corporation ("TGI")."
2. Section 2.1(a) of the Merger Agreement is restated to read in its
entirety as follows:
"(a) Cancellation of Treasury Stock and Valhi-Owned Stock. Each share
of Tremont Common Stock (i) that is owned by Valhi, (ii) that is held by
Tremont as treasury stock and (iii) that is owned by TGI shall, in each
case, automatically be canceled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor."
3. Section 3.15 of the Merger Agreement is restated to read in its entirety
as follows:
"Section 3.15 Certain Tax Matters. Neither Valhi nor, to Valhi's
knowledge, any other person, has taken or agreed to take any action that
could reasonably be expected to prevent the Merger followed by the LLC
Merger from constituting a "reorganization" under Section 368(a) of the
Code with respect to the holders of Tremont Common Stock other than Valhi
and TGI. Valhi is not aware of any agreement, plan or other circumstance
that could reasonably be expected to prevent such qualification."
4. Section 5.14 of the Merger Agreement is restated to read in its entirety
as follows:
"Section 5.14 Tax-Free Transaction. From and after the date of this
Agreement, each party hereto shall use its reasonable commercial efforts to
cause the Merger followed by the LLC Merger to qualify, and shall not take,
or cause to be taken, any actions that could reasonably be expected to
prevent the Merger followed by the LLC Merger from qualifying as a
"reorganization" under Section 368(a) of the Code with respect to the
holders of Tremont Common Stock other than Valhi and TGI."
5. The following Section 5.15 is added to the Merger Agreement:
"Section 5.15 Other Transactions. Valhi shall cause the TGI Merger to
be consummated prior to the Effective Time and shall cause the LLC Merger
to be consummated as soon as practicable after the Effective Time."
6. Section 6.2(g) of the Merger Agreement is restated to read in its
entirety as follows:
"(g) Tax Opinion. Valhi and Sub shall have received an executed copy
of a tax opinion of Locke Liddell & Sapp LLP, Valhi's legal counsel, to the
effect that the Merger followed by the LLC Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code with
respect to the holders of Tremont Common Stock other than Valhi and TGI and
a complete liquidation of Tremont under Section 332 of the Code with
respect to Valhi."
7. Section 6.3(g) of the Merger Agreement is restated to read in its
entirety as follows:
"(g) Tax Opinion. Tremont shall have received an executed copy of a
tax opinion of Piper Rudnick LLP, legal counsel to the Special Committee of
the Board of Directors of Tremont, to the effect that the Merger followed
by the LLC Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code with respect to shareholders of Tremont other
than Valhi or TGI."
8. The following Section 6.3(j) is added to the Merger Agreement:
(j) Closing of the TGI Merger. The TGI Merger shall have become
effective.
9. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to such terms in the Merger Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective duly authorized officers as of the date first above
written.
VALHI, INC.
By: /s/ Bobby D. O'Brien
----------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and
Treasurer
VALHI ACQUISITION CORP.
By: /s/ Bobby D. O'Brien
----------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and
Treasurer
TREMONT CORPORATION
By: /s/ Robert E. Musgraves
-----------------------------------------
Robert E. Musgraves
Vice President, General Counsel and
Secretary
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of November 4, 2002, is entered
into by and among Valhi, Inc., a Delaware corporation ("Valhi"), Tremont Group,
Inc., a Delaware corporation ("TGI"), and Valhi Acquisition Corp. II, a Delaware
corporation and a wholly-owned subsidiary of Valhi ("Sub").
WHEREAS, there are currently outstanding 5,141.421 shares of common stock,
par value $.01 per share ("TGI Common Stock"), of TGI, 4,113.421 of which are
owned by Valhi and 1,028.000 of which are owned by NL Industries, Inc., a
Delaware corporation ("NL"); and
WHEREAS, the board of directors of each of Valhi, TGI and Sub deems the
Merger (as defined below) to be desirable and in the best interests of its
respective corporation and stockholders.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements and covenants contained herein, the parties hereto agree as follows:
1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law (the
"DGCL"), Sub shall be merged with and into TGI (the "Merger") at the Effective
Time (as defined below). TGI shall be the surviving corporation (the "Surviving
Corporation") in the Merger. From and after the Effective Time, the identity and
separate corporate existence of Sub shall cease and TGI shall succeed to and
assume all the rights and obligations of Sub.
2. The Effective Time. The parties shall file a certificate of merger or
other appropriate documents (the "Certificate of Merger") executed in accordance
with the DGCL and shall make all other filings or recordings required under the
DGCL. The Merger shall become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, or at such later
time that TGI and Sub shall have agreed upon and designated in such filings in
accordance with applicable law (the time the Merger becomes effective being the
"Effective Time").
3. Effects of the Merger. The Merger shall have the effects set forth in
the DGCL.
4. Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of Sub, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation except
that the name of the corporation specified therein shall be "Tremont Group,
Inc.," until duly amended in accordance with applicable law. The Bylaws of Sub,
as in effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation (the "Bylaws") except that the name of the corporation
specified therein shall be "Tremont Group, Inc.," until duly amended in
accordance with applicable law.
5. Directors and Officers. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, each of whom
shall serve in accordance with the DGCL and the Bylaws. The officers of Sub
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation, each of whom shall serve until the earlier of his or her
resignation or removal or until his or her successor is duly elected and
qualified, as the case may be.
6. Conversion of Shares. By virtue of the Merger and without any action on
the part of any holder of capital stock of Valhi, TGI or Sub, at the Effective
Time:
(a) each share of TGI Common Stock that is owned by Valhi or is held
by TGI as treasury stock shall be converted into and become one share of
common stock, par value $.01 per share, of the Surviving Corporation;
(b) subject to Section 7, each share of TGI Common Stock that is owned
by NL shall be converted into 3,400 shares (the "Merger Shares") of common
stock, par value $.01 per share ("Valhi Common Stock"), of Valhi, or an
aggregate of 3,495,200 shares of Valhi Common Stock; and
(c) each share of common stock, par value $.01 per share ("Sub Common
Stock"), of Sub shall automatically be canceled and retired and shall cease
to exist, and no consideration shall be delivered in exchange therefore.
7. Dissenting Shares. Notwithstanding anything to the contrary contained in
this Agreement, holders of TGI Common Stock with respect to which dissenters'
rights, if any, are granted by reason of the Merger under the DGCL and who do
not vote in favor of the Merger and otherwise comply with Section 262 of the
DGCL ("Dissenting Shares"), shall not be entitled to shares of Valhi Common
Stock pursuant to Section 6 hereof unless and until the holder thereof shall
have failed to perfect or shall have effectively withdrawn or lost such holder's
right to dissent from the Merger under the DGCL, and shall be entitled to
receive only the payment provided for by Section 262 of the DGCL. If such holder
shall have failed to perfect or shall have effectively withdrawn or lost such
holder's dissenters' rights under the DGCL, such holders Dissenting Shares shall
thereupon be deemed to represent shares of Valhi Common Stock as set forth in
Section 6 hereof.
8. Condition to the Merger. In order for the Merger to be effective, the
Merger shall have received the requisite approval of the holders of Sub Common
Stock and TGI Common Stock pursuant to the DGCL.
9. Certain Understandings.
(a) TGI has been advised and understands that the Merger Shares have
not been and will not be registered under the Securities Act of 1933, as
amended, or any applicable state securities or "blue sky" laws.
(b) Each certificate representing the Merger Shares shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS VALHI HAS
BEEN FURNISHED WITH AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO VALHI, TO THE EFFECT THAT SUCH TRANSFER, SALE, ASSIGNMENT,
PLEDGE, HYPOTHECATION OR OTHER DISPOSITION MAY BE EFFECTED
WITHOUT REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE
SECURITIES OR 'BLUE SKY' LAWS."
10. Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the stockholders of Sub or
TGI, by the mutual written consent of Valhi, Sub and TGI. In the event of
termination of this Agreement by the parties hereto, this Agreement shall
forthwith become void.
11. Amendment. This Agreement may be amended by the parties hereto at any
time before or after approval hereof by the stockholders of TGI or Sub, provided
that after any such approval no amendment shall be made that (i) changes the
number of shares of TGI Common Stock are to be converted into shares of Valhi
Common Stock pursuant to Section 6(b) hereof, (ii) in any way materially
adversely affects the rights of holders of shares of TGI Common Stock or (iii)
changes any of the principal terms of this Agreement, in each case without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
12. General Provisions
(a) Further Assurances. From time to time, as and when required by the
Surviving Corporation or by its successors or assigns, there shall be
executed and delivered on behalf of Sub such instruments, and there shall
be taken or cause to be taken by it all such further action, as shall be
appropriate, advisable or necessary to vest, perfect or confirm, of record
or otherwise, in the Surviving Corporation title to and possession of all
property, interests, assets, rights, privileges, immunities, powers,
franchises and authority of Sub and otherwise to carry out the purposes of
this Agreement, and the officers and directors of the Surviving Corporation
are fully authorized in the name and on behalf of Sub or otherwise, to take
any and all such action and to execute and deliver any and all such
instruments.
(b) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same Agreement
and shall become effective when one or more counterparts have been signed
by each of the parties and delivered to the other parties.
(c) Entire Agreement; No Third-Party Beneficiaries. This Agreement and
the other agreements entered into in connection herewith (i) constitute the
entire Agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
of this Agreement and (ii) are not intended to confer upon any Person other
than the parties hereto any rights or remedies.
(d) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware, regardless of the
laws that might otherwise govern under applicable principles of conflict of
laws thereof.
(e) Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned or
delegated, in whole or in part, by operation of law or otherwise by any of
the parties without the prior written consent of the other parties. Subject
to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of, and be enforceable by, the parties and their respective
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first written above.
VALHI, INC.
By: /s/ Bobby D. O'Brien
------------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer
and Treasurer
VALHI ACQUISITION CORP. II
By: /s/ Bobby D. O'Brien
---------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer
and Treasurer
TREMONT GROUP, INC.
By: /s/ Steven L. Watson
------------------------------------------
Steven L. Watson
President
INTERCORPORATE SERVICES AGREEMENT
This INTERCORPORATE SERVICES AGREEMENT (the "Agreement"), effective as of
January 1, 2002, amends and supersedes that certain Intercorporate Services
Agreement effective as of January 1, 2001 by and between CONTRAN CORPORATION, a
Delaware corporation ("Contran"), and VALHI, INC., a Delaware corporation
("Recipient").
Recitals
A. Without direct compensation from Recipient, employees and agents of
Contran and affiliates of Contran perform (i) management, financial and
administrative functions for Recipient and (ii) pilot services and aircraft
management functions with respect to certain aircraft owned or leased by
Recipient.
B. Recipient does not separately maintain the full internal capability to
perform all necessary management, financial and administrative functions that
Recipient requires.
C. The cost of maintaining the additional personnel by Recipient necessary
to perform the functions provided for by this Agreement would exceed the fee set
forth in Section 3 of this Agreement, and the terms of this Agreement are no
less favorable to Recipient than could otherwise be obtained from a third party
for comparable services.
D. Recipient desires to continue receiving the services presently provided
by Contran and affiliates of Contran and Contran is willing to continue to
provide such services under the terms of this Agreement.
Agreement
For and in consideration of the mutual premises, representations and
covenants herein contained, the parties hereto mutually agree as follows:
Section 1. Services to be Provided. Contran agrees to make available to
Recipient, upon request, the following services (the "Services") to be rendered
by the internal staff of Contran and affiliates of Contran:
(a) Consultation and assistance in the development and implementation
of Recipient's corporate business strategies, plans and objectives;
(b) Consultation and assistance in management and conduct of corporate
affairs and corporate governance consistent with the charter and bylaws of
Recipient;
(c) Consultation and assistance in maintenance of financial records
and controls, including preparation and review of periodic financial
statements and reports to be filed with public and regulatory entities and
those required to be prepared for financial institutions or pursuant to
indentures and credit agreements;
(d) Consultation and assistance in cash management and in arranging
financing necessary to implement the business plans of Recipient;
(e) Consultation and assistance in tax management and administration,
including, without limitation, preparation and filing of tax returns, tax
reporting, examinations by government authorities and tax planning;
(f) Consultation and assistance with respect to employee benefit plans
and incentive compensation arrangements;
(g) Pilot services and aircraft management functions with respect to
aircraft owned or leased by Recipient;
(h) Certain administration and management services with respect to
Recipient's insurance and risk management needs, including, without
limitations, administration of Recipient's:
(i) property and casualty insurance program,
(ii) claims management program,
(iii) property loss control program, and
(i) Such other services as may be requested by Recipient from time to
time.
This Agreement does not apply to, and the Services provided for herein do
not include, any services that Harold C. Simmons, Glenn R. Simmons or Steven L.
Watson may provide to Recipient in their roles as members of Recipient's board
of directors or any other activity related to such board of directors.
Section 2. Miscellaneous Services. It is the intent of the parties hereto
that Contran provide only the Services requested by Recipient in connection with
routine functions related to the ongoing operations of Recipient and not with
respect to special projects, including corporate investments, acquisitions and
divestitures. The parties hereto contemplate that the Services rendered in
connection with the conduct of Recipient's business will be on a scale compared
to that existing on the effective date of this Agreement, adjusted for internal
corporate growth or contraction, but not for major corporate acquisitions or
divestitures, and that adjustments may be required to the terms of this
Agreement in the event of such major corporate acquisitions, divestitures or
special projects. Recipient will continue to bear all other costs required for
outside services including, but not limited to, the outside services of
attorneys, auditors, trustees, consultants, transfer agents and registrars, and
it is expressly understood that Contran assumes no liability for any expenses or
services other than those stated in Section 1. In addition to the fee paid to
Contran by Recipient for the Services provided pursuant to this Agreement,
Recipient will pay to Contran the amount of out-of-pocket costs incurred by
Contran in rendering such Services.
Section 3. Fee for Services. Recipient agrees to pay to Contran $1,044,750
quarterly on the first business day of each quarter, commencing as of January 1,
2002, pursuant to this Agreement.
Section 4. Original Term. Subject to the provisions of Section 5 hereof,
the original term of this Agreement shall be from January 1, 2002 to December
31, 2002.
Section 5. Extensions. This Agreement shall be extended on a
quarter-to-quarter basis after the expiration of its original term unless
written notification is given by Contran or Recipient thirty (30) days in
advance of the first day of each successive quarter or unless it is superseded
by a subsequent written agreement of the parties hereto.
Section 6. Limitation of Liability. In providing its Services hereunder,
Contran shall have a duty to act, and to cause its agents to act, in a
reasonably prudent manner, but neither Contran nor any officer, director,
employee or agent of Contran or its affiliates shall be liable to Recipient for
any error of judgment or mistake of law or for any loss incurred by Recipient in
connection with the matter to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Contran.
Section 7. Indemnification of Contran by Recipient. Recipient shall
indemnify and hold harmless Contran, its affiliates and their respective
officers, directors and employees from and against any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys' fees and
other expenses of litigation) to which Contran or any such person may become
subject arising out of the Services provided by Contran to the Recipient
hereunder, provided that such indemnity shall not protect any person against any
liability to which such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on the part of such person.
Section 8. Confidentiality. Except as otherwise required by applicable law,
each of the parties agrees that it will maintain in confidence all confidential
information regarding the other party supplied to it in the course of the
performance of this Agreement.
Section 9. Further Assurances. Each of the parties will make, execute,
acknowledge and deliver such other instruments and documents, and take all such
other actions, as the other party may reasonably request and as may reasonably
be required in order to effectuate the purposes of this Agreement and to carry
out the terms hereof.
Section 10. Notices. All communications hereunder shall be in writing and
shall be addressed, if intended for Contran, to Three Lincoln Centre, 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240, Attention: Chairman of the Board, or
such other address as it shall have furnished to Recipient in writing, and if
intended for Recipient, to Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240, Attention: President or such other address as it shall have
furnished to Contran in writing.
Section 11. Amendment and Modification. Neither this Agreement nor any term
hereof may be changed, waived, discharged or terminated other than by agreement
in writing signed by the parties hereto.
Section 12. Successor and Assigns. This Agreement shall be binding upon and
inure to the benefit of Contran and Recipient and their respective successors
and assigns, except that neither party may assign its rights under this
Agreement without the prior written consent of the other party.
Section 13. Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the state of Texas.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
CONTRAN CORPORATION
By:
------------------------------------
Steven L. Watson, President
VALHI, INC.
By:
-------------------------------------
Bobby D. O'Brien, Vice President
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valhi, Inc. (the "Company") on Form
10-Q for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Steven L. Watson,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Steven L. Watson
- -------------------------------------
Steven L. Watson
President and Chief Executive Officer
November 14, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valhi, Inc. (the "Company") on Form
10-Q for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Bobby D. O'Brien, Vice
President, Chief Financial Officer and Treasurer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Bobby D. O'Brien
- -----------------------------------------
Bobby D. O'Brien
Vice President, Chief Financial Officer and Treasurer
November 14, 2002