As filed with the Securities and Exchange Commission on September 24, 2002
Registration No. 333-
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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KRONOS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 2810 22-2949593
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation) Classification Code Number) Number)
</Table>
16825 NORTHCHASE DRIVE
SUITE 1200
HOUSTON, TEXAS 77060
(281) 423-3300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
ROBERT D. HARDY
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
16825 NORTHCHASE DRIVE
SUITE 1200
HOUSTON, TEXAS 77060
(281) 423-3300
FACSIMILE: (281) 423-3333
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Don M. Glendenning, Esq.
Toni Weinstein, Esq.
Locke Liddell & Sapp LLP
2200 Ross Avenue
Suite 2200
Dallas, Texas 75201
(214) 740-8000
Facsimile: (214) 740-8800
Approximate date of commencement of proposed sale to the public: Upon
consummation of the exchange offer referred to herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
========================================================================================================================
Proposed
maximum Proposed
offering maximum
Title of each class of securities to be Amount to be price per aggregate Amount of
registered registered unit (1) offering price registration fee(3)
- ------------------------------------------------------------------------------------------------------------------------
8 7/8% Senior Secured Notes due 2009(2) E.285,000,000 100% E.285,000,000 $25,719
========================================================================================================================
</Table>
(1) Estimated solely for purposes of determining the registration fee.
(2) Calculated pursuant to Rule 457(f) under the Securities Act of 1933.
(3) Calculated based on an exchange rate of E.1.00 = $.9809, being the spot
rate at 9:30 a.m., central time, on September 20, 2002, as quoted by
Bloomberg.
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 2002
PROSPECTUS
[LOGO]
KRONOS INTERNATIONAL, INC.
OFFER TO EXCHANGE
ALL OUTSTANDING
8 7/8% SENIOR SECURED NOTES DUE 2009
E.285,000,000 AGGREGATE PRINCIPAL AMOUNT
FOR
NEW 8 7/8% SENIOR SECURED NOTES DUE 2009
E.285,000,000 AGGREGATE PRINCIPAL AMOUNT
----------
We are offering to exchange an aggregate principal amount of up to
E.285,000,000 of our new 8 7/8% senior secured notes due 2009, which have been
registered under the Securities Act of 1933, for a like amount of our old 8 7/8%
senior secured notes due 2009.
----------
o The exchange offer expires at 5:00 p.m., New York City time, on
_____________, 2002, unless we extend it.
o The terms of the new notes to be issued are substantially identical to
the terms of the old notes, except for transfer restrictions and
registration rights relating to the old notes.
o No established trading market for the new notes currently exists. We
will apply to list the new notes on the Luxembourg Stock exchange in
accordance with the rules of the Luxembourg Stock Exchange.
o You may withdraw tenders of old notes at any time prior to the
expiration of the exchange offer.
o We will not receive any proceeds from the exchange offer.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF RISK
FACTORS THAT YOU SHOULD CONSIDER BEFORE DECIDING TO EXCHANGE YOUR OLD NOTES FOR
NEW NOTES.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
----------
The date of this prospectus is , 2002.
--------------
TABLE OF CONTENTS
<Table>
<Caption>
Page
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Notice to Non-U.S. Investors.................................................................................ii
Disclosure Regarding Forward-Looking Statements..............................................................v
Prospectus Summary...........................................................................................1
Risk Factors.................................................................................................15
The Exchange Offer...........................................................................................22
Use of Proceeds..............................................................................................31
Capitalization...............................................................................................31
Unaudited Pro Forma Financial Data...........................................................................32
Selected Historical Financial and Other Data.................................................................36
Management's Discussion and Analysis of Financial Condition and Results of Operations........................38
Business.....................................................................................................53
Management...................................................................................................63
Certain Relationships and Related Transactions...............................................................67
Description of Our Subsidiaries' New Credit Facility.........................................................69
Description of the New Notes.................................................................................70
Registration Rights..........................................................................................104
Book-Entry; Delivery and Form................................................................................105
Certain Tax Considerations...................................................................................108
Plan of Distribution.........................................................................................114
Where You Can Find More Information..........................................................................115
General Listing Information..................................................................................115
Legal Matters................................................................................................116
Experts......................................................................................................116
Index of Financial Statements................................................................................F-1
</Table>
----------
This prospectus incorporates important business and financial
information about us that is not included in or delivered with this prospectus.
We will provide you without charge, on your request, a copy of any document that
is incorporated by reference into this prospectus, other than exhibits to those
documents that are not specifically incorporated by reference into those
documents, by writing or telephoning Kronos International, Inc., 16825
Northchase Drive, Suite 1200, Houston, Texas 77060, Attention: Robert D. Hardy,
Vice President and Chief Financial Officer, at (281) 423-3300. To ensure timely
delivery, please make your request as soon a practicable and, in any event, no
later than five business days prior to the expiration of the exchange offer.
The market data included in this prospectus, including growth rates and
information relating to our relative position in the industry, are based on
internal surveys, market research, publicly available information and industry
publications. References in this prospectus to our market position and to
industry trends are based on information supplied by International Business
Management Associates, an industry research and consulting firm. Although we
believe that such independent sources are reliable, we have not independently
verified the information contained in them, and we cannot guarantee the accuracy
or completeness of this information.
You should rely only on the information provided in this prospectus. We
have not authorized anyone to provide you with any different information. The
information in this prospectus is current only as of the date on the cover, and
our business or financial condition and other information in this prospectus may
change after that date.
We accept responsibility for the information contained in this
prospectus. To the best of our knowledge, the information we give in this
prospectus is in accordance with the facts and contains no omissions likely to
affect the import of the Luxembourg Stock Exchange listing particulars.
Solely for your convenience, this prospectus contains translations of
some euro amounts into U.S. dollars. We are not making any representation to you
regarding those translated amounts.
i
NOTICE TO NON-U.S. INVESTORS
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR AN INVITATION
TO SUBSCRIBE FOR OR PURCHASE ANY OF THE NEW NOTES IN ANY JURISDICTION IN WHICH
SUCH OFFER OR INVITATION IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR INVITATION. THE DISTRIBUTION OF THIS
PROSPECTUS AND THIS EXCHANGE OFFER MAY BE RESTRICTED BY LAW IN CERTAIN
JURISDICTIONS. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED
TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY SUCH RESTRICTIONS.
AUSTRIA
The new notes may only be offered in the Republic of Austria in
compliance with the provisions of the Austrian Capital Markets Act and other
laws applicable in the Republic of Austria governing the offer and sale of the
new notes in the Republic of Austria. The new notes are not registered or
otherwise authorized for public offer either under the Capital Markets Act or
the Investment Fund Act. The recipients of this prospectus and other selling
material in respect of the new notes have been individually selected and are
targeted exclusively on the basis of a private placement. Accordingly, the new
notes must not be, and are not being, offered or advertised and no offering or
marketing materials relating to the new notes may be made available or
distributed in any way which could constitute a public offer under either the
Capital Markets Act or the Investment Fund Act (whether presently or in the
future). This exchange offer may not be made to any persons other than the
recipients of this prospectus.
BELGIUM
The exchange offer is exclusively conducted under applicable private
placement exemptions and is limited to (as amended from time to time): (i)
investors required to invest a minimum of E.250,000 (per investor and per
transaction); (ii) institutional investors as defined in Article 3.2 degrees of
the Belgian Royal Decree of July 7, 1999 on the public character of financial
transactions, acting for their own account; and (iii) persons for which the
acquisition of the new notes subject to the exchange offer is necessary to
enable them to exercise their professional activity.
DENMARK
This prospectus has not been filed with or approved by the Danish
Securities Council, the Copenhagen Stock Exchange or any other regulatory
authority or market in the Kingdom of Denmark. The new notes have not been
offered or sold and may not be offered, sold or delivered, directly or
indirectly, in the Kingdom of Denmark, unless in compliance with Chapter 12 of
the Danish Consolidation Act No. 587 of 9 July 2002 on Trading in Securities and
Executive Orders No. 1207 of 15 December 2000 on the First Public Offer of
Certain Securities issued pursuant hereto, as amended from time to time.
FINLAND
The new notes are not publicly offered or brought into general
circulation in the Republic of Finland other than in compliance with the all
applicable provisions of the laws of the Republic of Finland and especially in
compliance with the Finnish Securities Markets Act (1989/495) and any regulation
made thereunder, as supplemented and amended from time to time.
FRANCE
In France, the new notes may not be directly or indirectly offered or
sold to the public, and offers and sales of the new notes will only be made in
France to qualified investors for their own account, in accordance with Articles
L411-1 and L411-2 of the Code Monetaire et Financier and Decree no. 98-880,
dated October 1, 1998. Accordingly, this prospectus has not been submitted to
the Commission des Operations de Bourse. Neither this prospectus nor any other
offering material may be distributed to the public or used in connection with
any offer for subscription or sale of the new notes to the public in France or
offered to any investors other than those (if any) to whom offers and sales of
the new notes in France may be made as described above and no prospectus
(document d'information) shall be prepared and submitted for approval (visa) to
the Commission des Operations de Bourse.
ii
Les titres ne peuvent etre offerts ni vendus directement ou
indirectement au public en France et l'offre ou la vente de ces titres ne pourra
etre proposee qu'a des investisseurs qualifies, pour leur proper compte
conformement aux Articles L411-1 et L411-2 du Code Montetaire et Financier et au
decret no. 98-880 du 1 octobre 1998. Par consequent, ce prospectus n'a pas ete
soumis au visa de la Commission des Operations de Bourse et aucun document
d'information ne sera prepare ou soumis puor visa a la Commission des Operations
de Bourse. Ni ce prospectus ni aucun autre document promotionnel ne pourront
etre communiques en France au public ou utilise dans le cadre do l'offre de
souscription ou la vente ou l'offre de titres au public ou a toute personne
autre que les investisseurs (le cas echeant) decrits cidessus auxquels les
titres peuvent etre offerts et vendus en France.
GERMANY
The new notes have not been and will not be publicly offered in Germany
and, accordingly, no securities sales prospectus (Verkaufsprospekt) for a public
offering of the new notes in Germany in accordance with the Securities Sales
Prospectus Act of 13 December 1990, as amended
(Wertpapier-Verkaufsprospektgesetz), has been or will be published or circulated
in the Federal Republic of Germany. New notes have only been offered and sold
and will only be offered and sold in the Federal Republic of Germany in
accordance with the provisions of the Securities Sales Prospectus Act and any
other laws applicable in the Federal Republic of Germany governing the issue,
sale and offering of securities. Any resale of the new notes in the Federal
Republic of Germany may only be made in accordance with the provisions of the
Securities Sales Prospectus Act and any other laws applicable in the Federal
Republic of Germany governing the sale and offering of securities.
GREECE
This prospectus and the new notes to which it relates and any other
material related thereto may not be advertised, distributed or otherwise made
available to the public in Greece. The Greek Capital Market Committee has not
authorized any public offering of the subscription of new notes. Accordingly,
new notes may not be advertised, distributed or in any way offered or sold in
Greece or to residents thereof except as permitted by Greek law.
IRELAND
The new notes will not and may not be offered, sold, transferred or
delivered, whether directly or indirectly, otherwise and in circumstances which
do not constitute an offer to the public within the meaning of the Irish
Companies Acts 1963 - 2001 and the new notes will not and may not be the subject
of an offer in the Republic of Ireland to which the European Community
(Transferable Securities and Stock Exchange) Regulations, 1992 of Ireland will
apply. No application form has been issued or will be issued in the Republic of
Ireland in respect of the new notes.
ITALY
In Italy, this prospectus has not been submitted to the clearance
procedure of the Commissione Nazaionale per le Societa e la Borsa ("CONSOB") and
the offering of the new notes has not been notified to the Bank of Italy
pursuant to Article 129 of the Banking Act; therefore, the new notes may not be
offered, exchanged or delivered, nor may copies of this prospectus or of any
other document relating to the new notes or the exchange offer be distributed in
Italy.
LUXEMBOURG
The new notes may not be directly or indirectly offered or sold to the
public in the Grand-Duchy of Luxembourg and neither this prospectus nor any form
of application, advertisement or other material in connection therewith may be
distributed, published or made otherwise available in the Grand-Duchy of
Luxembourg, unless the requirements of Luxembourg law concerning public
offerings of securities have first been met. A listing on the Luxembourg Stock
Exchange of the new notes does not necessarily imply that a public offering
thereof has been authorized.
iii
NETHERLANDS
The new notes are not and will not be offered in the Netherlands other
than to persons who trade or invest in securities in the conduct of their
profession or trade (which includes banks, securities intermediaries (including
dealers and brokers), insurance companies, pension funds, other institutional
investors and commercial enterprises which as an ancillary activity regularly
invest in securities).
PORTUGAL
The new notes have not been offered, advertised, sold or delivered and
will not be directly or indirectly offered, advertised, sold, re-sold,
re-offered or delivered in circumstances which could qualify as a public offer
pursuant to the Codigo dos Valores Mobiliarios or in circumstances which could
qualify the issue of the new notes as an issue in the Portuguese market to
Portuguese residents, and the new notes have not been directly or indirectly
distributed and the agreement, any other document, circular, advertisement or
any offering material will not be directly or indirectly distributed except in
accordance with all applicable laws and regulations. In particular, the new
notes will not be offered to more than 200 Portuguese (non-institutional)
investors; the notes will not be offered to unidentified addressees, nor will
the offer of the new notes be preceded or performed by prospecting or
solicitation of investment intentions of unidentified addressees, or with
promotional material.
SWEDEN
A prospectus has not and will not be registered with the Swedish
Financial Supervisory Authority. Accordingly, this prospectus may not be made
available, nor may the new notes otherwise be marketed and offered for sale, to
the public in Sweden under the Financial Instruments Trading Act (1991:980).
SWITZERLAND
This prospectus has been prepared for private information purposes of
investors only. It may not be used for and shall not be deemed a public offering
of the new notes. No application has been made under Swiss law to publicly
market the new notes in or out of Switzerland. Therefore, no public offer of the
new notes or public distribution of this prospectus may be made in or out of
Switzerland. This prospectus is strictly for private use by its holder and may
not be passed on to third parties.
UNITED KINGDOM
The new notes will only be available for subscription pursuant to this
exchange offer to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances that do not, and will
not, constitute an offer to the public in the United Kingdom within the meaning
of the Public Offers of Securities Regulations 1995, as amended. This prospectus
is being distributed on the basis that each person in the United Kingdom to whom
this prospectus is delivered is a person of the kind described in Article 19(5)
of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001
(the "FPO") or a high net worth company or unincorporated association or high
value trust or other person of a kind described in Article 49(2) of the FPO and,
accordingly, by accepting delivery of this prospectus the recipient warrants and
acknowledges that it is such a person.
iv
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this prospectus or subsequently attributable to us, or persons acting on our
behalf, including, without limitation, statements regarding our future financial
position, business strategy, budgets, market conditions, sales volumes, titanium
dioxide pigments supply, demand and prices, projected costs and plans and
objectives of management for future operations, are forward-looking statements
that represent management's beliefs and assumptions based on currently available
information. Forward-looking statements can be identified by the use of words
such as "believes," "intends," "may," "will," "should," "anticipates,"
"expects," "could" or comparable terminology or by discussions of strategy or
trends. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve risks and uncertainties that could significantly affect expected
results, and actual future results could differ materially from those described
in such forward-looking statements.
Among the factors that could cause actual future results to differ
materially are the risks and uncertainties discussed in this prospectus. While
it is not possible to identify all factors, we continue to face many risks and
uncertainties including, but not limited to, the cyclicality of the titanium
dioxide industry, global economic and political conditions, changes in global
productive capacity, changes in customer inventory levels, changes in product
pricing, changes in product costing, changes in foreign currency exchange rates,
competitive technology positions, operating interruptions (including, but not
limited to, labor disputes, leaks, fires, explosions, unscheduled downtime,
transportation interruptions, war and terrorist activities), recoveries from
insurance claims and the timing thereof and the outcome of 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 expected. We disclaim any
intention or obligation to update publicly or revise such statements whether as
a result of new information, future events or otherwise. Important factors that
could cause actual results to differ materially from our expectations are
disclosed under "Risk Factors" and elsewhere in this prospectus, including,
without limitation, in conjunction with the forward-looking statements included
in this prospectus.
v
PROSPECTUS SUMMARY
In this prospectus, "KII," "we," "us" and "our" refer to Kronos
International, Inc. and its consolidated subsidiaries except where we expressly
state that we are only referring to Kronos International, Inc. As used in this
prospectus, "new notes" means our new 8 7/8% senior secured notes due 2009 that
are being offered in this exchange offer, "old notes" means our outstanding
8 7/8% senior secured notes due 2009 and "notes" means the new notes and the old
notes, collectively. The following summary contains basic information about us,
the new notes and this exchange offer. It likely does not contain all the
information that is important to you. For a more complete understanding of us,
the exchange offer and the new notes, we encourage you to read this prospectus
in its entirety and the other documents we have referred you to.
THE COMPANY
We are the second largest producer of titanium dioxide pigments
("TiO(2)") in Europe, with an estimated 18% share of European TiO(2) sales
volume. We are the leading producer and marketer of TiO(2) in Germany, with an
estimated 25% share of sales volume in 2001, and are among the leading marketers
of TiO(2) in the Benelux and Scandinavian markets. TiO(2) is a pigment used to
whiten, brighten and add opacity to thousands of commonly used products, such as
paints, plastics and paper, as well as fibers, rubber, ceramics, inks and
cosmetics. There are currently no effective substitutes for TiO(2) for use in
these applications. We market over 40 different TiO(2) grades to over 4,000
customers in over 100 countries. We market our products through a dedicated
sales force in Europe and provide our customers with significant technical and
application-related services. Our predecessor companies were the first producers
of TiO(2) in the world, and we have achieved and maintained our market position
through our long-term customer relationships, our new product development
efforts, our commitment to product quality and by offering extensive technical
and sales services.
We currently manufacture TiO(2) in five plants in Europe (two in
Leverkusen, Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium;
and one in Fredrikstad, Norway), and sell and distribute TiO(2) from our plants
and sales and distribution facilities located throughout Europe. Our plants are
currently capable of producing approximately 313,000 metric tons of TiO(2) per
year. Projected annual capacity is expected to increase to approximately 328,000
metric tons in 2004 as a result of additional debottlenecking that can be
achieved through low cost capital investment.
For the year ended December 31, 2001, we had net sales of $554.6
million and operating income plus depreciation and amortization expense less
other general corporate expense, net ("EBITDA"), of $146.4 million. For the six
months ended June 30, 2002, we had net sales of $285.7 million and EBITDA of
$43.5 million.
Some of the principal applications for our products include:
TiO(2) FOR PAINTS AND COATINGS. Our TiO(2) is used to provide
opacity, hiding power, durability, tinting strength and brightness in
industrial coatings, as well as for paints and coatings for home
interiors and exteriors, automobiles, aircraft, machines, appliances,
traffic paint and other special purpose coatings. The amount of TiO(2)
used in paints and coatings varies widely depending on the opacity,
color and quality desired. Generally, the higher the opacity
requirement of the coating, the greater the TiO(2) content. Recent
trends toward white and pastel-colored surface coatings and extended
warranties for appliances and other surface coated consumer durable
items have resulted in higher usage in some applications.
TiO(2) FOR PLASTICS. We produce TiO(2) pigments that improve
the physical and optical properties in plastics, including whiteness
and opacity. TiO(2) is used to provide opacity in items such as plastic
grocery bags, vinyl window and door profiles and vinyl siding, as well
as in agricultural and packaging film to provide opacity and allow the
film to be printed for informational or advertising purposes. TiO(2)
also provides hiding power, neutral undertone, brightness and
durability for housewares, appliances, toys, computer cases and food
packages. TiO(2)'s high brightness, along with its opacity, is used in
some engineering plastics to help mask their undesirable natural color.
TiO(2) FOR PAPER. Our TiO(2) is used in the production of
paper to provide whiteness, brightness, color stability and opacity.
TiO(2) is used in the production of several types of paper, including
filled paper, coated paper and laminate (decorative) paper. In filled
paper applications, TiO(2) is added directly to the pulp and becomes
part of the sheet itself. TiO(2) is particularly useful in filled paper
applications because of
1
its ability to improve the physical appearance of paper without
significant negative impact on other performance characteristics as a
result of the minimal quantities required. Without TiO(2), high
opacity, lightweight papers could not be produced. TiO(2) is used in
paper coatings for production of high gloss papers. TiO(2) is also used
in paper laminates, where several layers of paper are laminated
together using melamine resin under high temperature and pressure. The
top layer of paper contains as much as 50% TiO(2) and is the layer that
is printed with decorative patterns. Paper laminates are used to
replace materials such as wood and tile for such applications as
counter tops, furniture and wallboard. TiO(2) is beneficial in these
applications because it assists in preventing the material from fading
or changing color after prolonged exposure to sunlight and other
weathering agents.
TiO(2) FOR INKS AND TEXTILES. We produce TiO(2) to improve the
opacity and hiding power of printing inks. TiO(2) allows inks to
achieve very high print quality while not interfering with the
technical requirements of printing machinery, including speed and high
temperatures. Our TiO(2) is also used in textile applications. TiO(2)
functions as an opacifying, brightening and delustering agent. In
manmade fibers such as rayon and polyester, TiO(2) corrects undesirable
characteristics such as glossy and translucent appearance. Without the
presence of TiO(2), these materials would be unsuitable for use in many
textile applications.
TiO(2) FOR OTHER APPLICATIONS. We produce high purity sulfate
process anatase TiO(2) used to provide opacity, whiteness and
brightness in a variety of cosmetic and personal care products, such as
skin cream, lipstick, eye shadow and toothpaste. Our TiO(2) is also
found in food products, such as candy and confectionary, and in pet
foods where it is used to obtain uniformity of color and appearance. In
pharmaceuticals, our TiO(2) is used commonly as a colorant in pill and
capsule coatings as well as in liquid medicines to provide uniformity
of color and appearance. Kronos purified anatase grades meet the
applicable requirements of the CTFA (Cosmetics, Toiletries and
Fragrances Association), USP and BP (United States Pharmacopoeia and
British Pharmacopoeia) and the FDA (United States Food and Drug
Administration).
We are also engaged in the mining and sale of ilmenite ore, a raw
material used as a feedstock by certain TiO(2) plants. Our mining operations
have an estimated annual production capacity of approximately 900,000 metric
tons, and we have estimated ilmenite reserves of at least 20 years at the
current rate of usage. In 2000 and 2001, we sold approximately 699,000 and
793,000 metric tons of ilmenite, respectively, of which 304,000 and 243,000
metric tons were used internally in our sulfate-process TiO(2) plants,
respectively, and 395,000 and 550,000 metric tons were sold to third-party
customers, respectively. The decrease in our internal usage in 2001 was
primarily due to a fire that occurred on March 20, 2001 that damaged a section
of our Leverkusen, Germany sulfate-process TiO(2) plant and temporarily halted
production at that plant. Approximately 4% of our consolidated net sales in 2000
and 7% in 2001 represented ilmenite sales to external customers.
THE TiO(2) INDUSTRY
The global TiO(2) industry is concentrated. We, along with our North
American affiliates and our five largest competitors (E.I. du Pont de Nemours &
Co.; Millennium Chemicals, Inc.; Huntsman International Holdings LLC; Kerr-McGee
Corporation; and Ishihara Sangyo Kaisha, Ltd.) account for approximately 80% of
worldwide TiO(2) production volume and approximately 86% of Western European
TiO(2) production volume. The TiO(2) industry has substantial requirements for
entry, including proprietary production technology and significant capital
investment. Currently, total global capacity is approximately 4.4 million metric
tons, according to International Business Management Associates. Based upon
current selling prices, the long lead times required for planning, obtaining
government approvals and construction and the fact that no new plants are
currently under construction, additional greenfield capacity is not expected in
the next three to five years. While we believe that current selling prices do
not support new greenfield capacity, it is likely that producers will continue
to increase capacity over the next several years through incremental
debottlenecking of existing facilities. According to International Business
Management Associates, prices of TiO(2) are expected to be positively impacted
by limited investment in new capacity over the next three to five years.
TiO(2) is considered a "quality-of-life" product with demand affected
by underlying global macroeconomic variables such as GDP growth, consumer
disposable income and population. According to International Business Management
Associates, since 1980, growth in TiO(2) consumption has averaged 2.9% per year
and did not decline during any two consecutive years. Although short-term
influences, such as customer and producer stocking and
2
destocking activities, may have distorted TiO(2)'s growth trend, over the
long-term, GDP growth has historically been the primary underlying factor
influencing growth in TiO(2) demand. Additionally, the TiO(2) industry
experiences some seasonality in its sales as paint sales generally peak during
the spring and summer months in the northern hemisphere, resulting in greater
TiO(2) sales volume during the first half of the year. Per capita consumption of
TiO(2) in the United States and Western Europe far exceeds that in other areas
of the world and these regions are expected to continue to be the largest
consumers of TiO(2). TiO(2) demand in other regions of the world could increase
as these economies develop to the point that "quality-of-life" products using
TiO(2) become in greater demand.
The selling price of TiO(2) is significantly affected by industry
capacity and demand, with the last cyclical peak for TiO(2) prices having
occurred in late 2000 and the highest peak pricing for TiO(2) having occurred in
1990. Since late 2000 through early in the first quarter of 2002, weak economic
conditions worldwide have resulted in lower customer purchasing and, as a
result, TiO(2) producers reduced their operating rates and the selling prices of
TiO(2) declined. For example, our current TiO(2) prices in billing currencies
are approximately 8% below the five-year average and approximately 25% below
their historical high. Our average selling prices in billing currencies in June
2002 were approximately 16% lower than prices in November 2000.
In January 2002, we announced price increases in all major markets of
approximately 8% above existing December 2001 prices, a portion of which was
realized in the second quarter with additional price increases expected to be
realized in the third quarter of 2002. June 2002 prices in billing currencies
were up 1% over the average for the first six months of 2002 prices. Sales
volume for our TiO(2) in the first half of 2002 increased 15% over the 2001
comparable period. We believe that this strong demand is primarily attributable
to improved economic conditions, some seasonality and customers restocking their
inventory levels ahead of these price increases. We expect sales volume in the
second half of 2002 to be lower than in the first half of 2002. Also, in May
2002, we announced a second round of price increases of approximately 7% to 11%
for certain regions of the world, including Europe. We are hopeful that we will
realize a portion of the announced May 2002 price increases during the fourth
quarter of 2002. The extent to which any price increase will be realized will
depend on improving market conditions.
TiO(2) is manufactured using either the chloride or sulfate production
process. Although most end-use applications can use pigments produced by either
process, chloride process pigments are generally preferred in certain coatings
and plastics applications and sulfate process pigments are generally preferred
for paper, fibers and ceramics applications. Due to environmental factors and
customer considerations, the proportion of TiO(2) industry sales represented by
chloride process pigments has increased relative to sulfate process pigments. In
general, the chloride process is less intensive than the sulfate process in
terms of capital investment, labor and energy. Approximately 60% of global
production capacity (and approximately 62% of our production capacity) is based
on chloride process technology with the remainder thereof based upon the sulfate
process.
OUR COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
LEADING MARKET POSITIONS. We enjoy a leading market position in TiO(2),
which gives us an advantage over many of our competitors. Our predecessor
companies were the first TiO(2) producers in the world and have manufactured
TiO(2) for 86 years. We are the second largest producer of TiO(2) in Europe and
the largest in Germany, which has the largest economy in Europe. We are also
among the leading sellers of TiO(2) in the Scandinavian, Benelux, Austrian and
Swiss markets. We have a global presence through our parent, Kronos, Inc.
("Kronos"), which sells our products in North America. We believe that our
strong presence in Western Europe strategically positions us to take advantage
of growth within the Eastern European markets.
STRONG CUSTOMER BASE. Our experience in and commitment to the TiO(2)
industry are known by our customers. We enjoy a high level of customer loyalty,
which helps us maintain our leading market positions. We have developed many
long-term customer relationships through our broad product offerings, packaging
flexibility, strong technical support and customer service. We currently have
over 4,000 customers, with the top ten customers accounting for approximately
23% of our sales and no individual customer accounting for more than 6% of our
sales. We also collaborate with our customers to develop new TiO(2) grades for
key applications.
BROAD PRODUCT RANGE. We have one of the broadest product offerings in
the TiO(2) industry. We supply grades made via both the chloride and the sulfate
processes. We offer over 40 different TiO(2) grades, including
3
rutile, anatase and non-pigmentary grades, surface treated and non-surface
treated grades and dry and paper slurry grades. We offer a variety of packaging
options to meet our customers' needs, including 25 kilogram plastic and paper
bags, Intermediate Bulk Containers in various sizes, bulk deliveries of dry
pigments to our customers' silos and slurried pigments to the paper industry. We
use our product offering and packaging flexibility to help differentiate
ourselves from the competition.
HIGH PERFORMANCE PRODUCTS. We have several key grades within our
product range that we believe have superior performance characteristics. We
supply the leading chloride grade used in the manufacture of PVC profiles in
Europe, which are used to construct window frames, doorframes, window shades and
siding. This grade, with over 30 years of proven performance, holds over 50% of
the market for European PVC profiles. Other applications where we believe we
hold a performance advantage include chloride grades for paper laminate
applications and engineering plastics and sulfate grades for photographic films;
purified anatase grades for the food, pharmaceutical and cosmetics markets; and
specialty anatase grades for the dry cell battery, capacitor, textile and fiber
markets. We believe that our customer relationships, the breadth of our product
offerings and the performance of our grades in several applications make it
difficult for competitive grades to win the favor of our customers.
PROPRIETARY CHLORIDE PRODUCTION TECHNOLOGY. We are the leading European
chloride process manufacturer, with annual chloride process capacity of
approximately 194,000 metric tons using proprietary technology. Certain of our
customers, including many in the paint and plastics industries, generally prefer
chloride process pigments in part due to higher durability, high temperature
tolerance and blue tone characteristics. Proprietary production technology is
also an important barrier to entry in the TiO(2) industry, as companies that
possess such chloride technology are reluctant to license it to competitors.
Through debottlenecking, we have increased our chloride capacity by 40% since
1994, including a debottlenecking project between 1996 and 1998 at our
Leverkusen, Germany facility, which added 20,000 metric tons of capacity.
Approximately 62% of our product is produced with this technology, while only
22% of competitors' capacity in Europe utilizes the chloride process.
EXPERIENCED MANAGEMENT TEAM. We are managed by an experienced and
motivated group of senior executive officers, with an average of 21 years of
experience in the chemical industry. In addition to our strong executive
management team, we have an experienced group of operating managers who work to
maintain our strong TiO(2) position.
CAPTIVE ILMENITE ORE MINING OPERATIONS. Our captive mining operations
provide us a reliable source of TiO(2) feedstock for our sulfate process
production plants at reduced cost, providing 100% of the ore required for these
plants. Nearly 40% of our mine's production is used internally, and the balance
is sold to other pigment and titanium slag producers at competitive prices
yielding profitable margins.
OUR STRATEGY
Our strategy is to increase value by:
o maximizing our earnings, cash flows and return on capital
employed by reducing costs, increasing efficiencies and
optimizing existing assets; and
o increasing our competitiveness by expanding our size and
market presence through internal growth initiatives and
technology innovation.
Specifically, to meet our goals, we strive to:
IMPROVE OPERATING EFFICIENCIES AND MARGINS. We believe that our
operations are among the most efficient in the industry. We continue to focus on
increasing manufacturing efficiencies through selected capital projects, process
improvement and best practices, in order to lower unit costs and improve our
margins. Our research and development, including process technology, focuses on
improving production processes, yields and qualities. These operating
efficiencies have been accomplished through aggressive operator training,
innovative technology changes and constant equipment improvements. For example,
we continue to improve our chloride plants' on-stream efficiency, and we
anticipate further maintenance cost reductions by extending by 40% to 50% the
time that the plants' chlorinators are in use, yielding annual maintenance
savings of approximately $4 million. We also have a newly designed acid scrubber
and newly designed pigment bag filter, which are expected to add approximately
nine additional production days per year per line. This is equivalent to
approximately 4,500 metric tons per year.
4
Prudent personnel cost reductions are a continuous effort, which over
approximately the last six years have resulted in an approximate 13% reduction
in manufacturing and support staff personnel, yielding annual savings of
approximately $11 million. These cost reduction programs have resulted in a
significant improvement in our fixed cost structure during a time when our
production capacity has increased over 20%, leading to a significant improvement
in our margins. We intend to continue to use our manufacturing expertise to
lower costs, improve efficiency and enhance the performance and reliability of
our product line.
GROW THROUGH TECHNOLOGY AND INNOVATION. We continue to improve the
consistency of our grades and develop new grades for existing and new
applications to meet the needs of our customers and increase product life
cycles. For example, we have enhanced our product consistency and added new
grades for plastics, coatings, fiber and paper laminate applications.
Specifically, in plastics applications, one grade targeted for the growing
engineering plastic segment provides excellent masking of the natural yellowness
of engineering plastics at high temperatures. Two other plastic grades were
designed for use in a range of polyolefin plastic resin applications, as they
impart a desirable blue undertone to these resins. We have also developed a new
paper laminate grade that we expect to introduce later this year designed to
deliver higher opacity in this fast growing market segment.
DEBOTTLENECK EXISTING FACILITIES. Increasing our production capacity
with only moderate capital outlays continues to be a major goal. Without any new
plant or new line construction, our production capacity has increased 20% over
the last six years and we believe that our capacity can reach approximately
328,000 metric tons during 2004 as a result of additional debottlenecking that
can be achieved through low cost capital investment.
Our principal executive offices in the U.S. are located at 16825
Northchase Drive, Suite 1200, Houston, Texas 77060, and our telephone number is
(281) 423-3300. Our corporate headquarters in Europe are located at Peschstrasse
5, 51373 Leverkusen, Germany.
5
CORPORATE STRUCTURE
We are a Delaware corporation registered in the commercial register of
the Federal Republic of Germany, and our principal place of business is in
Germany. We conduct our manufacturing and distribution operations through our
principal subsidiaries, Kronos Titan GmbH & Co. OHG ("Kronos Germany"), Kronos
Europe S.A./N.V. ("Kronos Belgium"), Kronos Norge A/S ("Kronos Norway"), Kronos
Limited ("Kronos UK"), Kronos Denmark ApS ("Kronos Denmark") and Societe
Industrielle Du Titane, S.A. ("Kronos France"). We are a wholly-owned subsidiary
of Kronos, which in turn is a wholly-owned subsidiary of NL Industries, Inc.
("NL Industries"), the world's fifth largest producer of TiO(2). Kronos conducts
its North American operations through its principal wholly-owned direct and
indirect subsidiaries, Kronos Louisiana, Inc. ("Kronos Louisiana"), Kronos (US),
Inc. ("Kronos USA") and Kronos Canada, Inc. ("Kronos Canada"). The following
chart summarizes this corporate structure (ownership is 100% unless otherwise
noted):
[CHART]
- ----------
(a) 65% of the stock or other equity interests of these first-tier
subsidiaries has been pledged to secure the new notes.
(b) Borrowers under our subsidiaries' new E.80 million credit facility.
(c) 0.05% of Kronos Germany is held by NL Industries through its
wholly-owned German subsidiary, NL Industries Chemie GmbH.
(d) 6% of Kronos France is held by minority shareholders.
We are parties to various intercorporate agreements with Kronos and its
affiliates, which are described under "Certain Relationships and Related
Transactions."
6
CERTAIN TRANSACTIONS AND REFINANCING
In April 2002, we completed an internal restructuring of our operations
in which we transferred our Canadian operations to Kronos in contemplation of
the offering of the old notes. Pursuant to GAAP, our financial statements were
retroactively restated to exclude the assets, liabilities, results of operations
and cash flows of such Canadian operations for all periods presented. See note 1
to the consolidated financial statements included elsewhere in this prospectus.
We have implemented a refinancing of certain of our outstanding
indebtedness. The sources of funds of this refinancing were:
o the offering of the old notes, and
o entering into our subsidiaries' new E.80 million credit
facility.
As described in "Capitalization" and "Unaudited Pro Forma Financial
Data," we used the net proceeds from the offering of the old notes, plus cash on
hand, to repay a portion of our outstanding indebtedness owed to Kronos. We used
a portion of the borrowing available to us under our subsidiaries' new credit
facility, plus cash on hand, to repay our outstanding short-term notes payable
to third parties.
Immediately prior to the completion of the offering of the old notes,
we had approximately $695 million of outstanding redeemable preferred stock and
profit participation certificates (including cumulative and unpaid dividends
thereon), all of which were held by Kronos and were redeemable at our option or
Kronos' option. See note 16 to the consolidated financial statements included
elsewhere in this prospectus. Following the completion of the offering of the
old notes, we redeemed in non-cash transactions all such profit participation
certificates in exchange for a portion of our outstanding notes receivable from
affiliates (as discussed in the immediately following paragraph), and we
converted the redeemable preferred stock into our common stock. The ultimate
result of these transactions was that our stockholder's equity increased by an
amount equal to the carrying value of all such redeemable preferred stock and
profit participation certificates redeemed or converted into our common stock.
See "Capitalization," "Unaudited Pro Forma Financial Data" and note 22 to the
consolidated financial statements included elsewhere in this prospectus.
Immediately prior to the completion of the offering of the old notes,
we had approximately $753 million of outstanding notes receivable from
affiliates, all of which were owed by either Kronos or NL Industries. Settlement
of such notes receivable was not currently contemplated in the then foreseeable
future, and consequently such notes receivable from affiliates were reported in
our consolidated balance sheet as a reduction of our stockholder's equity in
accordance with GAAP. See note 17 to the consolidated financial statements
included elsewhere in this prospectus. Following the completion of the offering
of the old notes, we transferred such notes receivable from affiliates to Kronos
in non-cash transactions (by using a portion of them to redeem all of our
outstanding profit participation certificates and using the remainder as
consideration to redeem a portion of our outstanding common stock). Our reported
stockholder's equity has not been affected to the extent that such notes
receivable were used to redeem common stock. See "Capitalization," "Unaudited
Pro Forma Financial Data" and note 22 to the consolidated financial statements
included elsewhere in this prospectus.
7
THE EXCHANGE OFFER
In the exchange offer, we are offering to exchange your old notes for
new notes, which are identical in all material respects to the old notes, except
that:
o the new notes will be registered under the Securities Act of
1933, as amended (the "Securities Act");
o the new notes will not contain transfer restrictions and
registration rights that relate to the old notes; and
o the new notes will not contain provisions relating to the
payment of additional interest to be made to the holders of
the old notes under circumstances related to the timing of the
exchange offer.
The summary below describes the principal terms of the exchange offer.
The "Exchange Offer" section of this prospectus contains a more detailed
description of the exchange offer.
<Table>
Old Notes.................................................... On June 28, 2002, we completed a private
offering of E.285,000,000 aggregate
principal amount of 8 7/8% senior secured
notes due 2009, which we refer to in this
prospectus as the old notes.
Registration Rights Agreement................................ Simultaneously with the sale of the old notes,
we entered into a registration rights agreement,
which provides for the exchange offer. The
exchange offer satisfies your rights under the
registration rights agreement. After the
exchange offer is over, you will not be entitled
to any exchange or registration rights with
respect to your old notes, except under limited
circumstances.
The Exchange Offer........................................... We are offering to exchange the old notes for up
to E.285,000,000 aggregate principal amount of
8 7/8% senior secured notes due 2009 that have been
registered under the Securities Act, which we
refer to in this prospectus as the new notes.
You may exchange old notes only in integral
multiples of E.1,000 principal amount.
Expiration of the Exchange Offer............................. The exchange offer will expire at 5:00 p.m.,
New York City time, on ______________, 2002, or a
later date and time to which we may extend it.
Withdrawal................................................... You may withdraw your tender of old notes
pursuant to the exchange offer at any time
before the expiration of the exchange offer. We
will return any old notes not accepted for
exchange for any reason without expense to you
promptly after the expiration or termination of
the exchange offer.
</Table>
8
<Table>
Conditions to the Exchange Offer............................. The exchange offer is subject to customary
conditions, which we may waive. Please read "The
Exchange Offer -- Conditions to the Exchange Offer"
for more information regarding the conditions to
the exchange offer.
Acceptance of Old Notes and Delivery of New Notes............ We will accept and exchange any and all old
notes that are validly tendered in the exchange
offer and not withdrawn before the exchange
offer expires. The new notes will be delivered
promptly following the exchange offer.
Resale of New Notes.......................................... We believe that the new notes issued pursuant to
the exchange offer in exchange for old notes may
be offered for resale, resold and otherwise
transferred by you without compliance with the
registration and prospectus delivery provisions
of the Securities Act if:
o you are not our "affiliate" within the
meaning of Rule 405 under the
Securities Act;
o you are acquiring the new notes in the
ordinary course of your business; and
o you have not engaged in, do not intend
to engage in, and have no arrangement
or understanding with any person to
participate in, a distribution of the
new notes.
If you are an affiliate of ours, or are engaging
in or intend to engage in, or have any arrangement
or understanding with any person to participate in,
a distribution of the new notes, then:
o you will not be permitted to tender old
notes in the exchange offer; and
o you must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any
resale of the old notes.
Each participating broker-dealer that receives new
notes for its own account under the exchange offer
in exchange for old notes that were acquired by the
broker-dealer as a result of market-making or other
trading activity must acknowledge that it will
deliver a prospectus in connection with any resale of
the new notes. See "Plan of Distribution."
Consequences of Failing to Exchange........................... If you are a holder of old notes and you do not
tender your old notes in the exchange offer,
then you will continue to hold your old notes
and will be entitled to all the rights and will
be subject to
</Table>
9
<Table>
all the limitations applicable to the old notes in the
indenture. All untendered old notes will remain
subject to the restrictions on transfer provided for
in the old notes and in the indenture. Generally,
untendered old notes will remain restricted
securities and may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. Other
than in connection with the exchange offer, we
do not currently anticipate that we will
register the old notes under the Securities
Act. The trading market for old notes could be
adversely affected if some but not all of the
old notes are tendered and accepted in the
exchange offer.
Tax Considerations........................................... The exchange of old notes for new notes in the
exchange offer will not be a taxable event for
U.S. federal income tax purposes. See "Certain
Tax Considerations" for a more detailed
description of the tax consequences of the
exchange.
Use of Proceeds.............................................. We will not receive any cash proceeds from the
issuance of new notes pursuant to the exchange
offer.
Exchange Agent............................................... The Bank of New York is the exchange agent for
the exchange offer. The address and telephone
number of the exchange agent are set forth under
"The Exchange Offer -- Exchange Agent."
</Table>
10
THE NEW NOTES
The new notes will evidence the same debt as the old notes and will be
governed by the same indenture under which the old notes were issued. The
summary below describes the principal terms of the new notes. The "Description
of the New Notes" section of this prospectus contains a more detailed
description of the terms and conditions of the new notes.
<Table>
Issuer..................................... Kronos International, Inc.
Securities Offered......................... E.285,000,000 principal amount of 8 7/8% senior secured notes due 2009.
Maturity................................... June 30, 2009.
Interest Rate.............................. 8 7/8% per year (calculated using a 360-day year).
Interest Payment Dates..................... June 30 and December 30, beginning on December 30, 2002.
Ranking.................................... The new notes will rank equally in right of payment with the old
notes and with all of our senior debt and senior in right of payment
to all of our subordinated debt. The new notes will be structurally
subordinated to the debt and liabilities of our subsidiaries. As of
June 30, 2002, our subsidiaries had approximately $218.5 million of
debt and other liabilities (including approximately $49.9 million of
deferred income taxes) recorded on our balance sheet, excluding
approximately E.40 million ($40 million) that subsidiaries have
available to borrow under a new credit facility. See "Capitalization."
Security................................... The new notes will be secured by pledges in favor of the trustee for
the new notes or a collateral agent on behalf of the holders of 65%
of the stock or other equity interests of certain of our first-tier
subsidiaries, which is the same collateral that secures the old notes.
Sinking Fund............................... None.
Optional Redemption........................ We cannot redeem the new notes until December 30, 2005. On that date
and thereafter we may redeem some or all of the new notes at the
redemption prices listed in the "Description of the New Notes"
section under the heading "Optional Redemption," plus accrued
interest.
Optional Redemption After Public At any time (which may be more than once) on or before June 30, 2005,
Equity Offerings........................... we can choose to redeem up to 35% of the outstanding notes with money
that we, Kronos or NL Industries raise in one or more public equity
offerings, as long as:
o we pay 108.875% of the face amount of the outstanding notes,
plus interest;
o we redeem the outstanding notes within 90 days of completing
the public equity offering; and
o at least 65% of the aggregate principal amount of outstanding
notes originally issued remains outstanding afterwards.
</Table>
11
<Table>
Change of Control Offer.................... If we undergo a change of control, we must give holders of the new
notes the opportunity to sell us their notes at 101% of their face
amount, plus accrued interest. See "Description of the New Notes --
Repurchase at the Option of Holders upon Change of Control."
Asset Sale Proceeds........................ If we or our subsidiaries engage in asset sales, we generally must
either invest the net cash proceeds from such sales in our business
within a period of time, prepay senior debt or make an offer to
purchase a principal amount of the new notes equal to the excess net
cash proceeds. The purchase price of the new notes will be 100% of
their principal amount, plus accrued interest. See "Description of
the New Notes -- Certain Covenants -- Limitation on Asset Sales."
Restrictive Covenants...................... The indenture governing the new notes contains covenants limiting our
(and most or all of our subsidiaries') ability to:
o incur additional debt or enter into sale and leaseback
transactions;
o pay dividends or distributions on our capital stock or
repurchase our capital stock;
o issue stock of subsidiaries;
o make certain investments;
o create liens on our assets to secure debt;
o enter into transactions with affiliates;
o merge or consolidate with another company; and
o transfer and sell assets.
These covenants are subject to a number of important limitations
and exceptions.
Absence of Market for the New Notes........ The new notes will be a new issue of securities with no established
trading market. We will apply for the new notes to be listed on the
Luxembourg Stock Exchange upon the completion of the exchange offer.
However, we cannot provide any assurance as to the development or
liquidity of any market for the new notes.
Risk Factors............................... Investing in the new notes involves substantial risks. See "Risk
Factors" for a description of certain of the risks you should
consider before investing in the new notes.
</Table>
12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The historical income statement and cash flow data for the years ended
December 31, 1999, 2000 and 2001, and the historical balance sheet data as of
December 31, 2000 and 2001, have been derived from our audited consolidated
financial statements. The historical income statement and cash flow data for the
years ended December 31, 1997 and 1998, the six-month periods ended June 30,
2001 and 2002 and the historical balance sheet data as of December 31, 1997,
1998 and 1999 and as of June 30, 2001 and 2002, have been derived from our
unaudited consolidated financial statements covering such periods. The summary
historical data below should be read in conjunction with "Selected Historical
Financial and Other Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus (except for the
unconsolidated financial statements as of December 31, 1997, 1998 and 1999, and
for the years ended December 31, 1997 and 1998, which are not included in this
prospectus). We have derived the summary unaudited pro forma financial
information below from the "Unaudited Pro Forma Condensed Consolidated Financial
Statements," which include the detailed adjustments and assumptions used to
prepare this information. Such summary unaudited pro forma financial information
should be read in conjunction with such "Unaudited Pro Forma Condensed
Consolidated Financial Statements" included elsewhere in this prospectus. While
this pro forma information is based on adjustments we deem appropriate and that
were factually supported based on currently available data, the pro forma
information may not be indicative of what actual results would have been, nor
does this information purport to present our financial results for future
periods.
<Table>
<Caption>
ACTUAL PRO FORMA
------------------------------- ----------
SIX MONTHS
SIX MONTHS ENDED JUNE 30, ENDED
-------------------------- JUNE 30,
2001 2002 2002
---------- ---------- ----------
(in millions, except ratio information)
OPERATING DATA:
Net sales......................................................... $ 299.4 $ 285.7 $ 285.7
Operating income(a)............................................... 71.7 30.7 30.7
Income from continuing operations................................. 41.1 37.6 9.7
OTHER DATA:
Depreciation and amortization..................................... $ 12.2 $ 12.8 $ 12.8
EBITDA(b)......................................................... 83.9 43.5 43.5
Net cash provided by operating activities......................... 18.2 35.8 N/A
Net cash used by investing activities............................. (11.2) (10.8) N/A
Net cash used by financing activities............................. (5.6) (42.3) N/A
Capital expenditures(c)........................................... 12.4 7.9 7.9
Ratio of EBITDA to interest....................................... 5.2x 2.1x 3.2x
Ratio of earnings to fixed charges(d)............................. 3.0x 1.5x 2.2x
BALANCE SHEET DATA (AT PERIOD END):
Working capital(e)................................................ $ 106.7 $ 137.6 $ 137.6
Total assets...................................................... 529.4 573.1 573.1
Notes payable..................................................... 59.0 -- --
Long-term debt, including current maturities...................... 476.8 325.0 325.0
Total liabilities................................................. 708.5 507.8 507.8
Redeemable preferred stock and profit participation certificates.. 516.4 694.8 --
Stockholder's equity (deficit).................................... (695.7) (629.8) 65.0
</Table>
13
<Table>
<Caption>
PRO FORMA-
YEAR ENDED
DECEMBER
ACTUAL-YEAR ENDED DECEMBER 31, 31,
---------------------------------------------------- ----------
1997 1998 1999 2000 2001 2001
--------- -------- -------- -------- -------- ----------
(in millions, except ratio information)
OPERATING DATA:
Net sales........................................ $ 601.8 $ 631.6 $ 620.3 $ 620.5 $ 554.6 $ 554.6
Operating income(a).............................. 43.2 100.0 90.5 146.1 123.8 123.8
Income (loss) from continuing operations......... (88.6) 38.6 41.9 80.1 113.7 98.3
OTHER DATA:
Depreciation and amortization.................... $ 29.9 $ 29.7 $ 28.4 $ 24.1 $ 24.1 $ 24.1
EBITDA(b)........................................ 73.1 129.7 118.9 170.2 146.4 146.4
Net cash provided by operating activities........ 20.3 8.9 77.6 97.8 75.4 N/A
Net cash used by investing activities............ (23.3) (17.6) (26.9) (26.6) (27.9) N/A
Net cash used by financing activities............ (4.6) (1.6) (10.2) (96.1) (52.8) N/A
Capital expenditures(c).......................... 26.3 19.6 29.2 26.7 26.1 26.1
Ratio of EBITDA to interest...................... 1.0x 1.9x 3.2x 5.6x 3.8x 5.4x
Ratio of earnings to fixed charges(d)............ -- 1.8x 1.3x 3.5x 1.8x 4.9x
BALANCE SHEET DATA (AT PERIOD END):
Working capital(e)............................... $ 63.9 $ 79.5 $ 70.6 $ 73.0 $ 101.5 N/A
Total assets..................................... 564.5 626.5 580.4 530.1 532.5 N/A
Notes payable.................................... 14.0 36.4 57.1 70.0 46.2 N/A
Long-term debt, including current maturities..... 756.2 549.7 244.5 196.1 482.9 N/A
Total liabilities................................ 1,007.1 833.3 533.9 452.6 692.3 N/A
Redeemable preferred stock and profit
participation certificates................... -- -- 489.1 504.9 617.4 N/A
Stockholder's deficit............................ (442.9) (207.1) (442.9) (427.7) (777.5) N/A
</Table>
- ----------
(a) Operating income is defined as income before income taxes, minority
interest, interest expense, interest expense to affiliates, certain
nonrecurring items and certain general corporate items. Corporate items
excluded from operating income include corporate expense, interest
income from affiliates, gains and losses from the disposal of
long-lived assets outside of the ordinary course of business and
currency transaction gains and losses related to our U.S.
dollar-denominated note payable to Kronos. See note 3 to the
consolidated financial statements included elsewhere in this
prospectus.
(b) EBITDA, as presented, represents operating income plus depreciation and
amortization expense less other general corporate expenses, net, of
$1.5 million in 2001. EBITDA is presented as a supplement to our
operating income and cash flow from operations because we believe that
EBITDA is a widely accepted financial indicator of cash flows and the
ability to service debt. EBITDA should not be considered as an
alternative to, or more meaningful than, operating income or net income
determined under GAAP as an indicator of our operating performance, or
cash flows from operating, investing and financing activities
determined under GAAP as a measure of liquidity. EBITDA is not intended
to depict funds available for reinvestment or other discretionary uses,
as we have significant debt requirements and other commitments.
Investors should consider certain factors in evaluating our EBITDA,
including interest expense, income taxes, noncash income and expense
items, changes in assets and liabilities, capital expenditures and
other items included in GAAP cash flows as well as future debt
repayment requirements and other commitments, including those described
in our consolidated financial statements included elsewhere in this
prospectus. We believe that the trend of our EBITDA is consistent with
the trend of our GAAP operating income. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
discussion of operating income and cash flows during the last three
years and our outlook. EBITDA as a measure of our performance may not
be comparable to similarly titled captions of other companies due to
potential differences in the method of calculation.
(c) Capital expenditures in 2001 and the six months ended June 30, 2001 and
June 30, 2002 exclude an aggregate of $22.3 million, $3.4 million and
$2.2 million, respectively, related to the rebuilding of our
Leverkusen, Germany sulfate plant destroyed by fire, substantially all
of which was reimbursed by insurance proceeds. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Investing cash flow"
and note 14 to the consolidated financial statements included elsewhere
in this prospectus.
(d) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before income
taxes plus fixed charges (excluding capitalized interest). Fixed
charges consist of interest expense, interest portion of rent expense,
capitalized interest and preferred dividends and accretion. Our
earnings were insufficient to cover total fixed charges in 1997. The
coverage deficiency was $84.2 million.
(e) Calculated as current assets less current liabilities.
14
RISK FACTORS
Before you decide to exchange your old notes for new notes, you should
carefully consider the following factors in addition to the other information
contained in this prospectus.
RISKS RELATED TO THE EXCHANGE OFFER
YOU MAY HAVE DIFFICULTY SELLING THE OLD NOTES THAT YOU DO NOT EXCHANGE.
If you do not exchange your old notes for the new notes offered in this
exchange offer, then you will continue to be subject to transfer restrictions of
your old notes. Those transfer restrictions are described in the indenture
governing the new notes and in the legend contained on the old notes, and arose
because we originally issued the old notes under exemptions from, and in
transactions not subject to, the registration requirements of the Securities
Act.
In general, you may offer or sell your old notes only if they are
registered under the Securities Act and applicable state securities laws, or if
they are offered and sold under an exemption from those requirements. We do not
intend to register the old notes under the Securities Act.
If a large number of old notes are exchanged for new notes issued in
the exchange offer, then it may be more difficult for you to sell your
unexchanged old notes. In addition, if you do not exchange your old notes in the
exchange offer, then you will no longer be entitled to have those notes
registered under the Securities Act.
See "The Exchange Offer -- Consequences of Failing to Exchange Old
Notes" for a discussion of the possible consequences of failing to exchange your
old notes.
Each of the risks described in this section with respect to the new
notes is equally applicable to the old notes.
RISKS RELATED TO THE NOTES
OUR LEVERAGE MAY IMPAIR OUR FINANCIAL CONDITION.
We currently have a significant amount of debt. As of June 30, 2002,
our total consolidated debt was $325.0 million. See "Capitalization" for
additional information.
Our level of debt could have important consequences to you, including:
o making it more difficult for us to satisfy our obligations
with respect to the notes;
o increasing our vulnerability to adverse general economic and
industry conditions;
o requiring that a substantial portion of our cash flow from
operations be used for the payment of interest on our debt,
therefore reducing our ability to use our cash flow to fund
working capital, capital expenditures, acquisitions and
general corporate requirements;
o limiting our ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and
general corporate requirements;
o limiting our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate;
and
o placing us at a competitive disadvantage relative to other
less leveraged competitors.
15
Subject to specified limitations, the indenture permits us and our
subsidiaries to incur additional debt, including secured debt that may be
secured by the collateral on a pari passu basis. In addition, our subsidiaries
have unused borrowing availability of approximately $40 million under our
subsidiaries' new credit facility, subject to certain tests, all of which
borrowings would be senior, structurally, to the notes and would be secured by
substantially all of the current assets of such subsidiaries. If new debt is
added to our and our subsidiaries' current debt levels, then the related risks
that we and they now face could intensify. See "Description of Our Subsidiaries'
New Credit Facility" for additional information.
THE NOTES ARE SECURED ONLY BY PLEDGES OF 65% OF THE STOCK OR OTHER EQUITY
INTERESTS OF CERTAIN OF OUR FIRST-TIER SUBSIDIARIES, AND ASSETS OF OUR
SUBSIDIARIES WILL FIRST BE APPLIED TO REPAY INDEBTEDNESS AND LIABILITIES OF OUR
SUBSIDIARIES AND MAY NOT BE SUFFICIENT TO REPAY THE NOTES.
The notes are secured only by pledges of 65% of the stock or other
equity interests of certain of our first-tier subsidiaries. Each of the stock
pledges securing the notes has been made in favor of the trustee or a collateral
agent appointed under the indenture governing the notes and is governed by the
local law of Denmark, France, Germany and the United Kingdom, as applicable, the
jurisdictions where our pledged subsidiaries are formed. As a result, the
validity of those pledges and the ability of the trustee or a collateral agent,
as applicable, or noteholders to realize any benefits associated with the
pledged shares may be limited under applicable local law as any action to
enforce the stock pledges must be taken under the laws of the applicable
jurisdiction and such laws may differ in significant respects from the laws of
the United States. The rights of the trustee or a collateral agent, as
applicable, or the noteholders to foreclose upon and sell the pledged shares
upon the occurrence of a default will be subject to limitations under applicable
local bankruptcy laws if a bankruptcy proceeding were commenced against us or
our subsidiaries. Any delay or inability to realize any benefit associated with
the security interest in any jurisdiction or the application of local bankruptcy
laws that are contrary to noteholders' interests could have a material adverse
effect on the security interest we have granted in our subsidiaries and could
result in an inability to realize the full value of the share pledges entered
into in connection with the issuance of the notes.
In addition to the foregoing, the old notes are and the new notes will
be effectively subordinated in right of payment to all of the indebtedness and
other liabilities of our subsidiaries, which were approximately $218.5 million
(including approximately $49.9 million in deferred income taxes) recorded on our
historical balance sheet at June 30, 2002. Furthermore, our debt under our
subsidiaries' new credit facility is secured by liens on substantially all of
the current assets of our subsidiaries. The notes do not have the benefit of
this collateral, nor any other assets of our subsidiaries. Accordingly, if an
event of default occurs under our subsidiaries' new credit facility, the lenders
under our subsidiaries' new credit facility will have a right to such assets and
may foreclose upon the collateral. In that case, such assets would first be used
to repay in full amounts outstanding under our subsidiaries' new credit facility
and may not be available to repay the notes. In the event of a bankruptcy event
affecting any of our subsidiaries, local bankruptcy law would be likely to
apply. In general, such local bankruptcy law affords significant protection for
senior secured creditors, and there can be no assurance that, in the event of a
bankruptcy event, such creditors could not take actions that would materially
and adversely affect the value of our ongoing business and the equity value of
such subsidiaries. The remaining value, if any, of our assets may not be
sufficient to repay the notes.
SERVICING OUR DEBT WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH AND OUR ABILITY TO
GENERATE SUFFICIENT CASH DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL.
Our ability to make payments on and refinance our debt and to fund
planned capital expenditures depends on our future ability to generate cash
flow. To some extent, this is subject to general economic, financial,
competitive, legislative and regulatory and other factors that are beyond our
control. In addition, our ability to borrow funds under our subsidiaries' new
credit facility in the future will depend on these subsidiaries' ability to
maintain specified financial ratios and satisfy certain financial covenants
contained in the credit agreement for our subsidiaries' new credit facility. As
of June 30, 2002, approximately $40 million was available for general corporate
purposes borrowing under our subsidiaries' new credit facility. We cannot assure
you that our business will generate cash flow from operations or that future
borrowings will be available to us under our subsidiaries' new credit facility
in an amount sufficient to enable us to pay our debt or to fund other liquidity
needs. As a result, we may need to refinance all or a portion of our debt before
maturity, and it is likely that we will need to refinance all or a portion of
our debt on maturity. Our subsidiaries' new three-year credit facility matures
in 2005. We cannot assure you that
16
we will be able to refinance any of our debt on favorable terms, if at all. Any
inability to generate sufficient cash flow or refinance our debt on favorable
terms could have a material adverse effect on our financial condition.
COVENANT RESTRICTIONS UNDER OUR SUBSIDIARIES' NEW CREDIT FACILITY AND THE
INDENTURE MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our subsidiaries' new credit facility and the indenture governing the
notes contain, among other things, covenants that may restrict our ability to
finance future operations or capital needs or to engage in other business
activities. Our subsidiaries' new credit facility and the indenture restrict,
among other things, our ability and the ability of our restricted subsidiaries
to:
o borrow money, pay dividends or make distributions;
o purchase or redeem stock;
o make investments and extend credit;
o engage in transactions with affiliates;
o engage in sale-leaseback transactions;
o freely distribute the proceeds from certain asset sales;
o effect a consolidation or merger or sell, transfer, lease or
otherwise dispose of all or substantially all of our assets;
and
o create liens on our assets.
In addition, our subsidiaries' new credit facility requires these
subsidiaries to maintain specified financial ratios and satisfy certain
financial condition tests, which may require that action be taken to reduce debt
or to act in a manner contrary to our business objectives. Events beyond our
control, including changes in general business and economic conditions, may
affect our ability to meet those financial ratios and financial condition tests.
We cannot assure you that we will meet those tests or that the lenders will
waive any failure to meet those tests. A breach of any of these covenants would
result in a default under our subsidiaries' new credit facility and any
resulting acceleration under the credit facility may result in a default under
the indenture. If an event of default under our subsidiaries' new credit
facility occurs, the lenders could elect to declare all amounts outstanding
thereunder, together with accrued interest, to be immediately due and payable.
See "Description of Our Subsidiaries' New Credit Facility" and "Description of
the New Notes" for additional information.
IF OUR SUBSIDIARIES DO NOT MAKE SUFFICIENT DISTRIBUTIONS TO US, WE WILL NOT BE
ABLE TO MAKE PAYMENTS ON OUR DEBT, INCLUDING THE NOTES.
Our assets consist primarily of investments in our operating
subsidiaries. Our cash flow and our ability to service indebtedness, including
our ability to pay the interest on and principal of the notes, depend upon cash
dividends and distributions or other transfers from our subsidiaries. In
addition, any payment of dividends, distributions, loans or advances by our
subsidiaries to us could be subject to restrictions on or taxation of dividends
or repatriation of earnings under applicable local law, monetary transfer
restrictions and foreign currency exchange regulations in the jurisdictions in
which our subsidiaries operate, and any restrictions imposed by the current and
future debt instruments of our subsidiaries. Such payments to us by our
subsidiaries are contingent upon our subsidiaries' earnings.
Our subsidiaries are separate and distinct legal entities that have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
notes or to make any funds available therefor, whether by dividends, loans,
distributions or other payments, and do not guarantee the payment of interest
on, or principal of, the notes. Any right that we have to receive any assets of
any of our subsidiaries upon the liquidation or reorganization of any such
17
subsidiary, and the consequent right of holders of the notes to realize proceeds
from the sale of such assets, will be effectively subordinated to the claims of
that subsidiary's creditors, including trade creditors and holders of debt
issued by the subsidiary.
NO PUBLIC MARKET EXISTS FOR THE NEW NOTES, AND ANY MARKET FOR THE NEW NOTES MAY
BE ILLIQUID.
The new notes are a new issue of securities with no established trading
market. We will apply to list the new notes on the Luxembourg Stock Exchange.
The initial purchasers of the old notes have informed us that they intend to
make a market in the new notes. However, the initial purchasers are not
obligated to do so, and may cease market-making activities at any time.
Accordingly, we cannot give any assurance as to:
o the likelihood that an active market for the new notes will
develop;
o the liquidity of any such market;
o the ability of holders to sell their new notes; or
o the prices that holders may obtain for their new notes upon
any sale.
In addition, the liquidity of the trading market for the new notes, if
any, and the market price quoted for the new notes, will depend on many factors,
including our operating results, the market for similar securities, currency
exchange rates and interest rates. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the new notes. We cannot
guarantee that the market for the new notes will not be subject to similar
disruptions or that any such disruptions will not have an adverse effect on the
value or marketability of the new notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon a change of control, we are required to offer to repurchase all
outstanding notes at 101% of the face amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The source of funds for any such
purchase of notes will be our available cash or cash generated from our
subsidiaries' operations or other sources, including borrowing, sales of assets
or sales of equity. We cannot assure you that sufficient funds will be available
at the time of any change of control to make any required repurchases of notes
tendered. If the holders of the notes exercise their right to require us to
repurchase all of the notes upon a change of control, the financial effect of
this repurchase could cause a default under our other debt, even if the change
of control itself would not cause a default. Accordingly, it is possible that we
will not have sufficient funds at the time of the change of control to make the
required repurchase of the notes. See "Description of the New Notes -- Change of
Control" and "Description of Our Subsidiaries' New Credit Facility" for
additional information.
RISKS RELATED TO OUR BUSINESS
DEMAND FOR OUR PRODUCTS IS CYCLICAL AND WE MAY EXPERIENCE PROLONGED DEPRESSED
MARKET CONDITIONS FOR OUR PRODUCTS, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO
MAKE PAYMENTS ON THE NOTES.
Substantially all of our revenue is attributable to sales of TiO(2),
the price of which has been historically cyclical and sensitive to relative
changes in supply and demand and general market and economic conditions.
Historically, the market for TiO(2) has experienced alternating periods of tight
supply, causing prices and profit margins to increase, followed by periods of
oversupply and declining prices and profit margins. Recently, our markets are
experiencing periods of oversupply due to a global economic downturn, which has
contributed to depressed pricing of our products in these markets. We cannot
guarantee that future growth in demand for these products will be sufficient to
alleviate any existing or future conditions of excess industry capacity or that
such conditions will not be sustained or further aggravated by anticipated or
unanticipated changes in economic conditions, capacity additions or other
events.
18
WE SELL OUR PRODUCTS IN A MATURE AND HIGHLY COMPETITIVE INDUSTRY AND FACE PRICE
PRESSURE IN THE MARKETS IN WHICH WE OPERATE.
The global markets in which we operate our business are highly
competitive. Competition is based on a number of factors, such as price, product
quality and service. Some of our competitors may be able to drive down prices
for our products because they have costs that are lower than ours. In addition,
some of our competitors may have greater financial, technological and other
resources than ours, and may be better able to withstand changes in market
conditions. Our competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than we can. Further,
consolidation of our competitors or customers in any of the industries in which
we compete may have an adverse effect on us. The occurrence of any of these
events could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
WE ARE SUBJECT TO MANY ENVIRONMENTAL AND SAFETY REGULATIONS THAT MAY RESULT IN
UNANTICIPATED COSTS OR LIABILITIES.
We are subject to extensive laws, regulations, rules and ordinances
relating to pollution, the protection of the environment and the use or cleanup
of hazardous substances and wastes. We may incur substantial costs, including
fines, damages and criminal penalties or civil sanctions, or experience
interruptions in our operations for actual or alleged violations or compliance
requirements arising under environmental laws. Our operations could result in
violations under environmental laws, including spills or other releases of
hazardous substances to the environment. Some of our operating facilities are in
densely populated urban areas or in industrial areas adjacent to other operating
facilities. In the event of a catastrophic incident, we could incur material
costs as a result of addressing such an event and in implementing measures to
prevent such incidents. Given the nature of our business, violations of
environmental laws may result in restrictions imposed on our operating
activities, substantial fines, penalties, damages or other costs, including as a
result of private litigation, any of which could have a material adverse effect
on our business, financial condition, results of operations or cash flows. See
"Business -- Regulatory and Environmental Matters" and "-- Legal Proceedings."
In addition, we could incur significant expenditures to comply with
existing or future environmental laws. Capital expenditures and, to a lesser
extent, costs and operating expenses relating to environmental matters will be
subject to evolving regulatory requirements and will depend on the timing of
promulgation and enforcement of specific standards that impose requirements on
our operations. We cannot, therefore, assure you that capital expenditures
beyond those currently anticipated will not be required under environmental
laws. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE HAVE A LIMITED NUMBER OF SUPPLIERS FOR SOME OF OUR RAW MATERIALS, WHICH COULD
NEGATIVELY AFFECT US.
We have a limited number of suppliers for some of our raw materials,
and the number of sources for and availability of certain raw materials is
specific to the particular geographical region in which a facility is located.
In addition, in 2001, we purchased titanium-bearing ores from three suppliers
under multiple-year agreements. If one of these suppliers were unable to meet
its obligations under present supply arrangements, we could suffer reduced
supplies or be forced to incur increased prices for our raw materials.
IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIP WITH KRONOS AND ITS AFFILIATES, WE
MAY NOT BE ABLE TO REPLACE ON FAVORABLE TERMS OUR CONTRACTS WITH THEM AND
FACILITIES THAT THEY PROVIDE, IF AT ALL.
We have entered into and intend to continue to enter into certain
agreements, including service, supply and buy/sell agreements, with Kronos and
its affiliates. If Kronos or any of its affiliates fails to perform its
obligations under any of these agreements, or if any of these agreements
terminate or we are otherwise unable to obtain the benefits thereunder for any
reason, there could be a material adverse effect on our business, financial
condition, results of operations or cash flows if we are unable to obtain
similar agreements on the same terms from third parties. See "Certain
Relationships and Related Transactions."
19
KRONOS AND ITS AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH US, AND THESE
CONFLICTS COULD ADVERSELY AFFECT OUR BUSINESS.
For so long as Kronos and its affiliates retain their direct and
indirect ownership interests in KII, conflicts of interest could arise with
respect to transactions involving business dealings between us and them,
potential acquisitions of business or properties, the issuance of additional
securities, our payment of dividends and other matters. In addition, affiliates
of Kronos are also engaged in the business of producing and selling TiO(2) and
may compete with us. See "Description of the New Notes -- Certain Covenants --
Limitations on Transactions with Affiliates."
WE COULD BE ADVERSELY AFFECTED IF NL INDUSTRIES SUFFERS ADVERSE CONSEQUENCES
FROM LAWSUITS.
We are wholly-owned by Kronos, which in turn is wholly-owned by NL
Industries, a publicly-held corporation subject to the reporting and disclosure
requirements of the Securities and Exchange Commission or the "SEC." NL
Industries is a defendant in numerous lawsuits, including environmental claims
and claims involving the past manufacture and sale in the United States of lead
pigments for use in paint for buildings, all as disclosed in NL Industries'
filings with the SEC. Neither we nor our subsidiaries has ever been named as a
defendant in any of such lawsuits against NL Industries. Nevertheless, judgments
against NL Industries in litigation could have adverse consequences for us and
holders of the notes. Such events could impose economic hardships on NL
Industries, which in turn could make future financings, including bank
borrowings, more difficult for Kronos and for us and also could adversely affect
our customers' perceptions of us as an affiliate of NL Industries. In addition,
judgments against NL Industries might force NL Industries to divest its equity
ownership of Kronos or us to raise cash, which could result in a change of
control of us. See "Description of the New Notes -- Change of Control" for
additional information.
TERRORIST ATTACKS, SUCH AS THE ATTACKS IN NEW YORK AND WASHINGTON, D.C. ON
SEPTEMBER 11, 2001, AND OTHER ATTACKS OR ACTS OF WAR, MAY ADVERSELY AFFECT THE
MARKETS IN WHICH WE OPERATE, OUR OPERATIONS AND OUR PROFITABILITY.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. These attacks caused major instability in the
U.S. and other financial markets. Leaders of the U.S. government have announced
their intention to actively pursue those behind the attacks and to possibly
initiate broader action against global terrorism. The attacks and any response
may lead to armed hostilities or further acts of terrorism in the United States
or elsewhere, and such developments would likely cause further instability in
financial markets. In addition, armed hostilities and further acts of terrorism
may directly impact our physical facilities and operations, which are located in
Europe, or those of our customers. Furthermore, the recent terrorist attacks and
future developments may result in reduced demand from our customers for our
products or disruption of supplies of raw materials. These developments may
subject our operations to increased risks and, depending on their magnitude,
could have a material adverse effect on our business and your investment.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY INTERNATIONAL OPERATIONS AND
FLUCTUATIONS IN CURRENCY EXCHANGE RATES.
We conduct all of our business in several foreign jurisdictions and are
subject to risks normally associated with international operations. These risks
include the need to convert currencies that we may receive for some of our
products into currencies required to pay some of our debt, or into currencies in
which we purchase certain raw materials or pay for certain services, all of
which could result in a gain or loss depending on fluctuations in exchange
rates. Other risks of international operations include trade barriers, tariffs,
exchange controls, national and regional labor strikes, social and political
risks, general economic risks, required compliance with a variety of foreign
laws, including tax laws, and the difficulty in enforcing agreements and
collecting receivables through foreign legal systems.
20
IF OUR PATENTS ARE DECLARED INVALID OR OUR TRADE SECRETS BECOME KNOWN TO
COMPETITORS, OUR ABILITY TO COMPETE MAY BE ADVERSELY AFFECTED.
Protection of our proprietary processes, apparatuses and other
technology is important to our business. Consequently, we rely on judicial
enforcement for protection of our patents, and there can be no assurance that
any of our patents will not be challenged, invalidated, circumvented or rendered
unenforceable. Furthermore, if any pending patent application filed by us does
not result in an issued patent, or if patents are issued to us, but such patents
do not provide meaningful protection of our intellectual property, then the use
of any such intellectual property by our competitors could have a material
adverse effect on our business, financial condition, results of operations or
cash flows. Additionally, our competitors or other third parties may obtain
patents that restrict or preclude our ability to lawfully produce or sell our
products in a competitive manner, which could have a material adverse effect on
our business, financial condition, results of operations or cash flows.
We also rely on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Although it is our policy to enter into confidentiality
agreements with our employees and third parties to protect our intellectual
property, because these confidentiality agreements may be breached, such
agreements may not provide meaningful protection for our trade secrets or
proprietary know-how, or adequate remedies may not be available in the event of
an unauthorized use or disclosure of such trade secrets and know-how. In
addition, others could obtain knowledge of such trade secrets through
independent development or other access by legal means. The failure of our
patents or confidentiality agreements to protect our processes, apparatuses,
technology, trade secrets or proprietary know-how could have a material adverse
effect on our business, financial condition, results of operations or cash
flows.
21
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
When we issued the old notes on June 28, 2002, we entered into a
registration rights agreement with the initial purchasers of the old notes. A
copy of the registration rights agreement is filed as an exhibit to the
registration statement of which this prospectus is a part. Under the
registration rights agreement, we agreed to:
o file and cause to become effective a registration statement
with respect to an offer to exchange the old notes for new
notes that have been registered under the Securities Act; or
o file and cause to become effective a shelf registration
statement with respect to the resale of the old notes.
If we complete the exchange offer within 300 days after the issuance of
the old notes, then we will satisfy those requirements under the registration
rights agreements. If we do not complete the exchange offer within 300 days of
the issuance of the old notes and a shelf registration statement has not been
declared effective, then we will be required to pay additional interest to the
holders of the old notes.
TERMS OF THE EXCHANGE OFFER
As of the date of this prospectus, E.285.0 million aggregate
principal amount of the old notes are outstanding. This prospectus and the
accompanying letter of transmittal together constitute the exchange offer. This
prospectus and the letter of transmittal are being sent to all registered
holders of old notes. There will be no fixed record date for determining
registered holders of old notes entitled to participate in the exchange offer.
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, we will accept for exchange any old
notes properly tendered and not withdrawn before expiration of the exchange
offer. We will issue E.1,000 principal amount of new notes in exchange for
each E.1,000 principal amount of old notes surrendered under the exchange
offer.
Old notes may be tendered only in integral multiples of E.1,000. The
exchange offer is not conditioned upon any minimum aggregate principal amount of
old notes being tendered for exchange.
The form and terms of the new notes will be substantially identical to
the form and terms of the old notes, except that the new notes:
o will be registered under the Securities Act;
o will not contain transfer restrictions and registration rights
that relate to the old notes; and
o will not contain provisions relating to the payment of
additional interest to be made to the holders of the old notes
under circumstances related to the timing of the exchange
offer.
The new notes will evidence the same debt as the old notes. The new
notes will be issued under and entitled to the benefits of the same indenture
that authorized the issuance of the old notes. For a description of the
indenture, see "Description of the New Notes."
In connection with the exchange offer, holders of the old notes do not
have any appraisal or dissenters' rights under applicable law or the Indenture.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the SEC. The
exchange offer is not being made to, nor will we accept tenders for exchange
from, holders of old notes in any jurisdiction in which the exchange offer or
the acceptance of it would not be in compliance with the securities or blue sky
laws, or other applicable laws, of the jurisdiction.
22
Holders who tender old notes in the exchange offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
letter of transmittal, transfer taxes with respect to the exchange of old notes.
We will pay all charges and expenses, other than applicable taxes described
below, in connection with the exchange offer. It is important that you read
"-- Fees and Expenses" for more details regarding fees and expenses incurred in
the exchange offer.
We expressly reserve the right, in our sole discretion:
o to extend the expiration date;
o to delay accepting any old notes;
o if any of the conditions set forth below under "-- Conditions
to the Exchange Offer" have not been satisfied, to terminate
the exchange offer and not accept any notes for exchange; and
o to amend the exchange offer in any manner.
We will give written and oral notice of any extension, delay,
non-acceptance, termination or amendment as promptly as practicable by public
announcement, and, in the case of an extension, no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.
During an extension, all old notes previously tendered will remain
subject to the exchange offer and may be accepted for exchange by us. Any old
notes not accepted for exchange for any reason will be returned without cost to
the holder that tendered them as promptly as practicable after the expiration or
termination of the exchange offer.
EXPIRATION OF THE EXCHANGE OFFER
The exchange offer will expire at 5:00 p.m., New York City time, on
____________, 2002. We can extend the exchange offer in our sole discretion, in
which case the term "expiration date" shall mean the latest date and time to
which we extend the exchange offer.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required
to accept for exchange any old notes or to issue new notes in the exchange
offer. We may terminate or amend the exchange offer as provided in this
prospectus before accepting any old notes for exchange if in our reasonable
judgment:
o the exchange offer, or the making of any exchange by a holder
of old notes, would violate applicable law or any applicable
interpretation of the staff of the SEC;
o any action or proceeding has been instituted or threatened in
any court or by any governmental agency with respect to the
exchange offer that would reasonably be expected to impair our
ability to proceed with the exchange offer, or a material
adverse development has occurred in any existing action or
proceeding that relates to us; and
o we have not obtained all governmental approvals that we deem
necessary for the consummation of the exchange offer.
We will not be obligated to accept for exchange any old notes that are
not validly tendered in accordance with the exchange offer.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. We may
waive the preceding conditions in whole or in part at any time or from time to
time in our sole discretion. If we do so, the exchange offer will remain open
for at least three business days following the waiver of any of the
23
preceding conditions. If we fail at any time to exercise any of the foregoing
rights, this failure will not constitute a waiver of that right. Each of these
rights will be deemed an ongoing right that we may assert at any time or at
various times.
We will not accept for exchange any old notes tendered, and will not
issue new notes in exchange for any old notes, if at that time a stop order is
threatened or in effect with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the indenture under the
Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
We have forwarded to you, along with this prospectus, a letter of
transmittal relating to this exchange offer. Because all the old notes are held
in book-entry accounts maintained by the exchange agent at Euroclear Bank
S.A./N.V., as operator of the Euroclear System ("Euroclear"), or Clearstream
Banking, Societe Anonyme, Luxembourg ("Clearstream"), a holder need not submit a
letter of transmittal if the holder tenders old notes in accordance with the
procedures mandated by Euroclear or Clearstream, as the case may be. To tender
old notes without submitting a letter of transmittal, the electronic
instructions sent to Euroclear or Clearstream and transmitted to the exchange
agent must contain your acknowledgment of receipt of and your agreement to be
bound by and to make all of the representations contained in the letter of
transmittal. In all other cases, a letter of transmittal must be manually
executed and delivered as described in this prospectus.
To tender in the exchange offer, a holder must comply with the
procedures of Euroclear or Clearstream, as applicable, and either:
o complete, sign and date the letter of transmittal, or a
facsimile of the letter of transmittal; have the signature on
the letter of transmittal guaranteed if the letter is
transmittal so requires; and deliver the letter of transmittal
or facsimile to the exchange agent prior to 5:00 p.m., New
York City time, on the expiration date; or
o in lieu of delivering a letter of transmittal, instruct
Euroclear or Clearstream, as the case may be, to transmit on
behalf of the holder an agent's message to the exchange agent,
which agent's message must be received by the exchange agent
prior to 5:00 p.m., New York City time, on the expiration
date.
In addition, either:
o the exchange agent must receive the certificates for the old
notes along with the letter of transmittal; or
o the exchange agent must receive, before the expiration date,
timely confirmation of the book-entry transfer of the old
notes being tendered into the exchange agent's account at
Euroclear or Clearstream according to the procedure for
book-entry described below, along with the letter of
transmittal or an agent's message.
The term "agent's message" means a message, transmitted by Euroclear or
Clearstream and received by the exchange agent, which states that Euroclear or
Clearstream has received an express acknowledgment from a participant tendering
old notes that the participant has received and agrees to be bound by the terms
of the letter of transmittal, and that we may enforce that agreement against the
participant.
To be tendered effectively, the exchange agent must receive any
physical delivery of the letter of transmittal and other required documents at
the address set forth below under "-- Exchange Agent" before the expiration of
the exchange offer. To receive confirmation of valid tender of old notes, a
holder should contact the exchange agent at the telephone number listed under
"-- Exchange Agent."
The tender by a holder that is not withdrawn before expiration of the
exchange offer will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
24
prospectus and in the letter of transmittal. Only a registered holder of old
notes may tender the old notes in the exchange offer. If a holder completing a
letter of transmittal tenders less than all of the old notes held by that
holder, then that tendering holder should fill in the applicable box of the
letter of transmittal. The amount of old notes delivered to the exchange agent
will be deemed to have been tendered unless otherwise indicated.
If old notes, the letter of transmittal or any other required documents
are physically delivered to the exchange agent, the method of delivery is at the
holder's election and risk. Rather than mail these items, we recommend that
holders use an overnight or hand delivery service. In all cases, holders should
allow sufficient time to assure delivery to the exchange agent before expiration
of the exchange offer. Holders should not send the letter of transmittal or old
notes to us. Holders may request their respective brokers, dealers, commercial
banks, trust companies or other nominees to effect the above transactions for
them.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If the beneficial owner wishes to tender on its
own behalf, then it must, prior to completing and executing the letter of
transmittal and delivering its old notes, either:
o make appropriate arrangements to register ownership of the old
notes in the owner's name; or
o obtain a properly completed bond power from the registered
holder of old notes.
The transfer of registered ownership may take considerable time and may
not be completed prior to the expiration date.
If the applicable letter of transmittal is signed by the record
holder(s) of the old notes tendered, then the signature must correspond with the
name(s) written on the face of the old note without alteration, enlargement or
any change whatsoever. If the applicable letter of transmittal is signed by a
participant in Euroclear or Clearstream, as applicable, then the signature must
correspond with the name as it appears on the security position listing as the
holder of the old notes.
Except as set forth below, a signature on a letter of transmittal or a
notice of withdrawal must be guaranteed by an eligible guarantor institution.
Eligible guarantor institutions include banks, brokers, dealers,
municipal securities dealers, municipal securities brokers, government
securities dealers, government securities brokers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. The signature need not be guaranteed by an eligible
guarantor institution if the old notes are tendered:
o by a registered holder of old notes who has not completed the
box entitled "Special Registration Instructions" or "Special
Delivery Instructions" on the letter of transmittal; or
o for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, then the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes
and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, then
these persons should so indicate when signing. Unless we waive this requirement,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
We will determine in our sole discretion all questions as to the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered old notes. Our determination will be final and binding.
We reserve
25
the absolute right to reject any old notes not properly tendered or any old
notes the acceptance of which would, in the opinion of our counsel, be unlawful.
We also reserve the right to waive any defects, irregularities or conditions of
tender as to particular old notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties.
Unless waived, holders of old notes must cure any defects or
irregularities in connection with tenders of old notes within the time that we
determine. Although we intend to notify holders of defects or irregularities
with respect to tenders of old notes, neither we, the exchange agent nor any
other person will incur any liability for failure to give notification. Tenders
of old notes will not be deemed made until those defects or irregularities have
been cured or waived. Any old notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the exchange agent without cost to the
tendering holder, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date.
By signing the letter of transmittal, or causing Euroclear or
Clearstream, as applicable, to transmit an agent's message to the exchange
agent, each tendering holder of old notes will represent to us that, among other
things:
o any new notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person
or entity to participate in the distribution of the new notes;
o if the holder is not a broker-dealer, that it is not engaged
in and does not intend to engage in the distribution of the
new notes;
o if the holder is a broker-dealer that will receive new notes
for its own account in exchange for old notes that were
acquired as a result of market-making activities or other
trading activities, that it will deliver a prospectus, as
required by law, in connection with any resale of those new
notes (see "Plan of Distribution"); and
o the holder is not our "affiliate," as defined in Rule 405 of
the Securities Act, or, if the holder is our affiliate, it
will comply with any applicable registration and prospectus
delivery requirements of the Securities Act.
If any holder or any such other person is our "affiliate," or is
engaged in or intends to engage in or has an arrangement or understanding with
any person to participate in a distribution of the new notes to be acquired in
the exchange offer, then that holder or any such other person:
o may not rely on the applicable interpretations of the staff of
the SEC;
o is not entitled and will not be permitted to tender old notes
in the exchange offer; and must comply with the registration
and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer who acquired its old notes as a result of
market-making activities or other trading activities and thereafter receives new
notes issued for its own account in the exchange offer, must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes issued
in the exchange offer. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution" for a discussion of the exchange and resale obligations of
broker-dealers in connection with the exchange offer.
26
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange
offer, we will accept, promptly after the expiration date, all old notes
properly tendered and will issue the new notes registered under the Securities
Act. For purposes of the exchange offer, we shall be deemed to have accepted
properly tendered old notes for exchange when, as and if we have given oral or
written notice to the exchange agent, with written confirmation of any oral
notice to be given promptly thereafter. See "-- Conditions to the Exchange
Offer" for a discussion of the conditions that must be satisfied before we are
required to accept any old notes for exchange.
For each old note accepted for exchange, the holder will receive a new
note registered under the Securities Act having a principal amount equal to, and
in the denomination of, that of the surrendered old note. Accordingly,
registered holders of new notes on the relevant record date for the first
interest payment date following the consummation of the exchange offer will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid on the old notes, from the date of
issuance of the old notes. Old notes that we accept for exchange will cease to
accrue interest from and after the date of consummation of the exchange offer.
Under the registration rights agreement, we may be required to make additional
payments of additional interest to the holders of the old notes under
circumstances relating to the timing of exchange offer.
In all cases, we will issue new notes for old notes that we have
accepted for exchange under the exchange offer only after the exchange agent has
timely received:
o the certificates representing the old notes, or a timely
confirmation from Euroclear or Clearstream of book-entry
transfer of the old notes into the exchange agent's account;
o a properly completed and duly executed letter of transmittal,
or in the case of a book-entry tender, a properly transmitted
agent's message; and
o all other required documents.
BOOK-ENTRY TRANSFER
The exchange agent has advised us that it will establish an account
with respect to the old notes at Euroclear and Clearstream as book-entry
transfer facilities, for purposes of the exchange offer within two business days
after the date of this prospectus. Any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of old notes by causing the book-entry transfer facility to transfer
the old notes into the exchange agent's account at the facility in accordance
with the facility's procedures for transfer. However, although delivery of old
notes may be effected through book-entry transfer at the facility, a properly
completed and duly executed letter of transmittal or an agent's message, and any
other required documents, must nonetheless be transmitted to, and received by,
the exchange agent at the address set forth below under "-- Exchange Agent"
prior to 5:00 p.m., New York City time, on the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of old notes
may withdraw their tenders at any time before expiration of the exchange offer.
For a withdrawal to be effective, the exchange agent must receive a
notice of withdrawal transmitted by Euroclear or Clearstream on behalf of the
holder in accordance with the standard operating procedures of Euroclear or
Clearstream, or a written notice of withdrawal, which may be by telegram,
facsimile transmission or letter, at one of the addresses set forth below under
"-- Exchange Agent."
27
Any notice of withdrawal must:
o specify the name of the person who tendered the old notes to
be withdrawn;
o identify the old notes to be withdrawn, including the
principal amount of the old notes to be withdrawn; and
o where certificates for old notes have been transmitted,
specify the name in which the old notes were registered, if
different from that of the withdrawing holder.
If certificates for old notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of those
certificates, the withdrawing holder must also submit:
o the serial numbers of the particular certificates to be
withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an
eligible institution, unless the withdrawing holder is an
eligible institution.
If old notes have been tendered pursuant to the procedures for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at Euroclear or Clearstream, as applicable, to be
credited with the withdrawn old notes and otherwise comply with the procedures
of the facility.
We will determine all questions as to the validity, form and
eligibility, including time of receipt, of notices of withdrawal, and our
determination shall be final and binding on all parties. We will deem any old
notes so withdrawn not to have been validly tendered for exchange for purposes
of the exchange offer. We will return any old notes that have been tendered for
exchange but that are not exchanged for any reason to their holder without cost
to the holder. You may retender properly withdrawn old notes by following one of
the procedures described under "-- Procedures for Tendering" above at any time
on or before expiration of the exchange offer.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the
exchange offer. All executed letters of transmittal should be delivered to our
exchange agent at the address set forth below. You should direct questions and
requests for assistance, requests for additional copies of this prospectus or of
the letter of transmittal to the exchange agent addressed as follows:
By Registered Mail, Hand Delivery or Overnight Courier:
The Bank of New York
Lower Ground Floor
30 Cannon Street
London
EC4M 6XH
Attn: Julie McCarthy
For Information, Call:
011 44 (207) 964-6513 or
011 44 (207) 964-7235
By Facsimile Transmission:
(for Eligible Institutions Only)
011 44 (207) 964-6369 or
011 44 (207) 964-7294
Confirm by Telephone:
011 44 (207) 964-7235
28
Delivery of the letter of transmittal to an address other than as shown
above or transmission of the letter of transmittal via facsimile other than as
set forth above does not constitute a valid delivery of the letter of
transmittal.
FEES AND EXPENSES
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer, including the following:
o SEC registration fees;
o fees and expenses of the exchange agent and trustee;
o our accounting and legal fees; and
o our printing and mailing costs.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of
old notes under the exchange offer. A tendering holder of old notes, however,
will be required to pay any transfer taxes, whether imposed on the registered
holder or any other person, if:
o certificates representing old notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or
are to be issued in the name of, any person other than the
registered holder of old notes tendered;
o new notes are to be delivered to, or issued in the name of,
any person other than the registered holder of the old notes;
o tendered old notes are registered in the name of any person
other than the person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the
exchange of old notes under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted
with the letter of transmittal, then the amount of any transfer taxes will be
billed to the tendering holder.
ACCOUNTING TREATMENT
We will record the new notes in our accounting records at the same
carrying value as the old notes, which is the aggregate principal amount, as
reflected in our accounting records on the date of exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes in connection with
the exchange offer. The expenses of the exchange offer will be amortized over
the term of the new notes.
RESALE OF NEW NOTES
Based on interpretations of the staff of the SEC, as set forth in
no-action letters to third parties, we believe that new notes issued under the
exchange offer in exchange for old notes may be offered for resale, resold and
29
otherwise transferred by any old note holder without further registration under
the Securities Act and without delivery of a prospectus that satisfies the
requirements of Section 10 of the Securities Act if:
o the holder is not our "affiliate" within the meaning of Rule
405 under the Securities Act;
o the new notes are acquired in the ordinary course of the
holder's business; and
o the holder does not intend to participate in a distribution of
the new notes.
Any holder who exchanges old notes in the exchange offer with the
intention of participating in any manner in a distribution of the new notes must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of new notes. With regard to broker-dealers, only broker-dealers that
acquired the old notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives new notes for its own account in exchange for old notes, where the old
notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the new notes. Please read "Plan of
Distribution" for more details regarding the transfer of new notes.
CONSEQUENCES OF FAILING TO EXCHANGE OLD NOTES
Holders who desire to tender their old notes in exchange for new notes
registered under the Securities Act should allow sufficient time to ensure
timely delivery. Neither we nor the exchange agent is under any duty to give
notification of defects or irregularities with respect to the tenders of old
notes for exchange.
Old notes that are not tendered or are tendered but not accepted will,
following the consummation of the exchange offer, continue to be subject to the
provisions in the indenture regarding the transfer and exchange of the old notes
and the existing restrictions on transfer set forth in the legend on the old
notes and in the offering memorandum dated June 19, 2002, relating to the old
notes. Except in limited circumstances with respect to specific types of holders
of old notes, we will have no further obligation to provide for the registration
under the Securities Act of such old notes. In general, old notes, unless
registered under the Securities Act, may not be offered or sold except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. We do not anticipate that we will take any
action to register the untendered old notes under the Securities Act or under
any state securities laws.
Upon completion of the exchange offer, holders of the old notes will
not be entitled to any further registration rights under the registration rights
agreement, except under limited circumstances.
Old notes that are not exchanged in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits their holders have under the indenture relating to the old notes
and the new notes. Holders of the new notes and any old notes that remain
outstanding after consummation of the exchange offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage of the class have taken certain actions or exercised certain rights
under the indenture.
30
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new
notes under the exchange offer. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive the old notes in like principal
amount, the terms of which are identical in all material respects to the new
notes. The old notes surrendered in exchange for the new notes will be retired
and canceled and cannot be reissued. Accordingly, the issuance of the new notes
will not result in any increase or decrease in our indebtedness.
CAPITALIZATION
The following table sets forth our unaudited historical consolidated
cash and cash equivalents and capitalization as of June 30, 2002 and our pro
forma cash and cash equivalents and capitalization at such date after giving
effect to the transactions affecting our stockholder's equity described below.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Financial Data" and our audited and unaudited consolidated
financial statements and the related notes included elsewhere in this
prospectus. Euro amounts have been presented in U.S. dollars at an exchange rate
of E.1.00 to $.99, based on the closing spot rate on June 30, 2002 reported
by Bloomberg.
<Table>
<Caption>
AS OF JUNE 30, 2002
----------------------------------
PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA
-------- ----------- -------
(in millions)
Cash, cash equivalents and restricted cash equivalents................... $ 17.6 $ -- $ 17.6
======== =========== =======
Debt:
New revolving credit facility of subsidiaries.......................... $ 39.6 $ -- $ 39.6
Senior secured notes due 2009.......................................... 283.0 -- 283.0
Other.................................................................. 2.4 -- 2.4
-------- ----------- -------
Total debt.......................................................... 325.0 -- 325.0
Redeemable preferred stock and profit participation certificates......... 694.8 (694.8)(a) --
Stockholder's equity (deficit)........................................... (629.8) 694.8 (a) 65.0
-------- ----------- -------
Total capitalization................................................ $ 390.0 $ -- $ 390.0
======== =========== =======
</Table>
- ----------
(a) Represents the elimination, by way of redemption or conversion in July
2002 into our common stock of $695 million of our redeemable preferred
stock and profit participation certificates in one or more non-cash
transactions, the ultimate result of which was that our stockholder's
equity increased by an amount equal to the carrying value of such
redeemable preferred stock and profit participation certificates
redeemed or converted.
Immediately prior to the completion of the offering of the old notes,
we had approximately $695 million of outstanding redeemable preferred stock and
profit participation certificates (including cumulative and unpaid dividends
thereon), all of which were held by Kronos and were redeemable at our option or
Kronos' option. See note 16 to the consolidated financial statements included
elsewhere in this prospectus. Following the completion of the offering of the
old notes, in July 2002 we redeemed in non-cash transactions all such profit
participation certificates in exchange for a portion of our outstanding notes
receivable from affiliates (as discussed in the immediately following
paragraph), and we converted the redeemable preferred stock into our common
stock. The ultimate result of these transactions is that our stockholder's
equity increased by an amount equal to the carrying value of all such redeemable
preferred stock and profit participation certificates redeemed or converted into
our common stock. See "Capitalization," "Unaudited Pro Forma Financial Data" and
note 22 to the consolidated financial statements included elsewhere in this
prospectus.
Immediately prior to the completion of the offering of the old notes,
we had approximately $753 million of outstanding notes receivable from
affiliates, all of which were owed by either Kronos or NL Industries. Settlement
of such notes receivable was not currently contemplated in the then foreseeable
future, and consequently such notes receivable from affiliates were reported in
our consolidated balance sheet as a reduction of our stockholder's equity in
accordance with GAAP. See note 17 to the consolidated financial statements
included elsewhere in this prospectus. Following the completion of the offering
of the old notes, in July 2002 we transferred such notes
31
receivable from affiliates to Kronos in non-cash transactions (by using a
portion of them to redeem all of our outstanding profit participation
certificates and using the remainder as consideration to redeem a portion of our
outstanding common stock) in July 2002. Our reported stockholder's equity has
not been affected to the extent that such notes receivable were used to redeem
common stock. See "Capitalization," "Unaudited Pro Forma Financial Data" and
note 22 to the consolidated financial statements included elsewhere in this
prospectus.
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data is based on our
historical financial statements and reflects, as applicable, the following:
o the issuance of E.285 million (approximately $283 million) of
old notes;
o borrowings outstanding of approximately E.40 million
(approximately $40 million) under our subsidiaries' new E.80
million revolving credit facility;
o the repayment in full of all outstanding principal on our
11.75% second-tier senior mirror note ($169 million at June
28, 2002) and related accrued interest ($6 million at June 28,
2002);
o the repayment in full of short-term notes payable to third
parties ($53 million at June 28, 2002);
o the repayment of other of our existing affiliate indebtedness
($112 million at June 28, 2002);
o the elimination, by way of redemption and conversion into our
common stock, of our redeemable preferred stock and profit
participation certificates held by Kronos ($695 million at
June 30, 2002) in non-cash transactions in July 2002, the
ultimate result of which was that our stockholder's equity
increased by an amount equal to the carrying value of such
redeemable preferred stock and profit participation
certificates redeemed or converted; and
o the elimination of our notes receivable from Kronos and NL
Industries ($753 million at June 30, 2002) in July 2002.
Pro forma adjustments to historical financial statements include
adjustments that we deem appropriate, reflecting items of recurring significance
and that are factually supported based on currently available information. We
assumed that the last two transactions described above occurred on June 30, 2002
for purposes of preparing the pro forma condensed consolidated balance sheet as
of that date, and we assumed that all of the transactions described above
occurred on January 1, 2001 for purposes of preparing the pro forma condensed
consolidated statement of earnings for the year ended December 31, 2001 and the
six months ended June 30, 2002. The pro forma financial statements may not be
indicative of what actually would have been, nor do the pro forma financial
statements purport to present our consolidated financial results for future
periods.
The unaudited pro forma financial data have been derived from our
historical consolidated financial statements. The pro forma adjustments, as
described in the notes that follow, are based upon available information and
upon certain assumptions that management believes to be reasonable. You should
read this information in conjunction with our consolidated financial statements
and related notes included elsewhere in this prospectus. The unaudited pro forma
financial data are included for comparative purposes only.
Amounts in U.S. dollars have been translated from euro at the rate of
E.1.00 to $.99, in the unaudited pro forma condensed consolidated balance
sheet and at the rate of E.1.00 to $.90 and $.89 for the respective unaudited
pro forma condensed statements of income for the year ended December 31, 2001
and the six months ended June 30, 2002.
32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
<Table>
<Caption>
PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA
-------- ----------- -------
(in millions)
ASSETS:
Cash, cash equivalents and restricted cash equivalents................... $ 17.6 $ -- $ 17.6
Accounts and notes receivable............................................ 101.3 -- 101.3
Inventories.............................................................. 113.7 -- 113.7
Other current assets..................................................... 9.5 -- 9.5
-------- ----------- -------
Total current assets................................................ 242.1 -- 242.1
-------- ----------- -------
Prepaid pension cost..................................................... 18.2 -- 18.2
Other noncurrent assets.................................................. 12.5 -- 12.5
Property and equipment, net.............................................. 300.3 -- 300.3
======== ========== =======
Total assets........................................................ $ 573.1 $ -- $ 573.1
======== ========== =======
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current maturities of long-term debt..................................... $ 1.2 $ -- $ 1.2
Accounts payable and accrued liabilities................................. 92.5 -- 92.5
Other current liabilities................................................ 10.8 -- 10.8
-------- ----------- -------
Total current liabilities........................................... 104.5 -- 104.5
-------- ----------- -------
Long-term debt:
Senior secured notes................................................... 283.0 -- 283.0
Revolving credit facility.............................................. 39.6 -- 39.6
Other.................................................................. 1.2 -- 1.2
Deferred income taxes.................................................... 48.3 -- 48.3
Accrued pension cost..................................................... 18.6 -- 18.6
Other noncurrent liabilities............................................. 12.6 -- 12.6
-------- ----------- -------
Total noncurrent liabilities........................................ 403.3 -- 403.3
-------- ----------- -------
Total liabilities.............................................. 507.8 -- 507.8
-------- ----------- -------
Minority interest........................................................ 0.3 -- 0.3
-------- ----------- -------
Redeemable preferred stock and profit participation certificates......... 694.8 (694.8)(a) --
-------- ----------- -------
Stockholder's equity (deficit)........................................... (629.8) 694.8 (a) 65.0
-------- ----------- -------
Total liabilities and stockholder's equity..................... $ 573.1 $ -- $ 573.1
======== =========== =======
</Table>
- ----------
(a) Represents the elimination, by way of redemption or conversion into our
common stock of $695 million of our redeemable preferred stock and
profit participation certificates in non-cash transactions in July
2002, the ultimate result of which was that our stockholder's equity
increased by an amount equal to the carrying value of such redeemable
preferred stock and profit participation certificates redeemed or
converted.
33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
PRO FORMA PRO FORMA PRO
ACTUAL ADJUSTMENTS ADJUSTMENTS FORMA
-------- ----------- ----------- -------
(in millions)
Net sales.................................................. $ 554.6 $ -- $ -- $ 554.6
Cost of sales.............................................. 379.6 -- -- 379.6
-------- ----------- ----------- -------
Gross margin............................................. 175.0 -- -- 175.0
Selling, general and administrative........................ 66.9 -- -- 66.9
Other income............................................... 15.7 -- -- 15.7
-------- ----------- ----------- -------
Operating income......................................... 123.8 -- -- 123.8
Insurance recoveries, net.................................. 17.5 -- -- 17.5
Interest expense........................................... (4.3) 4.1(a) (25.4)(b) (27.2)
(1.6)(c)
Interest expense to affiliates............................. (34.1) 34.1(d) -- --
Interest income from affiliates............................ 36.2 (36.2)(e) -- --
Other, net................................................. (1.5) -- -- (1.5)
Currency transaction loss on affiliate loans............... (9.4) 9.4(f) -- --
-------- ----------- ----------- -------
Income before income taxes................................. 128.2 11.4 (27.0) 112.6
Income tax expense......................................... 14.5 0.6(g) (0.8)(g) 14.3
-------- ----------- ----------- -------
Income from continuing operations.......................... $ 113.7 $ 10.8 $ (26.2) $ 98.3
======== =========== =========== =======
</Table>
- ----------
(a) Represents the elimination of interest expense associated with the
repayment of short-term notes payable to third parties.
(b) Represents interest expense (8.875% interest rate) associated with the
E.285 million principal amount of the old notes ($22.7 million) and
our subsidiaries' new variable rate (assumed 7.86%) E.80 million
revolving credit facility of which an average $34.4 million is assumed
to be outstanding during the period ($2.7 million).
(c) Represents amortization of underwriting fees, commitment fees and other
offering costs totaling $9.3 million, amortized over the respective
life of the agreements (old notes-$8.1 million and seven years;
revolving credit facility-$1.2 million and three years).
(d) Represents the elimination of interest expense associated with our
notes payable to affiliates.
(e) Represents elimination of interest income on notes receivable from
affiliates due to the transfer of such notes receivable to Kronos in
non-cash transactions.
(f) Represents elimination of currency transaction gains (losses) on
affiliate loans.
(g) Related tax effect calculated using respective statutory rates in
jurisdictions where repayments or borrowings occur. Substantially all
of the pre-tax effect of the pro forma adjustments relates to KII
itself. We have a significant amount of net operating loss
carryforwards in Germany, the benefit of which has not previously been
recognized in accordance with GAAP. Accordingly, the pro forma tax
effect differs from the amount that would be expected by applying the
statutory tax rate to the amount of the pre-tax pro forma adjustments
due to such carryforwards.
34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2002
<Table>
<Caption>
PRO FORMA PRO FORMA PRO
ACTUAL ADJUSTMENTS ADJUSTMENTS FORMA
-------- ----------- ----------- -------
(in millions)
Net sales............................................... $ 285.7 $ -- $ -- $ 285.7
Cost of sales........................................... 224.7 -- -- 224.7
-------- ----------- ----------- -------
Gross margin.......................................... 61.0 -- -- 61.0
Selling, general and administrative..................... 33.4 -- -- 33.4
Other income............................................ 3.1 -- -- 3.1
-------- ----------- ----------- -------
Operating income...................................... 30.7 -- -- 30.7
Interest expense........................................ (1.7) 1.6(a) (12.6)(b) (13.5)
-- (0.8)(c)
Interest expense to affiliates.......................... (18.7) 18.7(d) -- --
Interest income from affiliates......................... 19.2 (19.2)(e) -- --
Currency transaction gain on affiliate loans............ 15.8 (15.8)(f) -- --
-------- ----------- ----------- -------
Income before income taxes.............................. 45.3 (14.7) (13.4) 17.2
Income tax expense...................................... 7.7 0.2(g) (0.4)(g) 7.5
-------- ----------- ----------- -------
Income from continuing operations....................... $ 37.6 $ (14.9) $ (13.0) $ 9.7
======== =========== =========== =======
</Table>
- ----------
(a) Represents the elimination of interest expense associated with the
repayment of short-term notes payable to third parties.
(b) Represents interest expense (8.875% interest rate) associated with the
E.285 million principal amount of the old notes ($11.3 million) and
our subsidiaries' new variable rate (assumed 7.86%) E.80 million
revolving credit facility of which an average $34.4 million is assumed
to be outstanding during the period ($1.3 million).
(c) Represents amortization of underwriting fees, commitment fees and other
offering costs totaling $9.3 million, amortized over the respective
life of the agreements (old notes-$8.1 million and seven years;
revolving credit facility-$1.2 million and three years).
(d) Represents the elimination of interest expense associated with our
notes payable to affiliates.
(e) Represents elimination of interest income on notes receivable from
affiliates due to the transfer of such notes receivable to Kronos in
non-cash transactions.
(f) Represents elimination of currency transaction gains (losses) on
affiliate loans.
(g) Related tax effect calculated using respective statutory rates in
jurisdictions where repayments or borrowings occur. Substantially all
of the pre-tax effect of the pro forma adjustments relates to KII
itself. We have a significant amount of net operating loss
carryforwards in Germany, the benefit of which has not previously been
recognized in accordance with GAAP. Accordingly, the pro forma tax
effect differs from the amount that would be expected by applying the
statutory tax rate to the amount of the pre-tax pro forma adjustments
due to such carryforwards.
35
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The historical income statement and cash flow data for the years ended
December 31, 1999, 2000 and 2001, and the historical balance sheet data as of
December 31, 2000 and 2001, have been derived from our audited consolidated
financial statements. The historical income statement and cash flow data for the
years ended December 31, 1997 and 1998 and the six-month periods ended June 30,
2001 and 2002, and the historical balance sheet data as of December 31, 1997,
1998 and 1999 and as of June 30, 2001 and 2002, have been derived from our
unaudited consolidated financial statements. The selected historical financial
and other data below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes included elsewhere in this
prospectus (except for the consolidated financial statements as of December 31,
1997, 1998 and 1999, and for the years ended December 31, 1997 and 1998, which
are not included in this prospectus).
<Table>
<Caption>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------------- ---------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(in millions, except financial ratios)
STATEMENT OF INCOME DATA:
Net sales .............................. $ 601.8 $ 631.6 $ 620.3 $ 620.5 $ 554.6 $ 299.4 $ 285.7
Cost of sales .......................... 485.1 457.3 469.2 413.5 379.6 199.2 224.7
-------- -------- -------- -------- -------- -------- --------
116.7 174.3 151.1 207.0 175.0 100.2 61.0
Selling, general and administrative .... 85.7 78.1 79.9 72.5 66.9 33.7 33.4
Other income ........................... 12.2 3.8 19.3 11.6 15.7 5.2 3.1
-------- -------- -------- -------- -------- -------- --------
Operating income(a) ................. 43.2 100.0 90.5 146.1 123.8 71.7 30.7
Interest income from affiliates ........ 5.9 4.7 1.5 23.1 36.2 15.9 19.2
Insurance recoveries, net .............. -- -- -- -- 17.5 1.9 --
Currency transaction gains (losses)
on affiliate loans .................. (60.5) 27.0 (36.9) (15.6) (9.4) (15.0) 15.8
Other, net ............................. -- -- -- -- (1.5) -- --
Interest expense ....................... (12.5) (11.1) (7.6) (1.9) (4.3) (2.2) (1.7)
Interest expense to affiliates ......... (58.6) (57.2) (29.9) (28.7) (34.1) (13.9) (18.7)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
discontinued operations ............. (82.5) 63.4 17.6 123.0 128.2 58.4 45.3
Income tax expense (benefit) ........... 6.1 24.8 (24.3) 42.9 14.5 17.3 7.7
-------- -------- -------- -------- -------- -------- --------
Income (loss) before discontinued
operations .......................... (88.6) 38.6 41.9 80.1 113.7 41.1 37.6
Discontinued operations ................ -- 1.0 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) .................. $ (88.6) $ 39.6 $ 41.9 $ 80.1 $ 113.7 $ 41.1 $ 37.6
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Depreciation and amortization .......... $ 29.9 $ 29.7 $ 28.4 $ 24.1 $ 24.1 $ 12.2 $ 12.8
Capital expenditures(b) ................ 26.3 19.6 29.2 26.7 26.1 12.4 7.9
EBITDA(c) .............................. 73.1 129.7 118.9 170.2 146.4 83.9 43.5
Ratio of EBITDA to interest ............ 1.0x 1.9x 3.2x 5.6x 3.8x 5.2x 2.1x
Ratio of total debt to EBITDA .......... 10.5x 4.5x 2.5x 1.6x 3.6x N/A N/A
Ratio of total debt to total
capitalization ...................... 2.4x 1.5x 0.9x 0.8x 1.4x 1.5x .8x
Ratio of earnings to fixed
charges(d) .......................... -- 1.8x 1.3x 3.5x 1.8x 3.0x 1.5x
Pro forma ratio of earnings to fixed
charges(d) .......................... 4.9x N/A 2.2x
CASH FLOW DATA:
Net cash provided by operating
activities .......................... $ 20.3 $ 8.9 $ 77.6 $ 97.8 $ 75.4 $ 18.2 $ 35.8
Net cash used by investing activities .. (23.3) (17.6) (26.9) (26.6) (27.9) (11.2) (10.8)
Net cash used by financing activities .. (4.6) (1.6) (10.2) (96.1) (52.8) (5.6) (42.3)
</Table>
36
<Table>
<Caption>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------------- ---------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(in millions, except financial ratios)
BALANCE SHEET DATA (AT PERIOD END):
Cash, cash equivalents and
restricted cash equivalents ......... $ 34.5 $ 25.3 $ 62.8 $ 36.7 $ 30.3 $ 34.8 $ 17.6
Working capital(e).................... 63.9 79.5 70.6 73.0 101.5 106.7 137.6
Total assets.......................... 564.5 626.5 580.4 530.1 532.5 529.4 573.1
Notes payable......................... 14.0 36.4 57.1 70.0 46.2 59.0 --
Long-term debt including current
maturities......................... 756.2 549.7 244.5 196.1 482.9 476.8 325.0
Total liabilities..................... 1,007.1 833.3 533.9 452.6 692.3 708.5 507.8
Redeemable preferred stock and profit
participation certificates......... -- -- 489.1 504.9 617.4 516.4 694.8
Stockholder's deficit................. (442.9) (207.1) (442.9) (427.7) (777.5) (695.7) (629.8)
</Table>
- ----------
(a) Operating income is defined as income before income taxes, minority
interest, interest expense, interest expense to affiliates, certain
nonrecurring items and certain general corporate items. Corporate items
excluded from operating income include corporate expense, interest
income from affiliates, gains and losses from the disposal of
long-lived assets outside of the ordinary course of business and
currency transaction gains and losses related to our U.S.
dollar-denominated note payable to Kronos. See note 3 to the
consolidated financial statements included elsewhere in this
prospectus.
(b) Capital expenditures in 2001 and the six months ended June 30, 2001 and
2002 exclude an aggregate of $22.3 million, $3.4 million and $2.2
million, respectively, related to the rebuilding of our Leverkusen,
Germany sulfate plant destroyed by fire, substantially all of which was
reimbursed by insurance proceeds. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources -- Investing cash flow" and note 14 to the
consolidated financial statements included elsewhere in this
prospectus.
(c) EBITDA, as presented, represents operating income plus depreciation and
amortization expense less other general corporate expenses, net, of
$1.5 million in 2001. EBITDA is presented as a supplement to our
operating income and cash flow from operations because we believe that
EBITDA is a widely accepted financial indicator of cash flows and the
ability to service debt. EBITDA should not be considered as an
alternative to, or more meaningful than, operating income or net income
determined under GAAP as an indicator of our operating performance, or
cash flows from operating, investing and financing activities
determined under GAAP as a measure of liquidity. EBITDA is not intended
to depict funds available for reinvestment or other discretionary uses,
as we have significant debt requirements and other commitments.
Investors should consider certain factors in evaluating our EBITDA,
including interest expense, income taxes, noncash income and expense
items, changes in assets and liabilities, capital expenditures, and
other items included in GAAP cash flows as well as future debt
repayment requirements and other commitments, including those described
in our consolidated financial statements included elsewhere in this
prospectus. We believe that the trend of our EBITDA is consistent with
the trend of our GAAP operating income. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
discussion of operating income and cash flows during the last three
years and our outlook. EBITDA as a measure of our performance may not
be comparable to similarly titled captions of other companies due to
potential differences in the method of calculation.
(d) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income from continuing operations before income
taxes plus fixed charges (excluding capitalized interest). Fixed
charges consist of interest expense, interest portion of rent expense,
capitalized interest and preferred dividends and accretion. Our
earnings were insufficient to cover total fixed charges in 1997. The
coverage deficiency was $84.2 million.
(e) Calculated as current assets less current liabilities.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is based upon our consolidated financial
statements, which have been prepared in accordance with GAAP. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amount of revenues and expenses during the reported period. On an on-going basis
we evaluate our estimates, including those related to inventory reserves, the
recoverability of other long-lived assets, pensions and the underlying actuarial
assumptions related thereto, and the realization of deferred income tax assets
and accruals for environmental remediation, income tax and other contingencies.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from
previously-estimated amounts under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o We provide reserves for estimated obsolescence or unmarketable
finished goods inventory equal to the difference between the
cost of inventory and the estimated market value based upon
assumptions about future demand for our products and market
conditions. If actual market conditions are less favorable
than those projected by us, additional finished goods
inventory reserves may be required. We provide reserves for
tools and supplies inventory generally based on both
historical and expected future usage requirements.
o We recognize an impairment charge associated with our
long-lived assets, including property and equipment, whenever
we determine that recovery of such long-lived asset is not
probable. Such determination is made in accordance with the
applicable GAAP requirements associated with the long-lived
asset, and is based upon, among other things, estimates of the
amount of future net cash flows to be generated by the
long-lived asset and estimates of the current fair value of
the asset. Adverse changes in such estimates of future net
cash flows or estimates of fair value could result in an
inability to recover the carrying value of the long-lived
asset, thereby possibly requiring an impairment charge to be
recognized in the future.
o We record a valuation allowance to reduce our deferred income
tax assets to the amount that we believe to be realizable
under the "more-likely-than-not" recognition criteria. While
we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for
a valuation allowance, it is possible that in the future we
may change our estimate of the amount of the deferred income
tax assets that would "more-likely-than-not" be realized,
resulting in an adjustment to the deferred income tax asset
valuation allowance that would either increase or decrease, as
applicable, reported net income in the period such change in
estimate was made.
o We record an accrual for environmental, income tax and other
contingencies when estimated future expenditures associated
with such contingencies become probable, and the amounts can
be reasonably estimated. However, new information may become
available, or circumstances (such as applicable laws and
regulations) may change, thereby resulting in an increase or
decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income
in the period of such change).
38
RESULTS OF OPERATIONS
GENERAL
We derive the majority of our revenues, earnings and cash flow from the
production and sale of TiO(2). As discussed below, average TiO(2) selling prices
in billing currencies (which excludes the effects of foreign currency
translation), were (i) decreasing during the first three quarters of 1999, (ii)
generally increasing during the fourth quarter of 1999 and most of 2000, (iii)
generally decreasing during most of 2001 and the first quarter of 2002 and (iv)
generally increasing during the second quarter of 2002.
Many factors influence TiO(2) pricing levels, including (i) industry
capacity, (ii) worldwide demand growth, (iii) customer inventory levels and
purchasing decisions, (iv) competitor actions and decisions and (v) relative
changes in foreign currency exchange rates. We believe that the TiO(2) industry
has long-term growth potential, as discussed in "Business -- Industry" and
"-- Competition."
The following table sets forth certain information concerning our
results of operations for the years ended December 31, 1999, 2000 and 2001, and
the first six months of 2001 and 2002.
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1999 2000 2001 2001 2002
-------- -------- -------- --------- --------
(in millions)
Net sales................................................... $ 620.3 $ 620.5 $ 554.6 $ 299.4 $ 285.7
Operating income............................................ $ 90.5 $ 146.1 $ 123.8 $ 71.7 $ 30.7
General corporate items:
Interest income from affiliates........................... 1.5 23.1 36.2 15.9 19.2
Insurance recoveries, net................................. -- -- 17.5 1.9 --
Currency transaction gain (loss).......................... (36.9) (15.6) (9.4) (15.0) 15.8
Other, net................................................ -- -- (1.5) -- --
Interest expense.......................................... (37.5) (30.6) (38.4) (16.1) (20.4)
-------- -------- -------- --------- --------
Income before income taxes.................................. 17.6 123.0 128.2 58.4 45.3
Income tax expense (benefit)................................ (24.3) 42.9 14.5 17.3 7.7
-------- -------- -------- --------- --------
Net income............................................. $ 41.9 $ 80.1 $ 113.7 $ 41.1 $ 37.6
======== ======== ======== ========= ========
</Table>
We believe that TiO(2) industry demand in the second half of 2002
should be better than the TiO(2) industry demand in the second half of 2001 due
to worldwide economic conditions. Sales volume for our TiO(2) for the first half
of 2002 increased 15% over the 2001 comparable period. We believe that this
strong demand is primarily attributable to improved economic conditions, some
seasonality and customers restocking their inventory levels ahead of the price
increases noted below. We expect sales volume in the second half of 2002 to be
lower than in the first half of 2002. Our TiO(2) production volume in 2002 is
expected to approximate our 2002 TiO(2) sales volume. In January 2002, we
announced price increases in all major markets of approximately 8% above
existing December 2001 prices, a portion of which was realized in the second
quarter with additional price increases expected to be realized in the third
quarter of 2002. June 2002 prices in billing currencies were up 1% over the
average for the first six months of 2002 prices. Also, in May 2002, we announced
a second round of price increases of approximately 7% to 11% for certain regions
of the world, including Europe. We are hopeful that we will realize a portion of
the announced May 2002 price increases during the fourth quarter of 2002. The
extent to which any price increase will be realized will depend on improving
market conditions. We expect that second half 2002 prices will be higher than in
the first half of 2002. However, because TiO(2) prices were declining in 2001
and through the first quarter of 2002, we believe that our average 2002 prices
in billing currencies will be significantly below our average 2001 prices.
Overall, we expect our TiO(2) operating income in 2002 will be significantly
lower than 2001, primarily due to lower average TiO(2) selling prices. Our
expectations as to our and the TiO(2) industry's future prospects are based upon
a number of factors beyond our 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 our expectations, our results of operations could be
unfavorably affected.
39
NET SALES AND OPERATING INCOME
Six months ended June 30, 2001 and 2002
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2002 % CHANGE
-------- -------- --------
(in millions, except metric tons)
NET SALES AND OPERATING INCOME
Net sales...................................................... $ 299.4 $ 285.7 -5%
Operating income............................................... 71.7 30.7 -57%
Operating income margin percentage............................. 24% 11% N/A
TIO(2) OPERATING STATISTICS
Percent change in average selling price (in billing currencies) N/A N/A -16%
Sales volume (metric tons in thousands)........................ 138 158 +15%
Production volume (metric tons in thousands)................... 136 147 +8%
Production rate as a percentage of capacity.................... 90% 95% N/A
</Table>
Our operating income in the first six months of 2002 decreased $41
million or 57% from the first six months of 2001 primarily due to lower average
selling prices partially offset by higher sales and production volumes. Our
operating income in the first half of 2001 included $5.0 million of business
interruption insurance proceeds related to the fire at our Leverkusen, Germany
plant in 2001 described below.
Our average selling price in billing currencies (which excludes the
effects of foreign currency translation) during the first six months of 2002 was
16% lower than the first six months of 2001. Compared with the first six months
of 2001, prices in billing currencies were lower in all major markets. The
average selling price in billing currencies in June 2002 was approximately 1%
higher than the average selling price for the first six months of 2002. Average
selling prices in billing currencies continued to decline early in the first
half of 2002 and began to increase late in the first half of 2002 with June
prices 2% lower than December 2001 prices.
Our sales volume in the first six months of 2002 increased 15% from the
first six months of 2001. Finished goods inventory decreased 11,100 metric tons
during the first six months of 2002 and inventory levels at the end of June
represented about one and one-half months of sales.
Our production volume in the first six months of 2002 increased 8% from
the 2001 prior period with operating rates at 95% in the first six months of
2002 compared with 90% capacity in the first six months of 2001. The increase
from the prior year period was due in part to lost sulfate-process and
chloride-process production in 2001 as a result of the Leverkusen fire.
A fire on March 20, 2001 damaged a section of our Leverkusen, Germany
35,000 metric ton sulfate-process TiO(2) plant and, as a result, production of
TiO(2) at the Leverkusen facility was halted. The fire did not enter our
adjacent 125,000 metric ton chloride-process TiO(2) plant, but did damage
certain support equipment necessary to operate that plant. The damage to the
support equipment resulted in a temporary shutdown of the chloride plant. The
chloride plant became fully operational in April 2001 and the sulfate plant
became approximately 50% operational in September 2001 and fully operational in
late October 2001.
During the second quarter of 2001, our insurance carriers approved a
partial payment of $10.5 million ($9 million received as of June 30, 2001) for
property damage costs and business interruption losses caused by the Leverkusen
fire. Five million dollars of this payment represented partial compensation for
business interruption losses which was recorded as a reduction of cost of sales
to offset unallocated period costs that resulted from lost production. The
remaining $5.5 million represented property damage recoveries against clean-up
costs, resulting in a net gain of $1.9 million. We settled our insurance claim
involving the Leverkusen fire for $56.4 million during the fourth quarter of
2001 of which $27.3 million related to business interruption (which included the
$5 million partial payment described above) and $29.1 million related to
property damages, clean-up costs and other extra expenses. $19.3 million of the
$27.3 million of business interruption proceeds was recognized as a component of
operating
40
income in 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. No additional insurance recoveries related to
the Leverkusen fire are expected to be received in 2002.
Compared to the year-earlier period, cost of sales as a percentage of
net sales increased in the first six months of 2002 primarily due to lower
average selling prices in billing currencies, partially offset by higher
production volume. Excluding the effects of foreign currency translation, which
slightly decreased our expenses in the first six months of 2002 compared to
year-earlier period, our selling, general and administrative expenses in the
first six months of 2002 were comparable to the first six months of 2001.
The majority of our sales and operating costs are denominated in
currencies other than the U.S. dollar. Fluctuations in the value of the U.S.
dollar relative to other currencies, primarily a slightly stronger U.S. dollar,
on average, compared to the euro in the first six months of 2002 versus the
year-earlier period, decreased the dollar value of sales in the first six months
of 2002 when compared to the year-earlier period by approximately 1%. When
translated from billing currencies to U.S. dollars using currency exchange rates
prevailing during the respective periods, our first half 2002 average selling
price in U.S. dollars was 17% lower than in the first six months of 2001. The
effect of the stronger U.S. dollar on our operating costs that are not
denominated in U.S. dollars slightly reduced operating costs in the first six
months of 2002 compared to the year-earlier period. Sales to export markets are
typically denominated in U.S. dollars and a weaker U.S. dollar decreases margins
on these sales at our subsidiaries. In addition, we revalued certain export
trade receivables and certain monetary assets held by our subsidiaries whose
functional currency is not the U.S. dollar and based on the weakening U.S.
dollar late in the first half of 2002, we reported a revaluation loss for the
first six months of 2002. As a result, the net impact of currency exchange rate
fluctuations decreased operating income by $2.9 million in the first six months
of 2002 when compared to the year earlier period.
Years ended December 31, 1999, 2000 and 2001
<Table>
<Caption>
YEAR ENDED DECEMBER 31, % CHANGE
----------------------------- -----------------
1999- 2000-
1999 2000 2001 2000 2001
------- ------- ------- ------ ------
(in millions, except metric tons)
NET SALES AND OPERATING INCOME
Net sales.......................................... $ 620.3 $ 620.5 $ 554.6 -- (11)%
Operating income................................... $ 90.5 $ 146.1 $ 123.8 61% (15)%
Operating income margin percentage................. 15% 24% 22% N/A N/A
TiO(2) OPERATING STATISTICS
Percent change in average selling prices (in
billing currencies)............................... N/A N/A N/A 7% (2)%
Sales volume (metric tons in thousands)............ 291 294 265 1% (10)%
Production volume (metric tons in thousands)....... 272 297 269 9% (9)%
Production rate as a percent of capacity........... 90% 100% 89% N/A N/A
</Table>
Our operating income for 2000 was higher than 1999 due to higher
average TiO(2) selling prices in billing currencies and higher production and
sales volumes. Our operating income in 2001, including business interruption
proceeds of approximately $27 million, was lower than 2000, primarily due to
lower average TiO(2) selling prices in billing currencies and lower sales and
production volumes.
Average TiO(2) selling prices in billing currencies during 2001 were 2%
lower than 2000, with lower prices in all major regions. Pigment prices
decreased from the preceding quarter during each quarter of 2001, reversing the
upward trend that began in the fourth quarter of 1999 and continued through the
fourth quarter of 2000. The rate of price declines increased in the fourth
quarter of 2001 to 5% over the third quarter of 2001, and December 2001 prices
were 2% lower than the average selling price for the quarter. The average
selling price in billing currencies in December 2001 was 13% below the December
2000 average selling price. The most significant price erosion during this time
period occurred in the European and export markets. Average TiO(2) selling
prices in billing currencies in 2000 were 7% higher than 1999, with higher
prices in all major regions.
41
Industry-wide demand was weak throughout 2001 as compared to 2000 and
1999 levels. Sales volume of 265,000 metric tons of TiO(2) in 2001 was 10% lower
than 2000, primarily due to lower European sales. Sales volume in 2000 was 1%
higher than 1999. Industry-wide demand was weak in early 1999. Demand in the
second half of 1999 and the first three quarters of 2000 was stronger than
comparable year-earlier periods we believe as a result of, among other things,
customers buying in advance of anticipated price increases. Demand softened in
the fourth quarter of 2000 and weakened throughout 2001.
Our production volume in 2000 increased 9% compared with 272,000 metric
tons produced in 1999. Operating rates in 1999 were 90%. Production volume was
curtailed in the beginning of the first quarter of 1999 in order to manage
inventory levels. Our production volume was 269,000 metric tons in 2001, a
decrease of 9% from 297,000 metric tons produced in 2000. Operating rates were
down in 2001 from near full capacity in 2000, primarily due to lost production
resulting from the Leverkusen fire and our decision to curtail production in the
fourth quarter of 2001. Finished goods inventory levels increased in the fourth
quarter of 2001, and at the end of 2001 represented approximately two months of
sales.
A fire on March 20, 2001 damaged a section of our Leverkusen, Germany
35,000 metric ton sulfate-process TiO(2) plant and, as a result, production of
TiO(2) at the Leverkusen facility was halted. The fire did not enter our
adjacent 125,000 metric ton chloride-process TiO(2) plant, but did damage
certain support equipment necessary to operate that plant. The damage to the
support equipment resulted in a temporary shutdown of the chloride plant. The
chloride plant became fully operational in April 2001 and the sulfate plant
became approximately 50% operational in September 2001 and fully operational in
late October 2001.
We settled our insurance claim involving the Leverkusen fire for $56.4
million during the fourth quarter of 2001 ($46.9 million received as of December
31, 2001, with the remaining $9.5 million received in January 2002), of which
$27.3 million related to business interruption and $29.1 million related to
property damage, clean-up costs and other extra expenses. We recognized a $17.5
million pre-tax gain in 2001 related to the property damage recovery after
deducting $11.6 million of clean-up costs and other extra expenses incurred and
the carrying value of assets destroyed in the fire. The gain was excluded from
the determination of operating income. The $27.3 million of business
interruption proceeds recognized in 2001 were allocated between other income,
excluding corporate, which reflected recovery of lost margin ($7.2 million) and
as a reduction of cost of sales to offset unallocated period costs ($20.1
million). We do not expect to receive any additional insurance recoveries
related to the Leverkusen fire, and there was no impact on our results of
operations in the first six months of 2002.
Excluding the effects of foreign currency translation, which reduced
our expenses in both 2000 and 2001 compared to the year-earlier periods, our
cost of sales in 2001 was lower than 2000 due to lower sales volume partially
offset by higher unit costs, which resulted primarily from lower production
levels. The effects of lower TiO(2) sales volume and production volume were
partially offset by business interruption proceeds. Our cost of sales in 2000
was lower than 1999 primarily due to lower unit costs, which resulted primarily
from higher production levels. Cost of sales, as a percentage of net sales,
increased in 2001 primarily due to the impact on net sales of lower average
selling prices and higher unit costs partially offset by business interruption
insurance recoveries, and decreased in 2000 primarily due to the impact on net
sales of higher average selling prices and lower unit costs.
Excluding the effects of foreign currency translation, which reduced
our expenses in both 2000 and 2001 compared to the year-earlier periods,
selling, general and administrative expenses ("SG&A"), excluding corporate
expenses, decreased in 2001 from the year-earlier period due to lower variable
compensation expense and lower selling and distribution expenses associated with
lower 2001 sales volume. SG&A, excluding corporate expenses, increased in 2000
from the year-earlier period primarily due to higher variable compensation
expense and higher selling and distribution expenses associated with higher 2000
sales volumes. SG&A, excluding corporate expenses, as a percentage of net sales,
was 13% in 1999 and 12% in each of 2000 and 2001. See discussion of corporate
expenses below.
The majority of our sales and operating costs are subject to currency
exchange rate fluctuations which may impact reported earnings and may affect the
comparability of period-to-period revenues and expenses expressed in U.S.
dollars. A significant amount of our sales (79% in 2001) are denominated in
currencies other than the U.S. dollar, principally the euro and other major
European currencies. Certain purchases of raw materials, primarily
titanium-containing feedstocks for our chloride process plants, are denominated
in U.S. dollars, while labor and
42
other production costs are primarily denominated in local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies,
primarily a stronger U.S. dollar compared to the euro, decreased sales during
2000 and 2001, respectively, compared with the year-earlier period. When
translated to U.S. dollars using currency exchange rates prevailing during the
respective periods, our average selling prices for 2000 increased 14% from 1999.
Our average selling prices in U.S. dollars for 2001 decreased 2% from 2000. The
effect of the stronger U.S. dollar on our operating costs that are not
denominated in U.S. dollars reduced operating costs in 2000 and 2001 compared
with the respective prior year. In addition, sales to export markets are
typically denominated in U.S. dollars and a stronger U.S. dollar improves
margins on these sales. The favorable margin on export sales tends to offset the
unfavorable effect of translating local currency profits to U.S. dollars when
the dollar is stronger. As a result, the net impact of currency exchange rate
fluctuations decreased operating income in 2000 and 2001 by approximately 19%
and 7% when compared to the year-earlier periods.
GENERAL CORPORATE
The following table sets forth certain information regarding general
corporate income (expense):
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- -------- --------- --------
(in millions)
Interest income from affiliates.......................... $ 1.5 $ 23.1 $ 36.2 $ 15.9 $ 19.2
Insurance recoveries, net................................ -- -- 17.5 1.9 --
Currency transaction gains (losses) on affiliate loans... (36.9) (15.6) (9.4) (15.0) 15.8
Other, net............................................... -- -- (1.5) -- --
Interest expense-bank debt............................... (7.6) (1.9) (4.3) (2.2) (1.7)
Interest expense-affiliate debt.......................... (29.9) (28.7) (34.1) (13.9) (18.7)
-------- -------- -------- --------- --------
$ (72.9) $ (23.1) $ 4.4 $ (13.3) $ 14.6
======== ======== ======== ========= ========
</Table>
We have certain loans to affiliates, more fully described in note 17 to
the consolidated financial statements included elsewhere in this prospectus.
Interest income on such notes receivable from affiliates was higher in 2000 and
2001 compared to the respective prior year, and was higher in the first six
months of 2002 compared to the same period in 2001, due primarily to higher
average balances of outstanding loans to affiliates. Subsequent to completion of
the offering of the old notes (and as more fully described above in "Prospectus
Summary -- Certain Transactions and Refinancing" and note 22 to the consolidated
financial statements included elsewhere in this prospectus), we transferred such
notes receivable from affiliates to Kronos on July 30, 2002, and accordingly we
will no longer report interest income on such loans to affiliates.
The insurance recoveries, net in the first six months of 2001 and the
full year 2001 related to insurance proceeds received from property damage
resulting from the Leverkusen fire, as the insurance proceeds received exceeded
the carrying value of the assets destroyed and the clean-up costs and extra
expense incurred. See note 14 to the consolidated financial statements included
elsewhere in this prospectus.
We have certain loans from affiliates that are denominated in U.S.
dollars. Under GAAP, changes in the euro-equivalent of such indebtedness is
recognized in our earnings as a foreign currency transaction gain or loss. The
amount of such currency transaction gain or loss is dependent upon the relative
change in the exchange rate between the euro and the U.S. dollar during each
period, and the amount of such U.S. dollar-denominated indebtedness outstanding.
See note 8 to the consolidated financial statements included elsewhere in this
prospectus. As more fully described above in "Prospectus Summary -- Certain
Transactions and Refinancing, and Note 8 to the consolidated financial
statements included elsewhere in this prospectus" such U.S. dollar-denominated
loans from affiliates was repaid using a portion of the proceeds of the offering
of the old notes, and accordingly we will no longer report such currency
transaction gains or losses related to such loans from affiliates.
Other corporate expenses, net in 2001 of $1.5 million, related to
German real estate transfer taxes associated with a legal restructuring of our
German operations.
43
Interest expense in 2000 declined compared to 1999 due to reduced
levels of outstanding euro-bank debt. Interest expense in 2001 was higher than
2000 primarily due to higher levels of bank debt and affiliate debt. Interest
expense in the first six months of 2002 was higher than the comparable period in
2001 due to a higher level of outstanding affiliate indebtedness and the amount
paid to extinguish affiliate indebtedness in June 2002 included interest for the
month of July 2002 (approximately $1.5 million), partially offset by reduced
levels of short term notes payable. See notes 7 and 8 to the consolidated
financial statements included elsewhere in this prospectus. As more fully
described above in "Prospectus Summary -- Certain Transactions and Refinancing,"
a portion of such loans from affiliates was repaid using the proceeds of the
offering of the old notes and accordingly we will no longer report interest
expense on such loans from affiliates.
PROVISION FOR INCOME TAXES
The principal reasons for the difference between the U.S. Federal
statutory income tax rates and our effective income tax rates are explained in
note 13 to the consolidated financial statements included elsewhere in this
prospectus. Our operations are conducted in numerous jurisdictions, and the
geographic mix of income can significantly impact our effective income tax rate.
In 1999, our effective tax rate varied from the normally expected rate due
predominantly to the recognition of certain deductible tax attributes which
previously did not meet the "more-likely-than-not" recognition criteria. In
2000, our effective income tax rate varied from the normally expected rate
primarily due to the geographic mix of income and changes in the German income
tax "base" rate. In 2001 and the first half of 2002, our effective income tax
rate varied from the normally expected rate primarily due to the recognition of
certain German income tax attributes which previously did not meet the
"more-likely-than-not" recognition criteria. In each of 1999, 2000 and 2001, no
income tax benefit has been provided on certain currency transaction losses.
Also in 1999 and 2000, we recognized certain one-time benefits related to German
tax settlements. In the first half of 2002, no income taxes were provided on
certain currency transaction gains.
RELATED PARTY TRANSACTIONS
We are a party to certain transactions with related parties. See
"Liquidity and Capital Resources -- Investing Cash Flows," "Certain
Relationships and Related Transactions" and note 15 to the consolidated
financial statements included elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED CASH FLOWS
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- -------- --------- --------
(in millions)
NET CASH PROVIDED (USED) BY:
Operating activities:
Net income.............................................. $ 41.9 $ 80.1 $ 113.7 $ 41.1 $ 37.6
Depreciation and amortization........................... 28.4 24.1 24.1 12.2 12.8
Noncash currency transaction loss (gain)................ 36.9 15.6 9.4 15.0 (13.1)
Noncash interest income from affiliates................. -- (23.1) (25.0) (13.8) (18.3)
Noncash interest expense to affiliates.................. -- -- -- -- 5.5
Insurance recoveries, net............................... -- -- (17.5) (1.9) --
Deferred income taxes................................... (42.1) 5.2 (6.6) .6 5.1
Change in assets and liabilities, net................... 12.7 (2.5) (21.0) (33.4) 8.7
Other, net.............................................. (0.2) (1.6) (1.7) (1.6) (2.5)
-------- -------- -------- --------- --------
77.6 97.8 75.4 18.2 35.8
-------- -------- -------- --------- --------
</Table>
44
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- -------- --------- --------
(in millions)
Investing activities:
Capital expenditures.................................... (29.2) (26.7) (48.4) (15.8) (10.1)
Property damaged by fire, net........................... -- -- 20.2 4.5 --
Other, net.............................................. 2.3 0.1 0.3 .1 (0.7)
-------- -------- -------- --------- --------
(26.9) (26.6) (27.9) (11.2) (10.8)
-------- -------- -------- --------- --------
Financing activities:
Net borrowings (repayments)............................. $ (73.8) $ 15.7 $ (21.0) $ (5.6) $ 265.6
Affiliate net borrowings (repayments)................... 52.0 (93.0) -- -- (301.4)
Transactions with affiliates............................ 11.6 (18.8) (35.6) -- 2.9
Deferred financing costs................................ -- -- -- -- (9.3)
Other, net.............................................. -- -- 3.8 -- (.1)
-------- -------- -------- --------- --------
(10.2) (96.1) (52.8) (5.6) (42.3)
-------- -------- -------- --------- --------
Net cash provided (used) by operating,
investing and financing activities...................... $ 40.5 $ (24.9) $ (5.3) $ 1.4 $ (17.3)
======== ======== ======== ========= ========
</Table>
OPERATING CASH FLOWS
Certain items included in the determination of net income do not
represent current operating inflows or outflows of cash. For example, insurance
recoveries, net of $17.5 million in 2001 are excluded from the determination of
operating cash flow. These insurance proceeds are shown in the statement of cash
flows under investing activities to partially offset the cash outflow impact of
capital expenditures related to the Leverkusen sulfate plant reconstruction.
Certain other items included in the determination of net income have an impact
on cash flows from operating activities, but the impact of such items on cash
will differ from their impact on net income.
The TiO(2) industry is cyclical and changes in economic conditions
significantly impact our earnings and operating cash flows. Cash flow from
operations is considered our primary source of liquidity. Changes in TiO(2)
pricing, production volume and customer demand, among other things, could
significantly affect our liquidity. Operating cash flows, before changes in
assets and liabilities, in 2000 compared with 1999 were favorably affected by
$55.6 million higher operating income, $5.7 million of lower non-affiliate cash
interest expense, partially offset by $19.8 million of higher current tax
expense. Operating cash flows, before changes in assets and liabilities, in 2001
compared with 2000 were unfavorably affected by $22.3 million of lower operating
income, $2.4 million of higher non-affiliate cash interest expense and $1.5
million of higher corporate expenses, partially offset by $16.6 million of lower
current tax expense and $5.8 million of lower cash interest expense, net to
affiliates.
Cash flow from operations, before changes in assets and liabilities,
decreased $24.5 million in the first six months of 2002 from the comparable
period primarily due to $41.0 million of lower operating income, partially
offset by $14.0 million of lower current tax expense.
Changes in our assets and liabilities (excluding the effect of currency
translation) in 2000 compared with 1999 were unfavorably affected by higher
inventories of $28.4 million and $5.0 million of lower accounts payable and
accrued liabilities, partially offset by lower accounts and notes receivable
balances of $12.3 million and $7.9 million of higher affiliate balances.
Changes in our assets and liabilities (excluding the effect of currency
translation) in 2001 compared with 2000 were unfavorably affected by higher
affiliate balances of $21.4 million, partially offset by $5.5 million lower
accounts and notes receivable balances.
45
The net cash used to fund changes in our inventories, receivables and
payables (excluding the effect of currency translation) in the first six months
of 2002 was less than the first six months of 2001, with $16.9 million lower
inventory balances, $15.2 million lower accounts and notes receivable balances,
which included the collection of $11.1 million of insurance proceeds, and $16.0
million lower net affiliate balances, partially offset by decreases in taxes
payable of $10.2 million.
INVESTING CASH FLOWS
Our capital expenditures were $29.2 million, $26.7 million and $48.4
million in 1999, 2000 and 2001, respectively. Capital expenditures in 1999 were
higher compared with 2000 due to $6.0 million of expenditures for a landfill
expansion for our Belgian facility. Capital expenditures in 2001 include an
aggregate of $22.3 million for the rebuilding of our Leverkusen, Germany sulfate
plant. We received $23.4 million of insurance proceeds for property damage
resulting from the Leverkusen fire and paid $3.2 million of expenses related to
repairs and clean-up costs.
Capital expenditures of $10.1 million in the first six months of 2002
included approximately $2.2 million related to ongoing reconstruction of the
Leverkusen, Germany sulfate plant. We expect to complete all reconstruction by
December 31, 2002. In the second quarter of 2001, we received $5.5 million of
insurance proceeds for property damage resulting from the Leverkusen fire and we
paid $1.0 million of expenses related to repairs and clean-up costs.
As of June 30, 2002, we had $1.6 million of restricted cash
equivalents, which was collateralizing certain environmental remediation
obligations. We expect to replace such restricted cash deposit with a letter of
credit issued under our subsidiaries' new revolving credit facility described
below during the fourth quarter of 2002.
Our capital expenditures during the past three years include an
aggregate of $22.0 million ($4.7 million in 2001) for our ongoing environmental
protection and compliance programs. Our estimated 2002 and 2003 capital
expenditures are expected to be $28.5 million and $26.5 million, respectively,
and include $3.8 million and $3.6 million, respectively, in the area of
environmental protection and compliance. Included in the 2002 capital
expenditure estimate is $4.0 million to complete reconstruction of the
Leverkusen, Germany sulfate plant.
FINANCING CASH FLOWS
In the first quarter of 1999, we prepaid the remaining balance of DM107
million ($60 million when paid) of a term loan that was part of our previous DM
bank credit facility, principally by drawing DM100 million ($56 million when
drawn) on the revolving portion of the DM credit facility. In the second and
third quarters of 1999, we repaid DM60 million ($33 million when paid) of the DM
revolving credit facility. The revolver's outstanding balance of DM120 million
was further reduced in October 1999 by DM20 million ($11 million when paid). In
December 1999, we borrowed $26 million of short-term unsecured euro-denominated
bank debt and used the proceeds along with cash on hand to prepay the remaining
balance of DM100 million ($52 million when paid) of the revolving portion of the
DM credit facility. The DM credit facility was then terminated, which released
collateral and eliminated certain restrictive loan covenants.
During 1999, we borrowed $52 million from an affiliate. During 2000 and
the first three months of 2002, we repaid $93 million and $25 million,
respectively, of loans from affiliates (a portion of the 2000 repayment was
funded through new third-party borrowings discussed above). As discussed above
under "Prospectus Summary -- Certain Transactions and Refinancing," we will
repay a portion of our remaining balance of loans from affiliates using the
proceeds of this offering, and the remainder of our loans from affiliates will
be contributed to our equity upon completion of this offering.
In 2000, we repaid E.30.9 million ($28.9 million when paid) of our
short-term debt with cash flow from operations. Also, in December 2000, we
borrowed $43 million of short-term non-U.S. dollar-denominated bank debt and
used the proceeds along with cash on hand to repay certain loans to affiliates.
46
In 2001, we repaid E.24 million ($21.4 million when paid)
respectively, of our short-term bank debt with excess cash flow from operations.
In March 2002 we repaid $25 million in principal amount of affiliate
indebtedness to Kronos. In June 2002 we repaid $169 million principal amount,
plus accrued interest of affiliate indebtedness to Kronos with proceeds from the
notes offering discussed below. See note 8 to the consolidated financial
statements included elsewhere in this prospectus. Further, in June 2002, we
repaid E.113.8 million ($111.8 million), including interest, of the
euro-denominated note payable to Kronos with proceeds from the offering of the
old notes discussed below. See note 8 to the consolidated financial statements
included elsewhere in this prospectus.
In June 2002 we issued E.285 million ($280 million when issued and
$283 million at June 30, 2002) principal amount of old notes. The old notes are
collateralized by first priority liens on 65% of the common stock or other
equity interests of certain of our first-tier subsidiaries. The old notes were
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts our ability and our
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of our assets to, another
entity. See note 7 to the consolidated financial statements included elsewhere
in this prospectus.
In June 2002 our operating subsidiaries in Germany, Belgium and Norway,
entered into a three-year E.80 million secured revolving credit facility. The
credit facility is available in multiple currencies, including U.S. dollars,
euros and Norwegian kroner. As of June 30, 2002, E.13 million ($13 million)
and NOK 200 million ($26 million) was borrowed at closing, and along with
available cash, was used to repay and terminate our short term notes payable
($53.2 million when repaid). See note 7 to the consolidated financial statements
included elsewhere in this prospectus.
Deferred financing costs of $9.3 million for the old notes and the
credit facility are being amortized over the life of the respective agreements
and are included in other noncurrent assets as of June 30, 2002.
Unused lines of credit available for borrowing under our non-U.S.
credit facilities approximated $8 million and $42 million at December 31, 2001
and June 30, 2002, respectively, (including $40 million under our subsidiaries'
credit facility at June 30, 2002).
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash inflow of $11.6 million in 1999, a net cash
outflow of $18.8 million in 2000, a net cash outflow of $31.8 million in 2001,
and a net cash inflow of $2.9 million in the first six months of 2002 (nil for
the first six months of 2001). Such amounts relate principally to cash flows
related to dividends or loans we received from, or capital contributions or
loans we made to, our former Canadian operations, or affiliates (such loans
being reported as a reduction of our stockholder's equity, and therefore
considered financing cash flows). As discussed above under "Prospectus Summary
- -- Certain Transactions and Refinancing," we transferred our Canadian operations
to Kronos in April 2002, and accordingly we will no longer report any such
capital transaction cash flows related to such Canadian operations subsequent to
April 2002. Also as discussed above under "Prospectus Summary -- Certain
Transactions and Refinancing," settlement of such notes receivable from
affiliates is not currently contemplated in the foreseeable future. In July 2002
we transferred such notes receivable from affiliates to Kronos in one or more
non-cash transactions, and as a result we will no longer report cash flows
related to such notes receivable from affiliates after July 30, 2002. See note
22 to the consolidated financial statements included elsewhere in this
prospectus.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH EQUIVALENTS
At June 30, 2002, we had cash and cash equivalents aggregating $16.0
million and an additional $1.6 million of restricted cash equivalents. Based
upon our expectations for the TiO(2) industry and anticipated demands on our
cash resources as discussed herein, we expect to have sufficient liquidity to
meet our near-term obligations including operations, capital expenditures and
debt service. To the extent that actual developments differ from our
expectations, our liquidity could be adversely affected.
47
INCOME TAX CONTINGENCIES
Certain of our tax returns in various U.S. and non-U.S. jurisdictions
are being examined and tax authorities have proposed or may propose tax
deficiencies, including penalties and interest. See note 13 to the consolidated
financial statements included elsewhere in this prospectus.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of our deferred
income tax asset related to certain German tax attributes. We do not expect our
future current income tax expense to be affected by the rate change in Germany.
We received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK39.3 million
pertaining to 1994 and 1996. We were unsuccessful in appealing the tax
assessments and in June 2001 paid NOK39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. We were adequately reserved for this contingency.
The lien on our Fredrikstad, Norway TiO(2) plant in favor of the Norwegian tax
authorities has been released.
We have received preliminary tax assessments for the years 1991 to 1997
from the Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately E.10.4 million ($9.2 million at December 31, 2001
and $10.3 million at June 30, 2002). We have filed protests against the
assessments for the years 1991 to 1997. We are in discussions with the Belgian
tax authorities and believe that a significant portion of the assessments is
without merit.
No assurance can be given that our tax matters will be favorably
resolved due to the inherent uncertainties involved in court and tax
proceedings. We believe that we have provided adequate accruals for additional
taxes and related interest expense which may ultimately result from all such
examinations. We further believe that the ultimate disposition of such
examinations should not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
We recognized a $40 million noncash income tax benefit in 1999
comprised of a favorable resolution of our tax contingency in Germany ($14
million) and a net reduction in our deferred income tax valuation allowance due
to a change in estimate of our ability to utilize certain income tax attributes
under the "more-likely-than-not" recognition criteria ($26 million).
The $26 million net reduction in our deferred income tax valuation
allowance in 1999 is comprised of (i) a $50 million decrease in the valuation
allowance to recognize the benefit of certain deductible income tax attributes
which we now believe meet the recognition criteria as a result of, among other
things, a corporate restructuring of our German subsidiaries offset by (ii) a
$24 million increase in the valuation allowance to reduce the previously
recognized benefit of certain other deductible income tax attributes which we
now believe do not meet the recognition criteria due to a change in German tax
law.
During the fourth quarter of 2001 and the first six months of 2002, we
recognized income tax benefits of $23.2 million and $1.8 million, respectively,
attributable to decreases in the valuation allowance due to a change in estimate
of our ability to utilize certain German income tax attributes that did not
previously meet the "more-likely-than-not" recognition criteria.
At December 31, 2001 and June 30, 2002, we had approximately $317
million and $355 million, respectively, of income tax loss carryforwards in
Germany with no expiration date. At December 31, 2001 and June 30, 2002, we had
deferred tax valuation allowance totaling $121.7 million and $143.3 million,
respectively.
REDEEMABLE PREFERRED STOCK, PROFIT PARTICIPATION CERTIFICATES AND NOTES
RECEIVABLE FROM AFFILIATES
We had issued and outstanding Series A and Series B redeemable
preferred stock and profit participation certificates totaling $617.4 million
and $694.8 million at December 31, 2001 and June 30, 2002, respectively,
48
including cumulative and unpaid dividends. The Series A redeemable preferred
stock was issued to Kronos in February 1999 as a result of a capital
contribution to us through the reduction of our affiliate notes payable to NL
Industries and Kronos. The Series B redeemable preferred stock was issued to
Kronos in February 1999 as a result of a contribution of intellectual property
by Kronos to us. The intellectual property was contributed to us at Kronos'
carryover basis of zero due to common control of us and Kronos. The profit
participation certificates were issued to Kronos in December 1999 as part of a
recapitalization. We had $700.8 million and $753.0 million of outstanding notes
receivable from affiliates at December 31, 2001 and June 30, 2002, respectively.
Settlement of such notes receivable was not currently contemplated in the then
foreseeable future, and consequently such notes receivable from affiliates were
reported in our consolidated balance sheet as a reduction of our stockholder's
equity in accordance with GAAP. These notes arose between us, NL Industries and
Kronos through a series of transactions with affiliates, a substantial portion
of which were noncash in nature. We periodically convert accrued interest
receivable from affiliates to notes receivable from affiliates.
See "Certain Transactions and Refinancing" and "Capitalization."
Further, see note 22 to the consolidated financial statements included elsewhere
in this prospectus for the effect of our recapitalization in July 2002.
FOREIGN OPERATIONS
As discussed above, our operations are located outside the United
States for which the functional currency is not the U.S. dollar. As a result,
the reported amount of our assets and liabilities (and income and expenses)
related to our non-U.S. operations, and therefore our consolidated net assets
will fluctuate based upon changes in currency exchange rates. At June 30, 2002,
we had substantial net assets denominated in the euro, Norwegian kroner and
United Kingdom pound sterling.
EURO CURRENCY
Beginning January 1, 1999, certain members of the European Union
("EU"), including Germany, Belgium, the Netherlands and France, adopted a new
European currency unit (the "euro") as their common legal currency. Following
the introduction of the euro, the participating countries' national currencies
remained legal tender as denominations of the euro from January 1, 1999 through
January 1, 2002, and the exchange rates between the euro and such national
currency units were fixed. Beginning January 1, 2002, national currency units
were exchanged for euros and the euro became the primary legal tender currency.
We conduct substantially all of our operations in Europe. As of January
1, 2001, the functional currency of our German, Belgian, Dutch and French
operations have been converted to the euro from their respective national
currencies.
SUMMARY OF DEBT AND OTHER CONTRACTUAL COMMITMENTS
As more fully described in the notes to the consolidated financial
statements included elsewhere in this prospectus, we are party to various debt,
lease and other agreements which contractually and unconditionally commit us to
pay certain amounts in the future. See notes 7, 8 and 18 to the consolidated
financial statements included elsewhere in this prospectus. The following table
summarizes such contractual commitments as of June 30, 2002 that are
unconditional both in terms of timing and amount by the type and date of
payment.
<Table>
<Caption>
UNCONDITIONAL PAYMENT DUE DATE
-----------------------------------------
2007 AND
CONTRACTUAL COMMITMENT 2002 2003-2004 2005-2006 AFTER TOTAL
- ---------------------- ------ --------- --------- -------- --------
(in millions)
Indebtedness:
8 7/8% Senior Secured Notes due 2009....... $ -- $ -- $ -- $ 283.0 $ 283.0
New credit facility of subsidiaries........ -- -- 39.6 -- 39.6
Other indebtedness......................... 1.0 1.2 .2 -- 2.4
------ --------- --------- -------- --------
1.0 1.2 39.8 283.0 325.0
------ --------- --------- -------- --------
Property and equipment........................ 3.9 -- -- -- 3.9
Operating leases.............................. 1.0 2.5 1.8 19.0 24.3
------ --------- --------- -------- --------
$ 5.9 $ 3.7 $ 41.6 $ 302.0 $ 353.2
====== ========= ========= ======== ========
</Table>
49
The U.S. dollar amount shown for the old notes is presented based on
the issuance of E.285 million on June 28, 2002 and is presented at its U.S
dollar equivalent at June 30, 2002 using that date's exchange rate of E.1.00
to $.99. The U.S dollar amount shown for our new E.80 million credit facility
of subsidiaries is based on the amount drawn at closing on June 28, 2002, at its
U.S dollar equivalent at June 30, 2002 using that date's exchange rate of
E.1.00 to $.99. The proceeds from our new credit facility and available cash
were used to repay short-term notes payable to third parties ($53.2 million when
repaid). The table excludes our 11.75% second-tier senior mirror note ($194
million at December 31, 2001 and $169 million at June 28, 2002) that was deemed
repaid in full with proceeds from the old notes. Our remaining note payable to
affiliate of $286.4 million at December 31, 2001 was partially prepaid in April
2002 using as consideration an equivalent amount of KII's euro-denominated note
receivable from NL. See notes 7 and 8 to the consolidated financial statements
included elsewhere in this prospectus. The remaining balance was repaid with
proceeds from the issuance of E.285 million of old notes.
In addition, Kronos USA is party to certain agreements that
contractually and unconditionally commit Kronos USA to pay certain amounts in
the future. We, and certain of our affiliates, purchase chloride feedstock
underlying these long-term supply contracts from Kronos USA and are more fully
described in note 18 to the consolidated financial statements included elsewhere
in this prospectus.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
We are exposed to market risk from changes in currency exchange rates
and interest rates. We have not generally entered into forward or option
contracts to manage such market risks, nor have we entered into any such
contract or other type of derivative instrument for trading purposes. We are not
a party to any forward or derivative option contracts related to currency
exchange rates or interest rates at December 31, 2000 or 2001, or June 30, 2002.
See notes 2 and 19 to the consolidated financial statements included elsewhere
in this prospectus.
INTEREST RATES
We are exposed to market risk from changes in interest rates, primarily
related to indebtedness. At December 31, 2001, our aggregate indebtedness was
split between 91% of fixed-rate instruments to affiliates and 9% of
variable-rate borrowings with third parties (2000 - 73% fixed-rate to affiliates
and 27% variable-rate to third parties). The large percentage of fixed-rate debt
instruments minimizes earnings volatility which would result from changes in
interest rates. The following table presents principal amounts and
weighted-average interest rates, by contractual maturity dates, for our
aggregate indebtedness at December 31, 2000 and 2001. At December 31, 2001, 60%
of our fixed-rate indebtedness was denominated in euros with the remaining 40%
in U.S. dollars (2000 - 100% of our fixed-rate indebtedness denominated in U.S.
dollars). Our outstanding variable-rate indebtedness was denominated in either
euros or Norwegian kroner. Information shown below for such euro- and Norwegian
kroner-denominated indebtedness is presented in its U.S. dollar equivalent at
December 31, 2001 using that date's exchange rate of E.1.00 to $.88 (2000 -
E.1.00 to $.93) and 9.02 Norwegian kroner per U.S. dollar (2000 - 8.90 kroner
per U.S. dollar). Certain Norwegian kroner-denominated capital leases totaling
$2.1 million in 2000 and $2.5 million in 2001 have been excluded from the table
below.
50
<Table>
<Caption>
CONTRACTUAL MATURITY DATE
-------------------------------------------- FAIR VALUE AT
DECEMBER 31,
2001 2002 2003 2010 TOTAL 2000
------ ------ ------ ------ ------- -------------
(in millions, except percentages)
December 31, 2000:
Fixed-rate debt (U.S. dollar-denominated):
Principal amount........................ $ -- $ -- $194.0 $ -- $ 194.0 $ 195.9
Weighted-average interest rate.......... -- -- 11.75% -- 11.75%
Variable-rate debt (Non-U.S. dollar-
denominated):
Principal amount - euro-denominated..... $ 47.5 $ -- $ -- $ -- $ 47.5 $ 47.5
Weighted-average interest rate.......... 5.3% -- -- -- 5.3%
Principal amount - Norwegian
kroner denominated................... $ 22.5 $ -- $ -- $ -- $ 22.5 $ 22.5
Weighted-average interest rate.......... 7.9% -- -- -- 7.9%
</Table>
<Table>
<Caption>
CONTRACTUAL MATURITY DATE
-------------------------------------------- FAIR VALUE AT
DECEMBER 31,
2001 2002 2003 2010 TOTAL 2001
------ ------ ------ ------ ------- -------------
(in millions, except percentages)
December 31, 2001:
Fixed-rate debt (U.S. dollar-denominated):
Principal amount........................ $ -- $194.0 $ -- $ 194.0 $ 194.9
Weighted-average interest rate.......... -- 11.75% -- 11.75%
Fixed-rate debt (euro-denominated):
Principal amount........................ -- -- $286.4 $ 286.4 $ 286.4
Weighted-average interest rate.......... -- -- 6.0% 6.0%
Variable-rate debt (Non-U.S. dollar -
denominated):
Principal amount - euro-denominated..... $ 24.0 $ -- $ -- $ 24.0 $ 24.0
Weighted-average interest rate.......... 3.8% -- -- 3.8%
Principal amount - Norwegian
kroner denominated.................... $ 22.2 $ -- $ -- $ 22.2 $ 22.2
Weighted-average interest rate.......... 7.3% -- -- 7.3%
</Table>
The following table presents principal amounts and weighted-average
interest rates, by contractual maturity dates, for our aggregate indebtedness at
June 30, 2002. Information shown below for such euro- and kroner-denominated
indebtedness is presented in its U.S. dollar equivalent at June 30, 2002 using
that date's exchange rate of E.1.00 to $.99 and 7.48 Norwegian kroner per
U.S. dollar. Further, we have assumed that the fair value of these financial
instruments approximates carrying value. Certain Norwegian kroner-denominated
capital leases totaling $2.4 million at June 30, 2002 have been excluded from
the table below.
51
<Table>
<Caption>
CONTRACTUAL MATURITY DATE
-------------------------- FAIR VALUE
AT JUNE 30,
2005 2009 TOTAL 2002
------ ------ ------- -----------
(in millions, except percentages)
June 30, 2002:
Fixed-rate debt (euro- denominated):
Principal amount........................ $ -- $283.0 $ 283.0 $ 283.0
Weighted-average interest rate.......... -- 8.875% 8.875%
Variable-rate debt (non-U.S. dollar-
denominated):
Principal amount-euro denominated....... $ 12.9 $ -- $ 12.9 $ 12.9
Weighted-average interest rate.......... 5.15% -- 5.15%
Principal amount-Norwegian
kroner denominated.................... $ 26.7 -- $ 26.7 $ 26.7
Weighted-average interest rate.......... 8.80% -- 8.80%
</Table>
CURRENCY EXCHANGE RATES
We are exposed to market risk arising from changes in currency exchange
rates as a result of manufacturing and selling our products worldwide. Earnings
are primarily affected by fluctuations in the value of the U.S. dollar relative
to the euro, Norwegian kroner and the United Kingdom pound sterling. See
"Foreign operations" above.
At December 31, 2001, we had certain loans from affiliates that are
denominated in U.S. dollars ($194 million). Under U.S. GAAP, changes in the
euro-equivalent of such indebtedness is recognized in our earnings as a foreign
currency transaction gain or loss. The amount of such currency transaction gain
or loss is dependent upon the relative change in the exchange rate between the
euro and the U.S. dollar during each period, and the amount of such U.S.
dollar-denominated indebtedness outstanding. As such U.S. dollar-denominated
loans from affiliates was repaid using a portion of the proceeds of this
offering ($169 million at June 28, 2002), we will no longer report such currency
transaction gains or losses related to such loans from affiliates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- General Corporate."
At December 31, 2001, we had $310.4 million of indebtedness denominated
in euros (2000 - $47.5 million) and $22.2 million of indebtedness denominated in
Norwegian kroner (2000 - $22.5 million). The potential increase in the U.S.
dollar equivalent of the principal amount outstanding resulting from a
hypothetical 10% adverse change in exchange rates would have been approximately
$31.0 million (2000 - $7.0 million). We have $295.9 million of indebtedness
denominated in euros and $26.7 million of indebtedness denominated in Norwegian
kroner at June 30, 2002. The potential increase in the U.S. dollar equivalent of
the principal amount outstanding resulting from a hypothetical 10% adverse
change in exchange rates would have been approximately $32.2 million at June 30,
2002.
NEW ACCOUNTING PRINCIPLES NOT YET ADOPTED
See note 2 to the consolidated financial statements included elsewhere
in this prospectus.
OTHER
We periodically evaluate our liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, our debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, we in the past have
sought, and in the future may seek, to reduce, refinance, repurchase or
restructure indebtedness; raise additional capital; restructure ownership
interests; sell interests in subsidiaries or other assets; or take a combination
of such steps or other steps to manage our liquidity and capital resources. In
the normal course of our business, we may review opportunities for acquisitions,
divestitures, joint ventures or other business combinations in the chemical or
other industries. In the event of any acquisition or joint venture transaction,
we may consider using available cash, issuing equity securities or increasing
our indebtedness to the extent permitted by the agreements governing our
existing debt. See note 7 to the consolidated financial statements included
elsewhere in this prospectus.
52
BUSINESS
GENERAL
We are the second largest producer of TiO(2) in Europe, with an
estimated 18% share of European TiO(2) sales volume. We are the leading producer
and marketer of TiO(2) in Germany, with an estimated 25% share of sales volume
in 2001, and are among the leading marketers of TiO(2) in the Benelux and
Scandinavian markets. TiO(2) is a pigment used to whiten, brighten and add
opacity to thousands of commonly used products, such as paints, plastics and
paper, as well as fibers, rubber, ceramics, inks and cosmetics. There are
currently no effective substitutes for TiO(2) for use in these applications. We
market over 40 different TiO(2) grades to over 4,000 customers in over 100
countries. We market our products through a dedicated sales force in Europe and
provide our customers with significant technical and application-related
services. Our predecessor companies were the first producers of TiO(2) in the
world, and we have achieved and maintained our market position through our
long-term customer relationships, our new product development efforts, our
commitment to product quality and by offering extensive technical and sales
services.
We currently manufacture TiO(2) in five plants in Europe (two in
Leverkusen, Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium;
and one in Fredrikstad, Norway), and sell and distribute TiO(2) from our plants
and sales and distribution facilities located throughout Europe. Our plants are
currently capable of producing approximately 313,000 metric tons of TiO(2) per
year. Projected annual capacity is expected to increase to approximately 328,000
metric tons in 2004 as a result of additional debottlenecking that can be
achieved through low cost capital investment.
PRODUCTS AND OPERATIONS
Some of the principal applications for our products include:
TiO(2) FOR PAINTS AND COATINGS. Our TiO(2) is used to provide opacity,
hiding power, durability, tinting strength and brightness in industrial
coatings, as well as for paints and coatings for home interiors and exteriors,
automobiles, aircraft, machines, appliances, traffic paint and other special
purpose coatings. The amount of TiO(2) used in paints and coatings varies widely
depending on the opacity, color and quality desired. Generally, the higher the
opacity requirement of the coating, the greater the TiO(2) content. Recent
trends toward white and pastel-colored surface coatings and extended warranties
for appliances and other surface coated consumer durable items have resulted in
higher usage in some applications.
TiO(2) FOR PLASTICS. We produce TiO(2) pigments that improve the
physical and optical properties in plastics, including whiteness and opacity.
TiO(2) is used to provide opacity in items such as plastic grocery bags, vinyl
window and door profiles and vinyl siding, as well as in agricultural and
packaging film to provide opacity and allow the film to be printed for
informational or advertising purposes. TiO(2) also provides hiding power,
neutral undertone, brightness and durability for housewares, appliances, toys,
computer cases and food packages. TiO(2)'s high brightness, along with its
opacity, is used in some engineering plastics to help mask their undesirable
natural color.
TiO(2) FOR PAPER. Our TiO(2) is used in the production of paper to
provide whiteness, brightness, color stability and opacity. TiO(2) is used in
the production of several types of paper, including filled paper, coated paper
and laminate (decorative) paper. In filled paper applications, TiO(2) is added
directly to the pulp and becomes part of the sheet itself. TiO(2) is
particularly useful in filled paper applications because of its ability to
improve the physical appearance of paper without significant negative impact on
other performance characteristics as a result of the minimal quantities
required. Without TiO(2), high opacity, lightweight papers could not be
produced. TiO(2) is used in paper coatings for production of high gloss papers.
TiO(2) is also used in paper laminates, where several layers of paper are
laminated together using melamine resin under high temperature and pressure. The
top layer of paper contains as much as 50% TiO(2) and is the layer that is
printed with decorative patterns. Paper laminates are used to replace materials
such as wood and tile for such applications as counter tops, furniture and
wallboard. TiO(2) is beneficial in these applications because it assists in
preventing the material from fading or changing color after prolonged exposure
to sunlight and other weathering agents.
53
TiO(2) FOR INKS AND TEXTILES. We produce TiO(2) to improve the opacity
and hiding power of printing inks. TiO(2) allows inks to achieve very high print
quality while not interfering with the technical requirements of printing
machinery, including speed and high temperatures. Our TiO(2) is also used in
textile applications. TiO(2) functions as an opacifying, brightening and
delustering agent. In man-made fibers such as rayon and polyester, TiO(2)
corrects undesirable characteristics such as glossy and translucent appearance.
Without the presence of TiO(2), these materials would be unsuitable for use in
many textile applications.
TiO(2) FOR OTHER APPLICATIONS. We produce high purity sulfate process
anatase TiO(2) used to provide opacity, whiteness and brightness in a variety of
cosmetic and personal care products, such as skin cream, lipstick, eye shadow
and toothpaste. Our TiO(2) is also found in food products, such as candy and
confectionary, and in pet foods where it is used to obtain uniformity of color
and appearance. In pharmaceuticals, our TiO(2) is used commonly as a colorant in
pill and capsule coatings as well as in liquid medicines to provide uniformity
of color and appearance. Kronos purified anatase grades meet the applicable
requirements of the CTFA (Cosmetics, Toiletries and Fragrances Association), USP
and BP (United States Pharmacopoeia and British Pharmacopoeia) and the FDA
(United States Food and Drug Administration).
TiO(2) is produced in two crystalline forms: rutile and anatase. Rutile
TiO(2) is a more tightly bound crystal that has a higher refractive index than
anatase TiO(2) and therefore better opacification and tinting strength in many
applications. Although many end-use applications can use either form of TiO(2),
rutile TiO(2) is the preferred form for use in certain coatings, plastics and
ink applications. Anatase TiO(2) has a bluer undertone and is less abrasive than
rutile TiO(2), and it is often preferred for use in paper, ceramics, rubber and
man-made fibers.
While we believe that currently there are no effective substitutes for
TiO(2) for use in the above applications, extenders such as kaolin clays,
calcium carbonate and polymeric opacifiers are used in a number of our markets.
Generally, extenders are used to reduce to some extent the use of higher-cost
TiO(2). The use of extenders has not significantly changed TiO(2) consumption
over the past decade because, to date, extenders generally have failed to match
the performance characteristics of TiO(2). As a result, we believe that the use
of extenders will not materially alter the growth of the TiO(2) business in the
foreseeable future.
We currently produce over 40 different TiO(2) grades, sold under the
Kronos(TM) trademark, which provide a variety of performance properties to meet
customers' specific requirements. Our major customers include domestic and
international paint, plastics and paper manufacturers.
We are also engaged in the mining and sale of ilmenite ore, a raw
material used as a feedstock by certain TiO(2) plants. Our mining operations
have an estimated annual production capacity of approximately 900,000 metric
tons, and we have estimated ilmenite reserves of at least 20 years at the
current rate of usage. In 2000 and 2001, we sold approximately 699,000 and
793,000 metric tons of ilmenite, respectively, of which 304,000 and 243,000
metric tons were used internally in our sulfate-process TiO(2) plants,
respectively, and 395,000 and 550,000 metric tons were sold to third-party
customers, respectively. The decrease in our internal usage in 2001 was
primarily due to a fire that occurred on March 20, 2001 that damaged a section
of our Leverkusen, Germany sulfate-process TiO(2) plant and temporarily halted
production at that plant. Approximately 4% of our consolidated net sales in 2000
and 7% in 2001 represented ilmenite sales to external customers.
In addition, we are engaged in the manufacture and sale of iron-based
water treatment chemicals worldwide (derived from co-products of pigment
production processes). Our water treatment chemicals (marketed under the name
ecochem(TM)) are used as treatment and conditioning agents for industrial
effluents and municipal wastewater, and in the manufacture of iron pigments.
Sales of water treatment chemicals were approximately 5% of our revenue in both
2000 and 2001.
THE TiO(2) INDUSTRY
The global TiO(2) industry is concentrated. We, along with our North
American affiliates and our five largest competitors (E.I. du Pont de Nemours &
Co.; Millennium Chemicals, Inc.; Huntsman International Holdings LLC; Kerr-McGee
Corporation; and Ishihara Sangyo Kaisha, Ltd.) account for approximately 80% of
worldwide TiO(2) production volume and approximately 86% of Western European
TiO(2) production volume. The TiO(2) industry has substantial requirements for
entry, including proprietary production technology and significant capital
54
investment. Currently, total global capacity is approximately 4.4 million metric
tons, according to International Business Management Associates. Based upon
current selling prices, the long lead times required for planning, obtaining
government approvals and construction and the fact that no new plants are
currently under construction, additional greenfield capacity is not expected in
the next three to five years. While we believe that current selling prices do
not support new greenfield capacity, it is likely that producers will continue
to increase capacity over the next several years through incremental
debottlenecking of existing facilities. According to International Business
Management Associates, prices of TiO(2) are expected to be positively impacted
by limited investment in new capacity over the next three to five years.
TiO(2) is considered a "quality-of-life" product with demand affected
by underlying global macroeconomic variables such as GDP growth, consumer
disposable income and population. According to International Business Management
Associates, since 1980, growth in TiO(2) consumption has averaged 2.9% per year
and did not decline during any two consecutive years. Although short-term
influences, such as customer and producer stocking and destocking activities,
may have distorted TiO(2)'s growth trend, over the long-term, GDP growth has
historically been the primary underlying factor influencing growth in TiO(2)
demand. Additionally, the TiO(2) industry experiences some seasonality in its
sales as paint sales generally peak during the spring and summer months in the
northern hemisphere, resulting in greater TiO(2) sales volume during the first
half of the year. Per capita consumption of TiO(2) in the United States and
Western Europe far exceeds that in other areas of the world and these regions
are expected to continue to be the largest consumers of TiO(2). TiO(2) demand in
other regions of the world could increase as these economies develop to the
point that "quality-of-life" products using TiO(2) become in greater demand.
The selling price of TiO(2) is significantly affected by industry
capacity and demand, with the last cyclical peak for TiO(2) prices having
occurred in late 2000 and the highest peak pricing for TiO(2) having occurred in
1990. Since late 2000 through early in the first quarter of 2002, weak economic
conditions worldwide have resulted in lower customer purchasing. Accordingly,
TiO(2) producers reduced their operating rates, and the selling prices of TiO(2)
declined. For example, our current TiO(2) prices in billing currencies are
approximately 8% below the five-year average and approximately 25% below their
historical high. Our average selling prices in billing currencies in June 2002
were approximately 16% lower than prices in November 2000.
In January 2002, we announced price increases in all major markets of
approximately 8% above existing December 2001 prices, a portion of which was
realized in the second quarter with additional price increases expected to be
realized in the third quarter of 2002. June 2002 prices in billing currencies
were up 1% over the average for the first six months of 2002 prices. Sales
volume for our TiO(2) in the first half of 2002 increased 15% over the 2001
comparable period. We believe that this strong demand is primarily attributable
to improved economic conditions, some seasonality and customers restocking their
inventory levels ahead of these price increases. We expect sales volume in the
second half of 2002 to be lower than in the first half of 2002. Also, in May
2002, we announced a second round of price increases of approximately 7% to 11%
for certain regions of the world, including Europe. We are hopeful that we will
realize a portion of the announced price increases during the fourth quarter of
2002. The extent to which any price increase will be realized will depend on
improving market conditions.
TiO(2) is manufactured using either the chloride or sulfate production
process. Although most end-use applications can use pigments produced by either
process, chloride process pigments are generally preferred in certain coatings
and plastics applications and sulfate process pigments are generally preferred
for paper, fibers and ceramics applications. Due to environmental factors and
customer considerations, the proportion of TiO(2) industry sales represented by
chloride process pigments has increased relative to sulfate process pigments. In
general, the chloride process is less intensive than the sulfate process in
terms of capital investment, labor and energy. Approximately 60% of global
production capacity (and approximately 62% of our production capacity) is based
on chloride process technology with the remainder thereof based upon the sulfate
process.
OUR COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
LEADING MARKET POSITIONS. We enjoy a leading market position in TiO(2),
which gives us an advantage over many of our competitors. Our predecessor
companies were the first TiO(2) producers in the world and have
55
manufactured TiO(2) for 86 years. We are the second largest producer of TiO(2)
in Europe and the largest in Germany, which has the largest economy in Europe.
We are also among the leading sellers of TiO(2) in the Scandinavian, Benelux,
Austrian and Swiss markets. We have a global presence through our parent,
Kronos, which sells our products in North America. We believe that our strong
presence in Western Europe strategically positions us to take advantage of
growth within the Eastern European markets.
STRONG CUSTOMER BASE. Our experience in and commitment to the TiO(2)
industry are known by our customers. We enjoy a high level of customer loyalty,
which helps us maintain our leading market positions. We have developed many
long-term customer relationships through our broad product offerings, packaging
flexibility, strong technical support and customer service. We currently have
over 4,000 customers, with the top ten customers accounting for approximately
23% of our sales and no individual customer accounting for more than 6% of our
sales. We also collaborate with our customers to develop new TiO(2) grades for
key applications.
BROAD PRODUCT RANGE. We have one of the broadest product offerings in
the TiO(2) industry. We supply grades made via both the chloride and the sulfate
processes. We offer over 40 different TiO(2) grades, including rutile, anatase
and non-pigmentary grades, surface treated and non-surface treated grades and
dry and paper slurry grades. We offer a variety of packaging options to meet our
customers' needs, including 25 kilogram plastic and paper bags, Intermediate
Bulk Containers in various sizes, bulk deliveries of dry pigments to our
customers' silos and slurried pigments to the paper industry. We use our product
offering and packaging flexibility to help differentiate ourselves from the
competition.
HIGH PERFORMANCE PRODUCTS. We have several key grades within our
product range that we believe have superior performance characteristics. We
supply the leading chloride grade used in the manufacture of PVC profiles in
Europe, which are used to construct window frames, doorframes, window shades and
siding. This grade, with over 30 years of proven performance, holds over 50% of
the market for European PVC profiles. Other applications where we believe we
hold a performance advantage include chloride grades for paper laminate
applications and engineering plastics and sulfate grades for photographic films;
purified anatase grades for the food, pharmaceutical and cosmetics markets; and
specialty anatase grades for the dry cell battery, capacitor, textile and fiber
markets. We believe that our customer relationships, the breadth of our product
offerings and the performance of our grades in several applications make it
difficult for competitive grades to win the favor of our customers.
PROPRIETARY CHLORIDE PRODUCTION TECHNOLOGY. We are the leading European
chloride process manufacturer, with annual chloride process capacity of
approximately 194,000 metric tons using proprietary technology. Certain of our
customers, including many in the paint and plastics industries, generally prefer
chloride process pigments in part due to higher durability, high temperature
tolerance and blue tone characteristics. Proprietary production technology is
also an important barrier to entry in the TiO(2) industry, as companies that
possess such chloride technology are reluctant to license it to competitors.
Through debottlenecking, we have increased our chloride capacity by 40% since
1994, including a debottlenecking project between 1996 and 1998 at our
Leverkusen, Germany facility, which added 20,000 metric tons of capacity.
Approximately 62% of our product is produced with this technology, while only
22% of competitors' capacity in Europe utilizes the chloride process.
EXPERIENCED MANAGEMENT TEAM. We are managed by an experienced and
motivated group of senior executive officers, with an average of 21 years of
experience in the chemical industry. In addition to our strong executive
management team, we have an experienced group of operating managers who work to
maintain our strong TiO(2) position.
CAPTIVE ILMENITE ORE MINING OPERATIONS. Our captive mining operations
provide us a reliable source of TiO(2) feedstock for our sulfate process
production plants at reduced cost, providing 100% of the ore required for these
plants. Nearly 40% of our mine's production is used internally, and the balance
is sold to other pigment and titanium slag producers at competitive prices
yielding profitable margins.
OUR STRATEGY
Our strategy is to increase value by:
56
o maximizing our earnings, cash flows and return on capital
employed by reducing costs, increasing efficiencies and
optimizing existing assets; and
o increasing our competitiveness by expanding our size and
market presence through internal growth initiatives and
technology innovation.
Specifically, to meet our goals, we strive to:
IMPROVE OPERATING EFFICIENCIES AND MARGINS. We believe that our
operations are among the most efficient in the industry. We continue to focus on
increasing manufacturing efficiencies through selected capital projects, process
improvement and best practices, in order to lower unit costs and improve our
margins. Our research and development, including process technology, focuses on
improving production processes, yields and qualities. These operating
efficiencies have been accomplished through aggressive operator training,
innovative technology changes and constant equipment improvements. For example,
we continue to improve our chloride plants' on-stream efficiency, and we
anticipate further maintenance cost reductions by extending by 40% to 50% the
time that the plants' chlorinators are in use, yielding annual maintenance
savings of approximately $4 million. We also have a newly designed acid scrubber
and newly designed pigment bag filter, which are expected to add approximately
nine additional production days per year per line. This is equivalent to
approximately 4,500 metric tons per year. Prudent personnel cost reductions are
a continuous effort, which over approximately the last six years have resulted
in an approximate 13% reduction in manufacturing and support staff personnel,
yielding annual savings of approximately $11 million. These cost reduction
programs have resulted in a significant improvement in our fixed cost structure
during a time when our production capacity has increased over 20%, leading to a
significant improvement in our margins. We intend to continue to use our
manufacturing expertise to lower costs, improve efficiency and enhance the
performance and reliability of our product line.
GROW THROUGH TECHNOLOGY AND INNOVATION. We continue to improve the
consistency of our grades and develop new grades for existing and new
applications to meet the needs of our customers and increase product life
cycles. For example, we have enhanced our product consistency and added new
grades for plastics, coatings, fiber and paper laminate applications.
Specifically, in plastics applications, one grade targeted for the growing
engineering plastic segment provides excellent masking of the natural yellowness
of engineering plastics at high temperatures. Two other plastic grades were
designed for use in a range of polyolefin plastic resin applications, as they
impart a desirable blue undertone to these resins. We have also developed a new
paper laminate grade that we expect to introduce later this year designed to
deliver higher opacity in this fast growing market segment.
DEBOTTLENECK EXISTING FACILITIES. Increasing our production capacity
with only moderate capital outlays continues to be a major goal. Without any new
plant or new line construction, our production capacity has increased 20% over
the last six years and we believe that our capacity can reach approximately
328,000 metric tons during 2004 as a result of additional debottlenecking that
can be achieved through low cost capital investment.
MANUFACTURING PROCESS AND RAW MATERIALS
We manufacture TiO(2) using both the chloride process and the sulfate
process. Approximately 62% of our current production capacity is based on our
chloride process, which generates less waste than the sulfate process. The
sulfate process is a batch chemical process that uses sulfuric acid to extract
TiO(2). Sulfate technology normally produces either anatase or rutile pigment.
The chloride process is a continuous process that utilizes chlorine to extract
rutile TiO(2). In general, the chloride process is also less intensive than the
sulfate process in terms of capital investment, labor and energy. Because much
of the chlorine is recycled and higher titanium-containing feedstock is used,
the chloride process produces less waste. Once an intermediate TiO(2) pigment
has been produced by either the chloride or sulfate process, it is "finished"
into products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive milling and micronizing.
Due to environmental factors and customer considerations, the
proportion of TiO(2) industry sales represented by chloride-process pigments has
increased relative to sulfate-process pigments and, in 2001, chloride-process
production facilities represented approximately 60% of global industry capacity.
57
A fire on March 20, 2001 damaged a section of our Leverkusen, Germany
35,000 metric ton sulfate-process TiO(2) plant and, as a result, production of
TiO(2) at the Leverkusen facility was temporarily halted. The fire did not enter
our adjacent chloride-process TiO(2) plant, but did damage certain support
equipment necessary to operate that plant. The damage to the support equipment
resulted in a temporary shutdown of the chloride-process TiO(2) plant. On April
8, 2001, repairs to the damaged support equipment were substantially completed
and full production resumed at the chloride-process TiO(2) plant. The
sulfate-process TiO(2) plant became approximately 50% operational in September
2001 and became fully operational in late October 2001. The damages to property
and the business interruption losses caused by the fire were covered by
insurance. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations" and note 14 to our consolidated
financial statements included elsewhere in this prospectus.
We produced 136,000 and 147,000 metric tons of TiO(2) in each of the
six months ended June 30, 2001 and 2002, respectively. We produced 272,000,
297,000 and 269,000 metric tons of TiO(2) in 1999, 2000 and 2001, respectively.
Our average production capacity utilization rate in 2001 was down from near full
capacity in 2000, primarily due to lost production volume resulting from the
Leverkusen fire and our decision to curtail production in the fourth quarter of
2001 as demand remained soft. We believe that our current annual attainable
production capacity is approximately 313,000 metric tons. We expect that with
low cost capital investment, our production capacity will be increased by
approximately 12,000 metric tons primarily at our chloride facilities and 3,000
metric tons at our sulfate facilities, bringing our capacity to approximately
328,000 metric tons during 2004.
The primary raw materials used in the TiO(2) chloride production
process are titanium-containing feedstock derived from beach sand ilmenite,
natural rutile ore, chlorine and coke. Chlorine and coke are available from a
number of suppliers. Titanium-containing feedstock suitable for use in the
chloride process is available from a limited number of suppliers around the
world, principally located in Australia, South Africa, Canada, India and the
United States.
Through our affiliates we purchase slag refined from ilmenite sand from
Richards Bay Iron and Titanium (Proprietary) Limited (South Africa), a 51%-owned
subsidiary of Rio Tinto plc (U.K.), under a long-term supply contract that
expires at the end of 2006. Natural rutile ore is purchased by our affiliates
primarily from Iluka Resources, Limited (Australia), a company formed through
the merger of Westralian Sands Limited (Australia) and RGC Mineral Sands, Ltd.,
under a long-term supply contract that expires at the end of 2004. We, through
our affiliates, do not expect to encounter difficulties obtaining long-term
extensions to existing supply contracts or replacement contracts prior to the
expiration of the contracts. We expect to meet our chloride feedstock
requirements over the next several years from raw materials purchased under
these contracts and extensions thereof.
The primary raw materials used in the TiO(2) sulfate production process
are titanium-containing feedstock derived primarily from rock and beach sand
ilmenite and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. Ore from our ilmenite mine is expected to supply all or
substantially all of our sulfate-process feedstock requirements for the
foreseeable future.
We believe that the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
We do not expect to experience any interruptions of our raw material supplies
because of our long-term supply contracts. However, political and economic
instability in certain countries from which we purchase our raw material
supplies could adversely affect the availability of feedstock. Any interruption
of supply or any price increase of raw materials could have a material adverse
effect on our business, financial conditions, results of operations or cash
flows. See "Risk Factors -- We have a limited number of suppliers for some our
raw materials, which could negatively affect us."
ORGANIZATION AND RELATIONSHIP WITH OUR PARENT COMPANY
We are a Delaware corporation registered in the commercial register of
the Federal Republic of Germany. Because our principal place of business is in
Germany, we are treated as a resident corporation of Germany for German tax
purposes. We conduct our operations primarily through our principal wholly-owned
subsidiaries, Kronos Germany, Kronos Belgium, Kronos Norway, Kronos UK and
Kronos Denmark, and our 94%-owned
58
subsidiary, Kronos France. We are a wholly-owned subsidiary of Kronos, which in
turn is a wholly-owned subsidiary of NL Industries, the world's fifth largest
producer of TiO(2). Kronos conducts its North American operations through its
principal wholly-owned subsidiaries, Kronos Louisiana, Kronos USA and Kronos
Canada (collectively, "Kronos' North American Subsidiaries").
NL Industries is a New Jersey corporation incorporated in 1891. The
common stock of NL Industries is listed on the New York Stock Exchange, Inc. and
NL Industries files annual, quarterly and current reports, proxy statements and
other information with the SEC. We were formed in 1988, and our principal
subsidiaries, Kronos Germany, Kronos Belgium and Kronos Norway, were initially
formed in 1927, 1954 and 1916, respectively. Kronos' North American Subsidiaries
process and sell TiO(2) in North America, and we and our subsidiaries sell
TiO(2) in North America through Kronos' North American Subsidiaries pursuant to
certain buy/sell agreements described below under "Certain Relationships and
Related Transactions." Kronos' North American Subsidiaries also sell TiO(2) in
Europe through us and our subsidiaries pursuant to such agreements. We and our
subsidiaries are also parties to other intercorporate agreements with NL
Industries and its affiliates, which agreements are described below under
"Certain Relationships and Related Transactions."
COMPETITION
The global markets in which we operate our business are highly
competitive. Competition is based on a number of factors, such as price, product
quality and service. Although certain TiO(2) grades are considered specialty
pigments, the majority of our grades and substantially all of our production are
considered commodity pigments with price generally being the most significant
competitive factor. We are the second largest producer of TiO(2) in Europe, the
leading producer and marketer of TiO(2) in Germany and among the leading
marketers of TiO(2) in the Benelux and Scandinavian markets. See "Risk Factors
- -- We sell our products in a mature and highly competitive industry and face
price pressure in the markets in which we operate."
Our principal competitors in Europe are: E.I. du Pont de Nemours & Co.;
Millennium Chemicals, Inc.; Huntsman International Holdings LLC; Kerr-McGee
Corporation; and Kemira Pigments. Our five largest competitors have estimated
individual shares of worldwide TiO(2) production capacity ranging from 23% to
5%, and, together with us and the Kronos North American Subsidiaries, an
estimated aggregate 80% share of worldwide TiO(2) production volume. Huntsman
International Holdings LLC is the largest producer in Europe.
Capacity additions through construction of greenfield plants in the
worldwide TiO(2) market require significant capital investment and substantial
lead time, typically three to five years. No greenfield plants are currently
under construction, but industry capacity can be expected to increase as we and
our competitors debottleneck existing plants. In addition to potential capacity
additions, certain competitors have announced that they have either idled or
shut down facilities.
No assurance can be given that future increases in TiO(2) industry
production capacity and future average annual demand growth rates for TiO(2)
will conform to our expectations. If actual developments differ from our
expectations, our and the TiO(2) industry's performance could be unfavorably
affected.
RESEARCH AND DEVELOPMENT
Our expenditures for research and development and certain technical
support programs have averaged approximately $6 million annually during the past
three years. Research and development activities are conducted principally at
our Leverkusen, Germany facility. Such activities are directed primarily toward
improving both the chloride and sulfate production processes, improving product
quality and strengthening our competitive position by developing new pigment
applications.
PATENTS AND TRADEMARKS
We believe that patents held for products and production processes are
important to us and to our continuing business activities. We and our affiliates
continually seek patent protection for our technical
59
developments, principally in the United States, Canada and Europe, and from time
to time enter into licensing arrangements with third parties.
There can be no assurance that any of our patents will not be
challenged, invalidated, circumvented or rendered unenforceable. See "Risk
Factors -- If our patents are declared invalid or our trade secrets become known
to our competitors, our ability to compete may be adversely affected."
Our major trademarks, including Kronos(TM) and ecochem(TM), are
protected by registration in Europe, the United States and elsewhere with
respect to the products we manufacture and sell.
OPERATIONS
We have operated in European markets since the 1920s. Our current
production capacity is located in Europe with our net property and equipment
aggregating $300.3 million at June 30, 2002. Our European operations include
production facilities in Germany, Belgium and Norway. Approximately $425 million
of our 2001 consolidated sales were to European customers and approximately $130
million of our 2001 consolidated sales were to customers in areas other than
Europe. Sales to customers in the U.S. through Kronos' North American
Subsidiaries pursuant to buy/sell agreements aggregated $32 million in 2001. Our
operations are subject to, among other things, currency exchange rate
fluctuations and our results of operations have, in the past, been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
Effects of fluctuations in currency exchange rates on our results of operations
are discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Our manufacturing and mining operations are also subject to extensive
and diverse environmental regulation in each of the foreign countries in which
we operate. See "Regulatory and Environmental Matters" below and "Risk Factors
- -- We are subject to many environmental and safety regulations that may result
in unanticipated costs or liabilities." In addition, political and economic
uncertainties in certain of the countries in which we operate may expose us to
risk of loss.
CUSTOMER BASE AND SEASONALITY
We believe that neither our aggregate sales nor those of any of our
principal product groups are concentrated in or materially dependent upon any
single customer or small group of customers. Our ten largest customers accounted
for approximately 23% of net sales in 2001. Neither our business as a whole nor
that of any of our principal product groups is seasonal to any significant
extent. Due in part to the increase in paint production in the spring to meet
the spring and summer painting season demand, TiO(2) sales are generally higher
in the first half of the year than in the second half of the year.
EMPLOYEES
As of June 30, 2002, we had approximately 1,950 employees, with
approximately 1,200, 300 and 430 employees in Germany, Belgium and Norway,
respectively, and approximately 20 employees elsewhere in Europe. Hourly
employees in production facilities worldwide are represented by a variety of
labor unions, with labor agreements having various expiration dates. We believe
that our labor relations are good.
REGULATORY AND ENVIRONMENTAL MATTERS
Certain of our businesses are and have been engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other
damage. We have implemented and continue to implement various policies and
programs in an effort to minimize these risks. Our policy is to maintain
compliance with applicable environmental laws and regulations at all of our
facilities and to strive to improve our environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, revisions of existing
permits or discovery of previously unknown conditions, could adversely affect
our
60
production, handling, use, storage, transportation, sale or disposal of such
substances as well as our consolidated financial position, results of operations
or liquidity.
Our production facilities operate in an environmental regulatory
framework in which governmental authorities typically are granted broad
discretionary powers that allow them to issue operating permits required for the
plants to operate. We believe that all of our plants are in substantial
compliance with such permits and other applicable environmental requirements.
Although the laws regulating operations of industrial facilities in
Europe vary from country to country, a common regulatory base is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. We believe that we have all
required permits and are in substantial compliance with applicable EU
requirements, including EU Directive 92/112/EEC regarding establishment of
procedures for reduction and eventual elimination of pollution caused by waste
from the TiO(2) industry.
At all of our plant facilities other than Fredrikstad, Norway, we
recycle our spent acid wastes either through contracts with third parties or
using our own facilities. We have a contract with a third party to treat spent
acid wastes of our German sulfate-process plants. With regard to our Nordenham,
Germany plant, either party may terminate the contract after giving four years
advance notice. Under certain circumstances, we may terminate the contract after
giving six months notice, with respect to treatment of effluents from the
Leverkusen, Germany plant.
We landfill waste we generate at our Nordenham, Germany and
Langerbrugge, Belgium plants, and mine tailings waste generated at our facility
in Norway. We maintain reserves, as required under GAAP, to cover the
anticipated cost of closure of these landfills, which were approximately $.4
million as of June 30, 2002. These requirements for our landfills are expected
to increase in the future in view of recently adopted EU requirements.
We are also responsible for certain closure costs at landfills used and
formerly used by our Leverkusen, Germany TiO(2) plants. We have a reserve of
approximately $6 million related to such landfills.
Our capital expenditures related to our ongoing environmental
protection and improvement programs were approximately $4.7 million in 2001, and
are currently expected to be approximately $3.8 million in 2002 and $3.6 million
in 2003.
PRINCIPAL SHAREHOLDERS
We are a wholly-owned subsidiary of Kronos, which, in turn, is a
wholly-owned subsidiary of NL Industries. At June 30, 2002, Valhi, Inc. and
Tremont Corporation, each of which is an affiliate of Contran Corporation, held
approximately 62% and 21%, respectively, of NL Industries' outstanding common
stock. At June 30, 2002, Contran Corporation and its subsidiaries held
approximately 93% of Valhi, Inc.'s outstanding common stock, and a company 80%
owned by Valhi, Inc. and 20% owned by NL Industries held approximately 80% of
Tremont Corporation's outstanding common stock. Substantially all of Contran
Corporation'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 the sole trustee. Mr. Simmons, the Chairman of the Board of NL
Industries, Chairman of the Board and Chief Executive Officer of Contran
Corporation, Chairman of the Board of Valhi, Inc. and a director of Tremont
Corporation, may be deemed to control each of such companies. For a discussion
of potential conflicts of interest that may arise in connection with our
ownership structure, see "Risk Factors -- Kronos and its affiliates may have
conflicts of interest with us, and these conflicts could adversely affect our
business." See also note 22 to the consolidated financial statements included
elsewhere in this prospectus.
PROPERTIES
We currently operate five TiO(2) plants in Europe (two in Leverkusen,
Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium; and one in
Fredrikstad, Norway). Our principal German operating subsidiary leases the land
under our Leverkusen TiO(2) production facility pursuant to a lease expiring in
2050. The Leverkusen facility, with about 50% of our current TiO(2) production
capacity, is located within an extensive
61
manufacturing complex owned by Bayer AG. Rent for the Leverkusen facility is
established by agreement with Bayer AG to be an amount agreed to be reasonable
by the parties for periods of at least two years at a time. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials including chlorine and sulfuric acid, auxiliary and operating
materials and utilities services necessary to operate the Leverkusen facility.
Currently, both the lease and the supplies and services agreement have certain
restrictions regarding our ability to transfer ownership or use of the
Leverkusen facility.
All of our principal production facilities described above are owned,
except for the land under the Leverkusen facility. We have a governmental
concession with an unlimited term to operate our ilmenite mine in Norway.
We lease corporate and administrative offices located in Leverkusen,
Germany and Brussels, Belgium as well as various sales offices located in
France, the Netherlands, Denmark and the U.K.
LEGAL PROCEEDINGS
Kronos Belgium and various of its employees are the subject of an
investigation by Belgian authorities relating to an accident resulting in two
fatalities that occurred in our Langerbrugge, Belgium facility in October 2000.
The initial stage of this investigation, which could ultimately result in civil
and criminal sanctions against Kronos Belgium, has been completed. It is
anticipated that this matter will continue in the investigative phase until the
end of 2002 or early 2003. We are also involved in various other claims and
disputes incidental to our business. While the resolution of the matters
described in this paragraph cannot be predicted with certainty, we believe that
the final outcome of such matters will not have a material adverse effect on our
financial position, results of operations or liquidity.
62
MANAGEMENT
The table below sets forth information about our directors and officers
as of August 31, 2002.
<Table>
<Caption>
NAME AGE PRINCIPAL POSITIONS AND DIRECTORSHIPS
- ---- --- -------------------------------------
Dr. Lawrence A. Wigdor.............. 60 Chief Executive Officer
Dr. Ulfert Fiand.................... 54 President, Manufacturing and Technology and Director
Dr. Henry Basson.................... 60 President, Sales and Marketing and Director
Dr. Ulrich Rothe.................... 52 Senior Vice President, Technology
Robert D. Hardy..................... 41 Vice President and Chief Financial Officer
Volker Roth......................... 57 Vice President, Controller, Secretary and Director
Andrew Kasprowiak................... 56 Vice President, Treasurer and Director
Dieter Rohrbeck..................... 46 Vice President, Human Resources and General Counsel
Joerg Kohlbecker.................... 53 Director, Environmental, Health and Safety
Werner Thiel........................ 57 President, Kronos Ecochem Division
</Table>
Dr. Lawrence A. Wigdor has served as our Chief Executive Officer since
2002. Dr. Wigdor has served as President and Chief Executive Officer of Kronos
and Executive Vice President of NL Industries since prior to 1996.
Dr. Ulfert Fiand has served as our President of Manufacturing and
Technology and Director since 2001. Dr. Fiand joined our company in 1988, and
has served as Group Leader and Director of Chloride Process Technology, Director
of Process Technology, and VP Production & Process Technology.
Dr. Henry Basson has served as our President of Sales and Marketing and
Director since 1997. From 1992 to 1997, Dr. Basson was President of Rheox
Europe, a former subsidiary of NL Industries. Prior to 1992, Dr. Basson held
positions in Sales, Marketing and General Management at Rohm and Haas Company.
Dr. Ulrich Rothe has served as our Senior Vice President of Technology
since 2001. Since prior to 1996, Dr. Rothe served as our Process Technology
Project Chemist, Project Manager and Superintendent for Waste Acid Concentration
Plant and Director of Process Technology.
Robert D. Hardy has served as our Vice President and Chief Financial
Officer since 2002. Since prior to 1996, Mr. Hardy has served in various
positions with Kronos and currently serves as Vice President and Chief Financial
Officer of NL Industries and Kronos.
Volker Roth has served as our Vice President, Controller and Secretary
and Director since 1992. Mr. Roth also serves as Company Manager of
Unterstutzungskasse Kronos Titan, GmbH and Kronos Chemie, GmbH, subsidiaries of
Kronos.
Andrew Kasprowiak joined us and our affiliates in 1986 and has served
as our Vice President, Treasurer and Director since 1998. Prior to this time, he
served in various positions with our affiliates, including General Manager and
European Treasurer of Kronos World Services NV/SA.
Dieter Rohrbeck has served as our Vice President of Human Resources and
General Counsel since joining us in 1998. Mr. Rohrbeck previously held various
positions in the German iron and steel industry since 1984, including human
resources manager since July 1993 for certain divisions of Thyssen Krupp Steel
AG.
Joerg Kohlbecker has served as our Director of Environmental, Health
and Safety since 1992. Prior to this time, Mr. Kohlbecker served as Computer
Engineer for Applications for Mobil Oil, sales engineer for Bellmer GmbH & Co.
KG and Senior Process Engineer for Krupp Koppers.
Werner Thiel has served as the President of our Kronos Ecochem Division
(formerly the Water Treatment Chemicals Division) since 1989.
63
COMPENSATION OF DIRECTORS
During 2001, no fees were paid to any director for service as a
director. Directors are reimbursed for reasonable expenses incurred in attending
board of directors and committee meetings.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION OF EXECUTIVE OFFICERS
The summary compensation table set forth below provides summary
information regarding annual and long-term compensation awarded to, earned by or
paid to or on behalf of our Chief Executive Officer and each of our other four
most highly compensated executive officers for services rendered to us during
the years ended December 31, 1999, 2000 and 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION(1) SECURITIES
---------------------- UNDERLYING
SALARY OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR (1) BONUS (#)(2)
- --------------------------- ---- -------- ------------ ------------
Dr. Lawrence A. Wigdor........................... 2001 $ 0 $ 600,000(3) 100,000
Chief Executive Officer 2000 0 1,500,000 100,000
1999 0 0 99,000
Robert D. Hardy.................................. 2001 0 250,000(3) 50,000
Vice President and Chief 2000 0 0 30,000
Financial Officer 1999 0 0 30,000
Dr. Ulfert Fiand................................. 2001 117,520 182,111 6,000
President, Manufacturing 2000 113,977 43,596 5,000
and Technology 1999 116,956 22,941 5,000
Dr. Henry Basson................................. 2001 154,747 76,755 6,000
President, Sales and 2000 159,097 129,186 5,000
Marketing 1999 176,670 87,204 7,500
Volker Roth...................................... 2001 104,005 86,514 2,000
Vice President, Controller 2000 108,729 23,935 1,500
and Secretary 1999 120,868 15,705 0
</Table>
- ----------
(1) Each of Dr. Wigdor and Mr. Hardy is also an executive officer of NL
Industries and Kronos and divides his business time among us and NL
Industries and other affiliates of NL Industries. As an executive
officer of NL Industries, each of Dr. Wigdor and Mr. Hardy receives
salary, bonus and other compensation from NL Industries. Dr. Wigdor and
Mr. Hardy are generally not compensated directly by us or our
subsidiaries. For the years 1999, 2000 and 2001, no portion of Dr.
Wigdor's and Mr. Hardy's salary was allocated to us. Beginning in 2002,
a portion of Dr. Wigdor's and Mr. Hardy's salary will be charged to us
based on business time devoted.
(2) Represents options to purchase shares of common stock of NL Industries.
None of these options for Dr. Wigdor or Mr. Hardy were charged to us,
nor do we expect that any such options will be charged to us in the
future. We are charged by NL Industries for options exercised by Dr.
Fiand, Dr. Basson and Mr. Roth based upon the market price of NL
Industries common stock at the date of exercise.
(3) Represents amounts paid by NL Industries and allocated to us.
64
STOCK OPTION GRANTS
The following table provides information with respect to the individual
stock option grants to purchase shares of common stock of NL Industries made to
the persons named in the summary compensation table under NL Industries' 1998
Long-Term Incentive Plan (the "Incentive Plan") during 2001.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
OPTIONS/ VALUE AT ASSUMED
NUMBER OF SARS EXERCISE ANNUAL RATES OF STOCK
SECURITIES GRANTED OR BASE PRICE APPRECIATION FOR
UNDERLYING TO PRICE OPTION TERM(3)
OPTION/SARS EMPLOYEES ($/SHARE) EXPIRATION -----------------------
NAME (#)(1) FISCAL YEAR (2) DATE 5%($) 10%($)
- ---- ----------- ----------- --------- ---------- ---------- ----------
Dr. Lawrence A. Wigdor................. 100,000 47.62% $20.11 2/7/11 $1,264,707 $3,205,016
Robert D. Hardy........................ 50,000 23.81% $20.11 2/7/11 632,354 1,602,508
Dr. Ulfert Fiand....................... 6,000 2.86% $20.11 2/7/11 75,882 192,301
Dr. Henry Basson....................... 6,000 2.86% $20.11 2/7/11 75,882 192,301
Volker Roth............................ 2,000 0.95% $20.11 2/7/11 25,294 64,100
</Table>
- ----------
(1) Options vest over five years from the date of grant at a rate of 40% on
the second anniversary of the date of grant and 20% on each of the next
three succeeding anniversary dates. Options expire on the tenth
anniversary date of the date of grant.
(2) The exercise price is equal to the mean of the high and low prices of
NL Industries' common stock on the New York Stock Exchange Composite
Tape on the date of grant.
(3) Pursuant to the rules of the SEC, these amounts reflect the
calculations at assumed 5% and 10% annual appreciation rates. Such
calculations are not intended to forecast future appreciation, if any,
and do not necessarily reflect the actual value, if any, that may be
realized. The actual value of such options, if any, would be realized
only upon the exercise of such options and depends upon the future
performance of NL Industries' common stock. No assurance can be made
that the amounts reflected in these columns will be achieved. The
potential realizable value was computed as the difference between the
appreciated value (at the end of the ten-year term of the options) of
NL Industries common stock into which these options are exercisable and
the aggregate exercise price of these options. The appreciated value
per share at the end of the ten-year term would be $32.76 and $52.16 at
the assumed 5% and 10% rates, respectively, with respect to these
options.
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the persons
named in the summary compensation table concerning the exercise of options
during 2001 and the value of unexercised options held as of December 31, 2001.
The options described in the following table are options to purchase shares of
common stock of NL Industries pursuant to the Incentive Plan. No stock
appreciation rights were granted during 2001.
AGGREGATED OPTION/SAR EXERCISES IN 2001 AND DECEMBER 31, 2001
OPTION/SAR VALUES
<Table>
<Caption>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT 12/31/01 AT 12/31/01
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(#) UNEXERCISABLE($)
- ---- ----------- ----------- ---------------- ----------------
Dr. Lawrence A. Wigdor......................... 0 0 163,600/310,400 118,549/227,914
Robert D. Hardy................................ 0 0 43,000/116,000 45,124/ 87,847
Dr. Ulfert Fiand............................... 2,300 21,416 0/ 14,000 0/ 17,226
Dr. Henry Basson............................... 0 0 11,800/ 19,500 26,002/ 26,660
Volker Roth.................................... 0 0 0/ 3,500 0/ 1,560
</Table>
65
PENSION PLAN
The following table provides information with respect to estimated
annual benefits payable upon retirement under The Kronos, Inc. (Belgium) Group
Insurance Plan (the "Pension Plan"), which provides lifetime retirement benefits
to eligible employees of Kronos in Belgium. Dr. Basson is the only named
executive officer covered by the Pension Plan.
PENSION PLAN TABLE
<Table>
<Caption>
YEARS OF SERVICE
---------------------------------------------------
15 20 25 30 35
------- ------- ------- ------- -------
REMUNERATION (IN U.S. DOLLARS)
- ------------
<s>
125,000........................................................ 31,560 42,079 52,599 63,119 73,639
150,000........................................................ 39,060 52,079 65,099 78,119 91,139
175,000........................................................ 46,560 62,079 77,599 93,119 108,639
200,000........................................................ 54,060 72,079 90,099 108,119 126,139
225,000........................................................ 61,560 82,079 102,599 123,119 143,639
250,000........................................................ 69,060 92,079 115,099 138,119 161,139
300,000........................................................ 84,060 112,079 140,099 168,119 196,139
400,000........................................................ 114,060 152,079 190,099 228,119 266,139
450,000........................................................ 129,060 172,079 215,099 258,119 301,139
500,000........................................................ 144,060 192,079 240,099 288,119 336,139
</Table>
Under the Pension Plan, each employee contributes 1% of 13.9 times his
or her gross monthly salary up to the social security wage base plus 5% of any
salary in excess of this amount. The Pension Plan provides a benefit equal to
(a) 70% or the average of such participant's annual salary (including additional
vacation pay and bonus) over the last three full years immediately preceding
retirement, less such participant's single person basic social security benefit,
multiplied by (b) a fraction, the numerator of which is such participant's years
of service up to 35 years and the denominator of which is 35. Benefits are
payable upon retirement and the attainment of ages specified in Pension Plan.
Dr. Basson has an estimated 9.75 years of service credited under the Pension
Plan. Benefits under the Pension Plan are computed as an annual straight life
annuity. The benefits listed in the pension plan table set forth above are net
of basic social security benefits.
Dr. Fiand and Mr. Roth are eligible to receive their pension through
Kronos Germany through the Bayer Pensionskasse and the Supplemental Pension
Promise. All of our employees in Germany (including wage earners) who have
contributed for five years and are less than 55 years of age are covered by the
Bayer Pensionskasse. Each employee contributes 2% of eligible earnings excluding
bonus, up to the social security contribution ceiling (currently E.54,000)
and the Bayer Pensionskasse provides a benefit of 44% of such employee's
accumulated contributions (with a minimum benefit of approximately E.13 per
month). All of our employees in Germany who have completed 10 years of service
are also covered by the Supplemental Pension Promise. Kronos Germany accrues
11.25% of participants' eligible annual earnings excluding bonus in excess of
the social security contribution ceiling, up to a maximum of E.98,500. The
Supplemental Pension Promise provides an annual retirement benefit of 20% of all
accruals made by Kronos Germany. Benefits for both plans are payable upon
retirement and the attainment of ages specified in the plans. No amounts were
paid or distributed under these plans to Dr. Fiand or Mr. Roth in 2001. The
estimated accrued annual benefits payable upon normal retirement at normal
retirement age for Dr. Fiand and Mr. Roth are E.23,440 and E.30,431,
respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation for the named executive officers is set by the management
development and compensation committee of the board of directors of NL
Industries. None of the named executive officers served on this committee during
2001.
66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As discussed above under "Business -- Principal Shareholders," we may
be deemed to be controlled by Harold C. Simmons. It is our policy to engage in
transactions with related parties on terms, in our opinion, no less favorable to
us than could be obtained from unrelated parties. See note 15 to the
consolidated financial statements included elsewhere in this prospectus.
The Indenture governing the notes contains certain restrictions on our
ability to enter into transactions with affiliates. See "Description of the New
Notes."
We share certain services and resources with Kronos and NL Industries,
and we rely on Kronos to supply some of our raw materials and to purchase a
portion of our products.
Certain of our sales are made to Kronos' North American Subsidiaries.
Such sales, consisting primarily of TiO(2), were $57 million in 1999, $54
million in 2000 and $39 million in 2001, and were $22 million in the first six
months of 2001 and $27 million in the first six months of 2002. The transfer
price for such TiO(2) sales is an amount equal to 95% of the North American
trade price less certain selling expenses and approximates the selling price
that would have been paid if the same product had been sold to our third-party
distributors.
We purchase a nominal amount of TiO(2) from Kronos' North American
Subsidiaries. Such purchases were $5 million in 1999, $7 million in 2000 and
$1 million in 2001, and were nil in the first six months of 2001 and 2002. The
transfer price for such TiO(2) purchases are determined in a manner similar to
our sales of TiO(2) to affiliates.
We purchase rutile feedstock used as a raw material in all of our
chloride process TiO(2) facilities from Kronos USA for use in our facilities for
an amount equal to the amount paid by Kronos to the third-party supplier plus a
2.5% administrative fee. Such feedstock purchases were $88 million in 1999,
$89 million in 2000 and $92 million in 2001, and were $43 million in the first
six months of 2001 and $35 million in the first six months of 2002.
We own certain technology and trademarks used in our TiO(2) business.
We have granted a perpetual license to Kronos' North American Subsidiaries to
use such technology and trademarks in their TiO(2) operations. Such license is
royalty-free other than with respect to Kronos Canada, from which we receive a
royalty based upon specified percentages of sales generated by Kronos Canada.
Royalty income from Kronos Canada was $6 million in each of 1999 and 2000,
$5 million in 2001, and was $3 million in each of the first six months of 2001
and 2002.
Kronos' North American Subsidiaries and certain other affiliates
provide certain management, financial, tax planning, risk management and other
administrative services to us on a fee basis. Such charges are based upon
estimates of the time devoted by the employees of the provider of the services
to our affairs, and the compensation of such persons. Because of the number of
companies affiliated with NL Industries, we believe that we benefit from cost
savings and economies of scale gained by not having certain management,
financial and administrative staffs duplicated at each entity, thus allowing
certain individuals to provide services to multiple companies but only be
compensated by one entity. Management fees we paid pursuant to these agreements
were $0.7 million in 1999, $0.2 million in each of 2000 and 2001, and were
$0.1 million in the first six months of 2001 and $0.6 million in the first six
months of 2002. In addition, Dr. Wigdor and Mr. Hardy, each of whom is one of
our officers, are also officers of NL Industries and Kronos. From time to time,
our employees may also provide certain engineering services to Kronos' Canadian
operations for which we are compensated based on a time-and-materials basis. The
amount received for providing such services has not been material.
We and Kronos are both members of NL Industries' consolidated U.S.
federal income tax group. As such, we are a party to an income tax sharing
agreement with Kronos. Effective January 1, 2001, the NL Industries tax group,
including us, is included in the consolidated U.S. federal income tax group of
Contran. As a member of the Contran tax group, NL Industries is a party to a
separate tax sharing agreement with Valhi. NL Industries' tax sharing agreement
with Valhi provides that NL Industries calculate its liability for U.S. income
taxes on a separate-company basis using the tax elections made by Contran.
During 2002, our tax sharing agreement with Kronos was amended pursuant to which
our liability for U.S. income taxes is computed on a separate-company basis
using tax
67
elections consistent with Kronos' tax elections. We will make distributions to
or receive contributions from Kronos in the amounts we would have paid to or
received from the U.S. Internal Revenue Service had we not been a member of the
NL Industries tax group, but rather a separate taxpayer. Any contribution we
would receive from Kronos under the amended tax sharing agreement is limited to
amounts we previously paid to Kronos under such agreement. We have never paid
any distributions to Kronos nor have we received any contributions from Kronos
under our tax sharing agreement with them. We would not have reported a
different provision for income taxes in 1999, 2000 and 2001 if the provision for
income taxes in such periods had been computed in accordance with the tax
allocation policy contained in our amended tax sharing agreement with Kronos.
See note 2 to the consolidated financial statements included elsewhere in this
prospectus.
We have certain indebtedness owed to NL Industries and its affiliates.
Such indebtedness is discussed in note 8 to the consolidated financial
statements included elsewhere in this prospectus. Interest expense on such
indebtedness was $30 million in 1999, $29 million in 2000 and $34 million in
2001, and was $14 million in the first six months of 2001 and $19 million in the
first six months of 2002.
We are party to master global Contran and NL Industries insurance
coverage policies with regard to property, business interruption, excess
liability and other coverages. The costs associated with these policies
aggregated $2.9 million, $3.1 million and $7.1 million in 1999, 2000 and 2001,
respectively.
The amounts receivable from and payable to affiliates are summarized in
note 15 to the consolidated financial statements included elsewhere in this
prospectus.
68
DESCRIPTION OF OUR SUBSIDIARIES' NEW CREDIT FACILITY
On June 25, 2002, two subsidiaries of Kronos Norway (Kronos Titan A/S
and Titania A/S), Kronos Germany and Kronos Belgium (collectively the "Bank
Borrowers") have entered into a new senior secured credit facility (the "New
Credit Facility") with a syndicate of banks led by Deutsche Bank AG.
GENERAL
The New Credit Facility provides for up to E.80 million in revolving
credit loans available to refinance our outstanding indebtedness and provide for
our ongoing operating needs. At June 30, 2002, the Bank Borrowers had
approximately E.40 million available for additional borrowing under that
facility. The New Credit Facility replaced existing bank arrangements in place,
and matures in three years.
GUARANTEES; SECURITY
The Bank Borrowers are subject to covenants under the New Credit
Facility, as will certain current and future subsidiaries, if any. Kronos
Norway, Kronos Germany and Kronos Belgium have guaranteed all outstanding
borrowings under the New Credit Facility. The New Credit Facility is secured
primarily by the working capital assets of the Bank Borrowers and a pledge of
the shares of Kronos Norway.
INTEREST; FEES
Interest under the New Credit Facility is payable at rates per annum
equal to EURIBOR plus 175 basis points. Unused commitment fees are due
quarterly. Undrawn commitment fees are 75 basis points per annum.
CONDITIONS AND EVENTS OF DEFAULT
The New Credit Facility contains affirmative and negative covenants
customary for agreements of this type, including, among others, covenants
restricting our ability to (i) incur additional indebtedness, (ii) create liens
on our assets, (iii) make certain investments and loans, (iv) consolidate, merge
or sell assets and (v) change the character of our business.
We are required to comply with certain financial tests and maintain
certain financial ratios. These financial tests and ratios include requirements
to maintain (i) a maximum leverage ratio and (ii) a minimum interest coverage
ratio (as defined in the loan documentation).
The New Credit Facility also includes customary events of default.
Events of default under the New Credit Facility include non-payment of
principal, interest or fees, violation of covenants, inaccuracy of
representations and warranties in any material respect, bankruptcy and
insolvency events, cross-defaults and a default in the event of a change of
control (as defined). An event of default under the facility will permit the
lenders to accelerate the maturity of indebtedness under the facility, and may
result in cross-defaults under other indebtedness of us or our subsidiaries.
69
DESCRIPTION OF THE NEW NOTES
The Company issued the old notes, and will issue the new notes, under
an indenture (the "Indenture") between itself and The Bank of New York, as
Trustee (the "Trustee"). The following is a summary of the material provisions
of the Indenture. It does not include all of the provisions of the Indenture. We
urge you to read the Indenture because it defines your rights. The terms of the
new notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"). We have filed the Indenture as an exhibit to the registration statement
of which this prospectus is a part and incorporate by reference that exhibit
into this prospectus. You can find definitions of certain capitalized terms used
in this description under "-- Certain Definitions." For purposes of this
section, references to the "Company" include only KII and not its Subsidiaries.
The new notes will be senior obligations of the Company, ranking
equally in right of payment with the old notes and all our other senior
indebtedness. The new notes will be secured by a senior Lien on 65% of the
Capital Stock of each of the first-tier operating Subsidiaries of the Company,
which is the same collateral that secures the old notes.
The Company will issue the new notes in fully registered form in
denominations of E.1,000 and integral multiples thereof. The Trustee will
initially act as Paying Agent and Registrar for the new notes. The new notes may
be presented for registration or transfer and exchange at the offices of the
Registrar. The Company may change any Paying Agent and Registrar without notice
to holders of the notes (the "Holders"). The Company will pay principal (and
premium, if any) on the new notes at the Trustee's corporate office in New York.
At the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of Holders. So long as the
new notes are listed on the Luxembourg Stock Exchange, the Company will maintain
a special agent or, as the case may be, a paying and transfer agent in
Luxembourg. Any new notes that remain outstanding after the completion of the
exchange offer, together with the new notes issued in connection with the
exchange offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
An aggregate principal amount of E.285 million of new notes will be
issued in the exchange offer. The new notes will mature on June 30, 2009.
Additional Notes may be issued from time to time, subject to the limitations set
forth under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness." Interest on the new notes will accrue at the rate of 8 7/8% per
annum and will be payable semiannually in cash on each June 30 and December 30
commencing on December 30, 2002, to the persons who are registered Holders at
the close of business on the June 15 and December 15 immediately preceding the
applicable interest payment date. Interest on the new notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The new notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
Optional Redemption. Except as described below, the new notes are not
redeemable before December 30, 2005. Thereafter, the Company may redeem the new
notes at its option, in whole or in part, upon not less than 30 nor more than 60
days notice, at the following redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve-month period (or, in the
case of the period commencing on December 30, 2008, six-month period) commencing
on December 30 of the year set forth below:
<Table>
<Caption>
YEAR PERCENTAGE
---- -----------
2005................................................................................ 104.437%
2006................................................................................ 102.958%
2007................................................................................ 101.479%
2008 and thereafter................................................................. 100.000%
</Table>
70
In addition, the Company must pay accrued and unpaid interest on the
notes redeemed.
Optional Redemption upon Public Equity Offerings. At any time, or from
time to time, on or prior to June 30, 2005, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem up to 35% of the principal amount of the notes issued under the
Indenture at a redemption price of 108.875% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of redemption; provided
that:
(1) at least 65% of the principal amount of notes issued under the
Indenture remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 90 days after
the consummation of any such Public Equity Offering.
"Public Equity Offering" means an underwritten public offering of
Qualified Capital Stock of the Company, Kronos or NL Industries pursuant to a
registration statement filed with the SEC in accordance with the Securities Act
(or pursuant to a similar or reasonably equivalent process in the European Union
or in any one or more states that are members of the European Union as of the
Issue Date or in Norway); provided that, in the event of a Public Equity
Offering by Kronos or NL Industries, such issuer directly or indirectly
contributes to the equity capital of the Company the portion of the net cash
proceeds of such Public Equity Offering necessary to pay the aggregate
redemption price (plus accrued interest to the date of redemption) of the notes
to be redeemed pursuant to the preceding paragraph.
Optional Redemption upon a Change of Control. At any time on or prior
to December 30, 2005, the notes may also be redeemed or purchased (by the
Company or any other Person) in whole but not in part, at the Company's option,
upon the occurrence of a Change of Control, at a price equal to 100% of the
principal amount thereof plus the Applicable Premium as of, and accrued but
unpaid interest, if any, to the date of redemption or purchase (the "Redemption
Date") (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date). Such redemption or
purchase may be made upon notice mailed by first-class mail to each Holder's
registered address, not less than 30 nor more than 60 days prior to the
Redemption Date (but in no event shall such notice be mailed more than 180 days
after the occurrence of such Change of Control). The Company may provide in such
notice that payment of such price and performance of the Company's obligations
with respect to such redemption or purchase may be performed by another Person.
Any such notice may be given prior to the occurrence of the related Change of
Control, and any such redemption, purchase or notice may, at the Company's
discretion, be subject to the satisfaction of one or more conditions precedent,
including but not limited to the occurrence of the related Change of Control.
"Applicable Premium" means, with respect to a note at any Redemption
Date, the greater of (i) 1.0% of the principal amount of such note and (ii) the
excess of (A) the present value at such Redemption Date of (1) the redemption
price of such note on December 30, 2005 (such redemption price being that
described in the first paragraph of this "Redemption" section) plus (2) all
required remaining scheduled interest payments due on such note through December
30, 2005, computed using a discount rate equal to the Adjusted Bund Rate, over
(B) the principal amount of such note on such Redemption Date. Calculation of
the Applicable Premium will be made by the Company or on behalf of the Company
by such Person as the Company shall designate; provided, however, that such
calculation shall not be a duty or obligation of the Trustee.
"Adjusted Bund Rate" means, with respect to any Redemption Date, the
mid-market yield, under the heading which represents the average for the
immediately prior week, appearing on Reuters page AABBUND01, or its successor,
for the maturity corresponding to June 30, 2009 (if no maturity date is within
three months before or after June 30, 2009, yields for the two published
maturities most closely corresponding to June 30, 2009 shall be determined and
the Bund yield shall be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month), plus 0.50%. The Bund Rate
shall be calculated on the third Business Day preceding such Redemption Date.
71
SELECTION AND NOTICE OF REDEMPTION
In the event that the Company chooses to redeem less than all of the
notes, selection of the notes for redemption will be made by the Trustee either:
(1) in compliance with the requirements of the principal
national securities exchange, if any, on which the notes are listed; or
(2) on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate.
No notes of a principal amount of E.1,000 or less shall be redeemed
in part. If a partial redemption is made with the proceeds of a Public Equity
Offering, the Trustee will select the notes only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to the procedures of
Euroclear and Clearstream). Notice of redemption will be mailed by first-class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of notes to be redeemed at its registered address. In the event notes are
to be redeemed, the Company will also publish a notice of redemption in
accordance with the procedures described under "-- Notices." On and after the
redemption date, interest will cease to accrue on notes or portions thereof
called for redemption as long as the Company has deposited with the Paying Agent
funds in satisfaction of the applicable redemption price.
HOLDING COMPANY STRUCTURE
The Company's assets consist primarily of investments in its operating
Subsidiaries. The Company's cash flow and its ability to service Indebtedness,
including the Company's ability to pay the interest on and principal of the
notes, depends upon the distribution of the earnings of its Subsidiaries,
whether in the form of dividends, partnership distributions, advances or
payments on account of intercompany obligations, to service its debt
obligations. In addition, the claims of the Holders are subject to the prior
payment of all liabilities (whether or not for borrowed money) and to any
preferred stock interest of such Subsidiaries of the Company. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets available from the Company and its Subsidiaries to satisfy the claims of
the Holders of notes. See "Risk Factors -- If our subsidiaries do not make
sufficient distributions to us, then we will not be able to make payments on our
debt, including the new notes" and "Risk Factors -- The new notes are secured
only by the pledge of 65% of the stock or other equity interests of certain of
our first-tier subsidiaries, and assets of our subsidiaries will first be
applied to repay indebtedness and liabilities of our subsidiaries and may not be
sufficient to repay the new notes."
In addition to the foregoing, the new notes will be structurally
subordinated in right of payment to all of the Indebtedness and other
liabilities of the Company's Subsidiaries, which, as of June, 30 2002, were
approximately $218.5 million (including approximately $49.9 million in deferred
income taxes) recorded on our historical balance sheet. Furthermore, the
Indebtedness of certain of the Company's Subsidiaries under the Credit Agreement
is secured by Liens on substantially all current assets of such Subsidiaries.
The new notes will not have the benefit of this collateral, nor any other assets
of the Company's Subsidiaries. Accordingly, if an event of default occurs under
the Credit Agreement, the lenders under the Credit Agreement will have a right
to such assets and may foreclose upon their collateral. In that case, such
assets would first be used to repay in full amounts outstanding under the Credit
Agreement and may not be available to repay the new notes. In the event of a
bankruptcy event affecting any of the Subsidiaries, local bankruptcy law would
be likely to apply. In general, such local bankruptcy law affords significant
protection for senior secured creditors and there can be no assurances that, in
the event of bankruptcy events affecting Subsidiaries of the Company, senior
secured creditors could take actions that would materially and adversely affect
the value of the Company's ongoing business and the equity value of such
Subsidiaries. The remaining value, if any, of the Company's assets may not be
sufficient to repay the new notes.
SECURITY
The new notes will be secured only by the pledge of 65% of the Capital
Stock of the Company's first-tier operating Subsidiaries, which is the same
collateral that secures the old notes. Each of the pledges securing the new
notes will be in favor of either the Trustee or a collateral agent appointed
under the Indenture and will be governed
72
by the local law of the jurisdiction where each of our pledged Subsidiaries are
formed; those jurisdictions are Denmark, France, Germany and the United Kingdom.
As a result, the validity of those pledges, and the ability of the Trustee or a
collateral agent, as applicable, or the Holders to realize any benefit
associated with the pledged shares, may be limited under applicable local law as
any action to enforce the stock pledges must be taken under the laws of the
applicable jurisdiction and such laws may differ in significant respects from
the laws of the United States. Furthermore, the rights of the Trustee or a
collateral agent, as applicable, or the Holders to foreclose upon and sell the
pledged shares upon the occurrence of a default will be subject to limitations
under applicable local bankruptcy laws if a bankruptcy proceeding were commenced
against the Company or its Subsidiaries. Any delay or inability to realize any
benefit associated with the Lien in any jurisdiction or the application of local
bankruptcy laws that are contrary to Holders' interests could have a material
adverse effect on the Lien we have granted on certain of the Company's
first-tier Subsidiaries and could result in an inability to realize the full
value of the share pledges entered into in connection with the issuance of the
notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the
right to require that the Company purchase all or a portion of such Holder's
notes pursuant to the offer described below (the "Change of Control Offer"), at
a purchase price in cash equal to 101% of the principal amount thereof plus
accrued interest to the date of purchase.
Within 60 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). In the event of a Change of Control, the Company will also
publish a notice of the offer to purchase in accordance with the procedures
described under "-- Notices." Holders electing to have a note purchased
pursuant to a Change of Control Offer will be required to surrender the note,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third business day prior to the Change of
Control Payment Date.
The Company will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change of Control
purchase price for all the notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive
the covenant relating to a Holder's right to redemption upon a Change of
Control. Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on its property, to make Restricted Payments and to make Asset Sales
may also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of the
notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company or any of its Subsidiaries by the management of
the Company. While such restrictions cover a wide variety of arrangements which
have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders protection in all circumstances from the
adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
73
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries that is, or, upon such incurrence, becomes, a Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and any
Restricted Subsidiary of the Company that is not or will not, upon such
incurrence, become a Guarantor may incur Acquired Indebtedness, in each case if
on the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.5 to 1.0.
The Company and any Restricted Subsidiary that is a Guarantor will not
incur any Indebtedness that is expressly subordinated to any senior Indebtedness
of the Company or any such Guarantor unless such Indebtedness is also expressly
subordinated on the same basis to the notes or any such guarantees.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution
(other than dividends or distributions payable in Qualified Capital
Stock of the Company) on or in respect of shares of the Company's
Capital Stock to holders of such Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value
any Capital Stock of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock;
(3) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund
payment, any Indebtedness of the Company that is subordinate or junior
in right of payment to the Notes; or
(4) make any Investment (other than Permitted Investments)
(each of the foregoing actions set forth in clauses (1), (2), (3) and
(4) being referred to as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto,
(i) a Default or an Event of Default shall have occurred and be
continuing; or
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; provided,
however, that for purposes of this clause (ii), the Consolidated Fixed Charge
Coverage Ratio of the Company, after giving effect to such Restricted Payment,
must be greater than 3.0 to 1.0; or
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(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market value
of such property as determined in good faith by the Board of Directors of the
Company) shall exceed the sum of:
(v) 75% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss) of the Company earned subsequent to the Issue Date and on or
prior to the date the Restricted Payment occurs (the "Reference Date")
(treating such period as a single accounting period); plus
(w) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Restricted Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and on
or prior to the Reference Date of Qualified Capital Stock of the
Company or warrants, options or other rights to acquire Qualified
Capital Stock of the Company (but excluding any debt security that is
convertible into, or exchangeable for, Qualified Capital Stock); plus
(x) without duplication of any amounts included in clause
(iii)(w) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's
Capital Stock (excluding, in the case of clause (iii)(w) and this
clause (iii)(x), any net cash proceeds from a Public Equity Offering to
the extent used to redeem the notes in compliance with the provisions
set forth under "Redemption -- Optional Redemption upon Public Equity
Offerings"); plus
(y) without duplication, the sum of:
(1) the aggregate amount returned in cash on or with
respect to Investments (other than Permitted Investments) made
subsequent to the Issue Date whether through interest
payments, principal payments, dividends or other distributions
or payments;
(2) the net cash proceeds received by the Company or
any of its Restricted Subsidiaries from the disposition of all
or any portion of Investments (other than Permitted
Investments) made subsequent to the Issue Date other than to a
Restricted Subsidiary of the Company; and
(3) upon redesignation of an Unrestricted Subsidiary
as a Restricted Subsidiary, the fair market value of such
Subsidiary; provided, however, that the sum of amounts
governed by clauses (1), (2) and (3) above shall first be
included under this clause (y) and, to the extent that the sum
of clauses (1), (2) and (3) above exceeds the aggregate amount
of all Investments (other than Permitted Investments) made
subsequent to the Issue Date, shall be included under clause
(v) above as included in Consolidated Net Income; plus
(z) $25 million.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date
of declaration of such dividend if the dividend would have been
permitted on the date of declaration;
(2) the acquisition or redemption of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application
of net proceeds of a substantially concurrent sale for cash (other than
to a Restricted Subsidiary of the Company) of shares of Qualified
Capital Stock of the Company;
(3) the acquisition or redemption of any Indebtedness of the
Company that is subordinate or junior in right of payment to the notes
either (i) solely in exchange for shares of Qualified Capital Stock of
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the Company or (ii) through the application of net proceeds of (a) a
substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company or (b) if no Default or Event of Default shall have occurred
and be continuing, Refinancing Indebtedness;
(4) so long as no Default or Event of Default shall have
occurred and be continuing, repurchases by the Company of Common Stock
of the Company (or options or warrants to purchase such Common Stock)
from directors, officers and employees of the Company or any of its
Subsidiaries or their authorized representatives upon the death,
disability, retirement or termination of employment of such directors,
officers and employees, in an aggregate amount not to exceed $3 million
in any calendar year;
(5) on or before 200 days after the Issue Date, the partial or
complete redemption of any one or more of (i) the 738 shares of the
Company's outstanding Series A Preferred Stock, $100 par value, (ii)
the 647 shares of the Company's outstanding Series B Preferred Stock,
$100 par value, and (iii) the 5,500,000 shares of the Company's
outstanding Profit Participation Certificates, DM100 par value, in each
case including any accrued and unpaid dividends thereon, using as
consideration the Company's notes or loans receivable from its
Affiliates and existing as of the Issue Date (including accrued and
unpaid interest thereon);
(6) on or before 200 days from the Issue Date, the partial or
complete conversion into Qualified Capital Stock of the Company of any
one or more of (i) the 738 shares of the Company's outstanding Series A
Preferred Stock, $100 par value, (ii) the 647 shares of the Company's
outstanding Series B Preferred Stock, $100 par value, and (iii) the
5,500,000 shares of the Company's outstanding Profit Participation
Certificates, DM100 par value, in each case including any accrued and
unpaid dividends thereon;
(7) on or before 200 days from the Issue Date, the dividend or
other transfer by the Company to Kronos of all or a portion of the
Company's notes or loans receivable from its Affiliates and existing as
of the Issue Date (including accrued and unpaid interest thereon);
(8) on or before 200 days from the Issue Date, the redemption
of any Qualified Capital Stock of the Company, using as consideration
all or a portion of the Company's notes receivable from Affiliates and
existing as of the Issue Date (including accrued and unpaid interest
thereon); and
(9) one or more Restricted Payments of the net proceeds from
the issuance and sale of the notes, on or promptly after the Issue Date
as set forth in, and for the purposes described under, "Use of
Proceeds" and, if any net proceeds remain after such Restricted
Payment(s), additional Restricted Payment(s), promptly after the Issue
Date, in an aggregate amount up to the amount of such remaining net
proceeds from such issuance and sale.
In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (iii) of the immediately
preceding paragraph, amounts expended pursuant to clauses (1), (2)(ii) (to the
extent included in the calculation of net cash proceeds in clause (iii)(w)
above), 3(ii)(a) (to the extent included in the calculation of net cash proceeds
in clause (iii)(w) above) and (4) shall be included in such calculation and
amounts expended pursuant to clauses (2)(i), (2)(ii) (to the extent not included
in the calculation of net cash proceeds in clause (iii)(w) above), (3)(i),
(3)(ii)(a) (to the extent not included in the calculation of net cash proceeds
in clause (iii)(w) above), 3(ii)(b), (5), (6), (7), (8) and (9) shall be
excluded from such calculation, in each case without duplication.
Limitation on Asset Sales. The Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale
at least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Company's Board of
Directors);
76
(2) at least 75% of the consideration received by the Company
or the Restricted Subsidiary, as the case may be, from such Asset Sale
shall be in the form of cash or Cash Equivalents and is received at the
time of such disposition; provided, however, that for the purposes of
this provision, the amount of any liability that would be shown on a
consolidated balance sheet of the Company or such Restricted
Subsidiary, as the case may be, in accordance with GAAP and immediately
prior to the time of such Asset Sale, other than liabilities that are
by their terms expressly subordinated to the notes, that are assumed by
the transferee of any such Asset Sale, will be deemed to be cash; and
(3) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 365 days of receipt thereof
either:
(a) to prepay any secured senior Indebtedness of the
Company or senior Indebtedness of a Restricted Subsidiary and,
in the case of any such senior Indebtedness under any
revolving credit facility, effect a permanent reduction in the
availability under such revolving credit facility;
(b) to acquire or otherwise make an investment or
enter into a binding commitment to acquire or otherwise make
an investment in properties and assets (including Capital
Stock) that replace the properties and assets (including
Capital Stock) that were the subject of such Asset Sale or in
properties and assets (including Capital Stock) that will be
used in the business of the Company and its Restricted
Subsidiaries as existing on the Issue Date or in businesses
reasonably related thereto ("Replacement Assets"); and/or
(c) a combination of prepayment and investment
permitted by the foregoing clauses (3)(a) and (3)(b).
On the 366th day after an Asset Sale or such earlier date, if any, as
the Board of Directors of the Company or of such Restricted Subsidiary
determines not to apply the Net Cash Proceeds relating to such Asset Sale as set
forth in clauses (3)(a), (3)(b) and (3)(c) of the preceding paragraph (each, a
"Net Proceeds Offer Trigger Date"), the aggregate amount of Net Cash Proceeds
which have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(a), (3)(b) and (3)(c) of the preceding paragraph (each
a "Net Proceeds Offer Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on
a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45
days following the applicable Net Proceeds Offer Trigger Date, from all Holders
on a pro rata basis, that amount of notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Restricted Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant.
Notwithstanding the foregoing provision, the Company and its Restricted
Subsidiaries may consummate an Asset Sale without complying with such provision
to the extent that (1) at least 80% of the consideration for such Asset Sale
constitutes Replacement Assets and (2) such Asset Sale is for fair market value.
Any consideration that does not constitute Replacement Assets that is received
by the Company or any of its Restricted Subsidiaries in connection with any
Asset Sale permitted under this paragraph will constitute Net Cash Proceeds and
will be subject to the provisions set forth in the preceding paragraph.
The Company or such Restricted Subsidiary may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $20 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $20 million, shall be applied as required pursuant to this
paragraph).
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In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," which transaction does not constitute a Change of Control,
the successor corporation shall be deemed to have sold the properties and assets
of the Company and its Restricted Subsidiaries not so transferred for purposes
of this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value of such properties and assets of the Company or its Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 25 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their notes in whole or in part in integral
multiples of E.1,000 in exchange for cash. To the extent Holders properly
tender notes in an amount exceeding the Net Proceeds Offer Amount, notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
After consummation of any Net Proceeds Offers, any Net Proceeds Offer
Amount not applied to any such purchase may be used by the Company for any
purpose permitted by the other provisions of the Indenture.
To the extent that any or all of the Net Cash Proceeds related to an
Asset Sale of a Restricted Subsidiary are prohibited or delayed by applicable
law from being repatriated (in the form of dividends, loans or otherwise) to the
Company, the portion of such Net Cash Proceeds so affected shall not be required
to be applied at the time provided above, but may be retained by the applicable
Restricted Subsidiary so long, but only so long, as such applicable law will not
permit repatriation to the Company (the Company having agreed to cause the
applicable Restricted Subsidiary to promptly take all actions required by the
applicable law to permit such repatriation). After such repatriation of any such
affected Net Cash Proceeds is permitted under such applicable law, such
repatriation shall be immediately effected and such repatriated Net Cash
Proceeds will be applied in a manner as described in this covenant.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to:
(1) pay dividends or make any other distributions on or in
respect of its Capital Stock;
(2) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary of
the Company; or
(3) transfer any of its property or assets to the Company or
any other Restricted Subsidiary of the Company,
except, in each case, for such encumbrances or restrictions existing under or by
reason of:
(a) applicable law;
(b) the notes or the Indenture;
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(c) customary non-assignment provisions of any contract or any
lease governing a leasehold interest of any Restricted Subsidiary of
the Company;
(d) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to properties or assets
other than the properties or assets so acquired;
(e) agreements existing on the Issue Date to the extent and in
the manner such agreements are in effect on the Issue Date and any
amendments, extensions, renewals or substitutions thereof provided that
the terms of such amendments, extensions, renewals or substitutions are
not materially more restrictive in the aggregate as determined by the
Board of Directors of the Company in its good faith judgment;
(f) customary restrictions in the Credit Agreement, to the
extent and in the manner in effect on the date of effectiveness
thereof, and customary restrictions in other agreements governing
Permitted Indebtedness to the extent such restrictions would not
reasonably be expected to have an adverse effect on the ability of the
Company to timely pay the principal and interest on the notes;
(g) customary restrictions on the transfer of assets subject
to any Lien permitted under the Indenture imposed by the holder of such
Lien;
(h) customary restrictions imposed by any agreement to sell
assets or Capital Stock permitted under the Indenture to any Person
pending the closing of such sale;
(i) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary
course of business;
(j) in the case of a joint venture or similar entity 50% owned
by the Company or a Restricted Subsidiary, customary provisions in
joint venture agreements and other similar agreements (in each case
relating solely to the respective joint venture or similar entity or
the equity interests therein) entered into in the ordinary course of
business; or
(k) an agreement governing Indebtedness incurred to Refinance
the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clause (b), (d), (e) or (f) above; provided, however,
that the provisions relating to such encumbrance or restriction
contained in any such Indebtedness are not materially more restrictive
in the aggregate as determined by the Board of Directors of the Company
in its good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such
clause (b), (d), (e) or (f).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
will not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom, unless:
(1) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the notes, the
notes are secured by a Lien on such property, assets or proceeds that
is senior in priority to such Liens; and
(2) in all other cases, the notes are equally and ratably
secured, except for:
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(a) Liens existing as of the Issue Date to the extent
and in the manner such Liens are in effect on the Issue Date
and any amendments, extensions, renewals or substitutions
thereof provided that the property subject to such Liens as
amended, extended, renewed or substituted is not materially
different from that initially subject to such Liens as
determined by the Board of Directors of the Company in their
good faith judgment;
(b) Liens securing Indebtedness under the Credit
Agreement;
(c) Liens securing senior Indebtedness incurred
pursuant to clauses (11) or (12) of the definition of
Permitted Indebtedness;
(d) Liens securing the notes and any Guarantees;
(e) Liens of the Company or a Wholly Owned Restricted
Subsidiary of the Company on assets of any Restricted
Subsidiary of the Company;
(f) Liens securing Indebtedness incurred to Refinance
any Indebtedness which has been secured by a Lien permitted
under the Indenture and which has been incurred without
violation of the Indenture; provided, however, that such Liens
do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the
Indebtedness so Refinanced; and
(g) Permitted Liens.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing
corporation; or
(b) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of
the Company and of the Company's Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity"):
(x) shall be a corporation organized and validly
existing under the laws of the United States, any State
thereof or the District of Columbia; and
(y) shall expressly assume, by supplemental indenture
(in form and substance satisfactory to the Trustee), executed
and delivered to the Trustee, the due and punctual payment of
the principal of, and premium, if any, and interest on all of
the notes and the performance of every covenant of the notes,
the Indenture and the Registration Rights Agreement on the
part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction and
the assumption contemplated by clause (1)(b)(y) above (including giving
effect to any Indebtedness and Acquired Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction), the Company or such Surviving Entity, as the case may be,
(a) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such
transaction and (b) shall be able to
80
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the "-- Limitation on Incurrence of
Additional Indebtedness" covenant;
(3) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (1)(b)(y)
above (including, without limitation, giving effect to any Indebtedness
and Acquired Indebtedness incurred or anticipated to be incurred and
any Lien granted in connection with or in respect of the transaction),
no Default or Event of Default shall have occurred or be continuing;
and
(4) the Company or the Surviving Entity shall have delivered
to the Trustee an officers' certificate and an opinion of counsel, each
stating that such consolidation, merger, sale, assignment, transfer,
lease, conveyance or other disposition and, if a supplemental indenture
is required in connection with such transaction, such supplemental
indenture comply with the applicable provisions of the Indenture and
that all conditions precedent in the Indenture relating to such
transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the notes with the same effect as if such
surviving entity had been named as such.
Without limiting any of the activities and transactions that Kronos
Titan-GmbH & Co. OHG, a partnership, may engage in or undertake consistent with
the Indenture, Kronos Titan-GmbH & Co. OHG may through a merger, consolidation
or other business combination transaction continue or succeed as a corporation
incorporated under the laws of Germany; provided that such transaction does not
adversely affect the Lien on the Capital Stock of Kronos Titan-GmbH & Co. OHG
for the benefit of the Holders.
Notwithstanding the foregoing, neither the Company nor any Subsidiary
will consolidate or merge with NL Industries or any successor to NL Industries.
Each Guarantor (other than any Guarantor whose Guarantee is to be
released in accordance with the terms of the Guarantee and the Indenture in
connection with any transaction complying with the provisions of "-- Limitation
on Asset Sales") will not, and the Company will not cause or permit any
Guarantor to, consolidate with or merge with or into any Person other than the
Company or any other Guarantor unless:
(1) the entity formed by or surviving any such consolidation
or merger (if other than the Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the European Union, any state
that is a member of the European Union on the Issue Date, the United
States, any State thereof, the District of Columbia or Norway;
(2) such entity assumes by supplemental indenture all of the
obligations of the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and
the use of any net proceeds therefrom on a pro forma basis, the Company
(a) shall have a Consolidated Net Worth equal to or greater
81
than the Consolidated Net Worth of the Company immediately prior to
such transaction and (b) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to
the "-- Limitation on Incurrence of Additional Indebtedness" covenant.
Any merger or consolidation of a Guarantor with and into the Company
(with the Company being the surviving entity) or another Guarantor need only
comply with clause (4) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than Affiliate
Transactions on terms that are no less favorable than those that might
reasonably have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company or such
Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $2 million
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $12.5 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
The restrictions set forth in the first paragraph of this covenant
shall not apply to, and the term "Affiliate Transactions" shall not include, any
of the following (each of the following being a "Permitted Affiliate
Transaction"):
(1) reasonable fees and compensation paid to and indemnity
provided on behalf of officers, directors, employees or consultants of
the Company or any Restricted Subsidiary of the Company as determined
in good faith by the Company's Board of Directors or senior management;
(2) transactions to the extent exclusively between or among
the Company and any of its Restricted Subsidiaries or to the extent
exclusively between or among such Restricted Subsidiaries, provided
such transactions are not otherwise prohibited by the Indenture;
(3) arrangements under the Company's transfer pricing
guidelines, the Services Agreement, dated as of January 1, 1995 (and
amended as of April 1, 2002) among NL Industries, Kronos (US), Inc. and
the Company, the Tax Agreement, dated as of May 28, 2002, by and
between Kronos and the Company, the United States Sales Agreement,
effective as of January 1, 1995, among Kronos (US), Inc., Rheox, Inc.,
the Company, Kronos Limited, Societe Industrielle du Titane, S.A.,
Kronos Titan-GmbH, Kronos Canada, Inc., Kronos B.V., Kronos Europe
S.A./N.V., Kronos Titan A/S, Rheox Limited, Rheox GmbH, Abbey Chemicals
Limited, Bentone-Chemie GmbH and Rheox Canada, a division of Rheox,
Inc., the United States Sales Agreement, effective as of January 1,
1995, among Kronos (US), Inc., Rheox, Inc., the Company, Kronos Europe
S.A./N.V., Kronos Canada, Inc., Kronos Titan GmbH, Rheox Limited, Rheox
GmbH and Kronos Titan A/S, the Assignment and Assumption Agreement,
dated as of January 1, 1999, by and between Kronos (US), Inc. and the
Company, the Amended and Restated Technology Transfer and License
Agreement, dated as of May 30, 1990, between Kronos and Kronos
Titan-GmbH, the Amended and Restated Technology, the Patent and
Trademark License Agreement, dated as of May 30, 1990, by and between
Kronos (US), Inc. and Kronos Europe S.A./N.V., the Amended and Restated
Technology, Patent and Trademark License Agreement, dated as of May 30,
1990, by and between Kronos (USA), Inc. and Kronos Canada, Inc., the
Cross License Agreement, effective January 1, 1999, between Kronos Inc.
(formerly known as Kronos (USA), Inc.) and the Company and the
Trademark Use Agreement, dated as of May 30, 1990, between Kronos, Inc.
(now Kronos (US), Inc.), Kronos (USA), Inc. (now Kronos, Inc.),
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Kronos Titan-GmbH and Kronos Titan A/S and amended effective as of
October 16, 1993 and January 1, 1999, in each case as in effect as of
the Issue Date or any amendment thereto or any transaction contemplated
thereby (including pursuant to any amendment thereto) in any
replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the Holders in any
material respect than the original agreement as in effect on the Issue
Date or is required by law or regulatory authority;
(4) purchases and sales of product and raw materials,
insurance arrangements and payments, all of the foregoing in the
ordinary course of business consistent with past practice or as may be
necessary to accommodate legal, regulatory or other changes in the
business of the Company and its Restricted Subsidiaries; and
(5) Restricted Payments (or Permitted Investments set forth in
clauses (4), (7) and (12) of the definition thereof) permitted by the
Indenture.
Limitation of Guarantees by Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries, directly or indirectly, by way of
the pledge of any intercompany note or otherwise, to assume, guarantee or in any
other manner become liable with respect to any Indebtedness of the Company or
any other Restricted Subsidiary of the Company (other than: (1) Indebtedness and
other obligations under the Credit Agreement; (2) Permitted Indebtedness of a
Restricted Subsidiary of the Company; (3) Indebtedness under Currency Agreements
or Commodity Agreements in reliance on clause (5) of the definition of Permitted
Indebtedness; or (4) Interest Swap Obligations incurred in reliance on clause
(4) of the definition of Permitted Indebtedness), unless, in any such case:
(1) such Restricted Subsidiary executes and delivers a
supplemental indenture to the Indenture, providing a guarantee of
payment of the notes by such Restricted Subsidiary; and
(2) if such assumption, guarantee or other liability of such
Restricted Subsidiary is provided in respect of Indebtedness that is
expressly subordinated to the notes (or a Guarantee of the notes), the
guarantee or other instrument provided by such Restricted Subsidiary in
respect of such subordinated Indebtedness shall be subordinated to the
Guarantee pursuant to subordination provisions no less favorable to the
Holders of the notes than those contained in such other Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the notes shall (and shall provide by its terms that it shall) be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon:
(1) the unconditional release of such Restricted Subsidiary
from its assumption, guarantee or other liability in respect of the
Indebtedness in connection with which such Guarantee was executed and
delivered pursuant to the preceding paragraph; or
(2) any sale or other disposition (by merger or otherwise) to
any Person which is not a Restricted Subsidiary of the Company of all
of the Capital Stock in, or all or substantially all of the assets of,
such Restricted Subsidiary; provided that (a) such sale or disposition
of such Capital Stock or assets is otherwise in compliance with the
terms of the Indenture and (b) such assumption, guarantee or other
liability of such Restricted Subsidiary has been released by the
holders of the other Indebtedness so guaranteed.
Provision of Security. The Company will not form, acquire or maintain
any direct Restricted Subsidiary (other than Kronos Chemie-GmbH and Kronos World
Services, S.A./N.V., so long as each such company shall have gross assets of
less than $3 million (net of assets contributed thereto for the express purposes
of expunging contingent liabilities), and any other direct Restricted Subsidiary
having gross assets of less than $1 million), unless, concurrently with the
formation, acquisition or maintenance of such Subsidiary, the Company shall
execute and deliver, or cause to be executed and delivered, to the Trustee for
the benefit of Holders, one or more pledge agreements, in form and substance
reasonably satisfactory to the Trustee, pursuant to which not less than 65% of
the
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Capital Stock of such Subsidiary is pledged to the Trustee for the benefit of
the Holders and the Company shall, concurrently therewith, execute and deliver
all documents, instruments and agreements in form and substance reasonably
satisfactory to the Trustee reasonably necessary in the opinion of the Trustee
to grant and maintain at all times a fully perfected senior Lien on the
collateral pledged pursuant to such pledge agreements.
Conduct of Business. The Company and its Restricted Subsidiaries will
not engage in any businesses which are not the same, similar or reasonably
related to, or ancillary or complementary to, the businesses in which the
Company and its Restricted Subsidiaries are engaged on the Issue Date.
Reports to Holders. The Indenture provides that, whether or not
required by the rules and regulations of the SEC, so long as any notes are
outstanding, the Company will furnish the Holders of notes (or make publicly
available through the SEC's electronic data gathering and retrieval ("EDGAR")
database):
(1) all quarterly and annual financial information that would
be required to be contained in a filing with the SEC on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" that describes the financial condition and
results of operations of the Company and its consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial
statements or in the footnotes thereto and in Management's Discussion
and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its
Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company,
if any) and, with respect to the annual information only, a report
thereon by the Company's certified independent accountants; and
(2) all current reports that would be required to be filed
with the SEC on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the SEC's
rules and regulations.
In addition, following the consummation of the exchange offer
contemplated by the Registration Rights Agreement, whether or not required by
the rules and regulations of the SEC, the Company will file a copy of all such
information and reports with the SEC for public availability within the time
periods specified in the SEC's rules and regulations (unless the SEC will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request. So long as the new notes are listed on
the Luxembourg Stock Exchange, copies of such reports shall be available at the
specified office of the Paying Agent and Transfer Agent in Luxembourg. In
addition, the Company has agreed that, for so long as any notes remain
outstanding, it will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Release of Security Upon Satisfaction of Conditions. The Company will
have the right to obtain a release of items of Collateral from the Lien of the
Collateral Documents (the "Released Collateral") subject to a sale or
disposition in accordance with the Indenture (including, without limitation, the
"-- Limitation on Transactions with Affiliates" covenant) and the Trustee will
release the Released Collateral from the Lien of the relevant Collateral
Documents and reconvey the Released Collateral to the Company immediately prior
to such sale or disposition upon compliance with the condition that the Company
deliver to the Trustee the following:
(a) an officers' certificate of the Company stating that (i)
all Net Cash Proceeds, if any, from the sale of any of the Released
Collateral will be applied pursuant to the provisions of the Indenture
in respect of Asset Sales, (ii) there is no Default or Event of Default
in effect and continuing on the date thereof, (iii) the release of the
Collateral and the sale or disposition will not result in a Default or
Event of Default under the Indenture and (v) all conditions precedent
in the Indenture relating to the release in question have been complied
with; and
(b) all documentation, if any, required by the TIA prior to
the release of the Released Collateral by the Trustee.
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The Indenture provides that the Company shall be entitled to obtain a
full release of all of the Collateral following legal defeasance or covenant
defeasance of the Indenture as described below under "-- Legal Defeasance and
Covenant Defeasance."
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of
Default":
(1) the failure to pay interest on any notes when the same
becomes due and payable and the default continues for a period of 30
days;
(2) the failure to pay the principal on any notes when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase notes
tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer);
(3) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default
continues for a period of 45 days after the Company receives written
notice specifying the default (and demanding that such default be
remedied) from the Trustee or the Holders of at least 25% of the
outstanding principal amount of the notes (except in the case of a
default with respect to the "Merger, Consolidation and Sale of Assets"
covenant, which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(4) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal
amount of any Indebtedness of the Company or any Restricted Subsidiary
of the Company, or the acceleration of the final stated maturity of any
such Indebtedness (which acceleration is not rescinded, annulled or
otherwise cured within 20 days of receipt by the Company or such
Restricted Subsidiary of notice of any such acceleration) if the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure
to pay principal at final maturity or which has been accelerated (in
each case with respect to which the 20-day period described above has
elapsed), aggregates $20 million or more at any time;
(5) the repudiation by the Company of any of its obligations
under any Collateral Document, or the unenforceability of any
Collateral Document against the Company if such unenforceability
reasonably would be expected to result in a material adverse effect on
the Liens granted by the Company pursuant to such Collateral Documents;
(6) one or more judgments in an aggregate amount in excess of
$20 million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid
or unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable; or
(7) certain events of bankruptcy affecting the Company or any
of its Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in
clause (6) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding notes
may declare the principal of and accrued interest on all the notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
If an Event of Default specified in clause (6) above with respect to
the Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding notes shall
ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
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The Indenture provides that, at any time after a declaration of
acceleration with respect to the notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the notes may rescind and
cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or
decree;
(2) if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due
solely because of the acceleration;
(3) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of
acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable
compensation and reimbursed the Trustee for its expenses, disbursements
and advances; and
(5) in the event of the cure or waiver of an Event of Default
of the type described in clause (6) of the description above of Events
of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or
waived. No such rescission shall affect any subsequent Default or
impair any right consequent thereto.
The Holders of a majority in principal amount of the notes may waive
any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest on
any notes.
Holders of the notes may not enforce the Indenture or the notes except
as provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding notes, except for:
(1) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the notes when such
payments are due;
(2) the Company's obligations with respect to the notes
concerning issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an office or
agency for payments;
(3) the rights, powers, trust, duties and immunities of the
Trustee and the Company's obligations in connection therewith; and
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(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
that are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, cash in Euros or Government
Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the notes on the stated date for payment thereof
or on the applicable redemption date, as the case may be and, in the
event that the Trustee at any time determines the amount on deposit is
insufficient to pay the principal of, premium, if any, and interest on
the notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be, the Company must irrevocably
deposit with the Trustee, in trust, for the benefit of the Holders,
additional cash in Euros or Government Securities, or a combination
thereof, in such amounts as will be, together with prior deposit(s),
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the notes on the stated date for payment thereof
or on the applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will
not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will
not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event
of Default resulting from the borrowing of funds to be applied to such
deposit and the granting of Liens to secure such borrowing and such
deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, the
Indenture or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound (other than a breach, violation or
default resulting from the borrowing of funds to be applied to such
borrowing and such deposit and the granting of Liens to secure such
deposit);
(6) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other
creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others;
87
(7) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent specified in the Indenture providing for or
relating to the Legal Defeasance or the Covenant Defeasance have been
complied with; and
(8) the Company shall have delivered to the Trustee an opinion
of counsel to the effect that:
(a) either (i) the Company has irrevocably assigned
all of its ownership interest in the trust funds to the
Trustee or (ii) the Trustee has a valid perfected security
interest in the trust fund; and
(b) assuming no intervening bankruptcy of the Company
between the date of deposit and the 91st day following the
date of deposit and that no Holder is an insider of the
Company, after the 91st day following the date of deposit, the
trust funds will not be subject to avoidance as a preference
under Section 547 of the U.S. Bankruptcy Code.
Notwithstanding the foregoing, the opinion of counsel required by
clause (2) above with respect to a Legal Defeasance need not be delivered if all
notes not theretofore delivered to the Trustee for cancellation (1) have become
due and payable or (2) will become due and payable on the maturity date within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the Indenture) as to all outstanding notes
when:
(1) either:
(a) all the notes theretofore authenticated and
delivered (except lost, stolen or destroyed notes which have
been replaced or paid and notes for whose payment money has
theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust) have been delivered to the Trustee
for cancellation; or
(b) all notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the
Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amount sufficient to pay and
discharge the entire Indebtedness on the notes not theretofore
delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the notes to the date of
deposit together with irrevocable instructions from the
Company directing the Trustee to apply such funds to the
payment thereof at maturity or redemption, as the case may be;
(2) the Company has paid all other sums payable under the
Indenture by the Company; and
(3) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of
the Holders, may amend the Indenture or Collateral Documents for certain
specified purposes, including curing ambiguities, defects or inconsistencies, so
long as such change does not, in the opinion of the Trustee, adversely affect
the rights of any of the Holders in any material respect. In formulating its
opinion on such matters, the Trustee will be entitled to rely
88
on such evidence as it deems appropriate, including, without limitation, solely
on an opinion of counsel. Other modifications and amendments of the Indenture or
Collateral Documents may be made with the consent of the Holders of a majority
in principal amount of the then outstanding notes issued under the Indenture,
except that, without the consent of each Holder affected thereby, no amendment
may:
(1) reduce the amount of notes whose Holders must consent to
an amendment;
(2) reduce the rate of or change or have the effect of
changing the time for payment of interest, including defaulted
interest, on any notes;
(3) reduce the principal of or change or have the effect of
changing the fixed maturity of any notes, or change the date on which
any notes may be subject to redemption or reduce the redemption price
therefor;
(4) make any notes payable in money other than that stated in
the notes;
(5) make any change in provisions of the Indenture protecting
the right of each Holder to receive payment of principal of and
interest on such note on or after the due date thereof or to bring suit
to enforce such payment, or permitting Holders of a majority in
principal amount of notes to waive Defaults or Events of Default;
(6) after the Company's obligation to purchase notes arises
thereunder, amend, change or modify in any material respect the
obligation of the Company to make and consummate a Change of Control
Offer in the event of a Change of Control or make and consummate a Net
Proceeds Offer with respect to any Asset Sale that has been consummated
or, after such Change of Control has occurred or such Asset Sale has
been consummated, modify any of the provisions or definitions with
respect thereto; or
(7) modify or change any provision of the Indenture or the
related definitions affecting the ranking of the Indebtedness evidenced
by the notes.
GOVERNING LAW
The Indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent person would exercise
or use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations
on the rights of the Trustee, should it become a creditor of the Company, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the Trustee will be permitted to engage in other transactions; provided
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
NOTICES
All notices shall be deemed to have been given by (1) the mailing by
first-class mail, postage prepaid, of such notices to Holders of the notes at
their registered addresses as recorded in the Register; and (2) so long as the
new notes are listed on the Luxembourg Stock Exchange and it is required by the
rules of the Luxembourg Stock Exchange, publication of such notice to the
holders of the new notes in English in a leading newspaper having
89
general circulation in Luxembourg (which is expected to be the Luxemburger Wort)
or, if such publication is not practicable, in one other leading English
language daily newspaper with general circulation in Europe, such newspaper
being published on each business day in morning editions, whether or not it
shall be published on Saturday, Sunday or holiday editions.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with or into the Company or
any of its Restricted Subsidiaries or assumed in connection with the acquisition
of assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation, except for Indebtedness of a Person or any of its Subsidiaries
that is repaid at the time such Person becomes a Restricted Subsidiary of the
Company or at the time it merges with or into the Company or any of its
Restricted Subsidiaries other than from the assets of the Company and its other
Restricted Subsidiaries.
"Affiliate" means, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Acquisition" means (1) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or of any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (2) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprise any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of: (1) any Capital Stock of any Restricted Subsidiary of the Company;
or (2) any other property or assets of the Company or any Restricted Subsidiary
of the Company other than in the ordinary course of business; provided, however,
that asset sales or other dispositions shall not include: (a) a transaction or
series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration of less than $2 million; (b) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of the Company as permitted under "Merger, Consolidation and
Sale of Assets"; (c) sales or grants of licenses to use the patents, trade
secrets, know-how and other intellectual property of the Company or any of its
Restricted Subsidiaries to the extent that any such license does not prohibit
the Company or any of its Restricted Subsidiaries from using any material
technologies licensed or require the Company or any of its Restricted
Subsidiaries to pay fees (other than de minimis fees) for use of any material
technologies; (d) the sale or discount, in each case without recourse, of
accounts receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof; (e) disposals or
replacements of obsolete, surplus or unused equipment in the ordinary course of
business; (f) any Restricted Payment not prohibited by the "Limitation on
Restricted Payments" covenant or that constitutes a Permitted Investment; (g)
the sale, lease, conveyance, disposition or other transfer of assets or Capital
Stock of Kronos Invest A/S or Capital Stock of Tinfoss Titan & Iron A/S to the
extent the aggregate consideration therefrom is less than $10 million; and (h)
Permitted Affiliate Transactions.
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"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means:
(1) with respect to any Person that is a corporation, any and
all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person, and all
options, warrants or other rights to purchase or acquire any of the
foregoing; and
(2) with respect to any Person that is not a corporation, any
and all partnership, membership or other equity interests of such
Person, and all options, warrants or other rights to purchase or
acquire any of the foregoing.
"Capitalized Lease Obligation" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or
unconditionally guaranteed by, the government of any member of the
European Union on the Issue Date or Norway or the United States
government or issued by any agency of any of the foregoing governments
and backed by the full faith and credit of any such member of the
European Union on the Issue Date or Norway or the United States, in
each case maturing within one year from the date of acquisition
thereof;
(2) marketable direct obligations issued by any member of the
European Union on the Issue Date or Norway or any state of the United
States of America or the District of Columbia or any political
subdivision of any such state or District or any public instrumentality
thereof maturing within one year from the date of acquisition thereof
and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Group ("S&P") or
Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a
rating of at least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing
within one year from the date of acquisition thereof and having, at the
time of acquisition, a rating of at least A-1 from S&P or at least P-1
from Moody's and issued by any bank organized under the laws of any
member of the European Union on the Issue Date or Norway or the United
States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250 million;
(5) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (1)
above entered into with any bank meeting the qualifications specified
in clause (4) above; and
(6) Investments in money market funds which invest
substantially all their assets in securities of the types described in
clauses (1) through (5) above.
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"Change of Control" means the occurrence of one or more of the
following events:
(1) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Company to any Person or group
of related Persons (other than the Permitted Holders) for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any
Affiliates thereof (whether or not otherwise in compliance with the
provisions of the Indenture);
(2) the approval by the holders of Capital Stock of the
Company of any plan or proposal for the liquidation or dissolution of
the Company (whether or not otherwise in compliance with the provisions
of the Indenture);
(3) any Person or Group (other than the Permitted Holders)
shall become the owner, directly or indirectly, beneficially or of
record, of shares representing more than 50% of the aggregate ordinary
voting power represented by the issued and outstanding Capital Stock of
the Company; or
(4) the replacement of a majority of the Board of Directors of
the Company over a two-year period from the directors who constituted
the Board of Directors of the Company at the beginning of such period,
and such replacement shall not have been (A) approved by a vote of at
least a majority of the Board of Directors of the Company then still in
office who either were members of such Board of Directors at the
beginning of such period or whose election as a member of such Board of
Directors was previously so approved or (B) approved by the Permitted
Holders so long as the Permitted Holders then beneficially own a
majority of the Capital Stock of the Company.
"Collateral" means, collectively, all of the property described under
"Security," together with all property that is from time to time subject to the
Lien of the Collateral Documents.
"Collateral Documents" means, collectively, the pledge agreements and
all other security agreements or instruments evidencing or creating any security
interests in favor of the Trustee for the benefit of the Holders in all or any
portion of the Collateral, in each case, as amended, amended and restated,
extended, renewed, supplemented or otherwise modified from time to time, in
accordance with the terms thereof and the Indenture.
"Commodity Agreements" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
any of its Restricted Subsidiaries and designed to protect the Company or any of
its Restricted Subsidiaries against fluctuations in the price of commodities
actually at that time used in the ordinary course of business of the Company or
its Restricted Subsidiaries.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any
period, the sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced
thereby:
(a) all income taxes of such Person and its
Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period;
(b) Consolidated Interest Expense; and
(c) Consolidated Non-cash Charges;
92
all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
(1) the incurrence or repayment of any Indebtedness of such
Person or any of its Restricted Subsidiaries (and the application of
the proceeds thereof) giving rise to the need to make such calculation
and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), other than the incurrence or
repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities,
occurring during the Four Quarter Period or at any time subsequent to
the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may
be (and the application of the proceeds thereof), occurred on the first
day of the Four Quarter Period; and
(2) any asset sales (other than disposals or replacements of
obsolete or unused equipment in the ordinary course of business) or
other dispositions or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary
as a result of the Asset Acquisition) incurring, assuming or otherwise
being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under
the Exchange Act) attributable to the assets which are the subject of
the Asset Acquisition or asset sale or other disposition during the
Four Quarter Period) occurring during the Four Quarter Period or at any
time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such asset sale or other
disposition or Asset Acquisition (including the incurrence, assumption
or liability for any such Acquired Indebtedness) occurred on the first
day of the Four Quarter Period. If such Person or any of its Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a third
Person, the preceding sentence shall give effect to the incurrence of
such guaranteed Indebtedness as if such Person or any Restricted
Subsidiary of such Person had directly incurred or otherwise assumed
such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes
of determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to
be so determined thereafter shall be deemed to have accrued at a fixed
rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be
deemed to accrue at the rate per annum resulting after giving effect to
the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all dividend payments on
any series of Preferred Stock of such Person (other than dividends paid
in Qualified Capital Stock) paid, accrued or scheduled to be paid or
accrued during such period times (y) a fraction, the numerator of which
is one and the denominator of
93
which is one minus the then current effective consolidated federal,
state and local income tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and
its Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without
limitation: (a) any amortization of debt discount and amortization or
write-off of deferred financing costs; (b) the net cash costs under
Interest Swap Obligations; (c) all capitalized interest; and (d) the
interest portion of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and
its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom:
(1) after-tax gains from Asset Sales (without regard to the $2
million limitation set forth in the definition thereof) or abandonments
or reserves relating thereto;
(2) after-tax items classified as extraordinary gains in
accordance with GAAP;
(3) the net income of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted Subsidiary of
the referent Person;
(4) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of dividends
or similar distributions by that Restricted Subsidiary of that income
is restricted by a contract, operation of law or otherwise; provided,
however, that if the Restricted Subsidiary is able despite any such
restriction to distribute income or otherwise transfer cash to the
referent Person by way of an intercompany loan or otherwise, then such
income or cash, to the extent of such ability, shall not be excluded
pursuant to this clause (4);
(5) the net income of any Person, other than a Restricted
Subsidiary of the referent Person, except to the extent of cash
dividends or distributions paid to the referent Person or to a Wholly
Owned Restricted Subsidiary of the referent Person by such Person;
(6) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during such
period whether or not such operations were classified as discontinued);
provided, however, that such income or loss shall be included in
Consolidated Net Income for the purpose of calculating Consolidated Net
Income of the Company in clause (iii)(v) of the "Limitation on
Restricted Payments" covenant;
(7) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's
assets, any earnings of the successor corporation prior to such
consolidation, merger or transfer of assets;
(8) non-cash charges relating to compensation expense in
connection with benefits provided under employee stock option plans,
restricted stock option plans and other employee stock purchase or
stock incentive plans; and
94
(9) income or loss attributable solely to fluctuations in currency
values and related tax effects, in either case related to notes and
accounts payable existing prior to or as of the Issue Date and payable to
Affiliates of the Company.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for
any period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net Income
of such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Credit Agreement" means the E.80 million Facility Agreement, dated
June 25, 2002, among Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V.,
Kronos Titan A/S and Titania A/S, the lenders party thereto in their capacities
as lenders thereunder, and Deutsche Bank AG, as agent, together with the related
documents thereto (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant
above) or adding Restricted Subsidiaries of the Company as additional borrowers
or guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable, in either case at the option of the
holder thereof), or upon the happening of any event (other than an event which
would constitute a Change of Control), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole
option of the holder thereof (except, in each case, upon the occurrence of a
Change of Control) on or prior to the final maturity date of the notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom is
under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of the
Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
95
"Government Securities" means securities issued or directly and fully
guaranteed or insured by the government of any member of the European Union on
the Issue Date rated AAA or above.
"Guarantor" means each of the Company's Restricted Subsidiaries that in
the future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor; provided that
any Person constituting a Guarantor as described above shall cease to constitute
a Guarantor when its respective Guarantee is released in accordance with the
terms of the Indenture.
"Indebtedness" means with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
and all Obligations under any title retention agreement (but excluding
from all of the foregoing trade accounts payable and other accrued
liabilities arising in the ordinary course of business;
(5) all Obligations for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit
transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause
(8) below;
(7) all Obligations of any other Person of the type referred
to in clauses (1) through (6) which are secured by any Lien on any
property or asset of such Person, the amount of such Obligation being
deemed to be the lesser of the fair market value of such property or
asset or the amount of the Obligation so secured;
(8) Obligations under Currency Agreements, Interest Swap
Obligations of such Person and Commodity Agreements; and
(9) all Disqualified Capital Stock issued by such Person with
the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price, but
excluding accrued dividends, if any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock.
"Independent Financial Advisor" means a firm: (1) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company; and (2) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for
96
periodic payments made by such other Person calculated by applying a fixed or a
floating rate of interest on the same notional amount and shall include, without
limitation, interest rate swaps, caps, floors, collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude (i) extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be, provided that nothing in this clause shall
prevent the Company or any Restricted Subsidiary from providing such
concessionary trade terms as management deems reasonable in the circumstances;
and (ii) loans or extensions of credit which otherwise are Permitted Affiliate
Transactions. If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, at least 50% of
the outstanding Common Stock of such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means June 28, 2002, the date of original issuance of the
old notes.
"Kronos" means Kronos, Inc., a Delaware corporation.
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions);
(2) taxes paid or payable or reasonably reserved for after
taking into account any reduction in consolidated tax liability due to
available tax credits or deductions and any tax sharing arrangements;
(3) repayment of Indebtedness that is secured by the property
or assets that are the subject of such Asset Sale; and
(4) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in accordance
with GAAP, against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may
be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"Net Proceeds Offer" shall have the meaning set forth under "--
Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" shall have the meaning set forth
under "-- Limitation on Asset Sales."
"NL Industries" means NL Industries, Inc., a New Jersey corporation,
and its successors.
97
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Affiliate Transaction" shall have the meaning set forth
under "Limitations on Transactions with Affiliates."
"Permitted Holder(s)" means (1) Harold C. Simmons ("Simmons"), (2) any
trust established primarily for the benefit of Simmons or members of his family
(including his spouse and/or his descendants (whether natural or adopted)) or
both ("Simmons Trust"), (3) trustees, acting in such capacity, or beneficiaries
of a Simmons Trust to the extent of the beneficial interest therein and for so
long as such Simmons Trust exists ("Simmons Beneficiaries and Trustees"), (4) NL
Industries, (5) any employee plan or pension fund of NL Industries, the Company
or any of their Subsidiaries, (6) any Person holding Capital Stock for or
pursuant to the terms of any such plan or fund and (7) any Person controlled by,
or any group made up of, any one or more of the Persons specified in (1) through
(6) above.
"Permitted Indebtedness" means, without duplication, each of the
following:
(1) Indebtedness under the notes in an aggregate principal
amount not to exceed E.285 million and Guarantees in respect thereof;
(2) Indebtedness incurred pursuant to the Credit Agreement in
an aggregate principal amount at any time outstanding not to exceed
E.80 million less the amount of any principal payments made by the
Company under the Credit Agreement with the Net Cash Proceeds of any
Asset Sale (which are accompanied by a corresponding permanent
commitment reduction) pursuant to clause 3(a) of the first sentence of
"-- Limitation on Asset Sales" or under clause (3) of the definition
of Net Cash Proceeds);
(3) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date;
(4) Interest Swap Obligations of the Company or any Restricted
Subsidiary of the Company covering Indebtedness of the Company or any
of its Restricted Subsidiaries; provided, however, that such Interest
Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on its
outstanding Indebtedness to the extent the notional principal amount of
such Interest Swap Obligation does not, at the time of the incurrence
thereof, exceed the principal amount of the Indebtedness to which such
Interest Swap Obligation relates;
(5) Indebtedness under Commodity Agreements and Currency
Agreements; provided that in the case of Currency Agreements which
relate to Indebtedness, such Currency Agreements do not increase the
Indebtedness or trade payables (as applicable) of the Company and its
Restricted Subsidiaries outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(6) Indebtedness of a Restricted Subsidiary of the Company to
the Company or to a Restricted Subsidiary of the Company for so long as
such Indebtedness is held by the Company or a Restricted Subsidiary of
the Company, in each case subject to no Lien held by a Person other
than the Company or a Restricted Subsidiary of the Company or lenders
in respect of the Credit Agreement or other Permitted Indebtedness;
provided that if as of any date any Person other than the Company or a
Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person other than the Company or a Restricted
Subsidiary of the Company or lenders in respect of the Credit Agreement
or other Permitted Indebtedness holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the issuer of such
Indebtedness pursuant to this clause (6);
(7) Indebtedness of the Company to a Restricted Subsidiary of
the Company for so long as such Indebtedness is held by a Restricted
Subsidiary of the Company, in each case subject to no Lien other than a
Lien of the lenders in respect of the Credit Agreement or other
Permitted Indebtedness of such
98
Restricted Subsidiary; provided that if as of any date any Person other
than a Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person other than the lenders in respect of the
Credit Agreement or other Permitted Indebtedness of such Restricted
Subsidiary holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the Company pursuant to this clause (7);
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business; provided,
however, that such Indebtedness is extinguished within two business
days of incurrence;
(9) Indebtedness of the Company or any of its Restricted
Subsidiaries in respect of bid, payment or performance bonds, bankers'
acceptances, workers' compensation claims, surety or appeal bonds,
payment obligations in connection with self-insurance or similar
obligations, and bank overdrafts (and letters of credit in respect
thereof) and commercial letters of credit, in all such cases in the
ordinary course of business;
(10) Refinancing Indebtedness;
(11) additional Indebtedness of the Company in an aggregate
principal amount not to exceed $20 million at any one time outstanding;
(12) additional Indebtedness of one or more Restricted
Subsidiaries of the Company in an aggregate principal amount not to
exceed $20 million at any one time outstanding (which amount may, but
need not, be incurred in whole or in part under the Credit Agreement);
(13) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of
customary purchase price adjustments in connection with the acquisition
or disposition of assets; and
(14) Indebtedness represented by Capitalized Lease Obligations
and Purchase Money Indebtedness of the Company and its Restricted
Subsidiaries incurred in the ordinary course of business not to exceed
$15 million at any one time outstanding.
For purposes of determining compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the categories of Permitted
Indebtedness described in clauses (1) through (14) above or is entitled to be
incurred pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of
such covenant, the Company shall, in its sole discretion, classify (or later
reclassify) such item of Indebtedness in any manner that complies with such
covenant. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, the payment of dividends on Disqualified
Capital Stock in the form of additional shares of the same class of Disqualified
Capital Stock, and changes in the amount outstanding due solely to fluctuations
in currency exchange rates, will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Capital Stock for purposes of the
"Limitations on Incurrence of Additional Indebtedness" covenant.
"Permitted Investments" means, without duplication:
(1) Investments by the Company or any Restricted Subsidiary of
the Company in any Person that is or will become immediately after such
Investment a Restricted Subsidiary of the Company or that will merge or
consolidate into the Company or a Restricted Subsidiary of the Company;
(2) Investments in the Company by any Restricted Subsidiary of
the Company;
(3) Investments in cash and Cash Equivalents;
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(4) loans and advances to employees and officers of the
Company and its Restricted Subsidiaries in the ordinary course of
business for bona fide business purposes;
(5) Commodity Agreements, Currency Agreements and Interest
Swap Obligations entered into in the ordinary course of the Company's
or its Restricted Subsidiaries' businesses and otherwise in compliance
with the Indenture;
(6) additional Investments not to exceed $20 million at any
one time outstanding;
(7) Investments existing on the Issue Date;
(8) Investments resulting from settlements or compromises of
accounts receivable or trade payables in the ordinary course of
business, Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such trade creditors or customers
or in good faith settlements of delinquent obligations of such trade
creditors or customers;
(9) Investments made by the Company or its Restricted
Subsidiaries as a result of consideration received or investments
deemed made in connection with an Asset Sale made in compliance with
the "Limitation on Asset Sales" covenant;
(10) Investments represented by guarantees that are otherwise
permitted under the Indenture;
(11) Investments the payment for which is Qualified Capital
Stock of the Company; and
(12) Investments by the Company consisting of loans to one or
more officers, directors or other employees of the Company or any of
its Subsidiaries in connection with such officers', directors' or
employees' acquisition of shares of Capital Stock of the Company or its
Affiliates, pursuant to the exercise of stock options or in connection
with other equity-based compensation.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or
claims either (a) not delinquent or (b) contested in good faith by
appropriate proceedings and as to which the Company or its Restricted
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(3) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment
insurance and other types of social security, including any Lien
securing letters of credit issued in the ordinary course of business
consistent with past practice in connection therewith, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds,
bids, performance bonds, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money), or to secure letters of
credit, bankers' acceptances, payment obligations in connection with
self-insurance or similar obligations and bank overdrafts (and letters
of credit in respect thereof), in each case in the ordinary course of
business;
(4) judgment Liens not giving rise to an Event of Default so
long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such
judgment shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
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(5) easements, rights-of-way, zoning restrictions and other
similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of its Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized
Lease Obligation; provided that such Liens do not extend to any
property or assets which is not leased property subject to such
Capitalized Lease Obligation;
(7) purchase money Liens to finance the construction,
acquisition, repair of or improvements or additions to property or
assets of the Company or any Restricted Subsidiary of the Company, in
each case in the ordinary course of business; provided, however, that
(a) the related purchase money Indebtedness shall not exceed the cost
of such property or assets and shall not be secured by any property or
assets of the Company or any Restricted Subsidiary of the Company other
than the property and assets so acquired and (b) the Lien securing such
Indebtedness shall be created within 90 days of such construction,
acquisition, repair, improvement or addition;
(8) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person
to facilitate the purchase, shipment or storage of such inventory or
other goods;
(9) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other
property relating to such letters of credit in the ordinary course of
business and products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual, or warranty
requirements of the Company or any of its Restricted Subsidiaries,
including rights of offset and set-off;
(11) Liens securing Interest Swap Obligations that relate to
Indebtedness that is otherwise permitted under the Indenture;
(12) Liens securing Indebtedness under Commodity Agreements or
Currency Agreements;
(13) Liens securing Acquired Indebtedness incurred in
accordance with the "Limitation on Incurrence of Additional
Indebtedness" covenant; provided that:
(a) such Liens secured such Acquired Indebtedness at
the time of and prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the
Company and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company; and
(b) such Liens do not extend to or cover any property
or assets of the Company or of any of its Restricted
Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness
became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company;
(14) leases, subleases, licenses and sublicenses granted to
others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries;
(15) banker's Liens, rights of setoff and similar Liens with
respect to cash and Cash Equivalents on deposit in one or more bank
accounts in the ordinary course of business;
(16) Liens arising from filing Uniform Commercial Code
financing statements (or similar or equivalent notice-type filings in
jurisdictions in which the Uniform Commercial Code has not been adopted
or adopted in substantial part) regarding leases;
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(17) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payment of customs duties in connection
with the importation of goods;
(18) Liens in favor of the Company securing Indebtedness owed
to the Company by one or more of its Subsidiaries;
(19) rights of customers with respect to inventory which arise
from deposits and progress payments made in the ordinary course of
business; and
(20) escrow agreements and similar arrangements with respect
to Indebtedness permitted to be incurred by the Company or its
Restricted Subsidiaries pursuant to clause (13) of the definition of
Permitted Indebtedness.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Redemption Date" shall have the meaning set forth under "Redemption --
Optional Redemption upon Change of Control."
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness existing on the Issue Date
or incurred in accordance with the "Limitation on Incurrence of Additional
Indebtedness" covenant (other than pursuant to clause (2), (4), (5), (6), (7),
(8), (9), (11), (12), (13) or (14) of the definition of Permitted Indebtedness),
in each case that does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of
the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company in connection with such
Refinancing); or
(2) create Indebtedness with: (a) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced; or (b) a final maturity earlier than the
final maturity of the Indebtedness being Refinanced; provided that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company,
then such Refinancing Indebtedness shall be Indebtedness solely of the
Company and (y) if such Indebtedness being Refinanced is subordinate or
junior to the notes, then such Refinancing Indebtedness shall be
subordinate to the notes at least to the same extent and in the same
manner as the Indebtedness being Refinanced.
"Replacement Assets" has the meaning set forth under "-- Limitation on
Asset Sales."
"Restricted Subsidiary" of any Person means any Subsidiary of such
Person which at the time of determination is not an Unrestricted Subsidiary.
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"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"Significant Subsidiary," with respect to any Person, means any
Restricted Subsidiary of such Person that satisfies the criteria for a
"significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the
Exchange Act.
"Subsidiary," with respect to any Person, means:
(1) any corporation of which the outstanding Capital Stock
having at least a majority of the votes entitled to be cast in the
election of directors under ordinary circumstances shall at the time be
owned, directly or indirectly, by such Person; or
(2) any other Person of which at least a majority of the
voting interest under ordinary circumstances is at the time, directly
or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means:
(1) any Subsidiary of such Person that at the time of
determination shall be or continue to be designated an Unrestricted
Subsidiary by the Board of Directors of such Person in the manner
provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any
newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, the Company or any Restricted Subsidiary; provided that:
(1) the Company certifies to the Trustee that such designation
complies with the "Limitation on Restricted Payments" covenant; and
(2) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable with respect to any Indebtedness pursuant
to which the lender has recourse to any of the assets of the Company or
any of its Restricted Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary to be
a Restricted Subsidiary only if:
(1) immediately after giving effect to such designation, the
Company is able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation
on Incurrence of Additional Indebtedness" covenant; and
(2) immediately before and immediately after giving effect to
such designation, no Default or Event of Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy
of the Board Resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with
the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
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the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Wholly
Owned Subsidiary of such Person which at the time of determination is a
Restricted Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such
Person of which all the outstanding voting securities (other than in the case of
a foreign Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by such Person or any Wholly Owned Subsidiary of such Person; provided,
however, that each of Societe Industrielle du Titane and Kronos Titan-GmbH & Co.
OHG shall be deemed to be a Wholly Owned Subsidiary for all purposes of the
Indenture so long as the ownership of outstanding voting securities of such
Subsidiary by the Permitted Holders does not decrease after the Issue Date
(other than in respect of directors' qualifying shares or in respect of an
immaterial amount of shares required to be owned by other Persons pursuant to
applicable law).
REGISTRATION RIGHTS
We and the initial purchasers entered into a registration rights
agreement on June 28, 2002 pursuant to which we agreed that we will, at our
expense, for the benefit of the holders of the old notes, (i) within 120 days
after June 28, 2002 (the "Filing Date"), file an exchange offer registration
statement on an appropriate registration form with respect to a registered offer
to exchange the old notes for new notes, which new notes will have terms
substantially identical in all material respects to the old notes (except that
the new notes will not contain terms with respect to transfer restrictions) and
(ii) cause the exchange offer registration statement to be declared effective
under the Securities Act within 270 days after June 28, 2002. Upon the exchange
offer registration statement being declared effective, we will offer the new
notes in exchange for surrender of the old notes. We will keep the exchange
offer open for not less than 30 days (or longer if required by applicable law)
after the date notice of the exchange offer is mailed to the holders of the old
notes. For each of the old notes surrendered to us pursuant to the exchange
offer, the holder who surrendered such old note will receive a new note having a
principal amount equal to that of the surrendered old note. Interest on each new
note will accrue (A) from the later of (i) the last interest payment date on
which interest was paid on the old note surrendered in exchange therefor, or
(ii) if the old note is surrendered for exchange on a date in a period which
includes the record date for an interest payment date to occur on or after the
date of such exchange and as to which interest will be paid, the date of such
interest payment date, or (B) if no interest has been paid on such old note,
from June 28, 2002.
If (i) because of any change in law or in currently prevailing
interpretations of the Staff of the SEC, we are not permitted to effect an
exchange offer, (ii) the exchange offer is not consummated within 300 days of
June 28, 2002 or (iii) in certain circumstances, certain holders of unregistered
new notes so request, or (iv) in the case of any holder that participates in the
exchange offer, such holder does not receive new notes on the date of the
exchange that may be sold without restriction under state and federal securities
laws (other than due solely to the status of such holder as our affiliate within
the meaning of the Securities Act), then in each case, we will (x) promptly
deliver to the holders and the Trustee written notice thereof and (y) at our
sole expense, (a) as promptly as practicable, file a shelf registration
statement covering resales of the notes, and (b) use our best efforts to keep
effective the shelf registration statement until the earliest of two years after
June 28, 2002, such time as all of the applicable notes have been sold
thereunder. We will, in the event that a shelf registration statement is filed,
provide to each holder copies of the prospectus that is a part of the shelf
registration statement, notify each such holder when the shelf registration
statement for the notes has become effective and take certain other actions as
are required to permit unrestricted resales of the old notes. A holder that
sells notes pursuant to the shelf registration statement will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the registration rights agreement that are applicable
to such a holder (including certain indemnification rights and obligations).
If we fail to meet the targets listed above, then additional interest
will become payable in respect of the old notes as follows:
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(i) if (A) neither the exchange offer registration statement
nor the shelf registration statement is filed with the SEC on or prior
to 120 days after June 28, 2002 or (B) notwithstanding that we have
consummated or will consummate an exchange offer, we are required to
file a shelf registration statement and such shelf registration
statement is not filed on or prior to the date required by the
registration rights agreement, then commencing on the day after either
such required filing date, additional interest will accrue on the
principal amount of the notes at a rate of 0.25% per annum for the
first 90 days immediately following each such filing date, such
additional interest rate increasing by an additional 0.25% per annum at
the beginning of each subsequent 90-day period; or
(ii) if (A) neither the exchange offer registration statement
nor a shelf registration statement is declared effective by the SEC on
or prior to 270 days after June 28, 2002 or (B) notwithstanding that we
have consummated or will consummate an exchange offer, we are required
to file a shelf registration statement and such shelf registration
statement is not declared effective by the SEC on or prior to the date
required by the registration rights agreement, then, commencing on the
day after either such required effective date, additional interest will
accrue on the principal amount of the notes at a rate of 0.25% per
annum for the first 90 days immediately following such date, such
additional interest rate increasing by an additional 0.25% per annum at
the beginning of each subsequent 90-day period; or
(iii) if (A) we have not exchanged new notes for all old notes
validly tendered in accordance with the terms of the exchange offer on
or prior to the 300th day after June 28, 2002 or (B) if applicable, the
shelf registration statement has been declared effective and such shelf
registration statement ceases to be effective at any time prior to the
second anniversary of June 28, 2002 (other than after such time as all
notes have been disposed of thereunder), then additional interest will
accrue on the principal amount of the notes at a rate of 0.25% per
annum for the first 90 days commencing on (x) the 300th day after June
28, 2002, in the case of (A) above, or (y) the day such shelf
registration statement ceases to be effective, in the case of (B)
above, such additional interest rate increasing by an additional 0.25%
per annum at the beginning of each subsequent 90-day period;
provided, however, that the additional interest rate on the old notes
may not accrue under more than one of the foregoing clauses (i) -- (iii) at any
one time and at no time shall the aggregate amount of additional interest
accruing exceed in the aggregate 0.75% per annum; provided, further, that (1)
upon the filing of the exchange offer registration statement or a shelf
registration statement (in the case of clause (i) above), (2) upon the
effectiveness of the exchange offer registration statement or a shelf
registration statement (in the case of clause (ii) above), or (3) upon the
exchange of new notes for all old notes tendered (in the case of clause (iii)
(A) above), or upon the effectiveness of the shelf registration statement that
had ceased to remain effective (in the case of clause (iii) (B) above),
additional interest on the old notes as a result of such clause (or the relevant
subclause thereof), as the case may be, will cease to accrue.
Any amounts of additional interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on the same original interest payment dates
as the notes.
BOOK-ENTRY; DELIVERY AND FORM
The new notes to be issued in this exchange offer will be issued in
registered, global form in minimum denominations of E.1,000 and integral
multiples thereof. The new notes will be represented by one or more global notes
in fully registered form without interest coupons and will be deposited with The
Bank of New York, London Branch, as common depositary for Euroclear and
Clearstream (the "Common Depositary"), and registered in the name of a nominee
of the Common Depositary. The notes will not be eligible for clearance through
The Depository Trust Company.
All holders of new notes who exchanged their old notes in this exchange
offer will hold their interests through the global note regardless of whether
they purchased their interests pursuant to Rule 144A or Regulation S. Except in
the limited circumstances described below, owners of beneficial interests in the
global note will not be entitled to receive physical delivery of certificated
notes. Transfers of beneficial interests in the global note will be subject to
the applicable rules and procedures of Euroclear and Clearstream and their
respective direct or indirect participants, which rules and procedures may
change from time to time.
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Global Note
The following description of the operations and procedures of Euroclear
and Clearstream are provided solely as a matter of convenience. These operations
and procedures are solely within the control of the respective settlement
systems and are subject to changes by them from time to time. We take no
responsibility for these operations and procedures and urge investors to contact
the system or their participants directly to discuss these matters.
Upon the issuance of the global note, the Common Depositary will
credit, on its internal system, the respective principal amount of the
beneficial interests represented by such global notes to the accounts of
Euroclear or Clearstream, as the case may be. Euroclear or Clearstream, as the
case may be, will credit, on its internal systems, the respective principal
amounts of the individual beneficial interests in such global notes to the
accounts of persons who have accounts with Euroclear or Clearstream, as the case
may be. Ownership of beneficial interests in the global note will be limited to
participants or persons who hold interests through participants in Euroclear or
Clearstream, as the case may be. Ownership of beneficial interests in the global
note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by Euroclear or Clearstream, as the case may be, or
their nominees (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
AS LONG AS THE COMMON DEPOSITARY, OR ITS NOMINEE, IS THE REGISTERED
HOLDER OF A GLOBAL NOTE, THE COMMON DEPOSITARY OR SUCH NOMINEE, AS THE CASE MAY
BE, WILL BE CONSIDERED THE SOLE OWNER AND HOLDER OF THE NEW NOTES REPRESENTED BY
SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE INDENTURE AND THE NOTES. Unless (1)
Euroclear or Clearstream notifies us that it is unwilling or unable to continue
as a clearing agency, (2) the Common Depositary notifies us that it is unwilling
or unable to continue as Common Depositary and a successor Common Depositary is
not appointed within 120 days of such notice or (3) in the case of any new note,
an event of default has occurred and is continuing with respect to such note,
owners of beneficial interests in a global note will not be entitled to have any
portions of such global note registered in their names, will not receive or be
entitled to receive physical delivery of notes in certificated form and will not
be considered the owners or holders of the global note (or any notes represented
thereby) under the indenture or the new notes. In addition, no beneficial owner
of an interest in a global note will be able to transfer that interest except in
accordance with Euroclear's and Clearstream's applicable procedures (in addition
to those under the indenture referred to herein).
Investors may hold their interests in the global note through Euroclear
or Clearstream, if they are participants in such systems, or indirectly through
organizations that are participants in such systems. Clearstream and Euroclear
will hold interests in the global note on behalf of their participants through
customers' securities accounts in their respective names on the books of the
Common Depositary. All interests in the global note may be subject to the
procedures and requirements of Euroclear and Clearstream.
Payments of the principal of and interest on the global note will be
made to the order of the Common Depositary or its nominee as the registered
owner thereof. Neither KII, the Trustee, the Common Depositary nor any of their
respective agents will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the global note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
We expect that the Common Depositary, in its capacity as paying agent,
upon receipt of any payment or principal or interest in respect of a global note
representing any new notes held by it or its nominee, will immediately credit
the accounts of Euroclear or Clearstream, as the case may be, which in turn will
immediately credit accounts of participants in Euroclear or Clearstream, as the
case may be, with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such global note for such new
notes as shown on the records of Euroclear or Clearstream, as the case may be.
We also expect that payments by participants to owners of beneficial interests
in such global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." Such payments will be
the responsibility of such participants.
Because Euroclear and Clearstream can act only on behalf of their
respective participants, who in turn act on behalf of indirect participants and
certain banks, the ability of a holder of a beneficial interest in a global note
to
106
pledge such interest to persons or entities that do not participate in the
Euroclear or Clearstream systems, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some countries and some U.S. states require that certain
persons take physical delivery of securities in certificated form. Consequently,
the ability to transfer beneficial interests in a global note to such persons
may be limited.
Transfers of interests in a global note between participants in
Euroclear and Clearstream will be effected in the ordinary way in accordance
with their respective rules and operating procedures.
Euroclear and Clearstream have advised us that they will take any
action permitted to be taken by a holder of notes (including the presentation of
notes for exchange as described below) only at the direction of one or more
participants to whose account with Euroclear or Clearstream, as the case may be,
interests in a global note are credited and only in respect of such portion of
the aggregate principal amount of the notes as to which such participant or
participants has or have given such direction. However, if there is an event of
default under the notes, Euroclear and Clearstream reserve the right to exchange
the global note for legended notes in certificated form, and to distribute such
notes to their respective participants.
Euroclear and Clearstream have advised us as follows: Euroclear and
Clearstream each hold securities for their account holders and facilitate the
clearance and settlement of securities transactions by electronic book-entry
transfer between their respective account holders, thereby eliminating the need
for physical movements of certificates and any risk from lack of simultaneous
transfers of securities.
Euroclear and Clearstream each provide various services including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Euroclear and Clearstream each
also deal with domestic securities markets in several countries through
established depository and custodial relationships. The respective systems of
Euroclear and Clearstream have established an electronic bridge between their
two systems across which their respective account holders may settle trades with
each other.
Account holders in both Euroclear and Clearstream are world-wide
financial institutions including underwriters, securities brokers and dealers,
trust companies and clearing corporations. Indirect access of both Euroclear and
Clearstream is available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
An account holder's overall contractual relations with either Euroclear
or Clearstream are governed by the respective rules and operation procedures of
Euroclear or Clearstream and any applicable laws. Both Euroclear and Clearstream
act under such rules and operating procedures only on behalf of their respective
account holders, and have no record of or relationship with persons holding
through their respective account holders.
Although Euroclear and Clearstream currently follow the foregoing
procedures to facilitate transfers of interests in global notes among
participants of Euroclear and Clearstream, they are under no obligation to do
so, and such procedures may be discontinued or modified at any time. Neither we
nor the Trustee will have any responsibility for the performance by Euroclear or
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If any depositary is at any time unwilling or unable to continue as a
depositary for the notes for the reasons set forth above, we will issue
certificates for such notes in definitive, fully registered, non-global form
without interest coupons in exchange for the global note. Certificates for notes
delivered in exchange for any global note or beneficial interests therein will
be registered in the names, and issued in any approved denominations, requested
by Euroclear, Clearstream or the Common Depositary (in accordance with their
customary procedures). Upon transfer or partial redemption of any note, new
certificates may be obtained from the Transfer Agent in Luxembourg.
Notwithstanding any statement herein, we and the Trustee reserve the
right to impose such transfer, certification, exchange or other requirements,
and to require such restrictive legends on certificates evidencing notes,
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as they may determine are necessary to ensure compliance with the securities
laws of the United States and the states therein and any other applicable laws
or as Euroclear or Clearstream may require.
Same-Day Settlement and Payment
The indenture requires that payments in respect of the notes
represented by a global note, including principal, premium, if any, interest and
liquidated damages, if any, be made by wire transfer of immediately available
funds to the accounts specified by the global note holder. With respect to notes
in certificated form, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. Certificated notes may be surrendered for payment at the offices of the
Trustee or, so long as the notes are listed on the Luxembourg Stock Exchange,
the Paying Agent in Luxembourg on the maturity date of the notes. We expect that
secondary trading in any certificated notes will also be settled in immediately
available funds.
CERTAIN TAX CONSIDERATIONS
UNITED STATES TAX CONSIDERATIONS
The following discussion is a summary of some material United States
federal income tax considerations relevant to the exchange of old notes for new
notes in the exchange offer and the subsequent ownership and disposition of the
new notes, but does not purport to be a complete analysis of all potential tax
considerations relating to the notes. This summary is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations, rulings of
the Internal Revenue Service (the "IRS") and judicial decisions in existence on
the date hereof, all of which are subject to change. Any such change could apply
retroactively and could affect adversely the tax consequences described below.
We have obtained an opinion from our counsel, Locke Liddell & Sapp LLP, with
respect to the anticipated material United States federal income tax
consequences of the exchange offer and the ownership and disposition of the new
notes, which are summarized below. No advance tax ruling has been sought or
obtained from the IRS regarding the tax consequences of the transactions
described herein and there can be no assurance that the IRS will not challenge
one or more of the tax consequences described in this prospectus.
For purposes of this discussion, a U.S. Person is:
o an individual who is a citizen of the United States or who is
resident in the United States for United States federal income
tax purposes;
o a corporation (including any entity treated as a corporation
for United States federal income tax purposes), that is
organized under the laws of the United States or any state
thereof;
o an estate the income of which is subject to United States
federal income taxation regardless of its source; or
o a trust that is subject to the supervision of a court within
the United States and is subject to the control of one or more
United States persons as described in Section 7701(a)(30) of
the Code, or that has a valid election in effect under
applicable Treasury regulations to be treated as a United
States person.
For purposes of this discussion, a U.S. Holder is a beneficial owner of
the notes who or which is a U.S. Person and a Non-U.S. Holder is a beneficial
owner of the notes other than a U.S. Holder.
This summary does not discuss all United States federal tax
considerations, such as estate and gift tax consequences to U.S. Holders, that
may be relevant to a Holder in light of its particular circumstances. This
summary does not address the federal income tax consequences that may be
relevant to certain Holders that may be subject to special treatment (including,
without limitation, Holders subject to the alternative minimum tax, banks,
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insurance companies, tax-exempt organizations, financial institutions, small
business investment companies, partnerships or other pass-through entities,
dealers in securities or currencies, broker-dealers, persons who hold notes as
part of a straddle, hedging, constructive sale, or conversion transaction, and
U.S. Holders whose functional currency is not the U.S. dollar). Furthermore,
this summary does not address any aspects of state, local or other taxation.
This summary is limited to those Holders who purchased notes in the initial
offering at the initial offering price and who hold notes as "capital assets"
within the meaning of Section 1221 of the Code. In the case of any Non-U.S.
Holder who is an individual, the following discussion assumes that this
individual was not a former United States citizen, and was not formerly a
resident of the United States for United States federal income tax purposes.
If a partnership (including for this purpose any entity treated as a
partnership for United States federal income tax purposes) is a beneficial owner
of the notes, the treatment of a partner in the partnership will generally
depend upon the status of the partner and upon the activities of the
partnership. A Holder of notes that is a partnership and partners in such
partnership should consult their tax advisors about the United States federal
income tax consequences of holding and disposing of the notes.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
HOLDER. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF EXCHANGING, HOLDING AND DISPOSING OF
THE NOTES AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY
FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTIONS.
Exchange of Notes
The exchange of old notes for new notes in the exchange offer will not
constitute a taxable event. As a result:
o no Holder should recognize taxable gain or loss as a result of
exchanging old notes for new notes pursuant to the exchange
offer;
o each Holder's holding period of the new notes should include
the holding period of the old notes exchanged; and
o each Holder's adjusted tax basis of the new notes should be
the same as the adjusted tax basis of the old notes exchanged
immediately before such exchange.
Consequences to U.S. Holders
Stated Interest. Stated interest on the notes will be taxable to a U.S.
Holder as ordinary income at the time the interest accrues or is received in
accordance with the U.S. Holder's method of accounting for United States federal
income tax purposes.
We intend to take the position for United States federal income tax
purposes that any redemption premium paid upon a change in control should be
taxable to a U.S. Holder as ordinary income when received or accrued in
accordance with the U.S. Holder's method of accounting for federal income tax
purposes. This position is based in part on our determination that, as of the
date of issuance of the notes, the possibility that any such additional payment
will actually be made is a "remote" or "incidental" contingency within the
meaning of applicable Treasury regulations. Our determination that the
possibility is a remote or incidental contingency is binding on each U.S.
Holder, unless the U.S. Holder explicitly discloses to the IRS, on its federal
income tax return for the year during which the note is acquired, that the U.S.
Holder is taking a different position. Regardless of our position, however, the
IRS may assert that the possibility that such an additional payment will
actually be made is not a remote or incidental contingency. If such an assertion
by the IRS is successful, the timing and character of the U.S. Holder's income
from the notes may be affected.
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The interest on the notes will be paid in euros rather than in United
States dollars. In general, a U.S. Holder that uses the cash method of
accounting will be required to include in income the United States dollar value
of the amount of interest income received, whether or not the payment is
received in United States dollars or converted into United States dollars. The
United States dollar value of the amount of interest received is the amount of
foreign currency interest paid, translated at the spot rate on the date of
receipt. The U.S. Holder will not have exchange gain or loss on the interest
payment, but may have exchange gain or loss when the U.S. Holder disposes of any
foreign currency received.
A U.S. Holder that uses the accrual method of accounting is generally
required to include in income the United States dollar value of interest accrued
during the accrual period. Accrual basis U.S. Holders may determine the amount
of income recognized with respect to such interest in accordance with either of
two methods. Under the first method, the U.S. dollar value of accrued interest
is translated at the average rate for the interest accrual period (or, with
respect to an accrual period that spans two taxable years, the average rate for
the partial period within the taxable year). For this purpose, the average rate
is the simple average of spot rates of exchange for each business day of such
period or other average exchange rate for the period reasonably derived and
consistently applied by the U.S. Holder. Under the second method, a U.S. Holder
can elect to accrue interest at the spot rate on the last day of an interest
accrual period (in the case of a partial accrual period, the last day of the
taxable year) or, if the last day of an interest accrual period is within five
business days of the receipt or payment, the spot rate on the date of receipt or
payment. Any such election will apply to all debt instruments held by the U.S.
Holder both at the beginning of the first taxable year to which the election
applies and thereafter acquired, and may not be revoked without the consent of
the IRS. An accrual basis U.S. Holder will recognize exchange gain or loss on
the receipt of a foreign currency interest payment if the exchange rate on the
date payment is received differs from the rate applicable to the previous
accrual of that interest income. The foreign currency gain or loss of a U.S.
Holder will generally be treated as United States sourced ordinary income or
loss.
Disposition of Notes. In the case of a sale or other disposition
(including a retirement) of a note, a U.S. Holder will recognize gain or loss
equal to the difference, if any, between the amount received (other than any
amount representing accrued but unpaid stated interest, which is taxable as
ordinary income) and the U.S. Holder's adjusted tax basis in the note. A U.S.
Holder's adjusted tax basis in a note generally will equal the U.S. Holder's
cost of the note in United States dollars, reduced by the amount in United
States dollars of any payments (other than stated interest) made on such note.
Except as described below with respect to currency exchange gain or loss, gain
or loss recognized by a U.S. Holder on a sale or other disposition of a note
generally will constitute capital gain or loss. Capital gains of non-corporate
taxpayers from the sale or other disposition of a note held for more than one
year are eligible for reduced rates of United States federal income taxation.
The deductibility of a capital loss realized on the sale or other disposition of
a note may be subject to limitations.
With respect to the sale or other disposition (including a retirement)
of a note denominated in euros, the amount realized in euros will be considered
to be (1) first, the payment of accrued but unpaid interest (on which exchange
gain or loss will be recognized as described in the section entitled "Stated
Interest" above), and (2) second, a payment of principal. With respect to such
payment of principal, gain or loss will be computed in euros and translated on
the date of sale or other disposition. Additionally, exchange gain or loss will
be separately computed in euros on the amount of principal to the extent that
the rate of exchange on the date of sale or other disposition differs from the
rate of exchange on the date the note was acquired. Exchange gain or loss
computed on accrued interest and principal will be realized, however, only to
the extent of total gain or loss realized on the transaction.
In the case of a note denominated in euros, the cost of the note to the
U.S. Holder will be the United States dollar value of the purchase price in
euros translated at the spot rate for the date of purchase. The conversion of
United States dollars into euros and the immediate use of that currency to
purchase a note generally will not result in a taxable gain or loss for a U.S.
Holder.
Backup Withholding and Information Reporting. We, our paying agent or a
broker may be required to provide the IRS with certain information, including
the name, address and taxpayer identification number of U.S. Holders, the
aggregate amount of principal and interest (and premium, if any) and sales
proceeds paid to that Holder during the calendar year, and the amount of tax
withheld, if any. This obligation, however, does not apply with respect to
certain U.S. Holders including corporations, tax-exempt organizations, qualified
pension and profit sharing trusts and individual retirement accounts. In the
event that a U.S. Holder subject to the reporting
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requirements described above fails to supply its correct taxpayer identification
number in the manner required by applicable law or is notified by the IRS that
it has failed to properly report payments of interest and dividends, we, our
paying agent or a broker may be required to "backup" withhold tax (at a rate
equal to 30% for tax years beginning before January 1, 2004, 29% for tax years
beginning between January 1, 2004 through December 31, 2006, and 28% for tax
years beginning on January 1, 2006 and thereafter) on each payment of interest
and principal (and premium, if any) and sales proceeds on or with respect to the
notes.
Backup withholding is not an additional tax; any amounts so withheld
may be credited against the United States federal income tax liability of the
Holder or refunded if the amounts withheld exceed such liability, provided that
the required information is furnished to the IRS.
Consequences to Non-U.S. Holders
Interest Income. Interest earned on a note by a Non-U.S. Holder will be
considered "portfolio interest," and will not be subject to United States
federal income tax or withholding, if:
o the certification requirements described generally below are
satisfied and the Non-U.S. Holder is not (i) a "controlled
foreign corporation" that is related to us as described in
Section 881(c)(3)(C) of the Code, (ii) a bank receiving the
interest on a loan made in the ordinary course of its
business, or (iii) a person who owns, directly or under the
attribution rules of Section 871(h)(3)(C) of the Code, 10% or
more of the total combined voting power of all our stock;
o the interest is not effectively connected with the conduct of
a trade or business within the United States by the Non-U.S.
Holder; and
o we do not have actual knowledge or reason to know that the
beneficial Holder is a U.S. Person and we can reliably
associate the interest payment with the certification
documents provided to us.
The certification requirements will be satisfied if either (i) the
beneficial owner of the note timely certifies to us or our paying agent, under
penalties of perjury, that such owner is a Non-U.S. Holder and provides its name
and address, or (ii) a custodian, broker, nominee, or other intermediary acting
as an agent for the beneficial owner (such as a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business) that holds the notes
in such capacity timely certifies to us or our paying agent, under penalties of
perjury, that such statement has been received from the beneficial owner of the
notes by such intermediary, or by any other financial institution between such
intermediary and the beneficial owner, and furnishes to us or our paying agent a
copy thereof. The foregoing certification may be provided on a properly
completed IRS Form W-8BEN or W-8IMY, as applicable, or any successor forms, duly
executed under penalties of perjury. With respect to the certification
requirement for notes that are held by an entity that is classified for United
States federal income tax purposes as a foreign partnership, the applicable
Treasury Regulations provide that, unless the foreign partnership has entered
into a withholding agreement with the IRS, the foreign partnership will be
required, in addition to providing an intermediary Form W-8IMY, to attach an
appropriate certification by each partner.
Any interest earned on a note, and any gain realized on a sale or other
disposition (including a retirement) of a note, that is effectively connected
with the conduct of a trade or business within the United States by a Non-U.S.
Holder will be subject to United States federal income tax at regular graduated
rates as if the Non-U.S. Holder were a U.S. Holder. In addition, if the Non-U.S.
Holder is a corporation, the Non-U.S. Holder may also be subject to a 30% branch
profits tax (unless reduced or eliminated by an applicable treaty) imposed on
any such effectively connected earnings and profits. However, such income will
not be subject to United States federal income tax withholding if the Non-U.S.
Holder furnishes a properly completed IRS Form W-8ECI to us or our paying agent.
Any payments to a Non-U.S. Holder of interest that do not qualify for
the "portfolio interest" exemption, and that are not effectively connected with
the conduct of a trade or business within the United States by the Non-U.S.
Holder, will be subject to United States federal income tax and withholding at a
rate of 30% (or at a lower rate under an applicable tax treaty).
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Disposition of Notes. Any gain recognized by a Non-U.S. Holder on a
sale or other disposition (including a retirement) of a note will not be subject
to United States federal income tax or withholding if (i) the gain is not
effectively connected with the conduct of a trade or business within the United
States by the Non-U.S. Holder, and (ii) in the case of a Non-U.S. Holder who is
an individual, such individual is not present in the United States for 183 days
or more in the taxable year of the sale or other disposition, or the individual
does not have a "tax home" in the United States and the gain is not attributable
to an office or other fixed place of business maintained in the United States by
the individual.
Estate Tax Consequences. Any note that is owned by an individual who is
not a citizen or resident (as specially defined for United States federal estate
tax purposes) of the United States at the date of death will not be included in
such individual's estate for United States federal estate tax purposes, unless
the individual owns, directly or indirectly, 10% or more of the voting power of
all our stock, or, at the time of such individual's death, payments in respect
of the notes would have been effectively connected with the conduct by such
individual of a trade or business in the United States.
Backup Withholding and Information Reporting. We must report annually
to the IRS and to each Non-U.S. Holder any interest on the notes that is subject
to withholding or that is exempt from U.S. withholding tax pursuant to a tax
treaty or the "portfolio interest" exemption. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides.
In the case of payments of principal on the notes, backup withholding
and information reporting will not apply if the Non-U.S. Holder has made the
requisite certification, described in the section entitled "Interest Income"
above or otherwise establishes an exemption, provided that neither we nor our
paying agent has actual knowledge that (i) the holder is a U.S. Holder, or (ii)
the conditions of any other exemption are not, in fact, satisfied.
The payment of the proceeds on the disposition of a note to or through
the U.S. office of a broker generally will be subject to information reporting
and potential backup withholding unless a holder either certifies its status as
a Non-U.S. Holder under penalties of perjury on IRS Form W-8BEN (or a suitable
substitute form) and meets certain other conditions or otherwise establishes an
exemption. If the foreign office of a foreign broker (as defined in applicable
Treasury regulations) pays the proceeds of the sale of a note to the seller
thereof, backup withholding and information reporting generally will not apply.
Information reporting requirements (but not backup withholding) will apply,
however, to a payment of the proceeds of the sale of a note by (1) a foreign
office of a custodian, nominee, other agent or broker that is a U.S. Person, (2)
a foreign custodian, nominee, other agent or broker that derives 50% or more of
its gross income for certain periods from the conduct of a trade or business in
the United States, (3) a foreign custodian, nominee, other agent or broker that
is a controlled foreign corporation for United States federal income tax
purposes or (4) a foreign partnership if at any time during its tax year one or
more of its partners are U.S. Persons who, in the aggregate, hold more than 50%
of the income or capital interest of the partnership or if, at any time during
its taxable year, the partnership is engaged in the conduct of a trade or
business within the United States, unless the custodian, nominee, other agent,
broker or foreign partnership has documentary evidence in its records that the
holder is not a U.S. Person and certain other conditions are met or the holder
otherwise establishes an exemption.
Backup withholding is not an additional tax; any amounts so withheld
may be credited against the United States federal income tax liability of the
holder or refunded if the amounts withheld exceed such liability, provided that
the required information is furnished to the IRS.
LUXEMBOURG TAX CONSIDERATIONS
The following discussion is a summary of some of the material
Luxembourg income tax consequences relevant to the acquisition, ownership and
disposition of the notes offered by this prospectus for a non-resident Holder of
a note. This summary is based on Luxembourg laws, regulations, rulings and
decisions now in effect, all of which are subject to change.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
HOLDER. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX
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ADVISORS REGARDING THE LUXEMBOURG INCOME TAX CONSEQUENCES OF EXCHANGING, HOLDING
AND DISPOSING OF THE NOTES AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER
THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTIONS.
Withholding Tax
Under Luxembourg tax laws currently in effect, there is no withholding
tax on payments of principal, interest, accrued but unpaid interest or
accretions of yield to maturity in respect of the notes, nor is any Luxembourg
withholding tax payable by such Holders on redemption or repurchase of the
notes. There is no income tax due upon redemption or repurchase of, or on
capital gains on the sale of, any notes held by a non-resident, as long as the
notes are not held through a permanent establishment in Luxembourg.
No stamp, value added, registration or similar taxes or duties will,
under present Luxembourg law, be payable in Luxembourg by the Holders of notes
in connection with the issuance of the notes.
GERMAN TAX CONSIDERATIONS
The following discussion is a summary of some of the material German
income tax consequences relevant to the acquisition, ownership and disposition
of notes for a resident and non-resident Holder of a note. This summary is based
on German laws, regulations, rulings and decisions now in effect, all of which
are subject to change.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR
HOLDER. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE GERMAN INCOME TAX CONSEQUENCES OF EXCHANGING, HOLDING AND DISPOSING OF THE
NOTES AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY
FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTIONS.
Tax Residents
Payments of interest on the notes, including interest having accrued up
to the sale of a note and credited separately ("Accrued Interest") to persons
who are tax residents of Germany (i.e., persons whose residence, habitual abode,
statutory seat or place of effective management and control is located in
Germany) are subject to German corporate income tax (plus a solidarity surcharge
of 5.5% thereon (Solidaritaetszurschlag)). Such interest is also subject to
trade tax if the notes form part of the property of a German trade or business.
Any original issue discount ("OID") in excess of certain threshold
amounts is taxed as interest income in the year the note is sold or redeemed,
provided the note can be classified as a financial innovation
(Finanzinnovation), including, among other things, zero coupon notes or
discounted notes. However, if the note is part of property of a trade or
business in Germany, the OID amount must be taken into account pro rata as
interest income over the term of the note and may also be subject to trade tax.
Because the stated redemption price of the notes is not expected to exceed the
issue price by more than a de minimis amount, no portion of the OID, if any, on
the notes will be taxable to a German Holder as interest income on a current or
amortized basis. The remainder of this discussion assumes that there will not be
OID on the notes.
Capital gains from the disposal of notes by German-resident corporate
Holders of notes will be subject to corporate income tax (plus a solidarity
surcharge at a rate of 5.5% thereon) and trade tax.
If the notes are held in a custodial account that the holder maintains
with a German branch of a German or non-German financial or financial services
institution (the "Disbursing Agent"), a 30% withholding tax on interest payments
(Zinsabschlagstieuer), plus a 5.5% solidarity surcharge on such tax, will be
levied, resulting in a total tax charge of 31.65% of the gross interest payment.
Withholding tax is also imposed on Accrued Interest.
In computing the tax to be withheld, the Disbursing Agent may deduct
from the basis of the withholding tax any Accrued Interest paid by the holder of
a note to the Disbursing Agent during the same calendar year. No
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withholding tax will be deducted if the holder of the note has submitted to the
Disbursing Agent a certificate of non-assessment
(Nichtveranlagungsbescheinigung) issued by the relevant local tax office.
Withholding tax and the solidarity surcharge thereon are credited as
prepayments against the German corporate income tax and the solidarity surcharge
liability of the German resident. Amounts overwithheld will entitle the holder
to a refund, based on an assessment to tax.
Nonresidents
Interest, including Accrued Interest, and capital gains with respect to
a note held by a German nonresident are not subject to German taxation, unless:
(1) the note forms part of the business property of a permanent
establishment, including a permanent representative, or a
fixed base maintained in Germany by the Holder; or
(2) the interest income otherwise constitutes German-source income
(such as income from the letting and leasing of certain
property located in Germany).
In situations (1) and (2), a tax regime similar to that explained above
under "Tax Residents" applies. Capital gains from the disposition of the Notes
are, however, only taxable in situation (1).
Nonresidents of Germany are, in general, exempt from German withholding
tax on interest and the solidarity surcharge thereon. However, where the
interest is subject to German taxation as set forth in the preceding paragraph
and the notes are held in a custodial account with a disbursing agent,
withholding tax is levied as explained above under "Tax Residents."
Other Taxes
No stamp, issue, registration or similar taxes or duties will be
payable in Germany in connection with the issuance, delivery or execution of the
notes. Currently, a net assets tax is not levied in Germany.
PLAN OF DISTRIBUTION
If you are a broker-dealer and hold old notes for your own account as a
result of market-making activities or other trading activities and you receive
new notes in exchange for old notes in the exchange offer, then you may be a
statutory underwriter and must acknowledge that you will deliver a prospectus in
connection with any resale of these new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We acknowledge and, unless you are a broker-dealer, you must
acknowledge that you are not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate in a distribution of
new notes. For a period of 120 days after the consummation of the exchange
offer, we will make this prospectus, as amended and supplements, available to
any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of those methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
these new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of new notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that
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it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 120 days after the consummation of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests those documents in the letter of transmittal.
We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the notes other than
commissions or concessions of any broker-dealers and will indemnify the holders
of the new notes, including any broker-dealers, against various liabilities,
including liabilities under the Securities Act. We note, however, that, in the
opinion of the SEC, indemnification against liabilities arising under federal
securities laws is against public policy and may be unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act.
In accordance with the Exchange Act, we file periodic reports, registration
statements and other information with the SEC. You may read and copy our
reports, registration statements and other information we file with the SEC at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms. In addition, reports and other
filings are available to the public on the SEC's web site at http://www.sec.gov.
If for any reason we are not subject to the reporting requirements of
the Exchange Act in the future, we will still be required under the indenture
governing the notes to furnish the holders of the notes with certain financial
and reporting information. See "Description of the New Notes -- Certain
Covenants -- Reports to Holders" for a description of the information that we
are required to provide.
GENERAL LISTING INFORMATION
We will apply to list the new notes on the Luxembourg Stock Exchange in
accordance with its rules once the exchange offer has been completed. Prior to
the listing, a legal notice relating to the issuance of the new notes and our
certificate of incorporation will be deposited with the Chief Registrar of the
District Court of Luxembourg (Greffier en Chef du Tribunal d'Arrondissement de
et a Luxembourg), where these documents are available for inspection and where
copies of these documents may be obtained free of charge on request.
As long as the notes are listed on the Luxembourg Stock Exchange and
the rules of the Luxembourg Stock Exchange so require, copies of our certificate
of incorporation and the indenture and the registration rights agreement
relating to the new notes may be inspected, and our most recent audited annual
consolidated financial statements and unaudited quarterly consolidated financial
statements may be obtained, on any business day free of charge, at the office of
the paying agent in Luxembourg.
Our board of directors approved the issuance of the new notes on June
17, 2002.
Except as disclosed in this prospectus, we are not involved in, or have
any knowledge of a threat of, any litigation, administrative proceeding or
arbitration which, in our judgment, is or may be material in the context of the
issuance of the notes.
Except as disclosed in this prospectus, there has been no material
adverse change in our consolidated financial position since June 30, 2002.
The new notes have been accepted for clearance through Euroclear and
Clearstream with a Common Code of ___________ and an International Securities
Identification Number of ______________.
115
LEGAL MATTERS
Certain legal matters with regard to the validity of the new notes will
be passed upon for us by Locke Liddell & Sapp LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of Kronos International, Inc. and
its subsidiaries as of December 31, 2000 and 2001 and for each of the three
years in the period ended December 31, 2001, included in this prospectus, have
been so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Kronos Titan GmbH & Co. OHG
and its subsidiary as of December 31, 2000 and 2001 and for each of the three
years in the period ended December 31, 2001, included in this prospectus, have
been so included in reliance on the report of PricewaterhouseCoopers GmbH,
Wirtschaftsprufungsgesellschaft, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Kronos Denmark ApS and its
subsidiaries as of December 31, 2000 and 2001 and for each of the three years in
the period ended December 31, 2001, included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
116
INDEX OF FINANCIAL STATEMENTS
<Table>
<Caption>
PAGES
-----
FINANCIAL STATEMENTS OF KRONOS INTERNATIONAL, INC.
Report of Independent Accountants................................................................... F-2
Consolidated Balance Sheets -- December 31, 2000 and 2001 and June 30, 2002 (unaudited)............. F-3/F-4
Consolidated Statements of Income -- Years ended December 31, 1999, 2000 and 2001; Six months ended
June 30, 2001 (unaudited) and 2002 (unaudited)................................................... F-5
Consolidated Statements of Comprehensive Income -- Years ended December 31, 1999, 2000 and 2001; Six
months ended June 30, 2001 (unaudited) and 2002 (unaudited)...................................... F-6
Consolidated Statements of Redeemable Preferred Stock, Profit Participation Certificates and Common
Stockholder's Equity (Deficit) -- Years ended December 31, 1999, 2000 and 2001; Six months ended
June 30, 2002 (unaudited)........................................................................ F-7
Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 2000 and 2001; Six months
ended June 30, 2001 (unaudited) and 2002 (unaudited)............................................. F-8/F-9
Notes to Consolidated Financial Statements.......................................................... F-10/F-32
FINANCIAL STATEMENTS OF KRONOS TITAN GMBH & CO. OHG................................................. FA-1/FA-28
FINANCIAL STATEMENTS OF KRONOS DENMARK APS.......................................................... FB-1/FB-28
</Table>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Common Stockholder of Kronos International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, redeemable
preferred stock, profit participation certificates and common stockholder's
equity (deficit) and cash flows present fairly, in all material respects, the
financial position of Kronos International, Inc. and Subsidiaries at December
31, 2000 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, the accompanying financial statements exclude
the accounts of Kronos Canada, Inc., formerly a wholly owned subsidiary that was
sold to Kronos, Inc. on April 30, 2002.
PricewaterhouseCoopers LLP
Houston, Texas
May 9, 2002
F-2
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31,
------------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 36,731 $ 30,343 $ 16,011
Restricted cash equivalents ......................... -- -- 1,554
Accounts and notes receivable ....................... 90,118 87,422 101,280
Receivable from affiliates .......................... 1,833 1,134 3,404
Refundable income taxes ............................. 1,677 1,347 2,844
Inventories ......................................... 118,657 121,316 113,660
Prepaid expenses .................................... 1,385 1,548 2,702
Deferred income taxes ............................... 858 497 597
---------- ---------- ----------
Total current assets ............................. 251,259 243,607 242,052
---------- ---------- ----------
Other assets:
Prepaid pension cost ................................ 16,509 14,696 18,174
Other ............................................... 2,943 5,615 12,581
---------- ---------- ----------
Total other assets ............................... 19,452 20,311 30,755
---------- ---------- ----------
Property and equipment:
Land ................................................ 21,345 20,996 23,695
Buildings ........................................... 93,704 96,874 109,384
Machinery and equipment ............................. 431,534 441,216 502,255
Mining properties ................................... 47,652 48,167 58,069
Construction in progress ............................ 3,541 2,995 7,895
---------- ---------- ----------
597,776 610,248 701,298
Less accumulated depreciation and depletion ......... 338,358 341,649 401,021
---------- ---------- ----------
Net property and equipment ....................... 259,418 268,599 300,277
---------- ---------- ----------
$ 530,129 $ 532,517 $ 573,084
========== ========== ==========
</Table>
F-3
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31,
------------------------------ JUNE 30,
2000 2001 2002
------------ ------------ ------------
(UNAUDITED)
LIABILITIES AND COMMON STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Notes payable ..................................................... $ 69,970 $ 46,201 $ --
Current maturities of long-term debt .............................. 730 1,033 1,225
Accounts payable and accrued liabilities .......................... 76,990 78,846 92,465
Payable to affiliates ............................................. 22,602 7,929 3,233
Income taxes ...................................................... 6,157 6,597 5,824
Deferred income taxes ............................................. 1,822 1,530 1,732
------------ ------------ ------------
Total current liabilities ......................................... 178,271 142,136 104,479
------------ ------------ ------------
Noncurrent liabilities:
Long-term debt .................................................... 1,363 1,465 323,823
Notes payable to Kronos, Inc. ..................................... 194,000 480,363 --
Deferred income taxes ............................................. 46,643 37,783 48,317
Accrued pension cost .............................................. 18,904 18,696 18,644
Other ............................................................. 13,375 11,846 12,474
------------ ------------ ------------
Total noncurrent liabilities .................................... 274,285 550,153 403,258
------------ ------------ ------------
Minority interest .................................................... 299 284 336
------------ ------------ ------------
Redeemable preferred stock and profit participation
certificates ...................................................... 474,374 571,119 640,631
Accrued dividends ................................................. 30,569 46,290 54,150
------------ ------------ ------------
Total redeemable preferred stock and profit participation
certificates ................................................. 504,943 617,409 694,781
------------ ------------ ------------
Common stockholder's equity (deficit):
Common stock -- $100 par value; 100,000 shares authorized;
3,196 shares issued ............................................ 320 320 320
Additional paid-in capital ........................................ 1,966,464 1,870,935 2,010,563
Retained earnings (deficit) ....................................... (1,884,071) (1,774,150) (1,736,573)
Notes receivable from affiliates .................................. (343,777) (700,843) (753,007)
Accumulated other comprehensive loss:
Currency translation adjustment ................................. (166,605) (169,758) (147,104)
Pension liabilities ............................................. -- (3,969) (3,969)
------------ ------------ ------------
Total common stockholder's equity (deficit) .......................... (427,669) (777,465) (629,770)
------------ ------------ ------------
$ 530,129 $ 532,517 $ 573,084
============ ============ ============
Commitments and contingencies (Notes 13 and 18)
</Table>
See accompanying notes to consolidated financial statements.
F-4
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Revenues and other income:
Net sales ........................................ $ 620,324 $ 620,525 $ 554,637 $ 299,410 $ 285,714
Interest income from affiliates .................. 1,585 23,069 36,220 15,891 19,157
Insurance recoveries, net ........................ -- -- 17,468 1,929 --
Other income (loss), net ......................... (17,626) (3,835) 6,201 (9,791) 18,930
---------- ---------- ---------- ---------- ----------
604,283 639,759 614,526 307,439 323,801
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales .................................... 469,224 413,475 379,558 199,200 224,668
Selling, general and administrative .............. 79,923 72,534 68,277 33,730 33,401
Interest ......................................... 7,562 1,942 4,305 2,232 1,697
Interest expense to affiliates ................... 29,876 28,724 34,145 13,875 18,699
---------- ---------- ---------- ---------- ----------
586,585 516,675 486,285 249,037 278,465
---------- ---------- ---------- ---------- ----------
Income before income taxes and minority
interest ........................................ 17,698 123,084 128,241 58,402 45,336
Income tax expense (benefit) ....................... (24,255) 42,888 14,497 17,255 7,732
---------- ---------- ---------- ---------- ----------
Income before minority interest .................. 41,953 80,196 113,744 41,147 37,604
Minority interest .................................. 48 47 16 9 27
---------- ---------- ---------- ---------- ----------
Net income ..................................... 41,905 80,149 113,728 41,138 37,577
Dividends and accretion applicable to
redeemable preferred stock and profit
participation certificates ...................... (18,603) (15,867) (112,466) (11,489) (77,372)
---------- ---------- ---------- ---------- ----------
Net income (loss) available to common stock .... $ 23,302 $ 64,282 $ 1,262 $ 29,649 $ (39,795)
========== ========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-5
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Net income ......................................... $ 41,905 $ 80,149 $ 113,728 $ 41,138 $ 37,577
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment ....... -- -- (3,969) -- --
Currency translation adjustment .............. 13,684 (12,239) (3,153) (1,217) 22,654
---------- ---------- ---------- ---------- ----------
Total other comprehensive income (loss) .... 13,684 (12,239) (7,122) (1,217) 22,654
---------- ---------- ---------- ---------- ----------
$ 55,589 $ 67,910 $ 106,606 $ 39,921 $ 60,231
========== ========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-6
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
PROFIT PARTICIPATION CERTIFICATES AND COMMON
STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
COMMON STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------------------------------------------------
REDEEMABLE ACCUMULATED OTHER
PREFERRED COMPREHENSIVE LOSS TOTAL
STOCK AND NOTES ------------------------- COMMON
PROFIT ADDITIONAL RETAINED RECEIVABLE CURRENCY STOCKHOLDER'S
PARTICIPATION COMMON PAID-IN EARNINGS FROM TRANSLATION PENSION EQUITY
CERTIFICATES STOCK CAPITAL (DEFICIT) AFFILIATES ADJUSTMENTS LIABILITIES (DEFICIT)
------------- ------ ---------- ----------- ---------- ----------- ----------- -------------
Balance at
December 31, 1998 .... $ -- $ 320 $1,693,981 $(1,697,215) $ (36,182) $ (168,050) $ -- $ (207,146)
Net income .............. -- -- -- 41,905 -- -- -- 41,905
Other comprehensive
income ............... -- -- -- -- -- 13,684 -- 13,684
Change in notes
receivable from
affiliates ............ -- -- -- -- 36,182 -- -- 36,182
Issuance of
redeemable preferred
stock and profit
participation shares .. 470,473 -- -- (284,295) -- -- -- (284,295)
Preferred dividends
and accretion ......... 18,603 -- (18,603) -- -- -- -- (18,603)
Common dividends
declared .............. -- -- -- (24,615) -- -- -- (24,615)
------------- ------ ---------- ----------- ---------- ----------- ----------- -------------
Balance at
December 31, 1999 ..... 489,076 320 1,675,378 (1,964,220) -- (154,366) -- (442,888)
Net income .............. -- -- -- 80,149 -- -- -- 80,149
Other comprehensive
loss .................. -- -- -- -- -- (12,239) -- (12,239)
Change in notes
receivable from
affiliates ............ -- -- -- -- (64,840) -- -- (64,840)
Preferred dividends
and accretion ......... 15,867 -- (15,867) -- -- -- -- (15,867)
Capital contribution:
NL Capital
Corporation merger .. -- -- 291,910 -- (278,937) -- -- 12,973
Other ................ -- -- 15,043 -- -- -- -- 15,043
------------- ------ ---------- ----------- ---------- ----------- ----------- -------------
Balance at
December 31, 2000 ..... 504,943 320 1,966,464 (1,884,071) (343,777) (166,605) -- (427,669)
Net income .............. -- -- -- 113,728 -- -- -- 113,728
Other comprehensive
loss, net of tax ...... -- -- -- -- -- (3,153) (3,969) (7,122)
Change in notes
receivable from
affiliates ............ -- -- -- -- (357,066) -- -- (357,066)
Preferred dividends
and accretion ......... 112,466 -- (112,466) -- -- -- -- (112,466)
Capital contribution .... -- -- 16,937 -- -- -- -- 16,937
Common dividends
declared .............. -- -- -- (3,807) -- -- -- (3,807)
------------- ------ ---------- ----------- ---------- ----------- ----------- -------------
Balance at
December 31, 2001 .... 617,409 320 1,870,935 (1,774,150) (700,843) (169,758) (3,969) (777,465)
Net income .............. -- -- -- 37,577 -- -- -- 37,577
Other comprehensive
income, net of tax .... -- -- -- -- -- 22,654 -- 22,654
Change in notes
receivable from
affiliates ............ -- -- -- -- 164,836 -- -- 164,836
Preferred dividends
and accretion ......... 77,372 -- (77,372) -- -- -- -- (77,372)
Capital contribution .... -- -- 217,000 -- (217,000) -- -- --
------------- ------ ---------- ----------- ---------- ----------- ----------- -------------
Balance at June 30,
2002 (unaudited) ...... $ 694,781 $ 320 $2,010,563 $(1,736,573) $ (753,007) $ (147,104) $ (3,969) $ (629,770)
============= ====== ========== =========== ========== =========== =========== =============
</Table>
See accompanying notes to consolidated financial statements.
F-7
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net income ...................................... $ 41,905 $ 80,149 $ 113,728 $ 41,138 $ 37,577
Depreciation, depletion and amortization ........ 28,377 24,108 24,119 12,175 12,837
Noncash currency transaction (gain) loss ........ 36,881 15,591 9,355 14,992 (13,121)
Noncash interest income from affiliates ......... -- (23,069) (25,044) (13,815) (18,254)
Noncash interest expense to affiliates .......... -- -- -- -- 5,521
Noncash interest expense ........................ 2,168 -- -- -- --
Deferred income taxes ........................... (42,088) 5,226 (6,565) 604 5,096
Minority interest ............................... 48 47 16 9 27
Net (gain) loss from disposition of property
and equipment ................................. 225 1,404 548 240 (597)
Pension, net .................................... (2,602) (3,162) (2,342) (1,882) (2,001)
Insurance recoveries, net ....................... -- -- (17,468) (1,929) --
---------- ---------- ---------- ---------- ----------
64,914 100,294 96,347 51,532 27,085
Change in assets and liabilities:
Accounts and notes receivable ................. (19,619) (7,312) (1,797) (17,576) (2,395)
Inventories ................................... 20,523 (7,859) (7,617) 3,841 20,703
Prepaid expenses .............................. (16) (293) 128 (927) (759)
Accounts payable and accrued liabilities ...... 6,840 1,885 4,088 (3,183) (2,179)
Income taxes .................................. 4,960 6,069 386 7,186 (2,987)
Accounts with affiliates ...................... 143 8,046 (13,332) (22,291) (6,282)
Other noncurrent assets ....................... 1,082 (464) (1,885) 68 3,271
Other noncurrent liabilities .................. (1,225) (2,595) (932) (475) (681)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities ....... 77,602 97,771 75,386 18,175 35,776
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures ............................ (29,205) (26,663) (48,417) (15,782) (10,078)
Property damaged by fire:
Insurance proceeds ............................ -- -- 23,361 5,500 --
Other, net .................................... -- -- (3,205) (1,000) --
Proceeds from disposition of property and
equipment ..................................... 2,330 110 364 34 832
Change in restricted cash equivalents ........... -- -- -- -- (1,554)
Other, net ...................................... -- (33) -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used by investing activities ........... (26,875) (26,586) (27,897) (11,248) (10,800)
========== ========== ========== ========== ==========
</Table>
F-8
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from financing activities:
Indebtedness:
Borrowings .................................. $ 82,038 $ 44,923 $ 1,437 $ 1,437 $ 319,275
Principal payments .......................... (155,787) (29,162) (22,428) (6,990) (53,688)
Deferred financing costs .................... -- -- -- -- (9,342)
Loans from affiliates:
Loans ....................................... 52,000 -- -- -- --
Repayments .................................. -- (93,000) -- -- (301,432)
Capital contribution .......................... -- -- 3,815 8 --
Dividends paid ................................ (30) -- -- -- --
Other capital transactions with affiliates,
net ......................................... 11,567 (18,831) (35,631) -- 2,925
Distributions to minority interest ............ (6) (6) (5) (5) (11)
---------- ---------- ---------- ---------- ----------
Net cash used by financing activities ............ (10,218) (96,076) (52,812) (5,550) (42,273)
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents:
Net change during the period from:
Operating, investing and financing
activities ................................ 40,509 (24,891) (5,323) 1,377 (17,297)
Currency translation ........................ (2,988) (1,159) (1,065) (3,298) 2,965
Balance at beginning of period ................ 25,260 62,781 36,731 36,731 30,343
---------- ---------- ---------- ---------- ----------
Balance at end of period ...................... $ 62,781 $ 36,731 $ 30,343 $ 34,810 $ 16,011
========== ========== ========== ========== ==========
Supplemental disclosures:
Cash paid for:
Interest .................................... $ 35,606 $ 32,290 $ 38,607 $ 13,813 $ 19,835
Income taxes ................................ 12,491 25,544 20,690 9,465 5,623
</Table>
See accompanying notes to consolidated financial statements.
F-9
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION:
Kronos International, Inc. ("KII") is incorporated in the state of
Delaware, U.S.A., with its seat of management in Leverkusen, Germany. KII is a
wholly owned subsidiary of Kronos, Inc. ("Kronos"), a wholly owned subsidiary of
NL Industries, Inc. ("NL"). NL conducts its titanium dioxide pigments ("TiO(2)")
operations through Kronos. KII conducts Kronos' European TiO(2) operations. At
June 30, 2002, Valhi, Inc. ("Valhi") and Tremont Corporation ("Tremont"), each
affiliates of Contran Corporation ("Contran"), held approximately 62% and 21%,
respectively, of NL's outstanding common stock. Valhi and Tremont held
approximately 61% and 21%, respectively, of NL's outstanding common stock at
December 31, 2001. At June 30, 2002, Contran and its subsidiaries held
approximately 93% of Valhi's outstanding common stock, and Tremont Group, Inc.
("Tremont Group"), which is 80%-owned by Valhi and 20%-owned by NL, held
approximately 80% of Tremont'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 the sole trustee. Mr. Simmons, the Chairman of the Board of NL, Chairman of
the Board and Chief Executive Officer of Contran, the Chairman of the Board of
Valhi and a director of Tremont, may be deemed to control each of such companies
and KII. See Note 22.
KII's current operations are conducted primarily through its German,
Belgian and Norwegian subsidiaries with three TiO(2) plants in Germany, one
TiO(2) plant in Belgium and one TiO(2) plant and an ilmenite ore mining
operation in Norway. KII also operates TiO(2) sales and distribution facilities
in England, France, Denmark and the Netherlands. Prior to April 30, 2002, KII
also conducted operations in Canada through Kronos Canada, Inc. ("KC"), its
wholly owned subsidiary. Effective April 30, 2002, in anticipation of a proposed
debt securities offering, KII sold 100% of KC's capital stock to Kronos in
exchange for a promissory note receivable in the amount of $217 million bearing
interest of 7.87% per annum with a maturity date of April 30, 2012. KII has
accounted for the disposition of KC as a change in accounting entity.
Accordingly, KII's consolidated financial statements have been retroactively
restated to exclude the assets, liabilities, results of operations and cash
flows of KC for all periods presented. KII's cash dividends received from KC and
cash capital contributions to KC prior to April 30, 2002 are reflected as part
of "other capital transactions with affiliates, net" in the accompanying
consolidated statement of cash flows. The effect of the change in accounting
entity as a result of the sale of KC to Kronos was to reduce KII's net income by
the following amounts:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
---------- ---------- ----------
(IN THOUSANDS)
Net income .......... $ 11,365 $ 14,155 $ 10,133
</Table>
Information included in the consolidated financial statements and
related notes to the consolidated financial statements as of June 30, 2002 and
for the six months ended June 30, 2001 and 2002, is unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the information for the interim periods 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 and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the U.S. ("GAAP") have been condensed or omitted for the interim periods.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND MANAGEMENT'S ESTIMATES
The accompanying consolidated financial statements include the accounts
of KII and its majority-owned subsidiaries (collectively, the "Company") and
have been prepared in accordance with GAAP with the U.S. dollar as the reporting
currency. The Company also prepares financial statements on other bases, as
required in countries in which such entities are resident. All material
intercompany accounts and balances have been eliminated.
F-10
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Actual results may differ from previously
estimated amounts under different assumptions or conditions.
TRANSLATION OF FOREIGN CURRENCIES
The functional currencies of the Company include the euro, the
Norwegian kroner and the United Kingdom pound sterling. Assets and liabilities
of the Company are translated to U.S. dollars at year-end rates of exchange and
revenues and expenses are translated at weighted average exchange rates
prevailing during the year. Resulting translation adjustments are included in
other comprehensive income (loss), net of related income taxes, if applicable.
Currency transaction gains and losses are recognized in income currently and
include amounts related to KII's U.S. dollar-denominated note payable to Kronos
that has been remeasured into the non-U.S. dollar functional currency of KII.
See Note 8.
CASH EQUIVALENTS
Cash equivalents include bank deposits with original maturities of
three months or less.
INVENTORIES
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
PROPERTY, EQUIPMENT, DEPRECIATION AND DEPLETION
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to forty years for buildings and three to
twenty years for machinery and equipment. Depletion of mining properties is
computed by the unit-of-production and straight-line methods.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company assesses the impairment of
other long-lived assets (such as property and equipment and mining properties)
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144
as discussed under "Other" below.
LONG-TERM DEBT AND NOTES PAYABLE TO AFFILIATES
Where applicable, long-term debt and notes payable to affiliates are stated
net of unamortized original issue discount ("OID"). OID is amortized over the
period during which cash interest payments are not required and deferred
financing costs are amortized over the term of the applicable issue, both by the
interest method.
EMPLOYEE BENEFIT PLANS
Accounting and funding policies for retirement plans are described in
Note 10.
F-11
The Company accounts for stock-based employee compensation in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations. Under APBO No.
25, no compensation cost is generally recognized for fixed stock options in
which the exercise price is not less than the market price on the grant date.
Compensation cost recognized by the Company in accordance with APBO No. 25 was
nil in each of 1999, 2000 and 2001. The Company is charged by NL for stock
options exercised by employees of the Company and the amount of expense
recognized by the Company was nil, $.2 million and nil in 1999, 2000 and 2001,
respectively. See Note 17.
ENVIRONMENTAL REMEDIATION COSTS
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures generally are not discounted to present value. Recoveries of
remediation costs from other parties, if any, are reported as receivables when
their receipt is deemed probable. At December 31, 2000 and 2001, no receivables
for recoveries have been recognized.
NET SALES
The Company adopted the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended, in 2000. Revenue generally is realized or realizable
and earned when all of the requirements of SAB No. 101 are met, including when
title and the risks and rewards of ownership passes to the customer (generally
at the time the product is shipped to the customer). The impact of adopting SAB
No. 101 was not material. Fees charged to customers for shipping and handling
are included in net sales.
REPAIR AND MAINTENANCE COSTS
The Company performs planned major maintenance activities throughout
the year. Repair and maintenance costs estimated to be incurred in connection
with planned major maintenance activities are accrued in advance and are
included in cost of goods sold.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in selling, general and
administrative expense and were $37 million in 1999, $33 million in each of 2000
and 2001, and $17 million and $16 million for the six months ended June 30, 2001
and 2002, respectively.
INCOME TAXES
KII is a member of NL's consolidated U.S. federal income tax group (the
"NL Tax Group"). KII is a party to a U.S. federal income tax sharing agreement
(the "Kronos Tax Agreement"). Effective January 1, 2001, the NL Tax Group,
including KII, is included in the consolidated U.S. federal income tax group of
Contran (the "Contran Tax Group"). As a member of the Contran Tax Group, NL is a
party to a separate tax sharing agreement (the "Contran Tax Agreement"). The
Contran Tax Agreement provides that NL calculate its liability for U.S. income
taxes on a separate-company basis using the tax elections made by Contran.
During 2002 the Kronos Tax Agreement was amended (the "Amended Kronos Tax
Agreement"). The Amended Kronos Tax Agreement provides that Kronos calculate
KII's liability for U.S. income taxes on a separate-company basis using tax
elections consistent with Kronos' tax elections. Pursuant to the Amended Kronos
Tax Agreement, KII is to make distributions to or receive contributions from
Kronos in the amounts it would have paid to or received from the U.S. Internal
Revenue Service had it not been a member of the NL Tax Group, but rather a
separate taxpayer. Contributions under the Amended Kronos Tax Agreement are
limited to amounts previously distributed under the agreement. No distributions
have yet been made or received under the Amended Kronos Tax Agreement. KII would
not have reported a different provision for income taxes in 1999, 2000 and 2001
if the provision for income taxes in such periods had been computed in
accordance with the tax allocation policy contained in the Amended Kronos Tax
Agreement.
F-12
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries not included in the NL Tax Group. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance.
The Company's valuation allowance is equal to the amount of deferred tax assets
which the Company believes do not meet the "more-likely-than-not" recognition
criteria.
DERIVATIVES AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, effective January 1, 2001. SFAS
No. 133 establishes accounting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. Under SFAS No. 133, all derivatives are recognized as either assets
or liabilities and measured at fair value. The accounting for changes in fair
value of derivatives is dependent upon the intended use of the derivative. As
permitted by the transition requirements of SFAS No. 133, as amended, the
Company exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were issued or acquired prior to January 1, 1999. The
Company is not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 at December 31, 2001, and there was no impact on the
Company's financial statements from adopting SFAS No. 133.
The Company periodically uses interest rate swaps, currency swaps and
other types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 1999, 2000 and 2001.
OTHER
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations," for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations are accounted for by the purchase method, and
the pooling-of-interests method is prohibited.
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 Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant 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 any net assets to be disposed of by sale 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. The adoption of SFAS No. 144 effective January 1, 2002 did not have a
material effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company 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. 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 are retroactively reclassified and reported as a
component of income before extraordinary item. The Company had not previously
recognized any gains and losses from the early extinguishment of debt, thus
there was no impact on the Company upon adoption.
F-13
NEW 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, to 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.
NOTE 3 -- BUSINESS AND GEOGRAPHIC SEGMENTS:
The Company's operations are conducted in one operating business
segment -- the production and sale of TiO(2). Titanium dioxide pigments are used
to whiten, brighten and add opacity to thousands of commonly used products, such
as paints, plastics and paper, as well as fibers, rubber, ceramics, inks and
cosmetics. All of the Company's net assets are located in Europe and are
attributable to the TiO(2) reportable operating segment.
The Company evaluates its TiO(2) segment performance based on operating
income. Operating income is defined as income before income taxes, minority
interest, interest expense, interest expense to affiliates, certain nonrecurring
items and certain general corporate items. Corporate items excluded from
operating income include corporate expense, interest income from affiliates,
gains and losses from the disposal of long-lived assets outside the ordinary
course of business, and currency transaction gains and losses related to KII's
U.S. dollar-denominated note payable to Kronos discussed in Note 8. The
accounting policies of the TiO(2) segment are the same as those described in
Note 2. Interest income included in the calculation of TiO(2) operating income
is disclosed in Note 11 as "Trade interest income."
F-14
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Business segment -- TiO(2)
Net sales .................................................... $ 620,324 $ 620,525 $ 554,637 $ 299,410 $ 285,714
Other income, excluding corporate ............................ 19,255 11,756 15,556 5,201 3,091
---------- ---------- ---------- ---------- ----------
639,579 632,281 570,193 304,611 288,805
Cost of sales ................................................ 469,224 413,475 379,558 199,200 224,668
Selling, general and administrative, excluding corporate ..... 79,923 72,534 66,789 33,730 33,401
---------- ---------- ---------- ---------- ----------
Operating income ............................................. 90,432 146,272 123,846 71,681 30,736
Insurance recoveries, net .................................... -- -- 17,468 1,929 --
---------- ---------- ---------- ---------- ----------
Income before corporate items, income taxes and
minority interest .......................................... 90,432 146,272 141,314 73,610 30,736
General corporate income (expense):
Currency transaction gain (loss), net ...................... (36,881) (15,591) (9,355) (14,992) 15,839
Income (expense), net ...................................... -- -- (1,488) -- --
Interest expense ........................................... (7,562) (1,942) (4,305) (2,232) (1,697)
Interest expense to affiliates ............................. (29,876) (28,724) (34,145) (13,875) (18,699)
Interest income from affiliates ............................ 1,585 23,069 36,220 15,891 19,157
---------- ---------- ---------- ---------- ----------
Income before income taxes and minority interest ................ $ 17,698 $ 123,084 $ 128,241 $ 58,402 $ 45,336
========== ========== ========== ========== ==========
Geographic areas
Net sales -- point of origin:
Germany .................................................... $ 459,467 $ 444,050 $ 398,470 $ 214,045 $ 202,598
Belgium .................................................... 138,671 137,829 126,782 70,964 66,294
Norway ..................................................... 88,277 98,300 102,843 55,808 50,889
Other ...................................................... 90,442 92,691 82,320 44,603 42,966
Eliminations ............................................... (156,533) (152,345) (155,778) (86,010) (77,033)
---------- ---------- ---------- ---------- ----------
$ 620,324 $ 620,525 $ 554,637 $ 299,410 $ 285,714
========== ========== ========== ========== ==========
Net sales -- point of destination:
Europe ..................................................... $ 478,320 $ 479,637 $ 424,888 $ 230,162 $ 217,548
United States .............................................. 46,379 41,375 32,052 17,419 22,127
Latin America .............................................. 20,539 14,064 16,039 9,189 6,096
Asia ....................................................... 40,995 41,470 42,686 22,072 23,810
Other ...................................................... 34,091 43,979 38,972 20,568 16,133
---------- ---------- ---------- ---------- ----------
$ 620,324 $ 620,525 $ 554,637 $ 299,410 $ 285,714
========== ========== ========== ========== ==========
</Table>
NOTE 4 -- ACCOUNTS AND NOTES RECEIVABLE:
<Table>
<Caption>
DECEMBER 31,
------------------------ JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Trade receivables ........................... $ 75,899 $ 65,417 $ 94,848
Insurance claims receivable ................. 2,236 11,505 452
Recoverable VAT and other receivables ....... 13,645 12,126 7,886
Allowance for doubtful accounts ............. (1,662) (1,626) (1,906)
---------- ---------- ----------
$ 90,118 $ 87,422 $ 101,280
========== ========== ==========
</Table>
F-15
NOTE 5 -- INVENTORIES:
<Table>
<Caption>
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Raw materials ........... $ 38,014 $ 33,911 $ 28,170
Work in process ......... 5,261 6,421 7,667
Finished products ....... 55,368 61,191 54,297
Supplies ................ 20,014 19,793 23,526
---------- ---------- ----------
$ 118,657 $ 121,316 $ 113,660
========== ========== ==========
</Table>
NOTE 6 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<Table>
<Caption>
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Accounts payable ........ $ 34,505 $ 36,974 $ 40,972
---------- ---------- ----------
Accrued liabilities:
Employee benefits ..... 17,664 16,227 17,699
Other ................. 24,821 25,645 33,794
---------- ---------- ----------
42,485 41,872 51,493
---------- ---------- ----------
$ 76,990 $ 78,846 $ 92,465
========== ========== ==========
</Table>
NOTE 7 -- NOTES PAYABLE AND LONG-TERM DEBT:
<Table>
<Caption>
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Notes payable ..................... $ 69,970 $ 46,201 $ --
========== ========== ==========
Long-term debt:
8.875% Senior Secured Notes ..... $ -- $ -- $ 283,005
Revolving credit facility ....... -- -- 39,649
Other .......................... 2,093 2,498 2,394
---------- ---------- ----------
2,093 2,498 325,048
Less current maturities ........... 730 1,033 1,225
---------- ---------- ----------
$ 1,363 $ 1,465 $ 323,823
========== ========== ==========
</Table>
Notes payable as of December 31, 2001 consisted of short-term
borrowings denominated in non-U.S. currencies due within one year from non-U.S.
banks. Borrowings totaled $70 million (E51 million and NOK 200 million) at
December 31, 2000 and $46 million (E27 million and NOK 200 million) at
December 31, 2001. Weighted average interest rates on the euro-denominated note
payable and the Norwegian kroner-denominated note payable were 5.33% and 7.92%,
respectively, at December 31, 2000 and 3.84% and 7.27%, respectively, at
December 31, 2001. Notes payable totaling $53.2 million were repaid on June 28,
2002 with proceeds from the revolving credit facility and available cash, and
the agreements were terminated. See description of revolving credit facility
below.
In June 2002 KII issued E285 million ($280 million when issued and
$283 million at June 30, 2002) principal amount of 8.875% Senior Secured Notes
(the "Notes") due 2009. The Notes are collateralized by first priority liens on
65% of the common stock or other equity interests of certain of KII's first-tier
subsidiaries. The Notes are issued pursuant to an indenture which contains a
number of covenants and restrictions which, among other
F-16
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 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
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 Notes at 101% of the
principal amount. KII would also be required to make an offer to purchase a
specified portion of its 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. At June 30, 2002, KII was in compliance with all
the covenants. The Notes require cash interest payments on June 30 and December
30, commencing on December 30, 2002. KII has agreed to make an offer to exchange
the Notes for registered publicly traded notes that have substantially identical
terms as the Notes. In the event that KII does not (i) file a registration
statement regarding such an exchange offer with the Securities and Exchange
Commission, (ii) cause the registration statement to be declared effective, and
(iii) complete the exchange offer to exchange the Notes, in each case within
specified time limits, the interest rate on the Notes would increase by up to
..75% per year.
In June 2002 KII's operating subsidiaries in Germany, Belgium and
Norway, entered into a three-year E80 million secured revolving credit facility
("Credit Facility"). The Credit Facility is available in multiple currencies,
including U.S. dollars, euros and Norwegian kroner. As of June 30, 2002, E13
million ($13 million) and NOK 200 million ($26 million) was borrowed at closing,
and along with available cash, was used to repay and terminate KII's short term
notes payable. E40 million was available for future working capital requirements
and general corporate purposes of the borrowers at June 30, 2002. Borrowings
bear interest at the applicable interbank market rate plus 1.75%. As of June 30,
2002, the interest rate was 5.15% and 8.80% on the euro and Norwegian kroner
borrowings, respectively, and the weighted average interest rate was 7.61%.
The Credit Facility is collateralized by accounts receivable and
inventory of the borrowers, plus a limited pledge of certain other assets of the
Belgian borrower. The Credit Facility contains, among others, various
restrictive covenants, including restrictions on incurring liens, asset sales,
additional financial indebtedness, mergers, investments and acquisitions,
transactions with affiliates and dividends. The Company has a E5 million
sub-limit for issuing letters of credit with no letters of credit issued at June
30, 2002. The borrowers were in compliance with all the covenants as of June 30,
2002.
Deferred financing costs of $9.3 million for the Notes and the Credit
Facility are being amortized over the life of the respective agreements and are
included in other noncurrent assets as of June 30, 2002.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $8 million and $42 million at December
31, 2001 and June 30, 2002, respectively, (including $40 million under the
Credit Facility at June 30, 2002).
The aggregate maturities of long-term debt as of December 31, 2001 are
shown in the table below (excluding the effects of the Notes offering and Credit
Facility).
<Table>
<Caption>
DECEMBER 31,
YEARS ENDING DECEMBER 31, 2001
- ------------------------- ------------
(IN THOUSANDS)
2002 ................... $ 1,033
2003 ................... 1,008
2004 ................... 216
2005 ................... 115
2006 ................... 112
2007 ................... 14
------------
$ 2,498
============
</Table>
F-17
NOTE 8 -- NOTES PAYABLE TO KRONOS, INC.:
<Table>
<Caption>
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
11.75% Second Tier Senior Mirror Note .... $ 194,000 $ 194,000 $ --
Euro-denominated note .................... -- 286,363 --
---------- ---------- ----------
$ 194,000 $ 480,363 $ --
========== ========== ==========
</Table>
NL had $194 million of 11.75% Senior Secured Notes due 2003 (the "NL
Notes") at December 31, 2000 and 2001. KII had a Second-Tier Senior Mirror Note
(the "KII Mirror Note") payable to Kronos, which had a First-Tier Senior Mirror
Note (the "Kronos Mirror Note") payable to NL. The terms of the KII Mirror Note
and the Kronos Mirror Note were identical to the terms of the NL Notes with
respect to the maturity dates and interest rates with interest paid
semi-annually. The NL Notes were collateralized by a first priority lien on the
common stock, and redeemable preferred stock and profit participation
certificates of KII, the KII Mirror Note, the Kronos Mirror Note and other
collateral pledged by NL and Kronos. An acceleration with respect to the
principal amount of the NL Notes would have resulted in an automatic
acceleration of the KII Mirror Note and the Kronos Mirror Note. In 2000 NL
redeemed $50 million (par value) of the NL Notes using cash provided by KII,
prepaying $50 million (par value) of the KII Mirror Note.
On March 22, 2002, NL redeemed $25 million principal amount of the NL
Notes at the current call price of 100%, and as a result $25 million principal
amount of the KII Mirror Note was repaid. In addition, immediately following the
closing of the Notes offering (see Note 7), KII effectively loaned to NL
sufficient funds for NL to redeem in full the remaining $169 million principal
amount of the NL Notes. In accordance with the terms of the indenture governing
the NL Notes, on June 28, 2002, NL irrevocably placed on deposit with the
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 being the primary obligor under the indenture as
of June 30, 2002, the NL Notes were derecognized as of that date along with the
funds placed on deposit with the trustee to effect the July 28, 2002 redemption.
KII recognized a loss on the early extinguishment of debt of approximately $1.5
million in the second quarter of 2002, consisting primarily of the interest on
the KII Mirror Note for the period from July 1 to July 28, 2002. Such loss was
recognized as a component of interest expense. The Kronos Mirror Note and the
KII Mirror Note were deemed repaid in accordance with the terms and conditions
of such agreements, and the agreements were canceled.
The quoted market price of the NL Notes per $100 principal amount was
$101 and $100.47 at December 31, 2000 and December 31, 2001, respectively, which
the Company believed was a reasonable approximation of the fair value of the KII
Mirror Note for the periods presented.
The euro-denominated note payable to Kronos (E323.9 million at December
31, 2001) was originally due In 2010 and bore interest at 6% payable monthly.
The euro note payable to Kronos was established in 2001 as a result of a series
of noncash transactions between KII, NL and Kronos. A portion of the note
payable (E217.6 million, including interest of E6.3 million) was prepaid in
April 2002, using as consideration an equivalent amount of KII's
euro-denominated note receivable from NL. See Note 17. The remaining balance of
E113.8 million (including interest) was repaid as of June 28, 2002 with proceeds
from the E285 million Notes offering described in Note 7 and the note agreement
was canceled.
F-18
NOTE 9 -- OTHER NONCURRENT LIABILITIES:
<Table>
<Caption>
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Environmental costs .......... $ 7,630 $ 5,662 $ 6,110
Employee benefits ............ 3,841 3,476 3,842
Insurance claims expense ..... 1,002 821 414
Other ........................ 902 1,887 2,108
---------- ---------- ----------
$ 13,375 $ 11,846 $ 12,474
========== ========== ==========
</Table>
NOTE 10 -- EMPLOYEE BENEFIT PLANS:
COMPANY-SPONSORED PENSION PLANS
The Company maintains various defined benefit pension plans covering
substantially all employees. Personnel are covered by plans in their respective
countries.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 2000 2001
---------- ---------- ----------
(PERCENTAGES)
Discount rate .................................... 5.8 to 6.3 6.0 to 6.5 5.8 to 7.3
Rate of increase in future compensation levels ... 3.0 to 3.3 3.0 to 4.0 2.8 to 3.0
Long-term rate of return on plan assets .......... 6.0 to 9.0 7.0 to 8.0 6.8 to 7.8
</Table>
Plan assets are comprised primarily of investments in corporate equity
and debt securities, short-term investments, mutual funds and group annuity
contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
---------- ---------- ----------
(IN THOUSANDS)
Net periodic pension cost:
Service cost benefits .................................... $ 3,118 $ 3,114 $ 3,087
Interest cost on projected benefit obligation ("PBO") .... 11,051 9,793 10,268
Expected return on plan assets ........................... (10,056) (9,746) (9,676)
Amortization of prior service cost ....................... 267 238 201
Amortization of net transition obligation ................ 385 331 320
Recognized actuarial losses .............................. 1,068 196 415
---------- ---------- ----------
$ 5,833 $ 3,926 $ 4,615
========== ========== ==========
</Table>
F-19
The funded status of the Company's defined benefit pension plans is set
forth below.
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 2001
---------- ----------
(IN THOUSANDS)
Change in PBO:
Beginning of year ......................... $ 183,509 $ 172,762
Service cost .............................. 3,114 3,087
Interest .................................. 9,793 10,268
Participant contributions ................. 977 958
Amendments ................................ -- 106
Actuarial loss (gain) ..................... (112) 6,241
Benefits paid ............................. (9,668) (11,274)
Change in currency exchange rates ......... (14,851) (1,562)
---------- ----------
End of year ............................ 172,762 180,586
========== ==========
Change in fair value of plan assets:
Beginning of year ......................... 150,745 138,564
Actual return on plan assets .............. 2,423 6,603
Employer contributions .................... 7,088 6,957
Participant contributions ................. 977 958
Benefits paid ............................. (9,668) (11,274)
Change in currency exchange rates ......... (13,001) (4,650)
---------- ----------
End of year ............................ 138,564 137,158
========== ==========
Funded status at year end:
Plan assets less than PBO ................. (34,198) (43,428)
Unrecognized actuarial loss ............... 23,140 35,882
Unrecognized prior service cost ........... 1,693 2,713
Unrecognized net transition obligation .... 1,115 739
---------- ----------
$ (8,250) $ (4,094)
========== ==========
Amounts recognized in the balance sheet:
Prepaid pension cost ...................... $ 16,509 $ 14,696
Accrued pension cost:
Current ................................ (5,855) (5,573)
Noncurrent ............................. (18,904) (18,696)
Unrecognized net pension obligations ...... -- 446
Accumulated other comprehensive loss ...... -- 5,033
---------- ----------
$ (8,250) $ (4,094)
========== ==========
</Table>
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 2000 and 2001, 100% of the projected
benefit obligations of such plans related to non-U.S. plans.
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 2001
---------- ----------
(IN THOUSANDS)
Projected benefit obligation ...... $ 137,684 $ 141,269
Accumulated benefit obligation .... 121,311 129,884
Fair value of plan assets ......... 99,114 99,339
</Table>
INCENTIVE BONUS PROGRAMS
Certain employees are eligible to participate in the Company's various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee, if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for certain employees, individual
performance.
F-20
NOTE 11 -- OTHER INCOME (EXPENSE), NET:
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Currency transaction gains (losses), net .... $ (25,618) $ (10,598) $ (9,098) $ (13,705) $ 14,921
Royalty income .............................. 5,922 5,801 5,421 3,103 2,890
Trade interest income ....................... 2,077 1,544 2,148 970 539
Disposition of property and equipment ....... (225) (1,404) (548) (240) 597
Insurance recoveries, net (see Note 14) ..... -- -- 7,222 -- --
Other, net .................................. 218 822 1,056 81 (17)
---------- ---------- ---------- ---------- ----------
$ (17,626) $ (3,835) $ 6,201 $ (9,791) $ 18,930
========== ========== ========== ========== ==========
</Table>
Included in currency transaction gains (losses), net are noncash gains
(losses) associated with the Company's notes payable to affiliates. See Note 8.
Noncash currency transaction losses totaled $36.9 million, $15.6 million, $9.4
million and $15.0 million in 1999, 2000, 2001 and the first six months of 2001.
Noncash currency transaction gains totaled $13.1 million in the first six months
of 2002.
The Company receives royalty income from KC for use of certain of the
Company's intellectual property.
NOTE 12 -- OTHER ITEMS:
Advertising costs are expensed as incurred and were $1 million in each
of 1999, 2000 and 2001, and $.3 million for each of the six months ended June
30, 2001 and 2002, respectively.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $6 million in each of 1999 and 2000, $5
million in 2001, and $3 million for each of the six months ended June 30, 2001
and 2002, respectively.
Interest capitalized in connection with long-term capital projects was
nil in 1999, 2000, 2001, and each of the six months ended June 30, 2001 and
2002, respectively.
NOTE 13 -- INCOME TAXES:
The components of (i) income from continuing operations before income
taxes and minority interest ("pretax income"), (ii) the difference between the
provision for income taxes attributable to pretax income and the amounts that
would be expected using the U.S. federal statutory income tax rate of 35%, (iii)
the provision for income taxes and (iv) the comprehensive tax provision are
presented below.
F-21
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Pretax income:
Germany ................................................. $ (26,656) $ 63,051 $ 88,359 $ 28,965 $ 33,060
Other non-U.S. .......................................... 44,354 60,033 39,882 29,437 12,276
---------- ---------- ---------- ---------- ----------
$ 17,698 $ 123,084 $ 128,241 $ 58,402 $ 45,336
========== ========== ========== ========== ==========
Expected tax expense .................................... $ 6,194 $ 43,079 $ 44,884 $ 20,441 $ 15,868
Non-U.S. tax rates ...................................... 7,550 (6,253) (8,365) (2,450) (677)
Resolution of German income tax audits .................. (13,844) (5,500) -- -- --
Change in valuation allowance:
Corporate restructuring in Germany and other .......... (49,841) -- (23,247) -- --
Change in German income tax law ....................... 24,070 -- -- -- --
Increase (decrease) in certain deductible
temporary differences that the Company
believes do not meet the
"more-likely-than-not" recognition criteria ......... (12,223) (375) -- (4,627) (1,783)
Currency transaction gains and losses for which no
income taxes are provided ............................. 12,908 5,457 3,274 5,247 (4,592)
Incremental tax on income of companies not
included in the NL Tax Group .......................... 791 -- -- -- --
German rate change adjustment of deferred taxes ......... -- 5,695 -- -- --
Other, net .............................................. 140 785 (2,049) (1,356) (1,084)
---------- ---------- ---------- ---------- ----------
Income tax expense (benefit) ............................ $ (24,255) $ 42,888 $ 14,497 $ 17,255 $ 7,732
========== ========== ========== ========== ==========
Provision for income taxes:
Current income tax expense:
Germany ............................................... $ 6,900 $ 20,814 $ 10,245 $ 8,933 $ (1,362)
Other non-U.S. ........................................ 10,933 16,848 10,817 7,718 3,998
---------- ---------- ---------- ---------- ----------
17,833 37,662 21,062 16,651 2,636
---------- ---------- ---------- ---------- ----------
Deferred income tax expense (benefit):
Germany ............................................... $ (40,398) $ 6,099 $ (6,183) $ 617 $ 5,632
Other non-U.S. ........................................ (1,690) (873) (382) (13) (536)
---------- ---------- ---------- ---------- ----------
(42,088) 5,226 (6,565) 604 5,096
---------- ---------- ---------- ---------- ----------
$ (24,255) $ 42,888 $ 14,497 $ 17,255 $ 7,732
========== ========== ========== ========== ==========
Comprehensive provision (benefit) for income
taxes allocable to:
Pretax income ......................................... $ (24,255) $ 42,888 $ 14,497 $ 17,255 $ 7,732
Other comprehensive loss -- pension liabilities ....... -- -- (1,064) -- --
---------- ---------- ---------- ---------- ----------
$ (24,255) $ 42,888 $ 13,433 $ 17,255 $ 7,732
========== ========== ========== ========== ==========
</Table>
F-22
The components of the net deferred tax liability are summarized below.
<Table>
<Caption>
DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------------
2000 2001 2002
------------------------ ------------------------ ------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX
------------------------ ------------------------ ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- ---------- ----------- ---------- -----------
(UNAUDITED)
(IN THOUSANDS)
Tax effect of temporary differences relating to:
Inventories ................................. $ 838 $ (2,966) $ 477 $ (2,849) $ 575 $ (1,826)
Property and equipment ...................... 61,738 (16,721) 42,721 (15,980) 44,254 (18,207)
Accrued (prepaid) pension cost .............. -- (21,838) 258 (21,665) 254 (24,740)
Accrued liabilities and other deductible
differences ............................... 2,971 -- 3,553 -- 3,247 --
Other taxable differences ................... -- (31,436) -- (23,673) -- (27,045)
Tax loss and tax credit carryforwards .......... 115,612 -- 100,709 -- 118,347 --
Valuation allowance ............................ (155,572) -- (121,681) -- (143,359) --
---------- ----------- ---------- ----------- ---------- -----------
Gross deferred tax assets (liabilities) ... 25,587 (72,961) 26,037 (64,167) 23,318 (71,818)
Reclassification, principally netting by tax
jurisdiction ................................ (24,496) 24,496 (24,854) 24,854 (21,769) 21,769
---------- ----------- ---------- ----------- ---------- -----------
Net total deferred tax assets
(liabilities) ............................. 1,091 (48,465) 1,183 (39,313) 1,549 (50,049)
Net current deferred tax assets
(liabilities) ............................. 858 (1,822) 497 (1,530) 597 (1,732)
---------- ----------- ---------- ----------- ---------- -----------
Net noncurrent deferred tax assets
(liabilities) ............................. $ 233 $ (46,643) $ 686 $ (37,783) $ 952 $ (48,317)
========== =========== ========== =========== ========== ===========
</Table>
Changes in the Company's deferred income tax valuation allowance during
the past three years and the six months ended June 30, 2001 and 2002,
respectively, are summarized below.
<Table>
<Caption>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Balance at beginning of year ............................... $ 71,280 $ 196,627 $ 155,572 $ 155,572 $ 121,681
Recognition of certain deductible tax attributes
which previously did not meet the "more-likely-
than-not" recognition criteria .......................... (37,994) (375) (23,247) (4,627) (1,783)
Offset to the change in gross deferred income tax
assets due principally to redeterminations of certain
tax attributes and implementation of certain
tax planning strategies ................................. 178,056 (24,955) (3,157) (3,261) 8,873
Foreign currency translation ............................... (14,715) (15,725) (7,487) (11,699) 14,588
---------- ---------- ---------- ---------- ----------
Balance at end of year ..................................... $ 196,627 $ 155,572 $ 121,681 $ 135,985 $ 143,359
========== ========== ========== ========== ==========
</Table>
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax
F-23
asset related to certain German tax attributes. The Company does not expect its
future current income tax expense to be affected by the rate change in Germany.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO(2) plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately E10.4 million ($9.2 million at December 31,
2001 and $10.3 million at June 30, 2002). The Company has filed protests to the
assessments for the years 1991 to 1997. The Company is in discussions with the
Belgian tax authorities and believes that a significant portion of the
assessments is without merit.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
The Company recognized a $40 million noncash income tax benefit in 1999
comprised of a favorable resolution of the Company's tax contingency in Germany
($14 million) and a net reduction in the Company's deferred income tax valuation
allowance due to a change in estimate of the Company's ability to utilize
certain income tax attributes under the "more-likely-than-not" recognition
criteria ($26 million).
The $26 million net reduction in the Company's deferred income tax
valuation allowance in 1999 is comprised of (i) a $50 million decrease in the
valuation allowance to recognize the benefit of certain deductible income tax
attributes which the Company now believes meet the recognition criteria as a
result of, among other things, a corporate restructuring of the Company's German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to
reduce the previously recognized benefit of certain other deductible income tax
attributes which the Company now believes do not meet the recognition criteria
due to a change in German tax law.
During the fourth quarter of 2001 and the first half of 2002, the
Company recognized income tax benefits of $23.2 million and $1.8 million,
respectively, attributable to decreases in the valuation allowance due to a
change in estimate of the Company's ability to utilize certain German income tax
attributes that did not previously meet the "more-likely-than-not" recognition
criteria.
At December 31, 2001 and June 30, 2002 the Company had approximately
$317 million and $355 million, respectively, of income tax loss carryforwards in
Germany with no expiration date. At December 31, 2001 and June 30, 2002, the
Company had deferred tax valuation allowance totaling approximately $121.7
million and $143.3 million, respectively.
NOTE 14 -- LEVERKUSEN FIRE AND INSURANCE CLAIM:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO(2) plant ("Sulfate Plant") and, as
a result, production of TiO(2) at the Leverkusen facility was halted. The fire
did not enter the Company's adjacent 125,000 metric ton chloride-process TiO(2)
plant ("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption
F-24
losses caused by the fire were covered by insurance as noted below, but the
effect on the financial results of the Company on a quarter-to-quarter basis was
impacted by the timing and amount of insurance recoveries.
The Company settled its insurance claim involving the Leverkusen fire
for approximately $56 million during the fourth quarter of 2001 ($46 million
received as of December 31, 2001, with the remaining $9.5 million received in
January 2002), of which approximately $27 million related to business
interruption ($5 million received as of June 30, 2001) and approximately
$29 million related to property damage, clean-up costs and other extra expenses
($5.5 million received as of June 30, 2001). The Company recognized a $17.5
million pre-tax gain in 2001 ($1.9 million pre-tax gain recognized in the first
six months of 2001) related to the property damage recovery after deducting
$11.6 million of clean-up costs and other extra expenses incurred and the
carrying value of assets destroyed in the fire. The gain was excluded from the
determination of operating income. The $27 million of business interruption
proceeds recognized in 2001 were allocated between other income, excluding
corporate, which reflects recovery of lost margin ($7 million) and as a
reduction of cost of sales to offset unallocated period costs ($20 million). No
additional insurance recoveries related to the Leverkusen fire are expected to
be received and there was no impact on the results of operations of the Company
during the first six months of 2002.
NOTE 15 -- RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos and related entities consider,
review and evaluate, such transactions. Depending upon the business, tax and
other objectives then relevant, and restrictions under the NL indenture and
other agreements, it is possible that the Company might be a party to one or
more such transactions in the future.
The Company is a party to a cost sharing agreement with Kronos whereby
Kronos provides certain management, financial, insurance and administrative
services to the Company on a fee basis. The Company's expense was $.7 million in
1999, $.2 million in 2000 and 2001, and $.1 million and $.6 million for the six
months ended June 30, 2001 and 2002, respectively.
Sales of TiO(2) to Kronos (US), Inc. ("KUS"), an affiliate, were $46.3
million in 1999, $41.1 million in 2000, $32.0 million in 2001, and $17.4 million
and $21.9 million for the six months ended June 30, 2001 and 2002, respectively.
Sales of TiO(2) to KC were $10.4 million in 1999, $12.4 million in 2000, $7.2
million in 2001, and $4.9 million and $5.1 million for the six months ended June
30, 2001 and 2002, respectively.
KUS purchases the rutile and slag feedstock used as a raw material in
all of the Company's chloride process TiO(2) facilities. The Company purchases
such feedstock from KUS for use in its facilities for an amount equal to the
amount paid by KUS to the third-party supplier plus a 2.5% administrative fee.
Such feedstock purchases were $88.2 million in 1999, $89.4 million in 2000,
$91.5 million in 2001, and $42.9 million and $35.1 million in the six months
ended June 30, 2001 and 2002, respectively.
Purchases of TiO(2) from KUS were $3.7 million in 1999, $3.9 million in
2000, $1.2 million in 2001, and $1.2 million and nil for the six months ended
June 30, 2001 and 2002, respectively. Purchases of TiO(2) from KC were $1.1
million in 1999, $3.4 million in 2000, $.1 million in 2001, and nil for each of
the six months ended June 30, 2001 and 2002, respectively.
F-25
Royalty income received from KC for use of certain of the Company's
intellectual property was $5.9 million in 1999, $5.8 million in 2000, $5.4
million in 2001, and $3.1 million and $2.9 million for the six months ended June
30, 2001 and 2002, respectively.
Interest income from affiliates related to notes receivable from
affiliates was $1.6 million in 1999, $23.1 million in 2000, $36.2 million in
2001, and $15.9 million and $19.2 million for the six months ended June 30, 2001
and 2002, respectively.
The Company is party to master global NL insurance coverage policies
with regard to property, business interruption, excess liability, and other
coverages. The costs associated with these policies aggregated $2.9 million,
$3.1 million and $7.1 million in 1999, 2000 and 2001.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
<Table>
<Caption>
DECEMBER 31,
------------------------ JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Receivable from:
NL .................... $ 221 $ -- $ 1,078
KC .................... 1,612 1,084 2,266
Other affiliates ...... -- 50 60
---------- ---------- ----------
$ 1,833 $ 1,134 $ 3,404
========== ========== ==========
Payable to:
Kronos ................ $ (4,818) $ (6,487) $ (1,951)
KUS ................... (17,784) (1,400) (1,282)
NL .................... -- (42) --
---------- ---------- ----------
$ (22,602) $ (7,929) $ (3,233)
========== ========== ==========
</Table>
Net amounts between the Company, KUS and KC were generally related to
product purchases and sales, whereas affiliate balances with NL and Kronos were
related primarily to accrued interest on affiliate loans. See Note 17 for
discussion of notes receivable from affiliates.
NOTE 16 -- REDEEMABLE PREFERRED STOCK AND PROFIT PARTICIPATION CERTIFICATES:
The Company's redeemable preferred stock and profit participation
certificates structure at December 31, 2001 and 2000, and June 30, 2002,
respectively, is summarized below:
Preferred Stock -- $100 par value; 2,000 Shares Authorized:
Series A (February 1999) -- 1,000 shares authorized, 738 shares
issued and outstanding, designated nonvoting cumulative preferred stock,
Series A, with an annual dividend rate of $11,354 per share (cumulative and
unpaid dividends of $15.9 million, $24.3 million and $28.5 million at
December 31, 2000 and 2001, and June 30, 2002, respectively), and with
liquidation and redemption preferences of $257,361 per share plus accrued
and unpaid dividends. The Series A shares ($189.9 million) were issued to
Kronos in February 1999 as a result of a capital contribution to the
Company via the reduction of affiliate notes payable to NL and Kronos. The
Series A shares may be redeemed by the Company or Kronos on or after
February 1, 2002. See Note 22.
Series B (February 1999) -- 1,000 shares authorized, 647 shares
issued and outstanding, designated nonvoting cumulative preferred stock,
Series B, with an annual dividend rate of $11,347 per share (cumulative and
unpaid dividends of $14.7 million, $22.0 million and $25.7 million at
December 31, 2000 and 2001, and June 30, 2002, respectively) and with
liquidation and redemption preferences of $257,193 per share plus accrued
and unpaid dividends. The Series B shares were issued to Kronos in February
1999 in exchange for
F-26
Kronos' contribution to the Company of its intellectual property and the
shares were recorded at carryover basis in accordance with GAAP due to the
common control of the Company and Kronos. The intellectual property was
transferred to the Company and recorded at Kronos' carryover basis of zero.
Thus, the original basis of the Series B shares was zero and the shares
have been accreted to the redemption value of $166.4 million at June 30,
2002 using the interest method. The Series B shares may be redeemed by the
Company or Kronos on or after February 1, 2002. See Note 22.
Kronos waived its right to redeem the Series A and Series B
redeemable preferred stock prior to November 1, 2003.
Profit Participation Certificates ("PPCs") (December 1999) --
DM100 par value: 5,500,000 shares authorized, issued and outstanding,
designated nonvoting cumulative preferred PPCs, with an annual dividend of
4% per share based on earnings of the Company and before any common stock
dividends to Kronos. Kronos has waived its right to dividend distributions
for all periods presented and through December 2002. The PPCs were issued
to Kronos ($284.3 million) in December 1999 as part of a recapitalization
of the Company. The PPC shares may be redeemed at the Company's or Kronos'
option after due notice of one year is given at par value plus any accrued
and unpaid dividends. See Note 22.
NOTE 17 -- CAPITAL STOCK AND NOTES RECEIVABLE FROM AFFILIATES:
COMMON STOCK
Common stock -- $100 par value: (voting) -- 100,000 shares authorized
(3,196 shares issued and outstanding at December 31, 2000 and 2001, and June 30,
2002). See Note 22 on the conversion of the Series A and Series B redeemable
preferred stock into 1,385 shares of KII common stock and the redemption of
1,613 shares of KII common stock in exchange for notes receivable from
affiliates. At July 30, 2002, 2,968 shares of common stock were issued and
outstanding upon completion of the recapitalization of the Company.
COMMON STOCK OPTIONS
The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option
Plan") provides for the discretionary grant of restricted common stock, stock
options, stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company. Although certain stock options
granted pursuant to a similar plan which preceded the NL Option Plan
("Predecessor Option Plan") remain outstanding at December 31, 2001, no
additional options may be granted under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan and, at December 31, 2001, 3,663,000 shares were available
for future grants. The NL Option Plan provides for the grant of options that
qualify as incentive options and for options which are not so qualified.
Generally, stock options and SARs (collectively, "options") are granted at a
price equal to or greater than 100% of the market price at the date of grant,
vest over a five-year period and expire ten years from the date of grant.
Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.
F-27
Changes in outstanding options to purchase NL common stock granted to
employees of the Company pursuant to the NL Option Plan and the Predecessor
Option Plan are summarized in the table below.
<Table>
<Caption>
EXERCISE PRICE PER AMOUNT
SHARE PAYABLE
------------------- UPON
SHARES LOW HIGH EXERCISE
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Outstanding at December 31, 1998 ............ 31 $ 8.69 $ 17.97 $ 456
Granted ................................... 22 11.28 11.28 243
-------- -------- -------- --------
Outstanding at December 31, 1999 ............ 53 8.69 17.97 699
Granted ................................... 46 14.25 14.25 656
Exercised ................................. (13) 8.69 17.97 (173)
-------- -------- -------- --------
Outstanding at December 31, 2000 ............ 86 11.28 17.97 1,182
Granted ................................... 60 20.11 20.11 1,207
Exercised ................................. (4) 11.28 14.25 (49)
-------- -------- -------- --------
Outstanding at December 31, 2001 ............ 142 $ 11.28 $ 20.11 $ 2,340
======== ======== ======== ========
</Table>
At December 31, 1999, 2000 and 2001 options to purchase 12,600, 7,200
and 17,500 shares, respectively, were exercisable and options to purchase 26,400
shares become exercisable in 2002. Of the exercisable options, options to
purchase 12,400 shares at December 31, 2001 had exercise prices less than NL's
December 31, 2001 quoted market price of $15.27 per share. Outstanding options
at December 31, 2001 expire at various dates through 2011, with a
weighted-average remaining life of eight years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 1999, 2000 and 2001 were $6.94, $4.83 and $7.52 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1999, 2000 and 2001: stock price volatility of
50%, 48% and 46% in 1999, 2000 and 2001, respectively; risk-free rate of return
of 6% in 1999 and 5% in 2000 and 2001; dividend yield of 1.2% in 1999, 4.9% in
2000 and 4.0% in 2001; and an expected term of 9 years in 1999, 2000 and 2001.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma net income available to common stock was as
follows.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(IN THOUSANDS)
Net income available to common stock -- as reported ... $ 23,302 $ 64,282 $ 1,262
Net income available to common stock -- pro forma ..... $ 23,150 $ 64,026 $ 959
</Table>
NOTES RECEIVABLE FROM AFFILIATES
Long-term notes receivable from affiliates are included as a component
of equity in accordance with GAAP as settlement of the affiliate notes
receivable balances is not currently contemplated within the foreseeable future.
The notes are summarized in the following table.
F-28
<Table>
<Caption>
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Notes receivable from:
NL:
8.7% Fixed rate ........................ $ 97,977 $ 106,783 $ 111,440
6.0% Fixed rate euro-denominated ....... -- 286,363 111,872
6.0% Fixed rate ........................ -- -- 20,166
Variable rate .......................... 203,718 262,772 241,826
Kronos:
7.87% Fixed rate ....................... -- -- 219,901
7.0% Fixed rate ........................ -- -- 2,078
Variable rate .......................... 42,082 44,925 45,724
---------- ---------- ----------
$ 343,777 $ 700,843 $ 753,007
========== ========== ==========
</Table>
The 8.7% fixed-rate note receivable from NL matures in 2008 with
interest payable quarterly. The 6.0% fixed-rate euro-denominated note receivable
from NL (E323.9 million and E113.8 million at December 31, 2001 and June 30,
2002) matures in 2010 with interest payable monthly. The note receivable from NL
was established in 2001 as a result of a series of noncash transactions between
KII, NL and Kronos. The note receivable from NL was reduced in April 2002 to
$101 million and correspondingly, KII's note payable to Kronos was also reduced
to $101 million. See Note 8. The 6.0% fixed-rate notes receivable consist of two
individual notes which mature in 2010 with interest payable semi-annually.
Variable-rate notes receivable from NL consists of eight individual
notes from NL of which five mature in 2003 and three mature in 2010, with
interest rates ranging from U.S. LIBOR plus .625% to U.S. LIBOR plus 1.625%
(6.789% to 7.789% at December 31, 2000, 2.5875% to 3.5875% at December 31, 2001,
and 2.575% to 3.575% at June 30, 2002, respectively) payable semi-annually.
The Company has three notes receivable from Kronos. The 7.87%
fixed-rate note receivable of $217 million matures in 2012, with interest
payable quarterly, and arose from the sale of KC to Kronos in April 2002. See
Note 1. The 7.0% fixed-rate note receivable of $2.1 million matures in 2004 with
interest payable semi-annually. The variable rate note receivable matures in
2003 and bears interest at U.S. LIBOR plus 1.625% (7.789% at December 31, 2000,
and 3.5875% at December 31, 2001, and 3.575% at June 30, 2002) payable
semi-annually.
The Company periodically converts interest receivable from affiliates
to notes receivable from affiliates. For the years ended 1999, 2000, 2001, and
the six months ended June 30, 2001 and 2002, respectively, the interest
transferred to notes receivable from affiliates totaled nil, $24.8 million,
$25.0 million, $13.6 million and $12.6 million, respectively.
See Note 22 for the exchange of notes receivable from affiliates as
part of the recapitalization of the Company.
NOTE 18 -- COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
The Company's principal German operating subsidiary leases the land
under its Leverkusen TiO(2) production facility pursuant to a lease expiring in
2050. The Leverkusen facility, with approximately two-thirds of the Company's
current TiO(2) production capacity, is located within the lessor's extensive
manufacturing complex.
F-29
Under a separate supplies and services agreement expiring 2011, the lessor
provides some raw materials, auxiliary and operating materials and utilities
services necessary to operate the Leverkusen facility. Currently, both the lease
and the supplies and services agreements restrict the Company's ability to
transfer ownership or use of the Leverkusen facility.
Net rent expense aggregated $7 million in 1999, and $6 million in 2000
and 2001, respectively. At December 31, 2001, minimum rental commitments under
the terms of noncancellable operating leases were as follows:
<Table>
<Caption>
DECEMBER 31, 2001
---------------------------
REAL ESTATE EQUIPMENT
------------ ------------
(IN THOUSANDS)
YEARS ENDING DECEMBER 31,
2002 ......................... $ 1,030 $ 913
2003 ......................... 899 475
2004 ......................... 792 346
2005 ......................... 795 141
2006 ......................... 798 31
2007 and thereafter .......... 18,975 19
------------ ------------
$ 23,289 $ 1,925
============ ============
</Table>
CAPITAL EXPENDITURES
At December 31, 2001 the estimated cost to complete capital projects in
process approximated $4 million to complete the reconstruction of the Leverkusen
Sulfate Plant.
PURCHASE COMMITMENTS
KUS has long-term supply contracts that provide for certain affiliates'
chloride feedstock requirements through 2003. The Company and certain of its
affiliates purchase chloride feedstock underlying these long-term supply
contracts from KUS. See Note 15. The agreements require KUS to purchase certain
minimum quantities of feedstock with average minimum annual purchase commitments
aggregating approximately $159 million.
ENVIRONMENTAL, PRODUCT LIABILITY AND LITIGATION MATTERS
The Company's operations are governed by various foreign environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws. As with other companies engaged in similar businesses, certain past and
current operations and products of the Company have the potential to cause
environmental or other damage. The Company has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
The policy of the Company is to maintain compliance with applicable foreign
environmental laws and regulations at all of its facilities and to strive to
improve its environmental performance. It is possible that future developments,
such as stricter requirements of environmental laws and enforcement policies
thereunder, could adversely affect the Company's production, handling, use,
storage, transportation, sale or disposal of such substances as well as the
Company's consolidated financial position, results of operations or liquidity.
The Company's production facilities operate in an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers which allow them to issue operating permits required
for the plants to operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
The Company landfills waste generated at its Nordenham, Germany and
Langerbrugge, Belgium plants and mine tailings waste generated at its facility
in Norway. The Company maintains reserves, as required under GAAP,
F-30
to cover the anticipated cost of closure of these landfills, which were
approximately $.1 million and $.4 million as of December 31, 2001 and June 30,
2002, respectively.
The Company is responsible for certain closure costs at landfills used
and formerly used by its Leverkusen, Germany TiO(2) plants. The Company has a
reserve of approximately $5 million and $6 million related to such landfills as
of December 31, 2001 and June 30, 2002, respectively.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business.
The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
CONCENTRATIONS OF CREDIT RISK
Sales of TiO(2) accounted for approximately 90% of net sales during
1999, 2000 and 2001. The remaining sales result from the mining and sale of
ilmenite ore (a raw material used in the sulfate pigment production process),
and the manufacture and sale of iron-based water treatment chemicals (derived
from co-products of the TiO(2) production processes). TiO(2) is generally sold
to the paint, plastics and paper, as well as fibers, rubber, ceramics, inks and
cosmetics markets. Such markets are generally considered "quality-of-life"
markets whose demand for TiO(2) is influenced by the relative economic
well-being of the various geographic regions. TiO(2) is sold to over 4,000
customers, with the top ten customers approximating 24% of net sales in 1999 and
2000, and 23% of net sales in 2001. Approximately 75% of the Company's TiO(2)
sales by volume were to Europe in 1999, 2000 and 2001. Approximately 10% of
sales by volume were to North America in 1999, 2000 and 2001.
NOTE 19 -- FINANCIAL INSTRUMENTS:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
<Table>
<Caption>
DECEMBER 31,
----------------------------------------- JUNE 30,
2000 2001 2002
------------------- ------------------- -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN MILLIONS)
Cash and cash equivalents ........................ $ 36.7 $ 36.7 $ 30.3 $ 30.3 $ 17.6 $ 17.6
Notes payable and long-term debt:
Notes payable to Kronos -- KII Mirror Note .... $ 194.0 $ 195.9 $ 194.0 $ 194.9 $ -- $ --
Subordinated debt payable to Kronos ........... -- -- 286.4 286.4 -- --
8.875% Senior Secured Notes ................... -- -- -- -- 283.0 283.0
Variable rate debt ............................ 72.1 72.1 48.7 48.7 42.0 42.0
</Table>
Fair value of the KII Mirror Note was based upon quoted market prices
of the NL Notes at December 31, 2000 and 2001. The Company held no derivative
financial instruments at December 31, 2000 and 2001, and June 30, 2002. See Note
8 for repayment of the KII Mirror Note.
NOTE 20 -- CAPITAL CONTRIBUTION:
On January 31, 2000, NL contributed its investment of $291.9 million in
NL Capital Corporation ("NLCC"), a wholly owned subsidiary of NL, to Kronos,
which immediately contributed it to KII. NLCC then merged with KII (with KII
being the surviving corporation in the merger.) The net assets acquired in the
merger were recorded at predecessor carryover basis in accordance with GAAP due
to the common control of KII and NLCC by NL. NLCC previously conducted NL's
rheological additives business which was sold in 1998.
F-31
Substantially all of the net proceeds from the sale of the operational assets
related to the rheological additives business were loaned to NL and Kronos.
Subsequent to the sale, NLCC did not conduct any operations and its major assets
held were such notes receivable from affiliates. Of the $291.9 million, $278.9
million represented noncurrent notes receivable from NL and Kronos, which were
classified as a reduction of stockholder's equity at the time of the merger.
NOTE 21 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
<Table>
<Caption>
QUARTERS ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(IN THOUSANDS)
Year ended December 31, 2000:
Net sales ........................................... $ 154,323 $ 174,696 $ 155,915 $ 135,591
Cost of sales ....................................... 108,502 117,253 97,616 90,104
Operating income .................................... 30,611 43,511 41,129 31,021
Income before income taxes and minority interest .... 16,354 38,804 28,909 39,017
Net income .......................................... 6,940 27,168 18,076 27,965
Year ended December 31, 2001:
Net sales ........................................... $ 159,030 $ 140,380 $ 134,675 $ 120,552
Cost of sales ....................................... 105,283 93,917 95,737 84,621
Operating income .................................... 38,401 33,280 22,747 29,418
Income before income taxes and minority interest .... 28,960 29,442 37,579 32,260
Net income .......................................... 19,727 21,411 31,409 41,181
</Table>
NOTE 22 - SUBSEQUENT EVENTS (UNAUDITED):
In July 2002 Valhi proposed a merger of Tremont and Valhi pursuant to
which stockholders of Tremont, other than Valhi (but including NL to the extent
of NL's ownership interest in the Tremont shares held by Tremont Group), would
receive between 2 and 2.5 shares of Valhi common stock for each Tremont share
held. Tremont has formed a special committee of its board of directors
consisting of members unrelated to Valhi to review the proposal. There can be no
assurance that any such merger will be completed or completed under the proposed
terms.
In July 2002 KII and Kronos agreed to a recapitalization of the Company
as contemplated in the E285 million Notes offering. See Note 7. In connection
with the recapitalization agreement, KII converted the Series A (738 shares) and
Series B (647 shares) redeemable preferred stock (including liquidation and
redemption preferences and accrued and unpaid dividends) held by Kronos totaling
$411.7 million ($410.5 million at June 30, 2002) into 1,385 shares of KII, $100
par value, common stock. As a result of the conversion, the Series A and B
redeemable preferred stock certificates were canceled. Further, KII redeemed its
PPCs held by Kronos totaling $284.3 million in exchange for various notes
receivable from NL. As a result of the redemption, the PPCs were canceled.
Finally, KII redeemed 1,613 shares of KII common stock held by Kronos in
exchange for its remaining notes receivable from NL and Kronos totaling $479.4
million. See Notes 16 and 17. As a result of the recapitalization in July 2002,
KII's common stockholder's equity increased a net $696.0 million.
F-32
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
Index of Consolidated Financial Statements
<Table>
<Caption>
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants FA-2
Consolidated Balance Sheets - December 31, 2000 and 2001 and
June 30, 2002 (unaudited) FA-3 / FA-4
Consolidated Statements of Income - Years ended
December 31, 1999, 2000 and 2001 and Six months ended
June 30, 2001 (unaudited) and 2002 (unaudited) FA-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1999, 2000 and 2001 and Six months ended
June 30, 2001 (unaudited) and 2002 (unaudited) FA-6
Consolidated Statements of Stockholders' Equity (Deficit) and
Partners' Capital (Deficit)- Years ended
December 31, 1999, 2000 and 2001 and Six months ended
June 30, 2002 (unaudited) FA-7
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 2000 and 2001 and Six months ended
June 30, 2001 (unaudited) and 2002 (unaudited) FA-8 / FA-9
Notes to Consolidated Financial Statements FA-10 / FA-28
</Table>
FA-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kronos Titan GmbH & Co. OHG:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity (deficit) and partners' capital (deficit) and cash flows present fairly,
in all material respects, the financial position of Kronos Titan GmbH & Co. OHG
and Subsidiary at December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers GmbH
Wirtschaftsprufungsgesellschaft
September 23, 2002
/s/ Hans-Peter Kreibich /s/ Rainer Mertes
(Wirtschaftsprufer) (Wirtschaftsprufer)
FA-2
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<Table>
<Caption>
December 31,
----------------------------- June 30,
ASSETS 2000 2001 2002
------------ ------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,816 $ 1,677 $ 3,562
Accounts and notes receivable 14,137 20,420 36,915
Note receivable from Kronos Europe S.A./N.V. -- 17,204 --
Receivable from affiliates 7,959 3,137 27,865
Inventories 70,429 72,215 65,941
Prepaid expenses 51 -- 1,250
------------ ------------ ------------
Total current assets 96,392 114,653 135,533
------------ ------------ ------------
Other assets 2,173 4,009 1,768
------------ ------------ ------------
Property and equipment:
Land 9,974 9,487 10,656
Buildings 66,305 69,568 79,042
Machinery and equipment 296,010 299,959 341,272
Construction in progress 2,267 2,457 3,817
------------ ------------ ------------
374,556 381,471 434,787
Less accumulated depreciation and depletion 208,701 206,475 240,105
------------ ------------ ------------
Net property and equipment 165,855 174,996 194,682
------------ ------------ ------------
$ 264,420 $ 293,658 $ 331,983
============ ============ ============
</Table>
FA-3
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<Table>
<Caption>
December 31,
----------------------------- June 30,
LIABILITIES AND PARTNERS' CAPITAL 2000 2001 2002
------------ ------------ ------------
(Unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 41,788 $ 49,186 $ 52,390
Payable to affiliates 32,486 3,451 14,017
Income taxes 684 947 22
Deferred income taxes 601 671 74
------------ ------------ ------------
Total current liabilities 75,559 54,255 66,503
------------ ------------ ------------
Noncurrent liabilities:
Note payable to Kronos International, Inc. 101,244 74,964 71,288
Deferred income taxes 22,709 15,126 18,664
Accrued pension cost 18,569 18,000 18,289
Other 11,813 10,439 10,934
------------ ------------ ------------
Total noncurrent liabilities 154,335 118,529 119,175
------------ ------------ ------------
Partners' capital:
Partners' capital 17,489 108,865 118,634
Accumulated other comprehensive loss:
Currency translation adjustment 17,037 14,958 30,620
Pension liabilities -- (2,949) (2,949)
------------ ------------ ------------
Total partners' capital 34,526 120,874 146,305
------------ ------------ ------------
$ 264,420 $ 293,658 $ 331,983
============ ============ ============
</Table>
Commitments and contingencies (Notes 7, 12 and 16)
See accompanying notes to consolidated financial statements.
FA-4
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
------------------------------------------ --------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(Unaudited)
Revenues and other income:
Net sales $ 429,127 $ 423,950 $ 379,360 $ 203,604 $ 192,782
Interest and other income from affiliates 2,400 1,648 2,135 552 1,513
Insurance recoveries, net -- -- 17,468 1,929 --
Other income (expense), net (600) (1,226) 7,717 (367) 135
---------- ---------- ---------- ---------- ----------
430,927 424,372 406,680 205,718 194,430
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 348,834 306,751 280,084 149,469 165,911
Selling, general and administrative 33,757 31,251 31,166 15,030 15,184
Interest 29 24 22 9 29
Interest and other expense to affiliates 11,524 10,381 8,856 4,519 2,795
---------- ---------- ---------- ---------- ----------
394,144 348,407 320,128 169,027 183,919
---------- ---------- ---------- ---------- ----------
Income before income taxes 36,783 75,965 86,552 36,691 10,511
Income tax expense (benefit) (20,602) 13,772 745 5,792 742
---------- ---------- ---------- ---------- ----------
Net income $ 57,385 $ 62,193 $ 85,807 $ 30,899 $ 9,769
========== ========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
FA-5
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
---------------------------------------- --------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(Unaudited)
Net income $ 57,385 $ 62,193 $ 85,807 $ 30,899 $ 9,769
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment -- -- (2,949) -- --
Currency translation adjustment 3,994 3,670 (2,079) (3,384) 15,662
---------- ---------- ---------- ---------- ----------
Total other comprehensive income (loss) 3,994 3,670 (5,028) (3,384) 15,662
---------- ---------- ---------- ---------- ----------
$ 61,379 $ 65,863 $ 80,779 $ 27,515 $ 25,431
========== ========== ========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
FA-6
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT) AND PARTNERS' CAPITAL (DEFICIT)
Years ended December 31, 1999, 2000 and 2001
Six months ended June 30, 2002 (Unaudited)
(In thousands)
<Table>
<Caption>
Accumulated other
comprehensive income (loss)
---------------------------
Additional Retained Currency
Common paid-in earnings Partners' translation Pension
stock capital (deficit) capital (deficit) adjustments liabilities Total
-------- ---------- ----------- ----------------- ----------- ----------- ---------
Balance at December 31, 1998 $ 40,900 $ 8,985 $ (91,277) $ -- $ 9,373 $ -- $ (32,019)
Net income -- -- 7,628 49,757 -- -- 57,385
Conversion to partnership (see Note 1) (40,900) (8,985) 83,649 (33,764) -- -- --
Other comprehensive income -- -- -- -- 3,994 -- 3,994
Distributions:
Cash -- -- -- (31,585) -- -- (31,585)
Noncash -- -- -- (28,429) -- -- (28,429)
-------- -------- --------- --------- --------- -------- ---------
Balance at December 31, 1999 -- -- -- (44,021) 13,367 -- (30,654)
Net income -- -- -- 62,193 -- -- 62,193
Other comprehensive income -- -- -- -- 3,670 -- 3,670
Cash distribution -- -- -- (683) -- -- (683)
-------- -------- --------- --------- --------- -------- ---------
Balance at December 31, 2000 -- -- -- 17,489 17,037 -- 34,526
Net income -- -- -- 85,807 -- -- 85,807
Other comprehensive loss, net of tax -- -- -- -- (2,079) (2,949) (5,028)
Cash distribution -- -- -- (11,097) -- -- (11,097)
Cash contribution -- -- -- 16,666 -- -- 16,666
-------- -------- --------- --------- --------- -------- ---------
Balance at December 31, 2001 -- -- -- 108,865 14,958 (2,949) 120,874
Net income -- -- -- 9,769 -- -- 9,769
Other comprehensive income -- -- -- -- 15,662 -- 15,662
-------- -------- --------- --------- --------- -------- ---------
Balance at June 30, 2002 (unaudited) $ -- $ -- $ -- $ 118,634 $ 30,620 $ (2,949) $ 146,305
======== ======== ========= ========= ========= ======== =========
</Table>
See accompanying notes to consolidated financial statements.
FA-7
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
------------------------------------------ --------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(Unaudited)
Cash flows from operating activities:
Net income $ 57,385 $ 62,193 $ 85,807 $ 30,899 $ 9,769
Depreciation, depletion and amortization 16,096 14,256 14,056 7,180 7,799
Deferred income taxes (31,075) 677 (6,273) (73) 742
Net loss from disposition of
property and equipment 1,182 1,350 512 255 162
Pension, net (1,451) (2,759) (2,846) (1,454) (1,279)
Insurance recoveries, net -- -- (17,468) (1,929) --
---------- ---------- ---------- ---------- ----------
42,137 75,717 73,788 34,878 17,193
Change in assets and liabilities:
Accounts and notes receivable (11,867) (1,398) (7,147) (1,615) (13,476)
Inventories 21,123 (9,268) (4,730) 2,262 12,869
Prepaid expenses 561 (146) 292 (1,170) (1,093)
Accounts payable and accrued
liabilities 983 1,012 8,239 1,132 (1,817)
Income taxes 7,161 860 162 3,505 (937)
Accounts with affiliates 3,164 (1,166) (22,752) (37,292) (12,261)
Other noncurrent assets 1,800 (258) (1,484) 53 2,731
Other noncurrent liabilities (1,065) (2,426) (827) (443) (587)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities 63,997 62,927 45,541 1,310 2,622
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (13,262) (13,497) (35,298) (8,877) (6,866)
Loans to affiliates:
Loans -- -- (16,677) (16,677) --
Collections -- -- -- -- 18,097
Property damaged by fire:
Insurance proceeds -- -- 23,361 5,500 --
Other, net -- -- (3,205) (1,000) --
Proceeds from disposition of property
and equipment 5 30 262 5 --
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by
investing activities (13,257) (13,467) (31,557) (21,049) 11,231
---------- ---------- ---------- ---------- ----------
</Table>
FA-8
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
------------------------------------------ --------------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
(Unaudited)
Cash flows from financing activities:
Loans from affiliates:
Loans $ 25,960 $ -- $ -- $ -- $ --
Repayments -- (90,743) (21,406) -- (12,090)
Cash contributions -- -- 16,666 16,666 --
Cash distributions (31,585) (683) (11,097) -- --
Indebtedness - deferred financing fees -- -- -- -- (410)
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by
financing activities (5,625) (91,426) (15,837) 16,666 (12,500)
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities 45,115 (41,966) (1,853) (3,073) 1,353
Currency translation 21 458 (286) (376) 532
Balance at beginning of period 188 45,324 3,816 3,816 1,677
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 45,324 $ 3,816 $ 1,677 $ 367 $ 3,562
========== ========== ========== ========== ==========
Supplemental disclosures:
Cash paid for:
Interest $ 9,843 $ 10,402 $ 8,689 $ 4,526 $ 2,782
Income taxes 2,968 12,234 6,855 2,360 937
Noncash transactions-distribution of
affiliate receivables 28,429 -- -- -- --
</Table>
See accompanying notes to consolidated financial statements.
FA-9
KRONOS TITAN GMBH & CO. OHG AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Kronos Titan GmbH & Co. OHG ("TG") is a German partnership that is
majority owned (99.95%) by Kronos International, Inc. ("KII"). KII is a wholly
owned subsidiary of Kronos, Inc. ("Kronos"), a wholly owned subsidiary of NL
Industries, Inc. ("NL"). NL Industries Chemie GmbH, a wholly owned subsidiary of
NL, holds the remaining 0.05% ownership interest in TG. NL conducts its titanium
dioxide pigments ("TiO(2)") operations through Kronos. At December 31, 2001,
Valhi, Inc. ("Valhi") and Tremont Corporation ("Tremont"), each affiliates of
Contran Corporation ("Contran"), held approximately 61% and 21%, respectively,
of NL's outstanding common stock (approximately 62% and 21%, respectively, at
June 30, 2002). At December 31, 2001, Contran and its subsidiaries held
approximately 94% of Valhi's outstanding common stock (approximately 93% at June
30, 2002), and a company 80% owned by Valhi and 20% owned by NL held
approximately 80% of Tremont'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 the sole trustee. Mr. Simmons, the Chairman of the Board of NL and Valhi, the
Chairman of the Board and Chief Executive Officer of Contran, and a director of
Tremont, may be deemed to control each of such companies and TG.
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"), with the U.S. dollar as the reporting currency. TG also
prepares financial statements on other bases, as required in Germany.
As part of the restructuring of KII's German operations, KII
implemented certain restructuring transactions in 1999 and 2001 (the "TG
Restructuring"). The principle elements of the TG Restructuring are that prior
to June 1999 Kronos Titan ("TGI") and NL Industries (Deutschland) GmbH ("NLD"),
a majority owned subsidiary of KII, operated in corporate form under German law
and in June 1999 TGI and NLD were converted to partnerships. In October 2001,
through various legal transactions, TGI partnership was dissolved and TGI was
merged into NLD with NLD surviving the merger. NLD was immediately renamed TG.
There was no impact on TG's consolidated financial statements as a result of the
merger of TGI into NLD since both companies were under common control.
Information included in the consolidated financial statements and
related notes to the consolidated financial statements as of June 30, 2002 and
for the six months ended June 30, 2001 and 2002, is unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the information for the interim periods 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 and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted for
the interim periods.
TG is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and is not subject to the SEC's periodic reporting requirements, except
as may be required by Rule 3-16 of Regulation S-X.
FA-10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts
of TG and its wholly owned subsidiary (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Actual results may differ from previously estimated
amounts under different assumptions or conditions.
Translation of foreign currencies
The functional currency of the Company is the euro. Assets and
liabilities of the Company are translated to U.S. dollars at year-end rates of
exchange and revenues and expenses are translated at weighted average exchange
rates prevailing during the year. Resulting translation adjustments are included
in other comprehensive income (loss), net of related income taxes, if
applicable. Currency transaction gains and losses are recognized in income
currently.
Cash equivalents
Cash equivalents include bank deposits with original maturities of
three months or less.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to forty years for buildings and three to
twenty years for machinery and equipment.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company assesses the impairment of
other long-lived assets (such as property and equipment and mining properties)
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144
as discussed under "Other" below.
FA-11
Long-term debt and notes payable to affiliates
Where applicable, long-term debt and notes payable to affiliates are
stated net of unamortized original issue discount ("OID"). OID is amortized over
the period during which cash interest payments are not required and deferred
financing costs are amortized over the term of the applicable issue, both by the
interest method.
Employee benefit plans
Accounting and funding policies for retirement plans are described in
Note 9.
The Company accounts for stock-based employee compensation in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations. Under APBO No.
25, no compensation cost is generally recognized for fixed stock options in
which the exercise price is not less than the market price on the grant date.
The Company is charged by NL for stock options exercised by employees of the
Company. Compensation cost recognized by the Company in accordance with APBO No.
25 and the amount charged to the Company by NL for stock option exercises was
nil in each of 1999, 2000 and 2001.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures generally are not discounted to present value. Recoveries of
remediation costs from other parties, if any, are reported as receivables when
their receipt is deemed probable. At December 31, 2000 and 2001, no receivables
for recoveries have been recognized.
Net sales
The Company adopted the SEC's Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," as amended, in 2000. Revenue
generally is realized or realizable and earned when all of the requirements of
SAB No. 101 are met, including when title and the risks and rewards of ownership
passes to the customer (generally at the time the product is shipped to the
customer). The impact of adopting SAB No. 101 was not material. Fees charged to
customers for shipping and handling are included in net sales.
Repair and maintenance costs
The Company performs planned major maintenance activities throughout
the year. Repair and maintenance costs estimated to be incurred in connection
with planned major maintenance activities are accrued in advance and are
included in cost of goods sold.
Shipping and handling costs
Shipping and handling costs are included in selling, general and
administrative expense and were $16.5 million in 1999, $13.9 million in 2000,
$14.3 million in 2001, and $7.2 million and $7.1 million for each of the six
months ended June 30, 2001 and 2002, respectively.
FA-12
Income taxes
As a partnership under German law, TG is not subject to corporate
income taxes. In 1999 TG reversed its previously-recognized corporate deferred
income tax liability through earnings (see Note 12) due to this change in tax
status. Under German law, TG remains subject to trade income taxes. Deferred
trade income tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the trade income tax and
financial reporting carrying amounts of assets and liabilities. The Company
periodically evaluates its deferred trade income tax assets and adjusts any
related valuation allowance. The Company's valuation allowance is equal to the
amount of deferred trade income tax assets which the Company believes do not
meet the "more-likely-than-not" recognition criteria.
Derivatives and hedging activities
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, effective January 1, 2001. SFAS
No. 133 establishes accounting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. Under SFAS No. 133, all derivatives are recognized as either assets
or liabilities and measured at fair value. The accounting for changes in fair
value of derivatives is dependent upon the intended use of the derivative. As
permitted by the transition requirements of SFAS No. 133, as amended, the
Company exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were issued or acquired prior to January 1, 1999. The
Company is not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 at December 31, 2001, and there was no impact on the
Company's financial statements from adopting SFAS No. 133.
The Company periodically uses interest rate swaps, currency swaps and
other types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 1999, 2000 and 2001.
Other
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 Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant 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 any net assets to be disposed of by sale 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. The adoption of SFAS No. 144 effective January 1, 2002 did not have a
material effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company 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. 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
FA-13
are retroactively reclassified and reported as a component of income before
extraordinary item. The Company had not previously recognized any gains and
losses from the early extinguishment of debt, thus there was no impact on the
Company upon adoption.
New 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, to 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.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE:
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Trade receivables $ 6,046 $ 2,287 $ 33,177
Insurance claims receivable (see Note 13) 2,093 11,060 --
Recoverable VAT and other receivables 6,737 7,752 4,538
Allowance for doubtful accounts (739) (679) (800)
------------ ------------ ------------
$ 14,137 $ 20,420 $ 36,915
============ ============ ============
</Table>
FA-14
During 1999 and 2000, the Company was party to an accounts receivable
factoring agreement with its affiliate, Kronos World Services S.A./N.V. ("KWS").
Beginning in February 2000 KII assumed the contract from KWS. KWS and KII
(collectively the "Factoring Agent"), contracted with the Company whereby the
Company factored its export accounts receivable without recourse for a fee of
0.85%. The Factoring Agent, upon non-recourse transfer from the Company, assumed
all risk pertaining to the factored receivables, including, but not limited to,
exchange control risks, risks pertaining to the bankruptcy of a customer and
risks related to late payments.
Effective June 2002, the KII factoring agreement was assigned to the
Company regarding prospective export receivables, with the Company assuming all
contractual rights and obligations of the agreement among KII and certain
operating subsidiaries.
Export receivables sold during 1999 and 2000 by the Company totaled
$166.1 million and $166.3 million, respectively. Export receivables sold during
2001 and the first five months of 2002 by the Company totaled $151.4 million and
$59.1 million, respectively. Export receivables purchased by the Company for the
one month ended June 30, 2002 totaled $9.5 million.
NOTE 4 - NOTE RECEIVABLE FROM KRONOS EUROPE S.A./N.V. ("KEU"):
The short-term euro-denominated note receivable from KEU (E.19.5
million or $17.2 million at December 31, 2001) is due within one year and bears
interest at EURIBOR plus 0.5% (3.84% at December 31, 2001). The note was
established in 2001 for general corporate purposes. The note was repaid in full
in June 2002 and the agreement was canceled.
NOTE 5 - INVENTORIES:
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Raw materials $ 20,219 $ 19,410 $ 16,374
Work in process 3,666 4,737 5,249
Finished products 36,415 38,229 32,790
Supplies 10,129 9,839 11,528
------------ ------------ ------------
$ 70,429 $ 72,215 $ 65,941
============ ============ ============
</Table>
FA-15
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Accounts payable $ 16,505 $ 23,671 $ 22,892
------------ ------------ ------------
Accrued liabilities:
Employee benefits 9,626 8,098 9,012
Waste acid recovery 6,832 6,596 7,844
Other 8,825 10,821 12,642
------------ ------------ ------------
25,283 25,515 29,498
------------ ------------ ------------
$ 41,788 $ 49,186 $ 52,390
============ ============ ============
</Table>
NOTE 7 - NOTE PAYABLE TO KRONOS INTERNATIONAL, INC. AND LONG-TERM DEBT:
The noncurrent note payable to affiliate is payable to KII and was
established in 1998 during a recapitalization of the Company. The
euro-denominated note payable to KII (E.109.0 million and E.84.8 million, or
$101.2 million and $75.0 million, at December 31, 2000 and 2001, respectively)
is due in 2008 and bears interest at EURIBOR plus 1% (4.88% and 5.75% at
December 31, 2000 and 2001, respectively), with interest payable annually.
In June 2002 the Company and KII's operating subsidiaries in Belgium
and Norway (KEU, Kronos Titan A/S - "TAS" and Titania A/S - "TIA"), referred to
as the "Borrowers", entered into a three-year E.80 million secured revolving
credit facility ("Credit Facility"). The Credit Facility is available in
multiple currencies, including U.S. dollars, euros and Norwegian kroner. As of
June 30, 2002, E.13 million ($13 million) and NOK 200 million ($26 million) was
borrowed at closing, by the Belgian and Norwegian operating subsidiaries. At
June 30, 2002, E.40 million was available for future working capital
requirements and general corporate purposes of the Borrowers. Borrowings bear
interest at the applicable interbank market rate plus 1.75%. As of June 30,
2002, the interest rate was 5.15% and 8.80% on the euro and Norwegian kroner
borrowings, respectively, and the weighted average interest rate was 7.61%.
The Credit Facility is collateralized by accounts receivable and
inventory of the Borrowers, plus a limited pledge of certain other assets of the
Belgian operating subsidiary. The Credit Facility contains, among others,
various restrictive covenants, including restrictions on incurring liens, asset
sales, additional financial indebtedness, mergers, investments and acquisitions,
transactions with affiliates and dividends. The Company and KEU are
unconditionally jointly and severally liable for any and all outstanding
borrowings under the Credit Facility. The parent company of TAS and TIA, Kronos
Norge A/S, is jointly and severally liable for any and all outstanding
borrowings under the Credit Facility to the extent permitted by Norwegian law.
The Company has a E.5 million sub-limit for issuing letters of credit with no
letters of credit issued at June 30, 2002. The Borrowers were in compliance with
all the covenants as of June 30, 2002.
FA-16
Deferred financing costs of $1.2 million for the Credit Facility ($.4
million recorded at the Company, with the remaining $.8 million recorded by the
Belgian and Norwegian operating subsidiaries) are being amortized over the life
of the Credit Facility and are included in other noncurrent assets as of June
30, 2002.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $40 million under the Credit Facility at
June 30, 2002.
In June 2002 KII issued E.285 million ($280 million when issued and
$283 million at June 30, 2002) principal amount of 8.875% Senior Secured Notes
(the "Notes") due 2009. The Notes are collateralized by first priority liens on
65% of the common stock or other equity interests of certain of KII's first-tier
subsidiaries, including the Company. The 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, including the
Company, 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.
NOTE 8 - OTHER NONCURRENT LIABILITIES:
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Environmental costs $ 7,630 $ 5,662 $ 6,110
Employee benefits 3,169 2,878 3,192
Insurance claims expense 938 763 390
Other 76 1,136 1,242
------------ ------------ ------------
$ 11,813 $ 10,439 $ 10,934
============ ============ ============
</Table>
NOTE 9 - EMPLOYEE BENEFIT PLANS:
Company-sponsored pension plans
The Company maintains a defined benefit pension plan and certain other
benefits covering substantially all employees.
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
<Table>
<Caption>
Years ended December 31,
----------------------------------
1999 2000 2001
-------- -------- --------
(Percentages)
Discount rate 5.8 6.0 5.8
Rate of increase in future compensation levels 3.0 3.0 2.8
Long-term rate of return on plan assets 7.5 7.5 7.3
</Table>
Plan assets are comprised primarily of investments in corporate equity
and debt securities, short-term investments, mutual funds and group annuity
contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability.
FA-17
Variances from actuarially assumed rates will change the actuarial valuation of
accrued pension liabilities, pension expense and funding requirements in future
periods.
The components of the net periodic defined benefit pension cost are set
forth below.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Net periodic pension cost:
Service cost benefits $ 2,173 $ 2,079 $ 1,924
Interest cost on projected benefit obligation ("PBO") 8,808 7,619 7,877
Expected return on plan assets (7,900) (7,166) (7,396)
Amortization of net transition obligation 240 208 201
Recognized actuarial losses 818 -- --
------------ ------------ ------------
$ 4,139 $ 2,740 $ 2,606
============ ============ ============
</Table>
The funded status of the Company's defined benefit pension plan is set
forth below.
<Table>
<Caption>
December 31,
--------------------------
2000 2001
---------- ----------
(In thousands)
Change in PBO:
Beginning of year $ 145,542 $ 137,684
Service cost 2,079 1,924
Interest 7,619 7,877
Participant contributions 877 852
Actuarial loss (gain) (74) 6,592
Benefits paid (7,169) (8,707)
Change in currency exchange rates (11,190) (6,750)
---------- ----------
End of year 137,684 139,472
---------- ----------
Change in fair value of plan assets:
Beginning of year 108,057 100,458
Actual return on plan assets (569) 5,422
Employer contributions 5,499 5,452
Participant contributions 877 852
Benefits paid (7,169) (8,707)
Change in currency exchange rates (6,237) (4,773)
---------- ----------
End of year 100,458 98,704
---------- ----------
Funded status at year end:
Plan assets less than PBO (37,226) (40,768)
Unrecognized actuarial loss 13,135 21,732
Unrecognized net transition obligation 676 446
---------- ----------
$ (23,415) $ (18,590)
========== ==========
</Table>
FA-18
<Table>
<Caption>
December 31,
--------------------------
2000 2001
---------- ----------
(In thousands)
Amounts recognized in the balance sheet:
Accrued pension cost:
Current $ (4,846) $ (4,612)
Noncurrent (18,569) (18,000)
Unrecognized net pension obligations -- 446
Accumulated other comprehensive loss -- 3,576
---------- ----------
$ (23,415) $ (18,590)
========== ==========
</Table>
Selected information related to the Company's defined benefit pension
plan which has accumulated benefit obligations in excess of fair value of plan
assets is presented below.
<Table>
<Caption>
December 31,
--------------------------
2000 2001
---------- ----------
(In thousands)
Projected benefit obligation $ 137,684 $ 139,472
Accumulated benefit obligation 121,311 122,859
Fair value of plan assets 100,458 98,704
</Table>
Incentive bonus programs
Certain employees are eligible to participate in the Company's various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee, if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for certain employees, individual
performance.
NOTE 10 - OTHER INCOME (EXPENSE), NET:
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Currency transaction gains (losses), net $ (322) $ (132) $ 631
Trade interest income 904 256 376
Disposition of property and equipment (1,182) (1,350) (512)
Insurance recoveries, net (see Note 13) -- -- 7,222
------------ ------------ ------------
$ (600) $ (1,226) $ 7,717
============ ============ ============
</Table>
NOTE 11 - OTHER ITEMS:
Advertising costs are expensed as incurred and were $.4 million in
1999, $.2 million in 2000 and $.3 million in 2001.
Interest capitalized in connection with long-term capital projects was
nil in each of 1999, 2000 and 2001.
FA-19
NOTE 12 - INCOME TAXES:
The components of (i) the difference between the provision for income
taxes attributable to pretax income and the amounts that would be expected using
the German statutory corporation tax rate of 25% (30% in 1999 and 2000), (ii)
the provision for income taxes and (iii) the comprehensive tax provision are
presented below.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Pretax income $ 36,783 $ 75,965 $ 86,552
============ ============ ============
Expected tax expense $ 11,035 $ 22,790 $ 21,638
Trade income tax 810 7,205 12,825
Change in valuation allowance:
Increase (decrease) in certain deductible
temporary differences that the Company believes
do not meet the "more-likely-than-not" recognition
criteria 7,733 6,906 (1,808)
Recognition of certain deductible tax attributes which
previously did not meet the "more-likely-than-not"
recognition criteria -- -- (11,535)
Reversal of previously provided corporate deferred income
taxes due to change in tax status (33,890) -- --
No corporation tax provision due to partnership structure (7,393) (23,247) (21,638)
Other, net 1,103 118 1,263
------------ ------------ ------------
Income tax expense (benefit) $ (20,602) $ 13,772 $ 745
============ ============ ============
Provision for income taxes:
Current income tax expense $ 10,473 $ 13,095 $ 7,018
Deferred income tax expense (benefit) (31,075) 677 (6,273)
------------ ------------ ------------
$ (20,602) $ 13,772 $ 745
============ ============ ============
Comprehensive provision (benefit) for income taxes
allocable to:
Pretax income $ (20,602) $ 13,772 $ 745
Other comprehensive loss - pension liabilities -- -- (627)
------------ ------------ ------------
$ (20,602) $ 13,772 $ 118
============ ============ ============
</Table>
FA-20
The components of the net deferred tax liability are summarized below.
<Table>
<Caption>
December 31,
--------------------------------------------------------------
2000 2001
---------------------------- ----------------------------
Deferred tax Deferred tax
---------------------------- ----------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ -- $ (485) $ -- $ (568)
Property and equipment 402 (17,472) 541 (20,120)
Prepaid pension cost -- (5,639) -- (5,680)
Other taxable differences -- (116) -- (1,505)
Tax loss and tax credit carryforwards 14,018 -- 11,535 --
Valuation allowance (14,018) -- -- --
----------- ----------- ----------- -----------
Gross deferred tax assets (liabilities) 402 (23,712) 12,076 (27,873)
Reclassification, principally netting by tax
jurisdiction (402) 402 (12,076) 12,076
----------- ----------- ----------- -----------
Net total deferred tax liabilities -- (23,310) -- (15,797)
Net current deferred tax liabilities -- (601) -- (671)
----------- ----------- ----------- -----------
Net noncurrent deferred tax liabilities $ -- $ (22,709) $ -- $ (15,126)
=========== =========== =========== ===========
</Table>
Changes in the Company's deferred income tax valuation allowance are
summarized below.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Balance at beginning of year $ -- $ 7,733 $ 14,018
Increase (decrease) in certain deductible tax attributes
which the Company believes do not meet the
"more-likely-than-not" recognition criteria 7,733 6,906 (1,808)
Recognition of certain deductible tax attributes which
previously did not meet the "more-likely-than-not"
recognition criteria -- -- (11,535)
Foreign currency translation -- (621) (675)
------------ ------------ ------------
Balance at end of year $ 7,733 $ 14,018 $ --
============ ============ ============
</Table>
Certain of the Company's tax returns are being examined and the German
tax authorities may propose tax deficiencies, including penalties and interest.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate did not impact income tax expense in the fourth quarter
of 2000 due to the Company's tax exempt structure.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the
FA-21
ultimate disposition of such examinations should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
On June 28, 1999, the Company changed its legal form from a corporation
to a partnership and is no longer subject to corporation tax. As a result of
this change the Company recognized an income tax benefit of $33.9 million in the
second quarter of 1999 from the reversal of its deferred corporation tax
liability. The net difference between the corporation tax bases and the reported
amount of the Company's assets and liabilities is $156.7 million at December 31,
2001. See Note 1.
During the fourth quarter of 2001, the Company recognized a $11.5
million trade income tax benefit attributable to a decrease in the valuation
allowance due to a change in estimate of the Company's ability to utilize
certain German trade income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria.
At December 31, 2001, the Company had approximately $65.8 million of
trade income tax loss carryforwards in Germany with no expiration date.
NOTE 13 - LEVERKUSEN FIRE AND INSURANCE CLAIM:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO(2) plant ("Sulfate Plant") and, as
a result, production of TiO(2) at the Leverkusen facility was halted. The fire
did not enter the Company's adjacent 125,000 metric ton chloride-process TiO(2)
plant ("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial results of the Company on a quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.
During the second quarter of 2001, the Company's insurance carriers
approved a partial payment of $10.5 million ($9 million received as of June 30,
2001) for property damage costs and business interruption losses caused by the
Leverkusen fire. Five million dollars of this payment represented partial
compensation for business interruption losses which was recorded as a reduction
of cost of sales to offset unallocated period costs that resulted from lost
production. The remaining $5.5 million represented property damage recoveries
against clean-up costs, resulting in a net gain of $1.9 million. The Company
reached an agreement and settled its insurance claim involving the Leverkusen
fire for $56.4 million during the fourth quarter of 2001 ($46.9 million received
as of December 31, 2001, with the remaining $9.5 million received in January
2002), of which $27.3 million related to business interruption and $29.1 million
related to property damage, clean-up costs and other extra expenses. The Company
recognized a $17.5 million pre-tax gain in 2001 related to the property damage
recovery after deducting $11.6 million of clean-up costs and other extra
expenses incurred and the carrying value of assets destroyed in the fire. The
gain was excluded from the determination of operating income. The $27.3 million
of business interruption proceeds recognized in 2001 were allocated between
other income, excluding corporate, which reflects recovery of lost margin ($7.2
million) and as a reduction of cost of sales to offset unallocated period costs
($20.1 million). No additional insurance recoveries related to the Leverkusen
fire are expected to be received in 2002.
FA-22
NOTE 14 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate, such transactions. Depending upon the business,
tax and other objectives then relevant, and restrictions under the KII
indenture, the Credit Facility and other agreements, it is possible that the
Company might be a party to one or more such transactions in the future.
The Company is a party to a cost sharing agreement with Kronos, KII and
KEU, whereby Kronos, KII and KEU provide certain management, financial,
insurance and administrative services to the Company on a fee basis. The
Company's expense was approximately $4.4 million in 1999, $3.8 million in 2000
and $3.6 million in 2001.
The Company charges affiliates for certain administrative costs, which
totaled approximately $6.7 million, $5.7 million and $5.3 million in 1999, 2000
and 2001, respectively. These charges to affiliates were reflected primarily as
a reduction of selling, general and administrative expense.
The Company is also party to master global insurance coverage policies
with NL with regard to property, business interruption, excess liability, and
other coverages. The costs associated with these policies aggregated $2.0
million, $2.3 million and $6.0 million in 1999, 2000 and 2001, respectively.
Intercompany sales to (purchases from) affiliates of TiO(2) are
summarized in the following table.
<Table>
<Caption>
Years ended December 31,
------------------------------------------
1999 2000 2001
---------- ---------- ----------
(In thousands)
Sales to:
Kronos (US), Inc. ("KUS") $ 29,950 $ 27,253 $ 19,821
Societe Industrielle Du Titane, S.A. ("SIT") 26,408 29,521 26,202
KEU 23,289 17,406 22,345
Kronos Limited ("KUK") 19,225 13,607 14,887
Kronos Canada, Inc. ("KC") 8,717 7,467 4,638
Other affiliates 3,317 7,090 9,274
---------- ---------- ----------
$ 110,906 $ 102,344 $ 97,167
========== ========== ==========
Purchases from:
KEU $ (30,609) $ (32,512) $ (34,346)
TAS (2,019) (2,053) (8,497)
KC (432) (3,377) (85)
---------- ---------- ----------
$ (33,060) $ (37,942) $ (42,928)
========== ========== ==========
</Table>
FA-23
KUS purchases the rutile and slag feedstock used as a raw material in
the Company's chloride process TiO(2) facility. The Company purchases such
feedstock from KUS for use in its facility for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $57.3 million in 1999, $61.0 million in 2000 and $59.5
million in 2001.
The Company sells water treatment chemicals (derived from co-products
of the TiO(2) production processes) to KII. Such water treatment chemical sales
were $8.9 million in 1999, $8.1 million in 2000 and $7.1 million in 2001.
The Company was party to a long-term ilmenite supply contract with TIA,
an affiliate, that provides for the Company's sulfate feedstock requirements
through December 31, 2001. Such feedstock purchases were $9.5 million in 1999,
$9.9 million in 2000 and $7.3 million in 2001. The Company continues to purchase
ilmenite from TIA on a year-by-year basis.
Interest expense to affiliates related to the note payable to KII was
$8.4 million in 1999, $8.5 million in 2000 and $7.2 million in 2001 (see Note
7). Interest income from affiliates related to the note receivable from KEU was
nil in each of 1999 and 2000, and $.5 million in 2001 (see Note 4). Included in
other affiliate income and other affiliate expense was other affiliate interest
income/expense, factoring fees and service fees.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Receivable from:
KUK $ 692 $ 1,328 $ 1,325
KII -- -- 23,098
SIT 1,551 714 2,213
KWS 4,697 -- --
Other affiliates 1,019 1,095 1,229
------------ ------------ ------------
$ 7,959 $ 3,137 $ 27,865
============ ============ ============
Payable to:
KII $ (28,929) $ (1,033) $ --
KEU (745) -- (5,612)
TAS -- (203) (2,759)
KUS (1,620) (1,670) (1,951)
TIA (1,187) (545) (3,695)
Kronos Denmark (5) -- --
------------ ------------ ------------
$ (32,486) $ (3,451) $ (14,017)
============ ============ ============
</Table>
Amounts receivable from affiliates were generally related to product
sales (including water treatment chemical sales to KII) and accounts receivable
factoring (through May 2002), whereas amounts payable to affiliates were related
primarily to raw material purchases, and accounts receivable factoring beginning
June 2002. See Notes 3, 4 and 7 for discussion of accounts receivable factoring
and notes receivable from (payable to) affiliates.
FA-24
NOTE 15 - COMMON STOCK OPTIONS:
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option
Plan") provides for the discretionary grant of restricted common stock, stock
options, stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company. Although certain stock options
granted pursuant to a similar plan which preceded the NL Option Plan
("Predecessor Option Plan") remain outstanding at December 31, 2001, no
additional options may be granted under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan and, at December 31, 2001, 3,663,000 shares were available
for future grants. The NL Option Plan provides for the grant of options that
qualify as incentive options and for options which are not so qualified.
Generally, stock options and SARs (collectively, "options") are granted at a
price equal to or greater than 100% of the market price at the date of grant,
vest over a five year period and expire ten years from the date of grant.
Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.
Changes in outstanding options granted to employees of the Company
pursuant to the NL Option Plan and the Predecessor Option Plan are summarized in
the table below.
<Table>
<Caption>
Exercise price Amount
per share payable
--------------------------- upon
Shares Low High exercise
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
Outstanding at December 31, 1998 and 1999 2 $ 14.25 $ 14.25 $ 21
Granted 4 14.25 14.25 64
Exercised (1) 14.25 14.25 (17)
----------- ----------- ----------- -----------
Outstanding at December 31, 2000 5 14.25 14.25 68
Granted 6 20.11 20.11 121
----------- ----------- ----------- -----------
Outstanding at December 31, 2001 11 $ 14.25 $ 20.11 $ 189
=========== =========== =========== ===========
</Table>
At December 31, 1999, 2000 and 2001 options to purchase 900, nil and
300 shares, respectively, were exercisable and options to purchase 1,800 shares
become exercisable in 2002. Of the exercisable options, options to purchase 300
shares at December 31, 2001 had exercise prices less than NL's December 31, 2001
quoted market price of $15.27 per share. Outstanding options at December 31,
2001 expire at various dates through 2011, with a weighted-average remaining
life of nine years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 1999, 2000 and 2001 were $6.94, $4.83 and $7.52 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1999, 2000 and 2001: stock price volatility of
50%, 48% and 46% in 1999, 2000 and 2001, respectively; risk-free rate of return
of 6% in 1999 and 5% in 2000 and 2001; dividend yield of 1.2% in 1999, 4.9% in
2000
FA-25
and 4.0% in 2001; and an expected term of 9 years in 1999, 2000 and 2001. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
The Company's pro forma net income was as follows.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands, except per share amounts)
Net income - as reported $ 57,385 $ 62,193 $ 85,807
Net income - pro forma $ 57,385 $ 62,168 $ 85,777
</Table>
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
The Company leases the land under its Leverkusen TiO(2) production
facility pursuant to a lease expiring in 2050. The Leverkusen facility, with
approximately two-thirds of the Company's current TiO(2) production capacity, is
located within the lessor's extensive manufacturing complex. Under a separate
supplies and services agreement expiring 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility with a minimum annual cost of approximately $9.7
million. Currently, both the lease and the supplies and services agreements
restrict the Company's ability to transfer ownership or use of the Leverkusen
facility.
Net rent expense aggregated $4 million in each of 1999, 2000 and 2001.
At December 31, 2001, minimum rental commitments under the terms of
noncancellable operating leases were as follows:
<Table>
<Caption>
Real Estate Equipment
----------- -----------
(In thousands)
Years ending December 31,
2002 $ 771 $ 613
2003 648 263
2004 648 201
2005 648 75
2006 648 14
2007 and thereafter 18,622 20
----------- -----------
$ 21,985 $ 1,186
=========== ===========
</Table>
Capital expenditures
At December 31, 2001 the estimated cost to complete capital projects in
process approximated $4 million to complete the reconstruction of the Leverkusen
Sulfate Plant.
FA-26
Purchase commitments
KUS has long-term supply contracts that provide for certain affiliates'
chloride feedstock requirements through 2003. The Company purchases chloride
feedstock underlying these long-term supply contracts from KUS. See Note 14. The
agreements require KUS to purchase certain minimum quantities of feedstock with
average minimum annual purchase commitments aggregating approximately $159
million.
Environmental, product liability and litigation matters
The Company's operations are governed by various environmental laws and
regulations. Certain of the Company's businesses are and have been engaged in
the handling, manufacture or use of substances or compounds that may be
considered toxic or hazardous within the meaning of applicable environmental
laws. As with other companies engaged in similar businesses, certain past and
current operations and products of the Company have the potential to cause
environmental or other damage. The Company has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
The policy of the Company is to maintain compliance with applicable foreign
environmental laws and regulations at all of its facilities and to strive to
improve its environmental performance. It is possible that future developments,
such as stricter requirements of environmental laws and enforcement policies
thereunder, could adversely affect the Company's production, handling, use,
storage, transportation, sale or disposal of such substances as well as the
Company's consolidated financial position, results of operations or liquidity.
The Company's production facilities operate in an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers which allow them to issue operating permits required
for the plants to operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Germany is a member of the European Union (the "EU") and follows its
initiatives. The Company believes that it has all required permits and is in
substantial compliance with applicable EU requirements, including EU Directive
92/112/EEC regarding establishment of procedures for reduction and eventual
elimination of pollution caused by waste from the TiO(2) industry.
The Company has a contract with a third party to treat spent acid waste
from its sulfate-process plants. With regard to the Company's Nordenham, Germany
plant, either party may terminate the contract after giving four years advance
notice. Under certain circumstances, the Company may terminate the contract
after giving six months notice, with respect to treatment of effluents from the
Leverkusen, Germany plant. The estimated minimum annual cost under the agreement
is approximately $13.1 million.
The Company is responsible for certain closure costs at landfills used
and formerly used by its Leverkusen, Germany TiO(2) plants. The Company has a
reserve of approximately $5 million related to such landfills as of December 31,
2001.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business.
The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
FA-27
Concentrations of credit risk
Sales of TiO(2) accounted for approximately 98% of net sales during
each of 1999, 2000 and 2001. The remaining sales result from the manufacture and
sale of iron-based water treatment chemicals (derived from co-products of the
TiO(2) production processes). TiO(2) is generally sold to the paint, plastics
and paper, as well as fibers, rubber, ceramics, inks and cosmetics markets. Such
markets are generally considered "quality-of-life" markets whose demand for
TiO(2) is influenced by the relative economic well-being of the various
geographic regions. TiO(2) is sold to over 1,000 customers, with the top ten
external customers approximating 18% of net sales in 1999, 16% of net sales in
2000 and 18% of net sales in 2001. Approximately 75% of the Company's TiO(2)
sales by volume were to Europe in each of 1999, 2000 and 2001. Approximately 9%
in 1999, 8% in 2000 and 6% in 2001 of sales by volume were to North America.
NOTE 17 - FINANCIAL INSTRUMENTS:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
<Table>
<Caption>
December 31,
-----------------------------------------------------------
2000 2001
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In millions)
Cash and cash equivalents $ 3.8 $ 3.8 $ 1.7 $ 1.7
Note receivable from KEU -- -- 17.2 17.2
Note payable to KII 101.2 101.2 75.0 75.0
</Table>
The Company held no derivative financial instruments at December 31,
2000 and 2001.
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED):
<Table>
<Caption>
Quarters ended
-----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------- ----------- ----------- -----------
(In thousands)
Year ended December 31, 2000:
Net sales $ 106,898 $ 109,840 $ 115,831 $ 91,381
Cost of sales 82,423 76,112 81,974 66,242
Operating income 15,786 25,023 25,617 18,296
Income before income taxes 13,547 23,114 22,703 16,601
Net income 11,673 19,082 18,359 13,079
Year ended December 31, 2001:
Net sales $ 106,912 $ 96,692 $ 93,155 $ 82,601
Cost of sales 76,920 72,549 71,126 59,489
Operating income 22,271 16,467 14,705 23,872
Income before income taxes 20,111 16,580 17,325 32,536
Net income 16,102 14,797 13,760 41,148
</Table>
FA-28
KRONOS DENMARK APS AND SUBSIDIARIES
Index of Consolidated Financial Statements
<Table>
<Caption>
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants FB-2
Consolidated Balance Sheets - December 31, 2000 and 2001 and
June 30, 2002 (unaudited) FB-3 / FB-4
Consolidated Statements of Income - Years ended December 31, 1999, 2000 and 2001
and Six months ended
June 30, 2001 (unaudited) and 2002 (unaudited) FB-5
Consolidated Statements of Comprehensive Income - Years ended December 31, 1999,
2000 and 2001 and Six months ended June 30,
2001 (unaudited) and 2002 (unaudited) FB-6
Consolidated Statements of Stockholder's Equity - Years ended December 31, 1999,
2000 and 2001 and Six months ended
June 30, 2002 (unaudited) FB-7
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 2000 and
2001 and Six months ended
June 30, 2001 (unaudited) and 2002 (unaudited) FB-8 / FB-9
Notes to Consolidated Financial Statements FB-10 / FB-28
</Table>
FB-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Kronos Denmark ApS:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kronos Denmark ApS and Subsidiaries at December 31, 2000 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 to the consolidated financial statements,
certain restructuring transactions occurred during the year ended December 31,
1999. The consolidated financial statements of Kronos Denmark ApS and
Subsidiaries as of December 31, 2000 and 2001 and for each of the three years in
the period ended December 31, 2001 present the effects of these restructuring
transactions as if they had occurred on December 31, 1998.
PricewaterhouseCoopers
Copenhagen, Denmark
September 20, 2002
/s/ Carsten Gerner /s/ Soren Skov Larsen
State Authorized Public Accountant State Authorized Public Accountant
FB-2
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<Table>
<Caption>
December 31,
---------------------------- June 30,
ASSETS 2000 2001 2002
------------ ------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,628 $ 5,430 $ 2,104
Restricted cash equivalents -- -- 1,554
Accounts and notes receivable 8,362 10,142 13,037
Receivable from affiliates 11,418 977 14,356
Refundable income taxes 136 1,116 1,540
Inventories 48,592 48,320 45,654
Prepaid expenses 1,290 1,474 1,361
Deferred income taxes 100 33 18
------------ ------------ ------------
Total current assets 72,526 67,492 79,624
------------ ------------ ------------
Other assets:
Prepaid pension cost 15,972 14,696 18,174
Other 223 642 1,579
------------ ------------ ------------
Total other assets 16,195 15,338 19,753
------------ ------------ ------------
Property and equipment:
Land 11,371 11,508 13,039
Buildings 26,822 26,758 29,723
Machinery and equipment 110,574 115,946 134,486
Mining properties 47,652 48,167 58,071
Construction in progress 1,115 410 3,893
------------ ------------ ------------
197,534 202,789 239,212
Less accumulated depreciation and depletion 112,409 117,348 141,846
------------ ------------ ------------
Net property and equipment 85,125 85,441 97,366
------------ ------------ ------------
$ 173,846 $ 168,271 $ 196,743
============ ============ ============
</Table>
FB-3
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
<Table>
<Caption>
December 31,
----------------------------- June 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 2001 2002
------------ ------------ ------------
(Unaudited)
Current liabilities:
Notes payable $ 22,480 $ 22,180 $ --
Current maturities of long-term debt 730 1,033 1,225
Accounts payable and accrued liabilities 26,106 20,996 28,874
Note payable to Kronos Titan GmbH -- 17,204 --
Payable to affiliates 13,409 5,435 1,067
Income taxes 5,985 5,261 5,211
Deferred income taxes 1,754 1,480 1,676
------------ ------------ ------------
Total current liabilities 70,464 73,589 38,053
------------ ------------ ------------
Noncurrent liabilities:
Long-term debt 1,363 1,465 40,818
Deferred income taxes 26,880 25,953 28,772
Other 826 750 865
------------ ------------ ------------
Total noncurrent liabilities 29,069 28,168 70,455
------------ ------------ ------------
Stockholder's equity:
Common stock - 100 Danish kroner par value; 10,000 shares
authorized; 10,000 shares issued 136 136 136
Additional paid-in capital 206,425 216,996 216,996
Retained deficit (103,367) (118,335) (109,947)
Accumulated other comprehensive loss - currency
translation adjustment (28,881) (32,283) (18,950)
------------ ------------ ------------
Total stockholder's equity 74,313 66,514 88,235
------------ ------------ ------------
$ 173,846 $ 168,271 $ 196,743
============ ============ ============
</Table>
Commitments and contingencies (Notes 6, 11 and 14)
See accompanying notes to consolidated financial statements.
FB-4
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
-------------------------------- --------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
(Unaudited)
Revenues and other income:
Net sales $232,736 $239,830 $233,932 $128,731 $120,692
Interest and other income from affiliates 291 3,749 813 393 255
Other income, net 1,353 528 490 141 879
-------- -------- -------- -------- --------
234,380 244,107 235,235 129,265 121,826
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 191,165 178,437 185,299 97,171 99,738
Selling, general and administrative 16,913 18,373 15,617 8,025 7,948
Interest 754 299 2,256 1,052 977
Interest and other expense to affiliates 3,797 4,351 3,250 1,569 1,534
-------- -------- -------- -------- --------
212,629 201,460 206,422 107,817 110,197
-------- -------- -------- -------- --------
Income before income taxes 21,751 42,647 28,813 21,448 11,629
Income tax expense 8,227 15,146 10,374 7,338 3,241
-------- -------- -------- -------- --------
Net income $ 13,524 $ 27,501 $ 18,439 $ 14,110 $ 8,388
======== ======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
FB-5
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
---------------------------------- ---------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
(Unaudited)
Net income $ 13,524 $ 27,501 $ 18,439 $ 14,110 $ 8,388
-------- -------- -------- -------- --------
Other comprehensive income (loss) -
currency translation adjustment (4,890) (19,052) (3,402) (5,063) 13,333
-------- -------- -------- -------- --------
Total other comprehensive income
(loss) (4,890) (19,052) (3,402) (5,063) 13,333
-------- -------- -------- -------- --------
$ 8,634 $ 8,449 $ 15,037 $ 9,047 $ 21,721
======== ======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
FB-6
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1999, 2000 and 2001
Six months ended June 30, 2002 (Unaudited)
(In thousands)
<Table>
<Caption>
Accumulated
other
comprehensive
Notes loss-
Additional Retained receivable currency
Common paid-in earnings from translation
stock capital (deficit) affiliates adjustments Total
--------- --------- ---------- ---------- -------------- ---------
Balance at December 31, 1998 $ 136 $ 36,455 $ 17,588 $ -- $ (4,939) $ 49,240
Net income -- -- 13,524 -- -- 13,524
Other comprehensive loss -- -- -- -- (4,890) (4,890)
Capital contributions:
Cash -- 27,705 -- -- -- 27,705
Noncash -- 142,265 -- (142,265) -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 136 206,425 31,112 (142,265) (9,829) 85,579
Net income -- -- 27,501 -- -- 27,501
Other comprehensive loss -- -- -- -- (19,052) (19,052)
Common dividends declared:
Cash -- -- (19,715) -- -- (19,715)
Noncash -- -- (142,265) 142,265 -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 136 206,425 (103,367) -- (28,881) 74,313
Net income -- -- 18,439 -- -- 18,439
Other comprehensive loss -- -- -- -- (3,402) (3,402)
Capital contribution -- 10,571 -- -- -- 10,571
Common dividends declared -- -- (33,407) -- -- (33,407)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 136 216,996 (118,335) -- (32,283) 66,514
Net income -- -- 8,388 -- -- 8,388
Other comprehensive income -- -- -- -- 13,333 13,333
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2002 (unaudited) $ 136 $ 216,996 $(109,947) $ -- $ (18,950) $ 88,235
========= ========= ========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements.
FB-7
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
---------------------------------- ---------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
(Unaudited)
Cash flows from operating activities:
Net income $ 13,524 $ 27,501 $ 18,439 $ 14,110 $ 8,388
Depreciation, depletion and
amortization 9,115 8,442 8,774 4,331 4,377
Deferred income taxes (1,841) (676) (125) (181) (235)
Net gain from disposition of
property and equipment (975) (7) (12) (15) (763)
Pension, net (567) 255 1,073 (97) (466)
-------- -------- -------- -------- --------
19,256 35,515 28,149 18,148 11,301
Change in assets and liabilities:
Accounts and notes receivable 1,219 (1,687) (2,280) (5,454) (997)
Inventories (1,611) 1,184 (1,619) 2,565 8,834
Prepaid expenses (148) (205) (156) 392 341
Accounts payable and
accrued liabilities 1,138 3,750 (4,321) (621) 4,205
Income taxes 1,012 3,414 (1,817) 3,122 (1,155)
Accounts with affiliates 33,729 (28,018) 2,903 (7,832) (15,806)
Other noncurrent assets 33 (104) (424) 22 14
Other noncurrent liabilities (27) (69) (65) (33) (34)
-------- -------- -------- -------- --------
Net cash provided by operating
activities 54,601 13,780 20,370 10,309 6,703
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (13,976) (12,325) (11,799) (6,471) (3,030)
Change in restricted cash equivalents -- -- -- -- (1,554)
Proceeds from disposition of
property and equipment 2,294 62 59 21 820
-------- -------- -------- -------- --------
Net cash used by investing
activities (11,682) (12,263) (11,740) (6,450) (3,764)
-------- -------- -------- -------- --------
</Table>
FB-8
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<Table>
<Caption>
Six months ended
Years ended December 31, June 30,
---------------------------------- ---------------------
1999 2000 2001 2001 2002
-------- -------- -------- -------- --------
(Unaudited)
Cash flows from financing activities:
Indebtedness:
Borrowings $ -- $ 23,115 $ 1,437 $ 1,437 $ 39,234
Principal payments (10,861) (5,417) (1,031) (450) (26,991)
Deferred financing costs -- -- -- -- (820)
Loans from affiliates:
Loans -- -- 16,677 16,677 --
Repayments (58,204) -- -- -- (18,097)
Capital contribution 27,705 -- 10,571 10,571 --
Dividends paid -- (19,715) (33,407) (33,407) --
-------- -------- -------- -------- --------
Net cash used by financing
activities (41,360) (2,017) (5,753) (5,172) (6,674)
-------- -------- -------- -------- --------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and
financing activities 1,559 (500) 2,877 (1,313) (3,735)
Currency translation (179) (74) (75) (121) 409
Balance at beginning of period 1,822 3,202 2,628 2,628 5,430
-------- -------- -------- -------- --------
Balance at end of period $ 3,202 $ 2,628 $ 5,430 $ 1,194 $ 2,104
======== ======== ======== ======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 4,418 $ 4,609 $ 5,459 $ 2,547 $ 2,668
Income taxes 9,131 12,405 12,316 4,397 4,631
</Table>
See accompanying notes to consolidated financial statements.
FB-9
KRONOS DENMARK APS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Kronos Denmark ApS ("KDK") was incorporated in Denmark in October 1999
and is a wholly owned subsidiary of Kronos International, Inc. ("KII"). KII is a
wholly owned subsidiary of Kronos, Inc. ("Kronos"), a wholly owned subsidiary of
NL Industries, Inc. ("NL"). NL is primarily a holding company and Kronos
conducts its titanium dioxide pigments ("TiO(2)") operations. At December 31,
2001, Valhi, Inc. ("Valhi") and Tremont Corporation ("Tremont"), each affiliates
of Contran Corporation ("Contran"), held approximately 61% and 21%,
respectively, of NL's outstanding common stock (approximately 62% and 21% at
June 30, 2002). At December 31, 2001, Contran and its subsidiaries held
approximately 94% of Valhi's outstanding common stock (approximately 93% at June
30, 2002), and a company 80% owned by Valhi and 20% owned by NL held
approximately 80% of Tremont'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 the sole trustee. Mr. Simmons, the Chairman of the Board of NL and Valhi, the
Chairman of the Board and Chief Executive Officer of Contran and a director of
Tremont, may be deemed to control each of such companies and KDK.
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") with the U.S. dollar as the reporting currency. KDK and its
subsidiaries also prepare financial statements on other bases, as required in
countries in which such entities are resident.
KDK's current operations are conducted primarily through its Belgian
and Norwegian subsidiaries with a TiO(2) plant in Belgium and a TiO(2) plant and
an ilmenite ore mining operation in Norway. KDK also operates TiO(2) sales and
distribution facilities in Denmark and the Netherlands.
As part of a restructuring transaction in 1999, ownership of certain
KII subsidiaries in Belgium, the Netherlands and Norway were transferred to KDK
(the "KDK Restructuring"). The principal elements of the KDK Restructuring were
(i) on December 30, 1999, Kronos Europe S.A./N.V. ("Kronos Belgium") sold its
52.66% investment in Kronos World Services S.A./N.V. ("KWS"), (a Belgium
coordination center, primarily KII's treasury operations) to KII for E.140.9
million ($142.3 million) in exchange for a promissory note for E.140.9 million
($142.3 million) bearing interest at EURIBOR plus 0.375% with a maturity date of
December 30, 2005 and (ii) on December 31, 1999, KII contributed the common
stock of Kronos Belgium and Kronos Norge A/S ("Kronos Norway") in exchange for
KDK common stock. See Note 13.
In accordance with GAAP, KDK accounted for the KDK Restructuring as a
combination of interests under common control in a manner similar to a pooling
of interests (with respect to the contribution of Kronos Belgium and Kronos
Norway) and as a change in accounting entity (with respect to Kronos Belgium's
sale of KWS to KII). Accordingly, KDK's consolidated financial statements have
been prepared to reflect KDK's consolidated financial position, results of
operations and cash flows as if the capital contribution of Kronos Belgium
(exclusive of the financial position, results of operations and cash flows
associated with its interest in KWS) and Kronos Norway had occurred on December
31, 1998. Kronos Belgium's gain on the KWS sale and dividends received from KWS
prior to December 31, 1999, are reflected as part of "other capital
transactions" with affiliates, net in the accompanying consolidated statement of
cash flows. The effect of the change in accounting entity as a result of the
sale of KWS to KII was to reduce KDK's net income by $20.8 million (E.19.2
million) in 1999.
Information included in the consolidated financial statements and
related notes to the consolidated financial statements as of June 30, 2002 and
for the six months ended June 30, 2001 and 2002, is unaudited. In the opinion of
FB-10
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the information for the interim periods 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 and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted for
the interim periods.
KDK is not a registrant with the U.S. Securities and Exchange
Commission ("SEC") and is not subject to the SEC's periodic reporting
requirements, except as may be required by Rule 3-16 of Regulation S-X.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts
of KDK and its wholly owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Actual results may differ from previously estimated
amounts under different assumptions or conditions.
Translation of foreign currencies
The functional currencies of the Company include the Danish kroner, the
euro and the Norwegian kroner. Assets and liabilities of the Company are
translated to U.S. dollars at year-end rates of exchange and revenues and
expenses are translated at weighted average exchange rates prevailing during the
year. Resulting translation adjustments are included in other comprehensive
income (loss), net of related income taxes, if applicable. Currency transaction
gains and losses are recognized in income currently.
Cash equivalents
Cash equivalents include bank deposits with original maturities of
three months or less.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to forty years for buildings and three to
twenty years for machinery and equipment. Depletion of mining properties is
computed by the unit-of-production and straight-line methods.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market
FB-11
value of an asset or (iii) a significant change in the extent or manner in which
an asset is used. All relevant factors are considered. The test for impairment
is performed by comparing the estimated future undiscounted cash flows
(exclusive of interest expense) associated with the asset to the asset's net
carrying value to determine if a write-down to market value or discounted cash
flow value is required. Effective January 1, 2002, the Company assesses the
impairment of other long-lived assets (such as property and equipment and mining
properties) in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144 as discussed under "Other" below.
Long-term debt and notes payable to affiliates
Where applicable, long-term debt and notes payable to affiliates are
stated net of unamortized original issue discount ("OID"). OID is amortized over
the period during which cash interest payments are not required and deferred
financing costs are amortized over the term of the applicable issue, both by the
interest method.
Employee benefit plans
Accounting and funding policies for retirement plans are described in
Note 8.
The Company accounts for stock-based employee compensation in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations. Under APBO No.
25, no compensation cost is generally recognized for fixed stock options in
which the exercise price is not less than the market price on the grant date.
The Company is charged by NL for stock options exercised by employees of the
Company. Compensation cost recognized by the Company in accordance with APBO No.
25 and the amount charged to the Company by NL for stock option exercises was
nil in each of 1999, 2000 and 2001.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures generally are not discounted to present value. Recoveries of
remediation costs from other parties, if any, are reported as receivables when
their receipt is deemed probable. At December 31, 2000 and 2001, no receivables
for recoveries have been recognized.
Net sales
The Company adopted the SEC's Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," as amended, in 2000. Revenue
generally is realized or realizable and earned when all of the requirements of
SAB No. 101 are met, including when title and the risks and rewards of ownership
passes to the customer (generally at the time the product is shipped to the
customer). The impact of adopting SAB No. 101 was not material. Fees charged to
customers for shipping and handling are included in net sales.
Repair and maintenance costs
The Company performs planned major maintenance activities throughout
the year. Repair and maintenance costs estimated to be incurred in connection
with planned major maintenance activities are accrued in advance and are
included in cost of goods sold.
FB-12
Shipping and handling costs
Shipping and handling costs are included in selling, general and
administrative expense and were $8.3 million in 1999, $8.8 million in 2000, $8.5
million in 2001, and $4.3 million and $4.2 million for each of the six months
ended June 30, 2001 and 2002, respectively.
Income taxes
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of assets and liabilities. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance.
The Company's valuation allowance is equal to the amount of deferred tax assets
which the Company believes do not meet the "more-likely-than-not" recognition
criteria.
Derivatives and hedging activities
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, effective January 1, 2001. SFAS
No. 133 establishes accounting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. Under SFAS No. 133, all derivatives are recognized as either assets
or liabilities and measured at fair value. The accounting for changes in fair
value of derivatives is dependent upon the intended use of the derivative. As
permitted by the transition requirements of SFAS No. 133, as amended, the
Company exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were issued or acquired prior to January 1, 1999. The
Company is not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 at December 31, 2001, and there was no impact on the
Company's financial statements from adopting SFAS No. 133.
The Company periodically uses interest rate swaps, currency swaps and
other types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 1999, 2000 and 2001 except as disclosed in Note 15.
Other
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 Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant 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 any net assets to be disposed of by sale 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. The adoption of SFAS No. 144 effective January 1, 2002 did not have a
material effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company 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. 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
FB-13
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 are retroactively reclassified and reported as a
component of income before extraordinary item. The Company had not previously
recognized any gains and losses from the early extinguishment of debt, thus
there was no impact on the Company upon adoption.
New 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, to 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.
FB-14
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE:
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Trade receivables $ 5,852 $ 7,558 $ 11,347
Recoverable VAT and other receivables 2,728 2,793 1,926
Allowance for doubtful accounts (218) (209) (236)
------------ ------------ ------------
$ 8,362 $ 10,142 $ 13,037
============ ============ ============
</Table>
During 1999 and 2000, the Company was party to an accounts receivable
factoring agreement with KWS. Beginning in February 2000 KII assumed the
contract from KWS. KWS and KII (collectively the "Factoring Agent") contracted
with the Company whereby the Company factored its export accounts receivable
without recourse for a fee of 0.85% for the Company's export receivables related
to Kronos Belgium and 1.2% for export receivables related to its Norwegian
operating subsidiaries, Kronos Titan A/S ("TAS") and Titania A/S ("TIA"). The
Factoring Agent, upon non-recourse transfer from the Company, assumed all risk
pertaining to the factored receivables, including, but not limited to, exchange
control risks, risks pertaining to the bankruptcy of a customer and risks
related to late payments.
Effective June 2002, the KII factoring agreement was assigned to Kronos
Titan GmbH and Co. OHG ("TG"), a 99.95%-owned subsidiary of KII.
Export receivables sold by the Company during 1999, 2000 and 2001
aggregated $88.4 million, $83.5 million and $82.9 million, respectively.
NOTE 4 - INVENTORIES:
<Table>
<Caption>
December 31,
---------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Raw materials $ 17,731 $ 14,503 $ 11,759
Work in process 1,595 1,685 2,418
Finished products 19,381 22,178 19,477
Supplies 9,885 9,954 12,000
------------ ------------ ------------
$ 48,592 $ 48,320 $ 45,654
============ ============ ============
</Table>
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<Table>
<Caption>
December 31,
---------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Accounts payable $ 14,827 $ 10,795 $ 14,313
------------ ------------ ------------
Accrued liabilities:
Employee benefits 5,701 6,238 6,693
Other 5,578 3,963 7,868
------------ ------------ ------------
11,279 10,201 14,561
------------ ------------ ------------
$ 26,106 $ 20,996 $ 28,874
============ ============ ============
</Table>
FB-15
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT:
<Table>
<Caption>
December 31,
---------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Notes payable (NOK 200 million) $ 22,480 $ 22,180 $ --
------------ ------------ ------------
Long-term debt:
Revolving credit facility $ -- $ -- $ 39,649
Other 2,093 2,498 2,394
------------ ------------ ------------
2,093 2,498 42,043
Less current maturities 730 1,033 1,225
------------ ------------ ------------
$ 1,363 $ 1,465 $ 40,818
============ ============ ============
</Table>
Notes payable as of December 31, 2001 consisted of short-term
borrowings denominated in Norwegian kroner due within one year from non-U.S.
banks. Weighted average interest rates on the note payable were 7.92% at
December 31, 2000 and 7.27% at December 31, 2001. Notes payable totaling $26.5
million were repaid on June 28, 2002 with proceeds from the revolving credit
facility, and the agreements were terminated. See description of revolving
credit facility below.
In June 2002 the Company's operating subsidiaries in Belgium, Kronos
Belgium, and Norway, TAS and TIA, and KII's operating subsidiary in Germany, TG,
(the "Borrowers") entered into a three-year E.80 million secured revolving
credit facility ("Credit Facility"). The Credit Facility is available in
multiple currencies, including U.S. dollars, euros and Norwegian kroner. As of
June 30, 2002, E.13 million ($13 million) and NOK 200 million ($26 million) was
borrowed at closing by the Company (nil by the German operating subsidiary). At
June 30, 2002, E.40 million was available for future working capital
requirements and general corporate purposes of the Borrowers. Borrowings bear
interest at the applicable interbank market rate plus 1.75%. As of June 30,
2002, the interest rate was 5.15% and 8.80% on the euro and Norwegian kroner
borrowings, respectively, and the weighted average interest rate was 7.61%.
The Credit Facility is collateralized by accounts receivable and
inventory of the Borrowers, plus a limited pledge of certain other assets of the
Company. The Credit Facility contains, among others, various restrictive
covenants, including restrictions on incurring liens, asset sales, additional
financial indebtedness, mergers, investments and acquisitions, transactions with
affiliates and dividends. Kronos Belgium and TG are unconditionally jointly and
severally liable for any and all outstanding borrowings under the Credit
Facility. The parent company of TAS and TIA, Kronos Norge A/S, is jointly and
severally liable for any and all outstanding borrowings under the Credit
Facility to the extent permitted by Norwegian law. The Company has a E.5 million
sub-limit for issuing letters of credit with no letters of credit issued at
June 30, 2002. The Borrowers were in compliance with all the covenants as of
June 30, 2002.
FB-16
Deferred financing costs of $1.2 million for the Credit Facility ($.8
million recorded at the Company, with the remaining $.4 million recorded by the
German operating subsidiary) are being amortized over the life of the Credit
Facility and are included in other noncurrent assets as of June 30, 2002.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $41 million at June 30, 2002, including
$40 million under the Credit Facility.
In June 2002 KII issued E.285 million ($280 million when issued and
$283 million at June 30, 2002) principal amount of 8.875% Senior Secured Notes
(the "Notes") due 2009. The Notes are collateralized by first priority liens on
65% of the common stock or other equity interests of certain of KII's first-tier
subsidiaries, including the Company. The 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, including the
Company, 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 aggregate maturities of long-term debt at December 31, 2001 are
shown in the table below (excluding the effects of the Credit Facility).
<Table>
<Caption>
Amount
--------------
(in thousands)
Years ending December 31,
2002 $ 1,033
2003 1,008
2004 216
2005 115
2006 112
2007 14
--------------
$ 2,498
==============
</Table>
NOTE 7 - NOTE PAYABLE TO TG:
The euro-denominated note payable to TG (E.19.5 million or $17.2 million at
December 31, 2001) is due within one year and bears interest at EURIBOR plus
0.5% (3.84% at December 31, 2001). The note was established in 2001 for general
corporate purposes. The note was repaid in full in June 2002 with proceeds from
the Credit Facility and the agreement was canceled.
NOTE 8 - EMPLOYEE BENEFIT PLANS:
Company-sponsored pension plans
The Company maintains various defined benefit pension plans covering
substantially all employees. Personnel are covered by plans in their respective
countries.
FB-17
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
<Table>
<Caption>
Years ended December 31,
-----------------------------------------------------
1999 2000 2001
---------------- ----------------- -----------------
(Percentages)
Discount rate 5.8 to 6.3 6.0 to 6.0 5.8 to 6.0
Rate of increase in future compensation levels 3.0 to 3.3 3.0 to 3.0 2.8 to 3.0
Long-term rate of return on plan assets 6.0 to 7.0 7.0 to 7.0 6.8 to 7.0
</Table>
Plan assets are comprised primarily of investments in corporate equity
and debt securities, short-term investments, mutual funds and group annuity
contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Net periodic pension cost:
Service cost benefits $ 935 $ 1,028 $ 1,154
Interest cost on projected benefit obligation ("PBO") 2,147 2,083 2,293
Expected return on plan assets (2,634) (2,919) (2,613)
Amortization of prior service cost 267 238 201
Amortization of net transition obligation 165 142 137
Recognized actuarial losses 225 186 400
------------ ------------ ------------
$ 1,105 $ 758 $ 1,572
============ ============ ============
</Table>
FB-18
The funded status of the Company's defined benefit pension plans is set
forth below.
<Table>
<Caption>
December 31,
-----------------------------
2000 2001
------------ ------------
(In thousands)
Change in PBO:
Beginning of year $ 36,387 $ 33,500
Service cost 1,028 1,154
Interest 2,083 2,293
Participant contributions 100 106
Amendments -- 106
Actuarial gain (169) (596)
Benefits paid (2,395) (2,475)
Change in currency exchange rates (3,534) 5,229
------------ ------------
End of year 33,500 39,317
------------ ------------
Change in fair value of plan assets:
Beginning of year 40,724 37,587
Actual return on plan assets 2,833 1,508
Employer contributions 503 499
Participant contributions 100 106
Benefits paid (2,395) (2,475)
Change in currency exchange rates (4,178) 594
------------ ------------
End of year 37,587 37,819
------------ ------------
Funded status at year end:
Plan assets in excess of (less than) PBO 4,087 (1,498)
Unrecognized actuarial loss 9,643 13,099
Unrecognized prior service cost 1,693 2,713
Unrecognized net transition obligation 549 382
------------ ------------
$ 15,972 $ 14,696
============ ============
Amounts recognized in the balance sheet - prepaid pension cost $ 15,972 $ 14,696
============ ============
</Table>
At December 31, 2000 and 2001, none of the Company's defined benefit
pension plans have accumulated benefit obligations in excess of fair value of
plan assets.
Incentive bonus programs
Certain employees are eligible to participate in the Company's various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee, if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for certain employees, individual
performance.
FB-19
NOTE 9 - OTHER INCOME, NET:
<Table>
<Caption>
Years ended December 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Currency transaction gains (losses), net $ 62 $ 3 $ (191)
Trade interest income 193 131 249
Disposition of property and equipment 975 7 12
Other, net 123 387 420
------------ ------------ ------------
$ 1,353 $ 528 $ 490
============ ============ ============
</Table>
NOTE 10 - OTHER ITEMS:
Advertising costs are expensed as incurred and were $.1 million in
1999, nil in 2000 and $.1 million in 2001.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $.2 million in 1999, $.1 million in 2000
and $.3 million in 2001.
Interest capitalized in connection with long-term capital projects was
nil in each of 1999, 2000 and 2001.
FB-20
NOTE 11 - INCOME TAXES:
The components of (i) income from continuing operations before income
taxes and minority interest ("pretax income"), (ii) the difference between the
provision for income taxes attributable to pretax income and the amounts that
would be expected using the Danish statutory income tax rate of 32%, (iii) the
provision for income taxes and (iv) the comprehensive tax provision are
presented below.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Pretax income:
Denmark $ -- $ 82 $ (71)
Non-Denmark 21,751 42,565 28,884
------------ ------------ ------------
$ 21,751 $ 42,647 $ 28,813
============ ============ ============
Expected tax expense $ 6,960 $ 13,647 $ 9,220
Non-Denmark tax rates 1,267 1,694 592
Other, net -- (195) 562
------------ ------------ ------------
Income tax expense $ 8,227 $ 15,146 $ 10,374
============ ============ ============
Provision for income taxes:
Current income tax expense:
Denmark $ -- $ 58 $ --
Non-Denmark 10,068 15,764 10,499
------------ ------------ ------------
10,068 15,822 10,499
------------ ------------ ------------
Deferred income tax expense (benefit):
Denmark -- (227) 540
Non-Denmark (1,841) (449) (665)
------------ ------------ ------------
(1,841) (676) (125)
------------ ------------ ------------
$ 8,227 $ 15,146 $ 10,374
============ ============ ============
Comprehensive provision for income taxes allocable to:
Pretax income $ 8,227 $ 15,146 $ 10,374
Other comprehensive loss - currency translation adjustment -- -- --
------------ ------------ ------------
$ 8,227 $ 15,146 $ 10,374
============ ============ ============
</Table>
FB-21
The components of the net deferred tax liability are summarized below.
<Table>
<Caption>
December 31,
---------------------------------------------------------------
2000 2001
----------------------------- -----------------------------
Deferred tax Deferred tax
----------------------------- -----------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
(In thousands)
Tax effect of temporary differences relating to:
Inventories $ 100 $ (1,841) $ 33 $ (1,562)
Property and equipment 29 (16,721) 67 (15,979)
Prepaid pension cost -- (4,632) -- (4,204)
Accrued liabilities and other deductible differences 631 -- 635 --
Other taxable differences -- (6,100) -- (6,390)
------------ ------------ ------------ ------------
Gross deferred tax assets (liabilities) 760 (29,294) 735 (28,135)
Reclassification, principally netting by tax jurisdiction (660) 660 (702) 702
------------ ------------ ------------ ------------
Net total deferred tax assets (liabilities) 100 (28,634) 33 (27,433)
Net current deferred tax assets (liabilities) 100 (1,754) 33 (1,480)
------------ ------------ ------------ ------------
Net noncurrent deferred tax liabilities $ -- $ (26,880) $ -- $ (25,953)
============ ============ ============ ============
</Table>
The Company's tax returns in Belgium and Norway are being examined and
tax authorities have proposed or may propose tax deficiencies, including
penalties and interest.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO(2) plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately E.10.4 million ($9.2 million at December
31, 2001). The Company has filed protests to the assessments for the years 1991
to 1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
NOTE 12 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and
FB-22
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect to
the Company other than as set forth in these financial statements, the Company
from time to time considers, reviews and evaluates such transactions and
understands that Contran, Valhi, NL, Kronos, KII and related entities consider,
review and evaluate, such transactions. Depending upon the business, tax and
other objectives then relevant, and restrictions under the KII indenture, the
Credit Facility, and other agreements, it is possible that the Company might be
a party to one or more such transactions in the future.
The Company is a party to a cost sharing agreement with Kronos and KII
whereby Kronos and KII provide certain management, financial, insurance and
administrative services to the Company on a fee basis. The Company's expense was
approximately $1.5 million in 1999 and $1.4 million in both 2000 and 2001.
The Company is also party to master global insurance coverage policies
with NL with regard to property, business interruption, excess liability, and
other coverages. The costs associated with these policies aggregated $.8
million, $.7 million and $1.1 million in 1999, 2000 and 2001, respectively.
Intercompany sales to (purchased from) affiliates of TiO(2) are
summarized in the following table.
<Table>
<Caption>
Years ended December 31,
----------------------------------------------
1999 2000 2001
------------ ------------ ------------
(In thousands)
Sales to:
TG $ 32,629 $ 34,565 $ 42,843
Kronos Limited ("KUK") 13,811 17,988 14,962
Kronos (US), Inc. ("KUS") 14,479 12,316 10,883
Societe Industrielle Du Titane, S.A. ("SIT") 9,147 8,700 7,158
Kronos Canada, Inc. ("KC") 1,583 4,885 2,587
------------ ------------ ------------
$ 71,649 $ 78,454 $ 78,433
============ ============ ============
Purchases from:
TG $ (26,606) $ (24,496) $ (31,619)
KUS (3,683) (3,827) (1,177)
KC (712) (11) --
------------ ------------ ------------
$ (31,001) $ (28,334) $ (32,796)
============ ============ ============
</Table>
Sales of ilmenite to TG were $9.5 million in 1999, $9.9 million in 2000
and $7.3 million in 2001.
KUS purchases the rutile and slag feedstock used as a raw material in
all of the Company's chloride process TiO(2) facilities. The Company purchases
such feedstock from KUS for use in its facilities for an amount equal to the
amount paid by KUS to the third-party supplier plus a 2.5% administrative fee.
Such feedstock purchases were $30.9 million in 1999, $28.5 million in 2000 and
$31.6 million in 2001.
FB-23
Interest income from affiliates related to the note receivable from KII
was nil in 1999, $2.2 million in 2000 and nil in 2001. Interest expense to
affiliates related to the note payable to TG was nil in each of 1999 and 2000,
and $.5 million in 2001. Included in other affiliate income and other affiliate
expense was other affiliate interest income/expense, factoring fees and service
fees.
Royalties paid to KII for use of certain of KII's intellectual property
totaled $8.8 million in 1999, $9.0 million in 2000 and $8.2 million in 2001, and
was included as a component of cost of sales.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
<Table>
<Caption>
December 31,
----------------------------- June 30,
2000 2001 2002
------------ ------------ ------------
(Unaudited)
(In thousands)
Receivable from:
KWS $ 8,301 $ -- $ 84
TG 1,572 228 11,385
SIT 689 387 760
KUK 689 328 1,391
KC 167 34 225
KII -- -- 511
------------ ------------ ------------
$ 11,418 $ 977 $ 14,356
============ ============ ============
Payable to:
KII $ (13,145) $ (3,592) $ --
KUS (257) (1,762) (1,067)
Other affiliates (7) (81) --
------------ ------------ ------------
$ (13,409) $ (5,435) $ (1,067)
============ ============ ============
</Table>
Net amounts between the Company, KUS, TG, SIT, KUK and KC were
generally related to product purchases and sales, whereas affiliate balances
with KWS and KII were related primarily to accrued interest on affiliate loans
and accounts receivable factoring (including factoring of accounts receivables
to TG beginning June 2002). See Notes 3 and 13 for discussion of accounts
receivable factoring and notes receivable from affiliates.
NOTE 13 - CAPITAL STOCK AND NOTES RECEIVABLE FROM AFFILIATES:
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option
Plan") provides for the discretionary grant of restricted common stock, stock
options, stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company. Although certain stock options
granted pursuant to a similar plan which preceded the NL Option Plan
("Predecessor Option Plan") remain outstanding at December 31, 2001, no
additional options may be granted under the Predecessor Option Plan.
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan and, at December 31, 2001, 3,663,000 shares were available
for future grants. The NL Option Plan provides for the grant of options that
qualify as incentive options and for options which are not so qualified.
Generally, stock options and SARs (collectively, "options") are granted at a
price equal to or greater than 100% of the market price at the date of grant,
vest over a five year period and expire ten years from the date of grant.
Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.
FB-24
Changes in outstanding options granted to employees of the Company
pursuant to the NL Option Plan and the Predecessor Option Plan are summarized in
the table below.
<Table>
<Caption>
Exercise price Amount
per share payable
---------------------------- upon
Shares Low High exercise
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
Outstanding at December 31, 1998 17 $ 8.69 $ 17.97 $ 245
Granted 7 11.28 11.28 84
------------ ------------ ------------ ------------
Outstanding at December 31, 1999 24 8.69 17.97 329
Granted 16 14.25 14.25 221
Exercised (4) 8.69 14.25 (46)
------------ ------------ ------------ ------------
Outstanding at December 31, 2000 36 11.28 17.97 504
Granted 20 20.11 20.11 402
------------ ------------ ------------ ------------
Outstanding at December 31, 2001 56 $ 11.28 $ 20.11 $ 906
============ ============ ============ ============
</Table>
At December 31, 1999, 2000 and 2001 options to purchase 5,700, 6,000
and 11,800 shares, respectively, were exercisable and options to purchase 10,200
shares become exercisable in 2002. Of the exercisable options, options to
purchase 7,300 shares at December 31, 2001 had exercise prices less than NL's
December 31, 2001 quoted market price of $15.27 per share. Outstanding options
at December 31, 2001 expire at various dates through 2011, with a
weighted-average remaining life of eight years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 1999, 2000 and 2001 were $6.94, $4.83 and $7.52 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1999, 2000 and 2001: stock price volatility of
50%, 48% and 46% in 1999, 2000 and 2001, respectively; risk-free rate of return
of 6% in 1999 and 5% in 2000 and 2001; dividend yield of 1.2% in 1999, 4.9% in
2000 and 4.0% in 2001; and an expected term of 9 years in 1999, 2000 and 2001.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
FB-25
The Company's pro forma net income was as follows.
<Table>
<Caption>
Years ended December 31,
-------------------------------------------------------
1999 2000 2001
---------------- ----------------- -----------------
(In thousands, except per share amounts)
Net income - as reported $ 13,524 $ 27,501 $ 18,439
Net income - pro forma $ 13,471 $ 27,415 $ 18,338
</Table>
Notes receivable from affiliates
Long-term notes receivable from affiliates were included as a component
of equity in accordance with GAAP as settlement of these affiliate notes
receivable balances was not currently contemplated within the foreseeable
future.
The Company exchanged its 52.66% investment in KWS for a $142.3 million
(E.140.9 million) note receivable from KII in December 1999. In 2000 the note
receivable from KII was dividended to KII in a noncash transaction, thus
canceling the note receivable. See Note 1.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
Net rent expense aggregated $2 million in 1999, and $1 million in 2000
and 2001, respectively. At December 31, 2001, minimum rental commitments under
the terms of noncancellable operating leases were as follows:
<Table>
<Caption>
Real Estate Equipment
------------- -------------
(In thousands)
Years ending December 31,
2002 $ 149 $ 118
2003 142 118
2004 144 100
2005 147 60
2006 150 17
2007 and thereafter 353 --
------------- -------------
$ 1,085 $ 413
============= =============
</Table>
Purchase commitments
KUS has long-term supply contracts that provide for certain affiliates'
chloride feedstock requirements through 2003. The Company and certain of its
affiliates purchase chloride feedstock underlying these long-term supply
contracts from KUS. See Note 12. The agreements require KUS to purchase certain
minimum quantities of feedstock with average minimum annual purchase commitments
aggregating approximately $159 million.
FB-26
Environmental, product liability and litigation matters
The Company's operations are governed by various environmental laws and
regulations. Certain of the Company's businesses are and have been engaged in
the handling, manufacture or use of substances or compounds that may be
considered toxic or hazardous within the meaning of applicable environmental
laws. As with other companies engaged in similar businesses, certain past and
current operations and products of the Company have the potential to cause
environmental or other damage. The Company has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
The policy of the Company is to maintain compliance with applicable foreign
environmental laws and regulations at all of its facilities and to strive to
improve its environmental performance. It is possible that future developments,
such as stricter requirements of environmental laws and enforcement policies
thereunder, could adversely affect the Company's production, handling, use,
storage, transportation, sale or disposal of such substances as well as the
Company's consolidated financial position, results of operations or liquidity.
The Company's production facilities operate in an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers which allow them to issue operating permits required
for the plants to operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws. At June 30, 2002, the
Company had approximately $1.6 million of restricted cash equivalents, which was
collateralizing certain environmental remediation obligations.
Although the laws regulating operations of industrial facilities in
Europe vary from country to country, a common regulatory base is provided by the
European Union (the "EU"). Belgium is a member of the EU and follows its
initiatives. Norway, although not a member, generally patterns its environmental
regulatory actions after the EU. The Company believes that it has all required
permits and is in substantial compliance with applicable EU requirements,
including EU Directive 92/112/EEC regarding establishment of procedures for
reduction and eventual elimination of pollution caused by waste from the TiO(2)
industry.
The Company landfills waste generated at the Langerbrugge, Belgium
plant and mine tailings waste generated at the facility in Norway. The Company
maintains reserves, as required under GAAP, to cover the anticipated cost of
closure of these landfills, which were approximately $.1 million as of December
31, 2001. The requirements for landfills are expected to increase in the future
in view of recently adopted EU requirements.
The Company's Belgian subsidiary and various of its Belgian employees
are the subject of an investigation by Belgian authorities relating to an
accident resulting in two fatalities that occurred in its Langerbrugge, Belgium
facility in October 2000. The initial stage of this investigation, which could
ultimately result in civil and criminal sanctions against the Company, has been
completed. It is anticipated that this matter will continue in the investigative
phase until the end of 2002 or early 2003.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business.
The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
FB-27
Concentrations of credit risk
Sales of TiO(2) accounted for approximately 87% , 85% and 80% of net
sales during 1999, 2000 and 2001, respectively. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate pigment
production process). TiO(2) is generally sold to the paint, plastics and paper,
as well as fibers, rubber, ceramics, inks and cosmetics markets. Such markets
are generally considered "quality-of-life" markets whose demand for TiO(2) is
influenced by the relative economic well-being of the various geographic
regions. TiO(2) is sold to over 1,000 customers, with the top ten external
customers approximating 25% of net sales in 1999 and 2000, and 30% of net sales
in 2001. Approximately 80% of the Company's TiO(2) sales by volume were to
Europe in 1999, 2000 and 2001. Approximately 10% of sales by volume were to
North America in 1999, 2000 and 2001.
NOTE 15 - FINANCIAL INSTRUMENTS:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
<Table>
<Caption>
December 31,
------------------------------------------------------------
2000 2001
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(In millions)
Cash and cash equivalents $ 2.6 $ 2.6 $ 5.4 $ 5.4
Notes payable and long-term debt:
Note payable to TG $ -- $ -- $ 17.2 $ 17.2
Variable rate debt 24.6 24.6 24.7 24.7
</Table>
At December 31, 2000 and 2001, the Company had unsecured foreign
currency forward contracts with KII with a notional value of approximately $1.3
million and 1.9 million, respectively. Fair value approximated notional value as
these contracts were generally of very short duration, with these specific
contracts having matured in January 2001 and January 2002, respectively. The
notional amount of these contracts represented the amount of foreign currencies
to be purchased or sold at maturity and did not represent the exposure on these
contracts. The Company marked the contracts to market, with gains and losses
recognized in income currently. The gains and losses associated with these
contracts were not material.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED):
<Table>
<Caption>
Quarters ended
-------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------ ------------ ------------ ------------
(In thousands)
Year ended December 31, 2000:
Net sales $ 59,193 $ 66,934 $ 66,285 $ 47,418
Cost of sales 45,246 50,931 49,302 32,958
Operating income 9,603 11,701 13,433 8,811
Income before income taxes 10,379 12,407 11,869 7,992
Net income 6,769 8,217 7,771 4,744
Year ended December 31, 2001:
Net sales $ 65,989 $ 62,742 $ 55,567 $ 49,634
Cost of sales 49,609 47,562 44,265 43,863
Operating income 12,358 11,318 7,436 2,394
Income before income taxes 11,178 10,270 6,192 1,173
Net income 7,988 6,122 3,992 337
</Table>
FB-28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Amended and Restated Bylaws the ("Bylaws") of Kronos International,
Inc. (the "Registrant") provide for the indemnification of a person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that the person is or was a director,
officer, employee or agent of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
entity to the fullest extent permitted by the Delaware General Corporation Law
(the "DGCL"). Each such person is specifically indemnified in the Bylaws against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful, except that, in the case of any action or suit brought by or in the
right of the Registrant, no indemnification will be made with respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the adjudicating
court determines that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses that such court deems proper.
The Registrant will pay expenses incurred by a present or former
director or officer of the Registrant in advance of the final disposition of an
action, suit or proceeding, if such person undertakes to repay such amount if it
is ultimately determined that such person is not entitled to be indemnified by
the Registrant.
Certain of the directors and officers of the Registrant have entered
into indemnity agreements with the registrant (the "Indemnity Agreements"),
which provide for the indemnification of such persons to the fullest extent
permitted by the DGCL.
The indemnification and expense advancement provisions in the Bylaws
and the Indemnity Agreements are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Bylaws, the Indemnity
Agreements or of other rights of indemnification or advancement of expenses
pursuant to any agreement, vote of the stockholder or directors or pursuant to
judicial direction. The Registrant is authorized to purchase insurance on behalf
of the indemnified persons for liabilities incurred, whether or not the
Registrant would have the power or obligation to indemnify such person pursuant
to the Bylaws, the Indemnity Agreements or the DGCL.
ITEM 21. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Certificate of Incorporation of the Registrant.
3.2 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated March 15, 1989.
3.3 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated January 1, 1999.
3.4 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated February 8, 1999.
3.5 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated December 15, 1999.
3.6 Amended and Restated Bylaws of the Registrant.
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009,
dated as of June 28, 2002, between the Registrant and The Bank
of New York, as trustee (incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of NL Industries,
Inc. for the quarter ended June 30, 2002).
4.2 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit A to Exhibit 4.1).
4.3 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit B to Exhibit 4.1).
</Table>
II-1
<Table>
4.4 Purchase Agreement, dated as of June 19, 2002, among the
Registrant, Deutsche Bank AG London, Dresdner Bank AG, London
Branch, and Commerzbank Aktiengesellschaft, London Branch
(incorporated by reference to Exhibit 4.4 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter
ended June 30, 2002).
4.5 Registration Rights Agreement, dated as of June 28, 2002,
among the Registrant, Deutsche Bank AG London, Dresdner Bank
AG, London Branch, and Commerzbank Aktiengesellschaft, London
Branch (incorporated by reference to Exhibit 4.5 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002).
4.6 Collateral Agency Agreement, dated as of June 28, 2002, among
The Bank of New York, U.S. Bank, N.A. and the Registrant
(filed herewith only with respect to Sections 2, 5, 6 and 8
thereof) (incorporated by reference to Exhibit 4.6 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002).
4.7 Security Over Shares Agreement (shares of Kronos Limited),
dated June 28, 2002, between the Registrant and The Bank of
New York, U.S., as trustee (incorporated by reference to
Exhibit 4.7 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002).
4.8 Pledge of Shares (shares of Kronos Denmark ApS), dated June
28, 2002, between the Registrant and U.S. Bank, N.A., as
collateral agent (incorporated by reference to Exhibit 4.8 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002).
4.9 Pledge Agreement (pledge of shares of Societe Industrielle du
Titane, S.A.), dated June 28, 2002, between the Registrant and
U.S. Bank, N.A., as collateral agent (incorporated by
reference to Exhibit 4.9 to the Quarterly Report on Form 10-Q
of NL Industries, Inc. for the quarter ended June 30, 2002).
4.10 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28,
2002, between the Registrant and U.S. Bank, N.A., as
collateral agent (incorporated by reference to Exhibit 4.10 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002).
4.12 Recapitalization Agreement, dated as of June 5, 2002, between
the Registrant and Kronos, Inc.
4.13 Redemption Agreement, dated as of June 6, 2002, between the
Registrant and NL Industries, Inc.
4.14 Form of Profit Participation Certificate (English translation
from German language document).
5.1 Opinion of Locke Liddell & Sapp LLP.
8.1 Opinion of Locke Liddell & Sapp LLP.
10.1 euro80,000,000 Facility Agreement, dated June 25, 2002, among
Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos
Titan A/S and Titania A/S, as borrowers, Kronos Titan GmbH &
Co. OHG, Kronos Europe S.A./N.V. and Kronos Norge AS, as
guarantors, Kronos Denmark ApS, as security provider, Deutsche
Bank AG, as mandated lead arranger, Deutsche Bank Luxembourg
S.A., as agent and security agent, and KBC Bank NV, as
fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002).
10.2 Lease Contract, dated June 21, 1952, between Farbenfabrieken
Bayer Aktiengesellschaft and Titangesellschaft mit
beschrankter Haftung (German language version and English
translation thereof) (incorporated by reference to Exhibit
10.14 to the Annual Report on Form 10-K of NL Industries, Inc.
for the year ended December 31, 1985).
10.3 Contract on Supplies and Services, dated as of June 30, 1995,
among Bayer AG, Kronos Titan-GmbH & Co. OHG and the Registrant
(English translation from German language document)
(incorporated by reference to Exhibit 10.1 to Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended
September 30, 1995).
10.4 Master Technology Exchange Agreement, dated as of October 18,
1993, among Kronos, Inc., Kronos Louisiana, Inc., the
Registrant, Tioxide Group Limited and Tioxide Group Services
Limited (incorporated by reference to Exhibit 10.8 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended September 30, 1993).
10.6 Services Agreement, dated as of January 1, 1995, amended as of
April 1, 2002, among NL Industries, Inc., Kronos (US), Inc.
and the Registrant.
10.7 Tax Agreement, dated as of May 28, 2002, between Kronos, Inc.
and the Registrant.
10.8 Form of Kronos Cost Sharing Agreement, effective as of January
1, 2002, among the Registrant, Kronos Europe S.A./N.V., Kronos
(US), Inc., NL Industries, Inc., Kronos Titan GmbH & Co. OHG,
Societe Industrielle du Titane, S.A., Kronos Titan A/S,
Titania A/S, Kronos Limited, Kronos Canada, Inc., Kronos
Denmark ApS and Kronos Louisiana Inc.
</Table>
II-2
<Table>
10.9 Form of Assignment and Assumption Agreement, dated as of
January 1, 1999, between Kronos (US), Inc. and the Registrant.
10.10 Form of Cross License Agreement, effective as of January 1,
1999, between Kronos Inc. (formerly known as Kronos (USA),
Inc.) and the Registrant.
10.11 NL Industries, Inc. 1998 Long-Term Incentive Plan
(incorporated by reference to Appendix A to the Proxy
Statement on Schedule 14A of NL Industries, Inc. for the
annual meeting of shareholders held on May 6, 1998).
10.12 Form of Indemnity Agreement between the Registrant and the
officers and directors of the Registrant.
10.13 Richards Bay Slag Sales Agreement, dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. (incorporated by reference to Exhibit 10.17 to
the Annual Report on Form 10-K for NL Industries, Inc. for the
year ended December 31, 1995).
10.14 Amendment to Richards Bay Slag Sales Agreement, dated May 1,
1999, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. (incorporated by reference to Exhibit
10.4 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 1999).
10.15 Amendment to Richards Bay Slag Sales Agreement, dated June 1,
2001, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. (incorporated by reference to Exhibit
10.5 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 2001).
12.1 Statement re computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP relating to the
financial statements and financial statement schedules of the
Registrant and its subsidiaries.
23.2 Consent of PricewaterhouseCoopers GmbH,
Wirtschaftsprufungsgesellschaft relating to the financial
statements of Kronos Titan GmbH & Co. OHG.
23.3 Consent of PricewaterhouseCoopers relating to the financial
statements of Kronos Denmark ApS.
23.4 Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1
and 8.1).
24.1 Powers of Attorney (included as part of signature page).
25.1 Form T-1 State of Eligibility of The Bank of New York to act
as Trustee under the Indenture.
99.1 Form of Letter of Transmittal.
99.2 Letter to Brokers.
99.3 Letter to Clients.
</Table>
All documents that have been incorporated by reference were previously filed by
NL Industries, Inc. under SEC File Number 1-640.
(b) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts, and certain
information called for in Schedule II has been omitted because
such information is included in the notes to the Kronos
International, Inc. consolidated financial statements included
elsewhere in this registration statement.
All other schedules have been omitted because they are not
applicable.
(c) Not applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
II-3
(iii) To include any material information with
respect to the plan of distribution previously disclosed in the
registration statement or any material change to such information in
the registration statement.
(2) That, for the purpose of determining any
liabilities under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from the registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That, for purposes of determining any liability
under the Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) of 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(5) Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of the
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by
means of post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly executed this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Houston,
State of Texas, on September 24, 2002.
KRONOS INTERNATIONAL, INC.
By: /s/ Robert D. Hardy
------------------------------------------
Robert D. Hardy
Vice President and Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Kronos International,
Inc. do hereby constitute and appoint Dr. Lawrence A. Wigdor and Robert D.
Hardy, and each of them, our true and lawful attorneys-in-fact and agents, to do
any and all acts and things in our names and on our behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
name in the capacities indicated below, which said attorneys and agents, or
either of them, may deem necessary or advisable to enable said company to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
registration statement, or any registration statement for this offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, including specifically, but without limitation, the power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that said attorneys and agents, or any of them, shall do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dated indicated.
<Table>
<Caption>
SIGNATURE TITLE AND CAPACITY DATE
--------- ------------------ ----
/s/ Dr. Lawrence A. Wigdor Chief Executive Officer September 24, 2002
- -------------------------------- (Principal Executive Officer)
Dr. Lawrence A. Wigdor
Vice President and Chief Financial Officer September 24, 2002
/s/ Robert D. Hardy (Principal Financial Officer and Principal
- -------------------------------- Accounting Offer)
Robert D. Hardy
/s/ Dr. Ulfert Fiand Director September 24, 2002
- --------------------------------
Dr. Ulfert Fiand
/s/ Dr. Henry Basson Director September 24, 2002
- --------------------------------
Dr. Henry Basson
/s/ Volker Roth Director September 24, 2002
- --------------------------------
Volker Roth
/s/ Andrew Kasprowiak Director September 24, 2002
- --------------------------------
Andrew Kasprowiak
</Table>
II-5
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Certificate of Incorporation of the Registrant.
3.2 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated March 15, 1989.
3.3 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated January 1, 1999.
3.4 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated February 8, 1999.
3.5 Certificate of Amendment to Certificate of Incorporation of
the Registrant, dated December 15, 1999.
3.6 Amended and Restated Bylaws of the Registrant.
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009,
dated as of June 28, 2002, between the Registrant and The Bank
of New York, as trustee (incorporated by reference to Exhibit
4.1 to the Quarterly Report on Form 10-Q of NL Industries,
Inc. for the quarter ended June 30, 2002).
4.2 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit A to Exhibit 4.1).
4.3 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit B to Exhibit 4.1).
4.4 Purchase Agreement, dated as of June 19, 2002, among the
Registrant, Deutsche Bank AG London, Dresdner Bank AG, London
Branch, and Commerzbank Aktiengesellschaft, London Branch
(incorporated by reference to Exhibit 4.4 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter
ended June 30, 2002).
4.5 Registration Rights Agreement, dated as of June 28, 2002,
among the Registrant, Deutsche Bank AG London, Dresdner Bank
AG, London Branch, and Commerzbank Aktiengesellschaft, London
Branch (incorporated by reference to Exhibit 4.5 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002).
4.6 Collateral Agency Agreement, dated as of June 28, 2002, among
The Bank of New York, U.S. Bank, N.A. and the Registrant
(filed herewith only with respect to Sections 2, 5, 6 and 8
thereof) (incorporated by reference to Exhibit 4.6 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002).
4.7 Security Over Shares Agreement (shares of Kronos Limited),
dated June 28, 2002, between the Registrant and The Bank of
New York, U.S., as trustee (incorporated by reference to
Exhibit 4.7 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002).
4.8 Pledge of Shares (shares of Kronos Denmark ApS), dated June
28, 2002, between the Registrant and U.S. Bank, N.A., as
collateral agent (incorporated by reference to Exhibit 4.8 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002).
4.9 Pledge Agreement (pledge of shares of Societe Industrielle du
Titane, S.A.), dated June 28, 2002, between the Registrant and
U.S. Bank, N.A., as collateral agent (incorporated by
reference to Exhibit 4.9 to the Quarterly Report on Form 10-Q
of NL Industries, Inc. for the quarter ended June 30, 2002).
4.10 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28,
2002, between the Registrant and U.S. Bank, N.A., as
collateral agent (incorporated by reference to Exhibit 4.10 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002).
4.12 Recapitalization Agreement, dated as of June 5, 2002, between
the Registrant and Kronos, Inc.
4.13 Redemption Agreement, dated as of June 6, 2002, between the
Registrant and NL Industries, Inc.
4.14 Form of Profit Participation Certificate (English translation
from German language document).
5.1 Opinion of Locke Liddell & Sapp LLP.
8.1 Opinion of Locke Liddell & Sapp LLP.
</Table>
<Table>
10.1 E.80,000,000 Facility Agreement, dated June 25, 2002, among
Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos
Titan A/S and Titania A/S, as borrowers, Kronos Titan GmbH &
Co. OHG, Kronos Europe S.A./N.V. and Kronos Norge AS, as
guarantors, Kronos Denmark ApS, as security provider, Deutsche
Bank AG, as mandated lead arranger, Deutsche Bank Luxembourg
S.A., as agent and security agent, and KBC Bank NV, as
fronting bank, and the financial institutions listed in
Schedule 1 thereto, as lenders (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002).
10.2 Lease Contract, dated June 21, 1952, between Farbenfabrieken
Bayer Aktiengesellschaft and Titangesellschaft mit
beschrankter Haftung (German language version and English
translation thereof) (incorporated by reference to Exhibit
10.14 to the Annual Report on Form 10-K of NL Industries, Inc.
for the year ended December 31, 1985).
10.3 Contract on Supplies and Services, dated as of June 30, 1995,
among Bayer AG, Kronos Titan-GmbH & Co. OHG and the Registrant
(English translation from German language document)
(incorporated by reference to Exhibit 10.1 to Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended
September 30, 1995).
10.4 Master Technology Exchange Agreement, dated as of October 18,
1993, among Kronos, Inc., Kronos Louisiana, Inc., the
Registrant, Tioxide Group Limited and Tioxide Group Services
Limited (incorporated by reference to Exhibit 10.8 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended September 30, 1993).
10.6 Services Agreement, dated as of January 1, 1995, amended as of
April 1, 2002, among NL Industries, Inc., Kronos (US), Inc.
and the Registrant.
10.7 Tax Agreement, dated as of May 28, 2002, between Kronos, Inc.
and the Registrant.
10.8 Form of Kronos Cost Sharing Agreement, effective as of January
1, 2002, among the Registrant, Kronos Europe S.A./N.V., Kronos
(US), Inc., NL Industries, Inc., Kronos Titan GmbH & Co. OHG,
Societe Industrielle du Titane, S.A., Kronos Titan A/S,
Titania A/S, Kronos Limited, Kronos Canada, Inc., Kronos
Denmark ApS and Kronos Louisiana Inc.
10.9 Form of Assignment and Assumption Agreement, dated as of
January 1, 1999, between Kronos (US), Inc. and the Registrant.
10.10 Form of Cross License Agreement, effective as of January 1,
1999, between Kronos Inc. (formerly known as Kronos (USA),
Inc.) and the Registrant.
10.11 NL Industries, Inc. 1998 Long-Term Incentive Plan
(incorporated by reference to Appendix A to the Proxy
Statement on Schedule 14A of NL Industries, Inc. for the
annual meeting of shareholders held on May 6, 1998).
10.12 Form of Indemnity Agreement between the Registrant and the
officers and directors of the Registrant.
10.13 Richards Bay Slag Sales Agreement, dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. (incorporated by reference to Exhibit 10.17 to
the Annual Report on Form 10-K for NL Industries, Inc. for the
year ended December 31, 1995).
10.14 Amendment to Richards Bay Slag Sales Agreement, dated May 1,
1999, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. (incorporated by reference to Exhibit
10.4 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 1999).
10.15 Amendment to Richards Bay Slag Sales Agreement, dated June 1,
2001, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. (incorporated by reference to Exhibit
10.5 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 2001).
12.1 Statement re computation of ratio of earnings to fixed
charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP relating to the
financial statements and financial statement schedules of the
Registrant and its subsidiaries.
23.2 Consent of PricewaterhouseCoopers GmbH,
Wirtschaftsprufungsgesellschaft relating to the financial
statements of Kronos Titan GmbH & Co. OHG.
23.3 Consent of PricewaterhouseCoopers relating to the financial
statements of Kronos Denmark ApS.
23.4 Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1
and 8.1).
24.1 Powers of Attorney (included as part of signature page).
25.1 Form T-1 State of Eligibility of The Bank of New York to act
as Trustee under the Indenture.
99.1 Form of Letter of Transmittal.
99.2 Letter to Brokers.
99.3 Letter to Clients.
</Table>
All documents that have been incorporated by reference were previously filed by
NL Industries, Inc. under SEC File Number 1-640.
II-6
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of Kronos International, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated May 9, 2002 appearing on page F-2 in the Kronos International, Inc.
Registration Statement also included an audit of the financial statement
schedule listed in Item 21 of this Registration Statement. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Houston, Texas
May 9, 2002
S-1
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<Table>
<Caption>
CHARGES
BALANCE AT (CREDITS) TO CURRENT
BEGINNING COSTS AND TRANSLATION BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS ADJUSTMENTS END OF YEAR
- ----------- ---------- ------------ ---------- ----------- -----------
Year ended December 31, 1999:
Allowance for doubtful accounts and
notes receivable................... $ 2,411 $ 120 $ (541)(a) $ (318) $ 1,672
=========== =========== =========== =========== ===========
Amortization of intangibles.......... $ 23,704 $ 1,851 $ -- $ (3,460) $ 22,095
=========== =========== =========== =========== ===========
Year ended December 31, 2000:
Allowance for doubtful accounts and
notes receivable................... $ 1,672 $ 199 $ (86)(a) $ (123) $ 1,662
=========== =========== =========== =========== ===========
Amortization of intangibles.......... $ 22,095 $ 113 $ (20,429) $ (1,779) $ --
=========== =========== =========== =========== ===========
Year ended December 31, 2001:
Allowance for doubtful accounts and
notes receivable................... $ 1,662 $ 254 $ (194)(a) $ (96) $ 1,626
=========== =========== =========== =========== ===========
Amortization of intangibles.......... $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
</Table>
- ----------
(a) Amounts written off, less recoveries.
Certain prior-year amounts have been reclassified to conform to the current year
presentation.
S-2