As filed with the Securities and Exchange Commission on October 3, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10
Amendment No.1
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
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Kronos Worldwide, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 76-0294959
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
(972) 233-1700
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class to be so Registered Name of Each Exchange on Which Each
Class is to be Registered
- ----------------------------------------- ------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act: None
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Copies of Communications Sent To:
Don M. Glendenning
Toni Weinstein
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Telephone: (214) 740-8000
Facsimile: (214) 740-8800
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KRONOS WORLDWIDE, INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN
FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN
INFORMATION STATEMENT AND ITEMS OF FORM 10
Item No. Item Caption Location in Information Statement
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Item 1. Business "Summary" (p. 1), "Risk Factors" (p. 7),
"Relationships Among NL, Kronos and
Their Affiliates After the Distribution"
(p. 22), "Management's Discussion and
Analysis of Financial Condition and
Results of Operations" (p. 28),
"Business" (p. 46)
Item 2. Financial Information "Selected Financial Data" (p. 26),
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations" (p. 28)
Item 3. Properties "Business-Properties" (p. 51)
Item 4. Security Ownership of "Principal Stockholders" (p. 58)
Certain Beneficial Owners
and Management
Item 5. Directors and Executive "Management" (p. 52)
Officers
Item 6. Executive Compensation "Management" (p. 52)
Item 7. Certain Relationships "Relationships Among NL, Kronos and
and Related Transactions Their Affiliates After the Distribution"
(p. 22), "Certain Relationships and
Related Transactions" (p. 62),
"Consolidated Financial Statements" (p.
FB-1)
Item 8. Legal Proceedings "Business-Legal Proceedings" (p. 51)
Item 9. Market Price and Dividends "Summary" (p. 1), "Risk Factors," (p.
on the Registrant's 7), "The Distribution" (p. 16),
Common Equity and Related "Dividend Policy" (p. 25), "Description
Stockholder Matters of Capital Stock" (p. 65)
Item 11. Description of Registrant's "Description of Capital Stock" (p. 65)
Securities to be Registered
Item 12. Indemnification of Directors "Description of Capital Stock--Liability
and Officer and Indemnification of Directors and
Officers" (p. 67)
Item 13. Financial Statements and "Unaudited Pro Forma Condensed
Supplementary Data Consolidated Financial Statements" (p.
FA-1); "Consolidated Financial
Statements" (p. FB-1)
Item 15. Financial Statements and "Unaudited Pro Forma Condensed
Exhibits Consolidated Financial Statements" (p.
FA-1); "Consolidated Financial
Statements" (p. FB-1)
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
Item 10. Recent Sales of Unregistered Securities
None.
2
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 15. Financial Statements and Exhibits
(a) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant**
Schedule II - Valuation and Qualifying Accounts**
(b) Exhibits:
Exhibit Number Description
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2.1* Form of Distribution Agreement between NL Industries, Inc. and
Kronos Worldwide, Inc.
3.1* First Amended and Restated Certificate of Incorporation of Kronos
Worldwide, Inc.
3.2* Amended and Restated Bylaws of Kronos Worldwide, Inc.
4.1* Form of Common Stock Certificate of Kronos Worldwide, Inc.
4.2 Indenture governing the 8.875% Senior Secured Notes due 2009,
dated as of June 28, 2002, between Kronos International, Inc. 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
4.3 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit A to Exhibit 4.2) - incorporated by
reference to Exhibit 4.2 to Kronos International, Inc.'s
Registration Statement on Form S-4 (File No. 333-100047).
4.4 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit B to Exhibit 4.2) - incorporated by
reference to Exhibit 4.3 to Kronos International Inc.'s
Registration Statement on Form S-4 (File No. 333-100047).
4.5 Purchase Agreement, dated as of June 19, 2002, among Kronos
International, Inc., 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.
4.6 Registration Rights Agreement, dated as of June 28, 2002, among
Kronos International, Inc., 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.
4.7 Collateral Agency Agreement, dated as of June 28, 2002, among The
Bank of New York, U.S. Bank, N.A. and Kronos International, Inc.
(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.
4.8 Security Over Shares Agreement (shares of Kronos Limited), dated
June 28, 2002, between Kronos International, Inc. 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.
4.9 Pledge of Shares (shares of Kronos Denmark ApS), dated June 28,
2002, between Kronos International, Inc. 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.
4.10 Pledge Agreement (pledge of shares of Societe Industrielle du
Titane, S.A.), dated June 28, 2002, between Kronos International,
Inc. 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.
4.11 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28,
2002, between Kronos International, Inc. 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.
10.1** Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide,
Inc.
10.2* Form of Intercorporate Services Agreement between Contran, Inc.
and Kronos Worldwide, Inc.
10.3* Form of Promissory Note made by Kronos Worldwide, Inc. in favor
of NL Industries, Inc.
3
10.4* Form of Kronos Worldwide, Inc. Long-Term Incentive Plan
10.5 (euro)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.
10.6 Lease Contract, dated June 21, 1952, between Farbenfabrieken
Bayer Aktiengesellschaft and Titangesellschaft mit beschrankter
Haftung (German language version and English translation thereof)
- incorporated by reference to Exhibit 10.14 to the Annual Report
on Form 10-K of NL Industries, Inc. for the year ended December
31, 1985.
10.7 Contract on Supplies and Services, dated as of June 30, 1995,
among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International, Inc. (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.
10.8 Master Technology Exchange Agreement, dated as of October 18,
1993, among Kronos Worldwide, Inc. (f/k/a Kronos, Inc.), Kronos
Louisiana, Inc., Kronos International, Inc., Tioxide Group
Limited and Tioxide Group Services Limited - incorporated by
reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q of
NL Industries, Inc. for the quarter ended September 30, 1993.
10.9 Services Agreement, dated as of January 1, 1995, amended as of
April 1, 2002, among NL Industries, Inc., Kronos (US), Inc. and
Kronos International, Inc. - incorporated by reference to Exhibit
10.6 to Kronos International, Inc.'s Registration Statement on
Form S-4 (File No. 333-100047).
10.10 Form of Kronos Cost Sharing Agreement, effective as of January 1,
2002, among Kronos International, Inc., 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. - incorporated by reference to
Exhibit 10.8 to Kronos International, Inc.'s Registration
Statement on Form S-4 (File No. 333-100047).
10.11 Form of Assignment and Assumption Agreement, dated as of January
1, 1999, between Kronos (US), Inc. and Kronos International, Inc.
- incorporated by reference to Exhibit 10.9 to Kronos
International, Inc.'s Registration Statement on Form S-4 (File
No. 333-100047).
10.12 Form of Cross License Agreement, effective as of January 1, 1999,
between Kronos Inc. (formerly known as Kronos (USA), Inc.) and
Kronos International, Inc. - incorporated by reference to Exhibit
10.10 to Kronos International, Inc.'s Registration Statement on
Form S-4 (File No. 333-100047).
10.13*** Richards Bay Slag Sales Agreement, dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos
Worldwide, Inc. (f/k/a 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 Worldwide, Inc. (f/k/a 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 Worldwide, Inc. (f/k/a 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.
10.16*** Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos Worldwide, Inc. (f/k/a Kronos, Inc.) - incorporated by
reference to Exhibit 10.7 to the Annual Report on Form 10-K for
NL Industries, Inc. for the year ended December 31, 2002.
10.17*** Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to
Exhibit 10.1 of Kronos International, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002.
10.18 Supplementary Agreement to the Agreement of December 30, 1986
between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated May 3,
1996 - incorporated by reference to Exhibit 10.2 of Kronos
International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
4
10.19 Second Supplementary Agreement to the Contract dated December 30,
1986 between Sachtleben Chemie GmbH and Kronos Titan-GmbH dated
January 8, 2002 - incorporated by reference to Exhibit 10.3 of
Kronos International, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.
10.20 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.2 to NL
Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993.
10.21 Joint Venture Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated
by reference to Exhibit 10.3 to NL Industries, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
10.22 Kronos Offtake Agreement dated as of October 18, 1993 between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.4 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.23 Amendment No. 1 to Kronos Offtake Agreement dated as of December
20, 1995 between Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. ? incorporated by reference to Exhibit 10.22 to NL
Industries, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995.
10.24 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P.
- incorporated by reference to Exhibit 10.5 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.25 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit
10.24 to NL Industries, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1995.
10.26 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. -
incorporated by reference to Exhibit 10.6 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.27 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.28 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos Worldwide, Inc. (f/k/a Kronos, Inc.), Kronos
Louisiana, Inc., Kronos International, Inc., Tioxide Group
Limited and Tioxide Group Services Limited - incorporated by
reference to Exhibit 10.8 to NL Industries, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
10.29 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos Worldwide, Inc. (f/k/a Kronos,
Inc.) - incorporated by reference to Exhibit 10.9 to NL
Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993.
10.30 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos Worldwide,
Inc. (f/k/a Kronos, Inc.) and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.10 to NL Industries,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.31 Purchase Agreement dated January 4, 2002 by and among Kronos
Worldwide, Inc. (f/k/a Kronos, Inc.) as the Purchaser, and Big
Bend Holdings LLC and Contran Insurance Holdings, Inc., as
Sellers regarding the sale and purchase of EWI RE, Inc. and EWI
RE, Ltd. - incorporated by reference to Exhibit 10.40 to the NL
Industries, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2001.
10.32* Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International, Inc. (English translation of German language
document).
21.1** Subsidiaries.
99.1* Preliminary Information Statement dated October 3, 2003.
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* Filed herewith.
** Previously filed.
*** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
5
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
KRONOS WORLDWIDE, INC.
By: /s/ Robert D. Graham
-----------------------------------
Robert D. Graham
Vice President, General Counsel & Secretary
Dated: October 3, 2003
6
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Agreement") is dated as of ________,
2003 between NL Industries, Inc., a New Jersey corporation ("NL"), and Kronos
Worldwide, Inc., a Delaware corporation and a wholly-owned subsidiary of NL
("Kronos").
WHEREAS, the Board of Directors of NL has authorized the distribution of
approximately 23.85 million shares of common stock, par value $.01 per share
("Kronos Common Stock"), to the holders of the issued and outstanding shares of
common stock, par value $.125 per share ("NL Common Stock"), of NL as of the
Record Date (as defined below), on the basis of one share of Kronos Common Stock
for every two shares of NL Common Stock (the "Distribution");
WHEREAS, immediately prior to the Distribution, Kronos will be
recapitalized (the "Recapitalization") to increase the number of authorized
shares of Kronos Common Stock to 60 million shares of which approximately 48.94
million shares will be issued and outstanding on the effective date of the
Distribution, and Kronos will declare and pay a dividend to NL in the form of a
$200 million long-term note payable to NL (the "Term Note");
WHEREAS, it is believed that the Distribution should, among other things,
enhance the ability of Kronos to capitalize on the Kronos brand name and to
develop separate business relationships and strategies distinct from operating
as a wholly-owned subsidiary of NL, which is expected to enhance Kronos' global
competitive position; and
WHEREAS, the parties hereto have determined to set forth the transactions
required to effect the Distribution and the Recapitalization.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement and the Ancillary Agreements (as defined below), the parties hereby
agree as follows:
ARTICLE I
DEFINITIONS
The following terms, as used herein, have the following meanings:
"Action" means any demand, claim, suit, action, arbitration, inquiry,
investigation or other proceeding by or before or any Governmental Authority or
any arbitration or mediation tribunal.
"Affiliate" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by, or under common control with such other
Person. For the purposes of this definition, "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 to the foregoing.
"Agreement" shall have the meaning set forth in the first paragraph of this
Agreement.
1
"Ancillary Agreements" means the Term Note, the Tax Sharing Agreement, the
Intercorporate Services Agreement dated as of __________, 2003 between Contran
and Kronos and the other agreements or documents contemplated hereby and
thereby, as any of such documents or agreements may be amended from time to
time.
"Commission" means the Securities and Exchange Commission.
"Consents" means any consents, waivers or approvals from, or notification
requirements to, any third parties.
"Contran" means Contran Corporation, a Delaware corporation.
"Distribution" shall have the meaning set forth in the Recitals to this
Agreement.
"Distribution Agent" means Equiserve Trust Co., N.A.
"Distribution Date" means the day as of which the Distribution shall be
effected.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Finally Determined" means, with respect to any Action or other matter,
that the outcome or resolution of such Action or matter has been determined by
judgment, award or order not subject to further appeal or discretionary review.
"Form 10" means the registration statement on Form 10 initially filed by
Kronos with the Commission on August 8, 2003 (SEC File No. 001-31763) to effect
the registration of Kronos Common Stock pursuant to the Exchange Act in
connection with the Distribution, as such registration statement may be amended
or supplemented from time to time.
"Governmental Approvals" means any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from, any Governmental Authority.
"Governmental Authority" means any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.
"Group" means, as the context requires, the Kronos Group or the NL Group.
"Indemnified Party" shall have the meaning set forth in Section 3.5 of this
Agreement.
"Indemnifying Party" shall have the meaning set forth in Section 3.5 of
this Agreement.
"Information Statement" means the final Information Statement, which is
filed as Exhibit 99.1 to the Form 10 and which is to be sent to each holder of
NL Common Stock in connection with the Distribution.
"Kronos" shall have the meaning set forth in the first paragraph of this
Agreement.
2
"Kronos Business" means the titanium dioxide and related business and
operations of Kronos and the Kronos Group, each as conducted on the Distribution
Date.
"Kronos Common Stock" shall have the meaning set forth in the recitals to
this Agreement.
"Kronos Financial Statements" means the financial statements of Kronos,
including the notes thereto, as presented in the Information Statement.
"Kronos Group" means Kronos and its Subsidiaries and the equity or
investment interest in joint ventures, partnerships and other entities that are
less than majority-owned entities of Kronos or any of its Subsidiaries, each as
of and after the Distribution Date.
"Kronos Indemnitees" shall have the meaning set forth in Section 3.3 of
this Agreement.
"Kronos Liabilities" means, without duplication:
(i) all Liabilities (including Taxes, other than Liabilities for Taxes
that are governed by the Tax Sharing Agreement), whether arising
before, on or after the Distribution Date relating to, arising out of
or resulting from:
(A) the operation of the Kronos Business, as conducted at any time
prior to, on or after the Distribution Date; or
(B) the operation of any business conducted by any member of the
Kronos Group at any time after the Distribution Date;
(ii) all Liabilities relating to, arising out of or resulting from any of
the terminated, divested or discontinued businesses and operations of
the Kronos Business; and
(iii)all Liabilities reflected as Liabilities or obligations of Kronos in
the Kronos Financial Statements.
"Liabilities" means any and all losses, claims, debts, liabilities,
obligations, damages, causes of action, suits, indemnities and similar
obligations, and other liabilities and requirements, including all contractual
obligations and assumed liabilities, absolute or contingent, matured or not
matured, liquidated or unliquidated, accrued or unaccrued, known or unknown,
whenever arising, including all costs and expenses relating thereto, and
including, without limitation, those debts, liabilities and obligations arising
under this Agreement, any law, rule, regulation, Action, order, injunction or
consent decree of any Governmental Authority, or any award of any arbitrator of
any kind, and those arising under any agreement, commitment or undertaking.
"Losses" means, with respect to any Person, any and all damage, loss,
liability, cost and expense incurred or suffered by such Person (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' fees and expenses in connection with any and all Actions or
threatened Actions).
"NL" shall have the meaning set forth in the first paragraph of this
Agreement.
3
"NL Business" means (i) the business, operations and assets of NL and its
Subsidiaries as of the Distribution Date (excluding the Kronos Business) and
(ii) any and all terminated, divested or discontinued businesses, assets or
operations conducted by or related to NL or its Subsidiaries (excluding the
Kronos Business).
"NL Common Stock" shall have the meaning set forth in the Recitals to this
Agreement.
"NL Group" means NL and its Subsidiaries (other than any Subsidiary or
member of, or other entity in, the Kronos Group).
"NL Indemnities" shall have the meaning set forth in Section 3.2 of this
Agreement.
"NL Liabilities" means, without duplication:
(i) all Liabilities (including Taxes, other than Liabilities for Taxes
that are governed by the Tax Sharing Agreement), whether arising
before, on or after the Distribution Date relating to, arising out of
or resulting from:
(A) the operation of the NL Business, as conducted at any time prior
to, on or after the Distribution Date; or
(B) the operation of any business conducted by any member of the NL
Group at any time after the Distribution Date;
(ii) all Liabilities relating to, arising out of or resulting from any of
the terminated, divested or discontinued businesses, assets and
operations of the NL Business; and
(iii)all Liabilities (other than Kronos Liabilities) reflected as
Liabilities or obligations of NL in NL's financial statements included
in its most recent Quarterly Report on Form 10-Q filed with the
Commission.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust or other entity or organization, including a
governmental or political subdivision or an agency or instrumentality thereof.
"Recapitalization" shall have the meaning set forth in the Recitals to this
Agreement.
"Record Date" means the date determined by the NL Board of Directors (or
determined by a committee of such Board of Directors pursuant to authority
delegated to such committee by the NL Board of Directors) as the record date for
determining the holders of NL Common Stock entitled to receive the Distribution.
"Representatives" shall have the meaning set forth in Section 4.5(a) of
this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
4
"Subsidiary" means, with respect to any Person, any other entity of which
securities or other ownership interests having voting power to elect a majority
of the board of directors or other persons performing similar functions are at
the time directly or indirectly owned by such Person.
"Tax Returns" means federal, foreign, state and local returns of Taxes.
"Taxes" means the Combined Foreign, State and Local Taxes and the Federal
Taxes (as such terms are defined in the Tax Sharing Agreement).
"Tax Sharing Agreement" means the Tax Agreement, dated as of _________,
2003, among Valhi, Contran and Kronos.
"Term Note" shall have the meaning set forth in the Recitals to this
Agreement.
"Third-Party Claim" shall have the meaning set forth in Section 3.6 of this
Agreement.
"Transaction" means, collectively, the transactions contemplated by this
Agreement and the Ancillary Agreements.
"Valhi" means Valhi, Inc., a Delaware corporation.
ARTICLE II
THE RECAPITALIZATION AND THE DISTRIBUTION
Section 2.1 Issuance of Stock. Prior to or as of the Distribution Date, the
parties hereto shall take all steps necessary to (i) amend and restate the
Certificate of Incorporation and Bylaws of Kronos in order to, among other
things, increase the number of authorized shares of Kronos' common stock to 60
million shares and (ii) reclassify in the form of a stock split the outstanding
shares of Kronos Common Stock so that immediately prior to or as of the
Distribution Date there shall be approximately 48.94 million shares of Kronos
Common Stock outstanding.
Section 2.2 Special Dividend. On or prior to the Distribution Date, Kronos
shall issue to NL as a special dividend the Term Note.
Section 2.3 Registration and Listing. Prior to the Distribution Date:
(a) NL and Kronos shall prepare, and Kronos shall file with the
Commission, the Form 10, which shall include the Information Statement, and
which shall set forth appropriate disclosure concerning Kronos and the
Distribution. NL and Kronos shall use reasonable commercial efforts to cause the
Form 10 to become effective under the Exchange Act as soon as practicable. After
the Form 10 has become effective, NL shall mail the Information Statement to the
holders of NL Common Stock as of the Record Date.
(b) NL and Kronos shall cooperate in preparing, filing with the
Commission and causing to become effective any registration statements or
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amendments thereto that are appropriate to reflect the establishment of or
amendments to any employee benefit and other plans contemplated by this
Agreement and the Ancillary Agreements.
(c) NL and Kronos shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States (and any comparable law under any foreign
jurisdiction) in connection with the Distribution.
(d) NL and Kronos shall take all reasonable steps to cause the shares
of Kronos Common Stock to be eligible for listing on the New York Stock Exchange
and NL and Kronos shall prepare, and Kronos shall file and pursue, an
application to permit listing of the Kronos Common Stock on the New York Stock
Exchange.
Section 2.4 NL Board Action; Sole Discretion of NL. NL's Board of Directors
shall establish (or delegate to the appropriate officers of NL authority to
establish) the Record Date and the Distribution Date and any appropriate
procedures in connection with the Distribution. NL may, in its sole and absolute
discretion, at any time and from time to time until the completion of the
Distribution modify or change the terms of the Distribution, including, without
limitation, by accelerating or delaying the timing of the consummation of all or
part of the Distribution.
Section 2.5 Conditions Precedent to the Distribution.
(a) The following shall be conditions to NL's obligation to effect the
Distribution:
(i) the Form 10 shall have been declared effective by the
Commission, and no suspension, withdrawal or stop-order shall be in
effect with respect thereto and no proceeding for that purpose shall
have been instituted by the Commission;
(ii) the New York Stock Exchange shall have approved the listing
of the Kronos Common Stock, subject to official notice of issuance;
(iii) the actions and filings with regard to state securities and
blue sky laws of the United States (and any comparable law under any
foreign jurisdiction) shall have been taken and, where applicable,
have become effective or accepted;
(iv) no order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal constraint or prohibition
preventing the consummation of the Transaction shall be in effect;
(v) all material Consents and Governmental Approvals necessary to
consummate the Transaction shall have been obtained and be in full
force and effect;
(vi) the NL Board of Directors shall be satisfied that the
Distribution is lawful under applicable state and federal law;
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(vii) the NL Board of Directors shall have approved the
Distribution and have not abandoned or revoked the Distribution at any
time before the completion of the Distribution;
(viii) Kronos' amended and restated Certificate of Incorporation
and Bylaws, in substantially the forms filed as exhibits to the Form
10, shall be in effect;
(ix) each of the Ancillary Agreements shall have been duly
executed and delivered by the parties thereto;
(x) no other events or developments shall have occurred
subsequent to the date hereof that, in the judgment of NL, would
result in the Distribution having an adverse effect on NL or on the
shareholders of NL; and
(xi) this Agreement shall not have been terminated.
(b) NL and Kronos shall cooperate and take all reasonable steps
necessary or appropriate to cause the conditions set forth in Section 2.5(a)
(subject to Sections 2.4 and 2.5(a)(x)) to be satisfied and to effect the
Distribution on the Distribution Date,
(c) The foregoing conditions are for the sole benefit of NL and shall
not give rise to or create any duty on the part of NL or NL's Board of Directors
to waive or not waive such conditions or in any way limit NL's right to
terminate this Agreement as set forth in Section 6.8. Any determination made by
NL prior to the Distribution Date concerning the satisfaction or waiver of any
or all of the conditions set forth in Section 2.5(a) shall be conclusive.
Section 2.6 The Distribution. Subject to the terms and conditions set forth
in this Agreement, (i) NL shall deliver to the Distribution Agent for the
benefit of holders of record of NL Common Stock on the Record Date, a stock
certificate or certificates, endorsed by NL in blank, representing the number of
shares Kronos Common Stock to be distributed to NL shareholders in the
Distribution, (ii) the Distribution shall be effective on the Distribution Date
and (iii) NL shall instruct the Distribution Agent to distribute, on or as soon
as practicable after the Distribution Date, to each holder of record of NL
Common Stock as of the Record Date one share of Kronos Common Stock for every
two shares of NL Common Stock so held; such distribution to be in book entry
form. Kronos agrees to provide all certificates for shares of Kronos Common
Stock that NL shall require (after giving effect to Section 2.7) in order to
effect the Distribution.
Section 2.7 Fractional Shares. No fractional shares of Kronos Common Stock
will be distributed in the Distribution. The Distribution Agent will be directed
to determine the number of whole shares and fractional shares of Kronos Common
Stock allocable to each holder of NL Common Stock as of the Record Date. Upon
the determination by the Distribution Agent of the aggregate number of
fractional shares, as soon as practicable after the Distribution Date, the
Distribution Agent, acting on behalf of the holders thereof, shall sell such
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fractional shares for cash on the open market and shall disburse to each holder
entitled thereto the appropriate portion of the resulting cash proceeds
(calculated by multiplying the average gross selling price per share times the
number of fractional shares allocable to such holder), less a pro rata portion
of the aggregate brokerage commission payable in connection with the sale.
ARTICLE III
MUTUAL RELEASES; INDEMNIFICATION
Section 3.1 Release of Pre-Distribution Claims.
(a) Except as provided in Section 3.1(c), effective as of the
Distribution Date, Kronos, on behalf of itself and each other member of the
Kronos Group, their respective successors and assigns, and all Persons who at
any time prior to the Distribution Date have been stockholders, directors,
officers, agents or employees of any member of the Kronos Group (in each case,
in their respective capacities as such), remise, release and forever discharge
each of NL, the other members of the NL Group and their respective successors
and assigns, and all Persons who at any time prior to the Distribution Date have
been shareholders, directors, officers, agents or employees of any member of the
NL Group (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any
and all Kronos Liabilities whatsoever, whether at law or in equity (including
any right of indemnity or contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any act or
event occurring or failing to occur or alleged to have occurred or to have
failed to occur or any condition existing or alleged to have existed on or
before the Distribution Date, including but not limited to in connection with
the Transaction and all other activities to implement the Distribution.
(b) Except as provided in Section 3.1(c), effective as of the
Distribution Date, NL, on behalf of itself and each other member of the NL
Group, their respective successors and assigns, and all Persons who at any time
prior to the Distribution Date have been stockholders, directors, officers,
agents or employees of any member of the NL Group (in each case, in their
respective capacities as such), remise, release and forever discharge each of
Kronos, the other members of the Kronos Group and their respective successors
and assigns, and all Persons who at any time prior to the Distribution Date have
been stockholders, directors, officers, agents or employees of any member of the
Kronos Group (in each case, in their respective capacities as such), and their
respective heirs, executors, administrators, successors and assigns, from any
and all NL Liabilities whatsoever, whether at law or in equity (including any
right of indemnity or contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any act or
event occurring or failing to occur or alleged to have occurred or to have
failed to occur or any condition existing or alleged to have existed on or
before the Distribution Date, including but not limited to in connection with
the Transaction and all other activities to implement the Distribution.
(c) Nothing contained in Sections 3.1(a) or (b) shall impair any right
of any Person to enforce this Agreement or any Ancillary Agreement, in each case
in accordance with its terms. Nothing contained in Section 3.1(a) or (b) shall
release any Person from:
(i) any Liability provided in or resulting from any agreement
between or among members of the NL Group, on one hand, and members of
the Kronos Group, on the other hand;
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(ii) any Liability that any Person may have with respect to
indemnification or contribution pursuant to this Agreement for claims
brought against such Person by third Persons, which Liability shall be
governed by the provisions of this Article III and, if applicable, the
appropriate provisions of the Ancillary Agreements; or
(iii) any Liability of any Person other than a Person
specifically released pursuant to this Section 3.1.
(d) Kronos shall not make, and shall not permit any other member of
the Kronos Group to make, any claim or demand, or commence any Action asserting
any claim or demand, including any claim of contribution or any indemnification,
against NL or any other member of the NL Group or any other Person released
pursuant to Section 3.1(a), with respect to any Liabilities released pursuant to
Section 3.1(a). NL shall not make, and shall not permit any other member of the
NL Group to make, any claim or demand, or commence any Action asserting any
claim or demand, including any claim of contribution or any indemnification,
against Kronos or any other member of the Kronos Group or any other Person
released pursuant to Section 3.1(b), with respect to any Liabilities released
pursuant to Section 3.1(b).
(e) It is the intent of the parties hereto by virtue of the provisions
of this Section 3.1 to provide for a full and complete release and discharge of
all applicable Liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
Distribution Date, between or among Kronos or any member of the Kronos Group, on
one hand, and NL or any member of the NL Group, on the other hand (including any
contractual agreements or arrangements existing or alleged to exist between or
among any such members on or before the Distribution Date), except as expressly
set forth in Section 3.1(c). At any time, at the request of any other party,
each party shall cause each member of its respective Group to execute and
deliver releases reflecting the provisions hereof.
Section 3.2 Indemnification of the NL Group. Subject to Section 3.4, on and
after the Distribution Date, Kronos shall indemnify, defend and hold harmless
the NL Group and their respective directors, officers, employees and agents (in
each case, in their respective capacities as such) (the "NL Indemnitees") from
and against any and all Losses incurred or suffered by any of the NL Indemnitees
relating to, arising out of or resulting from any of the following:
(a) the failure of Kronos or any other member of the Kronos Group or
any other Person to pay, perform or otherwise promptly discharge any Kronos
Liability in accordance with its terms, whether arising prior to or after the
Distribution Date;
(b) the Kronos Business or any Kronos Liability; and
(c) any material breach by Kronos or any other member of the Kronos
Group of this Agreement or any Ancillary Agreement.
Section 3.3 Indemnification of the Kronos Group. Subject to Section 3.4, on
and after the Distribution Date, NL shall indemnify, defend and hold harmless
the Kronos Group and their respective directors, officers, employees and agents
9
(in each case, in their respective capacities as such) (the "Kronos
Indemnitees") from and against any and all Losses incurred or suffered by any of
the Kronos Indemnitees relating to, arising out of or resulting from any of the
following:
(a) the failure of NL or any other member of the NL Group or any other
Person to pay, perform or otherwise promptly discharge any NL Liability in
accordance with its terms, whether arising prior to or after the Distribution
Date;
(b) the NL Business or any NL Liability; and
(c) any material breach by NL or any other member of the NL Group of
this Agreement or any Ancillary Agreement.
Section 3.4 Insurance; Third Party Obligations; Tax Benefits. Any
indemnification pursuant to Sections 3.2 or 3.3 shall be paid net of the amount
of any insurance or other amounts that would be payable by any third party to
the Indemnified Party (as defined below) in the absence of this Agreement
(irrespective of time of receipt of such insurance or other amounts) and net of
any tax benefit to the Indemnified Party attributable to the relevant payment or
Liability. Such indemnification shall be increased to reflect any tax liability
of the Indemnified Party so that the Indemnified Party receives 100% of the
after-tax amount of any payment or liability. It is expressly agreed that no
insurer or any other third party shall be (i) entitled to a benefit it would not
be entitled to receive in the absence of the foregoing indemnification
provisions, (ii) relieved of the responsibility to pay any claims to which it is
obligated or (iii) entitled to any subrogation rights with respect to any
obligation hereunder.
Section 3.5 Notice and Payment of Claims. If any NL Indemnitee or Kronos
Indemnitee (the "Indemnified Party") determines that it is or may be entitled to
indemnification by any party (the "Indemnifying Party") under this Article III
(other than in connection with any Action subject to Section 3.6), the
Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. Within 30 days after receipt of such
notice, the Indemnifying Party shall pay the Indemnified Party such amount in
cash or other immediately available funds unless the Indemnifying Party objects
to the claim for indemnification or the amount thereof. If the Indemnifying
Party does not give the Indemnified Party written notice objecting to such
indemnity claim and setting forth the grounds therefor within such 30-day
period, the Indemnified Party shall give the Indemnifying Party an additional
notice of its claims for indemnification and if the Indemnifying Party does not
give the Indemnified Party written notice objecting to such claims within 10
days after receipt of such additional notice, the Indemnifying Party shall be
deemed to have acknowledged its liability for such claim and the Indemnified
Party may exercise any and all of its rights under applicable law to collect
such amount. In the event of such a timely objection by the Indemnifying Party,
the amount, if any, that is Finally Determined to be required to be paid by the
Indemnifying Party in respect of such indemnity claim shall be paid by the
Indemnifying Party to the Indemnified Party in cash within 15 days after such
indemnity claim has been so Finally Determined. Notice and payment of all claims
shall be in accordance with the provisions of this Agreement.
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Section 3.6 Notice and Defense of Third-Party Claims. Promptly following
the earlier of (i) receipt of notice of the commencement by a third party of any
Action against or otherwise involving any Indemnified Party or (ii) receipt of
information from a third party alleging the existence of a claim against an
Indemnified Party, in either case, with respect to which indemnification may be
sought pursuant to this Agreement (a "Third-Party Claim"), the Indemnified Party
shall give the Indemnifying Party written notice thereof. The failure of the
Indemnified Party to give notice as provided in this Section 3.6 shall not
relieve the Indemnifying Party of its obligations under this Agreement, except
to the extent that the Indemnifying Party is materially prejudiced by such
failure to give notice. Within 15 days after receipt of such notice, the
Indemnifying Party may (a) by giving written notice thereof to the Indemnified
Party, acknowledge liability for such indemnification claim and at its option
elect to assume the defense of such Third-Party Claim at its sole cost and
expense or (b) object to the claim for indemnification set forth in the notice
delivered by the Indemnified Party pursuant to the first sentence of this
Section 3.6; provided that if the Indemnifying Party does not within such 15-day
period give the Indemnified Party written notice objecting to such
indemnification claim and setting forth the grounds therefor, the Indemnified
Party shall give the Indemnifying Party an additional notice of its claims for
indemnification and if the Indemnifying Party does not give the Indemnified
Party written notice objecting to such claims within 10 days after receipt of
such additional notice, the Indemnifying Party shall be deemed to have
acknowledged its liability for such indemnification claim. If the Indemnifying
Party has elected to assume the defense of a Third-Party Claim, (x) the defense
shall be conducted by counsel retained by the Indemnifying Party and reasonably
satisfactory to the Indemnified Party, provided that the Indemnified Party shall
have the right to employ counsel to represent such Indemnified Party if, in such
Indemnified Party's reasonable judgment, a conflict of interest between such
Indemnified Party and such Indemnifying Party exists in respect of such claim
that would make representation of both such parties by one counsel
inappropriate, and in such event the fees and expenses of such separate counsel
shall be paid by such Indemnifying Party (if the Indemnifying Party elects to
assume such defense, the Indemnified Party shall have the right to participate
in the defense thereof and to employ counsel, subject to the foregoing proviso,
at its own expense, separate from the counsel employed by the Indemnifying
Party, it being understood that the Indemnifying Party shall control such
defense); and (y) the Indemnifying Party may settle or compromise the Third
Party Claim without the prior written consent of the Indemnified Party so long
as such settlement includes an unconditional release of the Indemnified Party
from all claims that are the subject of such Third Party Claim, provided that
the Indemnifying Party may not agree to any such settlement pursuant to which
any remedy or relief, other than monetary damages for which the Indemnifying
Party shall be responsible hereunder, shall be applied to or against the
Indemnified Party, without the prior written consent of the Indemnified Party,
which consent shall not be unreasonably withheld. If the Indemnifying Party does
not assume the defense of a Third-Party Claim for which it has acknowledged
liability for indemnification hereunder, the Indemnified Party may require the
Indemnifying Party to reimburse it on a current basis for its reasonable
expenses of investigation, reasonable attorneys' fees and reasonable
out-of-pocket expenses incurred in defending against such Third-Party Claim and
the Indemnifying Party shall be bound by the result obtained with respect
thereto by the Indemnified Party; provided that the Indemnifying Party shall not
11
be liable for any settlement effected without its consent, which consent shall
not be unreasonably withheld. The Indemnifying Party shall pay to the
Indemnified Party in cash the amount, if any, for which the Indemnified Party is
entitled to be indemnified hereunder within 15 days after such Third Party Claim
has been Finally Determined, in the case of an indemnity claim as to which the
Indemnifying Party has acknowledged liability or, in the case of any indemnity
claim as to which the Indemnifying Party has not acknowledged liability, within
15 days after such Indemnifying Party's objection to liability hereunder has
been Finally Determined.
Section 3.7 Contribution. If for any reason the indemnification provided
for in this Article III is unavailable to any Indemnified Party, or insufficient
to hold it harmless, then the Indemnifying Party shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Losses in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party, on one hand, and the Indemnified Party, on the other hand, with respect
to the actions or omissions that resulted in such Liabilities as well as any
other relevant equitable considerations. The amount paid or payable by an
Indemnified Party as a result of the Liabilities referred to above in this
Section 3.7 shall be deemed to include any attorneys' fees or other
out-of-pocket expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such Liability or Action.
No Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
If indemnification is available under Section 3.2 or 3.3, the Indemnifying
Party shall indemnify the Indemnified Party to the full extent provided in
Section 3.2 or 3.3, as applicable, without regard to the relative fault of the
Indemnifying Party or Indemnified Party or any other equitable consideration
provided for in this Section 3.7.
Section 3.8 Non-Exclusivity of Remedies. The remedies provided for in this
Article III are not exclusive and shall not limit any rights or remedies that
may otherwise be available to any Indemnified Party at law or in equity.
Section 3.9 Survival of Indemnification Obligations. The rights and
obligations of the parties and their respective Indemnified Parties under this
Article III shall survive the Distribution Date to the full extent permitted
under applicable law and shall survive the sale or other transfer by any party
of any assets or the assignment by it of any Liabilities or the sale by any
member of the NL Group or the Kronos Group of the stock or other equity interest
of any Subsidiary or the equity or investment interest in joint ventures,
partnerships and other less than majority-owned entities of any Person.
ARTICLE IV
ACCESS TO INFORMATION
Section 4.1 Access to Information. From and after the Distribution Date,
each Group shall, upon request therefor, afford promptly to the other Group and
its accountants, counsel and other designated representatives reasonable access
during normal business hours to all documents, contracts, books, records,
computer data, Tax Returns (and any information related thereto) and other data
in such Group's possession relating to such other Group or the business and
12
affairs of such other Group (other than data and information subject to an
attorney/client or other privilege), insofar as such access is reasonably
required by such other Group, including, without limitation, for audit,
accounting, litigation, disclosure reporting and regulatory compliance purposes.
Section 4.2 Litigation Cooperation. Each Group shall use reasonable efforts
to make available to the other Group and its accountants, counsel, and other
designated representatives, upon written request, its directors, officers,
employees and representatives as witnesses, and shall otherwise cooperate with
the other Group, to the extent reasonably required in connection with any Action
arising out of either Group's business and operations prior to the Distribution
Date in which the requesting party may from time to time be involved.
Section 4.3 Reimbursement. Each Group providing information or witnesses to
the other Group, or otherwise incurring any expense in connection with
cooperating, under Sections 4.1 or 4.2 shall be entitled to receive from the
recipient thereof, upon the presentation of invoices therefor, payment for all
out-of-pocket costs and expenses as may be reasonably incurred in providing such
information, witnesses or cooperation. To the extent necessary to enforce rights
hereunder, each Group shall be entitled to recover expenses incurred for which
it is entitled to reimbursement hereunder pursuant to the indemnification
provisions set forth in Article III of this Agreement.
Section 4.4 Retention of Records. Except as otherwise required by law or
agreed to in writing, each party shall, and shall cause the members of its
respective Group to, retain all information relating to the other Group's
business and operations in accordance with past practice of such party (provided
that all Tax Returns and information related thereto will be retained for a
period of not less than six years). Notwithstanding the foregoing, any party may
destroy or otherwise dispose of any such information at any time, provided that,
prior to such destruction or disposal, (i) such party shall provide not less
than 90 days' prior written notice to the other party, specifying the
information proposed to be destroyed or disposed of and the scheduled date for
such destruction or disposal and (ii) if the recipient of such notice shall
request in writing prior to the scheduled date for such destruction or disposal
that any of the information proposed to be destroyed or disposed of be delivered
to such requesting party, the party proposing the destruction or disposal shall
promptly arrange for the delivery of such of the information as was requested at
the expense of the requesting party.
Section 4.5 Confidentiality.
(a) Each party shall hold and shall cause its directors, officers,
employees, agents, consultants and advisors ("Representatives") to hold in
strict confidence all information (other than any such information relating
solely to the business or affairs of such party) concerning the other party
unless (i) such party is compelled to disclose such information by judicial or
administrative process or, in the opinion of its counsel, by other requirements
of law or (ii) such information can be shown to have been (A) in the public
domain through no fault of such party or (B) lawfully acquired after the
Distribution Date on a non-confidential basis from other sources.
Notwithstanding the foregoing, such party may disclose such information to its
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Representatives so long as such Persons are informed by such party of the
confidential nature of such information and are directed by such party to treat
such information confidentially. If such party or any of its Representatives
becomes legally compelled to disclose any documents or information subject to
this Section 4.5, such party will promptly notify the other party so that the
other party may seek a protective order or other remedy or waive such party's
compliance with this Section 4.5. If no such protective order or other remedy is
obtained or waiver granted, such party will furnish only that portion of the
information which it is advised by counsel is legally required and will exercise
its reasonable efforts to obtain adequate assurance that confidential treatment
will be accorded such information. Such party agrees to be responsible for any
breach of this Section 4.5 by it and its Representatives.
(b) Notwithstanding anything set forth herein to the contrary
(including the confidentiality provision set forth in this Section 4.5) or in
any other agreement to which a party hereto is bound, the parties hereto (and
any employee, representative or other agent of any of the parties) are hereby
expressly authorized to disclose the "tax treatment" or "tax structure" (as
those terms are defined in Treas. Reg. ss.ss. 1.6011-4(c)(8) and (9),
respectively) of the Transaction and all materials of any kind (including
opinions or other tax analyses) that are provided to the parties relating to
such "tax treatment" or "tax structure" of the Transaction, except that "tax
structure" or "tax treatment" shall not include the identity of any existing or
future party or its Affiliates.
Section 4.6 Privileged Matters. The parties hereto recognize that legal and
other professional services that have been and will be provided prior to the
Distribution Date have been and will be rendered for the benefit of each of the
members of the NL Group and each of the members of the Kronos Group, and that
each of the members of the NL Group and each of the members of the Kronos Group
should be deemed to be the client for the purposes of asserting all privileges
which may be asserted under applicable law. Except as otherwise specifically
provided in the Tax Sharing Agreement with respect to tax matters, to allocate
the interests of each party in the information as to which any party is entitled
to assert a privilege, the parties agree as follows:
(a) NL shall be entitled, in perpetuity, to control the assertion or
waiver of all privileges in connection with privileged information that relates
solely to the NL Business, whether or not the privileged information is in the
possession of or under the control of NL or Kronos. NL shall also be entitled,
in perpetuity, to control the assertion or waiver of all privileges in
connection with privileged information that relates solely to the subject matter
of any claims constituting any NL Liability now pending or that may be asserted
in the future, in any Action initiated against or by NL, whether or not the
privileged information is in the possession of or under the control of NL or
Kronos.
(b) Kronos shall be entitled, in perpetuity, to control the assertion
or waiver of all privileges in connection with privileged information that
relates solely to the Kronos Business, whether or not the privileged information
is in the possession of or under the control of NL or Kronos. Kronos shall also
be entitled, in perpetuity, to control the assertion or waiver of all privileges
in connection with privileged information that relates solely to the subject
matter of any claims constituting Kronos Liabilities, now pending or which may
be asserted in the future, in any Action initiated against or by Kronos, whether
or not the privileged information is in the possession of Kronos or under the
control of NL or Kronos.
14
(c) The parties hereto agree that they shall have a shared privilege,
with equal right to assert or waive, subject to the restrictions in this Section
4.6, with respect to all privileges not allocated pursuant to the terms of
Sections 4.6(a) and (b). All privileges relating to any Action, disputes or
other matters that involve NL and Kronos in respect of which such parties retain
any responsibility or liability under this Agreement shall be subject to a
shared privilege among them.
(d) No party hereto may waive any privilege which could be asserted
under any applicable law, and in which any other party hereto has a shared
privilege, without the consent of the other party, which consent shall not be
unreasonably withheld or delayed, except to the extent reasonably required in
connection with any Third-Party Claim or as provided in Section 4.6(e). Consent
shall be in writing, or shall be deemed to be granted unless written objection
is made within 20 days after notice upon the other party requesting such
consent.
(e) In the event of any Action or dispute between any of the parties
hereto, any party and a Subsidiary of another party hereto, or a Subsidiary of
one party hereto and a Subsidiary of another party hereto, either such party, to
the extent necessary in connection with such Action or dispute, may waive a
privilege in which the other party has a shared privilege, without obtaining the
consent of the other party, provided that such waiver of a shared privilege
shall be effective only as to the use of information with respect to such Action
or dispute between the relevant parties and/or their Subsidiaries, and shall not
operate as a waiver of the shared privilege with respect to third parties.
(f) If a dispute arises between or among the parties hereto or their
respective Subsidiaries regarding whether a privilege should be waived to
protect or advance the interest of any party, each party agrees that it shall
negotiate in good faith, shall endeavor to minimize any prejudice to the rights
of the other parties, and shall not unreasonably withhold consent to any request
for waiver by another party. Each party hereto specifically agrees that it will
not withhold consent to waiver for any purpose except to protect its own
legitimate interests.
(g) Upon receipt by any party hereto or by any Subsidiary thereof of
any subpoena, discovery or other request which arguably calls for the production
or disclosure of information subject to a shared privilege or as to which
another party has the sole right hereunder to assert a privilege, or if any
party obtains knowledge that any of its or any of its Subsidiaries' current or
former officers or directors has received any subpoena, discovery or other
requests which arguably calls for the production or disclosure of such
privileged information, such party shall promptly notify the other party of the
existence of the request and shall provide the other party a reasonable
opportunity to review the information (to the extent such information is
available to such party) and to assert any rights it or they may have under this
Section 4.6 or otherwise to prevent the production or disclosure of such
privileged information.
(h) The transfer of all records and other information pursuant to this
Agreement is made in reliance on the agreement of NL and Kronos, as set forth in
Sections 4.5 and 4.6, to maintain the confidentiality of privileged information
and to assert and maintain all applicable privileges. The access to information
being granted pursuant to Section 4.1, the agreement to cooperate with respect
to litigation pursuant to Section 4.2, the furnishing of notices and documents
and other cooperative efforts contemplated by Section 3.6, and the transfer of
15
privileged information between and among the parties and their respective
Subsidiaries pursuant to this Agreement shall not be deemed a waiver of any
privilege that has been or may be asserted under this Agreement or otherwise.
(i) Any waiver of privilege granted pursuant to this Section 4.6 shall
only be valid if given in writing and signed by an authorized officer of the
party granting such waiver.
ARTICLE V
FURTHER ASSURANCES
In addition to the actions specifically provided for elsewhere in this
Agreement, each of the parties hereto shall use its reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements or otherwise to consummate and make effective the Transaction,
including but not limited to using its reasonable commercial efforts to obtain
any Consents and to make any filings and applications necessary or desirable in
order to consummate the Transaction; provided that no party hereto shall be
obligated to pay any consideration therefor (except for filing fees and other
similar charges) to any third party from whom such Consents are requested or to
take any action or omit to take any action if the taking of or the omission to
take such action would be unreasonably burdensome to the party, its Group or its
Group's business.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by NL and Kronos, or in the case of a waiver, by the party against
whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Section 6.2 Expenses. Except as specifically provided otherwise in this
Agreement or any Ancillary Agreement, all costs and expenses incurred by the NL
Group in connection with the Transaction shall be paid by NL, and all costs and
expenses incurred by the Kronos Group in connection with the Transaction shall
be paid by Kronos.
Section 6.3 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that neither party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement, including transfers or assignments by operation of law, without the
consent of the other party hereto. If any party or any of its successors or
assigns (i) shall consolidate with or merge into any other Person and shall not
be the continuing or surviving corporation or entity of such consolidation or
16
merger or (ii) shall transfer all or substantially all of its properties and
assets to any Person, then, and in each such case, proper provisions shall be
made to the satisfaction of the other party so that the successors and assigns
of such party shall assume all of the obligations of such party under this
Agreement and each Ancillary Agreement.
Section 6.4 Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of Texas, without regard to the
conflicts of laws rules thereof.
Section 6.5 Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof signed by the other parties hereto.
Section 6.6 Entire Agreement. This Agreement and the Ancillary Agreements
constitute the entire understanding of the parties with respect to the subject
matter hereof and thereof and supersedes all prior agreements, understandings
and negotiations, both written and oral, between the parties with respect to the
subject matter hereof and thereof. No representation, inducement, promise,
understanding, condition or warranty not set forth herein or in the Ancillary
Agreements has been made or relied upon by any party hereto. Neither this
Agreement nor any provision hereof is intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder. To the extent that the
provisions of this Agreement are inconsistent with the provisions of any
Ancillary Agreement, the provisions of such Ancillary Agreement shall prevail.
Section 6.7 Jurisdiction. Any Action seeking to enforce any provision of,
or based on any matter arising out of or in connection with, this Agreement or
the Transaction may be brought in the United States District Court for the
Northern District of Texas or any other Texas state court sitting in Dallas
County, and each of the parties hereby consents to the jurisdiction of such
courts (and of the appropriate appellate courts therefrom) in any such suit,
action or proceeding and irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding in any such court or that any such suit,
action or proceeding which is brought in any such court has been brought in an
inconvenient form. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court.
Section 6.8 Termination Prior to the Distribution. The NL Board of
Directors may at any time prior to the Distribution abandon the Distribution
and, by notice to Kronos, terminate this Agreement (whether or not the NL Board
of Directors has theretofore approved this Agreement and/or the Distribution).
Section 6.9 Severability. If any one or more of the provisions contained in
this Agreement should be declared invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained in this Agreement shall not in any way be affected or impaired thereby
so long as the economic or legal substance of the Transaction is not affected in
17
any manner materially adverse to any party. Upon such a declaration, the parties
shall modify this Agreement so as to effect the original intent of the parties
as closely as possible in an acceptable manner so that the Transaction is
consummated as originally contemplated to the fullest extent possible.
Section 6.10 Survival. All covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Date indefinitely,
unless a specific survival or other applicable period is expressly set forth
herein.
Section 6.11 Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
Section 6.12 Specific Performance. Each party to this Agreement
acknowledges and agrees that damages for a breach or threatened breach of any of
the provisions of this Agreement would be inadequate and irreparable harm would
occur. In recognition of this fact, each party agrees that, if there is a breach
or threatened breach, in addition to any damages, the nonbreaching party to this
Agreement, without posting any bond, shall be entitled to seek and obtain
equitable relief in the form of specific performance, temporary restraining
order, temporary or permanent injunction, attachment, or any other equitable
remedy which may then be available to obligate the breaching party (i) to
perform its obligations under this Agreement or (ii) if the breaching party is
unable, for whatever reason, to perform those obligations, to take any other
actions as are necessary, advisable or appropriate to give the other party to
this Agreement the economic effect that comes as close as possible to the
performance of those obligations (including, but not limited to, transferring,
or granting liens on, the assets of the breaching party to secure the
performance by the breaching party of those obligations).
18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first above
written.
NL INDUSTRIES, INC.
By: _______________________________
Name:
Title:
KRONOS WORLDWIDE, INC.
By: _______________________________
Name:
Title:
19
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
KRONOS, INC.
The undersigned officer of Kronos, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the state of
Delaware (the "Corporation"), does hereby certify as follows:
1. That the Corporation was originally incorporated under the name
Kronos (USA), Inc. and its original certificate of incorporation was filed
with the Secretary of State of the state of Delaware on October 13, 1989.
2. That the board of directors of the Corporation, in accordance with
sections 242, 245 and 141(f) of the General Corporation Law of the state of
Delaware, adopted resolutions by unanimous written consent as of September
24, 2003 recommending that the existing certificate of incorporation of the
Corporation, be amended and restated in its entirety to read as set forth
in this First Amended and Restated Certificate of Incorporation attached
hereto as Exhibit A, and ordered that such First Amended and Restated
Certificate of Incorporation be submitted to the sole stockholder of the
Corporation entitled to vote thereon for its approval by written consent in
lieu of a special meeting of stockholders called for that purpose.
3. That, in accordance with sections 242, 245 and 228 of the General
Corporation Law of the state of Delaware, as of September 24, 2003 the sole
holder of all of the outstanding shares of the Corporation's common Stock,
par value $0.01 per share, approved and adopted the First Amended and
Restated Certificate of Incorporation set forth on Exhibit A attached
hereto by written consent in lieu of a special meeting of stockholders
called for that purpose.
4. That upon the filing and effectiveness of this First Amended and
Restated Certificate of Incorporation, the certificate of incorporation of
the Corporation will be amended and restated in its entirety to read as set
forth on Exhibit A attached hereto.
Kronos, Inc. has caused this certificate to be signed by Robert D. Graham,
its vice president, as of September 24, 2003.
KRONOS, INC.
By:/s/Robert D. Graham
-------------------------------------------
Robert D. Graham, Vice President
KRONOS, INC. FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
EXHIBIT A
FIRST AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
KRONOS WORLDWIDE, INC.
- ------------------------------------------------------------------------------
ARTICLE I.
NAME
The name of the corporation is KRONOS WORLDWIDE, INC. (the "Corporation").
ARTICLE II.
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the state of Delaware
is Corporation Service Company, 2711 Centerville Road, Suite 400, city of
Wilmington, county of New Castle, state of Delaware 19808. The name of the
Corporation's registered agent at such address is Corporation Service Company.
ARTICLE III.
PURPOSE
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful business, act or activity for which
corporations may be organized under the General Corporation Law of the state of
Delaware as it may be amended from time to time (the "DGCL").
ARTICLE IV.
AUTHORIZED STOCK
Section 4.1. Authorized Stock. The total number of shares of stock that the
Corporation shall have authority to issue is 60,100,000 shares, consisting of
60,000,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), and 100,000 shares of preferred stock, par value $0.01 per share (the
"Preferred Stock").
Section 4.2. Common Stock. The rights of the holders of common stock shall
be subject to the rights of holders of Preferred Stock and any other applicable
provisions of this certificate of incorporation.
Section 4.3. Preferred Stock. The board of directors is expressly
authorized, at any time and from time to time, to provide for the issuance of
shares of Preferred Stock in one or more series with such designations,
KRONOS, INC. FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION PAGE A-1
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions thereof, as shall be expressed
in the resolution or resolutions providing for the issuance thereof adopted by
the board of directors and as are not inconsistent with this certificate of
incorporation or any amendment hereto, and as may be permitted by the DGCL.
Section 4.4. Record Holders. The Corporation shall be entitled to treat the
person in whose name any share of its stock is registered as the owner thereof
for all purposes and shall not be bound to recognize any equitable or other
claim to, or interest in, such share on the part of any other person, whether or
not the Corporation shall have notice thereof, except as expressly provided by
applicable law.
Section 4.5. Stock Split. Effective as of 5:00 p.m., Eastern time, on the
date this First Amended and Restated Certificate of Incorporation is filed with
the Secretary of State of the state of Delaware, the 1,000 shares of Common
Stock issued and outstanding immediately prior to such time shall automatically
and without any action on the part of the holder thereof, be recapitalized in
the form of a split into 48,943,049 shares of Common Stock (the "Stock Split").
Promptly after such effectiveness, each record holder of a certificate that,
immediately prior to such effectiveness, represented shares of Common Stock
shall be entitled to receive in exchange for such certificate, upon surrender of
such certificate to the Corporation, a certificate for the number of shares of
Common Stock to which the holder is entitled as a result of the Stock Split.
Until surrendered and exchanged in accordance herewith, each certificate that,
immediately prior to such effectiveness, represented Common Stock shall
represent the number of shares of Common Stock to which the holder is entitled
as a result of the Stock Split.
ARTICLE V.
EXISTENCE
The Corporation is to have perpetual existence.
ARTICLE VI.
BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the board of directors is expressly authorized to adopt, amend or repeal the
bylaws or adopt new bylaws.
ARTICLE VII.
MEETINGS OF STOCKHOLDERS
BOOKS OF CORPORATION
ELECTION OF DIRECTORS
Meetings of stockholders may be held within or without the state of
Delaware, as the bylaws of the Corporation may provide. The books of the
Corporation may be kept outside the state of Delaware at such place or places as
may be designated from time to time by the board of directors or in the bylaws
of the Corporation. Election of directors need not by written ballot unless the
bylaws of the Corporation so provide.
KRONOS, INC. FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION PAGE A-2
ARTICLE VIII.
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by law, indemnify
any and all officers and directors of the Corporation, and may, to the fullest
extent permitted by law or to such lesser extent as is determined in the
discretion of the board of directors, indemnify all other persons from and
against all expenses, liabilities or other matters and advance expenses to all
persons whom it shall have the power to indemnify.
ARTICLE IX.
DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for such liability as is expressly not subject to
limitation under the Delaware General Corporation Law, as the same exists or may
hereafter be amended to further limit or eliminate such liability. Any repeal or
modification of this ARTICLE by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE X.
CERTAIN BUSINESS COMBINATIONS
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the state of Delaware.
ARTICLE XI.
SETTLEMENTS WITH CREDITORS OR STOCKHOLDERS
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the state of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all creditors
or class of creditors, and/or on all the stockholders or class of stockholders,
of this Corporation, as the case may be, and also on this Corporation.
KRONOS, INC. FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION PAGE A-3
ARTICLE XII.
AMENDMENT
The Corporation shall have the right, subject to any express provisions or
restrictions contained in this certificate of incorporation or bylaws of the
Corporation, from time to time, to amend this certificate of incorporation or
any provision thereof in any manner now or hereafter provided by law, and all
rights and powers of any kind conferred upon a director or stockholder of the
Corporation by this certificate of incorporation or any amendment thereof are
conferred subject to such right.
KRONOS, INC. FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION PAGE A-4
AMENDED AND RESTATED
BYLAWS
OF
KRONOS WORLDWIDE, INC.
a Delaware Corporation
(Amended and Restated as of September 24, 2003)
TABLE OF CONTENTS
Page
TABLE OF CONTENTS...........................................................i
ARTICLE I. REGISTERED AGENT AND OFFICES....................................1
Section 1.1. Registered Agent and Office..........................1
Section 1.2. Other Offices........................................1
ARTICLE II. MEETINGS OF STOCKHOLDERS.......................................1
Section 2.1. Place and Time of Meetings...........................1
Section 2.2. Business to be Transacted at Meetings................1
Section 2.3. Notice...............................................2
Section 2.4. List of Stockholders.................................2
Section 2.5. Quorum...............................................2
Section 2.6. Proxies..............................................2
Section 2.7. Order of Business....................................2
Section 2.8. Appointment of Inspectors of Election................3
Section 2.9. Action Without a Meeting.............................3
Section 2.10. Fixing A Record Date................................3
Section 2.11. Telephone Meetings..................................4
Section 2.12. Minutes.............................................4
ARTICLE III. DIRECTORS.....................................................4
Section 3.1. Number, Qualifications and Term of Office............4
Section 3.2. Nomination of Director Candidates....................4
Section 3.3. Removals.............................................5
Section 3.4. Vacancies............................................5
Section 3.5. Annual Meeting.......................................5
Section 3.6. Other Meetings and Notice............................5
Section 3.7. Quorum...............................................5
Section 3.8. Committees...........................................5
Section 3.9. Committee Rules......................................6
Section 3.10. Telephonic Meetings.................................6
Section 3.11. Presumption of Assent...............................6
Section 3.12. Action Without a Meeting............................6
Section 3.13. Compensation........................................6
Section 3.14. Minutes.............................................6
ARTICLE IV. OFFICERS.......................................................6
Section 4.1. Number...............................................6
Section 4.2. Election and Term of Office..........................6
Section 4.3. The Chairman of the Board............................6
Section 4.4. The Vice Chairman of the Board.......................7
Section 4.5. The President........................................7
Section 4.6. The Chief Executive Officer..........................7
Section 4.7. The Chief Financial Officer..........................7
Section 4.8. Vice Presidents......................................7
Section 4.9. The Secretary and Assistant Secretary................7
Section 4.10. The Treasurer and Assistant Treasurer...............7
Section 4.11. Vacancies...........................................8
Section 4.12. Other Officers, Assistant Officers and Agents.......8
Section 4.13. Normal Duties and Responsibilities of Officers......8
ARTICLE V. INDEMNIFICATION AND INSURANCE OF DIRECTORS, OFFICERS AND OTHERS.8
Section 5.1. Indemnification......................................8
Section 5.2. Advancement of Expenses..............................8
i
TABLE OF CONTENTS
Page
Section 5.3. Expenses of Contested Indemnification Claims.........8
Section 5.4. Indemnification Not Exclusive........................9
Section 5.5. Survival of Indemnification and Advancement of
Expenses.............................................9
Section 5.6. Employees, Agents and Others.........................9
Section 5.7. Contract Right.......................................9
Section 5.8. Insurance............................................9
Section 5.9. Certain References Under Article V...................9
ARTICLE VI. STOCK CERTIFICATES.............................................9
Section 6.1. Form.................................................9
Section 6.2. Transfers............................................10
Section 6.3. Lost or Destroyed Certificates.......................10
Section 6.4. Registered Stockholders..............................10
Section 6.5. Restrictions on Transfers of Shares..................10
ARTICLE VII. CERTAIN BUSINESS COMBINATIONS.................................10
ARTICLE VIII. GENERAL PROVISIONS............................................10
Section 8.1. Dividends............................................10
Section 8.2. Accounts.............................................10
ARTICLE IX. NOTICES........................................................11
Section 9.1. General..............................................11
Section 9.2. Waivers..............................................11
Section 9.3. Attendance as Waiver.................................11
Section 9.4. Omission of Notice to Stockholders...................11
ii
AMENDED AND RESTATED
BYLAWS
OF
KRONOS WORLDWIDE, INC.
a Delaware Corporation
(Amended and Restated as of September 24, 2003)
- -------------------------------------------------------------------------------
ARTICLE I.
REGISTERED AGENT AND OFFICES
Section 1.1. Registered Agent and Office. The registered agent and office
of the corporation shall be such person or entity and located at such place
within the state of Delaware as the board of directors may from time to time
determine.
Section 1.2. Other Offices. The corporation may also have offices at such
other places, both within and without the state of Delaware, as the
corporation's board of directors may from time to time determine or the business
of the corporation may require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 2.1. Place and Time of Meetings. All meetings of the stockholders
shall be held on such date and at such time and place, within or without the
state of Delaware, as shall be determined, from time to time, by the board of
directors or by means of remote communication. The place at which a meeting of
stockholders shall be held shall be stated in the notice and call of the meeting
or a duly executed waiver of notice thereof. The chairman of the board, the
president, the chief executive officer, the board of directors or the holders of
at least 15 percent of the shares of the corporation that would be entitled to
vote at such a meeting may call special meetings of stockholders. If a special
meeting is called by any person or persons other than the board of directors,
the request shall be in writing, specifying the time of such meeting and the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by facsimile transmission to the
chairman of the board, the president, the chief executive officer or the
secretary of the corporation. No business may be transacted at such special
meeting other than specified in such notice. Nothing contained in this Section
shall be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.
Section 2.2. Business to be Transacted at Meetings. At a meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before a special meeting,
business must be specified in the notice of the meeting (or any supplement
thereto). To be properly brought before an annual meeting, business must be (a)
specified in the notice of the meeting (or any supplement thereto) given by or
at the direction of the board of directors, (b) otherwise properly brought
before the meeting by or at the direction of the board of directors or (c)
otherwise properly brought before the meeting by a stockholder. For business to
be properly brought before an annual meeting by a stockholder, the stockholder
must, in addition to any requirements imposed by federal securities law or other
applicable laws, have given timely notice thereof in writing to the secretary of
the corporation. To be timely for an annual meeting, a stockholder's notice must
be delivered to or mailed and received at the principal executive offices of the
corporation, no later than (i) if the corporation mailed notice of the last
annual meeting or publicly disclosed the date of such meeting and the annual
meeting for the current year has not changed more than thirty days from such
date (as if in the current year), forty-five days before the earlier of the date
(as if in the current year) of such mailing or public disclosure or (ii)
-1-
otherwise ninety days prior to the annual meeting. A stockholder's notice to the
secretary with regard to an annual meeting shall set forth as to each order of
business that the stockholder proposes to bring before the meeting (a) a brief
description of such business desired to be brought before the meeting and the
reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the corporation that are
beneficially owned by the stockholder and (d) any material interest of the
stockholder in such business. The chairman of the meeting may refuse to bring
before a meeting any business not properly brought before the meeting in
compliance with this section.
Section 2.3. Notice. Notice of the time and place of an annual meeting of
stockholders and notice of the time, place and purpose or purposes of a special
meeting of the stockholders shall be given by remote communications or by
mailing written or printed notice of the same not less than 10, nor more than
60, days prior to the meeting, with postage prepaid, to each stockholder of
record of the corporation entitled to vote at such meeting, and addressed to the
stockholder's last known post office address or to the address appearing on the
corporate books of the corporation.
Section 2.4. List of Stockholders. The officer or agent having charge of
the stock transfer books of the corporation shall make, at least 10 days before
every meeting of the stockholders, a complete list of the stockholders entitled
to vote at such meeting arranged in alphabetical order, specifying the address
of and the number of shares registered in the name of each stockholder. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting for a period of at least 10 days prior to the meeting on
a reasonably accessible electronic network or, during ordinary business hours,
at the principal place of business of the corporation. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present. The original
stock transfer books shall be the only evidence as to who are the stockholders
entitled to examine such list or transfer book or to vote at any such meeting of
stockholders.
Section 2.5. Quorum. The holders of a majority of the votes entitled to be
cast at any meeting of stockholders, counted as a single class if there be more
than one class of stock entitled to vote at such meeting, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders except as otherwise provided by statute or by the certificate of
incorporation. Once a quorum is present at a meeting of the stockholders, the
stockholders represented in person or by proxy at the meeting may conduct such
business as may be properly brought before the meeting until it is adjourned,
and the subsequent withdrawal from the meeting by any stockholder or the refusal
of any stockholder represented in person or by proxy to vote shall not affect
the presence of a quorum at the meeting. If a quorum is not present, the
chairman of the meeting or the holders of the shares present in person or
represented by proxy at the meeting, and entitled to vote thereat, shall have
the power, by the affirmative vote of the holders of a majority of such shares,
to adjourn the meeting to another time and/or place. Unless the adjournment is
for more than thirty days or unless a new record date is set for the adjourned
meeting, no notice of the adjourned meeting need be given to any stockholder
provided that the time and place of the adjourned meeting were announced at the
meeting at which the adjournment was taken. At the adjourned meeting the
corporation may transact any business that might have been transacted at the
original meeting.
Section 2.6. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. A telegram, telex, cablegram or reliable electronic transmission executed
or duly authorized by the stockholder, or a photographic, photostatic, facsimile
or reliable reproduction of a writing executed or duly authorized by the
stockholder shall be treated as an execution in writing for purposes of this
section. No proxy shall be valid after three years from the date of its
execution unless otherwise provided in the proxy. Each proxy shall be revocable
unless the proxy form conspicuously states that the proxy is irrevocable and the
proxy is coupled with an interest.
Section 2.7. Order of Business. The order of business at each such
stockholders meeting shall be as determined by the chairman of the meeting. One
of the following persons, in the order in which they are listed (and in the
absence of the first, the next, and so on), shall serve as chairman of the
meeting: the chairman of the board, vice chairman of the board, president, the
chief executive officer, vice presidents (in the order of their seniority if
more than one) and secretary. The chairman of the meeting shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof, and the opening
and closing of the voting polls.
-2-
Section 2.8. Appointment of Inspectors of Election. The board of directors
shall appoint one or more inspectors of election ("inspectors") to act at such
meeting or any adjournment or postponement thereof and make a written report
thereof. The board of directors may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is so appointed or if no inspector or alternate is able to act, the
chairman of the board, the vice chairman of the board, the president or the
chief executive officer shall appoint one or more inspectors to act at such
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors may be directors, officers or employees of the
corporation.
Section 2.9. Action Without a Meeting.
(a) Any action to be taken at a meeting of the stockholders, may be
taken without a meeting, without prior notice, and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holder or holders of shares having not less than the minimum
number of votes that would be necessary to take such action at a meeting at
which the holders of all shares entitled to vote on the action were present
and voted.
(b) Every written consent of the stockholders shall bear the date of
signature of each stockholder who signs the consent. No written consent
shall be effective to take the action that is the subject of the consent
unless, within 60 days after the date of the earliest dated consent
delivered to the corporation as provided below, a consent or consents
signed by the holder or holders of shares having not less than the minimum
number of votes that would be necessary to take the action that is the
subject of the consent are delivered to the corporation by delivery to its
registered office, its principal place of business, or an officer or agent
of the corporation having custody of the books in which proceedings of
meetings of the stockholders are recorded. Such delivery shall be made by
hand or by certified or registered mail, return receipt requested, and in
the case of delivery to the corporation's principal place of business,
shall be addressed to the president or chief executive officer of the
corporation.
(c) A telegram, cablegram or electronic transmission by a stockholder,
or a photographic, photostatic, facsimile or other reliable reproduction of
a writing signed or transmitted by a stockholder, shall be regarded as
signed by the stockholder for the purposes of this section.
(d) Prompt notice of the taking of any action by stockholders without
a meeting by less than unanimous written consent shall be given to those
stockholders who did not consent in writing to the action and who, if the
action had been taken at a meeting, would have been entitled to notice of
the meeting if the record date for such meeting had been the date that
written consents signed by a sufficient number of holders to take the
action were delivered to the corporation.
Section 2.10. Fixing A Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than 60 nor less than 10 days
before the date of such meeting, nor more than 60 days prior to any other
action.
If the board of directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held.
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(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which
the first written consent is expressed.
(c) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 2.11. Telephone Meetings. Stockholders may participate in and hold
a meeting by means of conference telephone or similar communication equipment by
means of which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
Section 2.12. Minutes. The stockholders shall cause regular minutes of
their proceedings to be kept, and such minutes shall be placed in the minute
book of the corporation.
ARTICLE III.
DIRECTORS
Section 3.1. Number, Qualifications and Term of Office. The business and
affairs of the corporation shall be managed by a board of directors. Subject to
the preferential voting rights of the holders of preferred stock or any other
class of capital stock of the corporation or any series of any of the foregoing
that is then outstanding, the board of directors shall consist of one or more
members. The number of members of the board of directors shall be fixed from
time to time (i) by the board of directors pursuant to a resolution adopted by a
majority of the entire board of directors or (ii) by the stockholders pursuant
to a resolution adopted by a majority of the holders of shares of the
corporation entitled to vote for the election of directors; provided, however,
that if the stockholders have acted to fix the number of directors, any action
by the board of directors to fix another number shall only become effective on
or after the first annual meeting of stockholders that follows such stockholder
action. Each director shall be elected at the annual meeting of the
stockholders, except as provided in Section 3.4, and each director elected shall
hold office until the next annual meeting of stockholders and until his or her
successor is duly elected and qualified or until his or her earlier death,
resignation or removal. No reduction of the authorized number of directors shall
have the effect of removing any director before that director's term expires.
Section 3.2. Nomination of Director Candidates. Subject to the preferential
voting rights of the holders of preferred stock or any other class of capital
stock of the corporation or any series of any of the foregoing that is then
outstanding, nominations for the election of directors may be made by the board
of directors or by any stockholder entitled to vote for the election of
directors. Any stockholder entitled to vote for the election of a director at a
meeting may nominate persons for whom such stockholder may vote only if written
notice of such stockholder's intent to make such nomination is given, either by
personal delivery or by United States mail, postage prepaid, to the secretary of
the corporation not later than (a) with respect to an election to be held at an
annual meeting of stockholders, (i) if the corporation mailed notice of the last
annual meeting or publicly disclosed the date of such meeting and the annual
meeting for the current year has not changed more than thirty days from such
date (as if in the current year), forty-five days before the earlier of the date
(as if in the current year) of such mailing or public disclosure or (ii)
otherwise ninety days prior to the annual meeting and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, the close of business on the tenth day following the date on which
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notice of such meeting is first given to stockholders. Each such notice shall
set forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons intended to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
such requirements been applicable and each nominee been nominated, or intended
to be nominated, by the board of directors; and (e) the consent of each nominee
to serve as a director of the corporation if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with this section.
Section 3.3. Removals. Subject to the preferential voting rights of the
holders of preferred stock or any other class of capital stock of the
corporation or any series of any of the foregoing that is then outstanding, each
director may be removed from office at any time by the stockholders, with or
without cause, by the affirmative vote of the holders of at least a majority of
the voting power of all of the shares of the corporation entitled to vote for
the election of such director.
Section 3.4. Vacancies. Subject to the preferential voting rights of the
holders of preferred stock or any other class of capital stock of the
corporation or any series of any of the foregoing that is then outstanding and
except as otherwise required by law, all vacancies in the board of directors,
whether caused by resignation, death or otherwise, may be filled by a majority
of the remaining directors though less than a quorum; provided, however, that
any vacancy resulting from an increase in the number of directors that is the
result of a resolution adopted by the stockholders of the corporation may be
filled by the stockholders of the corporation in accordance with the laws of the
state of Delaware, any other applicable provisions of the certificate of
incorporation and these bylaws. Each director so chosen shall hold office for
the unexpired term of his or her predecessor and until his or her successor is
elected and qualified or until his or her earlier death, resignation or removal.
Section 3.5. Annual Meeting. The annual meeting of the board of directors
may be held without notice immediately after the annual meeting of stockholders
at the location of the stockholders' meeting. If not held immediately after the
annual meeting of the stockholders, the annual meeting of the board of directors
shall be held as soon thereafter as may be convenient.
Section 3.6. Other Meetings and Notice. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board of directors. Special meetings of
the board of directors may be called by or at the request of the chairman of the
board, the vice chairman of the board, the president or the or chief executive
officer and shall be called by the chairman of the board on the written request
of a majority of directors, in each case on at least twenty-four hours notice to
each director.
Section 3.7. Quorum. A majority of the total number of directors shall be
necessary at all meetings to constitute a quorum for the transaction of
business. If a quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. At such adjourned meeting at which a quorum shall be present,
any business may be transacted that might have been transacted at the meeting as
originally notified and called.
Section 3.8. Committees. Standing or temporary committees consisting of one
or more directors of the corporation may be appointed by the board of directors
from time to time, and the board of directors may from time to time invest such
committees with such powers as it may see fit, subject to limitations imposed by
statute and such conditions as may be prescribed by the board of directors. An
executive committee may be appointed by resolution passed by a majority of the
entire board of directors and if appointed it shall have all the powers provided
by statute, except as specially limited by the board of directors. All
committees so appointed shall keep regular minutes of the transactions of their
meetings and shall cause them to be recorded in books kept for that purpose in
the office of the corporation, and shall report the same to the board of
directors at its next meeting. The board of directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. The board shall have the
power at any time to change the membership of, to increase or decrease the
membership of, to fill all vacancies in and to discharge any committee of the
board, or any member thereof, either with or without cause.
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Section 3.9. Committee Rules. Each committee of the board of directors may
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by the resolution of the board of
directors designating such committee, but in all cases the presence of at least
a majority of the members of such committee shall be necessary to constitute a
quorum.
Section 3.10. Telephonic Meetings. Members of the board of directors or any
committee designated by the board of directors may participate in any meeting of
the board of directors or such committee by means of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in such a meeting shall
constitute presence in person at such meeting.
Section 3.11. Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors or any committee thereof at which
action on any corporate matter is taken shall be deemed to have assented to the
action taken unless his or her dissent shall be entered in the minutes of the
meeting or unless he or she shall file his or her written dissent to such action
with the person acting as the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 3.12. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting if all members of the board of directors or such
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board of directors or
committee. Action taken pursuant to such written consent of the board of
directors or of any committee thereof shall have the same force and effect as if
taken by the board of directors or the committee, as the case may be, at a
meeting thereof.
Section 3.13. Compensation. The board of directors shall have the authority
to fix the compensation of directors.
Section 3.14. Minutes. The board of directors shall cause to be kept
regular minutes of its proceedings, and such minutes shall be placed in the
minute book of the corporation.
ARTICLE IV.
OFFICERS
Section 4.1. Number. The officers of the corporation shall be a chairman of
the board, a vice chairman of the board, a president, one or more vice
presidents, a secretary, a treasurer, and such other officers and assistant
officers as the board of directors may, by resolution, appoint. Any two or more
offices may be held by the same person. In its discretion, the board of
directors may choose not to fill any office for any period as it may deem
advisable, except the offices of president and secretary.
Section 4.2. Election and Term of Office. The officers of the corporation
shall be elected annually by the board of directors at the annual meeting of the
board of directors. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each officer shall hold office until the next annual meeting of the board of
directors and until his or her successor is duly elected and qualified or until
his or her earlier death, resignation or removal as hereinafter provided.
Section 4.3. The Chairman of the Board. The chairman of the board shall
preside at all meetings of the stockholders and directors. He or she shall have
general and active management of the business of the corporation, shall see that
all orders and resolutions of the board of directors are carried into effect
and, in connection therewith, shall be authorized to delegate to the vice
chairman of the board, president and other officers such of his or her powers
and duties as chairman of the board at such time and in such manner as he or she
may deem to be advisable. The chairman of the board shall be an ex officio
member of all standing committees and he or she shall have such other powers and
duties as may from time to time be assigned by the board of directors.
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Section 4.4. The Vice Chairman of the Board. The vice chairman of the board
shall assist the chairman of the board in the management of the business of the
corporation, and, in the absence or disability of the chairman of the board,
shall preside at all meetings of the stockholders and the board of directors and
exercise the other powers and perform the other duties of the chairman of the
board or designate the executive officers of the corporation by whom such other
powers shall be exercised and other duties performed. The vice chairman of the
board shall be an ex officio member of all standing committees and he or she
shall have such other powers and duties as may from time to time be assigned by
the board of directors or by the chairman of the board. In addition to the
foregoing, the vice chairman of the board shall have such other powers, duties
and authority as may be set forth elsewhere in these bylaws.
Section 4.5. The President. The president shall be the corporation's chief
operating officer unless otherwise determined by the board of directors. The
president shall assist the chairman of the board in the management of the
business of the corporation, and, in the absence or disability of the chairman
of the board and the vice chairman of the board, shall preside at all meetings
of the stockholders and the board of directors and exercise the other powers and
perform the other duties of the chairman of the board or designate the executive
officers of the corporation by whom such other powers shall be exercised and
other duties performed. The president shall be an ex officio member of all
standing committees and he or she shall have such other powers and duties as may
from time to time be assigned by the board of directors or by the chairman of
the board. In addition to the foregoing, the president shall have such other
powers, duties, and authority as may be set forth elsewhere in these bylaws. If
the board of directors does not elect a chairman or vice chairman of the board,
the president shall also have the duties and responsibilities, and exercise all
functions, of the chairman and the vice chairman of the board as provided in
these bylaws.
Section 4.6. The Chief Executive Officer. The board of directors may
designate an individual, whether or not such individual is an officer of the
corporation, to serve as the chief executive officer of the corporation. The
chief executive officer shall have the duties and responsibilities, and exercise
all functions, as the board of directors may determine.
Section 4.7. The Chief Financial Officer. The board of directors may
designate an individual, whether or not such individual is an officer of the
corporation, to serve as the chief financial officer of the corporation. The
chief financial officer shall have the duties and responsibilities, and exercise
all functions, as the board of directors may determine.
Section 4.8. Vice Presidents. Each vice president shall have such powers
and discharge such duties as may be assigned from time to time by the chairman
of the board, the vice chairman of the board or the president. During the
absence or disability of the president, first the chief executive officer and in
the absence or disability of the chief executive officer, one such vice
president, when designated by the board of directors, shall exercise all the
functions of the president.
Section 4.9. The Secretary and Assistant Secretary. The secretary or the
chairman of the board shall issue notices for all meetings. The secretary shall
keep minutes of all meetings of the board of directors, the committees thereof
and the stockholders, shall have charge of the seal and the corporate books and
shall make such reports and perform such other duties as are incident to the
office, and perform such other duties designated or properly required by the
chairman of the board, the vice chairman of the board, the president or the
chief executive officer. The secretary shall keep, or cause to be kept, at the
principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, a share register, or a duplicate
share register, showing the names of all stockholders and their addresses, the
number and classes of shares held by each, the number and date of certificates
evidencing such shares, and the number and date of cancellation of every
certificate surrendered for cancellation. The assistant secretary shall be
vested with the same powers and duties as the secretary, and any act may be done
or duty performed by the assistant secretary with like effect as though done or
performed by the secretary. The assistant secretary shall have such other powers
and perform such other duties as may be assigned by the chairman of the board,
the vice chairman of the board, the president or the chief executive officer.
Section 4.10. The Treasurer and Assistant Treasurer. The treasurer shall
have the custody of all moneys and securities of the corporation and shall keep
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regular books of account. He or she shall disburse the funds of the corporation
in payment of just demands against the corporation, or as may be ordered by the
chairman of the board, the vice chairman of the board, the president, the chief
executive officer or by the board of directors, taking proper vouchers for such
disbursements, and shall render to the board of directors from time to time as
may be required of him or her, an account of all transactions as treasurer and
of the financial condition of the corporation. The treasurer shall perform all
duties incident to the office, and perform such other duties designated or
properly required by the chairman of the board, the vice chairman of the board,
the president or the chief executive officer. The assistant treasurer shall be
vested with the same powers and duties as the treasurer, and any act may be
done, or duty performed by the assistant treasurer with like effect as though
done or performed by the treasurer. The assistant treasurer shall have such
other powers and perform such other duties as may be assigned by the chairman of
the board, the vice chairman of the board, the president or the chief executive
officer.
Section 4.11. Vacancies. Vacancies in any office arising from any cause may
be filled by the directors for the unexpired portion of the term with a majority
vote of the directors then in office. In the case of the absence or inability to
act of any officer of the corporation and of any person herein authorized to act
in his or her place, the board of directors may from time to time delegate the
powers or duties of such officer to any other officer or any director or other
person whom it may select.
Section 4.12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers, and agents, if any, other than those whose duties are
provided for in these bylaws shall hold their offices for such terms and shall
exercise such powers and perform such duties as the board of directors may
determine.
Section 4.13. Normal Duties and Responsibilities of Officers. Unless
otherwise provided in these bylaws or the board of directors decides otherwise,
if an officer title is one commonly used for officers of a business corporation
formed under the Delaware General Corporation Law or any successor or similar
statute, the assignment of such title shall constitute the delegation to such
officer of the authority and duties that are normally associated with that
office, subject to any specific delegation of authority and duties made to such
officer by the board of directors.
ARTICLE V.
INDEMNIFICATION AND INSURANCE OF DIRECTORS, OFFICERS AND OTHERS
Section 5.1. Indemnification. To the fullest extent permitted by Delaware
law, the corporation shall indemnify any and all officers and directors of the
corporation from and against all expenses (including attorneys' fees),
liabilities or other matters arising out of their status as such or their acts,
omissions or services rendered by such persons in such capacities or otherwise
while serving at the request of the corporation. Unless specifically addressed
in a repeal or amendment of Delaware law with regard to a corporation's ability
to indemnify its officers and directors, no such repeal or amendment shall
adversely affect any indemnification rights of any person existing at the time
of such repeal or amendment.
Section 5.2. Advancement of Expenses. Reasonable expenses (including
attorneys' fees) incurred by a director or officer who was, is or is threatened
to be made a named defendant or respondent in a proceeding by reason of his or
her status as a director or officer of the corporation or services rendered by
such persons in such capacities or otherwise at the request of the corporation
or incurred by a director or officer for prosecuting a claim under Section 5.3
shall be paid by the corporation in advance of the final disposition of such
proceeding upon receipt of a written affirmation by the director or officer of
his or her good faith belief that he or she has met the standard of conduct
necessary for indemnification and a written undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be determined
that he or she is not entitled to be indemnified by the corporation as
authorized in this Article.
Section 5.3. Expenses of Contested Indemnification Claims. If a claimant
makes a claim on the corporation under Section 5.1 or 5.2 and the corporation
does not pay such claim in full within thirty days after it has received such
written claim, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall also be entitled to be paid the expenses of
prosecuting such claim.
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Section 5.4. Indemnification Not Exclusive. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any other
bylaw, agreement, vote of stockholders or directors or otherwise, both as to
action in his or her official capacity and as to action in another capacity
while holding such office.
Section 5.5. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
Section 5.6. Employees, Agents and Others. To the fullest extent of
Delaware law, the corporation may grant rights of indemnification and
advancement of expenses to any person who is not at the time a current director
or officer of the corporation.
Section 5.7. Contract Right. Each of the rights of indemnification and
advancement of expenses provided by, or granted pursuant to, this Article shall
be a contract right and any repeal or amendment of the provisions of this
Article shall not adversely affect any such right of any person existing at the
time of such repeal or amendment with respect to any act or omission occurring
prior to the time of such repeal or amendment, and further, shall not apply to
any proceeding, irrespective of when the proceeding is initiated, arising from
the service of such person prior to such repeal or amendment.
Section 5.8. Insurance. To the fullest extent of Delaware law, the
corporation shall have power to purchase and maintain insurance on behalf of any
person, including one who is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liability under the
provisions of this Article.
Section 5.9. Certain References Under Article V. For purposes of this
Article, references to "the corporation," "other enterprise," "proceeding" and
"serving at the request of the corporation" shall have the meanings given such
terms in Section 145 of the Delaware General Corporation Law or any successor or
similar statute.
ARTICLE VI.
STOCK CERTIFICATES
Section 6.1. Form. The shares of stock of the corporation shall be
represented by certificates, provided that the board of directors of the
corporation may, by resolution, provide that some or all shares of any or all
classes or series of the corporation's stock shall be uncertificated shares. Any
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the adoption
of such a resolution by the board of directors, every holder of uncertificated
shares of the corporation shall be entitled to have a stock certificate issued
to such holder upon request. Stock certificates shall be issued in numerical
order, and each stockholder shall be entitled to a certificate signed by the
chairman of the board, the president, the chief executive officer or any vice
president and the secretary, any assistant secretary, the treasurer or any
assistant treasurer, certifying to the number of shares owned by such
stockholder. Where, however, such certificate is signed by a transfer agent or
an assistant transfer agent or by a transfer clerk acting on behalf of the
corporation, and a registrar or by an agent acting in the dual capacity of
transfer agent and registrar, the signatures of any of the above-named officers
may be facsimile signatures. In the event that any officer who has signed, or
whose facsimile signature has been used on, a certificate ceases to be an
officer before the certificate has been delivered, such certificate may
nevertheless be adopted and issued and delivered by the corporation, as though
the officer who signed such certificate or certificates, or whose facsimile
signature or signatures shall have been used thereon, had not ceased to be such
officer of the corporation.
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Section 6.2. Transfers. Transfers of stock shall be made only upon the
transfer books of the corporation or respective transfer agents designated to
transfer the several classes of stock. Before a new certificate is issued for
shares or uncertificated shares are credited to a stockholder's account, as
applicable, any old certificate, if any, representing such shares shall be duly
surrendered for cancellation.
Section 6.3. Lost or Destroyed Certificates. The corporation may issue a
new stock certificate in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the corporation shall,
except as otherwise determined by the board of directors, the chairman of the
board, the president, the chief executive officer any vice president or other
authorized officer, require the owner of the lost, stolen or destroyed
certificate, or his or her legal representative, to give the corporation a bond
sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
Section 6.4. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of another person, whether or not the
corporation shall have express or other notice thereof, except as otherwise
provided by the laws of the state of Delaware.
Section 6.5. Restrictions on Transfers of Shares. Notice of any restriction
on the transfer of shares of the corporation's stock shall be placed on each
certificate of stock issued, or in the case of uncertificated shares, contained
in the notice sent to the registered holder of such shares in accordance with
the laws of the state of Delaware.
ARTICLE VII.
CERTAIN BUSINESS COMBINATIONS
The provision of Section 203 of the Delaware General Corporation Law shall
not apply to the corporation.
This Article VII shall be amended, altered or repealed only as provided in
Section 203 of the Delaware General Corporation Law.
ARTICLE VIII.
GENERAL PROVISIONS
Section 8.1. Dividends. Dividends upon the capital stock of the
corporation, subject to any applicable provisions of the certificate of
incorporation, may be declared by the board of directors at any regular or
special meeting, pursuant to law. Dividends may be paid in cash, in property or
in shares of the capital stock, subject to the applicable provisions of the
certificate of incorporation. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think in the best interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 8.2. Accounts. The chairman of the board, vice chairman of the
board, president, the chief executive officer or any vice president is
authorized for and on behalf of the corporation: to establish, maintain and to
close depositary accounts, in the corporation's name, for the deposit and
withdrawal of corporation funds; to designate those individuals authorized to
withdraw funds or sign checks in said depositary accounts; and to execute
customer agreements with respect to such depositary accounts, including forms of
corporate resolutions, certified with respect to the approval of the board of
directors as of the date such forms of corporate resolutions are executed. The
secretary or assistant secretary is, authorized for and on behalf of the
corporation without further action of the board of directors to certify as to
the approval of the board of directors of forms of resolutions regarding any of
such depositary or trading accounts as of the date the officer of the
corporation executes the customer agreement with respect to each such account.
-10-
ARTICLE IX.
NOTICES
Section 9.1. General. Whenever the provisions of any statute or these
bylaws require notice to be given to any director, officer or stockholder, such
notice may be given personally or in writing by facsimile, by telegraph or by
depositing the same in the United States mail with postage prepaid addressed to
each director, officer or stockholder at his or her address, as the same appears
in the books of the corporation, and the time when the same shall be personally
given, sent by facsimile or telegraph or mailed shall be deemed to be the time
of the giving of such notice.
Section 9.2. Waivers. Whenever any notice whatever is required to be given
under provisions of law or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
Section 9.3. Attendance as Waiver. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened.
Section 9.4. Omission of Notice to Stockholders. Any notice required to be
given to any stockholder under any statutory provision, the certificate of
incorporation or these bylaws need not be given to the stockholder if:
(a) notice of two consecutive annual meetings and all notices of
meetings held or actions by written consent taken during the period between
those annual meetings, if any, or
(b) all, and at least two, payments (if sent by first class mail) of
distributions or interest on securities during a twelve month period
have been mailed to that person, addressed at his or her address as shown on the
share transfer records of the corporation, and have been returned undeliverable.
Any action or meeting taken or held without notice to such a person shall have
the same force and effect as if the notice had been duly given. If such a person
delivers to the corporation a written notice setting forth his or her then
current address, the requirement that notice be given to that person shall be
reinstated.
ADOPTED BY THE BOARD OF DIRECTORS AS OF
September 24, 2003
/s/Robert D. Graham
-----------------------------------------------------
Robert D. Graham, Vice President,
General Counsel and Secretary
-11-
---------------- ----------------
| Number | | Shares |
| | [Logo Goes Here] | |
| | | |
| | | |
---------------- ----------------
COMMON STOCK COMMON STOCK
CUSIP ______ __ _
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
- -----------------------------------------------------------------------------
| |
| THIS CERTIFIES THAT |
| |
| |
| |
| |
| IS THE RECORD HOLDER OF |
| |
- -----------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.01 PER
SHARE OF
KRONOS WORLDWIDE, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
Transferable on the books of the corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned and registered by a
transfer agent and registrar.
Witness the facsimile seal of the corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Harold C. Simmons [CORPORATE SEAL] /s/ Robert D. Graham
CHAIRMAN OF THE BOARD SECRETARY
COUNTERSIGNED AND REGISTERED:
EQUISERVE TRUST COMPANY, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
The corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such request shall be made in writing to the office of the transfer
agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ Custodian _______
TEN ENT - as tenants by the (Cust.) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act _____________
right of survivorship (State)
and not as tenants in
common
UNIF TRF MIN ACT - ______ Custodian (until age ___
(Cust.)
________ under Uniform Transfers
(Minor)
to Minors Act __________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
| |
| |
- ---------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
shares of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
- -----------------------------------------------------------------------------
attorney to transfer the said stock on the books of the within named corporation
with full power of substitution in the premises.
Dated ____________________
X ___________________________
X ___________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By ____________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
INTERCORPORATE SERVICES AGREEMENT
BETWEEN
CONTRAN CORPORATION
AND
KRONOS WORLDWIDE, INC.
Dated as of October [__], 2003
TABLE OF CONTENTS
Page
Recitals....................................................................1
ARTICLE I. RETENTION OF CONTRAN............................................1
Section 1.1. Performance of Services..............................1
Section 1.2. Disclaimer, Limited Liability; Indemnification.......2
ARTICLE II. SERVICES.......................................................2
Section 2.1. Provision of Financial, Audit,
Accounting and Tax Services.........................2
Section 2.2. Provision of Other Services..........................2
ARTICLE III. COMPENSATION..................................................3
Section 3.1. Compensation for Services............................3
ARTICLE IV. CONFIDENTIALITY................................................3
Section 4.1. Confidentiality......................................3
Section 4.2. Tax Information......................................4
ARTICLE V. MISCELLANEOUS...................................................4
Section 5.1. Review by KWI........................................4
Section 5.2. Maintenance and Inspection of Records................4
Section 5.3. Indemnity............................................4
Section 5.4. Notices..............................................4
Section 5.5. Term; Renewal........................................5
Section 5.6. Independent Contractor...............................5
Section 5.7. Force Majeure........................................5
Section 5.8. Entire Agreement.....................................6
Section 5.9. Amendments...........................................6
Section 5.10. Severability........................................6
Section 5.11. Counterparts........................................6
Section 5.12. Successors and Assigns..............................6
Section 5.13. Governing Law.......................................6
Section 5.14. Submission to Jurisdiction; Service; Waivers........6
Section 5.15. No Third-Party Beneficiaries........................7
Section 5.16. Titles and Headings.................................7
i
INTERCORPORATE SERVICES AGREEMENT
This Intercorporate Services Agreement ("Agreement"), is entered into
effective as of October [__], 2003 (the "Effective Date"), between Contran
Corporation, a Delaware corporation ("Contran"), and Kronos Worldwide, Inc., a
Delaware corporation ("KWI").
Recitals
A. KWI is an indirectly held subsidiary of Contran.
B. KWI is engaged in the manufacture, sales, marketing and distribution of
titanium dioxide and associated products.
C. KWI has and will have the need for executive, legal, audit, tax,
accounting, treasury, administrative, financial, risk management, technical,
consulting and similar services from time to time, but has determined that it is
not cost effective to obtain and separately maintain the infrastructure
associated therewith, particularly including the costs associated with
attracting and maintaining on its payroll on a full time basis a full complement
of skilled employees.
D. Contran is able and willing to provide the foregoing services to KWI,
and KWI desires to engage Contran as an independent contractor to provide the
same in accordance with the terms set forth in this Agreement.
Agreement
For and in consideration of the mutual promises, representations and
covenants herein contained, the parties hereto agree as follows.
ARTICLE I.
RETENTION OF CONTRAN
Section 1.1. Performance of Services.
(a) KWI hereby engages and retains Contran to perform the services set
forth in Article II (the "Services") and Contran hereby accepts and agrees
to provide such Services to KWI upon the terms and conditions hereinafter
set forth. All Services to be provided by Contran hereunder shall be
performed at the request and under the direction of KWI, and Contran shall
not have any power to act independently on behalf of KWI other than as
specifically authorized hereunder or from time to time by KWI.
(b) Contran shall determine the corporate facilities to be used in
rendering the Services and the individuals who will render such Services.
-1-
(c) Contran will use reasonable efforts to make the Services available
with substantially the same degree of care as it employs in making similar
services available for its own operations.
(d) Those employees or agents of Contran who perform similar services
for Contran or for other affiliates of Contran, or both, will perform the
Services.
(e) Nothing herein shall be deemed to restrict Contran or its
directors, officers, employees or agents from engaging in any business, or
from contracting with other parties, including, without limitation, other
affiliates of Contran, for similar or different services.
Section 1.2. Disclaimer, Limited Liability; Indemnification.
(a) Contran makes no express or implied representations, warranties or
guarantees relating to the Services or the quality or results of the
Services to be performed under this Agreement.
(b) Contran, its officers, employees or agents shall not be liable to
KWI or any third party, including any governmental agency, for any claims,
losses, damages or expenses that may result from the manner in which
Contran, its officers, employees or agents render the Services or the
consequences of any failure or delay to perform any of Contran's
obligations under this Agreement, other than claims, damages or expenses
arising from Contran's gross negligence or willful or reckless misconduct
(collectively, "Claims"). KWI shall have the ultimate responsibility for
all Services.
(c) KWI shall indemnify and hold Contran harmless from Claims. KWI
shall indemnify and hold Contran's officers, employees or agents harmless
from Claims to the full extent that Contran could indemnify such person
under applicable law in effect from time to time. KWI shall advance
expenses as incurred by Contran or its officers, employees or agents in
connection with KWI's indemnification obligations under this Agreement.
ARTICLE II.
SERVICES
Section 2.1. Provision of Financial, Audit, Accounting and Tax Services.
During the term of this Agreement, Contran shall provide financial, audit,
accounting and tax services, including without limitation, operation and
administration of tax compliance, for KWI's operations in the ordinary course of
business.
Section 2.2. Provision of Other Services. During the term of this
Agreement, at the request of KWI, Contran shall provide administrative,
executive, legal, risk management, treasury, technical, consulting and other
-2-
services required by KWI from time to time. KWI may request such other services
from time to time, including, without limitation, the following:
(a) executive and managerial functions;
(b) administration of KWI's insurance policies including
administration of worker's compensation claims;
(c) treasury functions, bank negotiations, compliance matters; and
(d) legal advice and compliance reporting.
ARTICLE III.
COMPENSATION
Section 3.1. Compensation for Services. Contran and KWI shall on or prior
to the Effective Date and before the beginning of each subsequent calendar year,
agree on the budgeted amounts of reimbursable costs and the allocation method to
be applied for such year. Such allocation method may be revised from time to
time with the consent of both parties.
(a) KWI shall pay to Contran one fourth of the budgeted annual amount
in advance quarterly around the first business day of each quarter.
(b) From time to time, the budgeted amounts may be revised to better
reflect actual expenses, and adjusted billings will then be made from
Contran to KWI.
(c) All charges from Contran to KWI are intended to be equal to the
actual cost of such expenses without premium or mark-up to Contran.
ARTICLE IV.
CONFIDENTIALITY
Section 4.1. Confidentiality. Each party shall hold and shall cause its
directors, officers, employees, agents, consultants and advisors
("Representatives") to hold in strict confidence all information (other than any
such information relating solely to the business or affairs of such party that
is otherwise publicly known or available) concerning the other party unless (i)
such party is compelled to disclose such information by judicial or
administrative process or, in the opinion of its counsel, by other requirements
of law or (ii) such information can be shown to have been (A) in the public
domain through no fault of such party or (B) lawfully acquired on a
non-confidential basis from other sources. Notwithstanding the foregoing, such
party may disclose such information to its Representatives so long as such
-3-
persons are informed by such party of the confidential nature of such
information and are directed by such party to treat such information
confidentially. If such party or any of its Representatives becomes legally
compelled to disclose any documents or information subject to this Section 4.1,
such party will promptly notify the other party so that the other party may seek
a protective order or other remedy or waive such party's compliance with this
Section 4.1. If no such protective order or other remedy is obtained or waiver
granted, such party will furnish only that portion of the information that it is
advised by counsel is legally required and will exercise its reasonable efforts
to obtain adequate assurance that confidential treatment will be accorded such
information. Such party agrees to be responsible for any breach of this Section
4.1 by it and its Representatives.
Section 4.2. Tax Information. Notwithstanding anything set forth herein to
the contrary (including Section 4.1) or in any other agreement to which a party
hereto is bound, the parties hereto (and any employee, representative or other
agent of any of the parties) are hereby expressly authorized to disclose all
information relating to taxes as required by the Internal Revenue Code of 1986,
as amended or supplemented, and the regulations promulgated thereunder (the
"Code"), but only to the extent necessary to comply with the Code.
ARTICLE V.
MISCELLANEOUS
Section 5.1. Review by KWI. All reports, memoranda, returns, statements,
contracts, agreements, regulatory submissions, applications and any other
documents arising from or in connection with the Services for or on behalf of
KWI shall be subject to review and approval by KWI.
Section 5.2. Maintenance and Inspection of Records. Contran shall keep
accurate books and records with respect to the costs and expenses incurred in
connection with the Services and such other books, accounts and records of its
operations as may be reasonably necessary for purposes of this Agreement. KWI
shall be permitted to inspect such books and records at any reasonable time.
Section 5.3. Indemnity. KWI assumes all liability for, and agrees to
defend, indemnify and hold Contran, its employees, officers, directors,
shareholders and agents, harmless from and against all demands, liabilities,
damages, costs and expenses, including attorneys' and expert witness fees
("Loss"), incurred by Contran arising from or in connection with the Services,
other than any Loss caused by the gross negligence or willful misconduct of
Contran.
Section 5.4. Notices. All notices and other communications hereunder shall
be in writing, and shall be delivered by hand or mailed by registered or
certified mail (return receipt requested) or transmitted by facsimile to the
parties at the following addresses (or at such other addresses for a party as
shall be specified by like notice) and shall be deemed given on the date on
which such notice is received:
If to Contran: Contran Corporation.
Three Lincoln Centre
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5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
Attention: General Counsel
Phone: 972.450.4251
Fax: 972.448.1445
If to KWI: Kronos Worldwide, Inc.
Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
Attention: General Counsel
Phone: 972.450.4289
Fax: 972.448.1445
Section 5.5. Term; Renewal. The initial term of this Agreement shall
commence as of the Effective Date and end on December 31, 2003, but shall be
automatically renewed for successive terms of one year. Either party may
terminate this Agreement by giving written notice of termination to the other
party not less than sixty (60) days prior to the end of the then current term.
In addition, in the event of a material default hereunder by a party, the
non-defaulting party may terminate this Agreement upon thirty (30) days prior
written notice if such default remains uncured and is continuing for twenty (20)
days after receipt by the defaulting party of such written notice of intent to
terminate. A final accounting and payment by one party to the other of all
amounts payable hereunder shall be made pursuant to the terms hereof within
thirty (30) days following such termination.
Section 5.6. Independent Contractor. Contran shall be an independent
contractor and not an employee of, or partner or joint venture with, KWI.
Section 5.7. Force Majeure. No party shall be in default of this Agreement
or liable to the other party for any delay or default in performance where
occasioned by any cause of any kind or extent beyond its control, including but
not limited to, armed conflict or economic dislocation resulting therefrom;
embargoes; shortages of labor, raw materials, production facilities or
transportation; labor difficulties; civil disorders of any kind; action of any
civil or military authorities (including, priorities and allocations); fires;
floods and accidents. The dates on which the obligations of the party are to be
fulfilled shall be extended for a period equal to the time lost by reason of any
delay arising, directly or indirectly from:
(a) Any of the foregoing causes, or
(b) Inability of a party, as a result of causes beyond its reasonable
control, to obtain instruction or information from the other party in time
to perform its obligations by such dates.
-5-
Section 5.8. Entire Agreement. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof and
all prior agreements or understandings shall be deemed merged herein. No
representations, warranties and if certifications, express or implied, shall
exist as between the parties except as stated herein.
Section 5.9. Amendments. No amendments, waivers or modifications hereof
shall be made or deemed to have been made unless in writing, executed by the
party to be bound thereby.
Section 5.10. Severability. If any provision in this Agreement or the
application of such provision to any person or circumstance shall be invalid,
illegal or unenforceable, the remainder of this Agreement or the application of
such provision to persons or circumstances other than those to which it is held
invalid, illegal or unenforceable shall not be affected thereby.
Section 5.11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute this Agreement.
Section 5.12. Successors and Assigns. This Agreement shall not be
assignable, in whole or in part, directly or indirectly, by any party hereto
without the prior written consent of the other party hereto, and any attempt to
assign any rights or obligations arising, under this Agreement without such
consent shall be void. This Agreement shall be binding, upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
Section 5.13. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic laws of the state of Texas, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the state of Texas or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the state of Texas.
Section 5.14. Submission to Jurisdiction; Service; Waivers. WITH RESPECT TO
ANY CLAIM ARISING OUT OF THIS AGREEMENT, EACH PARTY (A) IRREVOCABLY SUBMITS, FOR
ITSELF AND ITS PROPERTY, TO THE JURISDICTION OF THE FEDERAL OR STATE COURTS
LOCATED IN DALLAS COUNTY, TEXAS (B) AGREES THAT THE VENUE FOR ANY SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE EXCLUSIVE TO
SUCH COURTS, AND (C) IRREVOCABLY WAIVES ANY OBJECTION IT MAY HAVE AT ANY TIME TO
THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT BROUGHT IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WITH THE RIGHT TO OBJECT, WITH
-6-
RESPECT TO SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT THAT
SUCH COURT DOES NOT HAVE JURISDICTION OVER IT. EACH PARTY HEREBY IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY
OF THE AFORESAID COURTS BY THE MAILING OF COPIES OF SUCH PROCESS TO THE PARTY,
BY CERTIFIED OR REGISTERED MAIL AT THE ADDRESS SPECIFIED IN SECTION 5.4.
Section 5.15. No Third-Party Beneficiaries. This Agreement is solely for
the benefit of the parties hereto and should not be deemed to confer upon third
parties any remedy, claim, liability, reimbursement, claim of action or other
right in excess of those existing without reference to this Agreement.
Section 5.16. Titles and Headings. Titles and headings to sections herein
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement.
Executed as of the Effective Date.
CONTRAN CORPORATION
By:
-----------------------------------------------
[Name, Title]
KRONOS WORLDWIDE, INC.
By:
----------------------------------------------
[Name, Title]
-7-
PROMISSORY NOTE
$200,000,000.00 October __, 2003 Dallas, Texas
FOR VALUE RECEIVED, the undersigned, Kronos Worldwide, Inc., a Delaware
corporation, unconditionally promises to pay to the order of NL Industries,
Inc., a New Jersey corporation, in lawful money of the United States of America,
the principal sum of TWO HUNDRED MILLION and NO/100ths DOLLARS ($200,000,000.00)
together with interest from the date of this Note on the unpaid principal
balance from time to time pursuant to the terms of this Note. This Note shall be
unsecured and will bear interest on the terms set forth in Section 4 below.
Capitalized terms not otherwise defined shall have the meanings given to such
terms in Section 14 of this Note.
Section 1.Place of Payment. All payments will be made at Payee's address at
Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697, or
such other place as the Payee may from time to time designate in writing, in
immediately available funds, without setoff or counterclaim.
Section 2. Payment. The principal balance of this Note and any unpaid and
accrued interest thereon shall be due and payable on the Maturity Date or upon
acceleration as provided herein. Prior to the Maturity Date or acceleration,
unpaid and accrued interest on the outstanding principal balance of this Note
shall be due and payable quarterly on March 31, June 30, September 30 and
December 31 of each year; provided, however, that such day is a business day,
and if such day is not a business day, the quarterly interest payment shall be
due the next successive business day.
Section 3. Prepayment. This Note may be prepaid in part or in full at any
time without penalty; provided, however, prepayments shall be first applied to
accrued and unpaid interest and then to principal.
Section 4. Interest. The unpaid balance of this Note (exclusive of any past
due principal) shall bear interest at an annual rate of nine percent (9%). Ten
business days after the Maturity Date or acceleration as provided in this Note,
all past due principal and past due interest owed under this Note will bear
interest at an annual rate of twelve percent (12%). Accrued interest on the
unpaid principal of this Note shall be computed on the basis of a 365 or 366-day
year, as the case may be, for actual days elapsed. In no event, however, shall
such computation result in an amount of accrued interest that would exceed
accrued interest on the unpaid principal balance during the same period at the
Maximum Rate. Notwithstanding anything to the contrary, this Note is expressly
limited so that in no contingency or event whatsoever shall the amount paid or
agreed to be paid to the Payee exceed the Maximum Rate. If, from any
circumstances whatsoever, the Payee shall ever receive as interest an amount
that would exceed the Maximum Rate, such amount received that would be in excess
of the Maximum Rate shall be applied to the reduction of the unpaid principal
balance and not to the payment of interest, and if the principal amount of this
Note is paid in full, any remaining excess shall be paid to Maker, and in such
event, the Payee shall not be subject to any penalties provided by any laws for
contracting for, charging, taking, reserving or receiving interest in excess of
the highest lawful rate permissible under applicable law.
Section 5. Remedy. Upon the occurrence and during the continuation of an
Event of Default, Payee may, at its option, declare the entire unpaid principal
of this Note, and all accrued interest and other amounts payable hereunder,
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are expressly waived by Maker, and upon such
declaration, such amounts shall become and shall be immediately due and payable.
The Payee shall have all of the rights and remedies provided in the applicable
Uniform Commercial Code or in this Note or any other agreement between Maker and
in favor of the Payee, as well as those rights and remedies provided by any
other applicable law, rule or regulation. All rights and remedies of the Payee
are cumulative and may be exercised singly or concurrently. The exercise of any
right or remedy will not be a waiver of any other right or remedy. Failure to
exercise any right or remedy upon the occurrence of an Event of Default shall
not constitute a waiver of the right to exercise such right or remedy upon the
occurrence of a subsequent Event of Default.
Section 6. Right of Offset. The Payee shall have the right of offset
against amounts that may be due by the Payee now or in the future to Maker
against amounts due under this Note.
Section 7. Record of Outstanding Principal. The date and amount of each
repayment of principal outstanding under this Note shall be recorded by Payee in
its records. The aggregate unpaid principal balance so recorded by Payee shall
be the best evidence of the principal balance owing and unpaid under this Note;
Page 1 of 3
so recording any such balance shall not limit or otherwise affect the
obligations of Maker under this Note to repay the principal balance outstanding
and all accrued or accruing interest.
Section 8. Waiver. Maker and each surety, endorser, guarantor, and other
party now or subsequently liable for payment of this Note, severally waive
demand, presentment for payment, notice of dishonor, protest, notice of protest,
diligence in collecting or bringing suit against any party liable on this Note,
and further agree to any and all extensions, renewals, modifications, partial
payments, substitutions of evidence of indebtedness, and the taking or release
of any collateral with or without notice before or after demand by the Payee for
payment under this Note.
Section 9. Costs and Attorneys' Fees. In the event the Payee incurs costs
in collecting on this Note, this Note is placed in the hands of any attorney for
collection, suit is filed on this Note or if proceedings are had in bankruptcy,
receivership, reorganization, or other legal or judicial proceedings for the
collection, Maker and any guarantor jointly and severally agree to pay on demand
to the Payee all expenses and costs of collection, including, but not limited
to, attorneys' fees incurred in connection with any such collection, suit, or
proceeding, in addition to the principal and interest then due.
Section 10. Time of Essence. Time is of the essence with respect to all of
Maker's obligations and agreements under this Note.
Section 11. Jurisdiction and Venue. This Note shall be governed by and
construed in accordance with the domestic laws of the state of Texas, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the state of Texas or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the state of Texas. Maker
consents to jurisdiction in the courts located in Dallas, Texas.
Section 12. Notice. Any notice or demand required by this Note shall be
deemed to have been given and received on the earlier of (i) when the notice or
demand is actually received by the recipient or (ii) 72 hours after the notice
is deposited in the United States mail, certified or registered, with postage
prepaid, and addressed to the recipient. The address for giving notice or demand
under this Note (i) to the Payee shall be the place of payment specified in
Section 1 or such other place as the Payee may specify in writing to the Maker
and (ii) to the Maker shall be the address below the Maker's signature or such
other place as the Maker may specify in writing to the Payee.
Section 13. Successors and Assigns. All of the covenants, obligations,
promises and agreements contained in this Note made by Maker shall be binding
upon its successors and assigns; notwithstanding the foregoing, Maker shall not
assign this Note or its performance under this Note without the prior written
consent of the Payee.
Section 14. Definitions. For purposes of this Note, the following terms
shall have the following meanings:
(a) "Event of Default" shall mean the failure by Maker to make when
due a punctual payment of principal of, or interest on, this Note within
thirty (30) days following the date such amount becomes due and payable in
accordance with the terms of this Note.
(b) "Maker" shall mean Kronos Worldwide, Inc., a Delaware corporation.
(c) "Maturity Date" shall mean December 31, 2010.
(d) "Maximum Rate" shall mean the highest lawful rate permissible
under applicable law for the use, forbearance or detention of money.
(e) "Note" shall mean this Promissory Note.
Page 2 of 3
(f) "Payee" shall mean NL Industries, Inc., a New Jersey corporation,
or subsequent holder of this Note.
MAKER:
KRONOS WORLDWIDE, INC.
Robert D. Graham, Vice President
Address: Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
Page 3 of 3
KRONOS WORLDWIDE, INC.
2003 Long-Term Incentive Plan
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Section 1. Purpose. The purpose of this Plan is to advance the interests of
Kronos and its stockholders by providing incentives to certain Eligible Persons
who contribute significantly to the strategic and long-term performance
objectives and growth of the Company.
Section 2. Definitions. The following terms shall have the meaning
indicated:
(a) "Actual Value" has the meaning set forth in Section 9.
(b) "Associated Award" shall mean an Award granted concurrently or
subsequently in conjunction with another Award.
(c) "Award" shall mean an award of rights or options to an Eligible
Person under this Plan.
(d) "Award Period" has the meaning set forth in subsection 9(b).
(e) "Beneficiary" has the meaning set forth in Section 16.
(f) "Board" shall mean the board of directors of Kronos.
(g) "Code" shall mean the Internal Revenue Code of 1986, as it now
exists or may be amended from time to time, and the rules and regulations
promulgated thereunder, as they may exist or may be amended from time to
time.
(h) "Committee" shall mean a committee of the Board, if any,
designated by the Board to administer this Plan that is comprised of not
fewer than two directors and shall initially mean the Management,
Development & Compensation Committee of the Board. The membership of the
Committee or any successor committee (i) shall consist of "nonemployee
directors" (as defined in Rule 16b-3) and meet any other applicable
requirements so as to comply at all times with the applicable requirements
of Rule 16b-3, (ii) shall consist of "outside directors" (as defined in
Treasury Regulation ss.1.162-27(e)(3)(i) or any successor regulation) and
meet any other applicable requirements so as to comply at all times with
the applicable requirements of Section 162(m) and (iii) shall meet any
applicable requirements of any stock exchange or other market quotation
system on which Common Shares are listed. References to the Committee
hereunder shall include the Board or the Designated Administrator where
appropriate.
(i) "Company" shall mean Kronos and any parent or subsidiary of
Kronos.
(j) "Common Shares" shall mean shares of common stock, par value $0.01
per share, of Kronos and stock of any other class into which such shares
may thereafter be changed.
(k) "Designated Administrator" has the meaning set forth in Section 3.
(l) "Effective Date" shall mean the date the Board adopts this Plan
(which adoption date may be a date subsequent to the date of the actual
action taken by the Board if the Board action sets forth such subsequent
adoption date).
(m) "Eligible Person(s)" shall mean those persons who are key
employees of the Company or other key individuals who perform services for
the Company, including, without limitation, directors who are not employees
of the Company.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
it now exists or may be amended from time to time, and the rules
promulgated thereunder, as they may exist or may be amended from time to
time.
(o) "Fair Market Value" shall mean such value rounded up to the
nearest cent as determined by the Committee in accordance with applicable
law.
(p) "Incentive Stock Option" shall mean a Stock Option that is an
incentive stock option as defined in Section 422 of the Code. Incentive
Stock Options are subject, in part, to the terms, conditions and
restrictions described in Section 6.
(q) "Kronos" shall mean Kronos Worldwide, Inc., a Delaware
corporation.
(r) "Maximum Value" has the meaning set forth in subsection 9(a).
(s) "Nonqualified Stock Option" shall mean a Stock Option that is not
an incentive stock option as defined in Section 422 of the Code.
Nonqualified Stock Options are subject, in part, to the terms, conditions
and restrictions described in Section 6.
(t) "Other Kronos Securities" shall mean Kronos securities (which may
include, but need not be limited to, unbundled stock units or components
thereof, debentures, preferred stock, warrants, securities convertible into
Common Shares or other property) other than Common Shares.
(u) "Participant" shall mean an Eligible Person to whom an Award has
been granted under this Plan.
(v) "Performance Grant" shall mean an Award subject, in part, to the
terms, conditions and restrictions described in Section 9, pursuant to
which the recipient may become entitled to receive Common Shares, Other
Kronos Securities or any combination thereof, as determined by the
Committee.
(w) "Plan" shall mean this Kronos Worldwide, Inc. 2003 Long-Term
Incentive Plan.
(x) "Purchased Option" shall mean a Stock Option that is sold to an
Eligible Person at a price determined by the Committee. Purchase Options
are subject, in part, to the terms, conditions and restrictions described
in Section 6.
(y) "Restricted Period" has the meaning set forth in subsection 8(b).
(z) "Restricted Stock" shall mean an Award of Common Shares that are
issued subject, in part, to the terms, conditions and restrictions
described in Section 8.
(aa) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Exchange Act and any successor rule.
(bb) "Section 162(m)" shall mean ss.162(m) of the Code, any rules or
regulations promulgated thereunder, as they may exist or may be amended
from time to time, or any successor to such section.
(cc) "Stock Appreciation Right" shall mean an Award of a right to
receive (without payment to Kronos) cash, Common Shares, Other Kronos
Securities or property, or other forms of payment, or any combination
thereof, as determined by the Committee, based on the increase in the value
of the number of Common Shares specified in the Stock Appreciation Right.
Stock Appreciation Rights are subject, in part, to the terms, conditions
and restrictions described in Section 7.
(dd) "Stock Option" shall mean an Award of a right to purchase Common
Shares. The term Stock Option shall include Nonqualified Stock Options,
Incentive Stock Options and Purchased Options.
(ee) "Ten Percent Employee" shall mean an employee of the Company who
owns stock representing more than ten percent of the voting power of all
classes of stock of Kronos or any parent or subsidiary of Kronos.
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(ff) "Treasury Regulation" shall mean a final, proposed or temporary
regulation of the Department of Treasury under the Code and any successor
regulation.
Section 3. Administration. Unless the Board shall designate itself or a
Designated Administrator to administer this Plan, the Committee shall administer
this Plan. If at any time Rule 16b-3 so permits without adversely affecting the
ability of Awards to executive officers of Kronos to comply with the conditions
for Rule 16b-3 or Section 162(m), the Committee may delegate the administration
of this Plan and any of its power and authority in whole or in part, on such
terms and conditions, and to such person or persons as it may determine in its
discretion (a "Designated Administrator").
The Committee has all the powers vested in it by the terms of this Plan,
such powers to include exclusive authority to select the Eligible Persons to be
granted Awards under this Plan, to determine the type, size and terms of the
Award to be made to each Eligible Person selected, to modify the terms of any
Award that has been granted, to determine the time when Awards will be granted,
to establish performance objectives, to make any adjustments necessary or
desirable as a result of the granting of Awards to Eligible Persons located
outside the United States and to prescribe the form of the agreements embodying
Awards made under this Plan. The Committee is authorized to interpret this Plan
and the Awards granted under this Plan, to establish, amend and rescind any
rules and regulations relating to this Plan, and to make any other
determinations that it deems necessary or desirable for the administration of
this Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in this Plan or in any Award in the manner and to
the extent the Committee deems necessary or desirable to carry it into effect.
Any decision of the Committee in the interpretation and administration of this
Plan, as described herein, shall lie within its sole and absolute discretion and
shall be final, conclusive and binding on all parties concerned. The Committee
may act only by a majority of its members then serving, except that the members
thereof may authorize any one or more of their members or any officer of the
Company to execute and deliver documents or to take any other action on behalf
of the Committee with respect to Awards made or to be made to Participants.
No member of the Committee and no officer of the Company shall be liable
for anything done or omitted to be done by him, by any other member of the
Committee or by any officer of the Company in connection with the performance of
duties under this Plan, except for his own willful misconduct or as expressly
provided by statute. In addition to all other rights of indemnification and
reimbursement to which a member of the Committee and an officer of the Company
may be entitled, the Company shall indemnify and hold harmless each such member
or officer who was or is a party or is threatened to be made a party to any
threatened, pending or completed proceeding or suit in connection with the
performance of duties under this Plan against expenses (including reasonable
attorneys' fees), judgments, fines, liabilities, losses and amounts paid in
settlement actually and reasonably incurred by him in connection with such
proceeding or suit, except for his own willful misconduct or as expressly
provided otherwise by statute. Expenses (including reasonable attorneys' fees)
incurred by a such a member or officer in defending any such proceeding or suit
shall be paid by the Company in advance of the final disposition of such
proceeding or suit upon receipt of a written affirmation by such member or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification and a written undertaking by or on behalf of such
member or officer to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the Company as authorized in this
Section.
Section 4. Participation. Consistent with the purposes of this Plan, the
Committee shall have exclusive power to select the Eligible Persons who may
participate in this Plan and be granted Awards under this Plan. Eligible Persons
may be selected individually or by groups or categories, as determined by the
Committee in its discretion.
Section 5. Awards under this Plan.
(a) Types of Awards. Awards under this Plan may include, but need not
be limited to, one or more of the following types, either alone or in any
combination thereof: (i) Common Shares, (ii) Stock Options, (iii) Stock
Appreciation Rights, (iv) Restricted Stock, (v) Performance Grants and (vi)
any other type of Award deemed by the Committee in its discretion to be
consistent with the purposes of this Plan (including, but not limited to,
Awards of or options or similar rights granted with respect to unbundled
stock units or components thereof, and Awards to be made to Participants
who are foreign nationals or are employed or performing services outside
the United States).
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(b) Maximum Number of Shares that May be Issued. There may be issued
under this Plan (as Common Shares, Restricted Stock, through Performance
Grants, pursuant to the exercise of Stock Options or Stock Appreciation
Rights or in payment of or pursuant to the exercise of such other Awards as
the Committee, in its discretion, may determine) an aggregate of not more
than 150,000 Common Shares, subject to adjustment as provided in Section
15. No Eligible Person may receive Awards under this Plan for more than
50,000 Common Shares in any one fiscal year of Kronos, subject to
adjustment as provided in Section 15. Common Shares issued pursuant to this
Plan may be either authorized but unissued shares, treasury shares,
reacquired shares or any combination thereof. If any Common Shares issued
as Restricted Stock or otherwise subject to repurchase or forfeiture rights
are reacquired by the Company pursuant to such rights or, if any Award is
canceled, terminates or expires unexercised, any Common Shares that would
otherwise have been issuable pursuant thereto will be available for
issuance under new Awards.
(c) Rights with Respect to Common Shares and Other Securities. Except
as provided in subsection 8(c) with respect to Awards of Restricted Stock
and unless otherwise determined by the Committee in its discretion, a
Participant to whom an Award is made (and any person succeeding to such a
Participant's rights pursuant to this Plan) shall have no rights as a
stockholder with respect to any Common Shares or as a holder with respect
to other securities, if any, issuable pursuant to any such Award until the
date of the issuance of a stock certificate to him for such Common Shares
or other instrument of ownership, if any. Except as provided in Section 15,
no adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities, other
property or other forms of consideration, or any combination thereof) for
which the record date is prior to the date such stock certificate or other
instrument of ownership, if any, is issued. In all events, a Participant
with whom an Award agreement is made to issue Common Shares in the future,
shall have no rights as a stockholder with respect to Common Shares related
to such agreement until issuance to him of a stock certificate representing
such shares.
Section 6. Stock Options. The Committee may sell Purchased Options or grant
other Stock Options either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment thereafter; provided that an
Incentive Stock Option may be granted only to Eligible Persons who are employees
of the Company and have an Associated Award only to the extent that such
Associated Award does not disqualify the Incentive Stock Option's status as such
under the Code. Each Stock Option granted or sold under this Plan shall be
evidenced by an agreement in such form as the Committee shall prescribe from
time to time in accordance with this Plan and shall comply with the applicable
terms and conditions of this Section and this Plan, and with such other terms
and conditions, including, but not limited to, restrictions upon the Stock
Option or the Common Shares issuable upon exercise thereof, as the Committee, in
its discretion, shall establish.
(a) The exercise price of a Stock Option may be less than, equal to,
or greater than, the Fair Market Value of the Common Shares subject to such
Stock Option at the time the Stock Option is granted, as determined by the
Committee; provided, however, that in the case of an Incentive Stock Option
granted to an employee of the Company, the exercise price shall not be less
than the Fair Market Value of the Common Shares subject to such Stock
Option at the time the Stock Option is granted, or if granted to a Ten
Percent Employee, such exercise price shall not be less than 110% of such
Fair Market Value at the time the Stock Option is granted. In no event,
however, will the exercise price per share of a Stock Option be less than
the par value per share of a Common Share.
(b) The Committee shall determine the number of Common Shares to be
subject to each Stock Option. In the case of a Stock Option awarded in
conjunction with an Associated Award, the number of Common Shares subject
to an outstanding Stock Option may be reduced on an appropriate basis to
the extent that the Associated Award has been exercised, paid to or
otherwise received by the Participant, as determined by the Committee.
(c) Any Stock Option may be exercised during its term only at such
time or times and in such installments as the Committee may establish.
(d) A Stock Option shall not be exercisable:
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(i) in the case of any Incentive Stock Option granted to a Ten
Percent Employee, after the expiration of five years from the date it
is granted, and, in the case of any other Stock Option, after the
expiration of ten years from the date it is granted; and
(ii) unless payment in full is made for the shares being acquired
thereunder at the time of exercise as provided in subsection 6(i).
(e) The Committee shall determine in its discretion and specify in
each agreement embodying a Stock Option the effect, if any, the termination
of the Participant's employment with or performance of services for the
Company shall have on the exercisability of the Stock Option; provided,
however, that an Incentive Stock Option shall not be exercisable at a time
that is beyond the time an Incentive Stock Option may be exercised in order
to qualify as such under the Code.
(f) In the case of an Incentive Stock Option, the amount of the
aggregate Fair Market Value of Common Shares (determined at the time of
grant of the Stock Option) with respect to which incentive stock options
are exercisable for the first time by an employee of the Company during any
calendar year (under all such plans of his employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000.
(g) It is the intent of Kronos that Nonqualified Stock Options granted
under this Plan not be classified as Incentive Stock Options, that the
Incentive Stock Options granted under this Plan be consistent with and
contain or be deemed to contain all provisions required under Section 422
and the other appropriate provisions of the Code and any implementing
regulations (and any successor provisions thereof), and that any
ambiguities in construction shall be interpreted in order to effectuate
such intent.
(h) A Purchased Option may contain such additional terms not
inconsistent with this Plan, including but not limited to the circumstances
under which the purchase price of such Purchased Option may be returned to
the holder of the Purchased Option, as the Committee may determine in its
sole discretion.
(i) For purposes of payments made to exercise Stock Options, such
payment shall be made in such form (including, but not limited to, cash,
Common Shares, the surrender of another outstanding Award under this Plan
or any combination thereof) as the Committee may determine in its
discretion; provided, however, that for purposes of making such payment in
Common Shares, such shares shall be valued at their Fair Market Value on
the day of exercise and shall have been held by the Participant for a
period of at least six (6) months.
Section 7. Stock Appreciation Rights. The Committee may grant Stock
Appreciation Rights either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment thereafter. Each Award of Stock
Appreciation Rights granted under this Plan shall be evidenced by an agreement
in such form as the Committee shall prescribe from time to time in accordance
with this Plan and shall comply with the applicable terms and conditions of this
Section and this Plan, and with such other terms and conditions, including, but
not limited to, restrictions upon the Award of Stock Appreciation Rights or the
Common Shares issuable upon exercise thereof, as the Committee, in its
discretion, shall establish.
(a) The Committee shall determine the number of Common Shares to be
subject to each Award of Stock Appreciation Rights. In the case of an Award
of Stock Appreciation Rights awarded in conjunction with an Associated
Award, the number of Common Shares subject to an outstanding Award of Stock
Appreciation Rights may be reduced on an appropriate basis to the extent
that the Associated Award has been exercised, paid to or otherwise received
by the Participant, as determined by the Committee.
(b) The Award of Stock Appreciation Rights shall not be exercisable:
(i) unless the Associated Award, if any, is at the time
exercisable;
-5-
(ii) if the Associated Award is a Stock Option and the Fair
Market Value per share of the Common Shares on the exercise date does
not exceed the exercise price per share of such Stock Option; or
(iii) if the Associated Award is an Incentive Stock Option and
the exercise of the Award of Stock Appreciation Rights would
disqualify the Incentive Stock Option as such under the Code.
(c) The Committee shall determine in its discretion and specify in
each agreement embodying an Award of Stock Appreciation Rights the effect,
if any, the termination of the Participant's employment with or performance
of services for the Company shall have on the exercisability of the Award
of Stock Appreciation Rights.
(d) An Award of Stock Appreciation Rights shall entitle the holder to
exercise such Award or to surrender unexercised an Associated Award (or any
portion of such Associated Award) to Kronos and to receive from Kronos in
exchange thereof, without payment to Kronos, that number of Common Shares
having an aggregate value equal to (or, in the discretion of the Committee,
less than) the excess of the Fair Market Value of one share, at the time of
such exercise, over the exercise price, times the number of shares subject
to the Award or the Associated Award, or portion thereof, that is so
exercised or surrendered, as the case may be. The Committee shall be
entitled in its discretion to elect to settle the obligation arising out of
the exercise of a Stock Appreciation Right by the payment of cash or Other
Kronos Securities or property, or other forms of payment or any combination
thereof, as determined by the Committee, equal to the aggregate value of
the Common Shares it would otherwise be obligated to deliver. Any such
election by the Committee shall be made as soon as practicable after the
receipt by the Committee of written notice of the exercise of the Stock
Appreciation Right.
(e) A Stock Appreciation Right may provide that it shall be deemed to
have been exercised at the close of business on the business day preceding
the expiration date of the Stock Appreciation Right or of the related Stock
Option (or other Award), or such other date as specified by the Committee,
if at such time such Stock Appreciation Right has a positive value. Such
deemed exercise shall be settled or paid in the same manner as a regular
exercise thereof as provided in subsection 7(d) hereof.
Section 8. Restricted Stock. The Committee may grant Awards of Restricted
Stock either alone, or in conjunction with Associated Awards, either at the time
of grant or by amendment thereafter. Each Award of Restricted Stock under this
Plan shall be evidenced by an agreement in such form as the Committee shall
prescribe from time to time in accordance with this Plan and shall comply with
the applicable terms and conditions of this Section and this Plan, and with such
other terms and conditions as the Committee, in its discretion, shall establish.
(a) The Committee shall determine the number of Common Shares to be
issued to a Participant pursuant to the Award of Restricted Stock, and the
extent, if any, to which they shall be issued in exchange for cash, other
consideration, or both.
(b) Until the expiration of such period as the Committee shall
determine from the date on which the Award is granted and subject to such
other terms and conditions as the Committee in its discretion shall
establish (the "Restricted Period"), a Participant to whom an Award of
Restricted Stock is made shall be issued, but shall not be entitled to the
delivery of, a stock certificate representing the Common Shares subject to
such Award.
(c) Unless otherwise determined by the Committee in its discretion, a
Participant to whom an Award of Restricted Stock has been made (and any
person succeeding to such a participant's rights pursuant to this Plan)
shall have, after issuance of a certificate for the number of Common Shares
awarded and prior to the expiration of the Restricted Period, ownership of
such Common Shares, including the right to vote such Common Shares and to
receive dividends or other distributions made or paid with respect to such
Common Shares (provided that such Common Shares, and any new, additional or
different shares, or Other Kronos Securities or property, or other forms of
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consideration that the Participant may be entitled to receive with respect
to such Common Shares as a result of a stock split, stock dividend or any
other change in the corporation or capital structure of Kronos, shall be
subject to the restrictions hereinafter described as determined by the
Committee in its discretion), subject, however, to the options,
restrictions and limitations imposed thereon pursuant to this Plan.
(d) The Committee shall determine in its discretion and specify in
each agreement embodying an Award of Restricted Stock the effect, if any,
the termination of the Participant's employment with or performance of
services for the Company during the Restricted Period shall have on such
Award of Restricted Stock.
Section 9. Performance Grants. The Committee may grant Awards of
Performance Grants either alone, or in conjunction with Associated Awards,
either at the time of grant or by amendment thereafter. The Award of a
Performance Grant to a Participant will entitle him to receive a specified
amount determined by the Committee (the "Actual Value"), if the terms and
conditions specified in this Plan and in the Award are satisfied. Each Award of
a Performance Grant shall be subject to the applicable terms and conditions of
this Section and this Plan, and to such other terms and conditions, including
but not limited to, restrictions upon any Common Shares, Other Kronos Securities
or any combination thereof, issued with respect to the Performance Grant, as the
Committee, in its discretion, shall establish, and shall be embodied in an
agreement in such form and substance as is determined by the Committee.
(a) The Committee shall determine the value or range of values of a
Performance Grant to be awarded to each Participant selected for an Award
and whether or not such a Performance Grant is granted in conjunction with
an Associated Award. As determined by the Committee, the maximum value of
each Performance Grant (the "Maximum Value") shall be: (i) an amount fixed
by the Committee at the time the Award is made or amended thereafter, (ii)
an amount that varies from time to time based in whole or in part on the
then current value of the Common Shares, Other Kronos Securities or other
securities or property, or any combination thereof or (iii) an amount that
is determinable from criteria specified by the Committee. Performance
Grants may be issued in different classes or series having different names,
terms and conditions. In the case of a Performance Grant awarded in
conjunction with an Associated Award, the Performance Grant may be reduced
on an appropriate basis to the extent that the Associated Award has been
exercised, paid to or otherwise received by the Participant, as determined
by the Committee.
(b) The award period ("Award Period") related to any Performance Grant
shall be a period determined by the Committee. At the time each Award is
made, the Committee shall establish performance objectives to be attained
within the Award Period as the means of determining the Actual Value of
such a Performance Grant. The performance objectives shall be based on such
measure or measures of performance, which may include, but need not be
limited to, the performance of the Participant, the Company or one or more
of its divisions or units, or any combination of the foregoing, as the
Committee shall determine, and may be applied on an absolute basis or be
relative to industry or other indices or any combination thereof. The
Actual Value of a Performance Grant shall be equal to its Maximum Value
only if the performance objectives are attained in full, but the Committee
shall specify the manner in which the Actual Value of Performance Grants
shall be determined if the performance objectives are met in part. Such
performance measures, the Actual Value or the Maximum Value, or any
combination thereof, may be adjusted in any manner by the Committee in its
discretion at any time and from time to time during or as soon as
practicable after the Award Period, if it determines that such performance
measures, the Actual Value or the Maximum Value, or any combination
thereof, are not appropriate under the circumstances.
(c) The Committee shall determine in its discretion and specify in
each agreement embodying a Performance Grant the effect, if any, the
termination of the Participant's employment with or performance of services
for the Company during the Award Period shall have on such Performance
Grant.
(d) The Committee shall determine whether the conditions of a
Performance Grant have been met and, if so, shall ascertain the Actual
Value of the Performance Grant. If the Performance Grant has no Actual
Value, the Award and such Performance Grant shall be deemed to have been
canceled and the Associated Award, if any, may be canceled or permitted to
continue in effect in accordance with its terms. If the Performance Grant
has any Actual Value and:
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(i) was not awarded in conjunction with an Associated Award, the
Committee shall cause an amount equal to the Actual Value of the
Performance Grant earned by the Participant to be paid to him or his
permitted assignee or Beneficiary; or
(ii) was awarded in conjunction with an Associated Award, the
Committee shall determine, in accordance with criteria specified by
the Committee (A) to cancel the Performance Grant, in which event no
amount with respect thereto shall be paid to the Participant or his
permitted assignee or Beneficiary, and the Associated Award may be
permitted to continue in effect in accordance with its terms, (B) to
pay the Actual Value of the Performance Grant to the Participant or
his permitted assignee or Beneficiary as provided below, in which
event the Associated Award may be canceled or (C) to pay to the
Participant or his Beneficiary, the Actual Value of only a portion of
the Performance Grants, in which event all or a portion of the
Associated Award may be permitted to continue in effect in accordance
with its terms or be canceled, as determined by the Committee.
Such determination by the Committee shall be made as promptly as
practicable following the end of the Award Period or upon the earlier
termination of employment or performance of services, or at such other time or
times as the Committee shall determine, and shall be made pursuant to criteria
specified by the Committee.
(e) Payment of any amount with respect to the Performance Grants that
the Committee determines to pay as provided above shall be made by Kronos
as promptly as practicable after the end of the Award Period or at such
other time or times as the Committee shall determine, and may be made in
Common Shares, Other Kronos Securities or any combination thereof as
determined by the Committee in its discretion. Notwithstanding anything in
this Section to the contrary, the Committee may, in its discretion,
determine and pay out the Actual Value of the Performance Grants at any
time during the Award Period.
Section 10. Deferral of Compensation. The Committee shall determine whether
or not an Award shall be made in conjunction with the deferral of the
Participant's salary, bonus or other compensation, or any combination thereof,
and whether or not such deferred amounts may be:
(a) forfeited to the Company or to other Participants or any
combination thereof, under certain circumstances (which may include, but
need not be limited to, certain types of termination of employment or
performance of services for the Company);
(b) subject to increase or decrease in value based upon the attainment
of or failure to attain, respectively, certain performance measures; and/or
(c) credited with income equivalents (which may include, but need not
be limited to, interest, dividends or other rates of return) until the date
or dates of payment of the Award, if any.
Section 11. Deferred Payment of Awards. The Committee may specify that the
payment of all or any portion of Common Shares, Other Kronos Securities or any
combination thereof, under an Award shall be deferred until a later date.
Deferrals shall be for such periods or until the occurrence of such events, and
upon such terms, as the Committee shall determine in its discretion. Deferred
payments of Awards may be made by undertaking to make payment in the future
based upon the performance of certain investment equivalents (which may include,
but need not be limited to, government securities, Common Shares, other
securities, property or consideration, or any combination thereof), together
with such additional amounts of income equivalents (which may be compounded and
may include, but need not be limited to, interest, dividends or other rates of
return or any combination thereof) as may accrue thereon until the date or dates
of payment, such investment equivalents and such additional amounts of income
equivalents to be determined by the Committee in its discretion.
Section 12. Transferability of Awards. Except as may be approved by the
Committee, a Participant's rights and interest under this Plan or any Award may
not be assigned or transferred, hypothecated or encumbered in whole or in part
either directly or by operation of law or otherwise (except in the event of a
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Participant's death), including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner; provided,
however, that any Incentive Stock Option granted pursuant to this Plan shall not
be transferable other than by will or the laws of descent and distribution and
shall be exercisable during the Participant's lifetime only by him.
Section 13. Amendment or Substitution of Awards under this Plan. The terms
of any outstanding Award under this Plan may be amended or modified from time to
time by the Committee in its discretion in any manner that it deems appropriate
(including, but not limited to, acceleration of the date of exercise of any
Award and/or payments thereunder) if the Committee could grant such amended or
modified Award under the terms of this Plan at the time of such amendment or
modification; provided that no such amendment or modification shall adversely
affect in a material manner any right of a Participant under the Award without
his written consent, unless the Committee determines in its discretion that
there have occurred or are about to occur significant changes in the
Participant's position, duties or responsibilities, or significant changes in
economic, legislative, regulatory, tax, accounting or cost/benefit conditions
that are determined by the Committee in its discretion to have or to be expected
to have a substantial effect on the performance of the Company, or any
affiliate, division or department thereof, on this Plan or on any Award under
this Plan. The Committee may, in its discretion, permit holders of Awards under
this Plan to surrender outstanding Awards in order to exercise or realize the
rights under other Awards, or in exchange for the grant of new Awards, or
require holders of Awards to surrender outstanding Awards as a condition
precedent to the grant of new Awards under this Plan.
Section 14. Termination of a Participant. For all purposes under this Plan,
the Committee shall determine whether a Participant has terminated employment
with, or the performance of services for, the Company; provided, however, an
absence or leave approved by the Company, to the extent permitted by applicable
provisions of the Code, shall not be considered an interruption of employment or
performance of services for any purpose under this Plan.
Section 15. Dilution and Other Adjustments. In the event of any change in
the outstanding Common Shares by reason of any stock split, dividend, split-up,
split-off, spin-off, recapitalization, merger, consolidation, rights offering,
reorganization, combination or exchange of shares, a sale by Kronos of all or
substantially all of its assets, any distribution to stockholders other than a
normal cash dividend, or other extraordinary or unusual event, if the Committee
shall determine, in its discretion, that such change equitably requires an
adjustment in the terms of any Award or the number of Common Shares available
for Awards, such adjustment may be made by the Committee and shall be final,
conclusive and binding for all purposes of this Plan. Each adjustment made
pursuant to this Section shall be made with a view toward preserving the value
of the affected Award had prior to the event or transaction giving cause to such
adjustment.
In the event of the proposed dissolution or liquidation of Kronos, all
outstanding Awards shall terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Committee. In the event of a
proposed sale of all or substantially all of the assets of Kronos or the merger
of Kronos with or into another corporation, all restrictions on any outstanding
Awards shall lapse and Participants shall be entitled to the full benefit of all
such Awards immediately prior to the closing date of such sale or merger, unless
otherwise provided by the Committee.
Section 16. Designation of Beneficiary by Participant. A Participant may
name a beneficiary to receive any payment to which he may be entitled with
respect to any Award under this Plan in the event of his death, on a written
form to be provided by and filed with the Committee, and in a manner determined
by the Committee in its discretion (a "Beneficiary"). The Committee reserves the
right to review and approve Beneficiary designations. A Participant may change
his Beneficiary from time to time in the same manner, unless such Participant
has made an irrevocable designation. Any designation of a Beneficiary under this
Plan (to the extent it is valid and enforceable under applicable law) shall be
controlling over any other disposition, testamentary or otherwise, as determined
by the Committee in its discretion. If no designated Beneficiary survives the
Participant and is living on the date on which any amount becomes payable to
such a Participant's Beneficiary, such payment will be made to the legal
representatives of the Participant's estate, and the term "Beneficiary" as used
in this Plan shall be deemed to include such person or persons. If there are any
questions as to the legal right of any Beneficiary to receive a distribution
under this Plan, the Committee in its discretion may determine that the amount
in question be paid to the legal representatives of the estate of the
Participant, in which event the Company, the Board, the Committee, the
Designated Administrator (if any), and the members thereof, will have no further
liability to anyone with respect to such amount.
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Section 17. Miscellaneous Provisions.
(a) Any proceeds from Awards shall constitute general funds of Kronos.
(b) No fractional shares may be delivered under an Award, but in lieu
thereof a cash or other adjustment shall be made as determined by the
Committee in its discretion.
(c) No Eligible Person or other person shall have any claim or right
to be granted an Award under this Plan. Determinations made by the
Committee under this Plan need not be uniform and may be made selectively
among Eligible Persons under this Plan, whether or not such Eligible
Persons are similarly situated. Neither this Plan nor any action taken
hereunder shall be construed as giving any Eligible Person any right to
continue to be employed by or perform services for the Company, and the
right to terminate the employment of or performance of services by Eligible
Persons at any time and for any reason is specifically reserved.
(d) No Participant or other person shall have any right with respect
to this Plan, the Common Shares reserved for issuance under this Plan or in
any Award, contingent or otherwise, until written evidence of the Award
shall have been delivered to the recipient and all the terms, conditions
and provisions of this Plan and the Award applicable to such recipient (and
each person claiming under or through him) have been met.
(e) No Common Shares, Other Kronos Securities or property, other
securities or property or other forms of payment shall be issued hereunder
with respect to any Award unless counsel for Kronos shall be satisfied that
such issuance will be in compliance with applicable law and any applicable
rules of any stock exchange or other market quotation system on which
Common Shares are listed.
(f) It is the intent of Kronos that this Plan comply in all respects
with Rule 16b-3 and Section 162(m) with respect to Awards granted to
executive officers of Kronos, that any ambiguities or inconsistencies in
construction of this Plan be interpreted to give effect to such intention
and that if any provision of this Plan is found not to be in compliance
with Rule 16b-3 or Section 162(m), such provision shall be deemed null and
void with respect to Awards granted to executive officers of Kronos to the
extent required to permit such Awards to comply with Rule 16b-3 and Section
162(m). It is also the intent of Kronos that this Plan comply in all
respects with the provisions of the Code providing favorable treatment to
Incentive Stock Options, that any ambiguities or inconsistencies in
construction of this Plan be interpreted to give effect to such intention
and that if any provision of this Plan is found not to be in compliance
with the Incentive Stock Option provisions of the Code, such provision
shall be deemed null and void with respect to Incentive Stock Options
granted to employees of the Company to the extent required to permit such
Incentive Stock Options to receive favorable treatment under the Code.
(g) The Company shall have the right to deduct from any payment made
under this Plan any federal, state, local or foreign income or other taxes
required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of Kronos to issue Common Shares, Other Kronos
Securities or property, other securities or property, or other forms of
payment, or any combination thereof, upon exercise, settlement or payment
of any Award under this Plan, that the Participant (or any Beneficiary or
person entitled to act) pay to Kronos, upon its demand, such amount as may
be required by the Company for the purpose of satisfying any liability to
withhold federal, state, local or foreign income or other taxes. If the
amount requested is not paid, Kronos may refuse to issue Common Shares,
Other Kronos Securities or property, other securities or property, or other
forms of payment, or any combination thereof. Notwithstanding anything in
this Plan to the contrary, the Committee may, in its discretion, permit an
Eligible Person (or any Beneficiary or person entitled to act) to elect to
pay a portion or all of the amount requested by the Company for such taxes
with respect to such Award, at such time and in such manner as the
Committee shall deem to be appropriate (including, but not limited to, by
authorizing Kronos to withhold, or agreeing to surrender to Kronos on or
about the date such tax liability is determinable, Common Shares, Other
Kronos Securities or property, other securities or property, or other forms
of payment, or any combination thereof, owned by such person or a portion
of such forms of payment that would otherwise be distributed, or have been
distributed, as the case may be, pursuant to such Award to such person,
having a Fair Market Value equal to the amount of such taxes).
-10-
(h) The expenses of this Plan shall be borne by the Company; provided,
however, the Company may recover from a Participant or his Beneficiary,
heirs or assigns any and all damages, fees, expenses and costs incurred by
the Company arising out of any actions taken by a Participant in breach of
this Plan or any agreement evidencing such Participant's Award.
(i) This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Award under this Plan, and rights to
the payment of Awards shall be no greater than the rights of the Company's
general creditors.
(j) By accepting any Award or other benefit under this Plan, each
Participant and each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and ratification of,
and consent to, any action taken under this Plan by the Company, the Board,
the Committee or the Designated Administrator (if applicable). The grant of
any Award to a Participant is not evidence of any right to continued
employment or other relationship with the Company.
(k) The appropriate officers of the Company shall cause to be filed
any reports, returns or other information regarding Awards hereunder of any
Common Shares issued pursuant hereto as may be required by applicable law
and any applicable rules of any stock exchange or other market quotation
system on which Common Shares are listed.
(l) The validity, construction, interpretation, administration and
effect of this Plan, and of its rules and regulations, and rights relating
to this Plan and to Awards granted under this Plan, shall be governed by
the substantive laws, but not the choice of law rules, of the state of
Delaware.
(m) Records of the Company shall be conclusive for all purposes under
this Plan or any Award, unless determined by the Committee to be incorrect.
(n) If any provision of this Plan or any Award is held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect
the remaining provisions of this Plan or any Award, but such provision
shall be fully severable, and this Plan or Award, as applicable, shall be
construed and enforced as if the illegal or invalid provision had never
been included in this Plan or Award, as applicable.
(o) The terms of this Plan shall govern all Awards under this Plan and
in no event shall the Committee have the power to grant any Award under
this Plan that is contrary to any of the provisions of this Plan.
(p) For purposes of interpretation of this Plan, the masculine pronoun
includes the feminine and the singular includes the plural wherever
appropriate.
Section 18. Plan Amendment or Suspension. This Plan may be amended or
suspended in whole or in part at any time from time to time by the Board. No
amendment of this Plan shall adversely affect in a material manner any right of
any Participant with respect to any Award previously granted without such
Participant's written consent, except as permitted under Section 13.
Section 19. Plan Termination. This Plan shall terminate upon the earlier of
the following dates or events to occur:
(a) upon the adoption of a resolution of the Board terminating this
Plan; or
(b) the tenth anniversary of the Effective Date; provided, however,
that the Board may, prior to such date, extend the term of this Plan for an
additional period of up to five years for the grant of Awards other than
Incentive Stock Options. No termination of this Plan shall materially alter
or impair any of the rights or obligations of any person, without his
consent, under any Award previously granted under this Plan, except that
subsequent to termination of this Plan, the Committee may make amendments
or modifications permitted under Section 13.
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Section 20. Effective Date. This Plan shall be effective, and Awards may be
granted under this Plan, on or after the Effective Date; provided, however, if
this Plan is not approved by at least a majority of the votes cast by the
stockholders of Kronos at a meeting of stockholders at which a quorum is present
within one year after the Effective Date then, in such event, this Plan and all
Awards granted pursuant to this Plan shall be null and void.
ADOPTED BY THE BOARD: October __, 2003
APPROVED BY THE SOLE STOCKHOLDERS: October __, 2003
EFFECTIVE DATE: October __, 2003
EXECUTED to evidence this Kronos Worldwide, Inc. 2003 Long-Term Incentive
Plan adopted by the Board on October __, 2003 and the sole stockholder of Kronos
on October __, 2003.
KRONOS WORLDWIDE, INC.
By:
-----------------------------------------------
Robert D. Graham, Vice President,
General Counsel and Secretary
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Bayer Business Services [logo]
[handwritten:] Copies to UF, DR 08/11/03
Kronos Titan GmbH & Co. OHG
Attn: Mr. Volker Roth
Peschstrasse 5
51373 Leverkusen
Contract for services and shipments between Bayer AG and Kronos August 6, 2003
dated 1995-06-30
Dear Mr. Roth: Frank Froeschle
Attorney at Law
The agreement cited above was originally entered into by Bayer AG and Kronos
Titan GmbH/Kronos International, Inc. It is mutally agreed that since then the
Kronos Bayer AG Titan GmbH & Co. OHG, as the legal successor of Kronos Titan
GmbH, has assumed Bayer Business Services Kronos Titan GmbH, has assumed Kronos
Titan GmbH's rights and obligations as Law & Patents defined in that contract.
51368 Leverkusen
Germany
Both parties to the agreement envisage provisioning of Kronos on the basis of
individual contracts with the appropriate Bayer subsidiaries/Service entities. Tel. +49(214)30-8 11 84
Negotiations to that end are ongoing. Therefore, it is anticipated that both Fax +49(214)30-5 62 24
parties to the agreement will substitute relevant individual contracts in place of frank.froeschle
the existing contract prior to the expiration date mentioned in the agreement (of @BayerBBS.com
2011-12-31), thereby rescinding it. www.BayerBBS.com
----------------
Without regard to the above, you wrote us on 2003-07-02 to ask that we continue Board of Directors:
provisioning on the basis of the existing contract in any event, even if the Werner Wenning,
Kronos-Titan GmbH & Co. OHG should no longer be held by NL Industries, Inc. We Chairman
propose to accede to your request by amending the terms of the agreement as Klaus Kuhn
follows: Udo Oeis
Richard Pott
ss. 1 number 3 of the contract for services and shipments shall be worded as
follows:
Supervisory Board Chairman
Manfed Schneider
Corporate Headquarters:
Leverkusen
Cologne District Court
HRB 48248
[see original for filename]
"The obligations according to ss. 1 number 1 shall lapse in the event that
KRONOS undertakes the definitive shutdown of its manufacturing operations in
Leverkusen."
We are sending you two original copies of this letter. We ask you to indicate
your acceptance by signing both of them and returning one of the signed copies
to us.
Sincerely yours,
Bayer AG
[signature] [signature] Frank Froeschle Ferenc Eikel Legal Department BIS-V Key
Account Manager
Accepted: Accepted:
Date: 08/11/03 Date: 08/11/03
[signature] [signature]
Dr. Ulfert Fiand Dr. Ulfert Fiand
Volker Roth Volker Roth
Kronos Titan GmbH & Co. OHG Kronos International, Inc.
Exhibit 99.1
PRELIMINARY COPY DATED OCTOBER 3, 2003
SUBJECT TO COMPLETION OR AMENDMENT
INFORMATION STATEMENT
Dear NL Industries, Inc. Shareholder:
On _________, 2003, the Board of Directors of NL Industries, Inc. ("NL")
formally approved a distribution to NL shareholders of approximately 23.85
million shares of the common stock of Kronos Worldwide, Inc. ("Kronos"),
representing approximately 48.7% of the outstanding shares of common stock of
Kronos. Kronos is currently a wholly-owned subsidiary of NL. After the
distribution, NL and its affiliates will own approximately 92.5% of Kronos'
common stock and shareholders who are not affiliates of Kronos will own the
remaining 7.5%. As a holder of NL common stock, you will receive one share of
Kronos common stock for every two shares of NL common stock that you own at the
close of business on ________, 2003, the record date for the distribution. No
fractional shares of Kronos common stock will be issued. If you would otherwise
be entitled to a fractional share, you will receive a check for the cash value
thereof. We are sending you this information statement to describe the
distribution of Kronos stock.
A SHAREHOLDER VOTE IS NOT REQUIRED FOR THE DISTRIBUTION TO OCCUR. WE ARE
NOT ASKING YOU FOR A PROXY, AND WE REQUEST THAT YOU DO NOT SEND US A PROXY. In
addition, you do not need to pay any cash or other consideration for the shares
of Kronos common stock that you receive, nor will you be required to surrender
or exchange your existing shares of NL common stock, or take any other action in
order to receive Kronos common stock. The number of shares of NL common stock
that you currently own will not change as a result of the distribution. THE
DISTRIBUTION OF KRONOS COMMON STOCK WILL BE A TAXABLE DIVIDEND UNDER U.S. INCOME
TAX LAWS AND WILL GENERALLY BE TAXED AT RECENTLY ENACTED FAVORABLE DIVIDEND
RATES IF RECEIVED BY INDIVIDUAL SHAREHOLDERS.
There has been no trading market for Kronos common stock. However, we
expect that a limited market for Kronos common stock, commonly known as a "when
issued" trading market, will develop on or shortly before the record date for
the distribution. Kronos has applied for the listing of its common stock on the
New York Stock Exchange and expects that its common stock will be traded on such
exchange under the trading symbol "KRO."
This information statement contains information about the distribution and
about Kronos.
Sincerely,
Harold C. Simmons
Chairman of the Board and
Chief Executive Officer
As you review this information statement, you should carefully consider the
matters described in "Risk Factors" beginning on page 7 in evaluating the
benefits and risks of holding or disposing of shares of Kronos common stock that
you will receive in the distribution.
This information statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
information statement is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this information statement is __________, 2003, and it is being
mailed to NL shareholders on or about _______, 2003.
TABLE OF CONTENTS
Page
SUMMARY...........................................1
RISK FACTORS......................................7
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS.....15
THE DISTRIBUTION..................................16
Reasons for the Distribution.................16
Description of the Distribution..............17
Results of the Distribution..................19
Material U.S. Federal Income Tax
Consequences of the Distribution...........19
Listing and Trading of Kronos Common
Stock......................................20
RELATIONSHIPS AMONG NL, KRONOS
AND THEIR AFFILIATES AFTER THE DISTRIBUTION....22
Distribution Agreement.......................23
Intercorporate Services Agreement............25
Tax Sharing Agreement........................25
DIVIDEND POLICY...................................25
SELECTED FINANCIAL DATA...........................26
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................28
Critical Accounting Policies and Estimates...28
Results of Operations........................29
Liquidity and Capital Resources..............34
Quantitative and Qualitative Disclosures
About Market Risk..........................43
Non-GAAP Financial Measures..................45
BUSINESS..........................................46
General......................................46
Industry.....................................46
Products and Operations......................46
Manufacturing Process and Raw Materials......47
TiO2 Manufacturing Joint Venture.............48
Competition..................................48
Page
Research and Development.....................49
Patents and Trademarks.......................49
Foreign Operations...........................49
Customer Base and Annual Seasonality.........49
Employees....................................50
Regulatory and Environmental Matters.........50
Properties...................................51
Legal Proceedings............................51
MANAGEMENT........................................52
Directors and Officers.......................52
Board Committees.............................54
Compensation of Directors....................54
Compensation of Executive Officers...........54
Stock Option Exercises and Holdings..........56
Pension Plans................................56
Kronos 2003 Long-Term Incentive Plan.........57
Compensatory Arrangements....................57
Compensation Committee Interlocks and
Insider Participation......................57
PRINCIPAL STOCKHOLDERS............................58
Ownership of NL and Kronos Commo
Stock......................................58
Ownership of Valhi Common Stock..............60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....62
DESCRIPTION OF CAPITAL STOCK......................65
Common Stock.................................65
Preferred Stock..............................65
Provisions That May Have an Anti-Takeover
Effect.....................................66
Liability and Indemnification of Directors
and Officers...............................67
Stockholder Approval of Certain Business 68
Combinations...............................68
Transfer Agent...............................68
WHERE YOU CAN FIND MORE
INFORMATION....................................68
INDEX OF FINANCIAL STATEMENTS.....................F-1
i
SUMMARY
This summary highlights selected information from this information
statement but does not contain all details concerning the distribution of Kronos
common stock, including information that may be important to you. To better
understand the distribution, you should carefully read this entire document.
References in this document to NL mean NL Industries, Inc. and references to
Kronos mean Kronos Worldwide, Inc. The market data in this information
statement, including growth rates and information relating to our relative
position in the industry, are based on internal surveys, market research and
other publicly-available information. Although we believe that such third party
sources are reliable, we have not independently verified the accuracy or
completeness of this information.
Who We Are
NL, organized as a New Jersey corporation in 1891, conducts its primary
operations through Kronos, a Delaware corporation and one of its principal
wholly-owned subsidiaries. In September 2003, Kronos changed its name from
Kronos, Inc. to Kronos Worldwide, Inc. Kronos is the world's fifth largest
producer of titanium dioxide pigments, or TiO2, with an estimated 12% share of
worldwide TiO2 sales volume in 2002. TiO2 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 TiO2 for use in these applications.
Approximately one-half of Kronos' 2002 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. In 2002, Kronos had an estimated 18%
share of European TiO2 sales volume and an estimated 14% share of North American
TiO2 sales volume.
At _________, 2003, Valhi, Inc. ("Valhi") and Tremont LLC ("Tremont"), a
wholly owned subsidiary of Valhi, held an aggregate of approximately 85% of NL's
outstanding common stock. At _________, 2003, Contran Corporation ("Contran")
and its subsidiaries held approximately 90% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons is the Chairman
of the Board of each of Contran, Valhi and Tremont, the Chairman of the Board
and Chief Executive Officer of NL and, as of the distribution date, is
anticipated to be the Chairman of the Board and Chief Executive Officer of
Kronos, and may be deemed to control each such company. See "Principal
Stockholders."
The Distribution
NL will distribute approximately 23.85 million shares of Kronos common
stock, representing approximately 48.7% of the outstanding shares of Kronos
common stock, to its shareholders. After the distribution, NL and its affiliates
will own approximately 92.5% of Kronos' common stock and shareholders who are
not affiliates of Kronos will own the remaining 7.5%. Each NL shareholder as of
the close of business on ________, 2003, which is the record date for the
distribution, will receive one share of Kronos common stock for every two shares
of NL common stock held as of the record date. NL and Kronos expect that the
distribution will take place on or about _______, 2003, although completion of
the distribution is contingent upon the satisfaction of conditions described in
the distribution agreement. See "Relationships Among NL, Kronos and Their
Affiliates After the Distribution--Distribution Agreement." THE DISTRIBUTION OF
KRONOS COMMON STOCK WILL BE A TAXABLE DIVIDEND UNDER U.S. INCOME TAX LAWS AND
WILL GENERALLY BE TAXED AT RECENTLY ENACTED FAVORABLE DIVIDEND RATES IF RECEIVED
BY INDIVIDUAL SHAREHOLDERS.
In the distribution, shares of Kronos common stock shall initially be
distributed in book-entry form through Kronos' direct registration system. As
soon as practicable on or after the distribution date, NL's transfer agent will
provide NL's shareholders a statement showing such shareholder's ownership of
Kronos common stock along with a check for any fractional shares of Kronos
common stock to which the shareholder would otherwise be entitled. For NL common
stock held through a broker, bank or other nominee, the transfer agent will
1
credit the registered nominee's account with shares of Kronos common stock and
the dollar amount of any fractional shares of Kronos common stock to which the
holder is entitled, which in turn should be credited to the holder's account.
Following the distribution, any record holder of Kronos common stock may obtain
a physical stock certificate representing the holder's shares at no charge by
contacting Kronos' transfer agent.
Immediately prior to the distribution of Kronos common stock to NL
shareholders, Kronos will declare and pay a dividend to NL in the form of a $200
million long-term note payable to NL (the "Term Note"). The Term Note is
intended to provide NL with liquidity which should enable NL to, among other
things, explore diversification opportunities beyond the scope of its existing
assets and business. The terms of the Term Note are described in "Relationships
Among NL, Kronos and Their Affiliates After the Distribution--Distribution
Agreement--Term Note."
Questions and Answers About the Distribution and Kronos
Q: Why is the distribution being made?
A: The Board of Directors of NL has determined that the distribution is in the
best interests of NL and its shareholders. Through the recapitalization of
Kronos and distribution of approximately 48.7% of the outstanding shares of
Kronos common stock, NL believes significant benefits will be achieved.
First, it is believed that Kronos will be recognized in the TiO2 industry
and the financial markets as an entity whose business operations are
distinct from NL. Investors, suppliers, customers and employees worldwide
will be able to view and evaluate the Kronos business independently from NL
and its historical operations, and acquire a direct equity ownership
interest in Kronos. The separation and resulting public company recognition
should enhance the ability of Kronos to capitalize on the Kronos brand name
and to develop separate business relationships and strategies distinct from
operating as a wholly-owned subsidiary of NL, which is expected to enhance
Kronos' global competitive position.
Second, NL will retain a significant equity ownership interest in Kronos
and will continue to benefit from the affiliate group holding a controlling
interest in a public company serving the global TiO2 market. As Kronos
continues to grow and develop its TiO2 business separate from NL, the
potential long-term investment return to NL and its shareholders is
anticipated to increase. In 2002, Kronos International, Inc., a
wholly-owned subsidiary of Kronos ("KII"), issued (euro)285 million
aggregate principal amount of 8.875% Senior Secured Notes due 2009 (the
"KII Senior Notes"), primarily in the European financial market. Proceeds
of such financing were used in part to repay intercompany debt owed by KII
to Kronos, which in turn was used to repay intercompany debt owed by Kronos
to NL. NL used a portion of such proceeds to repay all of its third party
long-term indebtedness with the balance used for general corporate
purposes. As demonstrated by KII's successful public debt offering in 2002,
and the continuing market interest in such debt, as well as other recent
financing arrangements entered into by KII and its subsidiaries, it is
believed that the equity of Kronos will also be attractive to the financial
markets. It is further believed that with a separate public trading market,
the Kronos common stock retained by NL will provide significant increased
value to NL as a result of the anticipated favorable valuation of Kronos in
the financial markets. NL over time could sell a portion of its holdings of
Kronos common stock in the established trading market or more readily use
such stock as collateral for future credit arrangements if such additional
liquidity is determined to be beneficial to NL in the future.
Third, NL believes that the distribution will provide it with greater
opportunity for diversification of its holdings and business interests.
Through its future diversification efforts, NL may be able to provide
potentially more consistent and stable financial performance compared to
its current holdings. In order to accomplish a diversification of its
holdings, it is believed NL will require additional sources of liquidity.
As a result of the 2002 public debt offering by KII, and repayment of
intercompany debts, NL achieved additional liquidity while discharging all
of its long-term debt obligations. Through the recapitalization of Kronos,
NL will receive significant additional consideration through the payment of
a dividend in the form of the Term Note, which will provide NL with
2
additional financial resources and liquidity. The results of the 2002
financing activities and the dividend of the Term Note effectively converts
a portion of NL's investment in Kronos into a more liquid form (with
respect to the proceeds received from the 2002 financing activities) and
into a more senior position (with respect to the Term Note) that will also
provide additional liquidity to NL, which should enable NL to explore
diversification opportunities beyond the scope of its existing assets and
business. Additionally, the distribution of Kronos common stock should
enhance NL's ability to increase its liquidity through potential future
sales of a portion of its remaining holdings of Kronos common stock or the
use of Kronos common stock as collateral for any future credit
arrangements. Upon the completion of the distribution, NL will explore
diversification opportunities beyond the scope of its existing business,
which should reduce the risks inherent in continuing to conduct its
operations primarily in a single highly competitive industry that is
capital intensive and subject to significant historically cyclical demand
and pricing variations.
Q: Should I send in my NL stock certificates for exchange?
A: No, the distribution is not an exchange. Holders of NL common stock should
not send stock certificates to NL, Kronos or the distribution agent.
Q: Will NL shareholders vote on the distribution?
A: No. The vote of NL's shareholders is not required to complete the
distribution.
Q: How will fractional shares be treated?
A: On or after the distribution date, the distribution agent will aggregate
all fractional shares, sell them on the open market at prevailing market
prices and distribute the aggregate proceeds ratably to those NL
shareholders otherwise entitled to receive fractional shares. As a result,
each holder of NL common stock who would otherwise be entitled to receive a
fractional share will receive cash for those fractional shares less
applicable withholding taxes and a pro rata portion of the aggregate
brokerage commission payable in connection with the sale of the fractional
shares. The distribution agent will in its sole discretion, without
influence from Contran, Valhi, NL or Kronos, determine when, how, through
which broker-dealer and at what price to make its sales of the aggregated
fractional shares. Neither the distribution agent nor the broker-dealers it
uses will be affiliates of Contran, Valhi, NL or Kronos.
Q: What do shareholders need to do to participate in the distribution?
A: Nothing. The distribution agent will distribute shares of Kronos common
stock to NL shareholders without shareholders having to take any action.
Q: Why am I receiving this information statement?
A: This information statement is being provided solely to furnish information
to shareholders of NL who will receive shares of Kronos common stock in the
distribution. It is not, and is not intended to be construed as, an
inducement or encouragement to buy or sell any Kronos or NL securities. We
believe that the information contained in this information statement is
accurate as of the date set forth on the cover, and neither the mailing of
this information statement nor the delivery of Kronos common stock in the
distribution will create any implication to the contrary. Changes may occur
after that date, and we will not update the information contained herein
except in the normal course of public disclosure obligations and practices.
You should carefully review the information provided in this document.
Q: Will the distribution change the number of shares I own in NL?
A: No. The distribution will not change the number of NL common shares that
you own and after the distribution you will own the same percent of NL that
you owned immediately prior to the distribution. Immediately after the
distribution, NL's shareholders will continue to own their respective
proportionate interests in NL and Kronos. However, shareholders will now
own their interests in these businesses through their ownership of stock in
each of two public companies.
3
Q: Are there risks to continuing to own Kronos common stock following the
distribution?
A: Yes. The separation of Kronos from NL presents risks relating to Kronos'
common stock being publicly traded for the first time. Also, Kronos' Board
of Directors will make independent determinations regarding whether to pay
dividends and, if so, the amount and frequency of such dividend payments.
In addition, Kronos' business is subject to both general and specific risks
relating to its operations. Many of these risks are described in the "Risk
Factors" section beginning on page 8. We encourage you to read that section
carefully.
Q: Will Kronos common stock be publicly traded?
A: Kronos has applied for the listing of its common stock on the New York
Stock Exchange. Kronos expects that its common stock will be approved for
listing on the New York Stock Exchange under the trading symbol "KRO" and
that regular trading will begin on or about the distribution date.
Before regular trading begins, Kronos expects that a limited market for
shares of its common stock, commonly known as a "when issued" trading
market, will develop on or shortly before the record date for the
distribution. The term "when-issued" means that shares can be traded prior
to the time of the distribution. Even though when-issued trading may
develop, none of these trades will settle prior to the effective date of
the distribution, and if the distribution does not occur, all when-issued
trading will be null and void.
Q: Will the distribution affect the trading price of my NL common stock?
A: Probably. After the distribution, NL common stock will continue to be
listed on the NYSE under the symbol "NL," and the trading price of NL
common stock will likely be lower than the trading price immediately prior
to the distribution. Moreover, until the market has evaluated NL after the
distribution, the trading price of NL common stock may fluctuate
significantly.
Q: Will the distribution affect the amount of dividends that I receive on my
NL common stock, and does Kronos expect to pay a regular quarterly
dividend?
A: Yes. Prior to the distribution, NL's regular quarterly dividend was $.20
per NL share. NL's board of directors has declared a fourth quarter
dividend of $___ per NL share, payable on December ____, 2003 to NL
shareholders of record as of December ___, 2003. In addition, Kronos' board
of directors has declared a fourth quarter dividend of $___ per Kronos
share, payable on December ____, 2003 to Kronos shareholders of record as
of December ___, 2003. The payment of future dividends by NL and Kronos is
subject to the discretion of their respective boards of directors, and
various factors, including those discussed below on page 8 under "Risk
Factors--Various factors may hinder the declaration and payment of
dividends following the distribution."
Q: What if I want to sell my NL common stock or Kronos common stock after the
distribution?
A: Unless you are an affiliate of NL or Kronos, you are free to sell your
shares of NL common stock or Kronos common stock. However, you should
consult with your financial and tax advisors as to the implications of any
sales. Neither NL nor Kronos is making any recommendation on the purchase,
retention or sale of shares of NL common stock or Kronos common stock. If
you do decide to buy or sell any shares of NL or Kronos common stock, you
should make sure your broker, bank or other nominee understands whether you
want to buy or sell NL common stock, Kronos common stock or both.
Q: What is likely to be the initial trading price of Kronos common stock?
A: Prior to the distribution, there has been no trading market for Kronos
common stock and, as a result, it is difficult to predict the prices at
which Kronos common stock might trade. After the distribution, NL, Tremont
4
and Valhi will own a total of approximately 92.5% of the outstanding shares
of Kronos common stock and other stockholders will own approximately 7.5%
of the outstanding Kronos shares. Kronos expects that its common stock will
trade on the New York Stock Exchange. Neither NL nor Kronos can predict the
extent to which investors' interest will lead to a liquid trading market or
whether the market price of Kronos common stock will be volatile. The
combined trading prices of Kronos common stock and NL common stock after
the distribution may be less than, equal to or greater than the current
trading price of NL common stock. The market price of Kronos common stock
could fluctuate significantly for many reasons, including in response to
the risk factors listed in this information statement beginning on page 8
or for reasons unrelated to Kronos' specific performance. See "The
Distribution--Reasons for the Distribution" and "Risk Factors--Risks
Relating to the Distribution--There has been no prior market for Kronos
common stock, and it is difficult to predict the prices at which Kronos
common stock might trade."
Q: How will NL and Kronos be related after the distribution?
A: Immediately following the distribution, NL will own approximately 51.3% of
Kronos common stock and Valhi and Tremont will own a total of approximately
41.2% of Kronos common stock. In addition, a majority of the members of
Kronos' Board of Directors will also serve on NL's Board of Directors.
Kronos will also have the $200 million Term Note outstanding to NL. See
"Relationships Among NL, Kronos and Their Affiliates After the
Distribution."
Q: What are the conditions to the distribution becoming effective?
A: The completion of the distribution depends on the satisfaction of the
following conditions:
o the SEC has declared Kronos' registration statement on Form 10
effective, and there has been no suspension, withdrawal or stop-order
in effect with respect thereto and no proceeding for that purpose has
been instituted by the SEC;
o the New York Stock Exchange has approved the listing of the Kronos
common stock, subject to official notice of issuance;
o the actions and filings with regard to state securities and blue sky
laws of the United States (and any comparable law under any foreign
jurisdiction) have been taken and, where applicable, have become
effective or accepted;
o there has been no order, injunction or decree issued by any court or
agency of competent jurisdiction or other legal constraint or
prohibition preventing the consummation of the transactions
contemplated by the distribution agreement in effect;
o all material consents and governmental approvals necessary to
consummate the transactions contemplated by the distribution agreement
have been obtained and are in full force and effect;
o the NL Board of Directors is satisfied that the distribution is lawful
under applicable state and federal law;
o the NL Board of Directors has approved the distribution and not
abandoned or revoked the distribution at any time before the
completion of the distribution;
o Kronos' amended and restated certificate of incorporation and bylaws,
substantially as filed as exhibits to the Form 10 and described in
this information statement, are in effect;
o the various ancillary agreements described in this information
statement have been executed and delivered by the parties thereto,
including:
o the Tax Sharing Agreement among Contran, Valhi and Kronos; and
5
o the Intercorporate Services Agreement between Contran and Kronos;
o no other events or developments have occurred subsequent to the date
of the distribution agreement such that, in the judgment of NL, would
result in the distribution having an adverse effect on NL or on the
shareholders of NL; and
o the distribution agreement has not been terminated.
Q: Can NL decide not to complete the distribution?
A: Yes. NL may cancel the distribution for any reason at any time before it is
completed.
Q: Will I be taxed on the distribution under U.S. federal income tax laws?
A: Yes. NL shareholders who receive shares of Kronos common stock in the
distribution will receive a taxable dividend in an amount equal to the fair
market value of Kronos common stock received. For NL shareholders that are
not corporations, this amount will generally be taxable at favorable
dividend rates under recently enacted legislation. For shareholders that
are corporations, the distribution will be subject to the corporate
dividends received deduction but may result in a basis reduction to such
shareholder's NL stock and/or gain recognition. Each NL shareholder who
receives cash in lieu of a fractional Kronos share will be required to
recognize a short-term gain or loss equal to the difference between the
cash so received and the portion of the tax basis in Kronos common stock
that is allocable to the fractional share. You should consult your tax
advisor as to the particular tax consequences to you of the dividend. You
should also review the discussion under "The Distribution--Material U.S.
Federal Income Tax Consequences of the Distribution" that begins on page 19
of this information statement.
Q: Will NL or Kronos be taxed on the distribution under U.S. federal income
tax laws?
A: Yes. NL will be required to recognize a taxable gain equal to the
difference between the fair market value of the shares of Kronos common
stock distributed at the time of the distribution and NL's adjusted tax
basis in such stock, which tax basis is expected to be nominal at the time
of the distribution. NL currently intends to defer payment of the income
tax owed on such taxable gain, and instead NL currently intends to offset
against such payment the amount of any future income tax attributes. It is
anticipated that such future income tax attributes would eventually offset
the amount otherwise payable. There are no direct or indirect corporate tax
consequences to Kronos as a result of the distribution. You should also
review the discussion under "The Distribution--Material U.S. Federal Income
Tax Consequences of the Distribution."
Q: Will Contran still have voting control over, and will Harold C. Simmons
still be deemed to control, Kronos following the distribution?
A: Yes. As of the date of this information statement:
o Contran owned, directly or through subsidiaries, approximately 90% of
Valhi's outstanding common stock;
o Valhi and Tremont owned a total of approximately 85% of NL's
outstanding common stock;
o Valhi owned 100% of Tremont's outstanding membership interests; and
o NL owned 100% of Kronos' outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold
C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons is the
6
Chairman of the Board of each of Contran, Valhi and Tremont, the Chairman
of the Board and Chief Executive Officer of NL and, as of the distribution
date, is anticipated to be the Chairman of the Board and Chief Executive
Officer of Kronos, and may be deemed to control each such company.
After the distribution is completed, we expect that:
o Contran's ownership in Valhi will remain at 90%;
o Valhi's and Tremont's aggregate ownership in NL will remain at 85%;
and
o Valhi and Tremont will own a total of 41.2% of Kronos and NL will own
51.3% of Kronos.
Therefore, after the distribution is complete, Contran will still have
voting control over, and Mr. Simmons will still be deemed to control,
Kronos. Please read "Principal Stockholders" beginning on page 59 of this
information statement.
Q: Who is acting as the distribution agent?
A: EquiServe Trust Co., N.A.
150 Royall Street
Canton, Massachusetts 02021
Q: Where can NL shareholders get more information?
A: You may direct questions to Gregory M. Swalwell, Vice President, Finance,
NL Industries, Inc., Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240-2697, telephone number (972) 233-1700, or you may
contact the distribution agent for the distribution at (781) 575-2725.
RISK FACTORS
You should carefully consider each of the following risks, which Kronos
believes are the principal risks that it faces, and all of the other information
in this information statement. Some of the following risks relate to the
distribution of Kronos common stock to NL shareholders, including the impact of
such distribution on NL. Other risks relate to Kronos' business, the securities
markets and ownership of Kronos common stock. Kronos' business may also be
adversely affected by risks and uncertainties not presently known to Kronos or
that Kronos currently believes are immaterial. If any of the following risks and
uncertainties develop into actual events, this could have a material adverse
effect on Kronos' business, financial condition or results of operations. If
this occurs, the trading price of Kronos common stock could decline, and you may
lose all or part of your investment in Kronos, NL or both companies.
Risks Relating to the Distribution
Kronos' historical financial information may not be indicative of Kronos'
future performance.
Kronos' historical financial information included in this information
statement may not be indicative of its future performance and does not
necessarily reflect Kronos' financial position, results of operations and cash
flows during each of the periods presented if Kronos had outstanding publicly
traded equity securities. If Kronos had outstanding publicly traded equity
securities during all of 2002, Kronos estimates that its total expenses would
have been approximately $600,000 to $800,000 higher than those reflected in its
historical consolidated financial statements. The increase in expenses includes,
without limitation, increased public company compliance costs, audit and legal
7
expenses and accounting and payroll costs. The foregoing estimate of higher
expenses is not necessarily an accurate measure of what Kronos' expenses would
have been in 2002 or will be in the future. Kronos' actual expenses could be
higher or lower. The costs that Kronos actually incurs in the future will depend
on the market for these services when they are actually purchased and the size
and nature of Kronos' future operations. The financial information included in
this information statement does not reflect any changes that may occur in
Kronos' financial condition and operations as a result of the distribution.
There has been no prior market for Kronos common stock, and it is difficult
to predict the prices at which Kronos common stock might trade.
Prior to the distribution, there has been no trading market for Kronos
common stock. Immediately after the distribution, NL, Tremont and Valhi will own
a total of approximately 92.5% of the outstanding shares of Kronos common stock
and the other stockholders will own approximately 7.5% of the outstanding Kronos
shares. Kronos expects that its common stock will trade on the New York Stock
Exchange. Neither NL nor Kronos can predict the extent to which investors'
interest will lead to a liquid trading market or whether the market price of
Kronos common stock will be volatile. While it is expected that a limited market
for Kronos common stock, commonly known as a "when issued" trading market, will
develop on or shortly before the record date for the distribution, until Kronos
common stock is fully distributed and an orderly trading market develops, the
prices at which trading in Kronos common stock occurs may fluctuate
significantly. The term "when-issued" means that shares can be traded prior to
the time of the distribution. Even though when-issued trading may develop, none
of these trades will settle prior to the effective date of the distribution. See
"The Distribution--Listing and Trading of Kronos Common Stock." Neither NL nor
Kronos can provide any assurance as to an appropriate value or initial trading
price for Kronos common stock. Determining the proper price of any equity
security is very subjective and different investors will have different opinions
regarding price and will apply varying pricing methodologies. The combined
trading prices of Kronos common stock and NL common stock after the distribution
may be less than, equal to or greater than the current trading price of NL
common stock. The prices at which shares of Kronos common stock trade will be
determined based on the composite of pricing expectations of all market
participants and may be influenced by many factors, including, among others,
Kronos' performance and prospects, quarter to quarter variations in Kronos'
actual or anticipated financial results or those of other companies in the
industries or the markets that Kronos serves, investor perception of Kronos and
the TiO2 industry, the depth and liquidity of the market for Kronos common
stock, Kronos' business and the industry in which it operates, Kronos' dividend
policy, general financial and other market conditions, domestic and
international economic conditions, and the impact of factors described in this
"Risk Factors" section. In addition, the stock market in general has experienced
extreme price and volume fluctuations that have affected the market price of
many stocks that have often been unrelated or disproportionate to the operating
performance of these companies. See "The Distribution--Reasons for the
Distribution" and "--Listing and Trading of Kronos Common Stock."
The trading price of NL common stock will likely decline after the
distribution.
After the distribution, NL common stock will continue to be listed for
trading on the New York Stock Exchange under the symbol "NL." As a result of the
distribution, absent other action, the trading price of NL common stock
immediately following the distribution will likely be lower than the trading
price of NL common stock immediately prior to the distribution. The prices at
which shares of NL common stock will trade after the distribution may be
influenced by many factors, including, among others, NL's performance and
prospects, the success of its diversification efforts, quarter to quarter
variations in NL's actual or anticipated future results or those of other
companies in the industries or markets that NL serves, investor perceptions of
NL and the TiO2 industry, the depth and liquidity of the market for NL's common
stock, NL's business and the industry in which it operates, NL's dividend
policy, general financial and other market conditions, domestic and
international conditions, the cyclicality of the TiO2 industry (as discussed
below), global economic and political conditions, global productive capacity,
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), the ultimate outcome of NL's
pending or possible future litigation and the outcome of tax controversies.
8
Significant sales of Kronos common stock following the distribution, or the
perception that such sales might occur, could depress the market price of Kronos
common stock.
Approximately 3.6 million shares of Kronos common stock will be eligible
for immediate resale in the public market. Any sale of significant amounts of
Kronos shares in the public market as a percentage of the total number of
outstanding shares of Kronos common stock held by non-affiliates, or the
perception that such sales might occur, whether as a result of the distribution
or otherwise, could depress the market price of Kronos common stock. Neither NL
nor Kronos is able to predict whether significant amounts of Kronos common stock
will be sold in the open market following the distribution. See "The
Distribution--Listing and Trading of Kronos Common Stock."
Various agreements relating to the distribution contain indemnification and
payment obligations for NL and Kronos that neither party may be able to satisfy,
which could result in increased expenses and liabilities for NL and Kronos.
The distribution agreement between Kronos and NL and the tax sharing
agreement among Contran, Valhi and Kronos allocate responsibility among the
parties to the agreements for various liabilities and obligations. The
distribution agreement provides that each party will indemnify the other against
claims arising out of the distribution agreement and claims arising out of their
respective businesses before and after the distribution. The tax sharing
agreement provides that each party will indemnify the others with respect to
certain taxes attributable to their respective businesses arising before or
after the distribution. In addition, under the existing tax sharing agreements
between NL and Valhi and between NL and Kronos, each party has agreed to
continue to indemnify the other with respect to the taxes attributable to their
respective businesses, whether arising before or after the distribution.
However, the availability of such indemnities will depend upon the future
financial strength of NL, Contran, Valhi and Kronos. NL, Contran, Valhi or
Kronos may not be in a financial position to fund such indemnities if they
should arise, which could result in increased expenses and liabilities for one
or any of them. See "Relationships Among NL, Kronos and Their Affiliates After
the Distribution."
Some provisions may discourage a third party from acquiring control of
Kronos.
It could be difficult for a potential bidder to acquire Kronos because NL,
Tremont and Valhi together will own approximately 92.5% of Kronos common stock
after the distribution. In addition, Kronos' amended and restated certificate of
incorporation and bylaws contain provisions that may discourage takeover
attempts. In particular, these documents permit Kronos' Board of Directors to
issue, without stockholder approval, preferred stock with such terms as the
Board may determine. The ownership of Kronos common stock by its affiliates and
these provisions are likely to increase the cost or difficulty for a third party
to acquire control of Kronos or may discourage acquisition bids altogether. See
"Principal Stockholders" and "Description of Capital Stock--Provisions That May
Have an Anti-Takeover Effect."
Risks Related to Kronos' Business
Demand for and prices of Kronos' products are cyclical and Kronos may
experience prolonged depressed market conditions for its products, which may
adversely affect its financial condition and results of operations.
Substantially all of Kronos' revenue is attributable to sales of TiO2.
Pricing within the global TiO2 industry over the long term is cyclical, and
changes in industry economic conditions, especially in Western industrialized
nations, can significantly impact Kronos' earnings and operating cash flows.
Kronos' average TiO2 selling price on a billing currency basis (which excludes
the effect of foreign currency translation) increased from the preceding quarter
during each of the third and fourth quarters of 2002 and the first quarter of
2003, reversing the downward trend in prices that began in the first quarter of
2001 and continued through the first quarter of 2002. Kronos' average TiO2
9
selling prices in the second quarter of 2003 were flat compared to the first
quarter of 2003. Industry-wide demand for TiO2 strengthened throughout 2002,
with full year demand estimated as 9% higher than the previous year. This is
believed to have been the result of economic growth and restocking of customer
inventory levels. Volume demand in 2003 is expected to increase moderately over
2002 levels. Kronos cannot guarantee that it will not be affected by any
existing or future cyclical changes or that such conditions will not be
sustained or further aggravated by anticipated or unanticipated changes in
economic conditions or other events.
The demand for TiO2 during a given year is also subject to annual seasonal
fluctuations. TiO2 sales are generally higher in the first half of the year than
in the second half of the year due in part to the increase in paint production
in the spring to meet the spring and summer painting season demand.
Kronos sells its products in a mature and highly competitive industry and
faces price pressure in the markets in which it operates.
The global markets in which Kronos operates its business are highly
competitive. Competition is based on a number of factors, such as price, product
quality and service. Some of Kronos' competitors may be able to drive down
prices for Kronos' products because they have costs that are lower than Kronos'.
In addition, some of Kronos' competitors' financial, technological and other
resources may be greater than Kronos', and such competitors may be better able
to withstand changes in market conditions. Kronos' competitors may be able to
respond more quickly than Kronos can to new or emerging technologies and changes
in customer requirements. Further, consolidation of Kronos' competitors or
customers in any of the industries in which Kronos competes may have an adverse
effect on Kronos. The occurrence of any of these events could have a material
adverse effect on Kronos' business, financial condition and results of
operations or cash flows.
Kronos is subject to many environmental and safety regulations that may
result in unanticipated costs or liabilities.
Kronos is 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. Kronos may incur substantial costs,
including fines, damages and criminal penalties or civil sanctions, or
experience interruptions in its operations for actual or alleged violations or
compliance requirements arising under environmental laws. Kronos' operations
could result in violations under environmental laws, including spills or other
releases of hazardous substances to the environment. Some of Kronos' operating
facilities are in densely populated urban areas or in industrial areas adjacent
to other operating facilities. In the event of a catastrophic incident, Kronos
could incur material costs as a result of addressing such an event and in
implementing measures to prevent such incidents. Given the nature of Kronos'
business, violations of environmental laws may result in restrictions imposed on
Kronos' 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 Kronos' business, financial condition, results of
operations or cash flows.
In addition, Kronos could incur significant expenditures to comply with
existing or future environmental laws. Costs 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 Kronos' operations. Kronos cannot, therefore, assure you that
costs beyond those currently anticipated will not be required under existing and
future environmental laws.
Kronos has a limited number of suppliers for some of its raw materials,
which could negatively affect it.
Kronos has a limited number of suppliers for some of its raw materials. 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 2002, Kronos 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, Kronos could suffer reduced
supplies or incur increased prices for its raw materials.
NL and its affiliates may have conflicts of interest with Kronos, and these
conflicts could adversely affect Kronos' business.
After the distribution, NL, Valhi and Tremont will own approximately 92.5%
of the outstanding shares of Kronos common stock and approximately 92.5% of the
voting power of Kronos. For so long as NL and its affiliates retain their
10
ownership of Kronos shares, they will have the power to influence Kronos'
business strategy, including decisions relating to the pursuit of transactions
and commercial opportunities. In addition, as of the distribution date, although
each of Kronos and NL will have independent non-employee directors serving on
their respective boards of directors, it is anticipated that a majority of the
members of NL's Board of Directors will also serve on Kronos' Board of
Directors. Certain executive officers of NL also serve as executive officers of
Kronos. See "Management." Furthermore, under intercorporate service agreements
between Contran and Kronos, Contran will provide certain management, financial
and administrative services to Kronos on a fee basis. These circumstances could
create potential conflicts of interest when Kronos' directors and management are
faced with decisions that could have different implications for NL and Kronos.
Examples of these types of decisions might include the resolution of disputes
arising out of the agreements governing the relationship between NL and Kronos
following the distribution, the issuance of additional securities, Kronos'
payment of dividends, the pursuit of specific business opportunities available
to Kronos or NL or other circumstances in which Kronos or NL may have adverse
interests. Also, the appearance of conflicts, even if such conflicts do not
materialize, might adversely affect the public's perception of Kronos following
the distribution. No specific procedures are in place that govern the treatment
of transactions among Kronos and related entities, although such entities may
implement specific procedures as appropriate for particular transactions. In
addition, under applicable principles of law, in the absence of stockholder
ratification or approval by directors who may be deemed disinterested,
transactions involving contracts among companies under common control must be
fair to all companies involved. Furthermore, directors of companies owe
fiduciary duties of good faith and fair dealing to all stockholders of the
companies for which they serve. See "Relationships Among NL, Kronos and Their
Affiliates After the Distribution" and "Certain Relationships and Related
Transactions." Both Kronos' and NL's Board of Directors will include
non-employee directors. It is anticipated that at least one such non-employee
director on each company's board of directors will not serve on the other
company's board, and it is currently anticipated that these non-employee
directors will resolve any conflicts of interests that may arise between Kronos
and NL.
Kronos could be adversely affected if NL suffers adverse consequences from
environmental and other claims.
Kronos is currently wholly-owned by NL, and after the distribution will be
owned approximately 51.3% by NL. NL has been named as a defendant, potentially
responsible party ("PRP"), or both, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act, and similar state laws in approximately 70 governmental
and private actions associated with waste disposal sites, mining locations and
facilities currently or previously owned, operated or used by NL or its
subsidiaries, or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. NL is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising out of the sale in the
United States of lead pigments used in the manufacture of paint decades ago. To
NL's knowledge, none of the lead pigment claims have resulted in a judgment or
settlement in favor of any claimant since these claims first arose approximately
seventeen years ago.
Neither Kronos nor its subsidiaries have ever been subject to any of these
environmental, lead pigment or other claims against NL. Neither Kronos nor NL
believes that there is any basis for the assertion of any such claims against
Kronos. Nevertheless, judgments against NL could have indirect adverse
consequences for Kronos. Such events could impose economic hardships on NL,
which in turn could make future financings, including bank borrowings, more
difficult for Kronos and its subsidiaries and also could adversely affect
Kronos' customers' perceptions of Kronos as an affiliate of NL. In addition,
judgments against NL might force NL to divest its remaining equity ownership of
Kronos to raise cash, which could result in a change of control of Kronos or
depress the market price of Kronos common stock.
Kronos' business may be adversely affected by international operations and
fluctuations in currency exchange rates.
Kronos conducts a significant portion of its business in several
jurisdictions outside of the United States and is subject to risks normally
11
associated with international operations. These risks include the impact of such
operations on the prices that Kronos receives for its products and the need to
convert currencies that Kronos may receive for some of its products into
currencies required to pay some of its debt, or into currencies in which Kronos
purchases certain raw materials or pays 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.
If Kronos' patents are declared invalid or its trade secrets become known
to competitors, Kronos' and NL's ability to compete may be adversely affected.
Protection of Kronos' proprietary processes, apparatuses and other
technology is important to its business. Consequently, Kronos relies on judicial
enforcement for protection of its patents, and there can be no assurance that
any of Kronos' patents will not be challenged, invalidated, circumvented or
rendered unenforceable. Furthermore, if any pending patent application filed by
Kronos does not result in an issued patent, or if patents are issued to Kronos,
but such patents do not provide meaningful protection of Kronos' intellectual
property, then the use of any such intellectual property by Kronos' competitors
could have a material adverse effect on Kronos' business, financial condition,
results of operations or cash flows. Additionally, Kronos' competitors or other
third parties may obtain patents that restrict or preclude Kronos' ability to
lawfully produce or sell its products in a competitive manner, which could have
a material adverse effect on Kronos' business, financial condition, results of
operations or cash flows.
Kronos also relies on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain its
competitive position. Although it is Kronos' practice to enter into
confidentiality agreements to protect its intellectual property, because these
confidentiality agreements may be breached, such agreements may not provide
sufficient protection for Kronos' 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 Kronos' patents or confidentiality agreements to
protect its processes, apparatuses, technology, trade secrets or proprietary
know-how could have a material adverse effect on Kronos' business, financial
condition, results of operations or cash flows. Because NL has a perpetual
license to use Kronos' proprietary processes, apparatuses and other technology
in its business, any failure by Kronos to protect its processes, apparatuses,
technology, trade secrets or proprietary know-how could have a material adverse
effect on NL's business, financial condition, results of operations or cash
flows.
Kronos' leverage may impair its financial condition.
Kronos currently has, and after the distribution will continue to have, a
significant amount of debt. As of June 30, 2003, after giving effect to Kronos'
$200 million dividend to NL in the form of the Term Note, Kronos' total
consolidated debt would be $561 million, consisting of the following:
o (euro)285 million ($326 million) of the KII Senior Notes;
o (euro)30 million ($34 million) outstanding under KII's subsidiaries'
revolving credit facility;
o $200 million under the Term Note payable to NL, the terms of which are
described below under "Relationships Among NL, Kronos and Their
Affiliates After the Distribution--Distribution Agreement--Term Note";
and
o $1 million of other debt.
Subject to specified limitations, the indenture governing the KII Senior
Notes permits KII and its subsidiaries to incur additional debt. In addition, as
12
of June 30, 2003, KII's subsidiaries had unused borrowing availability of the
equivalent of approximately $55 million ((euro)48 million) under their credit
facility, and certain of Kronos' U.S. subsidiaries had approximately $45 million
available under their credit facility.
Kronos' current and future level of debt could have important consequences
to you, including:
o increasing Kronos' vulnerability to adverse general economic and
industry conditions;
o requiring that a substantial portion of Kronos' cash flow from
operations be used for the payment of interest on its debt, including
the Term Note due to NL, therefore reducing its ability to use its
cash flow to fund working capital, capital expenditures, acquisitions,
dividends and general corporate requirements;
o limiting Kronos' ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and general
corporate requirements;
o limiting Kronos' flexibility in planning for, or reacting to, changes
in its business and the industry in which it operates; and
o placing Kronos at a competitive disadvantage relative to other less
leveraged competitors.
Kronos' ability to generate sufficient cash to meet its debt service and
operating needs depends on many factors, some of which are beyond Kronos'
control.
Kronos' ability to make payments on and refinance its debt and to fund
planned capital expenditures depends on its future ability to generate cash
flow. To some extent, this ability is subject to general economic, financial,
competitive, legislative and regulatory and other factors that are beyond
Kronos' control. In addition, Kronos' ability to borrow funds under its
subsidiaries' 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 Kronos' subsidiaries' credit
facility. Kronos cannot assure you that its business will generate cash flow
from operations or that it will have adequate access to credit facilities in
amounts sufficient to enable Kronos to pay its debt or to fund other liquidity
needs. As a result, Kronos may need to refinance all or a portion of its debt
before maturity, and it is likely that Kronos will need to refinance all or a
portion of its debt on maturity. KII's subsidiaries' three-year credit facility
and Kronos' U.S. subsidiaries' three-year credit facility both mature in 2005.
Kronos cannot assure you that it will be able to refinance any of its debt on
favorable terms, if at all. Any inability to generate sufficient cash flow or
refinance Kronos' debt on favorable terms could have a material adverse effect
on its financial condition.
Various factors may hinder the declaration and payment of dividends
following the distribution.
The payment of dividends is subject to the discretion of Kronos' Board of
Directors, and various factors may cause Kronos to determine not to pay
dividends. Such factors include Kronos' financial position, results of
operations, capital requirements and liquidity, any loan or other agreement
restrictions, governmental requirements and such other factors as Kronos' Board
of Directors may consider relevant. Kronos' assets consist primarily of
investments in its operating subsidiaries. Kronos' cash flow and its ability to
pay dividends depend upon cash dividends and distributions or other transfers
from its subsidiaries. In addition, any payment of dividends, distributions,
loans or advances by Kronos' subsidiaries to Kronos 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 Kronos' subsidiaries operate,
and any restrictions imposed by the current and future debt instruments of
Kronos' subsidiaries. Such payments to Kronos by its subsidiaries are contingent
upon its subsidiaries' earnings. See "Dividend Policy."
13
Covenant restrictions may limit Kronos' ability to operate its business.
Kronos and its subsidiaries are subject to obligations under various
financing arrangements that contain, among other things, covenants that may
restrict Kronos' ability to finance future operations or capital needs or to
engage in other business activities. These covenants include, among other
things, restrictions on Kronos' and its subsidiaries' ability 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 its assets; and
o create liens on its assets.
In addition, these financing arrangements require Kronos' subsidiaries to
maintain specified financial ratios and satisfy certain financial tests, which
may require that action be taken to reduce debt or to act in a manner contrary
to Kronos' long-term business objectives. Events beyond Kronos' control,
including changes in general business and economic conditions, may affect
Kronos' ability to meet those financial ratios and satisfy certain financial
covenants. Kronos cannot assure you that it 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 one or more of these credit facilities
and any acceleration of debt obligations under the European subsidiaries' credit
facility may result in a default under the indenture governing the KII Senior
Notes. If an event of default under KII's subsidiaries' credit facility occurs,
the lenders could elect to declare all amounts outstanding thereunder, together
with accrued interest, to be immediately due and payable.
14
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained in this information statement that are not
historical facts, including, but not limited to, statements found in the section
entitled "Risk Factors," are forward-looking statements that represent
management's beliefs and assumptions based on currently available information.
Forward-looking statements include the information concerning Kronos' possible
or assumed future results of operations, business strategies, need for
financing, competitive position, potential growth opportunities, potential
operating performance improvements, ability to retain and recruit personnel,
benefits resulting from Kronos' distribution from NL, the effects of competition
and the effects of future legislation or regulations. Forward-looking statements
include all statements that are not historical facts and can be identified by
the use of forward-looking terminology such as the words "believes," "intends,"
"may," "will," "should," "anticipates," "expects," "could," or comparable
terminology or by discussions of strategy or trends. Although Kronos believes
that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve 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 information
statement. While it is not possible to identify all factors, Kronos continues to
face many risks and uncertainties including, but not limited to, the cyclicality
of the titanium dioxide industry, global economic and political conditions,
global productive capacity, 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), the ultimate
outcome of NL's pending or possible future lead pigment litigation and
legislative developments related to the lead pigment litigation and the outcome
of other litigation and tax controversies. 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. NL and Kronos disclaim any intention or obligation to
update publicly or revise such statements whether as a result of new
information, future events or otherwise.
The risk factors discussed in "Risk Factors" could cause Kronos' results to
differ materially from those expressed in forward-looking statements. There may
also be other risks and uncertainties that Kronos is unable to predict at this
time or that Kronos does not now expect to have a material adverse impact on its
business.
15
THE DISTRIBUTION
Reasons for the Distribution
The Board of Directors of NL has determined that the distribution is in the
best interests of NL and its shareholders. Through the recapitalization of
Kronos and distribution of approximately 48.7% of the outstanding shares of
Kronos common stock, NL believes significant benefits will be achieved.
First, it is believed that Kronos will be recognized in the TiO2 industry
and the financial markets as an entity whose business operations are distinct
from NL. Investors, suppliers, customers and employees worldwide will be able to
view and evaluate the Kronos business independently from NL and its historical
operations, and acquire a direct equity ownership interest in Kronos. The
separation and resulting public company recognition should enhance the ability
of Kronos to capitalize on the Kronos brand name and to develop separate
business relationships and strategies distinct from operating as a wholly-owned
subsidiary of NL, which is expected to enhance Kronos' global competitive
position.
Second, NL will retain a significant equity ownership interest in Kronos
and will continue to benefit from the affiliate group holding a controlling
interest in a public company serving the global TiO2 market. As Kronos continues
to grow and develop its TiO2 business separate from NL, the potential long-term
investment return to NL and its shareholders is anticipated to increase. In
2002, KII issued (euro)285 million aggregate principal amount of the KII Senior
Notes, primarily in the European financial market. Proceeds of such financing
were used in part to repay intercompany debt owed by KII to Kronos, which in
turn was used to repay intercompany debt owed by Kronos to NL. NL used a portion
of such proceeds to repay all of its third party long-term indebtedness with the
balance used for general corporate purposes. As demonstrated by KII's successful
public debt offering in 2002, and the continuing market interest in such debt,
as well as other recent financing arrangements entered into by KII and its
subsidiaries, it is believed that the equity of Kronos will also be attractive
to the financial markets. It is further believed that with a separate public
trading market, the Kronos common stock retained by NL will provide significant
increased value to NL as a result of the anticipated favorable valuation of
Kronos in the financial markets. NL over time could sell a portion of its
holdings of Kronos common stock in the established trading market or more
readily use such stock as collateral for future credit arrangements if such
additional liquidity is determined to be beneficial to NL in the future.
Third, NL believes that the distribution will provide it with greater
opportunity for diversification of its holdings and business interests. Through
its future diversification efforts, NL may be able to provide potentially more
consistent and stable financial performance compared to its current holdings. In
order to accomplish a diversification of its holdings, it is believed NL will
require additional sources of liquidity. As a result of the 2002 public debt
offering by KII, and repayment of intercompany debts, NL achieved additional
liquidity while discharging all of its long-term debt obligations. Through the
recapitalization of Kronos, NL will receive significant additional consideration
through the payment of a dividend in the form of the Term Note, which will
provide NL with additional financial resources and liquidity. The results of the
2002 financing activities and the dividend of the Term Note effectively converts
a portion of NL's investment in Kronos into a more liquid form (with respect to
the proceeds received from the 2002 financing activities) and into a more senior
position (with respect to the Term Note) that will also provide additional
liquidity to NL, which should, among other things, enable NL to explore
diversification opportunities beyond the scope of its existing assets and
business. Additionally, the distribution of Kronos common stock should enhance
NL's ability to increase its liquidity through potential future sales of a
portion of its remaining holdings of Kronos common stock or the use of Kronos
common stock as collateral for any future credit arrangements. Upon the
completion of the distribution, NL will explore diversification opportunities
beyond the scope of its existing business, which should reduce the risks
inherent in continuing to conduct its operations primarily in a single highly
competitive industry that is capital intensive and subject to significant
historically cyclical demand and pricing variations.
Prior to the distribution, there has been no trading market for Kronos
common stock. After the distribution, NL, Tremont and Valhi will own a total of
approximately 92.5% of the outstanding shares of Kronos common stock and the
other stockholders will own approximately 7.5% of the outstanding Kronos shares.
16
Kronos expects that its common stock will trade on the New York Stock Exchange.
Neither NL nor Kronos can predict the extent to which investors' interest will
lead to a liquid trading market or whether the market price of Kronos common
stock will be volatile or provide any assurance as to an appropriate value or
initial trading price for Kronos common stock. Determining the proper price of
any equity security is very subjective and different investors will have
different opinions regarding price and will apply varying pricing methodologies.
The combined trading prices of Kronos common stock and NL common stock after the
distribution may be less than, equal to or greater than the current trading
price of NL common stock. The prices at which shares of Kronos common stock
trade will be determined based on the composite of pricing expectations of all
market participants and may be influenced by many factors, including, among
others, Kronos' performance and prospects, quarter to quarter variations in
Kronos' actual or anticipated financial results or those of other companies in
the industries or the markets that Kronos serves, investor perception of Kronos
and the TiO2 industry, the depth and liquidity of the market for Kronos common
stock, Kronos' business and the industry in which it operates, Kronos' dividend
policy, general financial and other market conditions, domestic and
international economic conditions, and the impact of factors described in the
"Risk Factors" section of this information statement. In addition, the stock
market in general has experienced extreme price and volume fluctuations that
have affected the market price of many stocks and that have often been unrelated
or disproportionate to the operating performance of these companies. See "Risk
Factors--Risks Relating to the Distribution--There has been no prior market for
Kronos common stock, and it is difficult to predict the prices at which Kronos
common stock might trade" and " The Distribution--Listing and Trading of Kronos
Common Stock."
Description of the Distribution
The following diagram illustrates the current ownership structure of Kronos
(ownership is 100% unless otherwise noted).
[graph inserted here which shows (i) Valhi and Tremont's 84.6% aggregate
ownership in NL, (ii) other stockholders 15.4% ownership of NL and (iii) NL's
100% ownership of Kronos]
(a) Includes 63.2% held by Valhi and 21.4% held by Tremont, a wholly-owned
subsidiary of Valhi.
The distribution will be accomplished by NL issuing approximately 23.85
million shares of Kronos common stock, representing approximately 48.7% of the
outstanding shares of Kronos common stock, to its shareholders. After the
distribution, NL and its affiliates will own approximately 92.5% of Kronos'
common stock and shareholders who are not affiliates of Kronos will own the
remaining 7.5%. The following diagram illustrates the expected effect of the
distribution on the ownership structure of Kronos (ownership is 100% unless
otherwise noted).
17
[graph inserted here which shows (i) Valhi and Tremont's 84.6% aggregate
ownership in NL, (ii) other stockholders 15.4% ownership of NL, (iii) NL's 51.3%
ownership of Kronos, (iv) Valhi and Tremont's 41.2% aggregate ownership of
Kronos and (v) other stockholders 7.5% ownership of Kronos]
(a) Includes 63.2% held by Valhi and 21.4% held by Tremont, a wholly-owned
subsidiary of Valhi.
(b) Includes 30.8% held by Valhi and 10.4% held by Tremont, a wholly-owned
subsidiary of Valhi.
On _________, 2003, the Board of Directors of NL formally approved the
distribution. Each NL shareholder as of the close of business on __________,
2003, which is the record date for the distribution, will receive one share of
Kronos common stock for every two shares of NL common stock held as of the
record date. NL and Kronos expect that the distribution will take place on or
about _________, 2003, although completion of the distribution is contingent
upon the satisfaction of conditions described in the distribution agreement. See
"Relationships Among NL, Kronos and Their Affiliates After the Distribution."
In determining the structure and appropriateness of the distribution, the
NL Board, together with management, considered various legal and structural
considerations, including the financial position of Kronos and NL prior to and
after the distribution. The NL Board also considered the desirability for the
distribution initially to result in there being outstanding approximately the
same number of shares of Kronos common stock as the current number of
outstanding shares of NL common stock. The NL Board also considered standards of
the New York Stock Exchange as well as a desirable trading price for Kronos
common stock. Based on the estimated number of holders of NL common stock, the
NL Board concluded that a one-for-two distribution ratio should satisfy the
listing requirements of the New York Stock Exchange.
In the distribution, shares of Kronos common stock shall initially be
distributed in book-entry form through Kronos' direct registration system. As
soon as practicable on or after the distribution date, NL's transfer agent will
provide NL's shareholders a statement showing such shareholder's ownership of
Kronos common stock along with a check for any fractional shares of Kronos
common stock to which the shareholder would otherwise be entitled. For NL common
stock held through a broker, bank or other nominee, the transfer agent will
credit the registered nominee's account with shares of Kronos common stock and
the dollar amount of any fractional shares of Kronos common stock to which the
holder is entitled, which in turn should be credited to the holder's account.
Following the distribution, any record holder of Kronos common stock may obtain
a physical stock certificate representing the holder's shares at no charge by
contacting Kronos' transfer agent. See "Description of Capital Stock."
NL will not distribute any fractional shares of Kronos common stock as part
of the distribution. Instead, on or after the distribution date, the
distribution agent will aggregate all fractional shares, sell them on the open
market at prevailing market prices and distribute the aggregate proceeds less
applicable taxes and a pro rata portion of the aggregate brokerage commission
payable in connection with the sale of the fractional shares ratably to those NL
shareholders otherwise entitled to fractional shares. See "--Material U.S.
Federal Income Tax Consequences of the Distribution" for a discussion of the
United States federal income tax treatment of proceeds from fractional share
interests. The distribution agent will in its sole discretion, without influence
from Contran, Valhi, NL or Kronos, determine when, how, through which
18
broker-dealer and at what price to make its sales of the aggregated fractional
shares. Neither the distribution agent nor the broker-dealers it uses will be
affiliates of Contran, Valhi, NL or Kronos. None of NL, Kronos or the
distribution agent can guarantee any minimum sale price for the fractional
shares of Kronos common stock. Neither NL nor Kronos will pay any interest on
the proceeds from the sale of aggregated fractional shares. Neither NL, Kronos
nor any of their affiliates will receive any of the proceeds from the sale of
fractional shares.
No vote of NL shareholders is required or sought in connection with the
distribution, and NL shareholders will have no appraisal or dissenters' rights
in connection with the distribution.
No NL shareholder will be required to pay cash or other consideration for
any shares of Kronos common stock received in the distribution, or to surrender
or exchange shares of NL common stock.
Results of the Distribution
After the distribution, Kronos will be a separate public company, owned
approximately 92.5% in the aggregate by NL, Tremont and Valhi. As a result of
the distribution, Kronos expects to have approximately 6,000 holders of record
and approximately 48.9 million shares of Kronos common stock outstanding, based
on the number of NL record shareholders and the distribution ratio and the
number of outstanding shares of NL common stock as of the close of business on
__________, 2003. The actual number of shares of Kronos common stock to be
distributed will be determined as of the record date. The distribution will not
affect the number of outstanding shares of NL common stock or the rights of NL
shareholders.
Material U.S. Federal Income Tax Consequences of the Distribution
General
The following is a summary description of the material federal income tax
consequences of the distribution. This summary is not intended as a complete
description of all of the tax consequences of the distribution and does not
discuss tax consequences under the laws of state, local or foreign governments
or any other jurisdiction other than the federal income tax laws of the United
States. Moreover, the following discussion may not apply to particular
categories of holders subject to special tax treatment under the federal income
tax laws, including, without limitation, insurance companies, financial
institutions, broker-dealers, estates, trusts, tax-exempt organizations, real
estate investment trusts, regulated investment companies, non-United States
holders, or persons that will hold their shares of Kronos common stock as a
position in a straddle, as part of a synthetic security or hedge, or as part of
a conversion transaction or other integrated investment, other than a capital
asset. This summary does not include a description of any alternative minimum
tax consequences that may be applicable to the receipt of Kronos shares pursuant
to the distribution. This summary assumes that you hold your shares of Kronos
common stock as a capital asset within the meaning of section 1221 of the
Internal Revenue Code of 1986, as amended, or the "Code." In this regard,
special rules not discussed in this summary may apply to some of NL's
shareholders.
The following discussion is based on currently existing provisions of the
Code, existing, proposed and temporary Treasury Department regulations
promulgated under the Code and current administrative rulings and court
decisions. All of the foregoing are subject to change, which may or may not be
retroactive, and any of these changes could affect the validity of the following
discussion.
Please consult your tax advisor as to the particular tax consequences to
you of the distribution described herein, including the applicability and effect
of any state, local or foreign tax laws, and the possible effects of changes in
applicable tax laws.
Consequences of the Distribution
Each shareholder of NL receiving shares of Kronos common stock in the
distribution generally will be treated as if the shareholder received a taxable
distribution in an amount equal to the fair market value of Kronos common stock
received. Since the amount of the distribution will not exceed NL's current and
accumulated earnings and profits, the distribution will be a dividend. The
taxation of the dividend to a NL shareholder will depend on whether the
shareholder is a corporation. If the shareholder is a corporation, such amount
19
will be taxable as ordinary income, subject to the corporate dividends received
deduction. However, for such shareholder, if the distribution is treated as an
"extraordinary dividend" pursuant to Code section 1059, then such shareholder
may be required to reduce its basis in its NL stock and/or recognize gain up to
the amount of the dividends received deduction claimed on the distribution. A
shareholder that is a corporation should consult its tax advisor to determine
whether the distribution will be treated as an extraordinary dividend to the
shareholder. If the shareholder is not a corporation, under recently enacted
legislation, such amount will generally be taxable at the more favorable
dividend rate (15% in most cases) if the shareholder has held its NL stock for
more than 60 days during the 120-day period beginning 60 days before the
ex-dividend date. Otherwise, such amount will be taxable as ordinary income. The
favorable dividend rate applies only with respect to dividends that the
non-corporate shareholder does not treat as investment income under section
163(d)(4)(B) of the Code.
Each shareholder's initial tax basis in the Kronos common stock received by
the shareholder will be equal to the fair market value of such stock at the time
of the distribution.
Each shareholder who receives cash as a result of the sale of fractional
shares of Kronos stock by the distribution agent will be treated as if such
fractional share had been received by the shareholder as part of the
distribution and then sold by the shareholder. Accordingly, the shareholder will
recognize short-term gain or loss equal to the difference between the cash so
received and the portion of the tax basis in Kronos stock that is allocable to
the fractional share.
NL will be required to recognize taxable gain or loss equal to the
difference between the fair market value of the Kronos common stock distributed
at the time of the distribution and NL's adjusted tax basis in such stock, which
tax basis is expected to be nominal at the time of the distribution. NL
currently intends to defer payment of the income tax owed on such taxable gain,
and instead NL currently intends to offset against such payment the amount of
any future income tax attributes. It is anticipated that such future income tax
attributes would eventually offset the amount otherwise payable. There are no
direct or indirect corporate tax consequences to Kronos as a result of the
distribution.
Back-Up Withholding Requirements
NL is required to withhold federal income tax at a rate of 30% with respect
to payments such as dividends, interest or proceeds from the sale of stock made
to (a) persons who do not have a social security number or taxpayer
identification number, (b) persons that the IRS has determined have a history of
evading federal income tax or (c) persons who have refused to furnish NL with
information sufficient to enable it to comply with its applicable federal income
tax information reporting obligations. Such withholding is known as back-up
withholding. Back-up withholding is not an additional tax and may be refunded
(or credited against the shareholder's U.S. federal income tax liability, if
any), provided that required information is furnished to NL. United States
information reporting requirements and back-up withholding may apply to NL
shareholders and Kronos stockholders with respect to dividends paid on, and
proceeds from the taxable sale, exchange or other disposition of, NL or Kronos
common stock unless the holder:
o is a corporation or comes within certain other exempt categories, and,
when required, demonstrates these facts; or
o provides a correct taxpayer identification number, certifies that
there has been no loss of exemption from back-up withholding and
otherwise complies with applicable requirements of the back-up
withholding rules.
You may be subject to penalties imposed by the IRS if you do not supply NL
with your correct taxpayer identification number. You should consult your tax
advisor as to your qualification for exemption from back-up withholding and the
procedure for obtaining such an exemption. If information-reporting requirements
apply to you, the amount of dividends paid with respect to your shares will be
reported annually to the IRS and to you.
Listing and Trading of Kronos Common Stock
There has been no public market for Kronos common stock. An active trading
market may not develop or be sustained in the future. However, Kronos expects
20
that a limited market for shares of Kronos common stock, commonly known as a
"when issued" trading market, will develop on or shortly before the record date
for the distribution. The term "when-issued" means that shares can be traded
prior to the time of the distribution of the shares. Even though when-issued
trading may develop, none of these trades would settle prior to the effective
date of the distribution, and if the distribution does not occur, all
when-issued trading will be null and void. Kronos has applied for the listing of
its common stock on the New York Stock Exchange under the trading symbol "KRO"
and believes that Kronos common stock will be acceptable to the New York Stock
Exchange for listing. Beginning on the first New York Stock Exchange trading day
after the distribution, Kronos expects that its common stock will trade on a
"regular" basis. The term "regular" refers to trading after a security has been
issued and typically involves a transaction that settles on the third full
business day following the date of a transaction.
Prior to the distribution, there has been no trading market for Kronos
common stock. After the distribution, NL, Tremont and Valhi will own a total of
approximately 92.5% of the outstanding shares of Kronos common stock and the
other stockholders will own approximately 7.5% of the outstanding Kronos shares.
Kronos expects that its common stock will trade on the New York Stock Exchange
and in the over-the-counter market in the United States. Neither NL nor Kronos
can predict the extent to which investors' interest will lead to a liquid
trading market or whether the market price of Kronos common stock will be
volatile. While it is expected that a limited market for Kronos common stock,
commonly known as a "when issued" trading market, will develop near the record
date, until Kronos common stock is fully distributed and an orderly trading
market develops, the prices at which trading in Kronos common stock occurs may
fluctuate significantly. Neither NL nor Kronos can provide any assurance as to
an appropriate value or initial trading price for Kronos common stock.
Determining the proper price of any equity security is very subjective and
different investors will have different opinions regarding price and will apply
varying pricing methodologies. The combined trading prices of Kronos common
stock and NL common stock after the distribution may be less than, equal to or
greater than the current trading price of NL common stock. The prices at which
shares of Kronos common stock trade will be determined based on the composite of
pricing expectations of all market participants and may be influenced by many
factors, including, among others, Kronos' performance and prospects, quarter to
quarter variations in Kronos' actual or anticipated financial results or those
of other companies in the industries or the markets that Kronos serves, investor
perception of Kronos and the TiO2 industry, the depth and liquidity of the
market for Kronos common stock, Kronos' business and the industry in which it
operates, Kronos' dividend policy, general financial and other market
conditions, domestic and international economic conditions, and the impact of
factors described in the "Risk Factors" section of this information statement.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that have affected the market price of many stocks and that
have often been unrelated or disproportionate to the operating performance of
these companies. See "Risk Factors--There has been no prior market for Kronos
common stock, and it is difficult to predict the prices at which Kronos common
stock might trade."
Approximately 3.6 million shares of Kronos common stock that will be
distributed to NL shareholders will be eligible for immediate resale. In
transactions similar to the distribution, it is not unusual for a significant
redistribution of shares to occur during the first few weeks or even months
following completion of the transaction because of the differing objectives and
strategies of investors who acquire shares of Kronos common stock in the
transaction. Kronos is not able to predict whether significant amounts of its
common stock will be sold in the open market following the distribution or what
effect these sales may have on prices at which Kronos common stock may trade.
Any sale of significant amounts of Kronos common stock in the public market as a
percentage of the total number of outstanding shares of Kronos common stock held
by non-affiliates, or the perception that such sales might occur, whether as a
result of the distribution or otherwise, could depress the market price of
Kronos common stock.
Shares of Kronos common stock received in the distribution by "affiliates"
(as defined under Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act")) will not be freely transferable. Persons who can be
considered Kronos' affiliates after the distribution generally include
individuals or entities that directly, or indirectly through one or more
intermediaries, control, are controlled by, or are under common control with,
Kronos, and include some of Kronos' officers and directors. Affiliates of Kronos
may only sell common stock received in the distribution:
o under a registration statement that the Securities and Exchange
Commission (the "SEC") has declared effective under the Securities
Act; or
21
o under an exemption from registration under the Securities Act, such as
the exemption afforded by SEC Rule 144, which, among other
requirements, limits sales by affiliates based on the average
four-week trading volume or 1% of the outstanding common stock.
NL expects that its common stock will meet the continued listing standards
of the New York Stock Exchange and that its common stock will continue to trade
on a regular basis under the symbol "NL" following the distribution. NL common
stock may also trade on a when-issued basis, reflecting an assumed
post-distribution value for NL common stock. When-issued trading in NL common
stock, if available, could last from on or about the record date through the
effective date of the distribution. If when-issued trading in NL common stock is
available, NL shareholders may trade their existing NL common stock prior to the
effective date of the distribution in either the when-issued market or in the
regular market for NL common stock. If a shareholder trades in the when-issued
market, it will have no obligation to transfer to a purchaser of NL common stock
the Kronos common stock such shareholder receives in the distribution. If a
shareholder trades in the regular market, the shares of NL common stock traded
after the record date will be accompanied by due bills representing the Kronos
common stock to be distributed in the distribution. If when-issued trading in NL
common stock is not available, the NL common stock will only trade in the
regular market during the period from the record date through the effective date
of the distribution.
If a when-issued market for NL common stock develops, an additional listing
for NL common stock will appear on the New York Stock Exchange. Differences may
exist between the combined value of when-issued Kronos common stock plus
when-issued NL common stock and the price of NL common stock during this period.
Until the market has fully analyzed the operations of NL without the operations
of Kronos, the prices at which NL common stock trades may fluctuate
significantly.
You should consider consulting your financial and tax advisors prior to
making any decision with respect to the purchase, retention or sale of shares of
NL common stock or Kronos common stock. Neither NL nor Kronos makes
recommendations on the purchase, retention or sale of your shares of NL common
stock or Kronos common stock.
RELATIONSHIPS AMONG NL, KRONOS AND THEIR AFFILIATES AFTER THE DISTRIBUTION
This section of the information statement summarizes certain material
agreements, including certain intercorporate services, indemnification, tax and
other matters, relating to the distribution between NL, Kronos and their
affiliates that will govern the ongoing relationships after the distribution.
Additional or modified agreements, arrangements and transactions may be entered
into among NL, Kronos and their affiliated entities after the distribution.
Kronos' business consists of the businesses previously conducted by the Kronos
subsidiary of NL. On an overall basis, Kronos' business will constitute
substantially the same business as that previously conducted by the Kronos
subsidiary of NL. You should also read the agreements, forms of which have been
filed as exhibits to the registration statement on Form 10 of which this
information statement forms a part.
22
Distribution Agreement
The distribution agreement provides that the following conditions must be
satisfied or waived before or as of the date of the distribution for the
distribution to occur:
o the SEC has declared Kronos' registration statement on Form 10
effective, and there has been no suspension, withdrawal or stop-order
in effect with respect thereto and no proceeding for that purpose has
been instituted by the SEC;
o the New York Stock Exchange has approved the listing of the Kronos
common stock, subject to official notice of issuance;
o the actions and filings with regard to state securities and blue sky
laws of the United States (and any comparable law under any foreign
jurisdiction) have been taken and, where applicable, have become
effective or accepted;
o there has been no order, injunction or decree issued by any court or
agency of competent jurisdiction or other legal constraint or
prohibition preventing the consummation of the transactions
contemplated by the distribution agreement in effect;
o all material consents and governmental approvals necessary to
consummate the transactions contemplated by the distribution agreement
have been obtained and are in full force and effect;
o the NL Board of Directors is satisfied that the distribution is lawful
under applicable state and federal law;
o the NL Board of Directors has approved the distribution and not
abandoned or revoked the distribution at any time before the
completion of the distribution;
o Kronos' amended and restated certificate of incorporation and bylaws,
as filed as exhibits to the Form 10 and described in this information
statement, are in effect;
o the various ancillary agreements described in this information
statement have been executed and delivered by the parties thereto,
including:
o the Tax Sharing Agreement among Contran, Valhi and Kronos; and
o the Intercorporate Services Agreement between Contran and Kronos;
o no other events or developments have occurred subsequent to the date
of the distribution agreement such that, in the judgment of NL, would
result in the distribution having an adverse effect on NL or on the
shareholders of NL; and
o the distribution agreement has not been terminated.
Mutual Releases and Indemnification
In the distribution agreement, effective as of the distribution date,
Kronos and NL have released and discharged each other and certain related
parties from all liabilities existing or arising from acts and events occurring
or failing to occur or alleged to have occurred or to have failed to occur and
all conditions existing or alleged to have existed on or before the distribution
date, other than, among other things, liabilities provided in or resulting from
continuing agreements between NL and Kronos.
23
Kronos has agreed to indemnify NL and certain persons related to NL from
and against any and all damages, losses, liabilities and expenses relating to,
arising out or resulting from, among other things:
o Kronos' or any other person's failure to discharge any liability (the
"Kronos Liabilities") relating to, arising out of or resulting from
Kronos' operation of the titanium dioxide and related business and
operations, each as conducted on the distribution date (the "Kronos
Business");
o the Kronos Business, all assets used in connection with the Kronos
Business and the Kronos Liabilities; and
o a material breach by Kronos of the distribution agreement or the
various ancillary agreements described in this information statement.
NL has agreed to indemnify Kronos and certain persons related to Kronos
from and against any and all damages, losses, liabilities and expenses relating
to, arising out or resulting from, among other things:
o NL's or any other person's failure to discharge any liability relating
to, arising out of or resulting from the operation of NL's business
(excluding the Kronos Business);
o NL's business (excluding the Kronos Business); and
o a material breach by NL of the distribution agreement or the various
ancillary agreements described in this information statement.
None of these indemnities applies to indemnification for income tax
liabilities, which are addressed in the tax sharing agreement among Kronos,
Contran and Valhi described below under "Tax Sharing Agreement." The
distribution agreement also includes procedures for notice and payment of
indemnification claims and generally provides that the indemnifying party may
assume the defense of a claim or suit brought by a third party. Any
indemnification amount paid under the indemnities will be paid net of the amount
of any insurance or other amounts that would be payable by any third party to
the indemnified party in the absence of the indemnity. In addition, the
distribution agreement provides that if indemnification is unavailable or
insufficient to hold the indemnified party harmless, the indemnifying party will
contribute to the amount paid or payable in a manner appropriate to reflect all
relevant equitable considerations.
Term Note
Immediately prior to the distribution, Kronos will declare and pay a
dividend to NL in the form of the $200 million Term Note. The Term Note payable
to NL will be unsecured and will bear interest at 9% per annum. Interest on the
Term Note will be payable quarterly with the principal and all accrued and
unpaid interest due at maturity on December 31, 2010. The Term Note is intended
to, among other things, provide NL with liquidity to explore diversification
opportunities beyond the scope of its existing assets and business.
Stock Options
The Board of Directors of NL has authorized an adjustment to the option
exercise price for all outstanding employee and non-employee director options to
purchase NL common stock in an amount per share equal to the taxable value of
the distribution of shares of Kronos common stock for each share of NL common
stock. In addition, to the extent that NL makes any adjustments to its
outstanding options as a result of the distribution, similar adjustments will be
made to the NL options held by Kronos employees.
Access to Information; Provision of Witnesses; Confidentiality
Under the distribution agreement, Kronos and NL will allow the other party
and their specified representatives reasonable access to all records in Kronos'
24
or its possession relating to the business and affairs of the other party as
reasonably required. Access will be allowed for such purposes as audit,
accounting, litigation, disclosure reporting and regulatory compliance. Each
party will also use reasonable efforts to make available to the other party and
its accountants, counsel and other designated representatives, upon written
request, its directors, officers, employees and representatives as witnesses and
will otherwise cooperate with the other party in connection with any proceeding
arising out of its or the other party's business and operations before the
distribution. Subject to limited exceptions, Kronos, NL and their respective
directors, officers, employees, agents, consultants and advisors will hold in
strict confidence all information in its or their possession concerning the
other party.
Transaction Expenses
The distribution agreement provides for each of NL and Kronos to pay their
own respective expenses in connection with the distribution.
Intercorporate Services Agreement
The distribution agreement provides that prior to completion of the
distribution, Kronos will enter into a intercorporate services agreement with
Contran pursuant to which Contran will provide certain management, financial and
administrative services to Kronos on a fee basis.
Tax Sharing Agreement
Effective on the date of the distribution, Kronos will no longer be a
member of the consolidated income tax group of which NL is the common parent,
and Kronos will remain a member of the consolidated income tax group of which
Valhi is the common parent. The tax sharing agreement between NL and Kronos will
terminate on the effective date of the distribution and will be replaced by a
tax sharing agreement among Kronos, Contran and Valhi. The terms of the
Kronos/Contran/Valhi tax sharing agreement will be substantially similar to the
terms of the terminated NL/Kronos tax sharing agreement. In accordance with the
group's policy for the intercompany allocation of federal income taxes, Kronos
will compute its tax payments to or receive payments from Valhi in the amounts
it would have paid to or received from the Internal Revenue Service had Kronos
not been a member of the consolidated income tax group of which Valhi is the
common parent. Kronos' separate company provisions and payments will be computed
using the elections made by Contran.
DIVIDEND POLICY
Kronos' Board of Directors has declared an initial dividend in the amount
of $___ per share, payable on December [ ], 2003 to Kronos stockholders of
record as of December [ ], 2003. The declaration and payment of future dividends
is subject to the discretion of Kronos' Board of Directors, and any
determination as to the payment of such future dividends, as well as the type
and amount of such dividends, will depend on, among other things, Kronos'
results of operations and financial condition, general economic and business
conditions, Kronos' cash requirements for its businesses and other factors
deemed relevant by Kronos' Board of Directors. Kronos cannot provide any
assurance that any dividends will be declared and paid.
25
SELECTED FINANCIAL DATA
The following selected historical financial data of Kronos with respect to
the years ended December 31, 2000, 2001 and 2002 and as of December 31, 2001 and
2002, is derived from, and should be read in conjunction with, Kronos' audited
consolidated financial statements included in this information statement. The
selected historical financial data for the years ended December 31, 1998 and
1999 and for the six months ended June 30, 2002 and 2003, and as of December 31,
1998, 1999 and 2000 and June 30, 2003, is derived from Kronos' unaudited
consolidated financial statements. The selected historical financial data for
the six months ended June 30, 2002 and 2003 and as of June 30, 2003, should be
read in conjunction with the unaudited consolidated financial statements of
Kronos included in this information statement. Operating results for 2002 and
2003 interim periods are not necessarily indicative of the operating results
that Kronos will experience for the entire year. The selected historical
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this information statement. The earnings per share and cash
dividends per share data presented below has been restated to give effect to the
September 2003 change in Kronos' capital structure discussed in Note 1 to
Kronos' consolidated financial statements included in this information statement
in which the 1,000 shares of Kronos' common stock previously outstanding were
reclassified in the form of a stock split into approximately 48.9 million shares
of Kronos' common stock. The selected historical financial data reflects Kronos'
results as it has historically been operated as a part of NL, and these results
may not be indicative of Kronos' future performance as a publicly traded company
following the distribution.
Year Ended December 31, Six Months
----------------------------------------------------- Ended June 30,
1998 1999 2000 2001 2002 2002 2003
---------- ------------------------------- ---------- -----------------
(in millions, except per share data)
INCOME STATEMENT DATA:
Net sales................................$ 894.7 $ 908.4 $ 922.3 $ 835.1 $ 875.2 $ 429.3 $ 519.6
Net income(1)............................. 63.7 125.9 130.2 154.5 66.3 40.3 58.5
Net income per share...................... 1.30 2.57 2.66 3.16 1.35 .82 1.19
Cash dividends per share.................. .31 .61 1.12 .62 2.27 - .14
BALANCE SHEET DATA at period end:
Total assets.............................$ 1,015.4 $ 973.6 $ 893.4 $ 910.1 $ 988.5 $ 1,000.2 $ 1,014.3
Notes payable and long-term debt,
including current maturities............ 608.0 340.4 266.1 242.7 370.5 325.0 361.2
Common stockholder's equity............... 65.3 310.9 346.6 378.5 314.2 411.4 353.4
- --------------
(1) Net income in 1998 includes an $8.2 million income tax benefit resulting
from the refund of certain prior-year German dividend withholding taxes.
Net income in 1999 includes a $57.7 million income tax benefit related to
(i) a favorable resolution of Kronos' previously-reported tax contingency
in Germany ($29.1 million) and (ii) a net reduction in Kronos' deferred
income tax asset valuation allowance due to a change in the estimate of
Kronos' ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($28.6 million). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of certain unusual items occurring during
2000, 2001 and 2002 and the first six months of 2002 and 2003.
26
The following selected unaudited pro forma financial data of Kronos with
respect to the year ended December 31, 2002 and the six months ended June 30,
2003, and as of June 30, 2003, has been derived from, and should be read in
conjunction with, Kronos' Unaudited Pro Forma Condensed Consolidated Financial
Statements and the June 30, 2003 Unaudited Pro Forma Balance Sheet, both of
which are included in this information statement. While such Unaudited Pro Forma
Condensed Consolidated Financial Statements is based on adjustments that Kronos
deems 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 Kronos' financial
results for future periods.
Year ended Six months ended
December 31, 2002 June 30, 2003
(In millions, except per share data)
INCOME STATEMENT DATA:
Net sales ............................................. $ 875.2 $ 519.6
Net income ............................................ 41.0 52.6
Net income per share .................................. .84 1.08
BALANCE SHEET DATA at period end:
Total assets .......................................... N/A $ 1,014.3
Notes payable and long-term debt, including current
maturities .......................................... N/A 561.2
Common stockholder's equity ........................... N/A 153.4
27
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" are based upon Kronos' consolidated
financial statements, which have been prepared in accordance with generally
accepted accounting principles in the U.S. ("GAAP"). The preparation of these
financial statements requires Kronos to make estimates and judgments 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 reported period. On an on-going
basis, Kronos evaluates its estimates, including those related to inventory
reserves, the recoverability of other long-lived assets, pension and other
postretirement benefit obligations and the underlying actuarial assumptions
related thereto, and the realization of deferred income tax assets and accruals
for income tax and other contingencies. Kronos bases its estimates on historical
experience and on various other assumptions that are believed 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.
Kronos believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
o Inventory allowances. Kronos provides 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 its products and
market conditions. If actual market conditions are less favorable than
those projected by management, additional finished goods inventory
reserves may be required. Kronos provides reserves for tools and
supplies inventory generally based on both historical and expected
future usage requirements.
o Impairments of long-lived assets. Kronos recognizes an impairment
charge associated with its long-lived assets, including property and
equipment, whenever it determines that recovery of such long-lived
asset is not probable. Such determination is made in accordance with
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.
Under applicable GAAP (Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are
present. During 2002, no such impairment indicators were present with
respect to Kronos' net property and equipment.
o Deferred income tax valuation allowance. Kronos records a valuation
allowance to reduce its deferred income tax assets to the amount that
is believed to be realizable under the "more-likely-than-not"
recognition criteria. While Kronos has 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 Kronos may change its 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 Defined benefit pension and postretirement benefit plans. Kronos'
defined benefit pension and postretirement benefits other than
pensions ("OPEB") expenses and obligations are calculated based on
28
several estimates, including discount rates, expected rates of returns
on plan assets and expected healthcare trend rates. Kronos reviews
these rates annually with the assistance of its actuaries. See further
discussion of the potential effect of these estimates in the
Assumptions on Defined Benefit Pension Plans and OPEB Plans sections
in the Liquidity and Capital Resources section of this Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
o Other contingencies. Kronos records an accrual for 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).
Other significant accounting policies and use of estimates are described in
the Notes to Kronos' audited consolidated financial statements included in this
information statement.
Results of Operations
General
As discussed below, average TiO2 selling prices in billing currencies
(which excludes the effects of foreign currency translation) were generally
increasing during most of 2000, were generally decreasing during all of 2001 and
the first quarter of 2002, were flat during the second quarter of 2002, were
generally increasing during the third and fourth quarters of 2002 and the first
quarter of 2003 and were generally flat during the second quarter of 2003.
Many factors influence TiO2 pricing levels, including (i) competitor
actions, (ii) industry capacity, (iii) worldwide demand growth, (iv) customer
inventory levels and purchasing decisions and (v) relative changes in foreign
currency exchange rates. Kronos believes that the TiO2 industry has long-term
growth potential, as discussed in "Business--Industry" and "--Competition."
Sales and Operating Income--Six Months Ended June 30, 2002 and 2003
Six months ended %
June 30, Change
------------------------------------- ----------------
2002 2003
--------------------- ---------------
(In millions, except percentages and metric tons)
Net sales and operating income
Net sales $ 429.3 $ 519.6 +21%
Operating income $ 46.8 $ 69.8 +49%
Operating income margin percentage 11% 13%
TiO2 operating statistics Percent change in average selling price:
In billing currencies +6%
Using actual foreign currency exchange rates +18%
Sales volume (metric tons in thousands) 235 240 +2%
Production volume (metric tons in thousands) 219 237 +8%
Kronos' sales and operating income increased $90.3 million (21%) and $23.0
million (49%), respectively, in the first six months of 2003 compared to the
first six months of 2002 due primarily to higher average TiO2 selling prices as
well as higher TiO2 sales and production volumes partially offset by higher
operating costs (particularly energy costs, which increased by approximately
$5.3 million). Excluding the effect of fluctuations in the value of the U.S.
29
dollar relative to other currencies, Kronos' average TiO2 selling price in
billing currencies in the first six months of 2003 was 6% higher than the first
six months of 2002. When translated from billing currencies to U.S. dollars
using actual foreign currency exchange rates prevailing during the respective
periods, Kronos' average TiO2 selling prices in the first six months of 2003
increased 18% compared to the first six months of 2002. Kronos' TiO2 sales
volume in the first six months of 2003 was a first six-month record and was 2%
higher than the first six months of 2002. Kronos' TiO2 production volume in the
first six months of 2003, also a first six-month record, was 8% higher than the
first six months of 2002, with operating rates at near full capacity in 2003
compared to 98% of capacity in 2002. These increases in TiO2 sales and
production volume increased operating income by $6.5 million and $10.1 million,
respectively, while the increase in average TiO2 selling prices increased
operating income by $20.6 million.
Kronos' cost of sales increased $53.6 million (16%) in the first six months
of 2003 compared to the first six months of 2002. Kronos' cost of sales as a
percentage of net sales decreased 4% in the first six months of 2003 primarily
due to the higher average selling prices in billing currencies and higher
production volume, partially offset by the higher energy costs. Excluding the
effects of foreign currency translation, which increased Kronos' expenses in the
first six months of 2003 compared to year-earlier period, Kronos' selling,
general and administrative expenses in the first six months of 2003 were
approximately $2.7 million higher than the first six months of 2002 due to
higher distribution expenses associated with the higher sales volume. Kronos'
selling, general and administrative expenses were approximately 12% of sales in
both the first six months of 2003 and the first six months of 2002.
Kronos expects that its operating income in 2003 will be higher than in
2002 primarily due to higher average TiO2 selling prices in billing currencies,
slightly higher sales volumes and higher production volumes, partially offset by
higher operating costs (particularly energy costs). Kronos' TiO2 production
volume in 2003 is expected to be higher than Kronos' 2003 TiO2 sales volume,
with finished goods inventories rising modestly. Kronos' expectations as to its
future prospects of Kronos and the TiO2 industry are based upon a number of
factors beyond Kronos' control, including worldwide growth of gross domestic
product, competition in the market place, unexpected or earlier-than-expected
capacity additions by competitors and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. In addition, a portion of Kronos'
sales generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased Kronos' sales in the first six months of 2003 by a
net $54.4 million compared to the same period in 2002. Fluctuations in the value
of the U.S. dollar relative to other currencies similarly impacted Kronos'
foreign currency-denominated operating expenses. Kronos' operating costs that
are not denominated in the U.S. dollar, when translated into U.S. dollars, were
higher in the first six months of 2003 compared to the first six months of 2002.
Overall, the net impact of currency exchange rate fluctuations decreased Kronos
operating income by $2.4 million in the first six months of 2003 when compared
to the year-earlier period.
30
Sales and Operating Income--Years Ended December 31, 2000, 2001 and 2002
Years ended December 31, % Change
--------------------------------------- --------------------------
2000 2001 2002 2001-00 2002-01
----------- ------------ ------------- ------------ -------------
(In millions)
Net sales and operating income
Net sales $ 922.3 $ 835.1 $ 875.2 -9% +5%
Operating income $ 212.5 $ 169.2 $ 96.5 -20% -43%
Operating income margin percentage 23% 20% 11%
TiO2 operating statistics Percent change in average selling prices:
In billing currencies -3% -9%
Using actual foreign currency exchange
rates -5% -7%
Sales volume (metric tons in thousands) 436 402 455 -8% +13%
Production volume (metric tons in thousands) 441 412 442 -6% +7%
Production rate as a percent of capacity Full 91% 96%
Kronos' sales increased $40.1 million (5%) in 2002 compared to 2001 due
primarily to higher TiO2 sales volumes, offset by lower average TiO2 selling
prices. Kronos' record TiO2 sales volumes in 2002 were 13% higher compared to
2001 primarily due to higher volumes in European and North American markets of
14% and 17%, respectively. By volume, approximately one-half of Kronos' 2002
TiO2 sales volumes were attributable to markets in Europe, with 39% attributable
to North America and the balance to export markets. The lower TiO2 sales volumes
in 2001 were due in part to the effect of a fire at Kronos' Leverkusen, Germany
facility in March 2001 that disrupted operations discussed in Note 15 to Kronos'
audited consolidated financial statements included in this information
statement.
Kronos' operating income declined $72.7 million (43%) in 2002 compared to
2001 as the effect of lower average TiO2 selling prices (which decreased
operating income by $81.4 million) more than offset the effect of higher TiO2
sales and production volumes (which combined increased operating income by $46.7
million). The effect of the higher sales and production volumes was offset in
part by the $27.3 million of business interruption proceeds received in 2001, as
discussed below. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, Kronos' average TiO2 selling price in 2002
was 9% lower than 2001, with prices lower in all major regions. While Kronos'
average TiO2 selling prices had generally been declining during all of 2001 and
the first quarter of 2002, and were flat during the second quarter of 2002,
average TiO2 selling prices increased during the third and fourth quarters of
2002. Kronos' average TiO2 selling prices in the fourth quarter of 2002 were 2%
higher compared to the third quarter of the year, with increases in all major
markets. When translated from billing currencies to U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in 2002 decreased 7% compared to 2001.
Kronos' record TiO2 production volume in 2002 was 7% higher than 2001.
Kronos' operating rates in 2001 were lower as compared to 2002 primarily due to
lost production resulting from the Leverkusen fire.
Kronos' operating income in 2001 includes $27.3 million of business
interruption insurance proceeds as payment for losses (unallocated period costs
and lost margin) caused by the Leverkusen fire. The effects of the lower TiO2
sales and production volumes were offset in part by the business interruption
insurance proceeds. Of such $27.3 million of business interruption insurance
proceeds, $20.1 million was recorded as a reduction of cost of sales to offset
unallocated period costs that resulted from lost production, and the remaining
$7.2 million, presenting recovery of lost margin, was recorded in other income.
The business interruption insurance proceeds distorts the operating income
margin percentage of 2001 as there are no sales associated with the $7.2 million
of lost margin operating profit recognized. See Note 15 to Kronos' audited
consolidated financial statements included in this information statement.
31
Kronos also recognized insurance recoveries of $29.1 million in 2001 for
property damage and related cleanup and other extra expenses related to the
Leverkusen fire, resulting in an insurance gain of $17.5 million, as the
insurance recoveries exceeded the carrying value of the property destroyed and
the cleanup and other extra expenses incurred. Such insurance gain is not
reported as a component of operating income but is included in general corporate
items. Kronos does not expect to recognize any additional insurance recoveries
related to the Leverkusen fire. See Note 15 to Kronos' audited consolidated
financial statements included in this information statement.
Kronos' cost of sales increased $93.8 million (16%) in 2002 compared to
2001 due to the higher sales volume partially offset by lower unit costs, which
resulted primarily from the higher production levels. The effects of lower TiO2
sales and production volumes in 2001 were partially offset by receipt of the
business interruption proceeds discussed above. Kronos' cost of sales, as a
percentage of net sales, increased from 69% in 2001 to 77% in 2002 primarily due
to the impact on net sales of the lower average selling prices partially offset
by lower unit costs. Excluding the effects of foreign currency translation,
which increased Kronos' expenses in 2002 compared to 2001, Kronos' selling,
general and administrative expenses ("SG&A expenses") were $5.6 million higher
in 2002 compared to 2001 primarily due to higher distribution expenses
($600,000) associated with the higher sales volume in 2002 and higher
administrative expenses of $5.8 million. SG&A expenses were approximately 12% of
sales in both 2001 and 2002.
Kronos' sales decreased $87.2 million (9%) in 2001 compared to 2000 due
primarily to lower TiO2 sales volumes and lower TiO2 average selling prices.
Excluding the effect of fluctuations in the value of the U.S. dollar relative to
other currencies, Kronos' average TiO2 selling prices (in billing currencies)
during 2001 were 3% lower compared to 2000, with prices lower in all major
regions. When translated from billing currencies to U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in 2001 decreased 5% compared to 2000.
Kronos' TiO2 sales volumes in 2001 were 8% lower than the prior record sales
volumes of 2000, primarily due to lower volumes in North America and Europe of
6% and 13%, respectively.
Kronos' operating income in 2001 decreased $43.3 million (20%) compared to
2000 due primarily to the lower TiO2 sales volumes and average selling prices as
well as lower TiO2 production volume. Kronos' TiO2 production volume was 6%
lower in 2001 compared to the prior record production volume in 2000. The lower
production volume in 2001 was due primarily to the effects of the Leverkusen
fire. The lower average TiO2 selling prices decreased operating income by $19.2
million in 2001 compared to 2000, while the lower TiO2 sales and production
volumes decreased operating income by $22.3 million and $21.8 million,
respectively. The effect of the lower sales and production volumes was offset in
part by the $27.3 million of business interruption proceeds received in 2001, as
discussed above.
Kronos' cost of sales decreased $32.4 million (5%) in 2001 compared to 2000
primarily due to the lower sales volume, partially offset by higher unit costs,
which resulted primarily from lower production levels. Kronos' cost of sales, as
a percentage of net sales, increased from 66% in 2000 to 69% in 2001 primarily
due to the impact on net sales of the lower average selling prices and higher
unit costs, partially offset by business interruption insurance recoveries.
Excluding the effects of foreign currency translation, which reduced
Kronos' expenses in 2001 compared to 2000, Kronos' SG&A expenses decreased by
$6.2 million in 2001 compared to 2000 due to lower selling expenses ($3.2
million) associated with the lower 2001 sales volume and lower administrative
expenses of $3.7 million. SG&A expenses were approximately 12% of sales in both
2000 and 2001. Pricing within the TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact Kronos' earnings and
operating cash flows. The average TiO2 selling price index (using 1983 = 100) of
142 in 2002 was 9% lower than the 2001 index of 156 (2001 was 3% lower than the
2000 index of 161). In comparison, the 2002 index was 19% below the 1990 price
index of 176 and 9% higher than the 1993 price index of 130. Many factors
influence TiO2 pricing levels, including industry capacity, worldwide demand
growth and customer inventory levels and purchasing decisions.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Kronos expects its TiO2 production capacity
32
will increase by about 10,000 metric tons (primarily at its chloride-process
facilities), with moderate capital expenditures, to increase its aggregate
production capacity to about 480,000 metric tons during 2005.
As discussed above, Kronos has substantial operations and assets located
outside the United States (primarily in Germany, Belgium, Norway and Canada).
Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, increased Kronos' sales in 2002 by a net $21
million compared to 2001, and decreased Kronos' sales by a net $19 million in
2001 compared to 2000. Overall, the net impact of currency exchange rate
fluctuations decreased Kronos' operating income by $1.6 million in 2002 compared
to 2001, and decreased Kronos' operating income by $8.2 million in 2001 compared
to 2000.
General Corporate
The following table sets forth certain information regarding general
corporate income (expense) for the years ended December 31, 2000, 2001 and 2002
and the six months ended June 30, 2002 and 2003.
Years ended December 31, Six months ended June 30,
-------------------------------------- ----------------------------
2000 2001 2002 2002 2003
----------- ------------ --------- ----------- ---------------
(In thousands)
Interest income from affiliates............... $ 20,250 $ 33,379 $ 20,754 $ 17,475 $ 723
Other interest income 1,078 349 702 71 74
Insurance recoveries, net..................... -- 17,468 -- -- --
Foreign currency transaction gain............. -- -- 6,271 6,271 --
Corporate expenses............................ (6,949) (4,878) (3,288) (1,493) (1,684)
Interest expense-third party debt............. (2,005) (4,305) (16,837) (1,698) (16,350)
Interest expense-affiliate debt............... (28,979) (22,969) (12,290) (12,167) (703)
---------- ---------- ---------- ---------- ----------
$ (16,605) $ 19,044 $ (4,688) $ 8,459 $ (17,940)
========== ========== ========== ========== ==========
Kronos has certain loans to affiliates, more fully described in Notes 11
and 13 to Kronos' audited consolidated financial statements included in this
information statement. Period-to-period changes in the amount of interest income
on such loans to affiliates is due to changes in the average outstanding balance
of such loans during the respective periods.
The insurance recoveries, net of $17.5 million in 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 property
destroyed and cleanup costs incurred. See Note 15 to Kronos' audited
consolidated financial statements included in this information statement.
The $6.3 million foreign currency transaction gain in 2002 relates to the
extinguishment of certain intercompany indebtedness associated with the offering
of the KII Senior Notes in June 2002. See Notes 2 and 10 to Kronos' audited
consolidated financial statements included in this information statement.
Corporate expenses were comprised principally of the intercorporate service
agreement charges discussed in Note 17 to Kronos' audited consolidated financial
statements included in this information statement. Corporate expenses in 2001
also included certain German real estate transfer taxes of $1.5 million
associated with a legal restructuring of Kronos' German operations.
Interest expense on third-party debt was $14.7 million higher in the first
six months of 2003 compared to the first six months of 2002, and was $12.5
million higher in 2002 compared to 2001, due primarily to the issuance of the
KII Senior Notes in 2002 as well as borrowings under KII subsidiaries' bank
credit facility entered into in 2002. Interest expense on third-party debt was
$2.3 million higher in 2001 compared to 2000 due to higher levels of bank debt.
Interest expense on third-party debt is expected to be higher in 2003 compared
to 2002 due to higher outstanding levels of debt, partially offset by lower
average interest rates.
33
Interest expense on affiliate debt was $11.5 million lower in the first six
months of 2003 compared to the first six months of 2002, and was $10.7 million
lower in 2002 compared to 2001 and $6.0 million lower in 2001 compared to 2000,
due primarily to lower average balances of outstanding debt owed to affiliates.
See "--Liquidity and Capital Resources--Financing Cash Flows."
Provision for Income Taxes
The principal reasons for the difference between the U.S. Federal statutory
income tax rates and Kronos' effective income tax rates are explained in Note 14
to Kronos' audited consolidated financial statements included in this
information statement. Kronos' operations are conducted on a worldwide basis and
the geographic mix of income can significantly impact Kronos' effective income
tax rate. In 2002, Kronos' effective income tax rate varied from the normally
expected rate in part due to a reduction in the Belgian income tax rate and the
recognition of certain deductible tax assets which previously did not meet the
"more-likely-than-not" recognition criteria. In 2001, Kronos' effective income
tax rate varied from the normally expected rate primarily due to the geographic
mix of income and the recognition of certain German income tax attributes which
previously did not meet the "more-likely-than-not" recognition criteria. In
2000, Kronos' effective income tax rate varied from the normally expected rate
primarily due to the geographic mix of income, changes in the German income tax
"base" rate and the recognition of certain deductible tax assets which
previously did not meet the "more-likely-than-not" recognition criteria. Also in
2000, Kronos recognized certain one-time benefits related to German tax
settlements.
Kronos and its qualifying subsidiaries are members of NL's consolidated
U.S. federal income tax group (the "NL Tax Group"). As a member of the NL Tax
Group, Kronos is a party to a tax sharing agreement (the "NL Tax Agreement").
Effective January 1, 2001, the NL Tax Group, including Kronos, was included in
the consolidated U.S. federal tax return 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 and its qualifying subsidiaries, including Kronos, compute their provision
for U.S. income taxes on a separate-company basis using the tax elections made
by Contran. Pursuant to the NL Tax Sharing Agreement and using the tax elections
made by Contran, Kronos makes payments to or receives payments from NL in
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 instead was a separate
taxpayer. Refunds are limited to amounts previously paid under the tax sharing
agreement.
Following the completion of NL's distribution of 48.7% of the outstanding
shares of Kronos common stock to NL shareholders, Kronos and its qualifying
subsidiaries would no longer be members of the NL Tax Group, but Kronos and its
qualifying subsidiaries would remain as members of the Contran Tax Group. Kronos
would enter into a new tax sharing agreement with Valhi and Contran (the
"Kronos/Contran/Valhi Tax Agreement"). The Kronos/Contran/Valhi Tax Agreement
will contain similar terms to the NL Tax Agreement.
Other
Related Party Transactions. Kronos is a party to certain transactions with
related parties. See "Liquidity and Capital Resources--Investing Cash Flows" and
Note 17 to Kronos' audited consolidated financial statements included in this
information statement.
Recently Adopted Accounting Principles. As described in Note 2 to Kronos'
audited consolidated financial statements included in this information
statement, Kronos adopted Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," effective January 1, 2003.
Liquidity and Capital Resources
Kronos' consolidated cash flows from operating, investing and financing
activities for the years ended December 31, 2000, 2001 and 2002 and the six
months ended June 30, 2002 and 2003 are presented below.
34
Six months ended
Years ended December 31, June 30,
----------------------------------------- --------------------------
2000 2001 2002 2002 2003
------------ ------------- ---------- ----------- ----------
(In millions)
Net cash provided (used) by:
Operating activities $ 154.7 $ 135.7 $ 109.9 $ 40.1 $ 29.3
Investing activities....................... (31.0) (33.7) (33.4) (11.2) (14.7)
Financing activities....................... (172.2) (99.0) (93.9) 33.1 (27.4)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating,
investing and financing activities......... $ (48.5) $ 3.0 $ (17.4) $ 62.0 $ (12.8)
=========== =========== =========== =========== ===========
Operating Cash Flows
Certain items included in the determination of net income do not represent
current 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. For example, the amount of income or
expense recorded for pension and OPEB assets and obligations (which depend upon
a number of factors, including actuarial assumptions used to value obligations)
will generally differ from the outflows of cash for such benefits. See Note 12
to Kronos' audited consolidated financial statements included in this
information statement.
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact the earnings and operating cash flows of Kronos.
Cash flow from operations is considered the primary source of liquidity for
Kronos. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of Kronos.
Relative changes in assets and liabilities generally result from the timing
of production, sales, purchases and income tax payments. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period from when the underlying cash transaction occurs. For example,
raw materials may be purchased in one period, but the payment for such raw
materials may occur in a subsequent period. Similarly, inventory may be sold in
one period, but the cash collection of the receivable may occur in a subsequent
period.
Cash flow from operations, before changes in assets and liabilities,
increased $36.1 million in the first six months of 2003 from the comparable
period in 2002 primarily due to $22.9 million of higher operating income and
$20.1 million higher current income tax benefits, net partially offset by $1.5
million of lower net distributions from Kronos' investment in its TiO2
manufacturing joint venture. Relative changes to Kronos' assets and liabilities,
excluding the effect of currency translation, in the first six months of 2003
compared with the first six months of 2002, were negatively affected by $21.1
million of higher refundable income taxes and $11.2 million of lower insurance
proceeds collected. The net cash used to fund changes in Kronos' inventories,
receivables and payables (excluding the effect of currency translation) of $38.4
million in the first six months of 2003 was significantly higher than the $2.9
million in the first six months of 2002, with higher inventory balances, higher
receivable balances and decreases in accounts payable and accrued liabilities in
the first six months of 2003. Relative changes in inventories and accounts
payable and accrued liabilities are affected by, among other things, the timing
of raw material purchases and the payment for such purchases and the relative
difference between production volume and sales volume.
Cash flows from operations, before changes in assets and liabilities,
decreased $53.2 million in 2002 compared with 2001 primarily due to $72.7
million of lower operating income and $3.4 million of lower distributions from
Kronos' investment in its TiO2 manufacturing joint venture, partially offset by
$23.3 million of lower current tax expense.
35
Cash flows from operations, before changes in assets and liabilities,
decreased $5.7 million in 2001 compared with 2000 primarily due to $43.3 million
lower operating income, partially offset by $15.7 million of lower current tax
expense, $3.8 million of higher distributions from Kronos' investment in its
TiO2 manufacturing joint venture and $18.5 million of higher interest income
from affiliates, net.
Relative changes in Kronos' assets and liabilities, excluding the effect of
currency translation, increased operating cash flows by $27.4 million in 2002
compared to 2001, in part due to lower accounts and other receivables of $3.0
million, changes in noncurrent assets and liabilities, net of $2.6 million and
lower inventories. In 2002, Kronos reduced finished goods inventory by
approximately 13,000 metric tons from year end 2001, versus an increase in
finished goods inventory from 2000 to 2001 of approximately 10,000 metric tons.
These changes in the inventory balances resulted in a net $74.9 million
reduction in inventories. Kronos' assets and liabilities were unfavorably
affected primarily by lower accounts payable and accrued liabilities of $51.3
million
Relative changes in Kronos' assets and liabilities, excluding the effect of
currency translation, decreased operating cash flows by $13.3 million in 2001
compared with 2000, in part due to higher inventories of $9.3 million and
changes in income taxes payable of $15.9 million primarily due to the payment of
certain Canadian withholding taxes related to the restructuring of certain of
Kronos' subsidiaries. Kronos' assets and liabilities were favorably affected by
higher accounts payable of $9.3 million and higher accounts with affiliates, net
of $2.5 million.
Investing Cash Flows
Kronos' capital expenditures were $12.1 million and $13.8 million in the
first six months of 2002 and 2003, respectively. Capital expenditures in first
six months of 2002 included approximately $2.2 million related to reconstruction
of Kronos' Leverkusen, Germany sulfate plant damaged in the March 2001 fire.
Kronos' capital expenditures were $31.1 million, $53.7 million and $32.6
million in 2000, 2001 and 2002, respectively. Capital expenditures in 2001 and
2002 included an aggregate of $22.3 million and $3.1 million, respectively, for
the rebuilding of Kronos' Leverkusen, Germany sulfate plant. In 2001, Kronos
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 at LPC were approximately $4.0 million in
each of 2000, 2001 and 2002 and are not included in Kronos' capital
expenditures.
Kronos' capital expenditures during the past three years include an
aggregate of approximately $18.2 million ($5.0 million in 2002) for Kronos'
ongoing environmental protection and compliance programs. Kronos' estimated 2003
capital expenditures are $34.0 million and include approximately $5.0 million in
the area of environmental protection and compliance.
Financing Cash Flows
In March 2002, Kronos repaid $25 million in principal amount of affiliate
indebtedness to NL. In June 2002, Kronos repaid $169 million principal amount,
plus accrued interest of affiliate indebtedness to NL, with proceeds from the
offering of the KII Senior Notes discussed below. See Notes 10 and 11 to Kronos'
audited consolidated financial statements included in this information
statement.
In June 2002, KII issued (euro)285 million ($280 million when issued and
$297 million at December 31, 2002) principal amount of the KII Senior Notes. The
KII Senior Notes are collateralized by first priority liens on 85% of the common
stock or other equity interests of certain of KII's first tier subsidiaries. The
KII Senior Notes are issued pursuant to an indenture that contains a number of
covenants and restrictions that, among other things, restrict the ability of KII
and its subsidiaries to incur debt, incur liens or merge or consolidate with, or
sell or transfer all or substantially all of their assets to, another entity.
The indenture further restricts the ability of KII to pay dividends under
certain circumstances. See Note 10 to Kronos' audited consolidated financial
statements included in this information statement.
In June 2002, Kronos' primary operating subsidiaries in Germany, Belgium
and Norway entered into a new three-year (euro)80 million secured revolving
36
credit facility ("European Credit Facility") and borrowed (euro)13 million ($13
million) and NOK 200 million ($26 million) which, along with available cash, was
used to repay and terminate KII's short term notes payable ($53.2 million when
paid). In the third and fourth quarters of 2002, Kronos repaid a net
euro-equivalent (euro)12.7 million ($12.4 million when paid) and (euro)1.7
million ($1.6 million when paid), respectively, of the European Credit Facility.
See Note 10 to Kronos' audited consolidated financial statements included in
this information statement.
In September 2002, Kronos' U.S. operating subsidiaries entered into a
three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility"). As of December 31, 2002, no borrowings were outstanding under the
U.S. Credit Facility and Borrowing Availability was approximately $30 million.
See Note 10 to Kronos' audited consolidated financial statements included in
this information statement.
In March 2003, Kronos borrowed (euro)15.0 million ($16.1 million when
borrowed) under the European Credit Facility. In April 2003, Kronos repaid NOK
80 million (approximately $11 million when paid) under the European Credit
Facility.
At December 31, 2002, Kronos had borrowed a net $44.6 million from NL
Environmental Management Services, Inc. ("EMS"), a majority-owned subsidiary of
NL, under the terms of a $55 million revolving credit facility entered into with
EMS in 2002. During the first six months of 2003, Kronos repaid this net
outstanding balance in full, and the revolving credit agreement with EMS was
terminated on June 30, 2003. See Note 11 to Kronos' audited consolidated
financial statements included in this information statement.
Deferred financing costs of $10.7 million for the KII Senior Notes, the
European Credit Facility and the U.S. Credit Facility are being amortized over
the life of the respective agreements and are included in other noncurrent
assets. As of June 30, 2002, the deferred financing costs totaled $9.3 million.
In 2001, Kronos repaid (euro)7.6 million ($6.5 million when paid) and
(euro)16.4 million ($14.9 million when paid), respectively, of its
euro-denominated short-term debt with excess cash flow from operations.
In 2000, Kronos repaid (euro)17.9 million ($16.7 million when paid) and
(euro)13.0 million ($12.2 million when paid), respectively, of its
euro-denominated short-term debt with cash flow from operations. In January
2000, Kronos repaid a $43.0 million short-term affiliate note payable to NL
Capital Corporation ("NLCC"). Prior to January 31, 2000, NLCC was a wholly-owned
subsidiary of NL. See Note 20 to Kronos' audited consolidated financial
statements included in this information statement. In December 2000, Kronos
borrowed $43 million of short-term non-U.S. dollar-denominated bank debt and
used the proceeds along with cash on hand to redeem $50 million (par value) of
NL's 11.75% Senior Secured Notes.
Other than operating lease commitments disclosed in Note 18to Kronos'
audited consolidated financial statements included in this information
statement, Kronos is not party to any off-balance sheet financing arrangements.
Dividends paid by Kronos to NL during 2000, 2001 and 2002 and the first six
months of 2003 totaled $55.0 million, $30.5 million, $111.0 million and $7.0
million, respectively.
Cash flows related to capital contributions and other transactions with
affiliates aggregated net cash outflows of $40.0 million, $47.5 million, $73.7
million and $29.1 million in 2000, 2001, 2002 and the first six months of 2002,
respectively, and aggregated a net cash inflow of $19.7 million in the first six
months of 2003. Such amounts related principally to loans that Kronos made to
affiliates (such notes receivable from affiliates being reported as reductions
to Kronos' stockholder's equity, and therefore considered financing cash flows).
Additionally, settlement of the above-mentioned notes receivable from affiliates
was not currently contemplated in the foreseeable future. In July 2002, Kronos
transferred certain such notes receivable from affiliates to NL, and as a result
Kronos will no longer report cash flows related to certain such notes receivable
from affiliates.
37
Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Debt
Securities and Borrowing Availability
At June 30, 2003, Kronos had current cash and cash equivalents aggregating
$29.6 million, current restricted cash equivalents of $1.0 million and
noncurrent restricted marketable debt securities of $2.0 million. Of such
aggregate $32.6 million amount, $20.9 million was held by non-U.S. subsidiaries.
At June 30, 2003, certain of Kronos' subsidiaries had $102 million available for
borrowing with approximately $57 million available under non-U.S. credit
facilities (including $55 million under the European Credit Facility) and
approximately $45 million under the U.S. Credit Facility. At June 30, 2003,
Kronos had complied with all financial covenants governing its debt agreements.
Based upon Kronos' expectations for the TiO2 industry and anticipated
demands on Kronos' cash resources as discussed herein, Kronos expects to have
sufficient liquidity to meet its obligations including operations, capital
expenditures, debt service and dividends. To the extent that actual developments
differ from Kronos' expectations, Kronos' liquidity could be adversely affected.
Income Taxes
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 deferred income tax expense in the
fourth quarter of 2000 due to a reduction of Kronos' deferred income tax asset
related to certain German tax attributes.
A reduction in the Belgian income tax rate from 40.17% to 33.99%, enacted
in December 2002, became effective January 1, 2003. The reduction in the Belgian
income tax rate resulted in a $2.3 million decrease in deferred income tax
expense in the fourth quarter of 2002 due to a reduction of Kronos' deferred
income tax liabilities related to certain Belgian temporary differences.
Certain of Kronos' 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 14 to Kronos' audited
consolidated financial statements included in this information statement.
Kronos has received preliminary tax assessments for the years 1991 to 1997
from the Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately (euro)10.1 million ($11.6 million at June 30, 2003).
Kronos has filed protests to the assessments for the years 1991 to 1997. Kronos
is in discussions with the Belgian tax authorities and believes that a
significant portion of the assessments is without merit. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999. The anticipated assessment, including
interest, is expected to approximate (euro)13.1 million ($15 million at June 30,
2003). Kronos believes the proposed assessment related to 1999 is without merit
and in April 2003 filed a written response in opposition to the notification of
intent to assess.
In 2002, Kronos received a notification from the Norwegian tax authorities
of their intent to assess tax deficiencies of approximately NOK 12.2 million
($1.7 million at June 30, 2003) relating to 1998 through 2000. Kronos has
objected to this proposed assessment in a written response to the Norwegian tax
authorities.
In the first quarter of 2003, Kronos was notified by the German Federal
Fiscal Court (the "Court") that the Court had ruled in Kronos' favor concerning
a claim for refund suit in which Kronos sought refunds of prior taxes paid
during the periods 1990 through 1997. Kronos has filed certain amended German
tax returns and expects to file additional amended German tax returns claiming
such tax refunds for all years affected by the Court's decision, which is
expected to result in a net refund of taxes and interest of approximately $40
million. Receipt of the German tax refunds is subject to satisfaction of various
procedural requirements, including a review and acceptance of the amended German
tax returns by the German tax authorities. Certain of these procedural
38
requirements were satisfied in the second quarter of 2003 with respect to a
portion of the refund claim, and in July 2003 the German tax authorities
refunded Kronos a portion of the total anticipated refund. The portion received
in July was (euro)21.5 million ($24.6 million using June 30, 2003 exchange
rates). Kronos has reflected this tax refund in its second quarter 2003 results
of operations. Kronos expects to receive the remaining refunds over the next six
to nine months, a portion of which may result in an additional income tax
benefit.
No assurance can be given that Kronos' tax matters will be favorably
resolved due to the inherent uncertainties involved in court and tax
proceedings. Kronos 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 Kronos' consolidated
financial position, results of operations or liquidity.
At June 30, 2003, Kronos had the equivalent of approximately $470 million
of income tax loss carryforwards in Germany with no expiration date. However,
Kronos has provided a deferred tax valuation allowance against substantially all
of these income tax loss carryforwards because Kronos currently believes that it
does not meet the "more-likely-than-not" recognition criteria. In 2002, the
German federal government proposed certain changes to its income tax law,
including certain changes that would have imposed limitations on the annual
utilization of income tax loss carryforwards. Such proposal, if enacted, would
have significantly affected Kronos' 2003 and future income tax expense and cash
tax payments. In April 2003, the German federal government passed a new tax law
which does not contain the provision that would have restricted the utilization
of tax loss carryforwards. Furthermore, the provisions contained in the new law
are not expected to materially impact Kronos' income tax expense or cash tax
payments. On August 1, 2003, the German federal government proposed new tax law
amendments that, among other things, re-introduced the limitations on the annual
utilization of income tax loss carryforwards, to become effective in 2004. There
can be no assurance that these proposed law amendments will be enacted and, if
enacted, when they would become effective. Similar to the 2002 proposal, if
enacted as proposed, these amendments would significantly affect Kronos' future
income tax expense and cash tax payments.
At June 30, 2003, Kronos had net deferred tax liabilities of $86.9 million.
Kronos operates in numerous tax jurisdictions, in certain of which it has
temporary differences that net to deferred tax assets (before valuation
allowance). Kronos has provided a deferred tax valuation allowance of $166.0
million at June 30, 2003, principally related to Germany, partially offsetting
deferred tax assets that Kronos believes do not currently meet the
"more-likely-than-not" recognition criteria.
Environmental Matters and Litigation
See "Business--Legal Proceedings" and Note 18 to Kronos' audited
consolidated financial statements included in this information statement.
Foreign Operations
As discussed above, Kronos has substantial operations located outside the
United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of Kronos' assets and liabilities related to its
non-U.S. operations, and therefore Kronos' consolidated net assets, will
fluctuate based upon changes in currency exchange rates. As of January 1, 2001,
the functional currency of Kronos' German, Belgian, Dutch and French operations
have been converted to the euro from their respective national currencies. At
June 30, 2003, Kronos had substantial net assets denominated in the euro,
Canadian dollar, Norwegian kroner and United Kingdom pound sterling.
New Accounting Principles Not Yet Adopted
See Note 2 to Kronos' audited consolidated financial statements included in
this information statement.
Other
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
39
process, Kronos in the past has sought, and in the future may seek, to reduce,
refinance, repurchase or restructure indebtedness; raise additional capital;
issue additional securities; repurchase shares of its common stock; modify its
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets; or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business,
Kronos may review opportunities for the acquisition, divestiture, joint venture
or other business combinations in the chemicals or other industries, as well as
the acquisition of interests in related companies. In the event of any
acquisition or joint venture transaction, Kronos may consider using available
cash, issuing equity securities or increasing its indebtedness to the extent
permitted by the agreements governing Kronos' existing debt. See Note 10 to
Kronos' audited consolidated financial statements included in this information
statement.
Summary of Debt and Other Contractual Commitments
As more fully described in the notes to Kronos' audited consolidated
financial statements included in this information statement, Kronos is a party
to various debt, lease and other agreements which contractually and
unconditionally commit Kronos to pay certain amounts in the future. See Notes
10, 11 and 18 to Kronos' audited consolidated financial statements included in
this information statement. The following table summarizes such contractual
commitments that are unconditional both in terms of timing and amount by the
type and date of payment as of December 31, 2002.
Unconditional Payment Due Date
----------------------------------------------------------------------
Contractual Commitment 2003 2004-2005 2006-2007 2008 and after Total
- ------------------------------ ---------------- -------------------- ------------- --------------- -------------
(In millions)
Indebtedness $ 1.3 $ 72.1 $ .2 $ 296.9 $ 370.5
----------- ----------- ----------- ----------- -----------
Property and equipment 6.4 - - - 6.4
----------- ----------- ----------- ----------- -----------
Operating leases 4.4 6.4 3.4 18.9 33.1
----------- ----------- ----------- ----------- -----------
$ 12.1 $ 78.5 $ 3.6 $ 315.8 $ 410.0
=========== =========== =========== =========== ===========
In addition, Kronos is a party to certain other agreements that
contractually and unconditionally commit Kronos to pay certain amounts in the
future. However, while Kronos believes it is probable that amounts will be spent
in the future under such contracts, the amount and/or the timing of such future
payments will vary depending on certain provisions of the applicable contract.
Agreements to which Kronos is a party that fall into this category, more fully
described in Note 18 to Kronos' audited consolidated financial statements
included in this information statement, includes Kronos' long-term supply
contracts for the purchase of chloride-process TiO2 feedstock.
Assumptions on Defined Benefit Pension Plans and OPEB Plans
Defined Benefit Pension Plans. Kronos maintains various defined benefit
pension plans in Europe and Canada. Kronos accounts for its defined benefit
pension plans using SFAS No. 87, "Employer's Accounting for Pensions." Under
SFAS No. 87, defined benefit pension plan expense and prepaid and accrued
pension cost are each recognized based on certain actuarial assumptions,
principally the assumed discount rate, the assumed long-term rate of return on
plan assets and the assumed increase in future compensation levels. Kronos
recognized consolidated defined benefit pension plan expense of $4.5 million in
2000, $5.0 million in 2001 and $7.1 million in 2002. The amount of funding
requirements for these defined benefit pension plans is generally based upon
applicable regulation, and will generally differ from pension expense recognized
under SFAS No. 87 for financial reporting purposes. Contributions made by Kronos
to all of its defined benefit pension plans aggregated $8.2 million in 2000,
$7.4 million in 2001 and $9.0 million in 2002.
The discount rates Kronos utilizes for determining defined benefit pension
expense and the related pension obligations are based on current interest rates
earned on long-term bonds that receive one of the two highest ratings given by
recognized rating agencies in the applicable country where the defined benefit
pension benefits are being paid. In addition, Kronos receives advice about
appropriate discount rates to use based upon discussions with Kronos'
third-party actuaries, who may in some cases utilize their own market indices.
40
The discount rates are adjusted as of each valuation date (September 30th for
Kronos' plans) to reflect then-current interest rates on such long-term bonds.
Such discount rates are used to determine the actuarial present value of the
pension obligations as of December 31st of that year, and such discount rates
are also used to determine the interest component of defined benefit pension
expense for the following year.
At December 31, 2002, approximately 63%, 11% and 17% of the projected
benefit obligations for all of Kronos' defined benefit pension plans were
attributable to Germany, Canada and Norway, respectively. Because Kronos
maintains defined benefit pension plans in several different countries and
because the interest rate environment differs from country to country, Kronos
uses several different discount rate assumptions in determining its defined
benefit pension plan obligations and expense.
Kronos used the following discount rates for its defined benefit pension
plans:
Obligation at Obligation at Obligation at
December 31, 2000 December 31, 2001 December 31, 2002
and expense in 2001 and expense in 2002 and expense in 2003
------------------- ------------------- -------------------
Germany.............................. 6.0% 5.8% 5.5%
Canada............................... 7.5% 7.3% 7.0%
Norway............................... 6.0% 6.0% 6.0%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligation. Unlike the discount rate, which is
adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2002, approximately 59%, 10% and 22% of the plan assets for
all of Kronos' defined benefit pension plans were attributable to Germany,
Canada and Norway, respectively. Because Kronos maintains defined benefit
pension plans in several different countries, because the plan assets in
different countries are invested in a different mix of investments and because
the long-term rates of return for different investments differ from country to
country, Kronos uses several different long-term rates of return on plan asset
assumptions in determining its defined benefit pension plan expense.
In determining the expected long-term rate of return on plan asset
assumptions, Kronos considers the long-term asset mix (e.g. equity vs. fixed
income) for the assets for each of its plans and the expected long-term rates of
return for such asset components. In addition, Kronos receives advice about
appropriate long-term rates of return to use based upon discussions with Kronos'
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of plan assets is established to satisfy
the requirements of the German insurance commissioner. The current
plan asset allocation at December 31, 2002 was 30% to equity managers
and 70% to fixed income managers.
o In Canada, Kronos currently has a plan asset target allocation of 65%
to equity managers and 35% to fixed income managers, with an expected
long-term rate of return for such investments to average approximately
125 basis points above the applicable equity or fixed income index.
The current plan asset allocation at December 31, 2002 was 54% to
equity managers and 46% to fixed income managers.
o In Norway, Kronos currently has a plan asset target allocation of 15%
to equity managers and 85% to fixed income managers, with an expected
41
long-term rate of return for such investments of approximately 8% and
6%, respectively. The current plan asset allocation at December 31,
2002 was 13% to equity managers and 87% to fixed income managers.
Kronos regularly reviews its actual asset allocation for each of its plans,
and will periodically rebalance the investments in each plan to more accurately
reflect the targeted allocation when considered appropriate.
Kronos' assumed long-term rates of return on plan assets for 2000, 2001 and
2002 were as follows:
2000 2001 2002
------------------------------ ------------------------------ ----------------------------
Germany 7.5% 7.3% 6.8%
Canada 8.0% 7.8% 7.0%
Norway 7.0% 7.0% 7.0%
Kronos currently expects to utilize the same long-term rate of return on
plan asset assumptions in 2003 as it used in 2002 for purposes of determining
the 2003 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligation and the pension expense will be based in part
upon expected increases in future compensation levels. For all of Kronos' plans
for which the benefit formula is so calculated, Kronos generally bases the
assumed expected increase in future compensation levels based upon average
long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because Kronos
maintains defined benefit pension plans outside the U.S. the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension cost will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and Kronos' current
expectation for what actual average foreign currency exchange rates will be
during 2003, Kronos expects its defined benefit pension expense will approximate
$8 million in 2003. In comparison, Kronos expects to be required to make
approximately $12 million of contributions to such plans during 2003.
Defined benefit pension expense and the amount recognized as prepaid and
accrued pension costs are based upon the actuarial assumptions discussed above.
Kronos believes all of the actuarial assumptions used are reasonable and
appropriate. If Kronos had lowered the assumed discount rate by 25 basis points
for all of its plans as of December 31, 2002, Kronos' aggregate projected
benefit obligation would have increased by approximately $9.4 million at that
date, and Kronos' defined benefit pension expense would be expected to increase
by approximately $1.3 million during 2003. Similarly, if Kronos lowered the
assumed long-term rate of return on plan assets by 25 basis points for all of
its plans, Kronos' defined benefit pension expense would be expected to increase
by approximately $.5 million during 2003.
OPEB Plans. Certain of Kronos' subsidiaries in the U.S. and Canada
currently provide certain health care and life insurance benefits for eligible
retired employees. Kronos accounts for such OPEB costs under SFAS No. 106,
"Employers Accounting for Postretirement Benefits other than Pensions." Under
SFAS No. 106, OPEB expense and accrued OPEB costs are based on certain actuarial
assumptions, principally the assumed discount rate and the assumed rate of
increases in future health care costs. Kronos recognized consolidated OPEB
expense (income) of nil in 2000, $(.1) million in 2001 and $(.3) million in
2002. Similar to defined benefit pension benefits, the amount of funding will
differ from the expense recognized for financial reporting purposes, and
contributions to the plans to cover benefit payments aggregated $1.0 million in
2000, $1.2 million in 2001 and $1.0 million in 2002.
The assumed discount rates Kronos utilizes for determining OPEB expense and
the related accrued OPEB obligation is generally based on the same discount
rates Kronos utilizes for its Canadian defined benefit pension plans.
42
In estimating the health care cost trend rate, Kronos considers its actual
healthcare cost experience, future benefit structures, industry trends and
advice from its third-party actuaries. During each of the past three years,
Kronos has assumed that the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31, 2002,
the expected rate of increase in future health care costs ranges from 9% in
2003, declining to 5.5% in 2007 and thereafter.
Based on the actuarial assumptions described above and Kronos' current
expectation for what actual average foreign currency exchange rates will be
during 2003, Kronos expects its OPEB expense (income) will approximate $(.2)
million in 2003. In comparison, Kronos expects to be required to make
approximately $1.3 million of contributions to such plans during 2003.
OPEB expense and the amount recognized as accrued OPEB costs are based upon
the actuarial assumptions discussed above. Kronos believes all of the actuarial
assumptions used are reasonable and appropriate. If Kronos had lowered the
assumed discount rate by 25 basis points for all of its OPEB plans as of
December 31, 2002, Kronos' aggregate accumulated OPEB obligation would have
increased by approximately $.3 million at that date, and Kronos' OPEB expense
would be expected to increase by a nil amount during 2003. Similarly, if the
assumed future health care cost trend rate had been increased by 100 basis
points, Kronos' accumulated OPEB obligation would have increased by
approximately $.8 million at December 31, 2002, and OPEB expense would have
increased by $.1 million in 2002.
Quantitative and Qualitative Disclosures About Market Risk
General
Kronos is exposed to market risk from changes in currency exchange rates,
interest rates and equity security prices. In the past, Kronos has periodically
entered into interest rate swaps or other types of contracts in order to manage
a portion of its interest rate market risk. Otherwise, Kronos has not generally
entered into forward or option contracts to manage such market risks, nor has
Kronos entered into any such contract or other type of derivative instrument for
trading purposes. Kronos was not a party to any forward or derivative option
contracts related to currency exchange rates, interest rates or equity security
prices at December 31, 2001 or 2002. See Notes 2 and 19 to Kronos' audited
consolidated financial statements included in this information statement.
Interest Rates
Kronos is exposed to market risk from changes in interest rates, primarily
related to indebtedness. At December 31, 2002, Kronos' aggregate indebtedness
was split between 81% of fixed-rate instruments and 19% of variable-rate
borrowings (2001 - 81% fixed-rate and 19% variable-rate). 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 Kronos'
aggregate indebtedness at December 31, 2001 and 2002. At December 31, 2002, all
outstanding fixed-rate indebtedness was denominated in euros (2001 - all fixed
rate indebtedness denominated in U.S. dollars), and all outstanding
variable-rate indebtedness was denominated in either euros, Norwegian kroner or
U.S. dollars. Information shown below for such euro- and Norwegian
kroner-denominated indebtedness is presented in its U.S. dollar equivalent at
December 31, 2002 using that date's exchange rate of .96 euro per U.S. dollar
(2001 - 1.13 euro per U.S. dollar) and 6.99 Norwegian kroner per U.S. dollar
(2001 - 9.02 Norwegian kroner per U.S. dollar). Certain Norwegian
kroner-denominated capital leases totaling $1.9 million in 2002 have been
excluded from the table below.
43
Amount
------------------------------
Carrying Fair Interest Maturity
Indebtedness value value rate date
------------ ------------------------------ -------------- --------------
(In millions)
Fixed-rate indebtedness (euro-denominated):
KII Senior Notes $ 296.9 $ 299.9 8.875% 2009
------------------------------ --------------
296.9 299.9 8.875%
------------------------------ --------------
Variable-rate indebtedness:
European Credit Facility:
euro-denominated 15.6 15.6 4.8% 2005
Norwegian kroner-denominated 11.5 11.5 8.9% 2005
Note payable to affiliate (U.S. dollar denominated) 44.6 44.6 3.1% 2005
------------------------------ --------------
71.7 71.7 4.4%
------------------------------ --------------
$ 368.6 $ 371.6 8.0%
============================== ==============
At December 31, 2001, fixed-rate indebtedness aggregated $194.0 million
(fair value - $194.9 million) with a weighted-average interest rate of 11.75%;
variable rate indebtedness at such date aggregated $46.2 million, which
approximated fair value, with a weighted-average interest rate of 5.45%. All of
such fixed rate indebtedness was denominated in U.S. dollars. Such variable rate
indebtedness was denominated in the euro (52%) and the Norwegian kroner (48%).
Certain Norwegian kroner-denominated capital leases totaling $2.5 million at
December 31, 2001 have been excluded from the above analysis.
Currency Exchange Rates
Kronos is exposed to market risk arising from changes in currency exchange
rates as a result of manufacturing and selling its products worldwide. Earnings
are primarily affected by fluctuations in the value of the U.S. dollar relative
to the euro, Canadian dollar, Norwegian kroner and the United Kingdom pound
sterling. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of risks and uncertainties
related to the conversion of certain of these currencies to the euro.
At December 31, 2002, Kronos had $312.5 million of indebtedness denominated
in euros (2001 - $24.0 million) and $11.5 million of indebtedness denominated in
Norwegian kroner (2001 - $22.2 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 be approximately $32.4
million (2001 - $4.6 million).
Other
Kronos believes there are certain shortcomings in the sensitivity analyses
presented above, which analyses are required under the SEC's regulations. For
example, the hypothetical effect of changes in interest rates discussed above
ignores the potential effect on other variables which affect Kronos' results of
operations and cash flows, such as demand for Kronos' products, sales volumes
and selling prices and operating expenses. Contrary to the above assumptions,
changes in interest rates rarely result in simultaneous parallel shifts along
the yield curve. Accordingly, the amounts presented above are not necessarily an
accurate reflection of the potential losses Kronos would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions could differ materially from such
assumptions. Accordingly, such forward-looking statements should not be
considered to be projections by Kronos of future events, gains or losses.
44
Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding
Kronos' results as determined by GAAP, Kronos has disclosed certain non-GAAP
information which Kronos believes provides useful information to investors:
Kronos discloses percentage changes in its average TiO2 prices in billing
currencies, which excludes the effects of foreign currency translation, so that
changes can be analyzed without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons. Generally,
when the U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods.
45
BUSINESS
General
Kronos is the world's fifth largest producer of TiO2 with an estimated 12%
share of worldwide TiO2 sales volume in 2002. Approximately one-half of Kronos'
2002 sales volume was in Europe, where Kronos is the second largest producer of
TiO2.
Industry
Titanium dioxide pigments are chemical products used for imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics, paper, fibers and ceramics. TiO2 is considered a "quality-of-life"
product with demand affected by changes in gross domestic product in various
regions of the world.
Pricing within the global TiO2 industry over the long term is cyclical, and
changes in industry economic conditions, especially in Western industrialized
nations, can significantly impact Kronos' earnings and operating cash flows.
Kronos' average TiO2 selling price on a billing currency basis increased from
the preceding quarter during each of the third and fourth quarters of 2002 and
the first quarter of 2003, reversing the downward trend in prices that began in
the first quarter of 2001 and continued through the first quarter of 2002.
Kronos' average TiO2 selling prices in the second quarter of 2003 were flat
compared to the first quarter of 2003. Industry-wide demand for TiO2
strengthened throughout 2002, with full year demand estimated as 9% higher than
the previous year. This is believed to have been the result of economic growth
and restocking of customer inventory levels. Volume demand in 2003 is expected
to increase moderately over 2002 levels.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 14% share of North American TiO2 sales volume. Per capita consumption
of TiO2 in the United States and Western Europe far exceeds that in other areas
of the world and these regions are expected to continue to be the largest
consumers of TiO2. Significant regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these regions develop
to the point that quality-of-life products, including TiO2, are in greater
demand. Kronos believes that, due to its strong presence in Western Europe, it
is well positioned to participate in growth in consumption of TiO2 in Eastern
Europe. Geographic segment information is contained in Note 3 to Kronos' audited
consolidated financial statements included in this information statement.
Products and Operations
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile TiO2
is a more tightly bound crystal that has a higher refractive index than anatase
TiO2 and, therefore, provides better opacification and tinting strength in many
applications. Although many end-use applications can use either form of TiO2,
rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase
TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it is
often preferred for use in paper, ceramics, rubber and man-made fibers.
Kronos believes that there are no effective substitutes for TiO2. However,
extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used in a number of Kronos' markets. Generally, extenders are used to reduce to
some extent the utilization of higher-cost TiO2. The use of extenders has not
significantly changed TiO2 consumption over the past decade because, to date,
extenders generally have failed to match the performance characteristics of
TiO2. As a result, Kronos believes that the use of extenders will not materially
alter the growth of the TiO2 business in the foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
46
North America. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos' manufacturing facilities are located in Germany,
Canada, Belgium and Norway and Kronos owns a one-half interest in a TiO2
manufacturing joint venture located in Louisiana, U.S.A. Kronos has sales and
marketing activities in over 100 countries worldwide. Kronos and its
predecessors have produced and marketed TiO2 in North America and Europe for
over 80 years. As a result, Kronos believes that it has developed considerable
expertise and efficiency in the manufacture, sale, shipment and service of its
products in domestic and international markets. By volume, approximately
one-half of Kronos' 2002 TiO2 sales were to Europe, with 39% to North America
and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used as a feedstock by sulfate-process TiO2 plants) pursuant to a
governmental concession with an unlimited term that allows Kronos to operate an
ilmenite mine in Norway. The ore body, owned by the Norwegian government, has
estimated ilmenite reserves that are expected to last at least 20 years. Kronos
is also engaged in the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the pigment production processes).
Kronos' water treatment chemicals (marketed under the name Ecochem) are used as
treatment and conditioning agents for industrial effluents and municipal
wastewater, and in the manufacture of iron pigments.
Manufacturing Process and Raw Materials
TiO2 is manufactured by Kronos using both the chloride process and the
sulfate process. Approximately 72% of Kronos' current production capacity is
based on its chloride process which generates less waste than the sulfate
process. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. In general, the chloride process requires less capital
investment, labor and energy than the sulfate process. Because much of the
chlorine is recycled and higher titanium-containing feedstock is used, the
chloride process produces less waste. The sulfate process is a batch chemical
process that uses sulfuric acid to extract TiO2. Sulfate technology normally
produces either anatase or rutile pigment. Once an intermediate TiO2 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
TiO2 industry sales represented by chloride-process pigments has increased
relative to sulfate-process pigments and, in 2002, chloride-process production
facilities represented approximately 62% of industry capacity.
Kronos produced a company record 442,000 metric tons of TiO2 in 2002,
compared to 412,000 metric tons produced in 2001 and 441,000 metric tons in
2000. Kronos' average production capacity utilization rate in 2002 was 96%, up
from 91% in 2001. Capacity utilization rates in 2001 were down due in part to
lost sulfate production volume resulting from the Leverkusen fire. Kronos
believes its current annual attainable production capacity is approximately
470,000 metric tons, including its one-half interest in the joint venture-owned
Louisiana plant (see "TiO2 Manufacturing Joint Venture"). Kronos expects its
production capacity will be increased by approximately 10,000 metric tons
primarily at its chloride facilities, with moderate capital expenditures,
bringing Kronos' capacity to approximately 480,000 metric tons during 2005.
The primary raw materials used in the TiO2 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 in Australia, South Africa, Canada, India and the United States.
Kronos purchases 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
2007. Natural rutile ore is purchased primarily from Iluka Resources, Limited
(Australia) under a long-term supply contract that expires at the end of 2004.
Kronos does not expect to encounter difficulties obtaining long-term extensions
to existing supply contracts prior to the expiration of the contracts. Raw
materials purchased under these contracts and extensions thereof are expected to
meet Kronos' chloride feedstock requirements over the next several years.
47
The primary raw materials used in the TiO2 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, with the
principal active sources currently located in Norway, Canada, Australia, India
and South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, Kronos operates a rock ilmenite mine in Norway, which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2002. For its Canadian sulfate-process plant, Kronos also purchases
sulfate grade slag primarily from Q.I.T. Fer et Titane Inc. (Canada), a wholly
owned subsidiary of Rio Tinto Iron & Titanium, Inc., under a long-term supply
contract that expires at the end of 2006.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on Kronos' financial position,
results of operations or liquidity.
TiO2 Manufacturing Joint Venture
Subsidiaries of Kronos and Huntsman International Holdings LLC ("Huntsman")
each own a 50%-interest in a manufacturing joint venture, Louisiana Pigment
Company ("LPC"). LPC owns and operates a chloride-process TiO2 plant located in
Lake Charles, Louisiana. Production from the plant is shared equally by Kronos
and Huntsman (the "Partners") pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
The manufacturing joint venture operates on a break-even basis and,
accordingly, Kronos reports no equity in earnings of the joint venture. Kronos'
cost for its share of the TiO2 produced is equal to its share of the joint
venture's costs. Kronos' share of net costs is reported as cost of sales as the
related TiO2 acquired from the joint venture is sold. See Note 7 to Kronos'
audited consolidated financial statements included in this information
statement.
Competition
The TiO2 industry is highly competitive. Kronos competes primarily on the
basis of price, product quality and technical service, and the availability of
high performance pigment grades. Although certain TiO2 grades are considered
specialty pigments, the majority of Kronos' grades and substantially all of
Kronos' production are considered commodity pigments with price generally being
the most significant competitive factor. Kronos believes that it is the leading
seller of TiO2 in several countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont");
Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and Ishihara
Sangyo Kaisha, Ltd. Kronos' five largest competitors have estimated individual
shares of worldwide TiO2 production capacity ranging from 24% to 5%, and an
estimated aggregate 70% share of worldwide TiO2 production volume. DuPont has
about one-half of total U.S. TiO2 production capacity and is Kronos' principal
North American competitor.
Capacity additions that are the result of construction of greenfield plants
in the worldwide TiO2 market require significant capital and substantial lead
time, typically three to five years in Kronos' experience. As no new plants are
currently under construction, additional greenfield capacity is not expected in
48
the next three to five years, but industry capacity can be expected to increase
as Kronos and its competitors debottleneck existing plants. In addition to
potential capacity additions, certain competitors have either idled or shut down
facilities. Based on the factors described in "Industry" above, Kronos expects
that the average annual increase in industry capacity from announced
debottlenecking projects will be less than the average annual demand growth for
TiO2 over the next three to five years.
No assurance can be given that future increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to Kronos' expectations. If actual developments differ from Kronos'
expectations, Kronos and the TiO2 industry's performance could be unfavorably
affected.
Research and Development
Kronos' expenditures for research and development and certain technical
support programs averaged approximately $6 million during each of 2000, 2001 and
2002. Research and development activities are conducted principally at the
Leverkusen, Germany facility. Such activities are directed primarily toward
improving both the chloride and sulfate production processes, improving product
quality and strengthening Kronos' competitive position by developing new pigment
applications.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to Kronos and to the continuing business activities of Kronos. Kronos
continually seeks patent protection for its technical developments, principally
in the United States, Canada and Europe, and from time to time enters into
licensing arrangements with third parties.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells.
Foreign Operations
Kronos' chemical businesses have operated in non-U.S. markets since the
1920s. Most of Kronos' current production capacity is located in Europe and
Canada with non-U.S. net property and equipment aggregating approximately $399
million at June 30, 2003. Net property and equipment in the U.S., including 50%
of the property and equipment of LPC, was approximately $118 million at such
date. Kronos' European operations include production facilities in Germany,
Belgium and Norway. Approximately $603 million of Kronos' 2002 consolidated
sales were to non-U.S. customers, including $93 million to customers outside of
Europe and Canada. Sales to customers in the U.S. aggregated $272 million in
2002. Foreign operations are subject to, among other things, currency exchange
rate fluctuations and Kronos' 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 Kronos' results of
operations are discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Political and economic uncertainties in certain of the countries in which
Kronos operates may expose it to risk of loss. Kronos does not believe that
there is currently any likelihood of material loss through political or economic
instability, seizure, nationalization or similar event. Kronos cannot predict,
however, whether events of this type in the future could have a material effect
on its operations. Kronos' manufacturing and mining operations are also subject
to extensive and diverse environmental regulation in each of the foreign
countries in which they operate. See "Regulatory and Environmental Matters."
Customer Base and Annual Seasonality
Kronos believes that neither its aggregate sales nor those of any of its
principal product groups are concentrated in or materially dependent upon any
single customer or small group of customers. Kronos' largest ten customers
accounted for approximately 25% of net sales in 2002. Neither Kronos' business
49
as a whole nor that of any of its principal product groups is seasonal to any
significant extent. Due in part to the increase in paint production in the
spring to meet the spring and summer painting season demand, TiO2 sales are
generally higher in the first half of the year than in the second half of the
year.
Employees
As of June 30, 2003, Kronos employed approximately 2,500 persons, excluding
LPC employees, with approximately 100 employees in the United States and
approximately 2,400 employees outside of the United States. Hourly employees in
production facilities worldwide, including LPC, are represented by a variety of
labor unions, with labor agreements having various expiration dates. Kronos
believes its labor relations are good.
Regulatory and Environmental Matters
Certain of Kronos' 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 Kronos have the potential to cause environmental or other damage.
Kronos has implemented and continues to implement various policies and programs
in an effort to minimize these risks. The policy of Kronos is to maintain
compliance with applicable environmental laws and regulations at all its
facilities and to strive to improve its environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
Kronos' production, handling, use, storage, transportation, sale or disposal of
such substances as well as Kronos' consolidated financial position, results of
operations or liquidity.
Kronos' U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. Kronos believes LPC and a slurry facility owned by Kronos in Lake
Charles, Louisiana are in substantial compliance with applicable requirements of
these laws or compliance orders issued thereunder. Kronos has no other U.S.
plants. From time to time, Kronos' facilities may be subject to regulatory
enforcement under such statutes. Resolution of such matters typically involves
the establishment of compliance programs. Occasionally, resolution may result in
the payment of penalties, but to date such penalties have not involved amounts
having a material adverse effect on Kronos' consolidated financial position,
results of operations or liquidity.
Kronos' European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. Kronos believes that all its plants
are in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (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. Kronos believes that it has
obtained 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 TiO2 industry.
At all of Kronos' sulfate plant facilities other than Fredrikstad, Norway,
Kronos recycles spent acid either through contracts with third parties or using
Kronos' own facilities. At its Fredrikstad, Norway plant, Kronos ships its spent
acid to a third party location where it is treated and disposed. Kronos has a
contract with a third party to treat certain by-products of its German
sulfate-process plants. Either party may terminate the contract after giving
four years advance notice with regard to its Nordenham, Germany plant. Under
certain circumstances, Kronos may terminate the contract after giving six months
notice with respect to treatment of by-products from the Leverkusen, Germany
plant.
50
Kronos' capital expenditures related to its ongoing environmental
protection and improvement programs in 2002 were approximately $5 million, and
are currently expected to be approximately $5 million in 2003.
Properties
Kronos currently operates five TiO2 plants in Europe (two in Leverkusen,
Germany; one in Nordenham, Germany; one in Langerbrugge, Belgium; and one in
Fredrikstad, Norway). In North America, Kronos has a TiO2 plant in Varennes,
Quebec, Canada and, through LPC, the manufacturing joint venture described
above, a one-half interest in a TiO2 plant in Lake Charles, Louisiana. Kronos
operates an ilmenite ore mine in Hauge i Dalane, Norway pursuant to a
governmental concession and also owns a TiO2 slurry plant in Lake Charles,
Louisiana. See Note 7 to Kronos' audited consolidated financial statements
included in this information statement.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Rent for the Leverkusen facility is periodically established by agreement
with Bayer AG 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 certain amounts of sulfuric acid, auxiliary
and operating materials and utilities services necessary to operate the
Leverkusen facility. The lease and has certain restrictions regarding Kronos'
ability to transfer ownership or use of the Leverkusen facility.
Kronos owns, directly or through its joint venture, all of its principal
production facilities described above, except for the land under the Leverkusen
and Fredrikstad facilities and the ilmenite ore mine. Kronos has a governmental
concession with an unlimited term to operate the ilmenite mine in Norway.
Kronos has under lease various corporate and administrative offices located
in the U.S. and various sales offices located in the U.S., France, the
Netherlands, Denmark and the U.K.
Kronos' principal executive offices are located at Three Lincoln Centre,
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697 and its telephone number
is (972) 233-1700.
Legal Proceedings
See "Regulatory and Environmental Matters" above.
Kronos' 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 investigation stage, which could ultimately result in civil
and criminal sanctions against Kronos, was completed in 2002. In May 2003, the
Belgian authorities referred the proceedings against Kronos' Belgian subsidiary
and certain of its Belgium employees to the criminal court for trial. The matter
has been set for trial in October 2003.
51
MANAGEMENT
Directors and Officers
As of the distribution date, the following persons are currently
anticipated to serve as Kronos' officers and directors. Each of the directors
below will be elected to serve until the next annual meeting of stockholders and
his successor has been elected and has been qualified, or until his earlier
death, resignation or removal.
Name Age Principal Positions and Directorships
- ---- ---- -------------------------------------
Harold C. Simmons.......................... 72 Chairman of the Board and Chief Executive Officer
C. H. Moore, Jr............................ 64 Director
George E. Poston........................... 66 Director
Glenn R. Simmons........................... 75 Director
Dr. R. Gerald Turner....................... 57 Director
Steven L. Watson........................... 52 Director
Dr. Ulfert Fiand........................... 55 Senior Vice President, Manufacturing and Technology
H. Joseph Maas............................. 51 Senior Vice President, Sales and Marketing
Douglas C. Weaver.......................... 61 Senior Vice President, Development
Robert D. Graham........................... 48 Vice President, General Counsel and Secretary
Gregory M. Swalwell........................ 46 Vice President, Finance
John A. St. Wrba........................... 47 Vice President and Treasurer
Kelly D. Luttmer........................... 40 Tax Director
Harold C. Simmons has been a director of NL since 1986, Chairman of the
Board of NL since 1987 and Chief Executive Officer of NL since July 2003. Mr.
Simmons has served as Chairman of the Board and Chief Executive Officer of
Kronos since August 2003. He has been Chairman of the Board of Valhi and Contran
since prior to 1998, was Chief Executive Officer of Valhi and Contran from prior
to 1998 to 2002, and was President of Valhi and Contran from prior to 1997 to
1998. Mr. Simmons has been an executive officer and/or director of various
companies related to Valhi and Contran since 1961. He is a brother of Glenn R.
Simmons.
C. H. Moore, Jr. has been a director of NL since September 2003 and is
anticipated to become a director of Kronos as of the distribution date. Mr.
Moore retired from KPMG LLP in June 2000 after 37 years in which he served in
various capacities with the firm. Among other positions, he served as managing
partner of the firm's Dallas, Texas business unit from 1990 to 1999. Prior to
1990, Mr. Moore was partner-in-charge of the audit and accounting practice of
the firm's Dallas business unit for 12 years. Mr. Moore is a certified public
accountant. It is anticipated that Mr. Moore will become a member of Kronos'
Audit Committee.
George E. Poston has been a director of NL since 2002 and is anticipated to
become a director of Kronos as of the distribution date. He is President of
Poston Real Estate Co., a privately-held commercial real estate investment
company, and President of Poston Capital Co., a privately-held investment
company, since 1970. Mr. Poston is anticipated to become a member of Kronos'
Audit Committee and Management Development and Compensation Committee.
Glenn R. Simmons has been a director of NL since 1986 and is anticipated to
become a director of Kronos as of the distribution date. Mr. Simmons is Chairman
of the Board of Keystone Consolidated Industries, Inc. ("Keystone"), a steel
fabricated wire products, industrial wire and carbon steel rod company that is
affiliated with Contran, and CompX International Inc. ("CompX"), a manufacturer
of ergonomic computer support systems, precision ball bearing slides and
security products that is also affiliated with Contran. Since prior to 1998, Mr.
Simmons has been Vice Chairman of the Board of Valhi and Contran. Mr. Simmons is
also a director of Titanium Metals Corporation, an integrated producer of
titanium metal products that is 40% owned by Valhi ("TIMET"). Mr. Simmons has
been an executive officer and/or director of various companies related to Valhi
and Contran since 1969. He is a brother of Harold C. Simmons.
52
Dr. R. Gerald Turner has been a director of NL since May 2003 and is
anticipated to become a director of Kronos as of the distribution date. Dr.
Turner has served since 1995 as President of Southern Methodist University in
Dallas, Texas. He held previous executive and administrative positions at the
University of Mississippi, the University of Oklahoma, and Pepperdine
University. He serves on the Board of Directors of J.C. Penney and American
Aadvantage Funds. Dr. Turner is anticipated to become Chairman of Kronos' Audit
and Management Development and Compensation Committees.
Steven L. Watson has been a director of NL since 2000 and is anticipated to
become a director of Kronos as of the distribution date. Mr. Watson has been
President and a director of Valhi and Contran since 1998, and Chief Executive
Officer of Valhi since 2002. Mr. Watson is also a director of CompX, Keystone
and TIMET. Mr. Watson has served as an executive officer and/or director of
various companies related to Valhi and Contran since 1980.
Dr. Ulfert Fiand has served as Senior Vice President, Manufacturing and
Technology of Kronos since August 2003. He has been KII's President of
Manufacturing and Technology since 2001. Dr. Fiand joined KII in 1988, and has
served as Group Leader and Director of Chloride Process Technology, Director of
Process Technology, and VP Production & Process Technology.
H. Joseph Maas has served as Senior Vice President, Sales and Marketing of
Kronos since August 2003 and Vice President of Marketing Worldwide of Kronos
since prior to 1998. Mr. Maas has served in various positions with Kronos or NL
since 1978
Douglas C. Weaver has served as Senior Vice President, Development of
Kronos since August 2003 and Vice President, Business Development of Kronos
since prior to 1998. Mr. Weaver has served in various positions with Kronos or
NL since 1973.
Robert D. Graham has served as Vice President, General Counsel and
Secretary of NL since July 2003 and Vice President, General Counsel and
Secretary of Kronos since August 2003. Mr. Graham has served as Vice President
of Valhi and Contran since October 2002. From January 1997 to October 2002, Mr.
Graham served as an executive officer, and most recently as Executive Vice
President and General Counsel, of Software Spectrum, Inc. ("SSI"). SSI is a
global business-to-business software services provider that is a wholly owned
subsidiary of Level 3 Communications, Inc. From 1991 to June 2002, SSI was a
publicly held corporation. From 1985 to 1997, Mr. Graham was a partner in the
law firm of Locke Purnell Rain Harrell (A Professional Corporation), a
predecessor to Locke Liddell and Sapp LLP.
Gregory M. Swalwell has served as Vice President, Finance of NL since July
2003 and as Vice President, Finance of Kronos since August 2003. Mr. Swalwell
has served as Vice President of Valhi and Contran since 1998 and controller of
Valhi and Contran since prior to 1998. Mr. Swalwell has served in accounting
positions with various companies related to Valhi and Contran since 1988.
John A. St. Wrba has been Vice President and Treasurer of NL since February
2003 and Treasurer of Kronos since August 2003. Mr. St. Wrba was NL's Assistant
Treasurer from 2002 to 2003. From 2000 to 2002, he was Assistant Treasurer of
Kaiser Aluminum & Chemicals Corporation. From 1998 to 2000, Mr. St. Wrba served
as NL's Assistant Treasurer.
Kelly D. Luttmer has served as Tax Director of NL since July 2003 and as
Tax Director of Kronos since August 2003. Ms. Luttmer has served as Tax Director
of Valhi and Contran since 1998. Prior to 1998, Ms. Luttmer served as assistant
tax manager of Valhi and Contran. Ms. Luttmer has served in tax accounting
positions with various companies related to Valhi and Contran since 1989.
In addition, Dr. Lawrence A. Wigdor, formerly Kronos' President and Chief
Executive Officer since 1990, serves as a consultant to Kronos with ongoing
management involvement in the TiO2 operations conducted by Kronos.
53
Board Committees
As of the distribution date, Kronos' Board will establish two standing
committees: an Audit Committee and a Management Development and Compensation
Committee, each of which is composed entirely of individuals who are not
employees of Kronos.
Audit Committee. The principal responsibilities of the Audit Committee are
to serve as an independent and objective party to review Kronos' auditing,
accounting and financial reporting processes. Kronos' Board of Directors has
adopted a written charter for the Audit Committee. Each of the members of the
Audit Committee is independent within the meaning of the New York Stock Exchange
listing standards. The current members of the Audit Committee are anticipated to
be Dr. Turner (Chairman), Mr. Poston and Mr. Moore.
Management Development and Compensation Committee. The principal
responsibilities of the Management Development and Compensation Committee are to
review and make recommendations regarding executive compensation policies,
periodically to review and approve or make recommendations with respect to
matters involving executive compensation, to take action or to review and make
recommendations to the Board regarding employee benefit plans or programs, and
to serve as a counseling committee to the Chief Executive Officer regarding
matters of key personnel selection, organization strategies and such other
matters as the Board may from time to time direct. The Management Development
and Compensation Committee also is responsible for reviewing and approving stock
option and other stock-based compensation awards under Kronos' incentive plan
and for reviewing and approving Kronos' target and performance levels under
variable compensation awards. The current members of the Management Development
and Compensation Committee are anticipated to be Dr. Turner (Chairman) and Mr.
Poston.
Compensation of Directors
Annual fees will be paid to each director who was not an employee of Kronos
or a subsidiary of Kronos consisting of an annual retainer of $20,000 for board
members and $2,000 for each committee on which a member serves, payable in
quarterly installments, and shares of Kronos common stock granted pursuant to
the Kronos 2003 Long-Term Incentive Plan (discussed below), the number of shares
to be determined based on the closing sale price of Kronos common stock on the
date of grant. In addition, each non-employee director will receive an
attendance fee of $1,000 for each day during which Board or committee meetings
are held (including telephonic meetings) that a director attends. Non-employee
directors will also receive a fee of $1,000 per day for each day spent on Kronos
business at the request of the Board or the Chairman of the Board, other than
the day related to Board or committee meetings. Directors will be reimbursed for
reasonable expenses incurred in attending Board of Directors and committee
meetings. If any director who is not an officer or employee of Kronos or any
subsidiary or affiliate of Kronos dies while in active service, his or her
designated beneficiary or estate will be entitled to receive a life insurance
benefit equal to the annual retainer then in effect.
Compensation of Executive Officers
The summary compensation table set forth below provides summary information
for the years ended December 31, 2002, 2001 and 2000 regarding annual and
long-term compensation awarded to, earned by or paid to Kronos' former Chief
Executive Officer and one other Kronos executive officer for services they
rendered to Kronos and its subsidiaries (the "named executive officers").
54
SUMMARY COMPENSATION TABLE(1)
Long-Term
Compensation(2)
Annual Compensation Awards
Shares Underlying
Other Annual Options (#) All Other
Year Salary Bonus Compensation Compensation
Name and Principal Position (3)
Dr. Ulfert Fiand................. 2002 $ 142,179 $ 99,501 $ -0- -0- $ -0-
Senior Vice President 2001 117,520 182,111 -0- 6,000(4) -0-
Manufacturing and Technology 2000 113,977 43,596 -0- 5,000(4) -0-
Dr. Lawrence A. Wigdor(5)........ 2002 750,000 750,000(6) 68(7) -0- 186,848(8)
Former Chief Executive 2001 750,000 1,350,000(6) 2,729(7) 100,000(4) 351,658(8)
Officer 2000 750,000 2,625,000(6) 6,815(7) 100,000(4) 132,038(8)
- ----------
(1) Certain employees of NL provided services to Kronos during the years ended
December 31, 2002, 2001 and 2000, including the services of Robert D.
Hardy, Kronos' former chief financial officer, pursuant to a Services
Agreement between NL, Kronos and KII dated as of January 1, 1995 and
amended as of April 1, 2002 (the "NL ISA"). NL's charges to Kronos under
the NL ISA for the services Mr. Hardy provided to Kronos are not
specifically identifiable to his services. However, KII paid Mr. Hardy a
bonus of $250,000 in 2001 outside of the NL ISA for services Mr. Hardy
rendered to KII. See "Certain Relationships and Related Transactions."
(2) No shares of restricted stock were granted to the named executive officers
nor payouts made to the named executive officers pursuant to long-term
incentive plans during the last three years. Therefore, the columns for
such compensation have been omitted.
(3) Other annual compensation for each of the named executive officers
represents perquisites to the extent such amounts are required to be
reported pursuant to SEC rules.
(4) Represents options to purchase shares of common stock of NL. Upon exercise,
NL will bill Kronos the difference between the fair market value of the
shares issued upon exercise and the aggregate exercise price for such
shares.
(5) Dr. Wigdor resigned as Kronos' Chief Executive Officer in July 2003. Prior
to his resignation, Dr. Wigdor was an executive officer of NL and Kronos
and devoted all of his business time to Kronos. Accordingly, Kronos paid,
accrued or was charged for all of Dr. Wigdor's compensation. Dr. Wigdor
currently serves as a consultant to Kronos with ongoing management
involvement in the TiO2 operations conducted by Kronos.
(6) Amounts Kronos paid Dr. Wigdor pursuant to NL's variable compensation plan,
including in certain instances, discretionary bonus amounts.
(7) Theses amounts represent accruals on Dr. Wigdor's deferred compensation
that exceeded 120% of the applicable federal long-term interest rate.
(8) As shown below, all other compensation for 2002, 2001, and 2000 for Dr.
Wigdor consisted of (i) matching contributions Kronos made or accrued
pursuant to the savings feature of the NL savings plan, (ii) retirement
contributions Kronos made or accrued pursuant to the NL savings plan, (iii)
life insurance premiums Kronos paid and (iv) amounts Kronos paid under the
NL Supplemental Executive Retirement Plan (the "SERP") in 2002 and 2001 and
amounts accrued by Kronos in 2000 under the SERP and paid by Kronos in
2001.
NL Savings
NL Savings Plan
Plan Retirement Life Insurance SERP
Named Executive Officer Year Match Contributions Premiums Payments Total
--------------------------- ------ ------------ -------------- ------------ ------------ ---------
Lawrence A. Wigdor...... 2002 $ 8,000 $ 16,600 $ 10,248 $ 152,000 $ 186,848
2001 6,800 14,110 10,248 320,500 351,658
2000 10,200 14,110 9,328 98,400 132,038
In 2001, NL amended the SERP to provide for the distribution of the accrued
balance in each SERP participant's account and the payment of future SERP
benefits to participants as accrued, thus reducing Kronos' interest costs.
In connection with the amendment, in 2001 Kronos paid $1,761,661 to Dr.
Wigdor, which represented the accrued vested balance in his SERP account
with interest. These accrued amounts were previously reported as
compensation in the years accrued.
55
Stock Option Exercises and Holdings
The following table provides information with respect to the named
executive officers concerning the exercise of options during 2002 and the value
of unexercised options held as of December 31, 2002. The options described in
the following table are options to purchase shares of common stock of NL
pursuant to NL's 1998 Long-Term Incentive Plan. No stock options or stock
appreciation rights were granted to the named executive officers during 2002.
AGGREGATE STOCK OPTION EXERCISES IN 2002 AND
DECEMBER 31, 2002 OPTION VALUES (1)
Shares Number of Shares
Acquired Underlying Value of Unexercised
on Unexercised Options at In-the-Money Options
Exercise Value December 31, 2002 (#) at December 31, 2002 (2)
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ----------- ---------------- ----------------------------- ------------- ---------------
Dr. Ulfert Fiand........... -0- $ -0- 3,000 11,000 $ 10,979 $ 19,287
Dr. Lawrence A. Wigdor..... 4,547 27,846 (1) 96,000 217,600 14,040 288,207
- ----------
(1) In November 2002, NL entered into agreements with Dr. Wigdor and Robert D.
Hardy, Kronos' former chief financial officer, among others, whereby they
each exercised certain options to purchase NL common stock and thereafter
NL purchased certain of the shares acquired upon exercise, as well as
certain options to purchase NL common stock from each of them. For Dr.
Wigdor, the shares he acquired upon exercise and the value he realized upon
such exercise are reflected in the table above. For Mr. Hardy, he acquired
23,425 shares of NL common stock upon exercise and realized $127,458 upon
such exercise. Dr. Wigdor and Mr. Hardy tendered 3,000 shares and 16,344
shares, respectively, of their own shares of NL common stock, which each
had held for at least six months, to pay a portion of the stock option
exercise price and to pay applicable withholding taxes, as permitted under
NL's incentive plans. These shares were valued at the market price of NL
common stock on the date of exercise. In addition, NL purchased options to
purchase 155,835 shares of NL common stock and 25,575 shares of NL common
stock from Dr. Wigdor and Mr. Hardy, respectively. In the same
transactions, NL also purchased 1,547 shares of NL common stock from Dr.
Wigdor and 7,081 shares of NL common stock from Mr. Hardy. These options
were sold at a price equal to the market price of NL common stock on the
date of sale, less the exercise price of the options, and the shares were
sold at the market price of NL common stock on the date of sale. In
connection with the NL purchase of the options and shares, NL paid $655,288
to Dr. Wigdor and $216,936 to Mr. Hardy. NL charged Kronos $580,902 for all
of the foregoing transactions related to Dr. Wigdor but did not charge
Kronos anything for the foregoing transactions related to Mr. Hardy.
(2) The value is based on the difference between the exercise price of the
individual stock options and the $17.00 per share closing sales price of NL
common stock on December 31, 2002. At December 31, 2002, Mr. Hardy held
exercisable stock options to purchase 24,000 shares of NL common stock and
unexercisable stock options to purchase 86,000 shares of common stock.
Based on the difference between the exercise price of the individual stock
options and the $17.00 per share closing sales price of NL common stock on
December 31, 2002, the value of Mr. Hardy's exercisable and unexercisable
stock options to purchase NL common stock was nil and $97,724,
respectively.
Pension Plans
The Retirement Program of NL Industries, Inc. for its U.S. employees (the
"Pension Plan") provides lifetime retirement benefits to eligible employees. In
1996, NL approved the suspension of all future accruals under the salaried
component of the Pension Plan. No amounts were paid or distributed to any of
such persons in 2002. The estimated accrued annual benefits payable under the
Pension Plan upon retirement at normal retirement age for Dr. Wigdor and Mr.
Hardy are $29,439 and $12,348, respectively.
Dr. Fiand is eligible to receive his pension through Kronos Germany through
the Bayer Pensionskasse and the Supplemental Pension Promise. All of KII's
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 (euro)54,000) and the Bayer
Pensionskasse provides a benefit of 44% of such employee's accumulated
56
contributions (with a minimum benefit of approximately (euro)13 per month). All
of KII's 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 (euro)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 in 2002. The estimated accrued annual
benefits payable upon normal retirement at normal retirement age for Dr. Fiand
is (euro)24,425.
Kronos 2003 Long-Term Incentive Plan
Prior to the distribution, Kronos' Board of Directors and sole stockholder
are each expected to approve the Kronos 2003 Long-Term Incentive Plan. The
purpose of the Kronos 2003 Long-Term Incentive Plan is to advance the interests
of Kronos and its stockholders by providing incentives to persons who contribute
significantly to the strategic and long-term performance objectives and growth
of Kronos. The plan will provide for awards or grants of shares of Kronos common
stock, incentive and nonqualified stock options, stock appreciation rights,
restricted stock, performance grants and other awards at the discretion of the
Management Development and Compensation Committee. Key individuals employed by,
or performing services for Kronos or its parents or subsidiaries will be
eligible to receive such awards, including individuals who may be non-employee
directors or other persons who are not employed by Kronos or its parents or
subsidiaries. The plan will provide for a maximum of 150,000 shares of Kronos
common stock for awards, subject to certain adjustments. The underlying shares
of Kronos common stock issuable under the plan in any single fiscal year under
awards to an individual may not exceed 50,000 shares. The plan generally will
terminate on the tenth anniversary of its adoption unless Kronos' Board of
Directors extends it for up to an additional five years for the grant of awards
other than incentive stock options. Kronos has not granted any awards under the
plan and has no other equity compensation plans.
Compensatory Arrangements
Summarized below are certain benefit arrangements, other than arrangements
applicable to all employees generally, that have been established for the
benefit of Kronos' named executive officers following the distribution.
Concurrently with his resignation as Chief Executive Officer of Kronos in
July 2003, Dr. Wigdor entered into a consultancy arrangement with Kronos
pursuant to which Dr. Wigdor will provide ongoing management involvement in
Kronos' TiO2 operations. Dr. Wigdor received $461,000 on August 1, 2003 and will
receive a monthly payment of $84,000 beginning on August 1, 2003. If Kronos
achieves 2003 operating income of $130 million, Kronos will pay Dr. Wigdor an
additional $461,000 on February 1, 2004. Beginning in 2004, Dr. Wigdor will
receive annual discretionary bonuses that are no less than the average bonus
paid to the three executives of NL and Kronos combined receiving the highest
paid bonuses for 2004 and 2005, respectively, excluding the Chief Executive
Officer of NL. If Kronos terminates the consultancy arrangement prior to
September 30, 2005, Dr. Wigdor will receive eight months compensation, medical
and dental coverage through September 30, 2005 and, if terminated in 2004 or
after, a pro-rata portion of his discretionary bonus for the year in which the
termination occurs. The arrangement provides Dr. Wigdor various other benefits,
such as an office and secretarial support at Kronos' New Jersey office.
Compensation Committee Interlocks and Insider Participation
No member of Kronos' compensation committee is a current or former officer
or employee of Kronos or its subsidiaries or has had a relationship requiring
disclosure by Kronos under applicable federal securities regulations. No
executive officer of Kronos served as a director or member of the compensation
committee of any entity that has one or more executive officers serving as a
member of Kronos' Board of Directors or compensation committee.
57
PRINCIPAL STOCKHOLDERS
Ownership of NL and Kronos Common Stock
The following table sets forth the number of shares of NL common stock and
Kronos common stock that is beneficially owned, as defined by the regulations of
the SEC, as of __________, 2003 and the approximate number and percentage of
shares of Kronos common stock that will be beneficially owned immediately
following the distribution date, based on the number of outstanding shares of
Kronos common stock as of _______, 2003 and a distribution of one share of
Kronos common stock for every two shares of NL common stock as of the record
date, by each of Kronos' directors, the named executive officers, all Kronos
current executive officers and directors as a group and each other person known
to Kronos who will beneficially own 5% or more of Kronos common stock after the
distribution. Kronos expects to have an estimated 48.9 million shares of Kronos
common stock outstanding immediately after the completion of the distribution.
Percentage
Number of Shares of Kronos
of Kronos Common
Number of Shares Common Stock Number of Shares Stock
of NL Common Owned on of Kronos Common Owned
Stock Owned on -------, 2003 Stock Owned After After the
------, 2003(1) (1) the Distribution (1) Distribution
------------------ ----------------- --------------------- --------------
NL Industries, Inc...................... -0- 48,943,049 (2) 25,091,457 (3) 51.3%
Valhi, Inc.............................. 30,135,390 (3) -0- 15,067,695 (3) 30.8%
Tremont LLC............................. 10,215,541 (3) -0- 5,107,770 (3) 10.4%
---------- ---------- ---------- ----
40,350,931 (3) 48,943,049 45,266,922 (3) 92.5%
C. H. Moore, Jr......................... -0- -0- -0- -0-
George E. Poston........................ 2,000 -0- 1,000 (3) *
Glenn R. Simmons........................ 12,000 (3)(4) -0- 2,000 (3) *
Harold C. Simmons....................... 83,475 (3)(5) -0- 37,737 (3)(6) *
Dr. R. Gerald Turner.................... 1,000 -0- 500 (3) *
Steven L. Watson........................ 11,000 (3)(7) -0- 3,500 (3) *
Dr. Lawrence A. Wigdor.................. 196,800 (3)(8) -0- 1,500 (3) *
Dr. Ulfert Fiand........................ 7,400 (9) -0- -0- -0-
All current executive officers and
directors of Kronos as a group (11 ------------
persons)............................ 313,675 (3)(4)(5) -0- 46,237 (3)(6) *
(6)(7)(8)(9)
(10)
* Less than 1%.
(1) All beneficial ownership is sole and direct unless otherwise noted.
(2) Prior to the distribution, Kronos is a wholly-owned subsidiary of NL.
58
(3) Valhi and Tremont are the direct holders of approximately 63.2% and 21.4%,
respectively, of the outstanding common stock of NL. Valhi is the direct
holder of 100% of the membership interests of Tremont. Valhi Group, Inc.
("VGI"), National City Lines, Inc. ("National"), Contran, the Harold
Simmons Foundation, Inc. (the "Foundation"), the Contran Deferred
Compensation Trust No. 2 (the "CDCT No. 2") and The Combined Master
Retirement Trust (the "CMRT") are the direct holders of approximately
77.6%, 9.1%, 3.0%, 1.3%, 0.4% and 0.1%, respectively, of the outstanding
shares of Valhi common stock. National, NOA, Inc. ("NOA") and Dixie Holding
Company ("Dixie Holding") are the direct holders of approximately 73.3%,
11.4% and 15.3%, respectively, of the outstanding common stock of VGI.
Contran and NOA are the direct holders of approximately 85.7% and 14.3%,
respectively, of the outstanding common stock of National. Contran and
Southwest Louisiana Land Company, Inc. ("Southwest") are the direct holders
of approximately 48.9% and 51.1%, respectively, of the outstanding common
stock of NOA. Dixie Rice Agricultural Corporation, Inc. ("Dixie Rice") is
the direct holder of 100% of the outstanding common stock of Dixie Holding.
Contran is the holder of 100% of the outstanding common stock of Dixie Rice
and approximately 88.9% of the outstanding common stock of Southwest.
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 (the "Trusts"), of which Mr. Simmons is the sole trustee. As
sole trustee of each of the Trusts, Mr. Simmons has the power to vote and
direct the disposition of the shares of Contran stock held by each of the
Trusts. Harold C. Simmons is the Chairman of the Board and Chief Executive
Officer of NL, the Chairman of the Board of each of Tremont, Valhi, VGI,
National, NOA, Dixie Holding, Dixie Rice, Southwest and Contran and, as of
the distribution date, is anticipated to be the Chairman of the Board and
Chief Executive Officer of Kronos. The Foundation directly holds
approximately 1.3% of the outstanding shares of Valhi common stock. The
Foundation is a tax-exempt foundation organized for charitable purposes.
Harold C. Simmons is the Chairman of the Board of the Foundation and may be
deemed to control the Foundation. The CDCT No. 2 directly holds
approximately 0.4% of the outstanding shares of Valhi common stock. U.S.
Bank National Association serves as the trustee of the CDCT No. 2. Contran
established the CDCT No. 2 as an irrevocable "rabbi trust" to assist
Contran in meeting certain deferred compensation obligations that it owes
to Harold C. Simmons. If the CDCT No. 2 assets are insufficient to satisfy
such obligations, Contran is obligated to satisfy the balance of such
obligations as they come due. Pursuant to the terms of the CDCT No. 2,
Contran (i) retains the power to vote the shares of Valhi common stock held
directly by the CDCT No. 2, (ii) retains dispositive power over such shares
and (iii) may be deemed the indirect beneficial owner of such shares. The
CMRT directly holds approximately 0.1% of the outstanding shares of Valhi
common stock. Valhi established the CMRT to permit the collective
investment by master trusts that maintain the assets of certain employee
benefit plans Valhi and related companies adopt. Harold C. Simmons is the
sole trustee of the CMRT and a member of the trust investment committee for
the CMRT. Valhi's board of directors selects the trustee and members of the
trust investment committee for the CMRT. Harold C. Simmons, Glenn R.
Simmons, Steven L. Watson, Lawrence A. Wigdor and certain other executive
officers of Kronos are participants in one or more of the employee benefit
plans that invest through the CMRT. Each of such persons disclaims
beneficial ownership of the shares of Valhi common stock held by the CMRT,
except to the extent of his individual vested beneficial interest, if any,
59
in the assets held by the CMRT. By virtue of the holding of the offices,
the stock ownership and his services as trustee, all as described above,
(a) Harold C. Simmons may be deemed to control such entities and (b) Mr.
Simmons and certain of such entities may be deemed to possess indirect
beneficial ownership of shares directly held by certain of such other
entities. However, Mr. Simmons disclaims such beneficial ownership of the
shares beneficially owned directly or indirectly by any of such entities,
except to the extent of his vested beneficial interest, if any, in shares
held by the CMRT and his interest as a beneficiary of the CDCT No. 2. Mr.
Harold Simmons and all other directors and executive officers of Valhi or
NL disclaim beneficial ownership of all shares of NL common stock or Kronos
common stock that NL, Valhi or Tremont may directly hold, as applicable.
Valmont Insurance Company ("Valmont"), NL and a subsidiary of NL directly
own 1,000,000, 3,522,967 and 1,186,200 shares of Valhi common stock,
respectively. Valhi is the direct holder of 100% of the outstanding common
stock of Valmont. Pursuant to Delaware law, Valhi treats the shares of
Valhi common stock that Valmont, NL, and the subsidiary of NL own as
treasury stock for voting purposes. For the purposes of the percentage
calculations herein, such shares are not deemed outstanding. The business
address of NL, Valhi, Tremont, VGI, National, NOA, Dixie Holding, the CMRT,
the Foundation and Contran is Three Lincoln Centre, 5430 LBJ Freeway, Suite
1700, Dallas, Texas 75240-2697. The business address of Dixie Rice is 600
Pasquiere Street, Gueydan, Louisiana 70542. The business address of
Southwest is 402 Canal Street, Houma, Louisiana 70360.
(4) The shares of NL common stock shown as beneficially owned include 8,000
shares that Glenn R. Simmons has the right to acquire by exercise of
options within 60 days of _________, 2003 under NL's 1998 Long-Term
Incentive Plan (the "1998 Incentive Plan").
(5) The shares of NL common stock shown as beneficially owned by Harold C.
Simmons include 69,475 shares held by Harold C. Simmons' wife with respect
to which beneficial ownership is disclaimed by Mr. Simmons and 8,000 shares
which Mr. Simmons has the right to acquire by exercise of options within 60
days of _________, 2003 under the 1998 Incentive Plan.
(6) The shares of Kronos common stock shown as beneficially owned by Harold C.
Simmons include 34,737 shares held by Harold C. Simmons' wife with respect
to which beneficial ownership is disclaimed by Mr. Simmons.
(7) The shares of NL common stock shown as beneficially owned include 4,000
shares that Mr. Watson has the right to acquire by exercise of options
within 60 days of ________, 2003 under the 1998 Incentive Plan and NL's
1989 Incentive Plan (collectively, the "Incentive Plans").
(8) The shares of NL common stock shown as beneficially owned include 193,800
shares that Dr. Wigdor has the right to acquire by exercise of options
within 60 days of ________, 2003 under the Incentive Plans.
(9) The shares of NL common stock shown as beneficially comprise 7,400 shares
of NL common stock that Dr. Fiand has the right to acquire by exercise of
options within 60 days of ___________, 2003.
(10) The shares of NL common stock shown as beneficially owned include 221,200
shares of NL common stock that all current executive officers and directors
of Kronos as a group (11 persons) have the right to acquire by exercise of
options within 60 days of ___________, 2003.
Ownership of Valhi Common Stock
The following table and accompanying notes set forth as of ___________,
2003 the beneficial ownership, as defined above, of Valhi common stock held by
each director of Kronos, each named executive officer and all current executive
officers and directors of Kronos as a group. See note (3) to the ownership of NL
and Kronos common stock table above for information concerning individuals and
entities who may be deemed to indirectly beneficially own those shares of NL
common stock directly held by Valhi or Tremont.
Valhi Common Stock
-------------------------------------------------
Amount and Nature of
Name Beneficial Ownership(1) Percent of Class(2)
- ------------------------------------------------- ---------------------------- ---------------------
C. H. Moore, Jr............................ -0- -0-
George E. Poston........................... -0- -0-
Glenn R. Simmons........................... 113,247 (3)(4) *
Harold C. Simmons.......................... 3,383 (3) *
Dr. R. Gerald Turner....................... -0- -0-
Steven L. Watson........................... 157,246 (3)(4) *
Dr. Lawrence A. Wigdor..................... -0- -0-
Dr. Ulfert Fiand........................... -0- -0-
All current executive officers and directors
of Kronos as a group (11 persons)...... 360,442 (3)(4) *
- -----------
60
* Less than 1%.
(1) All beneficial ownership is sole and direct unless otherwise noted.
(2) For purposes of calculating the percent of class owned, 3,522,967 shares of
Valhi common stock held by NL, 1,186,200 shares of Valhi common stock held
by a subsidiary of NL and 1,000,000 shares of Valhi common stock held by
Valmont are excluded from the amount of Valhi common stock outstanding.
Kronos understands that, pursuant to Delaware law, Valhi treats these
excluded shares as treasury stock for voting purposes.
(3) Excludes certain shares that may be deemed to be indirectly beneficially
owned by such individual as to which he disclaims beneficial ownership. See
note (3) to the ownership of NL and Kronos common stock table above.
(4) Includes shares that such person or group could acquire upon the exercise
of stock options within 60 days of __________, 2003. During such 60-day
period, options for 100,000 shares of Valhi common stock are exercisable by
Glenn R. Simmons, options for 140,000 shares of Valhi common stock are
exercisable by Steven L. Watson and options for 85,400 shares of Valhi
common stock are exercisable by all other Kronos executive officers as a
group. In each case, only the shares exercisable by the particular option
holder during such 60-day period are deemed outstanding for purposes of
calculating the percent of class owned by such holder. For Mr. Glenn
Simmons, of the shares reported that he beneficially owns, 800 shares are
held by his wife in her retirement account, with respect to which he
disclaims beneficial ownership.
61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the distribution, Kronos is a wholly-owned subsidiary of NL. At
_________, 2003, Valhi and Tremont held a total of approximately 85% of NL's
outstanding common stock. At _________, 2003, Contran, directly or through its
subsidiaries, held approximately 90% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons is the Chairman
of the Board of each of Contran, Valhi and Tremont and the Chairman of the Board
and Chief Executive Officer of NL, and may be deemed to control each such
company and Kronos. Following the distribution date, Mr. Simmons is anticipated
to be the Chairman of the Board and Chief Executive Officer of Kronos, and will
still be deemed to control Kronos. See "Principal Stockholders." For a
discussion of potential conflicts of interest that may arise in connection with
Kronos' ownership structure, see "Risk Factors--NL and its affiliates may have
conflicts of interest with Kronos, and these conflicts could adversely affect
Kronos' business."
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 Kronos other than as set forth in this information statement, Kronos
continuously considers, reviews and evaluates, and understands that Contran,
Valhi, Tremont and NL and related entities consider, review and evaluate, such
transactions. Depending upon the business, tax and other objectives then
relevant, and restrictions under the indentures and other agreements, it is
possible that Kronos might be a party to one or more such transactions in the
future.
Kronos' policy is to engage in transactions with related parties on terms,
in Kronos' opinion, no less favorable to Kronos than could be obtained from
unrelated parties.
After the distribution, it is anticipated that a majority of NL's Board of
Directors will also serve on Kronos' Board of Directors. Certain executive
officers of NL also serve as executive officers of Kronos. Such relationships
may lead to possible conflicts of interest. These possible conflicts of interest
may arise from the duties of loyalty owed by persons acting as corporate
fiduciaries to two or more companies under circumstances in which such companies
may have adverse interests. No specific procedures are in place that govern the
treatment of transactions among Kronos and related entities, although such
entities may implement specific procedures as appropriate for particular
transactions. In addition, under applicable principles of law, in the absence of
stockholder ratification or approval by directors who may be deemed
disinterested, transactions involving contracts among companies under common
control must be fair to all companies involved. Furthermore, directors of
companies owe fiduciary duties of good faith and fair dealing to all
stockholders of the companies for which they serve.
Kronos is a party to intercorporate services agreements ("ISAs") with
various related parties discussed below. Under the ISAs, employees of one
company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by employees (or in certain instances,
groups of employees) of the provider of the services to the affairs of the
recipient, and the compensation of such persons.
Under the NL ISA, NL provided certain management, financial and
administrative services to Kronos and its subsidiaries on a fee basis.
Intercorporate services fee expense related to the NL ISA was $5.0 million in
2000, $3.5 million in 2001 and $3.7 million in 2002, and $1.9 million in the
first six months of 2003. Under the NL ISA and included in the total fee NL
charged Kronos in 2000 and 2001, Kronos paid fees of approximately $1.7 million
62
and $1.4 million for tax and controller services, respectively, which included
the amount Kronos paid NL for the services of Robert D. Hardy as tax director
and controller of Kronos. Under the NL ISA and included in the total fee NL
charged Kronos in 2002 and the first six months of 2003, Kronos paid fees of
approximately $1.4 million and $.7 million for chief financial, tax and treasury
services, respectively, which included the amount Kronos paid NL for the
services of Robert D. Hardy as chief financial officer of Kronos. NL's charges
to Kronos under the NL ISA for the services Mr. Hardy provided to Kronos are not
specifically identifiable to his services. However, KII paid Mr. Hardy a bonus
of $250,000 in 2001 outside of the NL ISA for services Mr. Hardy rendered to
KII.
From time to time, Kronos loans funds to related parties. See Notes 11 and
13 to Kronos' audited consolidated financial statements included in this
information statement. These loans permit Kronos to earn a higher rate of return
on cash not needed at the time for use in its operations than it could otherwise
earn. While such loans are of a lesser credit quality than cash equivalent
instruments otherwise available to Kronos, Kronos believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the loans. Interest income from affiliates related to such loans
was $20.3 million in 2000, $33.4 million in 2001 and $20.8 million in 2002, and
$.7 million in the first six months of 2003.
Interest expense on loans from affiliates was $29.0 million in 2000, $23.0
million in 2001 and $12.3 million in 2002, and $.7 million in the first six
months of 2003. See Note 11 to Kronos' audited consolidated financial statements
included in this information statement. See also "Relationships Among NL, Kronos
and Their Affiliates--Outstanding Debt to NL."
Tall Pines Insurance Company ("Tall Pines"), Valmont Insurance Company
("Valmont") and EWI provide for or broker certain of Kronos' and LPC's and its
affiliates' insurance policies. A son-in-law of Harold C. Simmons is the
Chairman of the Board of EWI. Kronos purchased EWI from certain affiliates of
Contran in January 2002, and Kronos distributed EWI to NL as a dividend in June
2003. See Notes 1 and 17 to Kronos' audited consolidated financial statements
included in this information statement. Consistent with insurance industry
practices, Tall Pines, Valmont and EWI receive commissions from the insurance
and reinsurance underwriters for the policies that they provide or broker.
Kronos and LPC paid approximately $5.6 million in 2000, $9.7 million in 2001 and
$10.1 million in 2002, and $1.1 million in the first six months of 2003, for
policies provided or brokered by Tall Pines, Valmont and EWI. The premiums paid
by affiliates (other than Kronos and LPC) for policies provided or brokered by
EWI was approximately $7.6 million in 2002, and $1.8 million in the first six
months of 2003. These amounts principally included payments for reinsurance and
insurance premiums paid to unrelated third parties, but also included
commissions paid to Tall Pines, Valmont and EWI. In Kronos' opinion, the amounts
that Kronos paid for these insurance policies and the allocation among Kronos
and its affiliates of relative insurance premiums are reasonable and similar to
those they could have obtained through unrelated insurance companies and/or
brokers. Kronos expects that these relationships with Tall Pines, Valmont and
EWI will continue through 2003.
During 2000, NL and an officer of both Kronos and NL entered into an
agreement whereby stock options held by the officer to purchase an aggregate of
100,000 shares of NL's common stock were exercised. On a net basis, NL made
aggregate cash payments to the officer of approximately $1.3 million and NL
charged Kronos an equivalent amount for stock compensation expense.
During 2002, NL and an officer of both Kronos and NL entered into an
agreement whereby stock options held by the officer to purchase an aggregate of
160,400 shares of NL's common stock were exercised or canceled for value. On a
net basis, NL made aggregate cash payments to the officer of approximately $.7
million, and NL charged Kronos an equivalent amount for stock compensation
expense.
Purchases of TiO2 from LPC were $92.5 million in 2000, $93.4 million in
2001 and $92.4 million in 2002, and $53.6 million in the first six months of
2003. See Notes 7 and 17 to Kronos' audited consolidated financial statements
included in this information statement.
Kronos is a member of NL's consolidated U.S. federal income tax group.
Kronos is currently a party to a U.S. federal tax sharing agreement with NL.
Effective January 1, 2001, NL and its qualifying subsidiaries, including Kronos
and its qualifying subsidiaries were included in the consolidated U.S. federal
tax return of Contran. As such, Kronos is a party to a tax sharing agreement
that provides that Kronos will compute its provision for U.S. income taxes on a
63
separate-company basis using the tax elections made by Contran. Pursuant to the
tax sharing agreement, Kronos makes payments to or receives payments from NL in
amounts it would have paid to or received from the U.S. Internal Revenue Service
had it not been a member of the NL's consolidated tax group but instead was a
separate taxpayer. Pursuant to its tax sharing agreement with NL, Kronos made
payments to NL of $11.2 million in 2000, $7.7 million in 2001 and $5.3 million
in 2002 and no payment was made in the first six months of 2003.
64
DESCRIPTION OF CAPITAL STOCK
Kronos' authorized capital stock consists of 60 million shares of common
stock, par value $.01 per share, and 100,000 shares of preferred stock, par
value $.01 per share. Currently, approximately 48.9 million shares of Kronos'
common stock are outstanding. On the distribution date and following the
distribution of approximately 23.85 million shares of Kronos common stock held
by NL to its shareholders, Kronos will have approximately 6,000 holders of
record. No shares of Kronos' preferred stock are currently outstanding.
The following description of Kronos' capital stock is intended as a summary
and is qualified in its entirety by reference to the First Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and the
Amended and Restated Bylaws (the "Bylaws") filed as exhibits to the registration
statement on Form 10, of which this information statement forms a part, and to
Delaware corporate law.
Common Stock
Voting Rights
The holders of Kronos common stock are entitled to one vote per share on
all matters to be voted on by stockholders. Holders of Kronos common stock are
not entitled to cumulate their votes in the election of directors. Generally, at
a meeting at which a quorum is present, all matters on which stockholders vote
must be approved by a majority of the votes entitled to be cast by all shares of
common stock present in person or represented by proxy, subject to any voting
rights granted to holders of any preferred stock. Except as otherwise provided
by law, and subject to any voting rights granted to holders of any outstanding
preferred stock, amendments to the Certificate of Incorporation must be approved
by holders of a majority of all outstanding shares of common stock.
Dividends
Holders of common stock will share ratably in any dividend declared by
Kronos' Board of Directors, subject to any preferential rights of any
outstanding preferred stock.
Other Rights
In the event of any merger or consolidation of Kronos with or into another
company in connection with which shares of common stock are converted into or
exchangeable for shares of stock, other securities or property (including cash),
all holders of common stock will be entitled to receive the same kind and amount
of shares of stock and other securities and property (including cash).
If Kronos is liquidated, dissolved or wound up after payment to creditors,
Kronos will pay the full amounts required to be paid to holders of shares of any
outstanding preferred stock before Kronos makes any payments to holders of
shares of Kronos common stock. All holders of shares of Kronos common stock are
entitled to share ratably in any assets available for distribution to these
holders, after all of Kronos' other creditors and preferred stockholders have
been satisfied.
No shares of Kronos common stock may be redeemed. Holders of shares of
Kronos common stock do not have any preemptive rights to purchase additional
shares of Kronos common stock.
Preferred Stock
Kronos may issue up to 100,000 shares of preferred stock in one or more
classes or series and with the terms of each class or series stated in Kronos'
Board of Director's resolutions providing for the designation and issue of that
class or series. The Certificate of Incorporation authorizes Kronos' Board of
Directors to determine the designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions pertaining to each class or series of preferred
stock that Kronos issues.
65
Kronos believes that the ability of its Board of Directors to issue one or
more series of preferred stock will provide Kronos with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Kronos preferred
stock, as well as authorized shares of Kronos common stock, will be available
for issuance without further action by Kronos' stockholders, unless such action
is required by applicable law or the rules of any stock exchange or automated
quotation system on which Kronos' securities may be listed or traded. The New
York Stock Exchange currently requires shareholder approval in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock, or in the amount
of voting securities, outstanding of at least 20%. If Kronos stockholder
approval is not required for the issuance of shares of preferred or common
stock, Kronos' Board of Directors may determine not to seek stockholder
approval.
Provisions That May Have an Anti-Takeover Effect
Some provisions of the Certificate of Incorporation and the Bylaws
summarized below may be deemed to have an anti-takeover effect and may delay,
deter or prevent a tender offer or takeover attempt that some, or a majority, of
Kronos' stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then-current
market price of such stock.
Board of Directors
The Bylaws provide that, subject to any rights of holders of preferred
stock to elect additional directors under specified circumstances, the number of
directors of Kronos consisting of one or more members shall be fixed from time
to time by resolution adopted by the affirmative vote of a majority of the Board
of Directors or pursuant to the action of the stockholders. In addition, the
Certificate of Incorporation and the Bylaws provide that newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
disqualification or removal may be filled only by a majority vote of the
directors then in office.
Amendments to the Certificate of Incorporation and Bylaws
The Certificate of Incorporation generally provides that the Bylaws and
certain provisions of the Certificate of Incorporation may be altered, amended
or repealed by the affirmative vote of the holders of at least the majority of
Kronos' securities entitled to vote in the election of directors. The Bylaws may
be altered, amended or repealed by a majority vote of Kronos' Board of Directors
or its stockholders.
Preferred Stock
Kronos' Board of Directors could issue a series of preferred stock that
could, depending on the terms of such series, delay, defer or prevent a change
in control of Kronos. Kronos' Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of Kronos and
its stockholders. Kronos' Board of Directors, in so acting, could issue
preferred stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition of Kronos' Board
of Directors, including a tender offer or other transaction that some, or a
majority, of Kronos' stockholders might believe to be in their best interests or
in which stockholders might receive a premium for their stock over the
then-current market price of such stock.
Advance Notice Provisions for Stockholder Proposals or Director Nominations
For stockholder proposals or director nominations to be brought before an
annual meeting of stockholders, the Bylaws require that the proposal or
nomination must be delivered or mailed to the principal executive offices of
Kronos no later than 45 days prior to the earlier of the date (as if in the
current year) on which notice of the date of the last annual meeting was mailed
or public disclosure of the date the meeting was made. If Kronos did not mail or
publicly disclose the date of the last annual meeting or Kronos has moved the
date of the annual meeting by 30 days from the date of the last annual meeting
66
(as if in the current year), the stockholder proposal or nomination must be
delivered or mailed to the principal executive offices of Kronos no later than
90 days prior to the meeting. With respect to an election of directors to be
held at a special meeting of stockholders, stockholder director nominations must
be delivered or mailed to the principal executive offices of Kronos no later
than the tenth day following the date on which notice of such meeting is first
given to stockholders.
Liability and Indemnification of Directors and Officers
Delaware General Corporation Law, the Certificate of Incorporation and the
Bylaws contain provisions relating to the limitation of liability and
indemnification of Kronos' directors and officers.
The Certificate of Incorporation provides that Kronos' directors are not
personally liable to Kronos or its stockholders for monetary damages for breach
of their fiduciary duties as directors, except for such liability as is
expressly not subject to limitation under Delaware corporate law, as the same
exists or may be amended to further limit or eliminate such liability. Existing
Delaware law permits the elimination or limitation of directors' personal
liability to Kronos or its stockholders for monetary damages for breach of their
fiduciary duties as directors, except liability for:
o any breach of a director's duty of loyalty to Kronos or its
stockholders;
o acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
o any transaction from which a director derived improper personal
benefit;
o the unlawful payment of dividends; and
o unlawful stock repurchases or redemptions.
Because of these exculpation provisions, stockholders may be unable to
recover monetary damages against directors for actions taken by them that
constitute negligence or that otherwise violate their fiduciary duties as
directors, although it may be possible to obtain injunctive or other equitable
relief with respect to such actions. If equitable remedies are not available to
stockholders, stockholders may not have an effective remedy against a director
in connection with the director's conduct.
The Certificate of Incorporation provides as follows:
o Kronos must, to the fullest extent permitted by law, indemnify any and
all of its officers and directors;
o Kronos may, to the fullest extent permitted by law or to such lesser
extent as is determined in the discretion of the Board of Directors,
indemnify all other persons; and
o Kronos may advance expenses to all persons to whom it has the power to
indemnify.
The Bylaws provide as follows:
o Kronos must indemnify its directors and officers to the fullest extent
permitted under Delaware law;
o Kronos must advance reasonable expenses (including attorneys' fees) of
a director or officer for an indemnifiable claim upon receipt of a
written affirmation by the director or officer of his or her good
faith belief that he or she has met the standard of conduct necessary
for indemnification and a written undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be
determined that he or she is not entitled to by indemnified by Kronos
as authorized in the Bylaws;
67
o if Kronos receives a claim for indemnification of expenses of an
indemnifiable claim and does not pay the claim within 30 days of its
receipt, the claimant may bring suit to recover the unpaid amount and,
if successful in whole or in part, the claimant will also be entitled
to be paid the expenses of prosecuting such claim; and
o Kronos may grant rights of indemnification and advancement of expenses
to any person who is not at the time a current director or officer of
Kronos.
Additionally, Kronos will seek to obtain directors and officers liability
insurance prior to the distribution.
Stockholder Approval of Certain Business Combinations
In its original certificate of incorporation and in the amended and
restated Certificate of Incorporation, Kronos has expressly elected not to be
governed by Section 203 of the Delaware General Corporation Law. Section 203
prohibits a Delaware corporation from engaging in certain business combinations
with an "interested stockholder" for three years following the date that such
person becomes an interested stockholder. With certain exceptions, an interested
stockholder is a person or entity who or which owns 15% or more of a
corporation's outstanding voting stock or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years. Because Kronos has elected not to be governed
by Section 203, Section 203 will not apply to Kronos.
Transfer Agent
The transfer agent and registrar for Kronos common stock is EquiServe Trust
Co., N.A. The contact information for the transfer agent and registrar is:
EquiServe Trust Co., N.A.
150 Royall Street
Canton, Massachusetts 02021
WHERE YOU CAN FIND MORE INFORMATION
This information statement is part of a Form 10 registration statement that
Kronos filed with the SEC relating to the shares of Kronos common stock to be
distributed to NL shareholders. As allowed by SEC rules, this information
statement does not contain all of the information that you can find in the Form
10 or the exhibits to the Form 10. You can get a copy of the Form 10 (SEC File
No. 001-31763):
o at the Public Reference Room of the SEC, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and
o from the Internet site that the SEC maintains at http://www.sec.gov,
which contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC.
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
After the distribution, Kronos will be required to comply with the
reporting requirements of the Exchange Act and to file with the SEC reports,
proxy statements and other information as required by the Exchange Act.
Additionally, Kronos will be required to provide annual reports containing
audited financial statements to its stockholders in connection with its annual
meetings of stockholders. After the distribution, these reports, proxy
statements and other information will be available to be inspected and copied at
68
the public reference facilities of the SEC or obtained by mail or over the
Internet from the SEC, as described above. Kronos expects to receive approval,
subject to official notice of issuance, to have its common stock listed on the
New York Stock Exchange under the symbol "KRO." When Kronos common stock
commences trading on the New York Stock Exchange, such reports, proxy statements
and other information will be available for inspection at the offices of the New
York Stock Exchange, 11 Wall Street, New York, New York 10005.
* * *
This information statement is being provided to you solely to furnish
information to shareholders of NL who will receive shares of Kronos common stock
in the distribution. It is not, and is not intended to be construed as, an
inducement or encouragement to buy or sell any of Kronos or NL securities. We
believe that the information contained in this information statement is accurate
as of the date set forth on the cover, and neither the mailing of this
information statement nor the delivery of Kronos common stock in the
distribution will create any implication to the contrary. Changes may occur
after that date, and we will not update the information contained herein except
in the normal course of public disclosure obligations and practices.
Neither NL nor Kronos has authorized anyone to give you any information or
to make any representation about the distribution or the companies that differs
from or adds to the information contained in this information statement or in
the documents NL has publicly filed with the SEC. Therefore, if anyone should
give you any different or additional information, you should not rely on it.
69
KRONOS WORLDWIDE, INC.
INDEX OF FINANCIAL STATEMENTS
Pages
Kronos Worldwide, Inc. Unaudited Pro Forma Condensed Consolidated
Financial Statements:
- ------------------------------------------------------------------------------
Summary................................................................ FA-1
Unaudited Pro Forma Condensed Consolidated Statements of Income--
Year ended December 31, 2002 and
Six Months Ended June 30, 2003................................. FA-2/FA-3
Notes to Unaudited Pro Forma Condensed Consolidated
Statements of Income........................................... FA-4/FA-5
Kronos Worldwide, Inc. Consolidated Financial Statements:
Report of Independent Auditors......................................... FB-2
Consolidated Balance Sheets-- December 31, 2001 and 2002;
June 30, 2003 (unaudited); Pro Forma
June 30, 2003 (unaudited)........................................... FB-3
Consolidated Statements of Income-- Years ended
December 31, 2000, 2001 and 2002; Six months ended................. FB-5
June 30, 2002 (unaudited) and 2003 (unaudited)
Consolidated Statements of Comprehensive Income-- Years
ended December 31, 2000, 2001 and 2002;.......................... FB-6
Six months ended June 30, 2002 (unaudited) and 2003 (unaudited)
Consolidated Statement of Stockholder's Equity-- Years
ended December 31, 2000, 2001 and 2002; Six ........................ FB-7
months ended June 30, 2003 (unaudited)
Consolidated Statements of Cash Flows-- Years ended
December 31, 2000, 2001 and 2002; Six months ........................ FB-8
ended June 30, 2002 (unaudited) and 2003 (unaudited)
Notes to Consolidated Financial Statements...................... FB-11/FB-41
F-1
KRONOS UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Consolidated Statements of Income for the
year ended December 31, 2002 and the six months ended June 30, 2003 gives effect
to Kronos' distribution of the Term Note and other transactions involving
Kronos' capital structure and indebtedness, as if such transactions had occurred
on January 1, 2002. You should read this information in conjunction with the:
o accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements; and
o audited consolidated financial statements of Kronos for the year ended
December 31, 2002, the unaudited consolidated financial statements of
Kronos for the six months ended June 30, 2003 and the unaudited pro
forma consolidated balance sheet of Kronos as of June 30, 2003, each
of which are included elsewhere in this information statement.
The unaudited pro forma condensed consolidated financial statements are
presented for informational purposes only and to aid you in your analysis of the
financial aspects of the distribution. The unaudited pro forma condensed
consolidated financial statements have been derived from Kronos' 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 Kronos believes to be reasonable and factually supportable. The
pro forma condensed consolidated financial statements are not necessarily
indicative of what Kronos' results of operations actually would have been had we
completed these transactions at the dates indicated. In addition, the unaudited
pro forma condensed consolidated financial statements do not purport to project
the future operating results of Kronos following the distribution.
An unaudited pro forma condensed consolidated balance sheet is not
presented in these unaudited pro forma condensed consolidated financial
statements. Instead, an unaudited pro forma condensed consolidated balance sheet
is presented on pages FB-2 and FB-3 of this information statement.
FA-1
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year ended December 31, 2002
(In millions, except per share amounts)
Pro forma adjustment
---------------------------
Kronos 2002 Kronos
historical Transactions Term Note pro forma
---------- ------------ ----------- -----------
Revenues and other income:
Net sales $ 875.2 $ - $ - $ 875.2
Interest income 20.7 (20.6) - .1
Other, net 7.8 - 7.8
--------- --------- ---------- ---------
903.7 (20.6) - 883.1
--------- --------- ---------- ---------
Costs and expenses:
Costs of goods sold 671.8 - - 671.8
Selling, general and administrative 111.0 - - 111.0
Interest 29.1 .4 18.0 47.5
--------- --------- ---------- ---------
811.9 .4 18.0 830.3
--------- --------- ---------- ---------
Interest before income taxes 91.8 (21.0) (18.0) 52.8
Provision for income taxes 25.5 (7.4) (6.3) 11.8
--------- --------- ---------- ---------
Net income $ 66.3 $ (13.6) $ (11.7) $ 41.0
========== ========= ========= =========
Net income per share $ 1.35 $ .84
========== ==========
Shares used in the calculation of per
share amounts
48.9 48.9
========== ==========
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements
FA-2
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30, 2003
(In millions, except per share amounts)
Pro forma
Kronos adjustment- Kronos pro
historical Term Note form
------------ ------------ -----------
Revenues and other income:
Net sales $ 519.6 $ - $ 519.6
Interest income .7 - .7
Other, net (3.3) - (3.3)
--------- ------- ---------
517.0 - 517.0
--------- ------- ---------
Costs and expenses:
Cost of goods sold 386.1 - 386.1
Selling, general and administrative 62.0 - 62.0
Interest 17.1 9.0 26.1
--------- ------- ---------
465.2 9.0 474.2
--------- ------- ---------
Income before income taxes 51.8 (9.0) 42.8
Provision for income taxes (6.7) (3.1) (9.8)
--------- ------- ---------
Net income $ 58.5 $ (5.9) $ 52.6
========= ======= =========
Net income per share $ 1.19 $ 1.08
========== =========
Shares used in the calculation of per share amounts 48.9 48.9
========== ========
See accompanying notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements
FA-3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The unaudited pro forma condensed consolidated statements of income for the
year ended December 31, 2002 and the six months ended June 30, 2003 reflect
adjustments necessary to reflect the following transactions, as if each of such
transactions had occurred on January 1, 2002:
o The June 2002 issuance of (euro)285 million (approximately $283
million, using the June 30, 2002 exchange rate) of 8?% Senior Secured
Notes ("KII Senior Notes") by Kronos International ("KII"), a
wholly-owned subsidiary of Kronos, and the application of the net
proceeds to repay certain indebtedness owed to NL ("Indebtedness to
NL") in the aggregate amount of $287 million (collectively, the "KII
Senior Note Issuance"),
o The June 2002 borrowing of approximately (euro)40 million ($40
million) by certain subsidiaries of KII under their revolving credit
facility ("European Credit Facility'), and the repayment in full of
certain short-term notes payable ($53 million) to third parties
("European Notes Payable") using the net proceeds from the borrowing
plus other available cash on hand (collectively, the "European Credit
Facility Issuance"),
o The July 2002 distribution of certain long-term notes receivable ($753
million at June 30, 2002) from NL in the form of a non-cash dividend
as part of a recapitalization of Kronos (together with the KII Senior
Note Issuance and the European Credit Facility Issuance, the "2002
Transactions"), and
o The distribution of the Term Note by Kronos to NL, as contemplated as
part of the distribution of 48.7% of Kronos' common stock to NL's
shareholders as more fully described in this information statement.
Note 2 - Pro forma adjustments:
Pro forma adjustments are summarized below.
2002 Transactions
The $20.6 million adjustment to interest income for the year ended December
31, 2002 represents elimination of interest income on Kronos' notes receivable
from affiliates distributed to NL in the form of a non-cash dividend in July
2002.
The adjustment to interest expense related to the issuance of the KII
Senior Notes and the European Credit Facility is comprised of the following:
Year ended Six months ended
December 31, 2002 June 30, 2003
---------------------- ------------------
(In millions)
Increase in interest expense:
KII Senior Notes $ 11.9 $ -
European Credit Facility 1.5 -
----------- ---------
13.4 -
----------- ---------
Decrease in interest expenses:
Indebtedness to NL 11.4 -
European Notes Payable 1.6 -
----------- ---------
13.0 -
----------- ---------
Net increase $ .4 $ -
=========== =========
FA-4
The increase in interest expense related to the KII Senior Notes, issued in
June 2002, is based upon the 8.875% interest rate on the KII Senior Notes, and
the (euro)285 million principal amount of the KII Senior Notes issued, and
assumed the KII Senior Notes were issued on January 1, 2002 as discussed above.
The increase in interest expense also is based upon the actual average exchange
rate during the period from January to June 2002 of $.89 per euro. The increase
in interest expense related to the KII Senior Notes also included $600,000 of
amortization of deferred financing costs related to the KII Senior Notes.
The increase in interest expense related to the European Credit Facility,
also entered into in June 2002, is based upon average outstanding borrowings of
$34.4 million and an assumed interest rate of 7.86%, and assumed such borrowing
occurred on January 1, 2002 as discussed above. The $34.4 million amount
represented the actual amount initially borrowed by Kronos under the European
Credit Facility in June 2002. The 7.86% interest rate represented the average
interest rate that would have been paid if such assumed borrowing had occurred
on January 1, 2002. The increase in interest expense related to the European
Credit Facility also included $100,000 of amortization of deferred financing
costs related to the European Credit Facility. If the 7.86% interest rate has
been increased by .125% to 7.99%, the increase in interest expense related to
the European Credit Facility, including amortization of deferred financing
costs, would have been increased by less than $100,000.
The reduction in interest expense related to the Indebtedness to NL and the
European Notes Payable, both of which were repaid in June 2002, assumed such
indebtedness was repaid on January 1, 2002 as discussed above. These amounts
represented the actual interest expense related to such indebtedness included in
Kronos' historical consolidated results of operations for the year ended
December 31, 2002.
The income tax effect associated with these adjustments to interest income
and interest expense have been calculated using applicable statutory income tax
rates in the various tax jurisdictions to which the pre-tax pro forma
adjustments relate.
Term Note
Interest expense on the Term Note (9% per annum, and based on the $200
million principal amount of the Term Note), and the related income tax benefit
using the statutory U.S. federal income tax rate of 35%.
Note 3 - Pro forma per share amounts:
The pro forma earnings per share amounts are based upon the 48.9 million
shares of Kronos' common stock that will be outstanding following the
recapitalization of Kronos discussed in Note 1 to Kronos' consolidated financial
statements included in this information statement.
FA-5
KRONOS WORLDWIDE, INC.
Index of Financial Statements
Financial Statements Pages
Report of Independent Auditors FB-2
Consolidated Balance Sheets - December 31, 2001 and 2002;
June 30, 2003 (unaudited); and Pro Forma June 30, 2003 (unaudited) FB-3
Consolidated Statements of Income - Years ended
December 31, 2000, 2001 and 2002; Six months ended
June 30, 2002 (unaudited) and 2003 (unaudited) FB-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2000,
2001 and 2002; Six months ended
June 30, 2002 (unaudited) and 2003 (unaudited) FB-6
Consolidated Statements of Stockholder's Equity -
Years ended December 31, 2000,
2001 and 2002; Six months ended
June 30, 2003 (unaudited) FB-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 2001 and 2002; Six months ended
June 30, 2002 (unaudited) and 2003 (unaudited) FB-8
Notes to Consolidated Financial Statements FB-11
FB-1
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of Kronos Worldwide, Inc. (formerly
known as Kronos, Inc.):
"In our opinion, the 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 consolidated
financial position of Kronos Worldwide, Inc. and its subsidiaries (collectively,
the "Company") at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002 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 LLP
Houston, Texas
July 28, 2003, except for Note 1, as to
which the date is September 26, 2003
FB-2
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, Pro Forma
-------------------- June 30, June 30,
ASSETS 2001 2002 2003 2003
--------- --------- -------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents .................... $ 54,717 $ 40,685 $ 29,565 $ 29,565
Restricted cash equivalents .................. -- -- 956 956
Accounts and other receivables ............... 123,870 134,243 180,862 180,862
Receivable from affiliates ................... 47 1,032 62 62
Refundable income taxes ...................... 1,528 1,777 25,595 25,595
Inventories .................................. 231,056 209,882 199,760 199,760
Prepaid expenses ............................. 2,642 6,390 3,835 3,835
Deferred income taxes ........................ 4,640 4,404 4,598 4,598
-------- -------- -------- --------
Total current assets ...................... 418,500 398,413 445,233 445,233
-------- -------- -------- --------
Other assets:
Notes receivable from NL Industries, Inc. .... -- 44,600 -- --
Investment in TiO2 manufacturing joint venture 138,428 130,009 129,209 129,209
Prepaid pension cost ......................... 16,043 17,572 17,209 17,209
Other ........................................ 11,100 22,193 20,418 20,418
-------- -------- -------- --------
Total other assets ........................ 165,571 214,374 166,836 166,836
-------- -------- -------- --------
Property and equipment:
Land ......................................... 22,066 26,568 29,404 29,404
Buildings .................................... 129,005 148,701 163,950 163,950
Machinery and equipment ...................... 534,089 636,336 693,089 693,089
Mining properties ............................ 48,167 65,296 63,114 63,114
Construction in progress ..................... 5,071 8,702 14,600 14,600
-------- -------- -------- --------
738,398 885,603 964,157 964,157
Less accumulated depreciation and depletion .. 412,373 509,845 561,976 561,976
-------- -------- -------- --------
Net property and equipment ................ 326,025 375,758 402,181 402,181
-------- -------- -------- --------
$910,096 $ 988,545 $1,014,250 $1,014,250
======== ========== ========== ==========
FB-3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31, Pro Forma
------------------ June 30, June 30,
LIABILITIES AND STOCKHOLDER'S EQUITY 2001 2002 2003 2003
---- ---- --------- ----------
(Unaudited)
Current liabilities:
Notes payable .............................. $ 46,201 $ -- $ -- $ --
Current maturities of long-term debt ....... 1,033 1,298 781 781
Accounts payable and accrued liabilities ... 152,633 148,257 129,221 129,221
Payable to affiliates ...................... 11,365 7,933 11,320 11,320
Income taxes ............................... 7,181 6,193 5,609 5,609
Deferred income taxes ...................... 1,530 3,219 1,711 1,711
----------- ----------- ----------- -----------
Total current liabilities ................. 219,943 166,900 148,642 148,642
----------- ----------- ----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 1,465 324,608 360,444 360,444
Notes payable to affiliates ................ 194,000 44,600 -- 200,000
Deferred income taxes ...................... 64,538 79,234 90,032 90,032
Accrued pension cost ....................... 25,558 33,098 35,078 35,078
Accrued postretirement benefits cost ....... 13,036 11,806 11,567 11,567
Other ...................................... 12,733 13,742 14,573 14,573
----------- ----------- ----------- -----------
Total noncurrent liabilities .............. 311,330 507,088 511,694 711,694
----------- ----------- ----------- -----------
Minority interest .............................. 284 383 465 465
----------- ----------- ----------- -----------
Stockholder's equity:
Preferred stock - $.01 par value; 100 shares
authorized; no shares issued or outstanding -- -- -- --
Common stock - $.01 par value; 60,000 shares
authorized; 48,943 shares issued .......... 489 489 489 489
Additional paid-in capital ................. 1,060,157 1,060,157 1,060,157 1,060,157
Retained earnings (deficit) ................ 180,048 (584,909) (558,346) (758,346)
Notes receivable from NL Industries, Inc. .. (655,918) -- -- --
Accumulated other comprehensive loss:
Currency translation ...................... (199,885) (148,082) (135,370) (135,370)
Pension liabilities ....................... (6,352) (13,481) (13,481) (13,481)
----------- ----------- ----------- -----------
Total stockholder's equity ................ 378,539 314,174 353,449 153,449
----------- ----------- ----------- -----------
$ 910,096 $ 988,545 $ 1,014,250 $ 1,014,250
=========== =========== =========== ===========
Commitments and contingencies (Notes 14 and 19)
See accompanying notes to consolidated financial statements.
FB-4
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Six months ended
Years ended December 31, June 30,
----------------------------------- ----------------------
2000 2001 2002 2002 2003
--------- --------- --------- --------- ---------
(Unaudited)
Net sales .................................. $ 922,319 $ 835,099 $ 875,188 $ 429,266 $ 519,604
Cost of sales .............................. 610,449 578,060 671,830 332,500 386,066
--------- --------- --------- --------- ---------
Gross margin ....................... 311,870 257,039 203,358 96,766 133,538
Selling, general and administrative
expense .................................. 107,554 98,667 107,675 49,626 60,354
Other income (expense):
Currency transaction gains (losses), net 6,510 1,188 (547) (1,451) (3,841)
Trade interest income .................. 2,333 2,332 1,709 555 361
Disposition of property and equipment .. (1,562) (735) (625) 597 (44)
Insurance recoveries, net .............. -- 7,222 -- -- --
Other income ........................... 1,116 886 459 100 166
Other expense .......................... (230) (78) (172) (117) (54)
--------- --------- --------- --------- ---------
Operating income ................... 212,483 169,187 96,507 46,824 69,772
General corporate income (expense):
Currency transaction gain .............. -- -- 6,271 6,271 --
Corporate expense ...................... (6,949) (4,878) (3,288) (1,493) (1,684)
Insurance recoveries, net .............. -- 17,468 -- -- --
Interest expense ....................... (2,005) (4,305) (16,837) (1,698) (16,350)
Interest expense to affiliates ......... (28,979) (22,969) (12,290) (12,167) (703)
Interest income ........................ 1,078 349 702 71 74
Interest income from affiliates ........ 20,250 33,379 20,754 17,475 723
--------- --------- --------- --------- ---------
Income before income taxes and
minority interest .................... 195,878 188,231 91,819 55,283 51,832
Income tax expense (benefit) ............... 65,625 33,759 25,500 14,945 (6,674)
--------- --------- --------- --------- ---------
Income before minority interest ....... 130,253 154,472 66,319 40,338 58,506
Minority interest .......................... 47 16 55 27 43
--------- --------- --------- --------- ---------
Net income ............................ $ 130,206 $ 154,456 $ 66,264 $ 40,311 $ 58,463
========= ========= ========= ========= =========
Net income per basic and diluted share ..... $ 2.66 $ 3.16 $ 1.35 $ .82 $ 1.19
========= ========= ========= ========= =========
Basic and diluted weighted average
shares used in the calculation of net
income per share ......................... 48,943 48,943 48,943 48,943 48,943
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
FB-5
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended
Years ended December 31, June 30,
----------------------------------- ------------------
2000 2001 2002 2002 2003
---------- --------- --------- ------- -------
(Unaudited)
Net income ................................... $ 130,206 $ 154,456 $ 66,264 $40,311 $58,463
--------- --------- --------- ------- -------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities
adjustment .............................. 691 (6,352) (7,129) -- --
Currency translation adjustment .......... (30,415) (15,974) 51,803 51,174 12,712
--------- --------- --------- ------- -------
Total other comprehensive (loss)
income ............................... (29,724) (22,326) 44,674 51,174 12,712
--------- --------- --------- ------- -------
Comprehensive income ..................... $ 100,482 $ 132,130 $ 110,938 $91,485 $71,175
========= ========= ========= ======= =======
See accompanying notes to consolidated financial statements.
FB-6
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2000, 2001 and 2002
Six months ended June 30, 2003 (Unaudited)
(In thousands)
Notes Accumulated other
Additional Retained receivable comprehensive income (loss)
Common paid-in earnings from Currency Pension
stock capital (deficit) affiliates translation liabilities Total
------- ---------- ---------- ----------- ------------ ----------- ----------
Balance at December 31, 1999 ................ $489 $ 483,694 $ (19,114) $ -- $(153,496) $ (691) $ 310,882
Net income .................................. -- -- 130,206 -- -- -- 130,206
Other comprehensive (loss) income, net of tax -- -- -- -- (30,415) 691 (29,724)
Change in notes receivable from affiliates .. -- -- -- (61,579) -- -- (61,579)
Dividends declared .......................... -- -- (55,000) -- -- -- (55,000)
Capital contribution ........................ -- 291,910 -- (240,116) -- -- 51,794
---- ---------- -------- --------- --------- -------- ---------
Balance at December 31, 2000 ................ 489 775,604 56,092 (301,695) (183,911) -- 346,579
Net income .................................. -- -- 154,456 -- -- -- 154,456
Other comprehensive loss, net of tax ........ -- -- -- -- (15,974) (6,352) (22,326)
Change in notes receivable from affiliates .. -- -- -- (69,678) -- -- (69,678)
Dividends declared .......................... -- -- (30,500) -- -- -- (30,500)
Capital contribution ........................ -- 284,553 -- (284,545) -- -- 8
---- ---------- -------- --------- --------- -------- ---------
Balance at December 31, 2001 ................ 489 1,060,157 180,048 (655,918) (199,885) (6,352) 378,539
Net income .................................. -- -- 66,264 -- -- -- 66,264
Other comprehensive income (loss), net of tax -- -- -- -- 51,803 (7,129) 44,674
Change in notes receivable from affiliates .. -- -- -- (55,154) -- -- (55,154)
Dividends declared:
Cash ..................................... -- -- (120,149) -- -- -- (120,149)
Noncash .................................. -- -- (711,072) 711,072 -- -- --
---- ---------- -------- --------- --------- -------- ---------
Balance at December 31, 2002 ................ 489 1,060,157 (584,909) -- (148,082) (13,481) 314,174
Net income .................................. -- -- 58,463 -- -- -- 58,463
Other comprehensive income .................. -- -- -- -- 12,712 -- 12,712
Dividends declared: ......................... -- -- -- -- -- -- --
Cash .................................... -- -- (7,000) -- -- -- (7,000)
Noncash ................................. -- -- (24,900) -- -- -- (24,900)
---- ---------- -------- --------- --------- -------- ---------
Balance at June 30, 2003 (unaudited) ........ $489 $1,060,157 $(558,346) $ -- $(135,370) $(13,481) $ 353,449
==== ========== ========= ========= ========= ======== =========
See accompanying notes to consolidated financial statements.
FB-7
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
Years ended December 31, June 30,
----------------------------------- ----------------------
2000 2001 2002 2002 2003
-------- --------- --------- -------- ----------
(Unaudited)
Cash flows from operating activities:
Net income ................................... $ 130,206 $ 154,456 $ 66,264 $ 40,311 $ 58,463
Depreciation and amortization ............ 28,989 28,907 32,152 15,287 19,287
Noncash interest income from affiliates .. (21,579) (22,201) (20,629) (14,552) --
Noncash interest expense ................. -- -- 932 -- 1,102
Deferred income taxes .................... 11,901 (4,242) 10,755 7,393 5,852
Minority interest ........................ 47 16 55 27 43
Net loss (gain) from disposition of
property and equipment .................. 1,562 735 625 (597) 44
Pension cost, net ........................ (3,710) (2,332) (1,866) (1,931) (1,410)
Other postretirement benefits, net ....... (1,056) (1,236) (1,250) (634) (555)
Distributions from TiO2 manufacturing
joint venture, net ...................... 7,550 11,313 7,950 2,250 800
Insurance recoveries, net ................ -- (17,468) -- -- --
Other, net ............................... -- 261 -- -- --
Change in assets and liabilities:
Accounts and other receivables ........... 1,541 2,507 5,547 (18,710) (36,570)
Inventories .............................. (23,395) (32,698) 42,249 68,227 25,301
Prepaid expenses ......................... (124) (322) (344) (968) 2,901
Accounts payable and accrued liabilities . 16,973 26,274 (25,049) (52,413) (27,168)
Income taxes ............................. 11,705 (4,211) (2,239) (3,003) (24,131)
Accounts with affiliates ................. (3,114) (652) (4,440) (3,028) 5,244
Other noncurrent assets .................. (458) (1,314) 74 3,211 337
Other noncurrent liabilities ............. (2,309) (2,111) (866) (749) (209)
-------- -------- -------- -------- -------
Net cash provided by operating activities 154,729 135,682 109,920 40,121 29,331
-------- -------- -------- -------- -------
FB-8
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Six months ended
Years ended December 31, June 30,
----------------------------------- ----------------------
2000 2001 2002 2002 2003
--------- ---------- ----------- --------- -----------
(Unaudited)
Cash flows from investing activities:
Capital expenditures .................... $ (31,066) $(53,656) $ (32,571) $ (12,073) $(13,766)
Property damaged by fire:
Insurance proceeds ..................... -- 23,361 -- -- --
Other, net ............................. -- (3,205) -- -- --
Change in restricted cash and restricted
marketable debt securities, net ........ -- (577) (1,665) -- (1,005)
Proceeds from disposition of property and
equipment .............................. 110 399 864 832 47
Other, net .............................. (33) -- -- -- --
--------- -------- -------- -------- --------
Net cash used by investing activities .. (30,989) (33,678) (33,372) (11,241) (14,724)
--------- -------- -------- -------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. 44,923 1,437 335,768 319,275 16,106
Principal payments ..................... (29,162) (22,428) (84,814) (53,688) (11,615)
Deferred financing fees ................ -- -- (10,706) (9,342) --
Dividends paid .......................... (55,000) (30,500) (111,000) -- (7,000)
Loans from affiliates:
Loans .................................. -- -- 44,600 -- 8,000
Repayments ............................. (93,000) -- (194,000) (194,000) (52,600)
Other capital transactions with
affiliates, net ........................ (40,000) (47,477) (73,749) (29,149) 19,700
Other, net .............................. (6) 3 (11) (11) --
--------- -------- -------- -------- --------
Net cash (used) provided by financing
activities ............................ (172,245) (98,965) (93,912) 33,085 (27,409)
--------- -------- -------- -------- --------
Net change during the period from ......
operating, investing and financing
activities ............................ $ (48,505) $ 3,039 $ (17,364) $ 61,965 $(12,802)
--------- -------- -------- -------- --------
FB-9
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Years ended Six months ended
December 31, June 30,
---------------------------------- ---------------------
2000 2001 2002 2002 2003
--------- ---------- ---------- -------- ----------
(Unaudited)
Cash and cash equivalents:
Net change during the period from:
Operating, investing and financing
activities .......................... $ (48,505) $ 3,039 $(17,364) $ 61,965 $(12,802)
Currency translation ................. (1,635) (1,301) 3,332 3,050 1,682
--------- -------- -------- --------- --------
(50,140) 1,738 (14,032) 65,015 (11,120)
Balance at beginning of period .. 103,119 52,979 54,717 54,717 40,685
--------- -------- -------- --------- --------
Balance at end of period ........ $ 52,979 $ 54,717 $ 40,685 $ 119,732 $ 29,565
========= ======== ======== ========= ========
Supplemental disclosures - cash paid for:
Interest ............................ $ 32,304 $ 27,239 $ 33,169 $ 18,747 $ 17,048
Income taxes ........................ 45,157 43,422 17,369 9,468 7,534
See accompanying notes to consolidated financial statements.
FB-10
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Worldwide, Inc. ("Kronos"), formerly known as Kronos, Inc., is a
wholly owned subsidiary of NL Industries, Inc. ("NL"). NL conducts its titanium
dioxide pigments ("TiO2") operations through Kronos. At June 30, 2003, Valhi,
Inc. ("Valhi") and Tremont LLC ("Tremont"), a wholly owned subsidiary of Valhi,
held an aggregate of approximately 85% of NL's outstanding common stock, and
Contran Corporation ("Contran") and its subsidiaries held approximately 90% of
Valhi's outstanding common stock. At December 31, 2002, (i) Contran and its
subsidiaries held approximately 93% of Valhi's outstanding common stock, (ii)
Tremont Group, Inc. ("Tremont Group"), which was 80% owned by Valhi and 20%
owned by NL, held approximately 80% of the outstanding shares of Tremont
Corporation ("Tremont Corp.") common stock and (iii) Valhi and Tremont Corp.
held 63% and 21%, respectively, of the outstanding common stock of NL.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board and Chief Executive Officer of Kronos and NL as well as the Chairman of
the Board of each of Contran, Valhi and Tremont, may be deemed to control each
of such companies and Kronos.
In January 2002, the Company acquired all of the stock and limited
liability company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. The purchase was approved by
a special committee of NL's Board of Directors consisting of two of its
directors unrelated to Contran and the Company's Board of Directors, and the
purchase price was negotiated by the special committee based upon its
consideration of relevant factors, including not limited to due diligence
performed by independent consultants and an appraisal of EWI conducted by an
independent third party selected by the special committee. In June 2003 the
Company distributed its investment in the common stock and limited liability
company units in EWI to NL in the form of a noncash dividend. The Company has
accounted for the distribution of EWI as a change in accounting entity, and
accordingly the Company's consolidated financial statements have been
retroactively restated to exclude the assets, liabilities, results of operations
and cash flows of EWI for all periods presented since the January 2002
acquisition. The effect of the change in accounting entity on the Company's
consolidated net income was immaterial for 2002 and 2003, and the effect of the
change in accounting entity on the Company's previously reported stockholder's
equity was a reduction of approximately $10 million. The $9.2 million purchase
price for EWI is reflected as part of "other capital transactions with
affiliates, net" in the accompanying consolidated statements of cash flows.
Information included in the consolidated financial statements and related
notes to the consolidated financial statements as of June 30, 2003 and for the
six months ended June 30, 2002 and 2003, 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 accounting principles generally accepted
in the U.S. ("GAAP") have been condensed or omitted for the interim periods.
On September 26, 2003, Kronos amended and restated its articles of
incorporation. Under the amended and restated articles of incorporation, among
other things, (i) Kronos' authorized capital stock now consists of 60 million
shares of common stock and 100,000 shares of preferred stock, each par value
$.01 per share, and (ii) the 1,000 shares of Kronos' common stock previously
outstanding were reclassified into an aggregate of 48.9 million shares. The
accompanying consolidated financial statements have been retroactively
reclassified to reflect such changes in Kronos' capital structure for all
periods presented. Earnings per share data for all periods presented has been
restated to reflect the 48.9 million shares of Kronos' common stock that was
outstanding following effectiveness of the amended and restated articles of
incorporation.
FB-11
In August 2003 NL announced a distribution of approximately 48.9% of the
outstanding shares of Kronos' common stock to NL shareholders in the form of a
pro-rata dividend. In September 2003, NL determined to reduce the percentage of
Kronos' common stock to be distributed to 48.7%. Upon completion of such
distribution, Valhi, Tremont and NL will own an aggregate of approximately 92.5%
of Kronos' common stock, and other NL shareholders would own the remaining 7.5%.
Immediately prior to such distribution, Kronos intends to pay a $200 million
dividend to NL in the form of a long-term note payable. The $200 million
long-term note payable to NL will be unsecured, bears interest at 9% per annum,
with interest payable quarterly and all principal due in 2010.
The accompanying unaudited pro forma balance sheet as of June 30, 2003
assumed Kronos had distributed the $200 million long-term note payable to NL as
if the transaction had occurred on June 30, 2003. The unaudited pro forma
balance sheet does not purport to project what Kronos' financial position will
be in the future when Kronos actually completes these transactions.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts of
Kronos and its majority-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. The Company currently
believes that it has no involvement with any variable interest entity covered by
the scope of FASB Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities."
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is other
than the U.S. dollar are translated at year-end rates of exchange and revenues
and expenses are translated at weighted average exchange rates prevailing during
the year. Resulting translation adjustments are included in other comprehensive
income (loss), net of related income taxes. Currency transaction gains and
losses are recognized in income currently, and in 2002 included a $6.3 million
gain related to the extinguishment of certain intercompany indebtedness.
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
Restricted marketable debt securities
Restricted marketable debt securities are primarily invested in corporate
debt securities. Restricted marketable debt securities of approximately $.6
million and approximately $2.5 million, as of December 31, 2001 and 2002,
respectively, were used to support certain capital requirements regarding the
Company's Norwegian operating subsidiaries' defined benefit pension plans in
accordance with applicable Norwegian law. Restricted marketable debt securities
are generally classified as either current or noncurrent assets depending upon
the maturity date of each marketable debt security and are carried at market
which approximates cost. See Note 6.
Inventories and cost of goods sold
Inventories are stated at the lower of cost (principally average cost) or
market. Amounts are removed from inventories at average cost. Cost of goods sold
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
FB-12
Investment in TiO2 manufacturing joint venture
Investment in a 50%-owned manufacturing joint venture is accounted for by
the equity method.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to major,
long-term capital projects are capitalized as a component of construction costs.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
The Company has a governmental concession with an unlimited term to operate
an ilmenite mine in Norway. Mining properties consists of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment (including mining properties)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 commenced accounting for
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 "Accounting principles adopted in 2002."
Long-term debt and interest expense
Amortization of deferred financing costs, included in interest expense, is
computed by the interest method over the term of the applicable issue.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 12.
The Company has not issued any stock options to purchase Kronos' common
stock. However, certain employees of the Company have been granted options by NL
to purchase NL common stock. The Company has elected the disclosure alternative
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," and to account for its stock-based employee compensation
related to these NL stock options 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. During the fourth quarter of 2002, and
following NL's cash settlement of options to purchase NL common stock held by
certain individuals, NL, including the Company, commenced accounting for its
stock options using the variable accounting method because NL could not overcome
the presumption that it would not similarly cash settle its remaining stock
options. Under the variable accounting method, the intrinsic value of all
unexercised stock options (including those with an exercise price at least equal
to the market price on the date of grant) are accrued as an expense over their
vesting period, with subsequent increases (decreases) in NL's market price
resulting in additional compensation expense (income). See Notes 13 and 17. Upon
exercise of such options to purchase NL common stock held by employees of the
FB-13
Company, the Company pays NL an amount equal to the difference between the
market price of NL's common stock on the date of exercise and the exercise price
of such stock option. Aggregate compensation expense related to NL stock options
held by employees of the Company was $2.1 million in 2000, nil in 2001 and $2.3
million in 2002, and nil in both the six months ended June 30, 2002 and 2003.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Six months ended
Years ended December 31, June 30,
----------------------------------- --------------------
2000 2001 2002 2002 2003
------------- ------------- -------- -------- ---------
(Unaudited)
(In thousands, except per share amounts)
Net income - as reported ....................... $ 130,206 $ 154,456 $ 66,264 $ 40,311 $ 58,463
Add back: Stock-based compensation cost, net of
tax, included in reported net income ........ 1,349 -- 1,549 -- --
Deduct: Stock-based compensation cost, net of
tax, determined under fair value based method
for all awards .............................. (1,077) (1,112) (740) (370) (165)
--------- --------- -------- -------- --------
Net income - pro forma ......................... $ 130,478 $ 153,344 $ 67,073 $ 39,941 $ 58,298
========= ========= ======== ======== ========
Net income per basic and diluted common share:
As reported ............................... $ 2.66 $ 3.16 $ 1.35 $ .82 $ 1.19
Pro forma ................................. $ 2.67 $ 3.13 $ 1.37 $ .82 $ 1.19
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures are generally 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, 2001 and 2002, 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. Amounts charged
to customers for shipping and handling are included in net sales. Sales are
stated net of price, early payment and distributor discounts and volume rebates.
Repair and maintenance costs
The Company performs planned major maintenance activities during 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. Accrued repair and maintenance costs, included in other current
liabilities (see Note 8), was $3.4 million and $4.0 million at December 31, 2001
and 2002, respectively.
Shipping and handling costs
Shipping and handling costs are included in selling, general and
administrative expense and were $50 million in 2000, $49 million in 2001 and $51
million in 2002.
Income taxes
Kronos and its qualifying subsidiaries are members of NL's consolidated
U.S. federal income tax group (the "NL Tax Group"). As a member of the NL Tax
Group, the Company is a party to a tax sharing agreement (the "NL Tax
FB-14
Agreement"). Effective January 1, 2001, the NL Tax Group, including Kronos, was
included in the consolidated U.S. federal tax return 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 and its qualifying subsidiaries, including Kronos, compute its
provision for U.S. income taxes on a separate-company basis using the tax
elections made by Contran. Pursuant to the NL Tax Sharing agreement and using
the tax elections made by Contran, Kronos makes payments to or receives payments
from NL in amounts it would have paid to or received from the U.S. Internal
Revenue Service had it not been a member of NL's consolidated tax group but
instead was a separate taxpayer. Refunds are limited to amounts previously paid
under the tax sharing agreement.
Following completion of NL's distribution of 48.7% of the outstanding
shares of Kronos common stock to NL shareholders, Kronos and its qualifying
subsidiaries are no longer members of the NL Tax Group, but Kronos and its
qualifying subsidiaries remain as members of the Contran Tax Group. Kronos will
enter into a new tax sharing agreement with Valhi and Contran (the
"Kronos/Contran/Valhi Tax Agreement"). The Kronos/Contran/Valhi Tax Agreement is
expected to contain similar terms to the NL Tax Agreement.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in subsidiaries and unconsolidated affiliates not included in the 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. At
December 31, 2001 and 2002, the Company was not a party to any significant
derivative or hedging instrument covered by SFAS No. 133. 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 2000, 2001 and 2002.
Accounting principles adopted in 2002
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.
FB-15
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 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 adoption of SFAS No. 145 effective January 1, 2002 did not have a material
effect on the Company's consolidated financial positions, results of operation
or liquidity.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires a guarantor to recognize a
liability at the inception of a guarantee covered by the scope of FIN No. 45,
equal to the fair value of the obligation undertaken in issuing the guarantee.
FIN No. 45 also expands the disclosures requirements with respect to certain
guarantees. The initial recognition and measurement provisions of FIN No. 45 are
applicable on a prospective basis for any guarantees issued or modified after
December 31, 2002, while the disclosure requirements were effective upon
issuance. The Company is not a party to any guarantees covered by the scope of
FIN No. 45 as of December 31, 2002.
Accounting principles adopted in 2003
The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective 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 is 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 is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity will either settle the obligation for its recorded amount
or incur a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference between the amounts recognized
as described above and the associated amounts recognized in the Company's
balance sheet as of December 31, 2002 was recognized as a cumulative effect of a
change in accounting principles as of January 1, 2003. The effect of adopting
SFAS No. 143 as of January 1, 2003 as summarized in the table below did not have
a material effect on the Company's consolidated financial position, results of
operations or liquidity and is not separately recognized in the accompanying
statement of income.
Amount
-------------------
(In millions)
Increase in carrying value of net property,
plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in liabilities previously accrued
for closure and post closure activities .3
Asset retirement obligation recognized (.6)
------------
Net impact $ -
============
FB-16
The Company adopted SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," effective 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 are 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). The adoption of SFAS No. 146 effective January 1,
2003 did not have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
Note 3 - Business and geographic segments:
The Company's operations are conducted in one operating business segment -
activities associated with the production and sale of TiO2. Titanium dioxide
pigments are used to impart whiteness, brightness and opacity to a wide variety
of products, including paints, plastics, paper, fibers and ceramics. At December
31, 2001 and 2002, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $394 million and $159 million,
respectively.
The Company's chief operating decision maker is Mr. Harold C. Simmons. The
Company evaluates its TiO2 segment performance based on operating income. The
Company defines operating income as income before income taxes, minority
interest, extraordinary items, interest expense, interest expense to affiliates,
certain nonrecurring items and certain general corporate items. Corporate items
excluded from operating income include foreign currency transaction gains and
losses related to the extinguishment of intercompany indebtedness, corporate
expense, interest income from affiliates, interest and dividend income not
attributable to TiO2 operations, and gains and losses from the disposal of
long-lived assets outside the ordinary course of business. The accounting
policies of the TiO2 segment are the same as those described in Note 2. Interest
income included in the calculation of TiO2 operating income is disclosed as
"Trade interest income."
Segment assets are comprised of all assets attributable to the reportable
operating segment. The Company's investment in the TiO2 manufacturing joint
venture (see Note 7) is included in TiO2 business segment assets. Corporate
assets are not attributable to the TiO2 operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents, restricted
marketable debt securities, and notes receivable from affiliates. For geographic
information, net sales are attributed to the place of manufacture (point of
origin) and the location of the customer (point of destination); property and
equipment are attributed to their physical location.
FB-17
Years ended December 31,
-------------------------------------
2000 2001 2002
--------- ---------- ---------
(In thousands)
Geographic areas
Net sales - point of origin:
Germany ............................. $ 444,050 $ 398,470 $ 404,299
United States ....................... 313,426 278,624 291,823
Canada .............................. 154,579 149,412 157,773
Belgium ............................. 137,829 126,782 123,760
Norway .............................. 98,300 102,843 111,811
Other ............................... 92,691 82,320 89,560
Eliminations ........................ (318,556) (303,352) (303,838)
--------- --------- ---------
$ 922,319 $ 835,099 $ 875,188
========= ========= =========
Net sales - point of destination:
Europe .............................. $ 480,388 $ 425,338 $ 456,834
United States ....................... 283,327 258,347 271,865
Canada .............................. 53,060 47,061 53,371
Latin America ....................... 27,104 25,514 19,970
Asia ................................ 45,922 46,169 47,549
Other ............................... 32,518 32,670 25,599
--------- --------- ---------
$ 922,319 $ 835,099 $ 875,188
========= ========= =========
December 31,
--------------------------
2001 2002
-------- -------
(In thousands)
Identifiable assets
Net property and equipment:
Germany ................................ $182,387 $213,170
Canada ................................. 54,676 54,719
Belgium ................................ 46,841 54,625
Norway ................................. 38,549 49,737
Other .................................. 3,572 3,507
-------- --------
$326,025 $375,758
======== ========
Total assets:
Operating .............................. $900,401 $939,349
General corporate ...................... 9,695 49,196
-------- --------
$910,096 $988,545
======== ========
FB-18
Note 4 - Accounts and other receivables:
December 31,
----------------------- June 30,
2001 2002 2003
--------- ---------- ----------
(Unaudited)
(In thousands)
Trade receivables ....................... $ 99,989 $ 124,044 $ 174,914
Insurance claims receivable ............. 11,505 312 436
Recoverable VAT and other receivables ... 14,615 12,492 8,103
Allowance for doubtful accounts ......... (2,239) (2,605) (2,591)
--------- --------- ----------
$ 123,870 $ 134,243 $ 180,862
========= ========= =========
Note 5 - Inventories:
December 31,
----------------------- June 30,
2001 2002 2003
--------- ---------- ----------
(Unaudited)
(In thousands)
Raw materials .................. $ 79,162 $ 54,077 $ 34,641
Work in process ................ 9,675 15,936 16,980
Finished products .............. 117,201 109,203 114,731
Supplies ..................... 25,018 30,666 33,408
-------- -------- --------
$231,056 $209,882 $199,760
======== ======== ========
Note 6 - Other noncurrent assets:
December 31,
----------------- June 30,
2001 2002 2003
------- ------- --------
(Unaudited)
(In thousands)
Deferred financing costs, net (see Note 10) ...... $ 12 $10,550 $10,446
Unrecognized net pension obligations (see Note 12) 5,901 5,561 6,439
Restricted marketable debt securities ............ 577 2,492 1,968
Other ............................................ 4,610 3,590 1,565
------- ------- -------
$11,100 $22,193 $20,418
======= ======= =======
Note 7 - Investment in TiO2 manufacturing joint venture:
Kronos Louisiana, Inc. ("KLA"), a wholly owned subsidiary of Kronos, owns a
50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a manufacturing
joint venture that is also 50%-owned by Tioxide Americas Inc. ("Tioxide"), a
wholly owned subsidiary of Huntsman International Holdings LLC, a 60%-owned
subsidiary of Huntsman Corporation. LPC owns and operates a chloride-process
TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, the Company reports no equity
in earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's costs. Kronos' share of net costs is reported as cost of
sales as the related TiO2 acquired from LPC is sold to third parties.
FB-19
Distributions from LPC, which generally relate to excess cash generated by LPC
from its non-cash production costs, and contributions to LPC, which generally
relate to cash required by LPC when it builds working capital, are reported as
part of cash generated by operating activities in the Company's Consolidated
Statements of Cash Flows.
LPC made cash distributions of $15.1 million in 2000, $22.6 million in 2001
and $15.9 million in 2002, equally split between the partners.
Summary balance sheets of LPC are shown below.
December 31,
-----------------------
2001 2002
-------- --------
(In thousands)
ASSETS
Current assets ................................... $ 45,872 $ 56,745
Property and equipment, net ...................... 250,501 235,739
-------- --------
$296,373 $292,484
======== ========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current ............. $ 16,767 $ 29,716
Partners' equity ................................. 279,606 262,768
-------- --------
$296,373 $292,484
======== ========
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
2000 2001 2002
-------- --------- --------
(In thousands)
Revenues and other income:
Kronos ........................... $ 92,530 $ 93,393 $ 92,428
Tioxide .......................... 93,366 94,009 93,833
Interest ......................... 578 303 53
-------- -------- --------
186,474 187,705 186,314
-------- -------- --------
Cost and expenses:
Cost of sales .................... 186,045 187,295 185,946
General and administrative ....... 429 410 368
-------- -------- --------
186,474 187,705 186,314
-------- -------- --------
Net income ..................... $ -- $ -- $ --
======== ======== ========
FB-20
Note 8 - Accounts payable and accrued liabilities:
December 31,
---------------------------
2001 2002
-------- --------
(In thousands)
Accounts payable ......................... $ 95,837 $ 89,602
-------- --------
Accrued liabilities:
Employee benefits ..................... 22,488 27,042
Other ................................. 34,308 31,613
-------- --------
56,796 58,655
-------- --------
$152,633 $148,257
======== ========
Note 9 - Other noncurrent liabilities:
December 31,
-------------------------
2001 2002
------- -------
(In thousands)
Insurance claims expense ................... $ 1,465 $ 1,480
Employee benefits .......................... 3,476 4,025
Environmental costs ........................ 5,662 5,921
Other ...................................... 2,130 2,316
------- -------
$12,733 $13,742
======= =======
Note 10 - Notes payable and long-term debt:
December 31,
---------------------
2001 2002
-------- --------
(In thousands)
Notes payable - Kronos International, Inc.
and subsidiaries .................................... $ 46,201 $ --
======== ========
Long-term debt:
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes ..................... $ -- $296,942
Revolving credit facility ....................... -- 27,077
Other ........................................... 2,498 1,887
-------- --------
2,498 325,906
Less current maturities .............................. 1,033 1,298
-------- --------
$ 1,465 $324,608
======== ========
Notes payable at December 31, 2001, consisted of (euro)27 million ($24.0
million) and NOK 200 million ($22.2 million). Notes payable totaling $53.2
million were repaid on June 28, 2002 with proceeds from the new European Credit
Facility discussed below and available cash, and the agreements were terminated.
In June 2002 Kronos International, Inc. ("KII"), a wholly owned subsidiary
of Kronos, issued (euro)285 million ($280 million when issued and $297 million
at December 31, 2002) principal amount of 8.875% Senior Secured Notes (the
"Notes") due 2009. The Notes are collateralized by first priority liens on 65%
FB-21
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 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. In addition, the indenture contains customary
cross-default provisions with respect to other debt and obligations of KII or
its subsidiaries. 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 December 31, 2002 and June 30, 2003, KII was in
compliance with all the covenants, and the quoted market price of the Notes at
December 31, 2002 was (euro)1,010 per (euro)1,000 principal amount. The Notes
require cash interest payments on June 30 and December 30, commencing on
December 30, 2002. KII completed an exchange offer on November 18, 2002 to
exchange the Notes for registered publicly traded notes that have substantially
identical terms as the Notes.
In June 2002 KII's operating subsidiaries in Germany, Belgium and Norway
(the "European Borrowers"), entered into a three-year (euro)80 million secured
revolving credit facility ("European Credit Facility"). The European Credit
Facility is available in multiple currencies, including U.S. dollars, euros and
Norwegian kroner. In addition, the European Credit Facility has a (euro)5.0
million sub limit available for issuance of letters of credit. As of December
31, 2002, (euro)15 million ($15.6 million) and NOK 80 million ($11.5 million)
were outstanding under the European Credit Facility and (euro)1.8 million ($1.8
million) of letters of credit was also outstanding under the European Credit
Facility. At December 31, 2002, approximately (euro)52 million (approximately
$54 million) was available for additional borrowings. Borrowings bear interest
at the applicable interbank market rate plus 1.75%. As of December 31, 2002, the
interest rate was 4.80% and 8.86% on the euro and Norwegian kroner borrowings,
respectively, and the weighted average interest rate was 6.51%.
In March 2003 the Company borrowed (euro)15 million ($16.1 million when
borrowed) under the European Credit Facility. In April 2003 the Company repaid
NOK 80 million (approximately $11 million when repaid) under the European Credit
Facility.
The European Credit Facility is collateralized by accounts receivable and
inventory of the European Borrowers, plus a limited pledge of certain other
assets of the Belgian borrower. The European 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. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of the European Borrowers, KII and its
other subsidiaries. The European Borrowers were in compliance with all the
covenants as of December 31, 2002 and June 30, 2003.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European Credit
Facility, any outstanding borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the European Borrowers or KII
default under any other indebtedness in excess of (euro)5 million due to a
failure to pay such other indebtedness at its due date (including any due date
that arises prior to the stated maturity as a result of a default under such
other indebtedness). In the event the cross-default provisions of either the
Notes or the European Credit Facility become applicable, and such indebtedness
is accelerated, the Company would be required to repay such indebtedness prior
to their stated maturity.
In September 2002 the Company's U.S. operating subsidiaries (the "U.S.
Borrowers") entered into a three-year $50 million asset-based revolving credit
facility ("U.S. Credit Facility"). Under the terms of the U.S. Credit Facility,
the amount available for borrowing is based on a formula-derived borrowing base
FB-22
using eligible accounts receivable and eligible inventory and is subject to
maintaining $5 million of minimum excess availability ("Borrowing
Availability"). The maximum amount available under the U.S. Credit Facility is
$45 million. Borrowings bear interest at either prime rate or eurodollar rates
plus a margin spread based on average excess availability under the U.S. Credit
Facility or certain levels of EBITDA (as defined) of the U.S. Borrowers. Margin
spreads range from 0.25% to 1.00% for prime rate borrowings and 2.00% to 2.75%
for eurodollar rate borrowings. The U.S. Credit Facility is available for future
working capital requirements and general corporate purposes of the U.S.
Borrowers, including dividend distributions. The U.S. Credit Facility is
collateralized by accounts receivable, inventory and certain fixed assets of the
U.S. Borrowers. The U.S. Credit Facility contains, among other things, various
restrictive and financial covenants including restrictions on incurring liens,
asset sales, mergers, and minimum EBITDA (as defined) of the U.S. Borrowers and
Kronos. The U.S. Borrowers were in compliance with all the covenants as of
December 31, 2002 and June 30, 2003. As of December 31, 2002 and June 30, 2003,
no borrowings were outstanding under the U.S. Credit Facility and Borrowing
Availability was approximately $45 million and approximately $45 million,
respectively.
Deferred financing costs of $10.7 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
December 31, 2002.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $57 million at December 31, 2002 (including
approximately $54 million under the European Credit Facility of which
approximately $3.2 million is available for letters of credit).
The aggregate maturities of long-term debt at December 31, 2002 are shown
in the table below.
Years ending December 31, Amount
- ------------------------- ---------------
(In thousands)
2003 $ 1,298
2004 279
2005 27,224
2006 145
2007 18
2008 and thereafter 296,942
------------
$ 325,906
============
Note 11 - Notes receivable from and payable to affiliates:
December 31,
-----------------------
2001 2002
--------- --------
(In thousands)
Notes receivable from affiliates:
Variable rate - NL ............................. $ -- $44,600
======== =======
Notes payable to affiliates:
11.75% First-Tier Senior Mirror Note ........... $194,000 $ --
Revolving credit facility ...................... -- 44,600
-------- -------
$194,000 $44,600
======== =======
Notes receivable from affiliates
At December 31, 2002, the Company had $44.6 million of loans outstanding to
NL under the terms of a $55 million revolving credit facility entered into with
NL during 2002. The loan bore interest at U.S. LIBOR plus 1.75% (3.1% at
December 31, 2002), with interest payable quarterly, and all principal was due
FB-23
on December 31, 2005. This note receivable from NL is included in noncurrent
assets at December 31, 2002, as settlement of the note was currently
contemplated within the foreseeable future. During the first six months of 2003,
NL repaid a net $19.7 million to the Company. In June 2003 the Company
distributed the remaining $24.9 million of notes receivable from affiliate to NL
in the form of a noncash dividend. The revolving credit agreement with NL was
terminated on June 30, 2003.
Notes payable to affiliates
NL had $194 million of 11.75% Senior Secured Notes due 2003 (the "NL
Notes") at December 31, 2001. The Company had a First-Tier Senior Mirror Note
(the "Mirror Note") payable to NL. The terms of the 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 Mirror Note was collateralized by a
first priority lien on the common stock of KII and another subsidiary of the
Company, as well as the Company's Second-Tier Senior Mirror Note ("Second-Tier
Mirror Note") receivable from KII, the terms of which were identical to the
terms of the Mirror Note. The Second-Tier Mirror Note was eliminated in the
Company's consolidated financial statements. The NL Notes were collateralized by
a first priority lien on the common stock of Kronos, the Mirror Note and other
collateral pledged by NL.
On March 22, 2002, NL redeemed $25 million principal amount of the NL Notes
at the current call price of 100%, and Kronos concurrently repaid $25 million
principal amount of the Mirror Notes. In addition, immediately following the
closing of the Notes offering (see Note 10), the Company 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.
The Company 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 Mirror Note for the period from July 1 to July 28, 2002.
Such loss was recognized as a component of interest expense. The Mirror Note was
deemed repaid in accordance with the terms and conditions of such agreement, and
the agreement was canceled.
At December 31, 2002, the Company had $44.6 million outstanding of loans
from NL Environmental Management Services, Inc. ("EMS"), a majority-owned
subsidiary of NL, under the terms of a $55 million revolving credit facility
entered into with EMS in 2002. The loan bore interest at U.S. LIBOR plus 1.75%
(3.1% at December 31, 2002), with interest payable quarterly, and all principal
was due on December 31, 2005. During the first six months of 2003, the Company
repaid this outstanding balance in full, and the revolving credit agreement with
EMS was terminated on June 30, 2003.
Note 12 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees as well as certain former
employees and retirees of certain business units formerly operated by the
Company. Non-U.S. employees are covered by plans in their respective countries
and a majority of U.S. employees are eligible to participate in a contributory
savings plan. The Company amended its defined benefit pension plans in Belgium
and Norway in 2002 to exclude the admission of new employees to the plans. New
employees of these particular locations are eligible to participate in
Company-sponsored defined contribution plans.
The Company contributes to eligible U.S. employees' accounts an amount
equal to approximately 4% (in each of 2000, 2001 and 2002) of the employee's
annual eligible earnings and partially matches employee contributions to the
U.S. contributory savings plan. The Company also has a nonqualified defined
contribution plan covering certain U.S. executives, and participants receive
benefits based on a formula involving eligible earnings. The Company's expense
related to the U.S. plans was $.3 million in 2000, $.4 million in 2001 and $.2
million in 2002.
FB-24
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below.
December 31,
---------------------------------------------------------------
2000 2001 2002
----------------- ----------------- ------------------
(Percentages)
Discount rate 6.0 to 7.8 5.8 to 7.3 5.5 to 7.0
Rate of increase in future compensation levels 3.0 to 4.5 2.8 to 4.5 2.5 to 4.5
Long-term rate of return on plan assets 7.0 to 9.0 6.8 to 8.5 6.8 to 8.5
Plan assets are comprised primarily of investments in U.S. and non-U.S.
corporate equity and debt securities, short-term investments, mutual funds and
group annuity contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates 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.
Years ended December 31,
--------------------------------
2000 2001 2002
--------- --------- --------
(In thousands)
Net periodic pension cost:
Service cost benefits ............................... $ 3,836 $ 3,743 $ 4,278
Interest cost on projected benefit obligation ("PBO") 12,196 12,751 13,641
Expected return on plan assets ...................... (12,553) (12,635) (12,778)
Amortization of prior service cost .................. 238 201 307
Amortization of net transition obligation ........... 586 563 570
Recognized actuarial losses ......................... 196 399 1,126
-------- -------- --------
$ 4,499 $ 5,022 $ 7,144
======== ======== ========
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
--------------------------
2001 2002
--------- ---------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 207,609 $ 218,162
Service cost ................................. 3,743 4,278
Interest ..................................... 12,751 13,641
Participant contributions .................... 1,005 1,056
Amendments ................................... 1,819 --
Actuarial loss (gain) ........................ 7,340 (5,178)
Benefits paid ................................ (12,972) (13,936)
Change in currency exchange rates ............ (3,133) 36,436
--------- --------
End of year ................................. 218,162 254,459
--------- --------
FB-25
December 31,
--------------------------
2001 2002
--------- ---------
(In thousands)
Change in fair value of plan assets:
Beginning of year 175,773 168,155
Actual return on plan assets 2,984 (2,054)
Employer contributions 7,354 9,010
Participant contributions 1,005 1,056
Benefits paid (12,972) (13,936)
Change in currency exchange rates (5,989) 27,705
--------- --------
End of year 168,155 189,936
--------- --------
Funded status at year end:
Plan assets less than PBO $ (50,007) $ (64,523)
Unrecognized actuarial loss 40,316 55,807
Unrecognized prior service cost 4,371 4,881
Unrecognized net transition obligation 4,536 5,247
--------- --------
$ (784) $ 1,412
========= ==========
Amounts recognized in the balance sheet:
Prepaid pension cost $ 16,043 $ 17,572
Accrued pension cost:
Current (5,682) (6,677)
Noncurrent (25,558) (33,098)
Unrecognized net pension obligations 5,901 5,561
Accumulated other comprehensive loss 8,512 18,054
--------- --------
$ (784) $ 1,412
========= ==========
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, 2001 and 2002, 100% and 94%, respectively,
of the projected benefit obligations of such plans relate to non-U.S. plans.
December 31,
-------------------------
2001 2002
-------- --------
(In thousands)
Projected benefit obligation ................. $167,825 $204,398
Accumulated benefit obligation ............... 150,716 184,314
Fair value of plan assets .................... 119,340 142,612
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 most of these employees,
individual performance.
FB-26
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently provides
certain health care and life insurance benefits for eligible retired employees.
Certain of the Company's Canadian employees may become eligible for such
postretirement health care and life insurance benefits if they reach retirement
age while working for the Company. In 1989 the Company began phasing out such
benefits for active U.S. employees over a ten-year period and U.S. employees
retiring after 1998 are not entitled to any such benefits. The majority of all
retirees are required to contribute a portion of the cost of their benefits and
certain current and future retirees are eligible for reduced health care
benefits at age 65. The Company's policy is to fund medical claims as they are
incurred, net of any contributions by the retirees.
For measuring the OPEB liability at December 31, 2002, the expected rate of
increase in health care costs is 9% in 2003 decreasing to 5.5% in 2007 and
thereafter. Other weighted-average assumptions used to measure the liability and
expense are presented below.
December 31,
----------------------
2000 2001 2002
---- ---- ----
(Percentages)
Discount rate ....................................... 7.3 7.0 6.5
Long-term rate for compensation increases ........... 6.0 6.0 6.0
Long-term rate of return on plan assets ............. 7.7 7.7 6.0
Variances from actuarially assumed rates will change accrued OPEB
liabilities, net periodic OPEB expense and funding requirements in future
periods. If the health care cost trend rate was increased (decreased) by one
percentage point for each year, postretirement benefit expense would have
increased approximately $.1 million (decreased by $.1 million) in 2002, and the
projected benefit obligation at December 31, 2002 would have increased by
approximately $.8 million (decreased by $.6 million).
The components of the Company's net periodic postretirement benefit cost
are set forth below.
Years ended December 31,
----------------------------------
2000 2001 2002
------- -------- --------
(In thousands)
Net periodic OPEB cost (benefit):
Service cost benefits ................... $ 84 $ 94 $ 103
Interest cost on PBO .................... 973 924 660
Expected return on plan assets .......... (66) (66) --
Amortization of prior service cost ...... (1,055) (1,055) (1,055)
Recognized actuarial losses ............. 24 27 27
------- ------- -------
$ (40) $ (76) $ (265)
======= ======= =======
FB-27
December 31,
------------------------
2001 2002
--------- ---------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 13,498 $ 11,407
Service cost ................................. 94 103
Interest cost ................................ 924 660
Actuarial losses (gains) ..................... (1,694) 103
Release of insurance obligations ............. -- (787)
Benefits paid:
Company funds ............................... (1,006) (985)
Plan assets ................................. (264) --
Change in currency exchange rates ............ (145) 32
-------- --------
End of year ................................. 11,407 10,533
-------- --------
Change in fair value of plan assets:
Beginning of year ............................ 850 787
Actual return on plan assets ................. 47 --
Employer contributions ....................... 154 --
Benefits paid ................................ (264) --
Release of insurance obligations ............. -- (787)
-------- --------
End of year ................................. 787 --
-------- --------
Funded status at year end:
Plan assets less than PBO .................... (10,620) (10,533)
Unrecognized actuarial gain .................. (421) (335)
Unrecognized prior service cost .............. (3,280) (2,225)
-------- --------
$(14,321) $(13,093)
======== ========
Amounts recognized in the balance sheet:
Current ...................................... $ (1,285) $ (1,287)
Noncurrent ................................... (13,036) (11,806)
-------- --------
$(14,321) $(13,093)
======== ========
Based on communications with a certain insurance provider of retiree
benefits, and consultations with the Company's actuaries, the Company has been
released from certain life insurance retiree benefit obligations totaling $.8
million as of December 31, 2002 through the use of an equal amount of plan
assets.
Note 13 - Common 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, 2002, 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, 2002, 3,651,000 shares were available for
FB-28
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 certain employees of the Company
pursuant to the NL Option Plan and the Predecessor Option Plan are summarized in
the table below.
Weighted-
average
Amount Weighted- fair
Exercise price payable average value
per share upon exercise at grant
Shares Low High exercise price date
------ ------- ------ -------- -------- ---------
(In thousands, except per share amounts)
Outstanding at December 31, 1999 800 $ 5.00 $24.19 $ 12,659 $ 15.82
Granted .................... 184 14.25 14.25 2,622 14.25 $ 4.83
Exercised .................. (193) 5.00 17.97 (2,034) 10.53
Forfeited .................. (150) 24.19 24.19 (3,628) 24.19
----- ------ ------ ------- -------
Outstanding at December 31, 2000 641 5.00 21.97 9,619 15.01
Granted .................... 216 20.11 20.51 4,344 20.11 $ 7.52
Exercised .................. (6) 11.28 14.25 (70) 12.43
----- ------ ------ ------- -------
Outstanding at December 31, 2001 851 5.00 21.97 13,893 16.33
Exercised .................. (192) 5.00 15.19 (2,715) 14.16
----- ------ ------ ------- -------
Outstanding at December 31, 2002 659 $ 8.69 $21.97 $ 11,178 $ 16.96
===== ====== ====== ======= =======
At December 31, 2000, 2001 and 2002 options to purchase 140,700, 261,000
and 240,400 shares, respectively, were exercisable and options to purchase
184,000 shares become exercisable in 2003. Of the exercisable options, options
to purchase 114,000 shares at December 31, 2002 had exercise prices less than
NL's December 31, 2002 quoted market price of $17.00 per share. Outstanding
options at December 31, 2002 expire at various dates through 2011.
FB-29
The following table summarizes NL's stock options outstanding and
exercisable that were held by certain employees of the Company as of December
31, 2002 by price range.
Options outstanding Options exercisable
- -------------------------------------------------------------------------------- ---------------------------
Weighted-
average Weighted- Weighted-
Outstanding remaining average Exercisable average
Range of at contractual exercise at exercise
exercise prices 12/31/02 life price 12/31/02 price
- --------------------------------- -------------- -------------- ------------ --------------- -------------
$ 7.26 - $ 9.68 2,000 1.1 $ 8.69 2,000 $ 8.69
9.68 - 12.09 68,900 5.4 11.47 47,500 11.56
12.09 - 14.51 198,700 6.5 14.03 52,500 14.14
14.51 - 16.93 25,200 4.8 15.46 12,000 15.75
16.93 - 19.35 84,400 4.6 17.87 70,400 17.85
19.35 - 21.77 250,000 7.7 20.11 32,000 20.10
21.77 - 24.19 30,000 5.1 21.97 24,000 21.97
--------- ------- ------------ -------- ------------
659,200 6.5 $ 16.96 240,400 $ 16.33
========= ======= ============ ======== ============
The pro forma information included in Note 2 required by SFAS No. 123 is
based on an estimation of the fair value of options issued subsequent to January
1, 1995. No options were granted in 2002. 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 2000 and 2001:
stock price volatility of 48% and 46% in 2000 and 2001, respectively; risk-free
rate of return of 5% in each of 2000 and 2001; dividend yield of 4.9% in 2000
and 4.0% in 2001; and an expected term of 9 years in each of 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.
Notes receivable from affiliates - contra equity
Certain long-term notes receivable from affiliates were included as a
component of equity in accordance with GAAP, as settlement of the affiliate
notes receivable balances was not currently contemplated within the foreseeable
future. The notes are summarized in the following table.
December 31,
---------------------------
2001 2002
-------- ------------
(In thousands)
Notes receivable from NL:
8.7% Fixed rate ............................. $106,783 $ --
6.0% Fixed rate euro-denominated ............ 286,363 --
Variable rate ............................... 262,772 --
-------- -----------
$655,918 $ --
======== ===========
The 8.7% fixed-rate note receivable from NL originally matured in 2008 with
interest payable quarterly. The 6% fixed-rate euro-denominated note receivable
from NL originally matured in 2010 with interest payable monthly. The 6%
fixed-rate euro-denominated note receivable from NL was established in 2001 as a
result of a series of noncash transactions between KII, NL and the Company.
Variable-rate notes receivable consisted of eight individual notes from NL of
which five originally matured in 2003 and three originally matured in 2010, with
interest rates ranging from U.S. LIBOR plus .625% to U.S. LIBOR plus 1.625%
(2.5875% to 3.5875% at December 31, 2001) payable semi-annually. In July 2002
the Company distributed its affiliate notes receivable to NL totaling $711.1
million in the form of a noncash dividend.
FB-30
The Company periodically converted interest receivable from affiliates to
notes receivable from affiliates. For the years ended 2000, 2001 and 2002, the
interest transferred to notes receivable from affiliates totaled $21.6 million,
$22.2 million and $20.6 million, respectively.
Cash flows related to such loans made to affiliates included in contra
equity were reflected in "Other capital transactions with affiliates, net" in
the accompanying consolidated statement of cash flows.
Note 14 - 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.
Six months ended
Years ended December 31, June 30,
---------------------------------- ----------------------
2000 2001 2002 2002 2003
--------- --------- ---------- ------- ----------
(Unaudited)
(In thousands)
Pretax income (loss):
U.S ..................................... $ 33,675 $ 34,167 $ 24,273 $ 15,886 $ 9,141
Non-U.S ................................. 162,203 154,064 67,546 39,397 42,691
--------- --------- -------- -------- --------
$ 195,878 $ 188,231 $ 91,819 $ 55,283 $ 51,832
========= ========= ======== ======== ========
Expected tax expense ........................ $ 68,557 $ 65,880 $ 32,137 $ 19,349 $ 18,141
Non-U.S. tax rates .......................... (6,462) (7,069) (3,238) (702) (366)
Resolution of German income tax audits ...... (5,500) -- -- -- --
Change in valuation allowance:
Corporate restructuring in Germany and
other .................................. -- (23,247) -- -- --
Recognition of certain deductible tax
attributes which previously did not meet
the "more-likely-than-not" recognition
criteria ............................... (375) -- (1,808) (3,027) (106)
Incremental tax on income of companies not
included in the NL Tax Group ............ 1,943 451 548 202 71
Refund of prior-year German taxes ........... -- -- -- -- (24,564)
Rate change adjustment of deferred taxes .... 5,695 -- (2,332) -- --
U.S. state income taxes ..................... 595 542 43 43 204
Tax contingency reserve adjustments, net .... 252 (3,423) 193 (1,083) --
Other, net .................................. 920 625 (43) 163 (54)
--------- --------- -------- -------- --------
Income tax expense (benefit) ........... $ 65,625 $ 33,759 $ 25,500 $ 14,945 $ (6,674)
========= ========= ======== ======== ========
FB-31
Six months ended
Years ended December 31, June 30,
---------------------------------- ------------------
2000 2001 2002 2002 2003
--------- --------- -------- -------- --------
(In thousands)
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................................... $ 7,274 $ 8,467 $ 4,281 $ 2,657 $ 4,017
U.S. state ............................................. 595 542 43 43 204
Non-U.S ................................................ 45,855 28,992 10,421 4,852 (16,747)
-------- -------- -------- -------- --------
53,724 38,001 14,745 7,552 (12,526)
-------- -------- -------- -------- --------
Deferred income tax expense (benefit):
U.S. federal ........................................... 4,569 4,021 5,203 1,822 (861)
U.S. state ............................................. -- -- -- -- --
Non-U.S ................................................ 7,332 (8,263) 5,552 5,571 6,713
-------- -------- -------- -------- --------
11,901 (4,242) 10,755 7,393 5,852
-------- -------- -------- -------- --------
$ 65,625 $ 33,759 $ 25,500 $ 14,945 $ (6,674)
======== ======== ======== ======== ========
Comprehensive provision (benefit) for income taxes allocable to:
Pretax income .............................................. $ 65,625 $ 33,759 $ 25,500 $ 14,945 $ (6,674)
Other comprehensive income (loss):
Pension liabilities .................................... -- (2,160) (2,882) -- --
-------- -------- -------- -------- --------
$ 65,625 $ 31,599 $ 22,618 $ 14,945 $ (6,674)
======== ======== ======== ======== ========
FB-32
The components of the net deferred tax liability are summarized below:
December 31,
--------------------------------------------------
2001 2002
------------------------ -----------------------
Deferred tax Deferred tax
------------------------ -----------------------
Assets Liabilities Assets Liabilities
---------- ----------- --------- -----------
(In thousands)
Tax effect of temporary differences relating to:
Inventories ..................................... $ 3,202 $ (2,849) $ 3,427 $ (3,302)
Property and equipment .......................... 42,721 (54,432) 43,868 (59,058)
Accrued postretirement benefits cost ............ 4,953 -- 4,516 --
Accrued (prepaid) pension cost .................. 1,473 (21,665) 3,043 (24,785)
Other accrued liabilities and deductible
differences .................................... 11,993 -- 9,627 --
Other taxable differences ....................... -- (26,591) -- (35,291)
Tax on unremitted earnings of non-U.S. subsidiaries . -- (3,933) -- (4,156)
Tax loss and tax credit carryforwards ............... 106,067 -- 139,674 --
Valuation allowance ................................. (121,681) -- (153,678) --
-------- -------- -------- ---------
Gross deferred tax assets (liabilities) ........ 48,728 (109,470) 50,477 (126,592)
Reclassification, principally netting by tax
jurisdiction ...................................... (43,402) 43,402 (44,139) 44,139
-------- -------- -------- ---------
Net total deferred tax assets (liabilities) ..... 5,326 (66,068) 6,338 (82,453)
Net current deferred tax assets (liabilities) ... 4,640 (1,530) 4,404 (3,219)
-------- -------- -------- ---------
Net noncurrent deferred tax assets (liabilities)$ 686 $ (64,538) $ 1,934 $ (79,234)
======== ========= ========= =========
Changes in the Company's deferred income tax valuation allowance are
summarized below.
Years ended December 31,
-------------------------------------
2000 2001 2002
---------- ---------- ----------
(In thousands)
Balance at the beginning of year ................................... $ 196,630 $ 155,572 $ 121,681
Recognition of certain deductible tax attributes which previously
did not meet the "more-likely-than-not" recognition criteria .. (375) (23,247) (1,808)
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 ............. (24,955) (3,157) 12,187
Foreign currency translation .................................... (15,728) (7,487) 21,618
--------- --------- ---------
Balance at the end of year ......................................... $ 155,572 $ 121,681 $ 153,678
========= ========= =========
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 asset related to certain German tax attributes.
A reduction in the Belgian income tax rate from 40.17% to 33.99%, enacted
in December 2002, became effective January 1, 2003. The reduction in the Belgian
FB-33
income tax rate resulted in a $2.3 million decrease in deferred income tax
expense in the fourth quarter of 2002 due to a reduction of the Company's
deferred income tax liabilities related to certain Belgian temporary
differences.
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.
In 2002 the Company received a notification from the Norwegian tax
authorities of their intent to assess tax deficiencies of approximately NOK 12.2
million ($1.7 million at December 31, 2002 and at June 30, 2003) relating to
1998 through 2000. The Company has objected to this proposed assessment in a
written response to the Norwegian tax authorities.
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 (euro)10.1 million ($10.5 million at December
31, 2002 and $11.6 million at June 30, 2003). 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.
In April 2003 the Company received a notification from the Belgian tax
authorities of their intent to assess a tax deficiency related to 1999. The
anticipated assessment, including interest, is expected to approximate
(euro)13.1 million ($15.0 million at June 30, 2003). The Company believes the
proposed assessment related to 1999 is without merit and in April 2003 filed a
written response in opposition to the notification of intent to assess.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. The Company has filed
certain amended German tax returns and expects to file additional amended German
tax returns claiming such refunds for all years affected by the Court's
decision, which is expected to result in an estimated total net refund of taxes
and interest of approximately $40 million. Receipt of the German tax refunds is
subject to satisfaction of various procedural requirements, including a review
and acceptance of the amended German tax returns by the German tax authorities.
Certain of these procedural requirements were satisfied in the second quarter of
2003 with respect to a portion of the refund claim, and in July 2003 the German
tax authorities refunded the Company a portion of the total anticipated refund.
The portion received in July was (euro)21.5 million ($24.6 million using June
30, 2003 exchange rates). The Company has reflected this tax refund in its
second quarter 2003 results of operations. The Company expects to receive the
remaining refunds over the next six to nine months, a portion of which may
result in an additional income tax benefit.
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.
During the fourth quarter of 2001, the Company completed a restructuring of
its German subsidiaries, and as a result recognized a $23.2 million net 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 income tax
attributes that did not previously meet the "more-likely-than-not" recognition
criteria.
At December 31, 2002 and at June 30, 2003, the Company had the equivalent
of approximately $414 million and $470 million, respectively, of income tax loss
carryforwards in Germany with no expiration date. However, the Company has
provided a deferred tax valuation allowance against substantially all of these
income tax loss carryforwards because the Company currently believes they do not
meet the "more-likely-than-not" recognition criteria. In 2002 the German federal
government proposed certain changes to its income tax law, including certain
changes that would have imposed limitations on the annual utilization of income
tax loss carryforwards. Such proposal, if enacted, would have significantly
affected Kronos' 2003 and future income tax expense and cash tax payments. In
FB-34
April 2003 the German federal government passed a new tax law which does not
contain the provision that would have restricted the utilization of tax loss
carryforwards. Furthermore, the provisions contained in the new law are not
expected to materially impact Kronos' income tax expense or cash tax payments.
On August 1, 2003, the German federal government proposed new tax law amendments
that, among other things, reintroduced the limitations on the annual utilization
of income tax loss carryforwards, to become effective in 2004. There can be no
assurance that these proposed law amendments will be enacted and, if enacted,
when they would become effective. Such proposal, if enacted as proposed, would
significantly affect the Company's future income tax expense and cash tax
payments.
At December 31, 2002 and June 30, 2003, the Company had net deferred tax
liabilities of $ 76.1 million and $86.9 million, respectively. The Company
operates in numerous tax jurisdictions, in certain of which it has temporary
differences that net to deferred tax assets (before valuation allowance). The
Company has provided a deferred tax valuation allowance of $153.7 million at
December 31, 2002 and $166.0 million at June 30, 2003, principally related to
Germany, partially offsetting deferred tax assets which the Company believes do
not currently meet the "more-likely-than-not" recognition criteria.
Note 15 - 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 TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 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.
The Company reached an agreement and settled the coverage 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 recoveries
related to the Leverkusen fire are expected to be received.
Note 16 - Other items:
Advertising costs are expensed as incurred and were $1 million in each of
2000, 2001 and 2002.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $6 million in each of 2000, 2001 and 2002.
Interest capitalized in connection with long-term capital projects was nil
in each of 2000, 2001 and 2002.
Note 17- 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
FB-35
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 continuously considers, reviews and evaluates, and understands that
Contran, Valhi, NL and related entities consider, review and evaluate, such
transactions. Depending upon the business, tax and other objectives then
relevant, and restrictions under the indentures and other agreements, it is
possible that the Company might be a party to one or more such transactions in
the future.
The Company is a party to various intercorporate services agreements
("ISA") with various related parties discussed below. Under the ISA's, employees
of one company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient, and the compensation of such persons.
The Company is a party to an intercorporate services agreement with NL ("NL
ISA") whereby NL provides certain management, financial and administrative
services to the Company on a fee basis. Intercorporate services fee expense
related to the NL ISA was $5.0 million in 2000, $3.5 million in 2001, $3.7
million in 2002, and $1.8 million and $1.9 million in the first six months of
2002 and 2003, respectively. Following completion of NL's distribution of 48.7%
of the outstanding shares of Kronos common stock to NL shareholders, Kronos
expects that the NL ISA will be amended with terms similar to the original
agreement.
Purchases of TiO2 from LPC were $92.5 million in 2000, $93.4 million in
2001, $92.4 million in 2002, and $44.7 million and $53.6 million in the first
six months of 2002 and 2003, respectively.
Interest income from affiliates related to notes receivable from affiliates
was $20.3 million in 2000, $33.4 million in 2001, $20.8 million in 2002, and
$17.5 million and $.7 million in the first six months of 2002 and 2003,
respectively. Interest expense to affiliates related to notes payable to
affiliates was $29.0 million in 2000, $23.0 million in 2001, $12.3 million in
2002, and $12.2 million and $.7 million in the first six months of 2002 and
2003, respectively.
Tall Pines Insurance Company ("Tall Pines"), Valmont Insurance Company
("Valmont") and EWI provide for or broker certain of the Company's, its joint
venture's and its affiliates' insurance policies. Valmont and Tall Pines are
wholly-owned by Valhi. A son-in-law of Mr. Simmons is the Chairman of the Board
of EWI. Consistent with insurance industry practices, Tall Pines, Valmont and
EWI receive commissions from the insurance and reinsurance underwriters for the
policies that they provide or broker. The Company and its joint venture paid
approximately $5.6 million, $9.7 million, $10.1 million in 2000, 2001, 2002,
respectively, and $1.1 million in each of the first six months of 2002 and 2003,
for policies provided or brokered by Tall Pines, Valmont and EWI. The premiums
paid by affiliates (other than the Company and its joint venture) for policies
provided or brokered by EWI was approximately $7.6 million in 2002, and
approximately $1.5 million and $1.8 million in the first six months of 2002 and
2003, respectively. These amounts principally included payments for reinsurance
and insurance premiums paid to unrelated third parties, but also included
commissions paid to Tall Pines, Valmont and EWI. In the Company's opinion, the
amounts that the Company paid for these insurance policies and the allocation
among the Company and its affiliates of relative insurance premiums are
reasonable and similar to those they could have obtained through unrelated
insurance companies and/or brokers. The Company expects that these relationships
with Tall Pines, Valmont and EWI will continue through 2003.
During 2000 NL and an officer of both the Company and NL entered into an
agreement whereby stock options held by the officer to purchase an aggregate of
100,000 shares of NL's common stock were exercised. On a net basis, NL made
aggregate cash payments to the officer of approximately $1.3 million and NL
charged the Company an equivalent amount for stock compensation expense. See
Note 2.
FB-36
During 2002 NL and an officer of both the Company and NL entered into an
agreement whereby stock options held by the officer to purchase an aggregate of
160,400 shares of NL's common stock were exercised or canceled for value. On a
net basis, NL made aggregate cash payments to the officer of approximately $.7
million, and NL charged the Company an equivalent amount for stock compensation
expense. See Note 2.
From time to time, the Company loans funds to related parties. See Notes 11
and 13. These loans permit the Company to earn a higher rate of return on cash
not needed at the time for use in its operations than it could otherwise earn.
While such loans are of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the loans.
Amounts receivable from and payable to affiliates are summarized in the
following table.
December 31, June 30,
2001 2002 2003
-------- --------- ---------
(Unaudited)
(In thousands)
Current receivable from affiliates:
NL - income taxes .................. $ -- $ 978 $ --
Other .............................. 47 54 62
------- ------- -------
$ 47 $ 1,032 $ 62
======= ======= =======
Current payable to affiliates:
NL ................................. $ 4,939 $ 319 $ 106
NL - income taxes .................. 64 -- 2,923
LPC ................................ 6,362 7,614 8,291
------- ------- -------
$11,365 $ 7,933 $11,320
======= ======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note 7),
and amounts payable to NL principally relate to accrued interest on affiliate
loans.
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.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex. Rent for the Leverkusen facility is periodically established by
agreement with the lessor for periods of at least two years at a time. Under a
separate supplies and services agreement expiring in 2011, the lessor provides
some raw materials, including chlorine and certain amounts of sulfuric acid,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen facility. Both the lease and the supplies and services agreements
restrict the Company's ability to transfer ownership or use of the Leverkusen
facility.
FB-37
Net rent expense aggregated $9 million in 2000, $8 million in 2001 and $10
million in 2002. At December 31, 2002, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Real Estate Equipment
----------- ---------
(In thousands)
Years ending December 31,
2003 $ 2,164 $2,232
2004 2,116 1,643
2005 1,692 984
2006 1,424 382
2007 1,414 174
2008 and thereafter 18,110 692
------- ------
$26,920 $6,107
======= ======
Approximately $16.5 million of the $26.9 million real estate minimum rental
commitment is attributable to the Leverkusen, Germany facility. The minimum
commitment is determined by taking the current annual rental rate in effect at
December 31, 2002 and extending out the annual rate to the year 2050.
Purchase commitments
The Company has long-term supply contracts that provide for the Company's
chloride feedstock requirements through 2006. The agreements require the Company
purchase certain minimum quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $156 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 changes in
environmental laws and enforcement policies thereunder, could affect the
Company's production, handling, use, storage, transportation, sale or disposal
of such substances as well as adversely affect the Company's consolidated
financial position, results of operations or liquidity.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers which allow them to issue operating permits under
which the plants must operate. The Company believes all of its plants are in
substantial compliance with applicable environmental laws. Neither Kronos nor
any of its subsidiaries have been notified of any environmental claim in the
United States or any foreign jurisdiction by the U.S. EPA or any applicable
foreign authority or any state, provincial or local authority.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that Kronos
has obtained 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 TiO2 industry.
FB-38
At all of the Company's sulfate plant facilities other than Fredrikstad,
Norway, the Company recycles spent acid either through contracts with third
parties or using the Company's own facilities. At its Fredrikstad, Norway plant,
the Company ships its spent acid to a third party location where it is treated
and disposed. The Company has a contract with a third party to treat certain
by-products of its German sulfate-process plants. Either party may terminate the
contract after giving four years advance notice with regard to its Nordenham,
Germany plant. Under certain circumstances, Kronos may terminate the contract
after giving six months notice with respect to treatment of by-products from the
Leverkusen, Germany plant.
The Company landfills waste generated at its Nordenham, Germany and
Langerbrugge, Belgium plants and mine tailings waste generated at its mining
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 and $.5 million as of December 31, 2001 and 2002,
respectively.
The Company is responsible for certain closure costs at landfills used and
formerly used by its Leverkusen, Germany TiO2 plants. The Company has a reserve
of approximately $5 million and $6 million related to such landfills as of
December 31, 2001 and 2002, respectively.
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 investigation stage, which could ultimately result in civil
and criminal sanctions against the Company, was completed in 2002. In May 2003
the Belgian authorities referred the proceedings against the Company's Belgian
subsidiary and certain of its Belgian employees to the criminal court for trial.
The matter has been set for trial in October 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.
Concentrations of credit risk
Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate pigment
production process), and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such markets are
generally considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, with the top ten customers
approximating 25% of net sales in each of the last three years. Approximately
one-half of the Company's TiO2 sales by volume were to Europe in each of the
past three years and approximately 37% in 2000, 38% in 2001 and 39% in 2002 of
sales were attributable to North America.
Consolidated cash, cash equivalents and current restricted cash equivalents
includes $17.7 million and $13.8 million invested in U.S. Treasury securities
purchased under short-term agreements to resell at December 31, 2001 and 2002,
respectively, of which $9.6 million and $10.4 million, respectively, of such
securities are held in trust for the Company by a single U.S. bank.
FB-39
Note 19 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2001 2002
---------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(In millions)
Cash, cash equivalents, and noncurrent
restricted marketable
debt securities ............................. $ 55.3 $ 55.3 $ 47.1 $ 47.1
Notes payable and long-term debt:
Fixed rate with market quotes:
11.75% First-Tier Senior Mirror Note to NL $194.0 $194.9 $ -- $ --
8.875% Senior Secured Notes .............. -- -- 296.9 299.9
Variable rate debt ........................ 48.7 48.7 29.0 29.0
Note payable to affiliate ................. -- -- 44.6 44.6
Fair value of the noncurrent restricted marketable debt securities were
based upon quoted market prices at December 31, 2001 and 2002. Fair value of the
Company's 11.75% First-Tier Senior Mirror Note was based upon quoted market
prices of the NL Notes at December 31, 2001. Fair value of the Company's Notes
was based upon quoted market prices at December 31, 2002. Fair value
approximated carrying value on the Company's variable rate debt and note payable
to affiliate because the variable interest rate on all of such indebtedness is
deemed to approximate market rates. The Company held no derivative financial
instruments at December 31, 2001 or 2002.
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 the Company,
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. Substantially all of the
net proceeds from the sale of the operational assets related to the rheological
additives business were loaned to NL and the Company. 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, $240.1 million represented
noncurrent notes receivable from NL, which were classified as a reduction of
stockholder's equity at the time of the merger.
FB-40
Note 21 - Quarterly financial data (unaudited):
Quarter ended
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- --------- ---------- ---------
(In thousands, except per share amounts)
Year ended December 31, 2001:
Net sales ............................... $226,060 $220,105 $206,952 $181,982
Cost of sales ........................... 149,902 151,320 145,945 130,893
Operating income ........................ 51,916 45,170 36,222 35,879(a)
Net income .............................. 35,965 35,641 25,442 57,408(a)
-------- -------- -------- --------
Basic and diluted net income per share .. $ .73 $ .73 $ .52 $1.17(a)
======== ======== ======== ========
Basic and diluted weighted average common
shares and potential common shares
outstanding ............................ 48,943 48,943 48,943 48,943
======== ======== ======== ========
Year ended December 31, 2002:
Net sales ............................... $202,357 $226,909 $234,061 $211,861
Cost of sales ........................... 156,253 176,247 177,521 161,809
Operating income ........................ 22,159 24,665 29,619 20,064
Net income .............................. 17,038 23,273(b) 16,754 9,199
-------- -------- -------- --------
Basic and diluted net income per share .. $ .35 $ .48(b) $ .34 $ .19
======== ======== ======== ========
Basic and diluted weighted average common
shares and potential common shares
outstanding ............................ 48,943 48,943 48,943 48,943
======== ======== ======== ========
Quarterly per share amounts are computed independently for each of the
quarters presented and therefore may not sum to the total for the year.
(a) Operating income in the fourth quarter of 2001 included $16.6 million
of pretax insurance recoveries for business interruption related to
prior 2001 quarters due to the Leverkusen fire. Net income in the
fourth quarter of 2001 also included $11.6 million net of pretax
insurance recoveries for property damage related to the Leverkusen
fire and a $17.6 million net income tax benefit related to a
restructuring of the Company's German subsidiaries.
(b) Net income in the second quarter of 2002 included a one-time foreign
currency transaction gain of $6.3 million related to the
extinguishment of certain intercompany indebtedness. Net income in
second quarter 2002 also included $1.5 million pretax of additional
interest expense related to the early extinguishment of the Company's
11.75% First-Tier Senior Mirror Note.
FB-41