As filed with the Securities and Exchange Commission on October 8, 2004
Registration No. 333-________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KRONOS WORLDWIDE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2810 76-0294959
(State or other jurisdiction of (Primary Standard Industries (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
Three Lincoln Centre Robert D. Graham
5430 LBJ Freeway, Suite 1700 Vice President and General Counsel
Dallas, Texas 75240-2697 Kronos Worldwide, Inc.
(972) 233-1700 Three Lincoln Centre
(Address, including zip code, and 5430 LBJ Freeway, Suite 1700
telephone number, including area code, Dallas, Texas 75240-2697
of Registrant's principal executive offices) (972) 233-1700
(972) 448-1445 (facsimile)
(Name, address, including zip code, and
telephone number, including area code, of agent
for service)
Copies to: Copies to:
Don M. Glendenning Neel Lemon
Toni Weinstein Rebecca Williams
Locke Liddell & Sapp LLP Baker Botts L.L.P.
2200 Ross Avenue, Suite 2200 2001 Ross Avenue, Suite 700
Dallas, Texas 75201 Dallas, Texas 75201
(214) 740-8000 (214) 953-6500
(214) 740-8800 (facsimile) (214) 953-6503 (facsimile)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box.
----------------
CALCULATION OF REGISTRATION FEE
- ---------------------------- ------------------- ----------------------- ------------------------- ----------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Unit (1) Price (1) Registration Fee
- ---------------------------- ------------------- ----------------------- ------------------------- ----------------------
Common Stock, par value 8,250,000 $40.20 $331,650,000 $42,020
$0.01 per share
- ---------------------------- ------------------- ----------------------- ------------------------- ----------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PRELIMINARY PROSPECTUS Subject to Completion October 8, 2004
- -------------------------------------------------------------------------------
7,500,000 Shares
[KRONOS LOGO]
KRONOS WORLDWIDE, INC.
Common Stock
We are offering 7,500,000 shares of our common stock. Our common stock is listed
on the New York Stock Exchange under the symbol "KRO." On October 5, 2004, the
last reported sales price of our common stock on the New York Stock Exchange was
$40.20 per share.
Investing in our common stock involves a high degree of risk. Before buying any
shares, you should carefully read the discussion of material risks of investing
in our common stock in "Risk factors" beginning on page 14 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Per share Total
- ----------------------------------------------------------------------- --------------------- ---------------------
Public offering price $ $
- ----------------------------------------------------------------------- --------------------- ---------------------
Underwriting discounts and commissions $ $
- ----------------------------------------------------------------------- --------------------- ---------------------
Proceeds, before expenses, to us $ $
- ----------------------------------------------------------------------- --------------------- ---------------------
The underwriters may also purchase from us up to an additional 750,000 shares of
our common stock at the public offering price, less the underwriting discounts
and commissions, to cover over-allotments, if any, within 30 days of the date of
this prospectus.
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2004.
UBS INVESTMENT BANK
You should rely only on the information contained in this prospectus. We and the
underwriters have not authorized anyone to provide information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions where those
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of shares of our common stock.
TABLE OF CONTENTS
Prospectus summary....................................1
Risk factors.........................................13
Special note regarding forward-looking statements....21
Market share, ranking and other data.................22
Use of proceeds......................................23
Dividend policy......................................23
Price range of common stock..........................23
Capitalization.......................................24
Selected historical consolidated financial
and operating data..................................25
Management's discussion and analysis of
financial condition and results of operations.......29
Industry overview...................................50
Business overview...................................52
Management..........................................63
Principal stockholders and ownership of management..71
Certain relationships and related transactions......76
Description of capital stock........................79
Underwriting........................................83
Legal matters.......................................86
Experts.............................................86
Where you can find more information.................86
Index to financial statements......................F-1
Kronos(R) is the registered trademark of Kronos Worldwide, Inc. This prospectus
contains trademarks and service marks of other companies.
i
PROSPECTUS SUMMARY
This summary highlights selected information appearing elsewhere in this
prospectus and may not contain all of the information that is important to you.
This prospectus includes information about the shares we are offering as well as
information regarding our business and detailed financial data. You should read
this prospectus in its entirety.
Unless the context requires otherwise, the words "Kronos," "we," "company," "us"
and "our" refer to Kronos Worldwide, Inc. and its subsidiaries.
OUR COMPANY
We are one of the leading global producers and marketers of value-added TiO2
pigments. Our TiO2 products are sold under the widely recognized Kronos(R) brand
name and are utilized in a diverse range of customer applications and end-use
markets, including coatings, plastics, paper and other industrial and consumer
markets. Our broad range of over 40 TiO2 pigment products are "quality-of-life"
products that significantly enhance the key characteristics of our customers'
end-products by imparting whiteness, brightness and opacity to the end-products.
We and our predecessors have produced and marketed TiO2 products for over 80
years, and we are the only leading TiO2 producer committed to producing TiO2
pigments and related products as our sole business. Our focused management team
and business strategy have enabled us to develop considerable expertise and
efficiency in the manufacture, sale and service of our products.
We serve over 4,000 customers located in over 100 countries. We estimate our
global market share based on 2003 sales volume at 12%. In Europe and North
America, our primary markets, we estimate our market share based on 2003 sales
volume at 18% and 15%, respectively. We believe that our strong competitive
position is the result of our industry experience, reputation for high quality
products, outstanding process technology, highly recognized brand name and
experienced management team. In addition, our high level of technical service
and ability to satisfy our customers' specific technical needs allow us to
maintain strong relationships with our customers.
We conduct our operations through six strategically located manufacturing
facilities, four in Europe and two in North America, which includes our 50%
interest in a joint venture in the United States. We believe our production
processes are among the most efficient in the industry, which results from our
high operating rates, proprietary chloride process technology, technical
expertise, ongoing debottlenecking programs and co-product business. In
addition, we believe that we have a significant competitive advantage by
operating the only ilmenite ore mine in Western Europe, which supplies the key
raw material for all of our European sulfate operations and also produces ore
for sale to third party customers.
Our consolidated results for the year ended December 31, 2003 included net sales
of $1,008.2 million, net income of $87.5 million and adjusted EBITDA of $171.9
million. Our consolidated results for the six months ended June 30, 2004
included net sales of $559.1 million, net income of $277.3 million and adjusted
EBITDA of $86.5 million, compared with net sales of $519.6 million, net income
of $58.5 million and adjusted EBITDA of $87.0 million for the six months ended
June 30, 2003. Please see "Selected historical consolidated financial and
operating data" for a reconciliation of adjusted EBITDA to GAAP financial
measures. In 2003, we had record TiO2 production of 476,000 metric tons,
resulting in almost full production capacity utilization. For the six months
ended June 30, 2004, our record TiO2 production totaled 240,000 metric tons, as
compared to 237,000 metric tons in the six months ended June 30, 2003.
1
The following charts show the approximate percentages of our 2003 sales volume
by geographic region and end use:
[Two pie charts. The first pie chart shows 2003 Sales Volume Percentages by
Geographic Region, consisting of Europe (50%), North America (40%) and Other
(10%). The second pie chart shows 2003 Sales Volume Percentages by End Use,
consisting of Coatings (49%), Plastics (36%), Paper (6%) and Other (9%).]
Our Competitive Strengths
Leading market positions with singular focus on TiO2. Based on production
capacity, we are the second and fourth largest producer of TiO2 in Europe and
North America, respectively. We believe that we have leading market positions
based on sales volumes in the German, Scandinavian, Benelux, Austrian, Swiss and
Canadian markets. The production and sale of TiO2 is our core business, a
business our predecessors and we have been operating for over 80 years. We
believe this singular focus combined with our long history and experience in the
industry, has helped to make our operations among the most highly regarded and
efficient in the industry, which is reflected in our strong operating results
relative to most of our major competitors.
Strong customer relationships across diverse end-use markets. We sell our
products to over 4,000 customers across a diverse range of end-use markets and
market segments in over 100 countries worldwide. Our top ten customers
represented approximately 25% of net sales in 2003, with our largest customer
accounting for less than 10% of our 2003 net sales. We have strong sales
penetration in the two largest TiO2 end-use markets, coatings and plastics, in
addition to sales into a diverse range of smaller end-use markets and market
segments. We sell the majority of our products through a direct sales force that
we believe has helped build customer loyalty and strengthen our competitive
position. Our business is also geographically diversified, with manufacturing
operations in North America and Western Europe, and has a worldwide
distribution, sales and technical support network. We believe this
diversification minimizes the potential impact of volatility from any one
customer, industry or geographic region.
Broad product offering, with favorable product mix. We believe we have one of
the broadest product offerings in the TiO2 industry. We offer over 40 different
TiO2 grades, including rutile, anatase and non-pigmentary grades. We manufacture
several key grades that we believe possess superior performance characteristics
relative to the products of most of our competitors. For example, we have a
significant share of the European PVC profile market, where we supply a TiO2
product grade that has more than 30 years of proven performance. Other TiO2
applications that we believe provide us with an advantage over many of our
competitors include chloride grades for engineering plastics and paper laminate
applications and sulfate grades for food, pharmaceutical, cosmetics, textile
fiber and dry cell battery applications. In addition, in 2003, we generated 36%
of our Ti02 sales volumes from the faster-growing plastics end-use market from
which we realize higher margins than the coatings end-use market.
High manufacturing efficiency enhanced by complementary businesses. We believe
that our manufacturing facilities are among the most efficient in the industry.
2
All of our manufacturing facilities are ISO 9001 or 9002 certified and our
chloride production facilities share essentially the same proprietary
technology, equipment and process controls systems. We have achieved operating
efficiencies through the standardization of equipment across our manufacturing
facilities, aggressive training of employees, innovative technology changes, and
processing by-products to sell as co-products into the marketplace. Due in part
to ongoing debottlenecking programs, our production capacity has increased by
approximately 30% over the past ten years with only moderate capital investment.
In addition, our research and development and process technology efforts focus
on improving production processes and yields and product grades and quality.
We operate additional businesses that are related to our TiO2 business and
further enhance our operational efficiencies. We operate an ilmenite mine in
Norway that supplies all of the feedstock for our European sulfate operations,
which reduces our production costs at these plants, and also sells ilmenite to
third parties. We also manufacture and sell iron-based co-product chemicals,
which are by-products and processed by-products of the TiO2 pigment production
process. By efficiently utilizing by-products, our co-products business provides
important cost savings to our production process. We also manufacture and sell
titanium chemicals. This business absorbs costs that would otherwise be incurred
by our TiO2 operations and contributes to our overall profitability. Our
ilmenite mine, chemicals co-product and titanium chemical businesses represented
approximately 10% of our 2003 net sales.
History of positive cash flow generation through industry cycles. Through the
recent economic cycle and through periods of challenging industry fundamentals,
we have generated positive cash flow from operating activities for 11
consecutive years, including years in which we had a significantly higher level
of outstanding indebtedness than we currently have. Through ongoing process
improvements we have reduced labor and other manufacturing costs and have added
production capacity with moderate capital investment, resulting in a reduction
in fixed costs and a significant improvement in margins. We continue to focus on
increasing manufacturing efficiencies through selected capital projects, process
improvements and best practices in order to lower unit costs and improve
margins. We also seek to increase margins by focusing our sales efforts on
particular end-use and geographic markets where we believe we can realize
relatively higher selling prices. We maintain rigorous financial discipline in
investing capital in our core business.
Significant barriers to entry. Chloride process technologies, including our
proprietary chloride technology, are held by a small number of principal TiO2
producers. The closely held nature of this technology poses a significant
barrier to entry for new entrants into the TiO2 industry because the chloride
process is the primary TiO2 production process in the industry, representing
approximately two-thirds of all TiO2 produced annually and approximately 72% of
our TiO2 production in 2003. In addition, adding new TiO2 production capacity by
constructing greenfield plants requires significant capital expenditures and
generally requires lead times of between three to five years before initial
production, which pose significant barriers to entry in the industry.
Experienced operating management team. We are managed by an experienced and
motivated group of senior operating management, each of whom has over 15 years
of experience in the chemical industry and an average of over 15 years of
experience with us. Our senior operating management team is responsible for
developing and executing our strategy, which has generated a track record of
production growth, high operating rates, cost reductions, steady sales volume
growth, strong customer relationships and significant cash flows. In addition to
our strong senior operating management team, we have an experienced group of
employees who work to maintain our market position by developing and maintaining
customer relationships, expanding our product offerings and implementing
innovative technological enhancements.
3
Our Business Strategy
Leverage our global leadership position. We plan to capitalize on our strong
market position and drive profitable growth by enhancing existing customer
relationships, providing high quality products and offering technical expertise
to our customers. We also intend to improve our competitive position by
developing new products and applications to increase sales volumes and drive
higher margins. As an example, we are currently developing a new universal
coatings grade that will have improved performance in certain coatings
applications, from interior water-based house paints to high gloss solvent-based
industrial/OEM applications. We are also developing a new paper laminate grade
that will provide greater adhesion to the paper fiber resulting in improved
opacity and efficiency. We believe these developments will help to maintain or
improve our market position.
Pursue attractive market opportunities. Our broad product offering allows us to
participate in a variety of end-use markets, and pursue those market segments
that have attractive growth prospects and profit margins. Our operations in
Germany position us to participate in markets in Eastern Europe, which we expect
to provide attractive growth opportunities as they develop. We also seek to
increase margins by focusing our sales efforts on those end-use and geographic
markets where we believe we can realize relatively higher selling prices than in
alternate markets.
Continue to enhance our operating efficiencies and improve our margins. We are
continually evaluating our business to identify opportunities to increase
operational efficiency. We intend to continue focusing on increasing
manufacturing efficiencies through selected capital projects, process
improvements and best practices in order to lower unit costs and improve our
margins. In addition, we intend to continue to pursue debottlenecking activities
at our manufacturing facilities in order to achieve incremental increases in
production capacity.
Pursue a disciplined acquisition strategy. We plan to evaluate and pursue new
opportunities that represent a logical fit with our existing business platform
and to seek acquisition opportunities that enhance our product portfolio, expand
our market presence or provide operational synergies and cost savings.
Recent TiO2 Industry Developments
We believe that TiO2 industry dynamics are improving due to strong demand and
higher selling prices. Several titanium dioxide manufacturers, including Kronos,
have announced further worldwide prices increases that are targeted to be
implemented in the fourth quarter of 2004 and the first quarter of 2005. Limited
new capacity, higher demand and improving pricing should result in improved
operating rates and product margins for TiO2 producers.
4
OUR CORPORATE STRUCTURE
The following chart summarizes our corporate structure (ownership is 100% unless
otherwise noted):
[A chart showing (i) Kronos Worldwide's 100% ownership of Kronos International,
Kronos Canada and Kronos Louisiana, (ii) Kronos International's 100% ownership
of Kronos UK, Kronos Germany and Kronos Denmark and 94% ownership of Kronos
France, (iii) Kronos Louisiana's 100% ownership of Kronos USA and 50% ownership
of Louisiana Pigment Company, (iv) Kronos Denmark's 100% ownership of Kronos
Norway and Kronos Belgium and (v) Kronos Norway's 100% ownership of Kronos Titan
and Titana.]
- ----------
(a) 6% of Kronos France is held by minority shareholders.
(b) 50% of Louisiana Pigment Company is owned by Huntsman International LLC
("Huntsman"). See "Business overview--TiO2 Manufacturing Joint Venture."
Ownership
On October 1, 2004, our common stock was owned 6% by unaffiliated stockholders
and 94% by Harold C. Simmons and related parties, including NL Industries, Inc.
("NL"), Valhi, Inc. ("Valhi") and a wholly-owned subsidiary of Valhi. NL and
Valhi are each related to Contran Corporation ("Contran"), each of which may be
deemed to be controlled by Mr. Simmons. Following this offering, assuming no
exercise of the underwriters' over-allotment option, our common stock will be
owned 18% by unaffiliated stockholders and 82% by Mr. Simmons and related
parties. Mr. Simmons may currently be deemed to control us, and may be deemed to
control us following the completion of this offering. See "Principal
stockholders and ownership of management."
5
OUR CORPORATE INFORMATION
We were incorporated in Delaware in 1989. Our principal executive offices are
located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas
75240, and our telephone number is (972) 233-1700. We maintain an internet web
site at www.kronostio2.com. We have not incorporated by reference into this
prospectus the information on our website, and you should not consider it to be
part of this prospectus.
RISK FACTORS
We face risks operating our business, including risks that may prevent us from
achieving our growth strategy. These risks include the following:
>> Demand for, and prices of, our products are cyclical and we may experience
prolonged depressed market conditions for our products, which may adversely
affect our financial condition and results of operations.
>> Our business may be adversely affected by international operations and
fluctuations in currency exchange rates.
>> We sell our products in a mature and highly competitive industry and face
price pressure in the markets in which we operate.
>> Our leverage may impair our financial condition.
>> We have a limited number of suppliers for some of our raw materials, which
could negatively affect us.
>> Our affiliates may have conflicts of interest with us, and these conflicts
could adversely affect our business.
>> We are subject to many environmental and safety regulations that may result
in unanticipated costs or liabilities.
>> Various factors may hinder the declaration and payment of dividends.
>> Covenant restrictions may limit our ability to operate our business.
>> Our ability to generate sufficient cash to meet our debt service and
operating needs depends on many factors, some of which are beyond our
control.
Please see "Risk factors" for more information regarding these risks.
6
THE OFFERING
Common stock we are offering................. 7,500,000 shares
Common stock to be outstanding
immediately after this offering......... 56,446,049 shares, 46,029,815 of
which will be owned by Harold C.
Simmons and related parties.
Use of proceeds.............................. We estimate that the net
proceeds to us from this
offering after expenses will be
approximately $288.4 million, or
approximately $317.4 million if
the underwriters' exercise their
over-allotment option in full,
assuming a public offering price
of $40.20 per share. We intend
to use approximately $200.0
million of the net proceeds of
this offering to repay our
outstanding $200 million, 9%
long-term notes payable to
affiliates and accrued and
unpaid quarterly interest
thereon, and the remainder for
general corporate purposes,
which may include possible
acquisitions of additional TiO2
facilities that may become
available in the future. See
"Use of proceeds."
Dividend policy............................... In each of the first three
quarters of 2004, we paid a
regular quarterly dividend to
stockholders of $.25 per share.
The declaration and payment of
future dividends is
discretionary, and the amount,
if any, will be dependent upon
our results of operations,
financial condition, contractual
restrictions and other factors
deemed relevant by our board of
directors.
New York Stock Exchange symbol................ "KRO"
The number of shares of our common stock outstanding after this offering is
based on approximately 48,946,049 shares outstanding as of October 1, 2004.
The number of shares of our common stock to be outstanding immediately after
this offering excludes:
>> 147,000 shares of our common stock available for future grant under our
long-term incentive plan as of October 1, 2004; and
>> 750,000 shares of our common stock that may be purchased by the
underwriters to cover over-allotments, if any.
Unless we specifically state otherwise, the information in this prospectus
assumes that the underwriters do not exercise their option to purchase up to
750,000 shares of our common stock to cover over-allotments, if any.
7
Summary historical and pro forma consolidated financial and operating data
The following summary historical financial data with respect to the years ended
December 31, 2001, 2002 and 2003 is derived from our audited consolidated
financial statements included in this prospectus. The summary historical
financial data for the six months ended June 30, 2003 and 2004, and as of June
30, 2004, is derived from our unaudited consolidated financial statements
included in this prospectus. Such unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") and include, in our opinion, all
adjustments, consisting only of normal, recurring adjustments, necessary to
present fairly our consolidated financial position, results of operations and
cash flows. Our historical results of operations are not necessarily indicative
of our results of operations expected for any future period, nor are our
operating results for any interim period necessarily indicative of our operating
results for any full year. The earnings per share and cash dividends per share
data presented below has been restated to give effect to the September 2003
change in our capital structure discussed in note 1 to our consolidated
financial statements in which the 1,000 shares of our common stock previously
outstanding were reclassified in the form of a stock split into approximately
48.9 million shares of our common stock. Kronos' TiO2 operating statistics data
is unaudited. You should read this data together with our consolidated financial
statements and related notes and the information under "Selected historical
consolidated financial and operating data" and "Management's discussion and
analysis of financial condition and results of operations." The following pro
forma summary unaudited financial data with respect to the year ended December
31, 2003 and the six months ended June 30, 2004, and with respect to June 30,
2004, has been derived from, and should be read in conjunction with, the
unaudited pro forma condensed consolidated financial statements, which are
included in this prospectus. Such pro forma unaudited financial data gives
effect to this offering and the application of the net proceeds as described in
"Use of proceeds." While such unaudited pro forma condensed consolidated
financial statements are based on adjustments that we deem appropriate and that
were factually supported based on currently available data, the pro forma
information may not be indicative of what actual results would have been, nor
does this information present our financial results for future periods.
8
Historical-Six Pro
Historical-Years ended Pro months ended Forma-
December 31, Forma- June 30, Six
---------------------------------- Year --------------------- months
ended ended
December June 30,
2001 2002 2003 31, 2003 2003 2004 2004
-------- -------- -------- ------------ -------- -------- -----------
(In millions, except per share data)
Statement of Income Data:
Net sales $ 835.1 $ 875.2 $ 1,008.2 $ 1,008.2 $ 519.6 $ 559.1 $ 559.1
========= ========= ========== ========= ========= ========= =========
Gross Profit $ 257.0 $ 203.4 $ 269.0 $ 269.0 $ 133.5 $ 129.3 $ 129.3
Selling, general and
administrative expenses 98.7 107.7 124.4 124.4 60.4 70.2 70.2
Insurance recoveries, net 7.2 - - - - - -
Other income (expense), net (1) (3.5) (4.2) (12.1) (12.1) (5.4) 5.6 5.6
--------- --------- ---------- ---------- --------- --------- ---------
Income from operations 162.0 91.5 132.5 132.5 67.7 64.7 64.7
Currency transaction gain - 6.3 - - - - -
Insurance recoveries, net 17.5 - - - - - -
Interest income 36.0 23.1 1.7 1.7 1.2 .8 .8
Interest expense (27.3) (29.1) (34.9) (33.8) (17.1) (26.8) (17.8)
--------- --------- ---------- ---------- --------- --------- ---------
Income before income taxes and
minority interest 188.2 91.8 99.3 100.4 51.8 38.7 47.7
Provision for income taxes
(benefit) 33.7 25.5 11.7 12.1 (6.7) (238.6) (235.0)
Minority interest - - .1 .1 - - -
--------- --------- ---------- ---------- --------- --------- ---------
Net income $ 154.5 $ 66.3 $ 87.5 $ 88.2 $ 58.5 $ 277.3 $ 282.7
========= ========= ========== ========= ========= ========= =========
Net income per share $ 3.16 $ 1.35 $ 1.79 $ 1.79 $ 1.19 $ 5.67 $ 5.24
Cash dividends per share (2) $ .62 $ 2.27 $ .14 N/A $ .14 $ .50 N/A
Weighted average common shares
outstanding 48.9 48.9 48.9 49.3 48.9 48.9 53.9
9
Years ended December 31, Six months ended June 30,
--------------------------------------------------- ----------------------------------
2001 2002 2003 2003 2004
--------------- --------------- -------------- ---------------- -------------
(In millions, except TiO2 operating statistics)
Other operating data:
Cash flows from:
Operating activities $ 135.7 $ 111.1 $ 107.7 $ 29.3 $ 67.5
Investing activities (33.7) (34.6) (35.4) (14.7) (10.5)
Financing activities (99.0) (93.9) (61.8) (27.4) (24.5)
Depreciation and amortization
expense 28.9 32.2 39.4 19.3 21.8
Capital expenditures 53.7 32.6 35.2 13.8 10.8
Adjusted EBITDA (3) 190.9 123.7 171.9 87.0 86.5
Kronos TiO2 operating statistics:
Indexed average selling price
(1990 = 100) 89 81 84 84 81
Sales volumes* 402 455 462 240 255
Production volumes* 412 442 476 237 240
Production capacity at beginning
of period* 450 455 470 470 480
Production rate as a percentage of
capacity 91% 96% Full Full Full
June 30, 2004
-----------------------------------
Historical Pro Forma
----------------- ---------------
(In millions)
Balance sheet data:
Cash and cash equivalents $ 88.4 $ 176.8
Working capital (4) 351.7 440.1
Total assets 1,251.4 1,339.8
Total debt, including current maturities 546.8 346.8
Common stockholders' equity 406.5 694.9
- -------------------------------
* Metric tons in thousands
(1) Other income (expense), net, includes currency transaction gains (losses),
gains and losses from the disposition of property and equipment, corporate
expense and other operating income and expense.
(2) Excludes our December 2003 dividend to NL in the form of a $200 million
long-term note payable. See note 11 to our consolidated financial
statements. On September 24, 2004, NL transferred $168.6 million principal
amount of such $200.0 million note to Valhi and a wholly-owned subsidiary
of Valhi in connection with a transaction involving these companies.
(3) Adjusted EBITDA is defined as earnings before minority interest, provision
for income taxes (benefit), interest expense, nonoperating interest income,
insurance recoveries, net, currency transaction gain and depreciation and
amortization expense. Adjusted EBITDA is a non-GAAP measure. For this
purpose, a non-GAAP measure is generally defined by the SEC as a financial
measure that purports to measure financial position, results of operations
or cash flows, but excludes or includes amounts that would not be so
adjusted in the most comparable GAAP measure. We exclude nonoperating
10
interest income, insurance recoveries, net and currency transaction gain
from our definition of adjusted EBITDA because they are not related to our
TiO2 operations and we believe including such items in our adjusted EBITDA
would not be representative of our ongoing operations. We have included
adjusted EBITDA in this prospectus because our management considers it an
important supplemental measure of our performance and believes that it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in our industry. Management believes
adjusted EBITDA is also a useful tool for measuring our ability to meet our
future debt service, capital expenditures and working capital requirements.
In addition, we utilize adjusted EBITDA in evaluating acquisition targets.
Adjusted EBITDA is not a substitute for the GAAP measures of net income (a
performance measure) or cash flows from operating activities (a liquidity
measure), and it is not necessarily a measure of our ability to fund our
cash needs. In addition, it should be noted that companies calculate
adjusted EBITDA differently and, therefore, adjusted EBITDA as presented in
this prospectus may not be comparable to adjusted EBITDA reported by other
companies. Adjusted EBITDA has material limitations as a performance
measure because it excludes, among other things, interest expense,
depreciation and amortization expense and income tax expense, each of which
is a necessary element of our costs and operations. Adjusted EBITDA has
material limitations as a liquidity measure because it excludes, among
other things, changes in assets and liabilities that are included in the
calculation of cash flows from operating activities. Therefore, you should
not consider adjusted EBITDA in isolation of, or as a substitute for, our
financial performance or liquidity as calculated in accordance with GAAP.
We compensate for these limitations by relying primarily on our GAAP
results and by using adjusted EBITDA only supplementally. The following
table reconciles adjusted EBITDA to net income and cash flows from
operating activities for the periods presented.
11
Reconciliation of Adjusted EBITDA to Net Income and Cash Flows from Operating
Activities
Year ended December 31, Six months ended June 30,
-------------------------------------------- -----------------------------------
2001 2002 2003 2003 2004
--------------- ------------ ----------- ---------------- -----------------
(In millions)
Adjusted EBITDA $ 190.9 $ 123.7 $ 171.9 $ 87.0 $ 86.5
Adjustments to reconcile
adjusted EBITDA to net income:
Currency transaction gain - 6.3 - - -
Insurance recoveries, net 17.5 - - - -
Interest income 36.0 23.1 1.7 1.2 0.8
Interest expense (27.3) (29.1) (34.9) (17.1) (26.8)
Depreciation and amortization
expense (28.9) (32.2) (39.4) (19.3) (21.8)
Provision for income taxes
(benefit) (33.7) (25.5) (11.7) 6.7 238.6
Minority interest - - (0.1) - -
--------- --------- --------- -------- --------
Net income 154.5 66.3 87.5 58.5 277.3
Adjustments to reconcile
net income from
operating activities:
Depreciation and amortization
expense 28.9 32.2 39.4 19.3 21.8
Deferred income taxes (4.2) 10.8 36.5 5.9 (245.1)
Distributions from TiO2
manufacturing joint
venture, net 11.3 8.0 0.9 0.8 8.3
Change in assets and
liabilities, net (12.5) 16.2 (52.6) (54.3) 3.1
Insurance recoveries, net (17.5) - - - -
Noncash interest income from
affiliates (22.2) (20.6) - - -
Other, net (2.6) (1.8) (4.0) (0.9) 2.1
--------- --------- --------- -------- --------
Cash flows from operating
activities $ 135.7 $ 111.1 $ 107.7 $ 29.3 $ 67.5
========= ========= ========== ========= =========
(4) Working capital is defined as current assets less current liabilities.
12
Risk factors
Investing in our common stock involves a high degree of risk. In addition to the
other information in this prospectus, you should carefully consider the risks
described below before purchasing our common stock. If any of the following
risks actually occurs, our business, results of operations or financial
condition will likely suffer. As a result, the trading price of our common stock
may decline, and you might lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
Demand for, and prices of, our products are cyclical and we may experience
prolonged depressed market conditions for our products, which may adversely
affect our financial condition and results of operations.
Substantially all of our 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 our earnings and operating cash flows. Our average TiO2
selling prices were generally decreasing during all of 2001 and the first
quarter of 2002, were generally flat during the second quarter of 2002, were
generally increasing during the third and fourth quarters of 2002 and the first
quarter of 2003, were generally flat during the second quarter of 2003, were
generally decreasing during the third and fourth quarters of 2003 and the first
quarter of 2004, were generally flat during the second quarter of 2004 and were
generally increasing in the third quarter of 2004. We may be affected by any
existing or future cyclical changes, and such conditions may 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.
Our business may be adversely affected by international operations and
fluctuations in currency exchange rates.
We conduct a significant portion of our business in several jurisdictions
outside of the United States and are subject to risks normally associated with
international operations. Risks of international operations include trade
barriers, tariffs, exchange controls, national and regional labor strikes,
social and political risks, general economic risks, seizures, nationalizations,
compliance with a variety of foreign laws, including tax laws, and the
difficulty in enforcing agreements and collecting receivables through foreign
legal systems, all of which may expose us to risk of loss.
We are also exposed to risks related to the prices that we receive for our
products and the need to convert currencies that we may receive for some of our
products into currencies required to pay some of our debt, or into currencies in
which we purchase certain raw materials or pay for certain services, all of
which could result in a gain or loss depending on fluctuations in exchange
rates.
We sell our products in a mature and highly competitive industry and face price
pressures in the markets in which we operate.
The global markets in which we operate our business are highly competitive.
Competition is based on a number of factors, such as price, product quality and
service. Some of our competitors may be able to drive down prices for our
products because their costs are lower than ours. In addition, some of our
competitors' financial, technological and other resources may be greater than
13
ours, and such competitors may be better able to withstand changes in market
conditions. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Further,
consolidation of our competitors or customers in any of the industries in which
we compete may have an adverse effect on us. The occurrence of any of these
events could have a material adverse effect on our business, financial condition
and results of operations or cash flows.
Our leverage may impair our financial condition.
We have a significant amount of debt. As of June 30, 2004, our outstanding debt
was $546.8 million. As of June 30, 2004, after giving effect to the sale of
common stock in this offering and the application of the net proceeds from this
offering as described under "Use of proceeds," our total consolidated debt would
be $346.8 million, consisting principally of $346.4 million relating to the
senior notes of Kronos International, Inc., or KII, one of our wholly-owned
subsidiaries.
As of June 30, 2004, KII's subsidiaries had unused borrowing availability of the
equivalent of approximately $95 million under their European revolving credit
facility, our Canadian operating subsidiary had $11 million available for
borrowing under its credit facility, our U.S. operating subsidiary had $40
million available for borrowing under its credit facility and certain of our
non-U.S. subsidiaries had an additional approximately $4 million available under
other facilities. Subject to specified limitations, the indenture governing
KII's senior notes permits KII and its subsidiaries to incur additional debt,
while the terms of the European revolving credit facility and the Canadian and
U.S. credit facilities generally limit additional indebtedness for those
entities.
Our current and future level of debt could have important consequences to you,
including:
>> increasing our vulnerability to adverse general economic and industry
conditions;
>> requiring that a substantial portion of our cash flow from operations be
used for the payment of interest on our debt thereby reducing our ability
to use our cash flow to fund working capital, capital expenditures,
acquisitions, dividends and general corporate requirements;
>> limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, acquisitions and general corporate
requirements;
>> limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
>> placing us at a competitive disadvantage relative to other less leveraged
competitors.
We have a limited number of suppliers for some of our raw materials, which could
negatively affect us.
The number of sources for, and availability of, certain raw materials is
specific to the particular geographical region in which a facility is located.
We purchase titanium-bearing ores from three suppliers in different countries
under multiple-year agreements. Political and economic instability in the
countries from which we purchase our raw material supplies could adversely
affect the availability of such feedstock. Should our vendors not be able to
meet their contractual obligations or should we be otherwise unable to obtain
necessary raw materials, we may incur higher costs for raw materials or may be
required to reduce production levels, which may have a material adverse effect
on our financial position, results of operations or liquidity.
Our affiliates may have conflicts of interest with us, and these conflicts could
adversely affect our business.
After the completion of the offering, NL, Valhi and a wholly-owned subsidiary of
Valhi will own approximately 81% of the outstanding shares of our common stock
(80% if the over-allotment option is exercised in full). For so long as these
entities retain their ownership of our shares, they will have the power to
influence our business strategy, including decisions relating to the pursuit of
14
transactions and commercial opportunities. In addition, although we, NL and
Valhi each have independent non-employee directors serving on the respective
boards of directors, a majority of the members of NL's board of directors, and
three of the seven members of Valhi's board of directors, also serve on our
board of directors. Currently, two of our non-employee directors do not serve on
the board of directors of either NL or Valhi, and these non-employee directors
will generally resolve any conflicts of interests that may arise between us, on
one hand, and Valhi or NL, on the other hand. Certain executive officers of
Valhi and NL also serve as our executive officers. See "Management."
Furthermore, under intercorporate service agreements between Contran and us,
Contran provides certain management, financial and administrative services to us
on a fee basis. These circumstances could create potential conflicts of interest
when our directors and management are faced with decisions that could have
different implications for us, on one hand, and Valhi or NL, on the other hand.
Examples of these types of decisions might include the resolution of disputes
arising out of the agreements governing the provision of services to us, our
issuance of additional securities, our payment of dividends, the pursuit of
specific business opportunities available to us or other circumstances in which
there are adverse interests. Also, the appearance of conflicts, even if such
conflicts do not materialize, might adversely affect the public's perception of
us. No specific procedures are in place that govern the treatment of
transactions among us 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
"Certain relationships and related transactions."
We are subject to many environmental and safety regulations that may result in
unanticipated costs or liabilities.
We are subject to extensive laws, regulations, rules and ordinances relating to
the protection of the environment, including those governing the discharge of
pollutants in the air and water and the generation, management and disposal of
hazardous substances and wastes or other materials. We may incur substantial
costs, including fines, damages and criminal penalties or civil sanctions, or
experience interruptions in our operations for actual or alleged violations or
compliance requirements arising under environmental laws. Our operations could
result in violations under environmental laws, including spills or other
releases of hazardous substances to the environment. Some of our operating
facilities are in densely populated urban areas or in industrial areas adjacent
to other operating facilities. In the event of an accidental release or
catastrophic incident, we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents. Given the
nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities, substantial fines, penalties,
damages or other costs, including as a result of private litigation, any of
which could have a material adverse effect on our business, financial condition,
results of operations or cash flows.
Our production facilities have been used for a number of years to manufacture
products or conduct mining operations. We may incur additional costs related to
compliance with environmental laws applicable to our historic operations and
these facilities. In addition, we may 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 our operations. Costs beyond those currently anticipated may be
required under existing and future environmental laws.
Various factors may hinder the declaration and payment of dividends.
The payment of dividends is subject to the discretion of our board of directors,
and various factors may cause the board to determine not to continue to pay
dividends. Such factors include our financial position, results of operations,
capital requirements and liquidity, any loan or other agreement restrictions,
governmental requirements and such other factors as our board of directors may
15
consider relevant. Our assets consist primarily of investments in our operating
subsidiaries. Our cash flow and ability to pay dividends depend upon cash
dividends and distributions or other transfers from our subsidiaries. In
addition, any payment of dividends, distributions, loans or advances to us by
our subsidiaries could be subject to restrictions on, or taxation of, dividends
or repatriation of earnings under applicable local law, monetary transfer
restrictions and foreign currency exchange regulations in the jurisdictions in
which our subsidiaries operate, and any restrictions imposed by the current and
future debt instruments of our subsidiaries. Such payments to us by our
subsidiaries are contingent upon our subsidiaries' earnings. See "Dividend
policy."
Covenant restrictions may limit our ability to operate our business.
Our subsidiaries are subject to obligations under various financing arrangements
that contain, among other things, covenants that may restrict our ability to
finance future operations or capital needs or to engage in other business
activities. These covenants include, among other things, restrictions on our
subsidiaries' ability to:
>> borrow money, pay dividends or make distributions;
>> purchase or redeem stock;
>> make investments and extend credit;
>> engage in transactions with affiliates;
>> engage in sale-leaseback transactions;
>> freely distribute the proceeds from certain asset sales;
>> effect a consolidation or merger or sell, transfer, lease or otherwise
dispose of all or substantially all of our assets; and
>> create liens on our assets.
In addition, these financing arrangements require our 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
our long-term business objectives. Events beyond our control, including changes
in general business and economic conditions, may affect our ability to meet
those financial ratios and satisfy certain financial covenants. We may not meet
those tests and lenders may not 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. A default under the European revolving credit facility may
result in a default under the indenture governing KII's senior notes. If any
such event of default occurs, the lenders could elect to declare all amounts
outstanding thereunder, together with accrued interest, to be immediately due
and payable.
Our ability to generate sufficient cash to meet our debt service and operating
needs depends on many factors, some of which are beyond our control.
Our ability to make payments on and refinance our debt and to fund planned
capital expenditures depends on our future ability to generate cash flow. To
some extent, this ability is subject to general economic, financial,
competitive, legislative and regulatory and other factors that are beyond our
control. In addition, our ability to borrow funds under our subsidiaries' credit
facilities in the future will depend on these subsidiaries' ability to maintain
specified financial ratios and satisfy certain financial covenants contained in
the credit agreements. Our business may not generate cash flow from operations
or have adequate access to credit facilities in amounts sufficient to enable us
to pay our debt or to fund other liquidity needs. As a result, we may need to
refinance all or a portion of our debt before maturity, and it is likely that we
16
will need to refinance all or a portion of our debt on maturity. The European
revolving credit facility and our U.S. subsidiaries' credit facility both mature
in 2005, while the Canadian credit facility matures in 2009. We may not be able
to refinance any of our debt on favorable terms, if at all. Any inability to
generate sufficient cash flow or refinance our debt on favorable terms could
have a material adverse effect on our financial condition.
We may pursue acquisitions, dispositions and joint ventures and other
transactions that may impact our results of operations and financial condition.
We seek opportunities to maximize efficiency and create stockholder value
through various transactions. These transactions may include various business
combinations, purchases or sales of assets or contractual arrangements or joint
ventures that are intended to result in the realization of synergies, the
creation of efficiencies or the generation of cash to reduce debt. To the extent
permitted under our credit facilities and other debt agreements, some of these
transactions may be financed by additional borrowings by us. These transactions
could adversely affect our results of operations in the short term because of
the costs associated with such transactions.
If we are unable to integrate or to successfully manage any business we may
acquire in the future, our business, financial condition and results of
operations could be adversely affected. We may not be able to realize the
operating efficiencies, synergies, cost savings or other benefits expected from
the acquisitions for a number of reasons, including the following:
>> we may fail to integrate the businesses we acquire into a cohesive,
efficient enterprise;
>> our resources, including management resources, are limited and may be
strained if we engage in a significant number of acquisitions, and
acquisitions may divert our management's attention from initiating or
carrying out programs to save costs or enhance revenues; and
>> our failure to retain key employees and contracts of the businesses we
acquire.
If our patents are declared invalid or our trade secrets become known to
competitors, our ability to compete may be adversely affected.
Protection of our proprietary processes and other technology is important to our
competitive position. Consequently, we rely on judicial enforcement for
protection of our patents, and our patents may be challenged, invalidated,
circumvented or rendered unenforceable. Furthermore, if any pending patent
application filed by us does not result in an issued patent, or if patents are
issued to us but such patents do not provide meaningful protection of our
intellectual property, then the use of any such intellectual property by our
competitors could have a material adverse effect on our business, financial
condition, results of operations or cash flows. Additionally, our competitors or
other third parties may obtain patents that restrict or preclude our ability to
lawfully produce or sell our products in a competitive manner, which could have
a material adverse effect on our business, financial condition, results of
operations or cash flows.
We also rely on unpatented proprietary know-how and continuing technological
innovation and other trade secrets to develop and maintain our competitive
position. Although it is our practice to enter into confidentiality agreements
to protect our intellectual property, because these confidentiality agreements
may be breached, such agreements may not provide sufficient protection for our
trade secrets or proprietary know-how, or adequate remedies may not be available
in the event of an unauthorized use or disclosure of such trade secrets and
know-how. In addition, others could obtain knowledge of such trade secrets
through independent development or other access by legal means. The failure of
our patents or confidentiality agreements to protect our processes, apparatuses,
technology, trade secrets or proprietary know-how could have a material adverse
effect on our business, financial condition, results of operations or cash
flows.
17
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our business and inhibit our ability to operate and grow
successfully.
Our success in the highly competitive markets in which we operate will continue
to depend to a significant extent on our leadership team and other key
management personnel. We may not be able to retain our current management
personnel and we may not be able to recruit qualified individuals to join our
management team, including recruiting qualified individuals to replace any of
our current personnel that may leave in the future. The loss of any of these
individuals could have a material adverse effect on our business.
Our relationships with our union employees could deteriorate, which could
adversely impact our operations.
As of June 30, 2004, we employed approximately 2,370 full-time persons. A
significant number of our non-U.S. employees are subject to arrangements similar
to collective bargaining arrangements. We may not be able to negotiate labor
agreements with respect to these employees on satisfactory terms or at all. If
our employees were to engage in a strike, work stoppage or other slowdown, we
could experience a significant disruption of our operations or higher ongoing
labor costs, which could adversely affect our business and financial condition
and results of operations. In addition, if our other employees were to become
unionized, we could experience a disruption of our operations and incur higher
ongoing labor costs, which could adversely affect our business, financial
condition and results of operations.
RISKS RELATED TO THIS OFFERING
The market price of our common stock could be adversely affected by sales of our
common stock in this offering, subsequent sales of substantial amounts of our
common stock in the public markets and the issuance of additional shares of
common stock in future offerings.
As of October 1, 2004, 2,916,234 shares of our common stock not owned by our
affiliates were outstanding, representing approximately 6% of our outstanding
common stock. The sale of shares in this offering could depress the market price
of our common stock.
Sales of a substantial number of shares of our common stock in the public market
after this offering or the perception that these sales may occur could cause the
market price of our common stock to decline. In addition, the sale of these
shares in the public market could impair our ability to raise capital through
the sale of additional common or preferred stock.
Upon the completion of this offering, we will have 56,446,049 shares of common
stock outstanding (57,196,049 shares if the underwriters' over-allotment option
is exercised in full). Parties related to us will own 46,029,815 of these
shares. Our affiliates will be free to sell shares, subject to the limitations
of Rule 144 or Rule 144(k) under the Securities Act of 1933, as amended.
An aggregate of 81% of our common stock immediately following this offering will
be held by Valhi and NL, and some or all of such stock, by pledge of such stock
or otherwise, may be subject to rights of creditors of Valhi or NL. Should
either Valhi or NL experience a need for liquidity or a creditor of Valhi or NL
exercise rights to such stock, some or all of our common stock may be sold in
the open market or otherwise, which could adversely affect the market price for
our common stock.
We cannot predict when any of our affiliates may sell their shares or in what
volumes. The market price of our common stock could decline significantly if any
of our affiliates sells a large number of shares into the public market after
this offering or if the market believes that these sales may occur. In
18
connection with this offering, we, along with our executive officers, directors
and certain of our stockholders, will have agreed prior to the commencement of
this offering, subject to limited exceptions, not to sell or transfer any shares
of common stock for 120 days after the date of this prospectus without consent
of UBS Securities LLC.
In addition, in the future, we may issue shares of our common stock in
connection with acquisitions of assets or businesses. If we use our shares for
this purpose, the issuances could have a dilutive effect on the value of your
shares, depending on market conditions at the time of an acquisition, the price
we pay, the value of the business or assets acquired, and our success in
exploiting the properties or integrating the businesses we acquire and other
factors.
The public offering price of our common stock in this offering may not be
indicative of the market price of our common stock after this offering and our
stock price may be volatile.
During the second quarter of 2004, the average daily trading volume for our
common stock as reported by the New York Stock Exchange, or the NYSE, was
approximately 6,800 shares. A more active market for our common stock may not
develop or may not be sustained after this offering. The public offering price
of our common stock in this offering will be determined by negotiations between
representatives of the underwriters and us, and this price may not be indicative
of the market price for our common stock after this offering. The market price
of our common stock could be subject to significant fluctuations after this
offering and may decline below the public offering price. You may not be able to
resell your shares at or above the public offering price. The following factors
could affect our stock price:
>> our operating and financial performance and prospects;
>> quarterly variations in the rate of growth of our financial indicators,
such as net income per share, net income, revenues, cash flow per share and
cash flow from operations;
>> changes in revenue or earnings estimates or publication of research reports
by analysts;
>> speculation in the press or investment community;
>> sales of our common stock by our major stockholders;
>> conditions generally affecting the TiO2 industry;
>> general market conditions, including fluctuations in TiO2 prices; and
>> domestic and international economic, legal and regulatory factors unrelated
to our performance.
Since our common stock became publicly traded in December 2003 and through
August 2004, certain of our affiliates have purchased our common stock in open
market transactions from time to time, as disclosed in public filings with the
SEC pursuant to the Securities Exchange Act of 1934 which discloses purchases in
material amounts prior to June 2004, and such purchases may have impacted the
historical market price for our stock. Such affiliates have ceased any further
open market transactions in our common stock as of the end of August 2004, and
will not effect any such transactions until the completion of this offering.
Thereafter, such affiliates may continue purchases or make sales of our common
stock in open market transactions, which may impact the market price for our
stock in the future.
The stock markets in general have experienced extreme volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
19
It may be difficult for a third party to acquire us, which could discourage or
prevent a change of control or merger transaction.
After the completion of this offering, parties related to us will own
approximately 82% of the voting power of our common stock. For as long as our
affiliates own a majority of our common stock, a takeover of our company will
require their approval.
In addition, provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or other change in control that a
stockholder may consider favorable.
20
Special note regarding forward-looking statements
As provided by the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, statements in this prospectus relating to matters that are
not historical facts are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "should," "could," "anticipates," "expected" or
comparable terminology, or by discussions of strategies or trends. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, we cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve substantial risks and
uncertainties that could significantly impact expected results, and actual
future results could differ materially from those described in such
forward-looking statements. While it is not possible to identify all factors, we
continue to face many risks and uncertainties. Among the factors that could
cause actual future results to differ materially are the risks and uncertainties
discussed in this prospectus and those described from time to time in our other
filings with the SEC including, but not limited to, the following:
>> future supply and demand for our products;
>> the cyclicality of our businesses;
>> customer inventory levels (such as the extent to which our customers may,
from time to time, accelerate purchases of TiO2 in advance of anticipated
price increases or defer purchases of TiO2 in advance of anticipated price
decreases);
>> changes in raw material and other operating costs (such as energy costs);
>> the possibility of labor disruptions or shortages in raw materials;
>> general global economic and political conditions (such as changes in the
level of gross domestic product in various regions of the world and the
impact of such changes on demand for TiO2);
>> competitive products and substitute products;
>> customer and competitor strategies;
>> the impact of pricing and production decisions;
>> competitive technology positions;
>> the introduction of trade barriers;
>> fluctuations in currency exchange rates (such as changes in the exchange
rate between the U.S. dollar and each of the euro, the Norwegian kroner and
the Canadian dollar);
>> operating interruptions (including, but not limited to, labor disputes,
leaks, fires, explosions, unscheduled or unplanned downtime and
transportation interruptions);
>> our ability to renew or refinance credit facilities;
>> the ultimate outcome of income tax audits, tax settlement initiatives or
other tax matters;
>> environmental matters (such as those requiring emission and discharge
standards for existing and new facilities);
21
>> the ultimate ability to utilize income tax attributes, the benefit of which
has been recognized under the "more-likely-than-not" recognition criteria
(such as our ability to utilize the benefit of our German net operating
loss carryforwards);
>> government laws and regulations and possible changes therein;
>> the ultimate resolution of pending litigation; and
>> possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
Market share, ranking and other data
We have obtained some of the market data that we use in this prospectus from
independent industry sources. Market data obtained in this manner include the
size and growth rates for TiO2 products and markets. We have not independently
verified that data. Other data including market share, ranking and similar such
information contained in this prospectus is based either on management's own
estimates, industry publications or other published independent sources but, in
each case, are believed by management to be reasonable estimates. Data of this
nature is subject to change and cannot always be verified with complete
certainty due to limits on the availability and reliability of raw data, the
voluntary nature of the data gathering process and other limitations and
uncertainties.
22
Use of proceeds
We estimate that we will receive net proceeds of approximately $288.4 million
from the sale of the shares of our common stock in this offering after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $317.4 million.
We intend to use approximately $200.0 million of the net proceeds of this
offering to repay our outstanding $200 million long-term notes payable to
affiliates and accrued unpaid and quarterly interest thereon. The notes bear
interest at 9% per annum. Interest on the long-term notes is payable quarterly
with the principal and all accrued and unpaid interest due at maturity on
December 31, 2010. We intend to use the remainder of the net proceeds for
general corporate purposes, which may include possible acquisitions of
additional TiO2 facilities that may become available in the future.
Dividend policy
In each of the first three quarters of 2004, we paid a regular quarterly
dividend to stockholders of $.25 per share. The declaration and payment of
future dividends is discretionary, and the amount, if any, will be dependent
upon our results of operations, financial condition, contractual restrictions
and other factors deemed relevant by our board of directors. Certain of our
subsidiaries are parties to credit agreements that, among other things, limit
their ability to pay dividends. See note 8 to our consolidated financial
statements.
Prior to December 2003, we were a wholly-owned subsidiary of NL. On December 8,
2003, NL completed a distribution to its stockholders of approximately 48.8% of
our outstanding common stock (including to Valhi and a wholly-owned subsidiary
of Valhi). Stockholders of NL received one share of our common stock for every
two shares of NL common stock outstanding as of the close of business on
November 17, 2003, the record date for the distribution.
Price range of common stock
Our common stock is listed and traded on the New York Stock Exchange under the
symbol "KRO." As of October 1, 2004, there were approximately 5,300 holders of
record of common stock. Our common stock commenced trading on December 8, 2003.
The following table sets forth, for the periods indicated, the high and low
sales prices per share for our common stock, as reported on the NYSE Composite
Tape:
High Low
----------- -------------
2003
Fourth Quarter (December 8 through December 31)................. $ 24.79 $ 16.00
2004
First Quarter................................................... $ 33.75 $ 21.51
Second Quarter.................................................. 34.48 29.00
Third Quarter................................................... 39.70 30.80
Fourth Quarter (through October 5).............................. 40.20 38.61
On October 5, 2004, the closing price of our common stock according to the NYSE
Composite Tape was $40.20.
23
Capitalization
The following table sets forth our capitalization as of June 30, 2004:
>> on an actual basis;
>> on a pro forma basis to give effect to our sale of 7,500,000 shares of
common stock in this offering and the application of the net proceeds from
this offering as described under "Use of proceeds."
This information should be read in conjunction with our consolidated financial
statements and related notes, unaudited pro forma condensed consolidated
financial statements and related notes and "Management's discussion and analysis
of financial condition and results of operations."
As of June 30, 2004
-------------------------------
Actual Pro forma
------------ --------------
(In millions of dollars)
(unaudited)
Cash and cash equivalents................................................ $ 88.4 $ 176.8
============= =============
Noncurrent liabilities:
Long-term debt........................................................ $ 346.7 $ 346.7
Note payable to affiliate............................................. 200.0 -
------------- -------------
546.7 346.7
Minority interest........................................................ .5 .5
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized, - -
no shares issued and outstanding....................................
Common stock, $.01 par value, 60,000,000 shares authorized,
48,946,049 shares issued and outstanding actual; 56,446,049 shares
issued and outstanding pro forma.................................... .5 .6
Additional paid-in capital............................................ 1,060.2 1,348.5
Retained deficit...................................................... (476.4) (476.4)
Accumulated other comprehensive loss:
Currency translation................................................ (138.8) (138.8)
Pension liabilities................................................. (39.0) (39.0)
------------- -------------
Total stockholders' equity.......................................... 406.5 694.9
------------- -------------
Total capitalization................................................ $ 953.7 $ 1,042.1
============= =============
>> The number of shares of our common stock to be outstanding after the
offering does not include 147,000 shares available for future grant under
our long-term incentive plan.
24
Selected historical consolidated financial and operating data
The following selected historical financial data with respect to the years ended
December 31, 2001, 2002 and 2003, and as of December 31, 2002 and 2003, is
derived from our audited consolidated financial statements included in this
prospectus. The selected historical financial data for the year ended December
31, 2000, and as of December 31, 2001, is derived from our audited consolidated
financial statements. The selected historical financial data for the year ended
December 31, 1999, and as of December 31, 1999 and 2000, is derived from our
unaudited consolidated financial statements. The selected historical financial
data for the six months ended June 30, 2003 and 2004, and as of June 30, 2003
and 2004, is derived from our unaudited consolidated financial statements
included in this prospectus. Such unaudited consolidated financial statements
have been prepared in accordance with GAAP and, in the case of such interim
consolidated financial statements, include, in our opinion, all adjustments,
consisting only of normal, recurring adjustments, necessary to present fairly
our consolidated financial position, results of operations and cash flows. Our
historical results of operations are not necessarily indicative of our results
of operations expected for any future period, nor are our operating results for
any interim period necessarily indicative of our operating results for any full
year. The earnings per share and cash dividends per share data presented below
has been restated to give effect to the September 2003 change in our capital
structure discussed in note 1 to our consolidated financial statements in which
the 1,000 shares of our common stock previously outstanding were reclassified in
the form of a stock split into approximately 48.9 million shares of our common
stock. Kronos' TiO2 operating statistics data is unaudited. The following
selected historical financial data should be read in conjunction with our
consolidated financial statements and "Management's discussion and analysis of
financial condition and results of operations."
Six months ended
Years ended December 31, June 30,
-------------------------------------------------------------- -----------------------
1999 2000 2001 2002 2003 2003 2004
----------- ----------- ---------- ---------- ----------- ----------- ----------
(In millions)
Statement of Income Data:
Net sales $ 908.4 $ 922.3 $ 835.1 $ 875.2 $ 1,008.2 $ 519.6 $ 559.1
========= ========= ========= ========= ========== ========= =========
Gross Profit $ 246.1 $ 311.9 $ 257.0 $ 203.4 $ 269.0 $ 133.5 $ 129.3
Selling, general and
administrative expenses 116.9 107.6 98.7 107.7 124.4 60.4 70.2
Insurance recoveries, net - - 7.2 - - - -
Other income (expense), net (1) 9.9 (1.1) (3.5) (4.2) (12.1) (5.4) 5.6
--------- --------- --------- --------- --------- --------- --------
Income from operations 139.1 203.2 162.0 91.5 132.5 67.7 64.7
Currency transaction gain - - - 6.3 - - -
Insurance recoveries, net - - 17.5 - - - -
Interest income 3.4 23.7 36.0 23.1 1.7 1.2 0.8
Interest expense (40.1) (31.0) (27.3) (29.1) (34.9) (17.1) (26.8)
--------- --------- --------- --------- --------- --------- --------
Income before income taxes and
minority interest 102.4 195.9 188.2 91.8 99.3 51.8 38.7
Provision for income taxes
(benefit) (2) (23.6) 65.6 33.7 25.5 11.7 (6.7) (238.6)
Minority interest 0.1 0.1 - - 0.1 - -
--------- --------- --------- --------- --------- --------- --------
Net income $ 125.9 $ 130.2 $ 154.5 $ 66.3 $ 87.5 $ 58.5 $ 277.3
========= ========= ========= ========= ========== ========= =========
25
Six months ended
Years ended December 31, June 30,
-------------------------------------------------------------- -----------------------
1999 2000 2001 2002 2003 2003 2004
----------- ----------- ---------- ---------- ----------- ----------- ----------
(In millions, except per share data and TiO2 operating statistics)
Net income per share $ 2.57 $ 2.66 $ 3.16 $ 1.35 $ 1.79 $ 1.19 $ 5.67
Cash dividends per share (3) $ 0.61 $ 1.12 $ 0.62 $ 2.27 $ 0.14 $ 0.14 $ 0.50
Weighted average common shares
outstanding 48.9 48.9 48.9 48.9 48.9 48.9 48.9
Cash and cash equivalents $ 103.1 $ 53.0 $ 54.7 $ 40.7 $ 55.9 $ 29.6 $ 88.4
Working capital (4) 197.5 171.9 198.6 231.5 331.5 296.6 351.7
Total assets 973.6 893.4 910.1 988.5 1,121.9 1,014.3 1,251.4
Total debt, including current
maturities 340.4 266.1 242.7 370.5 556.7 361.2 546.8
Common stockholders' equity 310.9 346.6 378.5 314.2 159.4 353.4 406.5
Other operating data:
Cash flows from:
Operating activities $ 124.6 $ 154.7 $ 135.7 $ 111.1 $ 107.7 $ 29.3 $ 67.5
Investing activities (30.4) (31.0) (33.7) (34.6) (35.4) (14.7) (10.5)
Financing activities (48.8) (172.2) (99.0) (93.9) (61.8) (27.4) (24.5)
Depreciation and amortization
expense 33.0 29.0 28.9 32.2 39.4 19.3 21.8
Capital expenditures 32.7 31.1 53.7 32.6 35.2 13.8 10.8
Adjusted EBITDA (5) 172.1 232.2 190.9 123.7 171.9 87.0 86.5
Kronos TiO2 operating statistics:
Indexed average selling price
(1990 = 100) 87 92 89 81 84 84 81
Sales volumes* 427 436 402 455 462 240 255
Production volumes* 411 441 412 442 476 237 240
Production capacity at beginning
of period* 440 440 450 455 470 470 480
Production rate as a percentage of
capacity 93% Full 91% 96% Full Full Full
- -------------------------
* Metric tons in thousands
(1) Other income (expense), net, includes currency transaction gains (losses),
gains and losses from the disposition of property and equipment, corporate
expense and other operating income and expense.
(2) The income tax benefit in 1999 includes a $57.7 million benefit related to
(i) a favorable resolution of our previously-reported tax contingency in
Germany ($29.1 million) and (ii) a net reduction in our deferred income tax
asset valuation allowance due to a change in the estimate of our ability to
utilize certain income tax attributes under the "more-likely-than-not"
recognition criteria ($28.6 million).
26
(3) Excludes our December 2003 dividend to NL in the form of a $200 million
long-term note payable. See note 11 to our consolidated financial
statements. On September 24, 2004, NL transferred $168.6 million principal
amount of such $200.0 million note to Valhi and a wholly-owned subsidiary
of Valhi in connection with a transaction involving these companies.
(4) Working capital is defined as current assets less current liabilities.
(5) Adjusted EBITDA is defined as income from operations plus depreciation and
amortization expense. Adjusted EBITDA is a non-GAAP measure. For this
purpose, a non-GAAP measure is generally defined by the SEC as a financial
measure that purports to measure financial position, results of operations
or cash flows, but excludes or includes amounts that would not be so
adjusted in the most comparable GAAP measure. We exclude nonoperating
interest income, insurance recoveries, net and currency transaction gain
from our definition of adjusted EBITDA because they are not related to our
TiO2 operations and we believe including such items in our adjusted EBITDA
would not be representative of our ongoing operations. We have included
adjusted EBITDA in this prospectus because our management considers it an
important supplemental measure of our performance and believes that it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in our industry. Management believes
adjusted EBITDA is also a useful tool for measuring our ability to meet our
future debt service, capital expenditures and working capital requirements.
In addition, we utilize adjusted EBITDA in evaluating acquisition targets.
Adjusted EBITDA is not a substitute for the GAAP measures of net income (a
performance measure) or cash flows from operating activities (a liquidity
measure), and it is not necessarily a measure of our ability to fund our
cash needs. In addition, it should be noted that companies calculate
adjusted EBITDA differently and, therefore, adjusted EBITDA as presented in
this prospectus may not be comparable to adjusted EBITDA reported by other
companies. Adjusted EBITDA has material limitations as a performance
measure because it excludes, among other things, interest expense,
depreciation and amortization expense and income tax expense, each of which
is a necessary element of our costs and operations. Adjusted EBITDA has
material limitations as a liquidity measure because it excludes, among
other things, changes in assets and liabilities that are included in the
calculation of cash flows from operating activities. Therefore, you should
not consider adjusted EBITDA in isolation of, or as a substitute for, our
financial performance or liquidity as calculated in accordance with GAAP.
We compensate for these limitations by relying primarily on our GAAP
results and by using adjusted EBITDA only supplementally. The following
table reconciles adjusted EBITDA to net income and cash flows from
operating activities for the periods presented.
27
Reconciliation of Adjusted EBITDA to Net Income and Cash Flows from Operating
Activities
Six months ended
Years ended December 31, June 30,
--------------------------------------------------------------- --------------------------
1999 2000 2001 2002 2003 2003 2004
----------- ---------- ----------- ---------- ------------ ----------- -------------
(In millions)
Adjusted EBITDA $ 172.1 $ 232.2 $ 190.9 $ 123.7 $ 171.9 $ 87.0 $ 86.5
Adjustments to reconcile
adjusted EBITDA to net income:
Currency transaction gain - - - 6.3 - - -
Insurance recoveries, net - - 17.5 - - - -
Interest income 3.4 23.7 36.0 23.1 1.7 1.2 0.8
Interest expense (40.1) (31.0) (27.3) (29.1) (34.9) (17.1) (26.8)
Depreciation and amortization
expense (33.0) (29.0) (28.9) (32.2) (39.4) (19.3) (21.8)
Provision for income taxes
(benefit) 23.6 (65.6) (33.7) (25.5) (11.7) 6.7 238.6
Minority interest (0.1) (0.1) - - (0.1) - -
--------- -------- --------- --------- --------- -------- ---------
Net income 125.9 130.2 154.5 66.3 87.5 58.5 277.3
Adjustments to reconcile net income from operating activities:
Depreciation and amortization
expense 33.0 29.0 28.9 32.2 39.4 19.3 21.8
Deferred income taxes (55.3) 11.9 (4.2) 10.8 36.5 5.9 (245.1)
Distributions from TiO2
manufacturing joint
venture, net 13.7 7.6 11.3 8.0 0.9 0.8 8.3
Change in assets and
liabilities, net 10.6 0.8 (12.5) 16.2 (52.6) (54.3) 3.1
Insurance recoveries, net - - (17.5) - -
Noncash interest income from
affiliates - (21.6) (22.2) (20.6) - - -
Other, net (3.3) (3.2) (2.6) (1.8) (4.0) (0.9) 2.1
--------- -------- --------- --------- --------- -------- ---------
Cash flows from operating
activities $ 124.6 $ 154.7 $ 135.7 $ 111.1 $ 107.7 $ 29.3 $ 67.5
========= ========= ========= ========= ========== ========= =========
28
Management's discussion and analysis of financial condition and results of
operations
EXECUTIVE SUMMARY
Relative changes in our TiO2 sales and income from operations during 2001, 2002
and 2003, and the first six months of 2003 and 2004, are primarily due to (i)
relative changes in average TiO2 selling prices, (ii) relative changes in TiO2
sales volumes and (iii) relative changes in foreign currency exchange rates. The
relatively lower levels of sales and production volumes in 2001 as compared to
2002 and 2003 are due in part to the effects of a fire at one of our production
facilities, as discussed below.
Selling prices for TiO2, our principal product, in billing currencies (which
exclude the effect of fluctuations in foreign currency exchange rates) were
generally decreasing during all of 2001 and the first quarter of 2002, were
generally flat during the second quarter of 2002, were generally increasing
during the last half of 2002 and the first quarter of 2003, were generally flat
during the second quarter of 2003, were generally declining during the third and
fourth quarter of 2003 and the first quarter of 2004 and were generally flat
during the second quarter of 2004. During each of 2002 and 2003, our TiO2 sales
and production volumes were higher than the respective prior year, and our TiO2
sales and production volumes in the first six months of 2004 were higher than
the comparable period in 2003.
We reported net income of $277.3 million, or $5.67 per diluted share, in the
first six months of 2004 compared to net income of $58.5 million, or $1.19 per
diluted share, in the first six months of 2003. The increase in our diluted
earnings per share from the first six months of 2003 to the same period in 2004
is due primarily to the net effects of (i) significantly higher tax benefit
generated from the reversal of our German deferred income tax asset valuation
allowance, (ii) lower gross margins, (iii) higher selling, general and
administrative expense, (iv) income from a contract dispute settlement and (v)
higher interest expense to affiliates. Net income in the first six months of
2003 includes certain income tax benefits relating to Germany aggregating $.50
per diluted share. Net income in the first six months of 2004 includes (a)
certain income tax benefits related to Germany aggregating $5.02 per diluted
share and (b) income related to contract dispute settlement of $.08 per diluted
share. These items are more fully described below.
We reported net income of $154.5 million, or $3.16 per diluted share, in 2001
compared to net income of $66.3 million, or $1.35 per diluted share, in 2002 and
net income of $87.5 million, or $1.79 per diluted share, in 2003. The decrease
in our diluted earnings per share from 2001 to 2002 is due primarily to the net
effects of (i) lower gross margins, (ii) higher selling, general and
administrative expense, (iii) income related to insurance recoveries arising out
of the fire in 2001, (iv) lower interest income from affiliates, (v) higher
third-party interest expense and (vi) an income tax benefit in 2001 related to
the restructuring of our German operations. The increase in our diluted earnings
per share from 2002 to 2003 is due primarily to the net effects of (i) higher
gross margin, (ii) higher selling, general and administrative expense, (iii)
higher third-party interest expense and (iv) an income tax benefit in 2003
related to Germany. Net income in 2001 and 2003 includes certain income tax
benefits related to Germany aggregating $.36 per diluted share and $.78 per
diluted share, respectively. These items are more fully described below.
Overall, we believe our net income in 2004 will be higher than 2003 as the
impact of the reversal of our deferred income tax asset valuation allowance is
expected to more than offset the effect of expected lower income from
operations.
We believe the analyses presented in the following tables are useful in
understanding the comparability of our results of operations for the periods
presented. Each of these items are more fully discussed below in the applicable
sections of this "Management's discussion and analysis of financial condition
and results of operations--Results of Operations" or elsewhere in this
prospectus.
29
Net sales, gross margin and income from operations
- -------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
-------------------------------------------------------
2003 2004 % Change
----------------- ------------------ -------------
(In millions, except volumes)
Net sales $ 519.6 $ 559.1 + 8%
Cost of sales 386.1 429.8 + 11%
----------- ----------
Gross margin 133.5 129.3 - 3%
Selling, general and administrative expense (60.4) (70.2)
Currency transaction gains (losses), net (3.8) .6
Contract dispute settlement - 6.3
Other income .1 -
Corporate expense (1.7) (1.3)
----------- ---------
Income from operations $ 67.7 $ 64.7 - 4%
=========== ==========
TiO2 data:
Percent change in average selling prices:
Using actual foreign currency exchange rates + 2%
Impact of changes in foreign currency exchange rates - 7%
--------
In billing currencies - 5%
========
Sales volumes* 240 255
Production volumes* 237 240
Net sales, gross margin and income from operations
- --------------------------------------------------------------------------------------------------------------------
Years ended December 31, % Change
----------------------------------- --------------------
2001 2002 2003 2001-02 2002-03
--------- ---------- ---------- --------- ---------
(In millions, except volumes)
Net sales $ 835.1 $ 875.2 $ 1,008.2 + 5% + 15%
Cost of sales 578.1 671.8 739.2 + 16% + 10%
---------- ---------- ----------
Gross margin 257.0 203.4 269.0 - 21% + 32%
Selling, general and administrative expense (98.7) (107.7) (124.4) + 9% + 16%
Insurance recoveries, net 7.2 - -
Currency transaction gains (losses), net 1.2 (.5) (7.7)
Corporate expense (4.9) (3.3) (4.2)
Other operating income (expense), net .2 (.4) (.2)
---------- ---------- ---------
Income from operations $ 162.0 $ 91.5 $ 132.5 - 44% + 45%
========== ========== =========
TiO2 data:
Percent change in average selling prices:
Using actual foreign currency exchange rates - 7% + 13%
Impact of changes in foreign currency exchange rates - 2% - 10%
------ ------
In billing currencies - 9% + 3%
====== ======
Sales volumes* 402 455 462 + 13% + 2%
Production volumes* 412 442 476 + 7% + 8%
Production rate as percent of capacity 91% 96% Full
- ------------------
* Thousands of metric tons
30
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying "Management's discussion and analysis of financial condition
and results of operations" are based upon our consolidated financial statements,
which have been prepared in accordance with GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities 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, we
evaluate our estimates, including those related to bad debts, inventory
reserves, impairments of investments in marketable securities and investments
accounted for by the equity method, the recoverability of other long-lived
assets (including goodwill and other intangible assets), pension and other
post-retirement benefit obligations and the underlying actuarial assumptions
related thereto, the realization of deferred income tax assets and accruals for
litigation, income tax and other contingencies. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
>> We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments and other
factors. We take into consideration the current financial condition of our
customers, the age of the outstanding balance and the current economic
environment when assessing the adequacy of the allowance. If the financial
condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
During 2001, 2002 and 2003, the net amount written off against the
allowance for doubtful accounts as a percentage of the balance of the
allowance for doubtful accounts as of the beginning of the year ranged from
12% to 18%.
>> We provide reserves for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated net
realizable value using assumptions about future demand for our products and
market conditions. If actual market conditions are less favorable than
those projected by management, additional inventory reserves may be
required. We also provide reserves for tools and supplies inventory based
generally on both historical and expected future usage requirements.
>> We recognize an impairment charge associated with our long-lived assets,
including property and equipment, whenever we determine that recovery of
such long-lived asset is not probable. Such determination is made in
accordance with the applicable GAAP requirements associated with the
long-lived asset, and is based upon, among other things, estimates of the
amount of future net cash flows to be generated by the long-lived asset and
estimates of the current fair value of the asset. Adverse changes in such
estimates of future net cash flows or estimates of fair value could result
in an inability to recover the carrying value of the long-lived asset,
thereby possibly requiring an impairment charge to be recognized in the
future.
Under applicable GAAP (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 2003, no such impairment indicators, as defined, were present.
>> We maintain various defined benefit pension plans and postretirement
benefits other than pensions ("OPEB"). The amount recognized as defined
benefit pension and OPEB expense, and the reported amount of prepaid and
accrued pension costs and accrued OPEB costs, are actuarially determined
based on several assumptions, including discount rates, expected rates of
returns on plan assets and expected health care trend rates. Variances from
31
these actuarially assumed rates will result in increases or decreases, as
applicable, in the recognized pension and OPEB obligations, pension and
OPEB expense and funding requirements. These assumptions are more fully
described below under "--Defined benefit pension plans" and "--OPEB plans."
>> As required by GAAP, we record a valuation allowance to reduce our deferred
income tax assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While we have considered
future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, it is possible
that in the future we may change our estimate of the amount of the deferred
income tax assets that would "more-likely-than-not" be realized in the
future, resulting in an adjustment to the deferred income tax asset
valuation allowance (or the initial recognition of a valuation allowance)
that would either increase or decrease, as applicable, reported net income
in the period such change in estimate was made.
>> We record accruals for legal, 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).
RESULTS OF OPERATIONS
Six months ended June 30, 2004 compared to six months ended June 30, 2003
Sales
Our sales increased $39.5 million (8%) in the first six months of 2004 compared
to the same period in 2003 as the favorable effect of fluctuations in foreign
currency exchange rates, which increased sales by approximately $35 million (as
more fully discussed below), and increased sales volumes more than offset the
impact of lower average TiO2 selling prices. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, our
average TiO2 selling prices in billing currencies in the first six months of
2004 were 5% lower than the first six months of 2003. When translated from
billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, our average TiO2 selling prices
in the first six months of 2004 were 2% higher compared to the first six months
of 2003. Our TiO2 sales volumes in the first six months of 2004 increased 6%
compared to the same period of 2003, as higher volumes in European and export
markets more than offset lower volumes in Canada. Our TiO2 sales volumes in the
first six months of 2004 were a new record for us.
Our sales are denominated in various currencies, including the U.S. dollar, the
euro, other major European currencies and the Canadian dollar. The disclosure of
the percentage change in our average TiO2 selling prices in billing currencies
(which excludes the effects of fluctuations in the value of the U.S. dollar
relative to other currencies) is considered a "non-GAAP" financial measure under
regulations of the SEC. The disclosure of the percentage change in our average
TiO2 selling prices using actual foreign currency exchange rates prevailing
during the respective periods is considered the most directly comparable
financial measure presented in accordance with GAAP ("GAAP measure"). We
disclose percentage changes in our average TiO2 prices in billing currencies
because we believe such disclosure provides useful information to investors to
allow them to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period comparisons of
32
the relative changes in average selling prices in the actual various billing
currencies. 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. The difference between the 2% increase in our average TiO2 selling
prices during the first six months of 2004 as compared to the same period in
2003 using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure) and the 5% decrease in our average TiO2
selling price in billing currencies (the non-GAAP measure) during such period is
due to the effect of changes in foreign currency exchange rates. The above table
presents (i) the percentage change in our average TiO2 selling prices using
actual foreign currency exchange rates prevailing during the respective periods
(the GAAP measure), (ii) the percentage change in our average TiO2 selling
prices in billing currencies (the non-GAAP measure) and (iii) the percentage
change due to changes in foreign currency exchange rates (or the reconciling
item between the non-GAAP measure and the GAAP measure).
Cost of sales and gross margin
Our cost of sales increased $43.7 million (11%) in the first six months of 2004
compared to the first six months of 2003 largely due to the increased sales
volumes and the effects of translating foreign currencies (primarily the euro)
into U.S. dollars. As a result of the lower average TiO2 selling prices in
billing currencies, our cost of sales, as a percentage of net sales increased
from 74% in the first six months of 2003 to 77% in the first six months of 2004.
Our TiO2 production volumes increased 1% in the first six months of 2004
compared to the first six months of 2003, with operating rates near full
capacity in both periods. Our TiO2 production volumes in the first six months of
2004 were also a new record for us.
Despite the increase in net sales, our gross margins decreased $4.2 million (3%)
from the first six months of 2003 to the first six months of 2004, as the
unfavorable effect of lower average TiO2 selling prices more than offset the
favorable effect on gross margin resulting from relative changes in foreign
currency exchange rates.
Selling, general and administrative expense
Selling, general and administrative expenses increased $9.8 million (16%) in the
first six months of 2004 as compared to the corresponding period in 2003. This
increase is largely attributable to the higher sales volumes as well as the
impact of translating foreign currencies (primarily the euro) into U.S. dollars.
Contract dispute settlement
Our income from operations in the first six months of 2004 includes $6.3 million
of income related to the settlement of a contract dispute with a certain
customer. As part of the settlement, the customer agreed to make payments to us
through 2007 aggregating $7.3 million. The $6.3 million recognized gain
represents the present value of the future payments to be paid by the customer
to us.
Impact of fluctuations in foreign currency exchange rates on sales and income
from operations
We have substantial operations and assets located outside the United States
(particularly in Germany, Belgium, Norway and Canada). A significant amount of
our sales generated from our non-U.S. operations are denominated in currencies
other than the U.S. dollar, primarily the euro, other major European currencies
and the Canadian dollar. In addition, a portion of our sales generated from our
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 our 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 TiO2
sales in the first six months of 2004 by approximately $35 million compared to
the same period in 2003. Fluctuations in the value of the U.S. dollar relative
to other currencies similarly impacted our foreign currency-denominated
operating expenses. Our operating costs that are not denominated in the U.S.
dollar, when translated into U.S. dollars, were higher in the second quarter and
first six months of 2004 compared to the second quarter and first six months of
2003. Overall, currency exchange rate fluctuations resulted in net increases in
our income from operations of approximately $8 million in the first six months
of 2004 as compared to the same period in 2003.
33
Year ended December 31, 2003 compared to year ended December 31, 2002
Sales
Our net sales increased $133.0 million (15%) in 2003 compared to 2002 due to
higher average selling prices along with higher sales volumes in 2003 and the
positive effects of currency exchange rates, specifically the weaker U.S. dollar
as compared to the euro and Canadian dollar. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, our
average TiO2 selling price in 2003 was 3% higher than 2002, primarily due to the
European and export markets. When translated from billing currencies to U.S.
dollars using actual foreign currency exchange rates prevailing during the
respective periods, our average TiO2 selling prices in 2003 increased 13%
compared to 2002. Our TiO2 sales volumes in 2003 set a new record, increasing 2%
from the previous record achieved in 2002, with higher volumes in European and
North American markets more than offsetting a decline in volumes to export
markets. By volume, approximately one-half of our 2002 and 2003 TiO2 sales
volumes were attributable to markets in Europe, with 40% attributable to North
America and the balance to export markets.
The difference between the 13% increase in our average TiO2 selling prices
during 2003 as compared to 2002 using actual foreign currency exchange rates
prevailing during the respective periods (the GAAP measure) and the 3%
percentage increase in our average TiO2 selling price in billing currencies (the
non-GAAP measure) during such periods is due to the effect of changes in foreign
currency exchange rates. The table above presents (i) the percentage change in
our average TiO2 selling prices using actual foreign currency exchange rates
prevailing during the respective periods (the GAAP measure), (ii) the percentage
change in our average TiO2 selling price in billing currencies (the non-GAAP
measure) and (iii) the percentage change due to changes in foreign currency
exchange rates (or the reconciling item between the non-GAAP measure and the
GAAP measure).
Cost of sales and gross margins
Our cost of sales increased $67.4 million (10%) in 2003 compared to 2002 due to
the higher sales volumes. Our cost of sales, as a percentage of net sales,
decreased from 77% in 2002 to 73% in 2003 due primarily to the effects of
continued cost reduction efforts combined with the impact of higher production
volumes and higher average selling prices. Operating rates were near full
capacity during most of 2003, setting a new company production record.
Our gross margins increased $65.5 million (32%) from 2002 to 2003 due to the net
effects of the aforementioned changes in sales and cost of sales during such
periods.
Selling, general and administrative expense
As a percentage of net sales, selling general and administrative expenses
remained consistent at 12%, increasing proportionately with the increased sales
and production volume.
Certain of the sales generated by our European and Canadian operations are
denominated in the U.S. dollar, and such operations routinely hold U.S.
dollar-denominated receivables. Primarily as a result of the weakening of the
U.S. dollar as compared to the Canadian dollar and the euro throughout the year,
our results in 2003 included net currency transaction losses of $7.7 million.
Due to a more stable dollar in 2002, we recognized net currency transaction
losses of $500,000.
Corporate expense
Corporate expenses for 2003 increased 26% to $4.1 million as compared to 2002
primarily due to higher fees associated with our becoming a separate SEC
registrant and certain corporate office relocation expenses.
34
Impact of fluctuations in foreign currency exchange rates on sales and income
from operations
We have substantial operations and assets located outside the United States
(primarily in Germany, Belgium, Norway and Canada). A significant amount of our
sales generated from our 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. A portion of our sales generated from our 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 our 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 TiO2
sales in 2003 by a net $93 million compared to 2002. Fluctuations in the value
of the U.S. dollar relative to other currencies similarly impacted our foreign
currency-denominated operating expenses. Our operating costs that are not
denominated in the U.S. dollar, when translated into U.S. dollars, were higher
in 2003 compared to the same periods of 2002. Overall, currency exchange rate
fluctuations resulted in a net decrease in our operating income in 2003 of
approximately $6 million as compared to 2002.
Year ended December 31, 2002 compared to year ended December 31, 2001
Sales
Our 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. Our
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 our 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 our Leverkusen, Germany facility in March
2001 that disrupted operations. See note 15 to our consolidated financial
statements. Excluding the effect of fluctuations in the value of the U.S. dollar
relative to other currencies, our average TiO2 selling price in 2002 was 9%
lower than 2001, 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, our average TiO2 selling prices in
2002 decreased 7% compared to 2001.
Cost of sales and gross margin
Our 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 below. Our 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.
Our gross margin declined $53.6 million (21%) in 2002 compared to 2001 as the
effect of lower average TiO2 selling prices more than offset the effect of
higher TiO2 sales and production volumes. 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.
Our record TiO2 production volume in 2002 was 7% higher than 2001. Our operating
rates in 2001 were lower as compared to 2002 primarily due to lost production
resulting from the Leverkusen fire.
35
Business interruption insurance
Our income from operations 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, representing recovery of lost margin, is included in income from
operations (as shown on the table above). The business interruption insurance
proceeds distorted the income from operations margin percentage in 2001 as there
are no sales associated with the $7.2 million of lost margin recognized. See
note 15 to our consolidated financial statements.
Insurance recoveries
We 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 income from operations but is included in other income and expense,
as discussed above. We do not expect to recognize any additional insurance
recoveries related to the Leverkusen fire. See note 15 to our consolidated
financial statements.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased $9.0 million (9%) in
2002 as 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, as well as the impact of relative
changes in foreign currency exchange rates, which increased our expenses in 2002
compared to 2001. Selling, general and administrative expenses were
approximately 12% of sales in both 2001 and 2002.
Impact of fluctuations in foreign currency exchange rates on sales and income
from operations
As discussed above, we have substantial operations and assets located outside
the United States (primarily in Germany, Belgium, Norway and Canada) and
consequently, the translated U.S. dollar value of our foreign sales and
operating results are subject to currency exchange rate fluctuations that 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 TiO2
sales in 2002 by a net $21 million compared to 2001. Fluctuations in the value
of the U.S. dollar relative to other currencies similarly impacted our foreign
currency-denominated operating expenses. Our operating costs that are not
denominated in the U.S. dollar, when translated into U.S. dollars, were higher
in 2003 compared to the same periods of 2002. Overall, currency exchange rate
fluctuations on our operating income comparisons were not significant in 2002 as
compared to 2001.
Outlook
Reflecting the impact of partial implementation of prior price increase
announcements, our average TiO2 selling prices in the second quarter of 2004
were generally flat as compared to the first quarter of 2004, reversing the
downward trend that had existed since the third quarter of 2003. In July and
August 2004, we announced additional price increases of 4 cents per pound in the
U.S., Canadian 6 cents per pound in Canada and (euro)120 per metric ton in
Europe, all of which are targeted to be implemented in the fourth quarter of
2004. In September 2004, we announced additional price increases of 3 cents to 6
cents per pound in the U.S., Canadian 4 cents to Canadian 8 cents per pound in
36
Canada and (euro)110 per metric ton in Europe, all of which are in addition to
the July/August announced increases and are targeted to be implemented in late
2004 and early 2005. The extent to which all of such price increase
announcements will be realized will depend on, among other things, economic
factors.
We expect our TiO2 sales and production volumes in calendar 2004 will be higher
for the full year 2004 as compared to 2003. Our average TiO2 selling price,
which declined during the second half of 2003 and first quarter of 2004, began
to rise during the latter part of the second quarter of 2004, has increased in
the third quarter of 2004 and should continue to rise during the remainder of
the year. Nevertheless, we expect our average TiO2 selling prices, in billing
currencies, will be lower in calendar 2004 as compared to 2003 and expect our
gross margin in 2004 to be lower than 2003. Our expectations as to our and the
TiO2 industry's future prospects are based upon a number of factors beyond our
control, including worldwide growth of gross domestic product, competition in
the marketplace, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from our expectations, our
results of operations could be unfavorably affected.
Other income (expense)
The following table sets forth certain information regarding other income and
expense items for 2001, 2002 and 2003, and the six months ended June 30, 2004:
Six months ended
Years ended December 31, June 30,
------------------------------------ ------------------------
2001 2002 2003 2003 2004
---------- ----------- ---------- ----------- ----------
(In millions)
Trade interest income $ 2.3 $ 1.7 $ .7 $ .4 $ .4
Interest income from affiliates 33.4 20.7 .7 .7 -
Other interest income .3 .7 .2 .1 .4
Currency transaction gains - 6.3 - - -
Insurance recoveries, net 17.5 - - - -
Interest expense to affiliates (22.9) (12.3) (1.8) (.7) (9.0)
Other interest expense (4.3) (16.8) (33.0) (16.4) (17.8)
-------- -------- -------- -------- --------
$ (26.3) $ .3 $ (33.2) $ (15.9) $ (26.0)
======== ======== ======== ======== ========
Interest income fluctuates in part based upon the amount of funds invested and
yields thereon. Aggregate interest income declined $21.0 million in 2003
compared to 2002 and $13.3 million in 2002 compared with 2001 primarily due to
lower average yields on invested funds. We expect interest income will be lower
in 2004 than 2003 due to lower average funds available for investment and to
lower average yields and lower average levels of funds available for investment.
In June 2002, KII, our wholly-owned subsidiary, sold (euro)285 million of its
8.875% senior secured notes due 2009. KII used the net proceeds of the notes
offering to repay certain intercompany indebtedness owed to us, a portion of
which we used to redeem at par all of our outstanding 11.75% senior secured
notes due 2003, plus accrued interest. As a result of the refinancing, we
recognized a foreign currency transaction gain of $6.3 million in 2002 related
to the extinguishment of certain intercompany indebtedness. See note 8 to our
consolidated financial statements.
The insurance recoveries, net of $17.5 million in 2001, related to insurance
proceeds received from property damage resulting from the Leverkusen fire. The
insurance proceeds received exceeded the carrying value of the property
destroyed and cleanup costs incurred. See note 15 to our consolidated financial
statements.
Aggregate interest expense in 2003 increased $5.7 million compared to 2002
primarily due to higher levels of outstanding debt and associated currency
37
effects, partially offset by lower interest rates. Aggregate interest expense in
2002 increased $1.9 million compared with 2001 primarily due to $2.0 million of
additional second-quarter 2002 interest expense related to the early
extinguishment of our 11.75% senior secured notes. See note 8 to our
consolidated financial statements.
Interest expense to affiliates in the first six months of 2004 was $8.3 million
higher than the first six months of 2003 due to our $200 million long-term note
payable to NL which we distributed to NL in December 2003. Because of this
distribution, interest expense to affiliates is expected to continue to be
higher during the remainder of 2004 as compared to the same periods in 2003.
We have a significant amount of outstanding indebtedness denominated in the
euro, including KII's (euro)285 million senior secured notes. Accordingly, the
reported amount of interest expense will vary depending on relative changes in
foreign currency exchange rates. Other interest expense in the first six months
of 2004 was $1.4 million higher than the first six months of 2003, due primarily
to relative changes in foreign currency exchange rates, which increased the U.S.
dollar equivalent of interest expense on KII's senior secured notes by
approximately $1.7 million. Assuming no significant change in interest rates or
foreign currency exchange rates, other interest expense for the full-year 2004
is expected to be slightly higher than amounts for the same periods in 2003.
Provision for income taxes
The principal reasons for the difference between our effective income tax rates
and the U.S. federal statutory income tax rates are explained in note 13 to our
consolidated financial statements. Income tax rates vary by jurisdiction
(country and/or state), and relative changes in the geographic mix of our
pre-tax earnings can result in fluctuations in the effective income tax rate.
At June 30, 2004, we had the equivalent of $594 million and $255 million,
respectively, of net operating loss carryforwards for German corporate and trade
tax purposes, all of which have no expiration date. As more fully described in
note 13 to our consolidated financial statements, we had previously provided a
deferred income tax asset valuation allowance against substantially all of these
tax loss carryforwards and other deductible temporary differences in Germany
because we did not believe we met the "more-likely-than-not" recognition
criteria. During the first six months of 2004, we reduced our deferred income
tax asset valuation allowance by approximately $8.7 million, primarily as a
result of utilization of these German net operating loss carryforwards, the
benefit of which had not previously been recognized. At June 30, 2004, after
considering all available evidence, we concluded that these German tax loss
carryforwards and other deductible temporary differences now meet the
"more-likely-than-not" recognition criteria. Accordingly, as of June 30, 2004,
we reversed the remaining $245.6 million valuation allowance related to such
items. Because the benefit of such net operating loss carryforwards and other
deductible temporary differences in Germany have now been recognized, our future
effective income tax rate will be higher than what it would have otherwise been,
although our future cash income tax rate would not be affected.
In January 2004, the German federal government enacted new tax law amendments
that limit the annual utilization of income tax loss carryforwards effective
January 1, 2004 to 60% of taxable income after the first (euro)1 million of
taxable income. The new law will have a significant effect on our cash tax
payments in Germany going forward, the extent of which will be dependent on the
level of income earned in Germany.
During 2003, we reduced our deferred income tax asset valuation allowance by
approximately $6.7 million, primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been recognized.
In addition, we recognized a $38.0 million income tax benefit related to the net
refund of certain prior year German income taxes.
During 2002, we reduced our deferred income tax asset valuation allowance by
approximately $1.8 million, primarily as a result of utilization of certain
income tax attributes for which the benefit had not previously been recognized.
The provision for income taxes in 2002 also includes a $2.3 million deferred
income tax benefit related to certain changes in the Belgian tax law.
38
During 2001, we reduced our deferred income tax asset valuation allowance by
$23.2 million. This entire reduction related to a change in the estimate of our
ability to utilize certain German income tax attributes following the completion
of a restructuring of our German operations, the benefit of which had not
previously been recognized under the "more-likely-than-not" recognition
criteria.
Related party transactions
We are a party to certain transactions with related parties. See "Certain
relationships and related transactions" and note 16 to our consolidated
financial statements.
Recently adopted accounting principles
See notes 19 and 21 to our consolidated financial statements.
Defined benefit pension plans
We maintain various defined benefit pension plans in the U.S., Europe and
Canada. See note 14 to our consolidated financial statements.
We account for our 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 costs 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. We recognized consolidated defined benefit pension
plan expense of $5.0 million in 2001, $7.1 million in 2002 and $8.4 million in
2003. The amount of funding requirements for these defined benefit pension plans
is generally based upon applicable regulations (such as ERISA in the U.S.), and
will generally differ from pension expense recognized under SFAS No. 87 for
financial reporting purposes. Contributions made by us to all of our plans
aggregated $7.4 million in 2001, $9.0 million in 2002 and $13.6 million in 2003.
The discount rates we utilize 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, we receive advice about
appropriate discount rates from our third-party actuaries, who may in some cases
utilize their own market indices. The discount rates are adjusted as of each
valuation date (September 30th) 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, 2003, approximately 4%, 63%, 12% and 17% of the projected
benefit obligation related to our plans in the U.S., Germany, Canada and Norway,
respectively. We use several different discount rate assumptions in determining
our consolidated defined benefit pension plan obligations and expense because we
maintain defined benefit pension plans in several different countries in North
America and Europe and the interest rate environment differs from country to
country.
39
We used the following discount rates for our defined benefit pension plans:
Discount rates used for:
---------------------------------------------------------------------------------------------
Obligations at December 31, Obligations at December 31, Obligations at December 31,
2001 and expense in 2002 2002 and expense in 2003 2003 and expense in 2004
---------------------------- -------------------------------- -----------------------------
Germany 5.8% 5.5% 5.3%
Canada 7.3% 7.0% 6.3%
Norway 6.0% 6.0% 5.5%
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 obligations. 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, 2003, approximately 5%, 57%, 12% and 22% of the plan assets
related to plan assets for our plans in the U.S., Germany, Canada and Norway,
respectively. We use several different long-term rates of return on plan asset
assumptions in determining our consolidated defined benefit pension plan expense
because we maintain defined benefit pension plans in several different countries
in North America and Europe, the plan assets in different countries are invested
in a different mix of investments and the long-term rates of return for
different investments differ from country to country.
In determining the expected long-term rate of return on plan asset assumptions,
we consider the long-term asset mix (e.g. equity vs. fixed income) for the
assets for each of our plans and the expected long-term rates of return for such
asset components. In addition, we receive advice about appropriate long-term
rates of return from our third-party actuaries. Such assumed asset mixes are
summarized below:
>> In Germany, the composition of our plan assets is established to satisfy
the requirements of the German insurance commissioner. The current plan
asset allocation at December 31, 2003 was 25% to equity managers and 75% to
fixed income managers.
>> In Canada, we currently have 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, 2003 was 57% to equity managers and
43% to fixed income managers.
>> In Norway, we currently have a plan asset target allocation of 14% to
equity managers and 86% to fixed income managers, with an expected
long-term rate of return for such investments of approximately 8% and 6%,
respectively. The current plan asset allocation at December 31, 2003 was
15% to equity managers and 85% to fixed income managers.
We regularly review our actual asset allocation for each of our plans, and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
40
Our assumed long-term rates of return on plan assets for 2001, 2002 and 2003
were as follows:
2001 2002 2003
------------ ------------ -------------
Germany 7.3% 6.8% 6.5%
Canada 7.8% 7.0% 7.0%
Norway 7.0% 7.0% 6.0%
We currently expect to utilize the same long-term rate of return on plan asset
assumptions in 2004 as we used in 2003 for purposes of determining the 2004
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 obligations and the pension expense will be based in part upon
expected increases in future compensation levels. For all of our plans for which
the benefit formula is so calculated, we generally base the assumed expected
increase in future compensation levels upon average long-term inflation rates
for the applicable country.
In addition to the actuarial assumptions discussed above, because we maintain
defined benefit pension plans outside the U.S., the amount of recognized defined
benefit pension expense and the amount of prepaid and accrued pension costs will
vary based upon relative changes in foreign currency exchange rates.
Based on the actuarial assumptions described above and our current expectation
for what actual average foreign currency exchange rates will be during 2004, we
expect our defined benefit pension expense will approximate $13 million in 2004.
In comparison, we expect to be required to make approximately $9 million of
contributions to such plans during 2004.
As noted above, defined benefit pension expense and the amount recognized as
prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. We believe all of the actuarial assumptions used are reasonable
and appropriate. If we had lowered the assumed discount rate by 25 basis points
for all of our plans as of December 31, 2003, our aggregate projected benefit
obligations would have increased by approximately $11.6 million at that date,
and our defined benefit pension expense would be expected to increase by
approximately $1.6 million during 2004. Similarly, if we lowered the assumed
long-term rate of return on plan assets by 25 basis points for all of our plans,
our defined benefit pension expense would be expected to increase by
approximately $600,000 during 2004.
OPEB plans
Certain of our subsidiaries in the U.S. and Canada currently provide certain
health care and life insurance benefits for eligible retired employees. See note
14 to our consolidated financial statements. We account 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. We recognized
consolidated OPEB income of approximately $76,000 in 2001, $265,000 in 2002 and
$133,000 in 2003. 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
$1.2 million in 2001 and $1.0 million in 2002 and 2003.
The assumed discount rates we utilize for determining OPEB expense and the
related accrued OPEB obligations are generally based on the same discount rates
we utilize for our Canadian defined benefit pension plans.
41
In estimating the health care cost trend rate, we consider our actual health
care cost experience, future benefit structures, industry trends and advice from
our third-party actuaries. During each of the past three years, we have 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, 2003, the expected rate of increase in
future health care costs ranges from 10% in 2004, declining to 5.5% in 2009 and
thereafter.
Based on the actuarial assumptions described above and our current expectation
for what actual average foreign currency exchange rates will be during 2004, we
expect our consolidated OPEB credit will approximate $200,000 in 2004. In
comparison, we expect to be required to make approximately $2 million of
contributions to such plans during 2004.
As noted above, OPEB expense and the amount recognized as accrued OPEB costs are
based upon the actuarial assumptions discussed above. We believe all of the
actuarial assumptions used are reasonable and appropriate. If we had lowered the
assumed discount rate by 25 basis points for all of our OPEB plans as of
December 31, 2003, our aggregate projected benefit obligations would have
increased by approximately $400,000 at that date, and our OPEB expense would be
expected to increase by less than $50,000 during 2004. Similarly, if the assumed
future health care cost trend rate had been increased by 100 basis points, our
accumulated OPEB obligations would have increased by approximately $1.1 million
at December 31, 2003, and OPEB expense would have increased by $200,000 in 2003.
Foreign operations
We have substantial operations located outside the United States (principally
Europe and Canada) for which the functional currency is not the U.S. dollar. As
a result, the reported amount of our assets and liabilities related to our
non-U.S. operations, and therefore our consolidated net assets, will fluctuate
based upon changes in currency exchange rates. As of January 1, 2001, the
functional currency of our German, Belgian, Dutch and French operations had been
converted to the euro from their respective national currencies. At December 31,
2003, we had substantial net assets denominated in the euro, Canadian dollar,
Norwegian kroner and United Kingdom pound sterling.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Our consolidated cash flows for 2001, 2002 and 2003 and for the six months ended
June 30, 2003 and 2004 are presented below:
Years ended December 31, Six months ended June 30,
------------------------------------------- ---------------------------
2001 2002 2003 2003 2004
------------- ------------ ------------ ------------ -----------
(In millions)
Operating activities $ 135.7 $ 111.1 $ 107.6 $ 29.3 $ 67.5
Investing activities (33.7) (34.6) (35.4) (14.7) (10.5)
Financing activities (99.0) (93.9) (61.8) (27.4) (24.5)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating,
investing and financing activities $ 3.0 $ (17.4) $10.4 $ (12.8) $ 32.5
========= ========= ========= ========= =========
42
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within the
industry significantly impact our earnings and operating cash flows. Cash flow
from operations is considered our primary source of liquidity. Changes in TiO2
pricing, production volume and customer demand, among other things, could
significantly affect our liquidity. Trends in cash flows from operating
activities (excluding the impact of significant asset dispositions and relative
changes in assets and liabilities) are generally similar to trends in our
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, deferred income taxes and non-cash
interest expense. Non-cash interest expense consists of amortization of deferred
financing costs.
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 14
to our consolidated financial statements.
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 flows from operating activities increased from $29.3 million provided in
the first six months of 2003 to $67.5 million of cash provided by operating
activities in the first six months of 2004. This $38.2 million increase was due
primarily to the net effects of (i) higher net income of $218.8 million, (ii)
higher depreciation expense of $2.5 million, (iii) lower deferred income taxes
of $250.9 million, (iv) higher net distributions from the TiO2 manufacturing
joint venture of $8.3 million in the first half of 2004 compared to an $800,000
distribution in the first half of 2003, (v) a lower amount of net cash used in
relative changes in our inventories, receivables, payables and accruals and
accounts with affiliates of $12.4 million in the first half of 2004 as compared
to the first half of 2003 and (vi) lower cash paid for income taxes of $29.7
million.
Cash flows from operating activities decreased from $111.1 million in 2002 to
$107.7 million in 2003. This $3.4 million decrease was due primarily to the net
effects of (i) higher net income of $21.3 million, (ii) higher depreciation
expense of $7.3 million, (iii) lower net distributions from the TiO2
manufacturing joint venture of $875,000 in 2003 compared to $8.0 million in
2002, (iv) a lower amount of net cash generated from relative changes in our
inventories, receivables, payables and accruals and accounts with affiliates of
$30.7 million in 2003 as compared to 2002 and (v) lower cash paid for income
taxes of $15.8 million.
Cash flows from operating activities decreased from $135.7 million in 2001 to
$111.1 million in 2002. This $24.6 million decrease was due primarily to the net
effects of (i) lower net income of $88.2 million, (ii) higher depreciation
expense of $3.2 million, (iii) insurance recoveries, net of $17.5 million in
2001 as compared to nil in 2002, (iv) lower distributions from the manufacturing
43
joint venture of $3.4 million in 2002 and (v) a higher amount of net cash
generated from relative changes in our inventories, receivables, payables and
accruals and accounts with affiliates of $22.9 million in 2002 as compared to
2001.
Relative changes in accounts receivable are affected by, among other things, the
timing of sales and the collection of the resulting receivable. 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 volumes and sales
volumes.
Investing activities
Our capital expenditures were $13.8 million and $10.8 million in the first six
months of 2003 and 2004, respectively.
Our capital expenditures were $53.7 million, $32.6 million and $35.2 million in
2001, 2002 and 2003, respectively. Capital expenditures in 2001 and 2002
included an aggregate of $22.3 million and $3.1 million, respectively, for the
rebuilding of our Leverkusen, Germany sulfate plant. In 2001, we received $23.4
million of insurance proceeds for property damage resulting from the Leverkusen
fire and paid $3.2 million of expenses related to repairs and clean-up costs.
Our capital expenditures during the past three years include an aggregate of
approximately $15.4 million ($5.4 million in 2003) for our ongoing environmental
protection and compliance programs. Our estimated 2004 capital expenditures are
$38 million and include approximately $5 million in the area of environmental
protection and compliance.
Financing activities
In the first quarter of 2004, KII's operating subsidiaries in Germany, Belgium
and Norway borrowed a net (euro)26 million ($32 million when borrowed) under
their three-year (euro)80 million secured revolving credit facility at an
interest rate of 3.8%. Such amounts were repaid in the second quarter of 2004.
At June 30, 2004, unused credit available under our existing credit facilities
approximated $150 million, which was comprised of: $95 million under our
European revolving credit facility, $11 million under our Canadian credit
facility, $40 million under our U.S. credit facility and $4 million under other
non-US facilities.
In March 2003, KII's operating subsidiaries in Germany, Belgium and Norway
borrowed (euro)15 million ($16.1 million when borrowed), in April 2003, repaid
NOK 80 million ($11.0 million when repaid) and in the third quarter of 2003,
repaid (euro)30.0 million ($33.9 million when repaid) under the European
revolving credit facility. See note 8 to our consolidated financial statements.
In March 2002, we redeemed $25 million principal amount of our 11.75% senior
secured notes using available cash on hand, and in June 2002 we redeemed the
remaining $169 million principal amount of such notes using a portion of the
proceeds from the June 2002 issuance of the (euro)285 million principal amount
of the KII 8.875% senior secured notes ($280 million when issued). Also in June
2002, KII's operating subsidiaries in Germany, Belgium and Norway 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 repaid). In 2002, we repaid a net euro-equivalent
12.7 million ($12.4 million when repaid) and 1.7 million ($1.6 million when
repaid), respectively, of our European revolving credit facility.
In September 2002 our U.S. operating subsidiaries entered into a three-year $50
million asset-based revolving credit facility. As of December 31, 2003, no
borrowings were outstanding under this facility and borrowing availability was
approximately $39 million. See note 8 to our consolidated financial statements.
44
Deferred financing costs of $10.7 million for the senior secured notes, the
European revolving credit facility and the U.S. revolving credit facility are
being amortized over the life of the respective agreements and are included in
other noncurrent assets as of December 31, 2003.
In 2001, we repaid (euro)7.6 million ($6.5 million when paid) and (euro)16.4
million ($14.9 million when paid), respectively, of our euro-denominated
short-term debt with excess cash flow from operations.
Cash dividends paid during 2001, 2002 and 2003 totaled $30.5 million, $120.1
million and $7.0 million, respectively. In each of the first and second quarters
of 2004, we paid a regular quarterly dividend to stockholders of $.25 per share,
aggregating $24.5 million. The declaration and payment of future dividends is
discretionary, and the amount, if any, will be dependent upon our results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by our board of directors. Certain of our subsidiaries are
parties to credit agreements that, among other things, limited their ability to
pay dividends. See note 8 to our consolidated financial statements.`
Cash flows related to capital contributions and other transactions with
affiliates aggregated net cash outflows of $47.5 million and $73.7 million in
2001 and 2002, respectively and a net cash inflow of $19.7 million in 2003. Such
amounts related principally to loans that we made to affiliates (such notes
receivable from affiliates being reported as reductions to our stockholders'
equity, and therefore considered financing cash flows). Additionally, settlement
of the above-mentioned notes receivable from affiliates was not then currently
contemplated in the foreseeable future. In 2002, we transferred certain such
notes receivable from affiliates to NL, and as a result, we no longer report
cash flows related to certain such notes receivable from affiliates. Such net
cash flows in 2002 also included $9.2 million related to our purchase of EWI RE,
Inc. See note 1 to our consolidated financial statements.
Provisions contained in certain of our credit agreements could result in the
acceleration of the applicable indebtedness prior to its stated maturity for
reasons other than defaults from failing to comply with typical financial
covenants. For example, certain credit agreements allow the lender to accelerate
the maturity of the indebtedness upon a change of control (as defined) of the
borrower. In addition, certain credit agreements could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside the ordinary course of business.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At June 30, 2004, we and our subsidiaries had (i) current cash and cash
equivalents aggregating $88.4 million ($37.1 million held by non-U.S.
subsidiaries), (ii) current restricted cash equivalents of $1.0 million and
(iii) noncurrent restricted marketable debt securities of $2.5 million.
At June 30, 2004, our outstanding debt was comprised of (i) $346.4 million
related to KII's senior secured notes and (ii) approximately $.4 million of
other indebtedness. In addition, we had a $200 million long-term note payable to
NL due in 2010.
At June 30, 2004, KII had approximately $220 million available for payment of
dividends and other restricted payments as defined in the notes indenture.
At June 30, 2004, we had complied with all financial covenants governing our
debt agreements.
Pricing within the TiO2 industry is cyclical, and changes in industry economic
conditions significantly impact our earnings and operating cash flows. Cash
flows from operations is considered the primary source of our liquidity. Changes
in TiO2 pricing, production volumes and customer demand, among other things,
could significantly affect our liquidity.
See note 13 to our consolidated financial statements for certain income tax
examinations currently underway with respect to certain of our income tax
45
returns in various U.S. and non-U.S. jurisdictions, and see note 17 to our
consolidated financial statements with respect to certain legal proceedings with
respect to us.
We have substantial operations located outside the United States for which the
functional currency is not the U.S. dollar. As a result, the reported amounts of
our assets and liabilities related to our non-U.S. operations, and therefore our
consolidated net assets, will fluctuate based upon changes in currency exchange
rates.
Based upon our expectations for the TiO2 industry and anticipated demands on our
cash resources as discussed herein, we expect to have sufficient liquidity to
meet our near-term obligations including operations, capital expenditures, debt
service and current dividend policy. To the extent that actual developments
differ from our expectations, our liquidity could be adversely affected.
Legal proceedings and environmental matters
See note 17 to our consolidated financial statements for a description of
certain legal proceedings and environmental matters with respect to us.
Foreign operations
As discussed above, we have 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 our assets and liabilities related to our non-U.S.
operations, and therefore our consolidated net assets, will fluctuate based upon
changes in currency exchange rates. As of January 1, 2001, the functional
currency of our German, Belgian, Dutch and French operations have been converted
to the euro from their respective national currencies. At December 31, 2003, we
had substantial net assets denominated in the euro, Canadian dollar, Norwegian
kroner and United Kingdom pound sterling.
Off balance sheet arrangements
Other than operating lease commitments disclosed in note 17 to our consolidated
financial statements, we are not party to any material off-balance sheet
financing arrangements. As of December 31, 2003, the aggregate amount of future
minimum payments of such operating leases was $29.4 million.
Other
We periodically evaluate our liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, our dividend policy, our debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, we in the past have sought, and in the future may seek, to reduce,
refinance, repurchase or restructure indebtedness; raise additional capital;
issue additional securities; repurchase shares of our common stock; modify our
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets; or take a combination of such steps or other steps to manage
our liquidity and capital resources. In the normal course of our business, we
may review opportunities for 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, we may consider using available cash, issuing
equity securities or increasing our indebtedness to the extent permitted by the
agreements governing our existing debt. See note 8 to our consolidated financial
statements.
Summary of debt and other contractual commitments
As more fully described in the notes to our consolidated financial statements,
we are a party to various debt, lease and other agreements, which contractually
and unconditionally commit us to pay certain amounts in the future. See notes 8
46
and 17 to our consolidated financial statements. The following table summarizes
such contractual commitments of us and our consolidated subsidiaries as of
December 31, 2003 that are unconditional both in terms of timing and amount by
the type and date of payment.
Payment due date
-----------------------------------------------------------------
2009 and
Contractual commitment 2004 2005/2006 2007/2008 after Total
---------- ----------- ----------- ------------ -----------
(In millions)
Third party indebtedness $ .3 $ .3 $ - $ 356.1 $ 356.7
Operating leases 3.3 3.7 2.5 19.9 29.4
Fixed asset acquisitions 9.6 - - - 9.6
Long term supply contracts for the purchase
of TiO2 feedstock 146.1 265.8 135.0 - 546.9
Asset retirement obligations and other - - - 5.8 5.8
---------- ---------- ---------- ---------- ----------
$ 159.3 $ 269.8 $ 137.5 $ 381.8 $ 948.4
========== ========== ========== ========== ==========
The above table does not reflect any amounts that we might pay to fund our
defined benefit pension plans and OPEB plans, as the timing and amount of any
such future fundings are unknown and dependent on, among other things, the
future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
We are exposed to market risk from changes in foreign currency exchange rates,
interest rates and equity security prices. In the past, we have periodically
entered into interest rate swaps or other types of contracts in order to manage
a portion of our interest rate market risk. Otherwise, we do not generally enter
into forward or option contracts to manage such market risks, nor do we enter
into any such contract or other type of derivative instrument for trading or
speculative purposes. Other than as described below, we were not a party to any
material forward or derivative option contract related to foreign exchange
rates, interest rates or equity security prices at December 31, 2002 and 2003
and June 30, 2004. See notes 1 and 18 to our consolidated financial statements.
Interest rates
We are exposed to market risk from changes in interest rates, primarily related
to indebtedness. At December 31, 2003, substantially all of our aggregate
indebtedness was comprised of fixed-rate instruments (2002 - 92% of fixed-rate
instruments and 8% of variable rate borrowings). The large percentage of
fixed-rate debt instruments minimizes earnings volatility that would result from
changes in interest rates. The following table presents principal amounts and
weighted average interest rates for our aggregate outstanding indebtedness at
December 31, 2003. At December 31, 2002 and 2003, all outstanding fixed-rate
indebtedness was denominated in U.S. dollars or the euro, and the outstanding
variable rate borrowings were denominated in U.S. dollars, the euro or the
Norwegian kroner. Information shown below for such foreign currency denominated
indebtedness is presented in its U.S. dollar equivalent at December 31, 2003
using exchange rates of 1.25 U.S. dollars per euro. Certain Norwegian kroner
denominated capital leases totaling $700,000 in 2003 have been excluded from the
table below.
47
Amount
-----------------------------
Carrying value Fair value Interest rate Maturity date
-------------- ---------- ------------- -------------
(In millions)
Fixed rate indebtedness:
Euro denominated KII senior secured notes $ 356.1 $ 356.1 8.9% 2009
========== ==========
At December 31, 2002, fixed rate indebtedness aggregated $296.9 million (fair
value - $299.9 million) with a weighted-average interest rate of 8.9%; and
variable rate indebtedness at such date aggregated $27.1 million, which
approximates fair value, with a weighted-average interest rate of 6.5%. All of
such fixed rate indebtedness was denominated in euros. Such variable rate
indebtedness was denominated in the euro (58% of the total) or the Norwegian
kroner (42%).
Foreign currency exchange rates
We are exposed to market risk arising from changes in foreign currency exchange
rates as a result of manufacturing and selling our products worldwide. Earnings
are primarily affected by fluctuations in the value of the U.S. dollar relative
to the euro, the Canadian dollar, the Norwegian kroner and the United Kingdom
pound sterling.
As described above, at December 31, 2003, we had the equivalent of $356.1
million of outstanding euro-denominated indebtedness (2002 - the equivalent of
$312.5 million of euro-denominated indebtedness and $11.5 million of Norwegian
kroner-denominated indebtedness). The potential increase in the U.S. dollar
equivalent of the principal amount outstanding resulting from a hypothetical 10%
adverse change in exchange rates at such date would be approximately $35.6
million at December 31, 2003 (2002 - $32.4 million).
At December 31, 2003, we had entered into a short-term currency forward contract
maturing on January 2, 2004 to exchange an aggregate of (euro)40 million into
U.S. dollars at an exchange rate of U.S. $1.25 per euro. Such contract was
entered into in conjunction with the January 2004 payment of an intercompany
dividend from one of our European subsidiaries. At December 31, 2003, the actual
exchange rate was U.S. $1.25 per euro. The estimated fair value of such foreign
currency forward contract was not material at December 31, 2003.
Other
We believe there may be a certain amount of incompleteness in the sensitivity
analyses presented above. For example, the hypothetical effect of changes in
exchange rates discussed above ignores the potential effect on other variables
which affect our results of operations and cash flows, such as demand for our
products, sales volumes and selling prices and operating expenses. Accordingly,
the amounts presented above are not necessarily an accurate reflection of the
potential losses we would incur assuming the hypothetical changes in exchange
rates were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk, which assume hypothetical changes in
currency exchange rates. Actual future market conditions will likely differ
materially from such assumptions. Accordingly, such forward-looking statements
should not be considered to be projections by us of future events, gains or
losses.
NON-GAAP FINANCIAL MEASURES
In an effort to provide investors with additional information regarding our
results of operations as determined by GAAP, we have disclosed certain non-GAAP
information that we believe provides useful information to investors.
48
We disclose percentage changes in our average TiO2 selling prices in billing
currencies, which excludes the effects of foreign currency translation. We
believe that disclosure of such percentage changes allows investors to analyze
such changes without the impact of changes in foreign currency exchange rates,
thereby facilitating period-to-period comparisons of the relative changes in
average selling prices in the actual various billing currencies. 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.
We exclude nonoperating interest income, insurance recoveries, net and currency
transaction gain from our definition of adjusted EBITDA because they are not
related to our TiO2 operations and we believe including such items in our
adjusted EBITDA would not be representative of our ongoing operations. We have
included adjusted EBITDA in this prospectus because our management considers it
an important supplemental measure of our performance and believes that it is
frequently used by securities analysts, investors and other interested parties
in the evaluation of companies in our industry. Management believes adjusted
EBITDA is a useful tool for measuring our ability to meet our future debt
service, capital expenditures and working capital requirements. In addition, we
utilize adjusted EBITDA in evaluating acquisition targets. Adjusted EBITDA is
not a substitute for the GAAP measures of net income (a performance measure) or
cash flows from operating activities (a liquidity measure), and it is not
necessarily a measure of our ability to fund our cash needs. In addition, it
should be noted that companies calculate adjusted EBITDA differently and,
therefore, adjusted EBITDA as presented in this prospectus may not be comparable
to adjusted EBITDA reported by other companies. Adjusted EBITDA has material
limitations as a performance measure because it excludes, among other things,
interest expense, depreciation and amortization expense and income tax expense,
each of which are a necessary element of our costs and operations. Adjusted
EBITDA has material limitations as a liquidity measure because it excludes,
among other things, changes in assets and liabilities that are included in the
calculation of cash flows from operating activities. Therefore, you should not
consider adjusted EBITDA in isolation, or as a substitute of our financial
performance or liquidity as calculated in accordance with GAAP. We compensate
for these limitations by relying primarily on our GAAP results and by using
adjusted EBITDA only supplementally.
49
Industry overview
TITANIUM DIOXIDE OVERVIEW
Titanium dioxide, or TiO2, an inorganic chemical, is the largest commercially
used whitening pigment by volume. Titanium dioxide derives its value from its
whitening properties and opacifying ability, commonly referred to as hiding
power. As a result of titanium dioxide's high refractive index rating, it can
provide more hiding power than any other white pigment. In addition, TiO2
pigments demonstrate excellent resistance to chemical attack, good thermal
stability and resistance to ultraviolet degradation. TiO2 is supplied to
end-users in either a powder or slurry form.
The global market for TiO2 in 2003 was estimated to be in excess of $8 billion.
Mature industries in the developed world are the primary consumers of TiO2
products. These industries include coatings (approximately 58% of industry sales
volume), plastics (approximately 23%) and paper (approximately 11%). Demand for
TiO2 has generally been driven by worldwide gross domestic product and has
generally increased with rising standards of living in various regions of the
world. According to industry estimates, TiO2 consumption has grown at a compound
annual growth rate of approximately 2.7% since 1990.
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. In 2003, North America and Western
Europe accounted for approximately 31% and 27% of global TiO2 consumption,
respectively. Significant markets for TiO2 could emerge in Eastern Europe, the
Far East and China as economies in these regions develop and quality-of-life
products, including TiO2, experience greater demand.
Pricing within the global TiO2 industry is cyclical and can be significantly
impacted by changes in economic conditions, especially in industrialized
nations. For example, over the past ten years, prices declined from 1994 to
1997, increased from 1997 to 2000, decreased from 2000 until mid-2002, increased
from mid-2002 until early 2003, remained flat or declined from early 2003 until
mid-2004 and began to rise late in the second quarter of 2004.
We, along with the other top four worldwide producers of TiO2, currently account
for approximately 76% of total worldwide capacity. The following charts show our
estimates of European and North American industry production capacity in 2003:
[Two pie charts. The first pie chart shows our estimate of 2003 production
capacity in Europe, consisting of Huntsman (27%), Kronos (20%), Millennium
(17%), Kerr-McGee (11%) and Other (25%). The second pie chart shows our estimate
of 2003 production capacity in North America, consisting of DuPont (53%),
Kerr-McGee (19%), Millennium (15%), Kronos (9%) and Huntsman (4%).]
We believe that there are no effective substitutes for TiO2. Extenders such as
kaolin clays, calcium carbonate and polymeric opacifiers are used in a number of
end-use markets as white pigments, however, the opacity in these products is not
able to duplicate the performance characteristics of TiO2 and we believe these
products are unlikely to replace TiO2.
50
RECENT TiO2 INDUSTRY DEVELOPMENTS
We believe that TiO2 industry dynamics are improving due to strong demand and
higher selling prices. Several titanium dioxide manufacturers, including Kronos,
have announced further worldwide price increases that are targeted to be
implemented in the fourth quarter of 2004 and the first quarter of 2005. Limited
new capacity, higher demand and improving pricing should result in improved
operating rates and product margins for TiO2 producers.
In recent years, global production capacity for TiO2 has grown modestly due
primarily to debottlenecking existing chloride production facilities. During
this time, sulfate process production capacity has remained relatively stable.
However, in the past year, Huntsman, Millennium Chemicals, Inc. ("Millennium")
and Kerr McGee Corporation ("Kerr McGee") have announced the idling or shut down
of an aggregate of approximately 135,000 metric tons of sulfate production
capacity by early 2005.
MANUFACTURING PROCESS
The two commercial processes used to produce TiO2 pigments are the chloride
process and the sulfate process. The chloride process utilizes a newer
technology and currently accounts for substantially all of the operating
capacity in North America and approximately two-thirds of all of the capacity
worldwide. The vast majority of the TiO2 production capacity built since the
late 1980s has utilized the chloride process. The sulfate process is an older
technology and until the 1990s accounted for most of the TiO2 capacity in the
world.
We believe that the chloride process has several advantages over the sulfate
process. It recycles chlorine back to the production process, it produces
significantly less waste than the sulfate process, which produces as much as ten
times the waste per ton of product as does the chloride process, and is less
energy and labor intensive. Chloride pigments are preferred to sulfate-based
pigments in a wide variety of products due to technical and commercial
considerations. However, certain end-use applications prefer sulfate process
TiO2, and the anatase form of TiO2 can only be produced through the sulfate
process.
Chloride Process. The feedstocks that are used in this process include titanium
slag, synthetic rutile, natural rutile, or ilmenite ores. The chloride process
is a continuous process, whereby the feedstock is chlorinated in the presence of
carbon to produce titanium tetrachloride (TiCl4) in a fluid-bed reactor. The
TiCl4 is extracted from other chlorinated products and purified by distillation.
It is then oxidized in the vapor phase to produce both recyclable chlorine and
TiO2 for finishing treatment. The technology used in the chloride manufacturing
process is closely held by the major global TiO2 manufacturers.
Sulfate Process. The feedstocks that are used in this process include ilmenite
ore or titanium slag. The sulfate process is a batch process, whereby the
ilmenite or slag is digested with sulfuric acid to form a mixture of soluble
sulfates. After filtration and concentration, the soluble sulfate is hydrolyzed
to an insoluble hydrous TiO2 that precipitates out after seeding crystals are
added to the solution. The precipitate is collected, filtered, bleached, washed
and calcined to yield a TiO2 ready for finishing treatment.
Crystal Forms. Two basic crystal forms of TiO2 are produced commercially -
rutile and anatase. Both the chloride and sulfate production processes produce
rutile TiO2. Chloride process rutile is preferred for the majority of the
customer applications. From a technical standpoint, chloride process rutile TiO2
has a bluer undertone and higher durability than sulfate process rutile TiO2.
Although many end-use applications can use either form of rutile TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastic, the
two largest end-use applications. Anatase TiO2, which is produced only through
the sulfate production process, represents a much smaller percentage of annual
global TiO2 production (approximately 10%) and is preferred for use in selected
paper, ceramics, rubber tires, man-made fibers, food and cosmetics.
51
Business overview
We are one of the leading global producers and marketers of value-added TiO2
pigments. Our TiO2 products are sold under the widely recognized Kronos(R) brand
name and are utilized in a diverse range of customer applications and end-use
markets, including coatings, plastics, paper and other industrial and consumer
markets. Our broad range of over 40 TiO2 pigment products are "quality-of-life"
products that significantly enhance the key characteristics of our customers'
end-products by imparting whiteness, brightness and opacity to the end-products.
We and our predecessors have produced and marketed TiO2 products for over 80
years, and we are the only leading TiO2 producer committed to producing TiO2
pigments and related products as our sole business. Our focused management team
and business strategy have enabled us to develop considerable expertise and
efficiency in the manufacture, sale and service of our products.
We serve over 4,000 customers located in over 100 countries. We estimate our
global market share based on 2003 sales volume at 12%. In Europe and North
America, our primary markets, we estimate our market share based on 2003 sales
volume at 18% and 15%, respectively. We believe that our strong competitive
position is the result of our industry experience, reputation for high quality
products, outstanding process technology, highly recognized brand name and
experienced management team. In addition, our high level of technical service
and ability to satisfy our customers' specific technical needs allow us to
maintain strong relationships with our customers.
We conduct our operations through six strategically located manufacturing
facilities, four in Europe and two in North America, which includes our 50%
interest in a joint venture in the United States. We believe our production
processes are among the most efficient in the industry, which results from our
high operating rates, proprietary chloride process technology, technical
expertise, ongoing debottlenecking programs and co-product business. In
addition, we believe that we have a significant competitive advantage by
operating the only ilmenite ore mine in Western Europe, which supplies the key
raw material for all of our European sulfate operations and also produces ore
for sale to third party customers.
Our consolidated results for the year ended December 31, 2003 included net sales
of $1,008.2 million, net income of $87.5 million and adjusted EBITDA of $171.9
million. Our consolidated results for the six months ended June 30, 2004
included net sales of $559.1 million, net income of $277.3 million and adjusted
EBITDA of $86.5 million, compared with net sales of $519.6 million, net income
of $58.5 million and adjusted EBITDA of $87.0 million for the six months ended
June 30, 2003. Please see "Selected historical consolidated financial and
operating data" for a reconciliation of adjusted EBITDA to GAAP financial
measure. In 2003, we had record TiO2 production of 476,000 metric tons,
resulting in almost full production capacity utilization. For the six months
ended June 30, 2004, our record TiO2 production totaled 240,000 metric tons, as
compared to 237,000 metric tons in the six months ended June 30, 2003.
52
The following charts show the approximate percentages of our 2003 sales volume
by geographic region and end use:
[Two pie charts. The first pie chart shows 2003 Sales Volume Percentages by
Geographic Region, consisting of Europe (50%), North America (40%) and Other
(10%). The second pie chart shows 2003 Sales Volume Percentages by End Use,
consisting of Coatings (49%), Plastics (36%), Paper (6%) and Other (9%).]
OUR COMPETITIVE STRENGTHS
Leading market positions with singular focus on TiO2. Based on production
capacity, we are the second and fourth largest producer of TiO2 in Europe and
North America, respectively. We believe that we have leading market positions
based on sales volumes in the German, Scandinavian, Benelux, Austrian, Swiss and
Canadian markets. The production and sale of TiO2 is our core business, a
business our predecessors and we have been operating for over 80 years. We
believe this singular focus combined with our long history and experience in the
industry, has helped to make our operations among the most highly regarded and
efficient in the industry, which is reflected in our strong operating results
relative to most of our major competitors.
Strong customer relationships across diverse end-use markets. We sell our
products to over 4,000 customers across a diverse range of end-use markets and
market segments in over 100 countries worldwide. Our top ten customers
represented approximately 25% of net sales in 2003, with our largest customer
accounting for less than 10% of our 2003 net sales. We have strong sales
penetration in the two largest TiO2 end-use markets, coatings and plastics, in
addition to sales into a diverse range of smaller end-use markets and market
segments. We sell the majority of our products through a direct sales force that
we believe has helped build customer loyalty and strengthen our competitive
position. Our business is also geographically diversified, with manufacturing
operations in North America and Western Europe, and has a worldwide
distribution, sales and technical support network. We believe this
diversification minimizes the potential impact of volatility from any one
customer, industry or geographic region.
Broad product offering, with favorable product mix. We believe we have one of
the broadest product offerings in the TiO2 industry. We offer over 40 different
TiO2 grades, including rutile, anatase and non-pigmentary grades. We manufacture
several key grades that we believe possess superior performance characteristics
relative to the products of most of our competitors. For example, we have a
significant share of the European PVC profile market, where we supply a TiO2
product grade that has more than 30 years of proven performance. Other TiO2
applications that we believe provide us with an advantage over many of our
competitors include chloride grades for engineering plastics and paper laminate
applications and sulfate grades for food, pharmaceutical, cosmetics, textile
fiber and dry cell battery applications. In addition, in 2003, we generated 36%
of our Ti02 sales volumes from the faster-growing plastics end-use market from
which we realize higher margins then the coatings end-use market.
High manufacturing efficiency enhanced by complementary businesses. We believe
that our manufacturing facilities are among the most efficient in the industry.
53
All of our manufacturing facilities are ISO 9001 or 9002 certified and our
chloride production facilities share essentially the same proprietary
technology, equipment and process controls systems. We have achieved operating
efficiencies through the standardization of equipment across our manufacturing
facilities, aggressive training of employees, innovative technology changes, and
processing by-products to sell as co-products into the marketplace. Due in part
to ongoing debottlenecking programs, our production capacity has increased by
approximately 30% over the past ten years with only moderate capital investment.
In addition, our research and development and process technology efforts focus
on improving production processes and yields and product grades and quality.
We operate three additional businesses that are related to our TiO2 business and
further enhance our operational efficiencies. We operate an ilmenite mine in
Norway that supplies all of the feedstock for our European sulfate operations,
which reduces our production costs at these plants, and also sells ilmenite to
third parties. We also manufacture and sell iron-based co-product chemicals in
Europe, which are by-products and processed by-products of the TiO2 pigment
production process. By efficiently utilizing by-products, our co-products
business provides important cost savings to our production process. We also
manufacture and sell titanium chemicals. This business absorbs costs that would
otherwise be incurred by our TiO2 operations and contributes to our overall
profitability. Our ilmenite mine, chemicals co-product and titanium chemical
businesses represented approximately 10% of our 2003 net sales.
History of positive cash flow generation through industry cycles. Through the
recent economic cycle and through periods of challenging industry fundamentals,
we have generated positive cash flow from operating activities for 11
consecutive years, including years in which we had a significantly higher level
of outstanding indebtedness than we currently have. Through ongoing process
improvements we have reduced labor and other manufacturing costs and have added
production capacity with moderate capital investment, resulting in a reduction
in fixed costs and a significant improvement in margins. We continue to focus on
increasing manufacturing efficiencies through selected capital projects, process
improvements and best practices in order to lower unit costs and improve
margins. We also seek to increase margins by focusing our sales efforts on those
end-use and geographic markets where we believe we can realize relatively higher
selling prices than in alternate markets. We maintain rigorous financial
discipline in investing capital in our core business.
Significant barriers to entry. Chloride process technologies, including our
proprietary chloride technology, are held by a small number of principal TiO2
producers. The closely held nature of this technology poses a significant
barrier to entry for new entrants into the TiO2 industry because the chloride
process is the primary TiO2 production process in the industry, representing
approximately two-thirds of all TiO2 produced annually and approximately 72% of
our TiO2 production in 2003. In addition, adding new TiO2 production capacity by
constructing greenfield plants requires significant capital expenditures and
generally requires lead times of between three to five years before initial
production, which pose significant barriers to entry in the industry.
Experienced operating management team. We are managed by an experienced and
motivated group of senior operating management, each of whom has over 15 years
of experience in the chemical industry and an average of over 15 years of
experience with us. Our senior operating management team is responsible for
developing and executing our strategy, which has generated a track record of
production growth, high operating rates, cost reductions, steady sales volume
growth, strong customer relationships and significant cash flows. In addition to
our strong senior operating management team, we have an experienced group of
employees who work to maintain our market position by developing and maintaining
customer relationships, expanding our product offerings and implementing
innovative technological enhancements.
54
OUR BUSINESS STRATEGY
Leverage our global leadership position. We plan to capitalize on our strong
market position and drive profitable growth by enhancing existing customer
relationships, providing high quality products and offering technical expertise
to our customers. We also intend to improve our competitive position by
developing new products and applications to increase sales volumes and drive
higher margins. As an example, we are currently developing a new universal
coatings grade that will have improved performance in certain coatings
applications, from interior water-based house paints to high gloss solvent-based
industrial/OEM applications. We are also developing a new paper laminate grade
that will provide greater adhesion to the paper fiber resulting in improved
opacity and efficiency. We believe these developments will help to maintain or
improve our market position.
Pursue attractive market opportunities. Our broad product offering allows us to
participate in a variety of end-use markets, and pursue those market segments
that have attractive growth prospects and profit margins. Our operations in
Germany position us to participate in markets in Eastern Europe, which we expect
to provide attractive growth opportunities as they develop. We also seek to
increase margins by focusing our sales efforts on those end-use and geographic
markets where we believe we can realize relatively higher selling prices than in
alternate markets.
Continue to enhance our operating efficiencies and improve our margins. We are
continually evaluating our business to identify opportunities to increase
operational efficiency. We intend to continue focusing on increasing
manufacturing efficiencies through selected capital projects, process
improvements and best practices in order to lower unit costs and improve our
margins. In addition, we intend to continue to pursue debottlenecking activities
at our manufacturing facilities in order to achieve incremental increases in
production capacity.
Pursue a disciplined acquisition strategy. We plan to evaluate and pursue new
opportunities that represent a logical fit with our existing business platform
and to seek acquisition opportunities that enhance our product portfolio, expand
our market presence or provide operational synergies and cost savings.
PRODUCTS AND END-USE MARKETS
Our titanium dioxide pigments are used for imparting whiteness, brightness and
opacity to a wide range of end-use products, including paints, plastics, paper,
ink, textiles, ceramics, food and cosmetics. We offer our customers a broad
portfolio of products that includes over 40 different TiO2 pigment grades.
Sales of our core TiO2 pigments represented over 90% of our net sales in 2003.
We and our agents and distributors primarily sell and provide technical services
for our products in three major end-use markets: coatings, plastics and paper.
In 2003, our sales volumes in each of these three end-use markets were 49%, 36%
and 6%, respectively.
Some of the principal applications for our products include the following:
TiO2 for coatings. Our TiO2 is used to provide opacity, durability, tinting
strength and brightness in industrial coatings, as well as for coatings for home
interiors and exteriors, automobiles, aircraft, machines, appliances, traffic
paint and other special purpose coatings. The amount of TiO2 used in coatings
varies widely depending on the opacity, color and quality desired. Generally,
the higher the opacity requirement of the coating, the greater the TiO2 content.
TiO2 for plastics. We produce TiO2 pigments that improve the optical and
physical properties in plastics, including whiteness and opacity. TiO2 is used
to provide opacity in items such as containers and packaging materials, and
vinyl products such as windows, door profiles and siding. TiO2 also generally
55
provides hiding power, neutral undertone, brightness and surface durability for
housewares, appliances, toys, computer cases and food packages. TiO2's high
brightness, along with its opacity, is used in some engineering plastics to help
mask their undesirable natural color. TiO2 is also used in masterbatch, which is
a concentrate of TiO2 and other additives and is one of the largest uses for
TiO2 in the plastics end-use market. The TiO2 is dispersed at high
concentrations into a plastic resin and is then used by manufacturers of plastic
containers, bottles and packaging and agricultural films.
TiO2 for paper. Our TiO2 is used in the production of several types of paper,
including laminate (decorative) paper, filled paper and coated paper, to provide
whiteness, brightness, opacity and color stability. Although we sell our TiO2 to
all segments of the paper end-use market, our primary focus is on the TiO2
grades used in paper laminates, where several layers of paper are laminated
together using melamine resin under high temperature and pressure. The top layer
of paper contains as much as 50% TiO2 and is the layer that is printed with
decorative patterns. Paper laminates are used to replace materials such as wood
and tile for such applications as counter tops, furniture and wallboard. TiO2 is
beneficial in these applications because it assists in preventing the material
from fading or changing color after prolonged exposure to sunlight and other
weathering agents.
TiO2 for other applications. We produce TiO2 to improve the opacity and hiding
power of printing inks. TiO2 allows inks to achieve very high print quality
while not interfering with the technical requirements of printing machinery,
including low abrasion, high printing speed and high temperatures. Our TiO2 is
also used in textile applications. TiO2 functions as an opacifying and
delustering agent. In man-made fibers such as rayon and polyester, TiO2 corrects
an otherwise undesirable glossy and translucent appearance. Without the presence
of TiO2, these materials would be unsuitable for use in many textile
applications.
We produce high purity sulfate process anatase TiO2 used to provide opacity,
whiteness and brightness in a variety of cosmetic and personal care products,
such as skin cream, lipstick, eye shadow and toothpaste. Our TiO2 is also found
in food products, such as candy and confectionaries, and in pet foods where it
is used to obtain uniformity of color and appearance. In pharmaceuticals, our
TiO2 is used commonly as a colorant in pill and capsule coatings as well as in
liquid medicines to provide uniformity of color and appearance. Kronos purified
anatase grades meet the applicable requirements of the CTFA (Cosmetics,
Toiletries and Fragrances Association), USP and BP (United States Pharmacopoeia
and British Pharmacopoeia) and the FDA (United States Food and Drug
Administration).
Related Businesses. Our TiO2 business is enhanced by the following three
complementary businesses, which comprised approximately 10% of our net sales in
2003:
>> We operate an ilmenite mine in Norway pursuant to a governmental concession
with an unlimited term. Ilmenite is a raw material used directly as a
feedstock by some sulfate-process TiO2 plants, including all of our
European sulfate-process plants. The mine has estimated ilmenite reserves
that are expected to last at least 20 years. Approximately 5% of our net
sales in 2003 represented ilmenite sales to third-party customers.
>> We manufacture and sell iron-based chemicals, which are by-products and
processed by-products of the TiO2 pigment production process. Our
co-product chemicals are marketed through our Ecochem division, and are
used primarily as treatment and conditioning agents for industrial
effluents and municipal wastewater as well as in the manufacture of iron
pigments, cement and agricultural products. Sales of co-product chemicals
were approximately 3% of our net sales in 2003. We believe the emerging use
of co-products in Europe in cement, driven by European Union regulations,
may increase demand for these products in the future. While sales of
co-products represent a relatively small percentage of our overall net
sales, they provide important cost savings to our production process by
efficiently utilizing by-products that would otherwise result in our
incurring disposal costs.
>> Titanium chemical products, titanium oxychloride and titanyl sulfate, are
side-stream products from the production of titanium dioxide. We
manufacture and sell these specialty products in Europe and North America.
56
Titanium oxychloride is used in specialty applications in the formulation
of pearlescent pigments, production of electroceramic capacitors for cell
phones and other electronic devices. Titanyl sulfate products are used
primarily in pearlescent pigments.
We produce titanium oxychloride at our Belgium plant and are building a new
7,000 metric ton plant in Canada that will double our oxychloride capacity
when operations commence, which we currently expect to occur in December
2004. We also produce titanyl sulfate at our Canadian plant. Both titanium
oxychloride and sulfate solutions are considered specialty chemicals. This
business absorbs costs that would otherwise be incurred by our TiO2
operations and contributes to our overall profitability. Sales of these
products represented approximately 2% of our net sales in 2003.
MANUFACTURING PROCESS, OPERATIONS AND PROPERTIES
We manufacture TiO2 using both the chloride process and the sulfate process.
Approximately 72% of our current production capacity is based on the chloride
process. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. The chloride process typically has lower manufacturing
costs than the sulfate process due to higher yield and production of less waste
and lower energy requirements and labor costs. Because much of the chlorine is
recycled and feedstock containing a higher titanium content is used, the
chloride process produces less waste than the sulfate process. The sulfate
process is a batch chemical process that uses sulfuric acid to extract TiO2.
Sulfate technology can produce 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.
We currently operate four TiO2 plants in Europe (one in each of Leverkusen,
Germany; Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In
North America, we have a TiO2 plant in Varennes, Quebec, Canada and, through the
manufacturing joint venture described below, a 50% interest in a TiO2 plant in
Lake Charles, Louisiana. We operate an ilmenite mine in Hauge i Dalane, Norway
pursuant to a governmental concession and also own a TiO2 slurry plant in Lake
Charles, Louisiana.
Our production capacity in 2003 was 480,000 metric tons, approximately 72% of
which was with the chloride production process. The following table presents the
division of our 2003 manufacturing capacity by plant location and type of
manufacturing process:
Percent of Capacity by Manufacturing Process
------------------------------------------------------
Facility Chloride Sulfate
----------------------- -------------------------
Leverkusen, Germany 41% 21%
Nordenham, Germany - 44
Langerbrugge, Belgium 20 -
Fredrikstad, Norway - 22
Varennes, Canada 19 13
Lake Charles, Louisiana 20 -
----- ------
100% 100%
===== ======
Our production capacity has increased by approximately 30% over the past ten
years due to debottlenecking programs, with only moderate capital investment. We
produced a new record of 476,000 metric tons of TiO2 in 2003, compared to the
prior record of 442,000 metric tons produced in 2002. We produced a new
six-month production record of 240,000 metric tons of TiO2 in the first six
months of 2004. Our production capacity is estimated to increase to
approximately 490,000 metric tons per year by year-end 2004 and to approximately
500,000 metric tons in 2005. Due to improved sales, our production capacity
utilization in 2003 and the first six months of 2004 was near full capacity, up
from 96% in 2002.
57
We own the land underlying all of our principle production facilities except for
Fredrikstadt, Norway and Leverkusen, Germany. The Fredrikstadt plant is located
on public land and is leased until 2013 with an option to extend the lease for
an additional 50 years. Our principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, which accounts for approximately one-third of
our 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 the supplies and
services agreement have certain restrictions regarding our ability to transfer
ownership or use of the Leverkusen facility.
We also operate an ilmenite mine in Norway pursuant to a governmental concession
with an unlimited term. Our co-products are produced at our Norwegian, Belgian
and German plants, and our titanium chemicals are produced at our Belgian and
Canadian plants. In addition, we operate a rutile slurry manufacturing plant in
Lake Charles, Louisiana, which converts dry pigment manufactured at the Lake
Charles TiO2 facilities into a slurry form that is then shipped to customers.
We have various corporate and administrative offices located in the U.S.,
Germany and Norway and various sales offices located in the U.S., Canada,
Belgium, France, the Netherlands, Denmark and the U.K.
TiO2 MANUFACTURING JOINT VENTURE
Kronos Louisiana, Inc., one of our subsidiaries, and Huntsman each own a
50%-interest in a manufacturing joint venture, Louisiana Pigment Company, L.P.,
or LPC. LPC owns and operates a chloride-process TiO2 plant located in Lake
Charles, Louisiana. We and Huntsman share production from the plant equally
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,
we report no equity in earnings of the joint venture. With the exception of raw
material costs for the pigment grades produced, we and our joint venture partner
share all costs and capital expenditures equally. Our share of net costs of the
joint venture is reported as cost of sales as the TiO2 acquired from the joint
venture is sold. See note 6 to our consolidated financial statements.
RAW MATERIALS
The primary raw materials used in the chloride production process for TiO2 are
titanium-containing feedstock, chlorine and coke. These feedstocks may be in the
form of titanium slag derived from ilmenite, natural rutile or synthetic rutile.
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
but increasing number of suppliers around the world, principally located in
Australia, South Africa, Canada, India and the United States. We purchased
approximately 390,000 metric tons of chloride feedstock in 2003, of which the
vast majority was slag.
We purchased slag in 2003 from two subsidiaries of Rio Tinto plc UK - Richards
Bay Iron and Titanium Limited South Africa and Q.I.T. Fer et Titane Inc. Canada
("Q.I.T.") under long-term supply contracts that expire at the end of 2007 and
2006, respectively. Natural rutile ore is purchased primarily from Iluka
58
Resources, Limited (Australia) under a long-term supply contract that expires at
the end of 2005. We do 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 our feedstock requirements over the next several years.
The primary raw materials used in the sulfate production process for TiO2 are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, we operate a rock ilmenite mine in Norway, which
provided all of the feedstock for our European sulfate-process pigment plants in
2003. We produced approximately 850,000 metric tons of ilmenite in 2003 of which
approximately 300,000 metric tons were used internally with the remainder sold
to third parties. For our Canadian sulfate-process plant, we also purchase
sulfate grade slag primarily from Q.I.T., and purchased approximately 25,000
metric tons in 2003. Raw materials purchased under these contracts and
extensions thereof are expected to meet our feedstock requirements over the next
several years.
Please see "Risk factors--We have a limited number of suppliers for some of our
raw materials, which could negatively affect us."
SALES AND MARKETING
Our marketing strategy is aimed at developing and maintaining strong customer
relationships with new and existing accounts. Because TiO2 is a significant raw
material cost for our customers, the purchasing decisions are often made by our
customers' senior management. We work to maintain close relationships with the
key decision makers, through in-depth frequent calling on these accounts. We
endeavor to extend these commercial and technical relationships to multiple
levels within our customers' organization using our direct sales force and
technical service group to accomplish this objective. We believe that this has
helped build customer loyalty to Kronos and strengthen our competitive position.
Close cooperation and strong relationships with our customers enables us to stay
closely attuned to trends in our customers' businesses. Where appropriate, we
work in conjunction with our customers to solve formulation or application
problems by modifying specific product properties or developing new pigment
grades. We also focus our sales and marketing efforts on those geographic and
end-use market segments where we believe we can realize higher selling prices.
This focus includes continuously reviewing and optimizing our customer and
product portfolios.
Our marketing strategy is also aimed at working directly with customers to
monitor the success of our products in their end-use applications, evaluate the
need for improvements in product and process technology and identify
opportunities to develop new product solutions for our customers. Our marketing
staff closely coordinates with our sales force and technical specialists to
ensure that all of the needs of our customers are met, and helps develop and
commercialize new grades where appropriate.
We sell a majority of our products through our direct sales force comprised of
over 40 persons operating from eight sales offices in Europe and four sales
offices in North America. We also utilize sales agents and distributors who are
authorized to sell our products in specific geographic areas. In Europe, our
sales are made primarily through our direct sales force and our sales agents.
Our agents do not sell any TiO2 products other than Kronos brand products. In
North America, our sales are made primarily through our direct sales force and
supported by a network of distributors. In addition to our direct sales force
and sales agents, many of our sales agents also act as distributors to service
our smaller customers in all regions. We offer our customers who purchase our
products through distributors the same high level of customer and technical
service as we offer to our larger customers.
NEW PRODUCT DEVELOPMENT
We have approximately 80 scientists, chemists, process engineers and technicians
engaged in research and development, process technology and quality assurance
activities in Leverkusen, Germany. They have the responsibility for improving
59
chloride and sulfate production processes, improving product quality and
strengthening our competitive position by developing new or improved TiO2
grades. Our expenditures for these activities were approximately $6 million in
each of 2001 and 2002, and $7 million in 2003.
We continually seek to improve the quality of our grades and have been
successful at developing new grades for existing and new applications to meet
the needs of our customers and increase product life cycles. For example, we
have enhanced our product consistency, and over the past five years have added
ten new grades for plastics, coatings, fiber and paper laminate applications.
Specifically, in plastics applications, one grade targeted for the growing
engineering plastic segment provides excellent masking of the natural yellowness
of engineering plastics at high temperatures. Two other plastic grades were
designed for use in a range of polyolefin plastic resin applications, as they
impart a desirable blue undertone to these resins. We have also developed a new
paper laminate grade that we recently introduced designed to deliver higher
opacity in this fast growing market segment and are currently working on further
improvements.
COMPETITION
The TiO2 industry is highly competitive. We compete primarily on the basis of
price, product quality, technical service and the availability of high
performance pigment grades. Although certain TiO2 grades are considered
specialty pigments, the majority of our grades are considered commodity pigments
with price generally being the most significant competitive factor. During 2003,
we had an estimated 12% share of worldwide TiO2 sales volume, and based on sales
volumes, we believe that we are the leading seller of TiO2 in the German,
Scandinavian, Benelux, Austrian, Swiss and Canadian markets.
Our principal competitors are E.I. du Pont de Nemours & Co., Millennium,
Huntsman, Kerr McGee and Ishihara Sangyo Kaisha, Ltd. We estimate that our five
largest competitors have individual shares of TiO2 production capacity ranging
from approximately 24% to 5%, and an estimated aggregate 70% share of worldwide
TiO2 production volume.
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. As no new plants are currently under construction
in North America or Europe, additional greenfield capacity is not expected to
come on-stream in the next three to five years, but industry capacity can be
expected to increase as we and our competitors continue to debottleneck existing
plants. In addition to potential capacity additions through debottlenecking,
certain competitors have either idled or shut down facilities. In the past year,
Huntsman, Millennium and Kerr McGee have announced the idling or shut down of an
aggregate of approximately 135,000 metric tons of sulfate production capacity by
early 2005.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS
Patents held for products and production processes are believed to be important
to our competitive position. We seek patent protection for our technical
developments, principally in the United States, Canada and Europe, and from time
to time enter into licensing arrangements with third parties.
Our major trademarks, including Kronos(R), are protected by registration in the
United States and elsewhere with respect to those products we manufacture and
sell. We also rely upon unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Our proprietary chloride production process is an
important part of our technology. Should we fail to maintain confidentiality of
our trade secrets used in this technology, our business could be harmed.
Please see "Risk factors-- If our patents are declared invalid or our trade
secrets become known to competitors, our ability to compete may be adversely
affected."
60
FOREIGN OPERATIONS
Our chemical businesses have operated in non-U.S. markets since the 1920s. Most
of our current production capacity is located in Europe and Canada with non-U.S.
net property and equipment aggregating approximately $435 million at December
31, 2003. Net property and equipment in the U.S., including 50% of the property
and equipment of LPC, was approximately $116 million at December 31, 2003. Our
European operations include production facilities in Germany, Belgium and
Norway. Approximately $711 million of our 2003 consolidated sales were to
non-U.S. customers, including $91 million to customers in areas other than
Europe and Canada. Sales to customers in the U.S. aggregated $297 million in
2003. Foreign operations are subject to, among other things, currency exchange
rate fluctuations and our results of operations have, in the past, been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
Effects of fluctuations in currency exchange rates on our results of operations
are discussed in "Risk Factors--Our business may be adversely affected by
international operations and fluctuations in currency exchange rates" and
"Management's discussion and analysis of financial condition and results of
operations."
EMPLOYEES
As of June 30, 2004, we employed approximately 2,370 persons, excluding LPC
employees, with approximately 1,900 employees in Europe and 470 in North
America. Certain of our employees are highly trained and highly educated. We
have approximately 25 employees with Ph.D. or equivalent degrees. Our key plant
managers possess an average of over 15 years of experience with us.
The employees at each of our production facilities are organized by labor
unions. In Europe, our union employees are covered by master collective
bargaining agreements for the chemical industry that are renewed annually. In
Canada, our union employees are covered by a collective bargaining agreement
that expires in June 2007. We believe that our labor relations are good.
REGULATORY AND ENVIRONMENTAL MATTERS
Our operations are governed by various environmental laws and regulations.
Certain of our businesses are, or have been engaged in the handling, manufacture
or use of substances or compounds that may be considered toxic or hazardous
within the meaning of applicable environmental laws. As with other companies
engaged in similar businesses, certain of our past and current operations and
products have the potential to cause environmental or other damage. We have
implemented and continue to implement various policies and programs in an effort
to minimize these risks. Our policy is to comply with applicable environmental
laws and regulations at all our facilities and to strive to improve our
environmental performance. It is possible that future developments, such as
stricter requirements in environmental laws and enforcement policies thereunder,
could adversely affect our production, handling, use, storage, transportation,
sale or disposal of such substances as well as our consolidated financial
position, results of operations or liquidity.
Our 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. We believe the TiO2 plant owned by the LPC joint venture and a TiO2
slurry facility we own in Lake Charles, Louisiana are in substantial compliance
with applicable requirements of these laws or compliance orders issued
thereunder. We have no other U.S. plants.
From time to time, our facilities may be subject to environmental regulatory
enforcement under U.S. and foreign statutes. Resolution of such matters
typically involves the establishment of compliance programs. Occasionally,
61
resolution may result in the payment of penalties, but to date such penalties
have not involved amounts having a material adverse effect on our consolidated
financial position, results of operations or liquidity.
We believe that all our plants are in substantial compliance with applicable
environmental laws.
While the laws regulating operations of industrial facilities in Europe vary
from country to country, the European Union (the "EU") provides a common
regulatory framework. Germany and Belgium are members of the EU and follow its
initiatives. Norway, although not a member, generally patterns its environmental
regulatory actions after the EU. We believe that we have obtained all required
permits and are in substantial compliance with applicable EU requirements.
At our sulfate plant facilities in Germany, we recycle weak sulfuric acid either
through contracts with third parties or using our own facilities. At our
Fredrikstad, Norway plant, we ship our spent acid to a third party location
where it is treated and disposed. Our Canadian subsidiary's sulfate plant
neutralizes its spent acid and sells its gypsum by-product to a local wallboard
manufacturer. We have a contract with a third party to treat certain by-products
of our German sulfate-process plants. Either party may terminate the contract
after giving four years advance notice with regard to our Nordenham, Germany
plant.
We are also involved in various other environmental, contractual, product
liability and other claims and disputes incidental to our business. We currently
believe the disposition of such claims and disputes, individually or in the
aggregate, should not have a material adverse effect on our consolidated
financial condition results of operating or liquidity.
Our capital expenditures related to our ongoing environmental protection and
improvement programs in 2003 were approximately $5 million, and are currently
expected to be approximately $5 million in 2004.
LEGAL PROCEEDINGS
Our Belgian subsidiary and various Belgian employees are the subject of civil
and criminal proceedings related to an accident that resulted in two fatalities
in such facility in 2000. In May 2004, the court ruled and, among other things,
imposed a fine of (euro)200,000 against us with an aggregate amount of less than
(euro)40,000 against various of our employees, the liability for which we have
undertaken. We and the individuals have appealed this ruling.
We are also involved in various other environmental, contractual, product
liability and other claims and disputes incidental to our business.
We currently believe the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on our consolidated
financial condition, results of operations or liquidity.
INSURANCE
We have customary levels of insurance for a company of our size in our industry.
Our insurance policies are subject to customary deductibles and limits. For a
discussion of our insurance program, please see "Certain relationships and
related transactions--Insurance Matters." For a discussion of our participation
in the Contran control group's insurance program, please see note 16 to our
consolidated financial statements.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at Three Lincoln Centre, 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240, and our telephone number is (972)
233-1700.
62
Management
CONTROLLED COMPANY
Because of the ownership of our common stock by NL, Valhi and Tremont LLC as
described above under "Summary--Ownership," we are considered a controlled
company under the listing standards of the New York Stock Exchange, and we will
continue to be considered a controlled company following the completion of this
offering. Pursuant to the listing standards, a controlled company may choose not
to have a majority of independent directors, independent compensation,
nominating or corporate governance committees or charters for these committees.
We have chosen not to have a majority of independent directors or an independent
nominating or corporate governance committee. Our board of directors believes
that the full board of directors best represents the interests of all of our
stockholders and that it is appropriate for all matters that would be considered
by a nominating or corporate governance committee to be considered and acted
upon by the full board of directors. Applying the requirements of the NYSE
listing standards, the board of directors has determined that three of our
directors are independent and have no material relationship with us. While the
members of our management development and compensation committee (the "MD&C
Committee") currently satisfy the independence requirements of the NYSE listing
standards, we have chosen not to satisfy all of the NYSE listing standards for a
compensation committee.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information relating to our current directors and
executive officers. Each executive officer serves at the pleasure of the Board
of Directors.
Name Age Position(s)
- ------------------------------------ ------ ---------------------------------------
Harold C. Simmons................... 72 Chairman of the Board and Chief Executive Officer
Steven L. Watson.................... 53 Vice Chairman of the Board
Cecil H. Moore, Jr.................. 65 Director
George E. Poston.................... 68 Director
Glenn R. Simmons.................... 76 Director
Dr. R. Gerald Turner................ 58 Director
Dr. Ulfert Fiand.................... 56 President, Manufacturing and Technology
H. Joseph Maas...................... 52 President, Sales and Marketing
Douglas C. Weaver................... 62 Senior Vice President, Development
Gregory M. Swalwell................. 47 Vice President, Finance and Chief Financial Officer
Robert D. Graham.................... 49 Vice President, General Counsel and Secretary
James W. Brown...................... 47 Vice President and Controller
John A. St. Wrba.................... 48 Vice President and Treasurer
Kelly D. Luttmer.................... 41 Vice President and Tax Director
Harold C. Simmons has served as our chairman of the board and chief executive
officer since August 2003. Mr. Simmons has served as chief executive officer of
NL since July 2003, chairman of the board of NL since 1987 and as a director of
NL since 1986. Mr. Simmons has been chairman of the board of Valhi and Contran
since prior to 1999 and was chief executive officer of Valhi from prior to 1999
to 2002. Mr. Simmons has also been a director and vice chairman of the board of
Titanium Metals Corporation ("TIMET"), an integrated producer of titanium metals
products that is related to Valhi, since August 2004. Mr. Simmons has been an
executive officer or director of various companies related to Valhi and Contran
since 1961. Mr. Simmons is a brother of Glenn R. Simmons.
Steven L. Watson has served as vice chairman of the board since October 2004 and
has been a director since August 2003. 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, NL and TIMET. Mr.
Watson has served as an executive officer or director of various companies
related to Valhi and Contran since 1980.
63
Cecil H. Moore, Jr. has been our director since December 2003. Mr. Moore is
currently a private investor and retired from KPMG LLP in 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, Texas business unit for 12 years. He
is chairman of our audit committee and on the board of directors and audit
committee of NL. Mr. Moore is also a director of Perot Systems Corporation.
George E. Poston has been our director since December 2003. From 2002 to
December 2003, he served as a director of NL. He has been 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 a member of our audit committee and MD&C Committee.
Glenn R. Simmons has been our director since August 2003. Mr. Simmons has been
vice chairman of the board of Valhi and Contran since prior to 1999. Mr. Simmons
is also a director of NL. Mr. Simmons is chairman of the board of Keystone
Consolidated Industries, Inc., a steel fabricated wire products, industrial wire
and carbon steel rod company that is related to Contran ("Keystone"), and CompX
International Inc., a manufacturer of ergonomic computer support systems,
precision ball bearing slides and security products that is related to Valhi
("CompX"). Mr. Simmons is also a director of TIMET. In February 2004, Keystone
filed a voluntary petition for reorganization under federal bankruptcy laws. Mr.
Simmons has been an executive officer or director of various companies related
to Valhi and Contran since 1969. He is a brother of Harold C. Simmons.
Dr. R. Gerald Turner has been our director since December 2003. From May 2003 to
December 2003, he was a director of NL. He 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 Corporation, Inc., American AAdvantage Funds and First Broadcasting
Investment Partners, LLC. Dr. Turner is a member of our audit committee and
chairman of our MD&C Committee.
Dr. Ulfert Fiand has served as our president, manufacturing and technology since
October 2004 and previously served as senior vice president, manufacturing and
technology since August 2003. Since 2001, he has served as president of
manufacturing and technology of KII. Dr. Fiand joined KII in 1988, and
previously served as group leader and director of chloride process technology,
director of process technology and vice president of production & process
technology.
H. Joseph Maas has served as our president, sales and marketing since October
2004 and previously served as senior vice president, sales and marketing since
August 2003. Mr. Maas served as vice president of marketing for Kronos since
1997. Prior to this he served as director of marketing for Kronos from 1990 to
1996. Mr. Maas has also held several positions in commercial development,
marketing and planning for various divisions of NL (Rheox and Spencer Kellogg)
since 1978.
Douglas C. Weaver has served as our senior vice president, development since
August 2003. Mr. Weaver served as our vice president, development since January
1998. Prior to that, Mr. Weaver served in various manufacturing, engineering and
planning capacities with NL since joining NL in 1973.
Gregory M. Swalwell has served as our chief financial officer since May 2004 and
vice president, finance since August 2003, vice president, finance of NL since
July 2003 and vice president and controller of Valhi and Contran since prior to
1999. Mr. Swalwell has served in accounting positions with various companies
related to Valhi and Contran since 1988.
64
Robert D. Graham has served as our vice president, general counsel and secretary
since August 2003, vice president, general counsel and secretary of NL since
July 2003 and as vice president of Valhi and Contran since 2002. From 1997 to
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 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.
James W. Brown has served as our and NL's vice president and controller since
December 2003. From 1998 to 2002, he served as vice president and chief
financial officer of SSI. From 1994 to 1998, Mr. Brown served as vice president,
corporate accounting of Affiliated Computer Services, Inc.
John A. St. Wrba has served as our vice president since May 2004 and treasurer
since August 2003 and vice president and treasurer of NL since February 2003. He
was NL's assistant treasurer from 2002 to 2003. He served as NL's assistant
treasurer from prior to 1998 until 2000. From 2000 until 2002, he was assistant
treasurer of Kaiser Aluminum & Chemical Corporation.
Kelly D. Luttmer has served as our vice president and tax director since October
2004 and our tax director since August 2003, tax director of NL since July 2003
and tax director of CompX, Valhi and Contran since 1998. Ms. Luttmer has served
in tax accounting positions with various companies related to Valhi and Contran
since 1989.
Consultant
Dr. Lawrence A. Wigdor has performed services to us as our Chief Operations
Management Consultant since August 2003. Prior to that, Dr. Wigdor served as our
president and chief executive officer since 1990. Dr. Wigdor also served as
chairman of the board, president and chief executive officer of Rheox, Inc., a
wholly owned chemicals subsidiary of NL until it was sold in 1998. From 1989 to
1990, Dr. Wigdor was chairman of the board of MEMC Electronic Materials, Inc., a
producer of silicon wafers for the semiconductor industry. From 1986 to 1990, he
served as president and chief executive officer of Huls America, Inc., a
worldwide producer of chemicals.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established and delegated authority to the following
two standing committees.
Audit committee
The audit committee assists the board of directors' oversight responsibilities
relating to our financial accounting and reporting processes and auditing
processes. The responsibilities of the audit committee are more specifically set
forth in the audit committee charter available on our website. See "Where you
can find more information." Applying the requirements of the NYSE listing
standards and SEC regulations, as applicable, the board of directors has
determined that
>> each member of the audit committee is financially literate and independent
and has no material relationship with us; and
>> Mr. Cecil H. Moore, Jr. is the "audit committee financial expert."
No member of the audit committee serves on more than three public company audit
committees. The current members of the audit committee are Cecil H. Moore, Jr.
(chairman), George E. Poston and R. Gerald Turner.
65
Management development and compensation committee
The principal responsibilities of the MD&C Committee are to review and approve
certain matters involving executive compensation; to take action or to review
and approve certain matters regarding our employee benefit plans or programs; to
administer and grant awards under the Kronos Worldwide, Inc. 2003 Long-Term
Incentive Plan; to approve certain annual incentive compensation awards; and to
review and administer such other compensation matters as the board of directors
may direct from time to time. The board of directors has determined that each
member of the MD&C Committee is independent by applying the requirements of the
NYSE listing standards. The current members of the MD&C Committee are R. Gerald
Turner (chairman) and George E. Poston.
BOARD COMPENSATION
In 2004, directors are expected to receive an annual retainer of $20,000, paid
in quarterly installments, plus a fee of $1,000 per day for attendance at
meetings and at a daily rate ($125 per hour) for other services rendered on
behalf of the board of directors or its committees. In addition, directors will
receive an annual retainer of $2,000, paid in quarterly installments, for each
committee on which they serve. If any director dies while serving on the board
of directors, his or her designated beneficiary or estate will be entitled to
receive a death benefit equal to the annual retainer then in effect. We
reimburse our directors for reasonable expenses incurred in attending meetings
and in the performance of other services rendered on behalf of the board of
directors or its committees.
On the day of each annual meeting of stockholders, each director is expected to
receive a grant of shares of our common stock as determined by the following
formula based on the closing price of a share of our common stock on the date of
such meeting.
Range of Closing Price Per Shares of Common
Share on the Date of Grant Stock to Be Granted
--------------------------------- -------------------
Under $5.00 2,000
$5.00 to $9.99 1,500
$10.00 to $20.00 1,000
Over $20.00 500
In accordance with this formula, each director received a grant of 500 shares of
our common stock on May 20, 2004, the date of our 2004 annual meeting of
stockholders.
CORPORATE GOVERNANCE MATTERS
We have adopted a code of business conduct and ethics that applies to all of our
directors, officers and employees, including our principal executive officer,
principal financial officer, principal accounting officer and controller. Only
the board of directors may amend the code, and only our audit committee or other
committee of the board of directors with specific delegated authority may grant
a waiver of the code. We will disclose amendments to, or waivers of, the code as
required by law and the applicable rules of the NYSE. We have also adopted
corporate governance guidelines that comply with the NYSE listing standards. The
code of business conduct and ethics, the corporate governance guidelines and our
audit committee charter are available on our website at www.kronostio2.com in
accordance with NYSE listing standards. See "Where you can find more
information."
EXECUTIVE COMPENSATION
Summary of cash and certain other compensation of executive officers
The Summary Compensation Table set forth below provides information concerning
annual and long-term compensation paid or accrued by us and our subsidiaries for
66
services rendered to us and our subsidiaries during 2003, 2002 and 2001 by our
chief executive officer, one other executive officer whose total salary and
bonus in 2003 exceeded $100,000 and our former chief executive officer (each, a
"named executive officer").
SUMMARY COMPENSATION TABLE (1)
Long-Term
Compensation(2)
Awards
---------------
Annual Compensation Shares
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation (3) Options (#) Compensation
- -------------------------- ------ -------------- -------------- ----------------- ------------------ -------------
Harold C. Simmons (4)..... 2003 $ 190,000 (4) $ 0 (4) $ 0 0 $ 0
Chairman of the Board and
Chief Executive Officer
Dr. Ulfert Fiand.......... 2003 173,786 (5) 121,650 (5) 0 0 0
Senior Vice President 2002 128,827 (5) 89,388 (5) 0 0 0
Manufacturing and 2001 119,071 (5) 184,514 (5) 0 6,000 (6) 0
Technology
Dr. Lawrence A. Wigdor (7) 2003 915,833 (7) 922,000 (7) 532 (9) 0 114,375 (10)
Former Chief Executive 2002 750,000 750,000 (8) 68 (9) 0 186,848 (10)
Officer 2001 750,000 1,350,000 (8) 2,729 (9) 100,000 (6) 351,658 (10)
- ----------------
(1) Other than Drs. Fiand and Wigdor, our executive officers provided their
services to us during 2003 pursuant to a Services Agreement between NL, us
and KII dated as of January 1, 1995 and amended as of April 1, 2002 (the
"NL ISA"). Other than Mr. Simmons, the charges for such executive officers'
services under the NL ISA for 2003 to us were not specifically identifiable
to a particular executive officer or did not exceed $100,000.
(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) For all of 2003, Harold C. Simmons was an employee of Contran. He became
one of our executive officers as of August 6, 2003. The amount shown in the
table as salary for him in 2003 represents the portion of the fees we and
our subsidiaries paid to NL pursuant to the NL ISA that relates to services
he rendered to us and our subsidiaries in 2003.
(5) Dr. Fiand receives his cash compensation in euros. We report these amounts
in the table above in U.S. dollars based on the average exchange rate for
each of 2003, 2002 and 2001 of $1.1212, $0.9360 and $0.8957 per (euro)1.00,
respectively.
(6) Represents options to purchase shares of NL common stock. Upon exercise, NL
will bill us the difference between the fair market value of the shares
issued upon exercise and the aggregate exercise price for such shares.
(7) In July 2003, Dr. Wigdor resigned as our chief executive officer and
elected to receive early retirement benefits. Prior to his resignation, Dr.
Wigdor was an executive officer of NL and us and devoted all of his
business time to us. Accordingly, prior to his resignation, we paid,
accrued or were charged for all of Dr. Wigdor's compensation. Dr. Wigdor
67
currently serves as a consultant to us with ongoing management involvement
in our TiO2 operations. Of the amount shown in the table as the 2003 salary
for Dr. Wigdor, $495,833 represents the salary we paid him for his 2003
services while he was an employee and $420,000 represents the amount we
paid him for his 2003 services while he was a consultant. The amount shown
in the table as the 2003 bonus for Dr. Wigdor represents amounts we paid
him for his 2003 services while he was a consultant that are comparable to
2003 bonus payments. See "-- Wigdor compensatory arrangement."
(8) Amounts we paid Dr. Wigdor pursuant to NL's variable compensation plan,
including, in certain instances, discretionary bonus amounts.
(9) These amounts represent accruals on Dr. Wigdor's deferred compensation that
exceeded 120% of the applicable federal long-term interest rate.
(10) As shown below, all other compensation for 2003, 2002, and 2001 for Dr.
Wigdor consisted of (i) matching contributions we made or accrued pursuant
to the savings feature of the NL savings plan, (ii) retirement
contributions we made or accrued pursuant to the NL savings plan, (iii)
life insurance premiums we paid and (iv) amounts we paid under the NL
Supplemental Executive Retirement Plan (the "SERP").
NL Savings
Plan Life
NL Savings Retirement Insurance SERP
Named Executive Officer Year Plan Match Contributions Premiums Payments Total
---------------------------- ---- ------------- --------------- ----------- -------------- ---------
Lawrence A. Wigdor...... 2003 $ 8,000 $ 16,600 $ 6,109 $ 83,666 $ 114,375
2002 8,000 16,600 10,248 152,000 186,848
2001 6,800 14,110 10,248 320,500 351,658
In 2001, the SERP was amended 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 our interest
costs. In connection with the amendment, in 2001, we 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. The SERP was terminated in 2004.
No grants of stock options or stock appreciation rights
Neither we nor any of our parent or subsidiary corporations granted any stock
options or stock appreciation rights ("SARs") to the named executive officers
during 2003.
Stock option holdings
The following table provides information concerning the value of unexercised
stock options the named executive officers held as of December 31, 2003. The
stock options described in the following table are options to purchase shares of
NL common stock pursuant to NL's stock option plans and were granted prior to
the effective date of the Distribution. We expect that any future grants will be
made under our long-term incentive plan and will consist of options to purchase
Kronos common stock. Neither we nor any of our parent or subsidiary corporations
has granted any SARs.
DECEMBER 31, 2003 OPTION VALUES
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Name December 31, 2003 (#) at December 31, 2003 (1)
----------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- --------------- ------------ ---------------
Harold C. Simmons................................. 8,000 0 $ 40,330 $ 0
Dr. Ulfert Fiand.................................. 7,400 6,600 36,828 21,968
Dr. Lawrence A. Wigdor............................ 154,000 159,600 181,772 640,245
- ----------
(1) The value is based on the difference between the exercise price of the
individual stock options and the closing sales price per share of NL common
stock on December 31, 2003 of $11.70.
68
Pension plans
Our U.S. employees participate in NL's retirement program for its U.S. employees
(the "Pension Plan"). The Pension Plan provides lifetime retirement benefits to
eligible employees. In 1996, all future accruals under the salaried component of
the Pension Plan were suspended. Following his resignation in July 2003, Dr.
Wigdor elected to receive his retirement benefits at an early retirement age. He
began receiving a monthly payment amount of $2,428 in August 2003, which will
continue for the remainder of his life.
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)61,200) and the Bayer Pensionskasse
provides a benefit of 44% of such employee's accumulated contributions (with a
minimum benefit of approximately (euro)13 per month). The Supplemental Pension
Promise also covers all of KII's employees in Germany who have completed ten
years of service. 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)106,900. 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 2003. The estimated accrued annual benefit payable upon normal
retirement at normal retirement age for Dr. Fiand is (euro)25,991.
Wigdor compensatory arrangement
Concurrently with his resignation as our chief executive officer in July 2003,
Dr. Wigdor entered into a consultancy arrangement with us pursuant to which Dr.
Wigdor provides ongoing operations management involvement in our TiO2
operations. Dr. Wigdor received $461,000 on August 1, 2003 and monthly payments
of $84,000 beginning on August 1, 2003. On February 1, 2004, Dr. Wigdor received
a payment under the arrangement of $461,000 based on our having achieved 2003
segment profit (as we define that term internally) of in excess of $130 million.
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 us
combined receiving the highest paid bonuses for 2004 and 2005, respectively,
excluding NL's chief executive officer. Under the consultancy arrangement, as
amended in February 2004, if we terminate the consultancy arrangement prior to
December 31, 2006, Dr. Wigdor will receive twelve months compensation and
medical and dental coverage through December 31, 2006 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 medical and dental benefits and office and secretarial support
at our New Jersey office.
69
EQUITY COMPENSATION PLAN INFORMATION
The following table provides summary information as of December 31, 2003 with
respect to our equity compensation plans under which our equity securities may
be issued to employees or nonemployees (such as directors, consultants,
advisers, vendors, customers, suppliers and lenders) in exchange for
consideration in the form of goods or services. Our long-term incentive plan,
which was approved by our sole stockholder prior to the distribution, is our
only such equity compensation plan.
Column (A) Column (B) Column (C)
--------------------------- -------------------------- ----------------------------
Number of Securities
Remaining Available for
Future Issuance Under
Number of Securities to be Weighted-Average Equity Compensation Plans
Issued Upon Exercise of Exercise Price of (Excluding Securities
Outstanding Options, Outstanding Options, Reflected in
Plan Category Warrants and Rights Warrants and Rights Column (A))
- ---------------------------- --------------------------- ------------------------- ----------------------------
Equity compensation plans
approved by security
holders................... 0 $ 0 150,000
Equity compensation plans
not approved by security
holders................... 0 0 0
Total.................. 0 0 150,000
70
Principal stockholders and ownership of management
OWNERSHIP OF OUR COMMON STOCK
The following table and footnotes set forth as of October 1, 2004 the beneficial
ownership, as defined by regulations of the SEC, of our common stock held and,
as adjusted to reflect the sale of common stock in this offering, by each person
or group of persons known to us to own beneficially more than 5% of our
outstanding shares of common stock, each named executive officer and all current
directors and executive officers as a group. See footnote (4) below for
information concerning individuals and entities that may be deemed to own
indirectly and beneficially those shares of our common stock that NL, Valhi or
Tremont directly hold. All information is taken from or based upon ownership
filings made by such persons with the SEC or upon information provided by such
persons.
Shares Beneficially
Owned Prior to this Percent Owned After this
Offering (1)(2) Offering (1)
---------------------------- --------------------------------
Before Exercise After Exercise
of of
Over-Allotment Over-Allotment
Name of Beneficial Owner Number Percent Option Option
- ----------------------------------------------------- --------------- ----------- ---------------- ---------------
Harold C. Simmons (3).................................. 3,984 (4) * * *
NL Industries, Inc. (3)............................. 24,081,128 (4) 49.2% 42.7% 42.1%
Valhi, Inc. (3)..................................... 16,584,370 (4) 33.9% 29.4% 29.0%
Tremont LLC (3)..................................... 5,311,899 (4) 10.9% 9.4% 9.3%
TIMET Finance Management Company (4)................ 2,850 * * *
Spouse (3).......................................... 35,622 (4) * * *
46,019,853 (4) 94.0% 81.5% 80.5%
Cecil H. Moore, Jr..................................... 512 (4) * * *
George E. Poston....................................... 1,518 * * *
Glenn R. Simmons....................................... 2,648 (4) * * *
Dr. R. Gerald Turner................................... 1,026 * * *
Steven L. Watson....................................... 4,151 (4) * * *
Dr. Ulfert Fiand....................................... 0 0 0 0
Dr. Lawrence A. Wigdor................................. 107 * * *
All current directors and executive officers
as a group (14 persons)............................. 46,029,708 (4) 94.0% 81.5% 80.5%
- --------------------
* Less than 1%.
(1) Except as otherwise noted, the listed entities, individuals and group have
sole investment power and sole voting power as to all shares of common
stock set forth opposite their names. The number of shares and percentage
of ownership of common stock for each person or group assumes the exercise
by such person or group (exclusive of the exercise by others) of stock
options that such person or group may exercise within 60 days subsequent to
October 1, 2004.
(2) The percentages are based on 48,946,049 shares of our common stock
outstanding as of October 1, 2004.
(3) The business address of NL, Valhi, Tremont and Harold C. Simmons is Three
Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697.
(4) Valhi, Tremont and TIMET Finance Management Company ("TFMC") are the direct
holders of approximately 62.2%, 21.1% and 0.5%, respectively, of the
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outstanding shares of NL common stock. TIMET directly holds 100% of the
outstanding common stock of TFMC. Tremont, Harold C. Simmons' spouse, The
Combined Master Retirement Trust (the "CMRT") and Valhi are the direct
holders of approximately 39.6%, 14.4%, 11.8% and 1.3%, respectively, of the
outstanding shares of TIMET common stock. The ownership of Mr. Simmons'
spouse is based on the 1,600,000 shares of TIMET's 6 3/4% Series A
Convertible Preferred Stock ("TIMET Series A Preferred Stock") that she
holds directly and that are convertible into 2,666,666 shares of TIMET
common stock, or approximately 14.4% of the outstanding shares of TIMET
common stock. The ownership of Valhi includes 24,500 shares of TIMET common
stock, or approximately 0.2% of the outstanding shares of TIMET common
stock, that Valhi has the right to acquire upon conversion of the 14,700
shares of TIMET Series A Preferred Stock that Valhi directly holds. The
percentage ownership of TIMET common stock held by Mr. Simmons' spouse and
Valhi assumes the full conversion of only the shares of TIMET Series A
Preferred Stock owned by Mr. Simmons' spouse and Valhi, respectively. 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 CMRT are the direct
holders of approximately 77.6%, 9.1%, 3.4%, 0.9%, 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 49.9% and 50.1%,
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, or
held by Mr. Simmons or persons or other entities related to Mr. Simmons. As
sole trustee of the Trusts, Mr. Simmons has the power to vote and direct
the disposition of the shares of Contran stock held by the Trusts. Mr.
Simmons, however, disclaims beneficial ownership of any Contran shares the
Trusts hold.
Harold C. Simmons is the chairman of the board and chief executive officer
of each of us and NL, vice chairman of the board of TIMET, and the chairman
of the board of each of Tremont, Valhi, VGI, National, NOA, Dixie Holding,
Dixie Rice, Southwest and Contran.
The Foundation directly holds approximately 0.9% 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.
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 must satisfy the balance
of such obligations. Pursuant to the terms of the CDCT No. 2, Contran
retains the power to vote the shares held by the CDCT No. 2, retains
dispositive power over such shares and 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
72
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 of our
executive officers are participants in one or more of the employee benefit
plans that invest through the CMRT. Each of such persons disclaims
beneficial ownership of all of the shares held by the CMRT, except to the
extent of his or her individual vested beneficial interest, if any, in the
assets the CMRT holds.
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 disclaims
beneficial ownership of all shares of our common stock that NL, Valhi,
Tremont or TFMC directly holds.
All of our directors or executive officers who are also directors or
executive officers of NL, Valhi or Tremont disclaim beneficial ownership of
the shares of our common stock that NL, Valhi, Tremont or TFMC directly
hold.
Harold C. Simmons' spouse is the direct owner of 35,622 shares of our
common stock, 69,475 shares of NL common stock, 43,400 shares of Valhi
common stock and 1,600,000 shares of TIMET Series A Preferred Stock, which
are convertible into 2,666,666 shares of TIMET common stock. Mr. Simmons
may be deemed to share indirect beneficial ownership of such shares. Mr.
Simmons disclaims all such beneficial ownership.
Harold C. Simmons directly holds 3,984 shares of our common stock, 30,800
shares of NL common stock (including stock options exercisable for 6,000
shares) and 3,383 shares of Valhi common stock.
Valmont Insurance Company ("Valmont"), NL and a subsidiary of NL directly
hold 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. NL is a majority owned subsidiary of Valhi. Pursuant to
Delaware law, Valhi treats the shares of Valhi common stock that Valmont,
NL and NL's subsidiary directly hold as treasury stock for voting purposes,
and for purposes of calculating the percentage ownership of the outstanding
shares of Valhi common stock, such shares are not deemed outstanding.
The business address of Valhi, Tremont, TFMC, VGI, National, NOA, Dixie
Holding, the Foundation, the CMRT 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.
We understand that Contran and related entities may acquire or dispose of shares
of our common stock through open-market or privately negotiated transactions,
depending upon future developments, including, but not limited to, the
availability and alternative uses of funds, the performance of our common stock
in the market, an assessment of our business and prospects, financial and stock
market conditions and other factors deemed relevant by such entities. We may
similarly consider acquisitions of shares of our common stock and acquisitions
or dispositions of securities issued by related entities.
73
OWNERSHIP OF NL AND VALHI COMMON STOCK
Our directors and executive officers own equity securities of certain companies
related to us. The following table and footnotes set forth the beneficial
ownership, as of October 1, 2004, of the shares of NL and Valhi common stock
held by each of our directors, each named executive officer and all of our
current directors and executive officers as a group. All information is taken
from or based upon ownership filings made by such persons with the SEC or upon
information provided by such persons.
NL Common Stock Valhi Common Stock
------------------------------------ -------------------------------------------
Percent
Amount and Nature of Amount and Nature Percent of
of Beneficial Class of Beneficial Class
Name of Beneficial Owner Ownership (1) (1)(2) Ownership (1) (1)(3)
- ----------------------------------- ------------------- ------------- ------------------------- ----------------
Harold C. Simmons................. 30,800 (4)(5) * 3,383 (4) *
Valhi Group, Inc................. 0 (4) 0 92,739,554 (4) 77.6%
National City Lines, Inc......... 0 (4) 0 10,891,009 (4) 9.1%
Contran Corporation.............. 0 (4) 0 4,493,100 (4)(6) 3.8%
Valhi, Inc....................... 30,135,390 (4) 62.2% n/a n/a
Tremont LLC...................... 10,215,541 (4) 21.1% 0 (4) 0
TIMET Finance Management Company.
222,100 (4) * 0 (4) 0
Other............................ 69,475 (4) * 1,242,600 (4) 1.0%
------------ ------------
40,673,306 (4) 84.0% 109,369,646 (4) 91.5%
Cecil H. Moore, Jr................ 1,000 * 0 0
George E. Poston.................. 2,000 * 0 0
Glenn R. Simmons.................. 8,000 (4)(5) * 9,247 (4)(7) *
Dr. R. Gerald Turner.............. 1,000 * 0 0
Steven L. Watson.................. 12,000 (4)(5) * 117,246 (4)(5) *
Dr. Ulfert Fiand.................. 3,600 (5) * 0 0
Dr. Lawrence A. Wigdor............ 89,800 (5) * 0 0
All current directors and
executive officers as a
group (14 persons)............. 40,700,906 (4)(5) 84.0% 109,654,905 (4)(5)(6)(7) 91.6%
- --------------------
* Less than 1%.
(1) Except as otherwise noted, the listed individuals and group have sole
investment power and sole voting power as to all shares set forth opposite
their names. The number of shares and percentage of ownership for each
person or group assumes the exercise by such person or group (exclusive of
others) of stock options that such person or group may exercise within 60
days subsequent to October 1, 2004.
(2) The percentages are based on 48,419,884 shares of NL common stock
outstanding as of October 1, 2004.
(3) The percentages are based on 119,475,878 shares of Valhi common sock
outstanding as of October 1, 2004. For purposes of calculating the
outstanding shares of Valhi common stock as of October 1, 2004, 1,000,000,
3,522,967 and 1,186,200 shares of Valhi common stock held by Valmont, NL
and a subsidiary of NL, respectively, are excluded from the amount of Valhi
common stock outstanding. Pursuant to Delaware law, Valhi treats these
excluded shares held by these majority owned subsidiaries as treasury stock
for voting purposes.
(4) Excludes certain shares that such individual, entity or group may be deemed
to indirectly and beneficially own and as to which each such individual
disclaims beneficial ownership. See footnote (4) to the "Ownership of our
Common Stock" table.
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(5) The shares of NL common stock or Valhi common stock shown as beneficially
owned by such person or group include the following number of shares such
person or group has the right to acquire upon the exercise of stock options
granted pursuant to NL or Valhi stock option plans that such person or
group may exercise within 60 days subsequent to October 1, 2004:
Shares of NL Common Stock Shares of Valhi Common Stock
Issuable Upon the Exercise of Issuable Upon the Exercise of
Stock Options On or Before Stock Options On or
Name of Beneficial Owner November 30, 2004 Before November 30, 2004
------------------------------------------ ----------------- ------------------------
Glenn R. Simmons......................... 2,000 0
Harold C. Simmons........................ 6,000 0
Steven L. Watson......................... 4,000 100,000
Dr. Ulfert Fiand......................... 3,600 0
Dr. Lawrence A. Wigdor................... 89,800 0
All current directors and executive
officers as a group (14 persons)....... 15,600 257,600
(6) Includes 439,400 shares of Valhi common stock the CDCT No. 2 directly
holds.
(7) The shares of Valhi common stock shown as beneficially owned by Glenn R.
Simmons include 800 shares his wife holds in her retirement account, with
respect to which shares he disclaims beneficial ownership.
We understand that Valhi has pledged approximately 62.0% of the outstanding
shares of NL common stock to secure Valhi's bank borrowings. Foreclosure by the
lender on this pledge in the event of Valhi's default on the loan, which Valhi
has advised us is unlikely, may at a subsequent date result in a change in
control of NL.
75
Certain relationships and related transactions
RELATIONSHIPS WITH RELATED PARTIES
As set forth under "Principal stockholders and ownership of management," Harold
C. Simmons, through Contran, may be deemed to control us, and will continue to
be deemed to control us following the completion of this offering. We and other
entities that may be deemed to be controlled by or affiliated with Mr. Simmons
sometimes engage in the following:
>> 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
>> 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 that resulted
in the acquisition by one related party of a publicly held equity interest
in another related party.
We consider, review and evaluate and understand that Contran and related
entities consider, review and evaluate transactions of the type described above.
Depending upon the business, tax and other objectives then relevant and
restrictions under the indentures and other agreements, it is possible that we
might be a party to one or more of such transactions in the future. In
connection with these activities, we may consider issuing additional equity
securities or incurring additional indebtedness. Our acquisition activities may
in the future include participation in acquisition or restructuring activities
conducted by other companies that may be deemed to be controlled by Mr. Simmons.
It is our policy to engage in transactions with related parties on terms, in our
opinion, no less favorable to us than could be obtained from unrelated parties.
Certain directors or executive officers of Contran, CompX, Keystone, NL, TIMET
or Valhi also serve as our directors or executive officers. 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 us and our 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 owe
fiduciary duties of good faith and fair dealing to all stockholders of the
companies for which they serve.
INTERCORPORATE SERVICES AGREEMENTS
We are a party to intercorporate services agreements ("ISAs") with various
related parties discussed below. Under the ISAs, employees of one company will
provide certain services, including executive officer 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 us and our subsidiaries on a fee basis. Our intercorporate services
fee expense related to the NL ISA was $3.5 million in 2001 and $3.7 million in
each of 2002 and 2003. Starting in 2004, the NL ISA was replaced by a similar
agreement with Contran, as discussed below.
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Effective November 6, 2003, we entered into an ISA with Contran (the "Contran
ISA"), which ISA was amended as of January 1, 2004. Under the Contran ISA,
Contran provides executive, management, financial, internal audit, accounting,
tax, legal, insurance, risk management, treasury, aviation, human resources,
technical, consulting, administrative and other services as required from time
to time in the ordinary course of our business. These services include the
services of certain of our executive officers. For a list of these executive
officers and the services provided, see "Management--Directors and Executive
Officers." The Contran ISA has an initial term that expires on December 31, 2004
and thereafter automatically extends on a quarter-to-quarter basis, generally
subject to the termination by either party pursuant to a written notice
delivered 30 days prior to the start of the next quarter. In 2004, we expect to
pay Contran $4.4 million for its services under the Contran ISA. We also pay
director fees and expenses directly to Messrs. Glenn and Harold Simmons and Mr.
Watson.
LOANS BETWEEN RELATED PARTIES
At December 31, 2002, we had loaned $44.6 million 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 on December 31, 2005.
During the first six months of 2003, NL repaid a net $19.7 million to us. In
June 2003, we distributed to NL the remaining $24.9 million of notes receivable
from NL in the form of a noncash dividend. The revolving credit agreement with
NL was terminated on June 30, 2003.
At December 31, 2002, we had borrowed $44.6 million from NL Environmental
Management Services, Inc., a majority owned subsidiary of NL ("NL EMS"), under
the terms of a $55 million revolving credit facility entered into with NL 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, we repaid this outstanding
balance in full, and the revolving credit agreement with NL EMS was terminated
on June 30, 2003.
On December 8, 2003, immediately prior to NL's distribution of our common stock,
we distributed a $200 million dividend to NL in the form of an unsecured
long-term note payable that bears interest at 9% per annum, with interest
payable quarterly and all principal due in 2010. On September 24, 2004, NL
transferred $168.6 million of such $200 million note to Valhi and a wholly-owned
subsidiary of Valhi in connection with a transaction involving these three
companies.
From time to time, other loans and advances are made between us and various
related parties pursuant to term and demand notes. These loans and advances are
entered into principally for cash management purposes. When we loan funds to
related parties, the lender is generally able to earn a higher rate of return on
the loan than the lender would earn if the funds were invested in other
instruments. While certain of such loans may be of a lesser credit quality than
cash equivalent instruments otherwise available to us, we believe that we have
evaluated the credit risks involved, and that those risks are reasonable and
reflected in the terms of the applicable loans. When we borrow from related
parties, we are generally able to pay a lower rate of interest than we would pay
if we borrowed from other parties. Interest income on all such cash management
and other loans to related parties, including our loan to NL discussed above,
was $0.7 million in 2003 and nil in the six months ended June 30, 2004. Interest
expense on all such cash management and other loans from related parties,
including our borrowings from NL EMS and our $200 million notes payable to
affiliates discussed above, was $1.9 million in 2003 and $9.0 million in the six
months ended June 30, 2004.
INSURANCE MATTERS
We and Contran participate in a combined risk management program. Pursuant to
the program, Contran and certain of its subsidiaries and affiliates, including
us and certain of our subsidiaries and affiliates, purchase certain of their
insurance policies as a group, with the costs of the jointly owned policies
being apportioned among the participating companies. Tall Pines Insurance
Company ("Tall Pines"), Valmont and EWI RE, Inc. ("EWI") provide for or broker
77
these insurance policies. Tall Pines and Valmont are captive insurance companies
wholly owned by Valhi, and EWI is a reinsurance brokerage firm wholly owned by
NL. A son-in-law of Harold C. Simmons serves as EWI's chairman of the board and
chief marketing officer and is compensated as an employee of EWI. Consistent
with insurance industry practices, Tall Pines, Valmont and EWI receive
commissions from insurance and reinsurance underwriters for the policies that
they provide or broker.
With respect to certain of such jointly owned insurance policies, it is possible
that unusually large losses incurred by one or more insureds during a given
policy period could leave the other participating companies without adequate
coverage under that policy for the balance of the policy period. As a result,
Contran and certain of its subsidiaries or affiliates, including us and certain
of our subsidiaries or affiliates, have entered into a loss sharing agreement
under which any uninsured loss is shared by those entities who have submitted
claims under the relevant policy. We believe the benefits in the form of reduced
premiums and broader coverage associated with the group coverage for such
policies justify the risks associated with the potential for any uninsured loss.
During 2003, Contran and its related parties paid premiums of approximately
$16.7 million for policies Tall Pines or Valmont provided or EWI brokered,
including approximately $7.2 million paid by us and LPC, a partnership of which
we and Huntsman each own 50%. During the six months ended June 30, 2004, Contran
and its related parties paid premiums of approximately $3.4 million for policies
Tall Pines or Valmont provided or EWI brokered, including approximately $1.1
million paid by us and LPC. 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 our opinion, the
amounts that we and LPC paid for these insurance policies and the allocation
among us and our affiliates of relative insurance premiums are reasonable and at
least as favorable to those we could have obtained through unrelated insurance
companies or brokers.
TAX SHARING AGREEMENTS
Prior to December 8, 2003, we and our qualifying subsidiaries were members of
NL's consolidated U.S. federal income tax group (the "NL Tax Group"). As a
member of the NL Tax Group, we were a party to a tax sharing agreement (the "NL
Tax Agreement"). The NL Tax Group, including us, 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 us, compute provisions 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, we made payments to or received payments from NL in amounts we
would have paid to or received from the U.S. Internal Revenue Service had we not
been a member of NL's consolidated tax group but instead were a separate
taxpayer. Refunds are limited to amounts previously paid under the NL Tax
Sharing Agreement.
Effective on December 8, 2003, we and our qualifying subsidiaries ceased being
members of the NL Tax Group, but we and our qualifying subsidiaries remained as
members of the Contran Tax Group. We entered into a new tax sharing agreement
with Valhi and Contran (the "Valhi Tax Agreement"), which contains similar terms
to the NL Tax Agreement.
Pursuant to the NL Tax Agreement, we paid NL $10.7 million in 2003 and we
received $1.2 million from NL in the six months ended June 30, 2004. We did not
pay or receive any amounts from Valhi pursuant to the Valhi Tax Agreement in
2003 or the six months ended June 30, 2004.
OTHER
During 2003 and the six months ended June 30, 2004, Dr. Wigdor's sister-in-law
was employed by us and was paid $42,302 and $22,156, respectively, and received
customary employee benefits, including medical insurance. During 2003 and the
six months ended June 30, 2004, Dr. Wigdor's son was employed by us and was paid
$61,275 and $38,700, respectively, but did not receive any customary employee
benefits. Both individuals continue to be employed by us.
78
Description of capital stock
Our 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, 48,946,049 shares of our common stock are outstanding held by
approximately 5,300 holders of record.
The following description of our 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") and to Delaware corporate law.
COMMON STOCK
Voting rights
The holders of our common stock are entitled to one vote per share on all
matters to be voted on by stockholders. Holders of our 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 our board
of directors, subject to any preferential rights of any outstanding preferred
stock.
Other rights
In the event of any merger or consolidation of us 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 we are liquidated, dissolved or wound up after payment to creditors, we will
pay the full amounts required to be paid to holders of shares of any outstanding
preferred stock before we make any payments to holders of shares of our common
stock. All holders of shares of our common stock are entitled to share ratably
in any assets available for distribution to these holders, after all of our
other creditors and preferred stockholders have been satisfied.
No shares of our common stock may be redeemed. Holders of shares of our common
stock do not have any preemptive rights to purchase additional shares of our
common stock.
PREFERRED STOCK
We 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 the board of
director's resolutions providing for the designation and issuance of that class
or series. The Certificate of Incorporation authorizes our 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 we issue.
We believe that the ability of our board of directors to issue one or more
series of preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
79
needs which might arise. The authorized shares of our preferred stock, as well
as authorized shares of our common stock, are available for issuance without
further action by our stockholders, unless such action is required by applicable
law or the rules of any stock exchange or automated quotation system on which
our 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 stockholder approval is not required for the issuance of shares of
preferred or common stock, our 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 our
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 will 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 a majority of our
securities entitled to vote in the election of directors. The Bylaws may be
altered, amended or repealed by a majority vote of our board of directors or our
stockholders.
Preferred stock
Our 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 us. Our board of directors will make any determination to issue such
shares based on its judgment as to the best interests of us and our
stockholders. Our 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 our board of directors,
including a tender offer or other transaction that some, or a majority, of our
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 our principal executive offices 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 we did not mail or publicly disclose the date of the
last annual meeting or we have moved the date of the annual meeting by 30 days
80
from the date of the last annual meeting (as if in the current year), the
stockholder proposal or nomination must be delivered or mailed to our principal
executive offices no later than 120 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 our principal
executive offices 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 our directors and officers.
The Certificate of Incorporation provides that our directors are not personally
liable to us or our 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 us or
our stockholders for monetary damages for breach of their fiduciary duties as
directors, except liability for:
>> any breach of a director's duty of loyalty to us or our stockholders;
>> acts or omissions not in good faith or involving intentional misconduct or
a knowing violation of law;
>> any transaction from which a director derived improper personal benefit;
>> the unlawful payment of dividends; and
>> 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:
>> we must, to the fullest extent permitted by law, indemnify any and all of
our officers and directors;
>> we 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
>> we may advance expenses to all persons to whom we have the power to
indemnify.
The Bylaws provide as follows:
>> we must indemnify our directors and officers to the fullest extent
permitted under Delaware law;
>> we 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 is ultimately determined that he or she is not entitled
to be indemnified by us as authorized in the Bylaws;
>> if we receive a claim for indemnification of expenses of an indemnifiable
claim and do 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
81
>> we may grant rights of indemnification and advancement of expenses to any
person who is not at the time our current director or officer.
Additionally, we have in effect directors and officers liability insurance.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
In the Certificate of Incorporation, we have 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 we have elected not to be governed by
Section 203, Section 203 will not apply to us.
TRANSFER AGENT
The transfer agent and registrar for our common stock is EquiServe Trust Co.,
N.A.
82
Underwriting
We are offering the shares of our common stock described in this prospectus
through the underwriters named below. UBS Securities LLC is the representative
of the underwriters.
We have entered into an underwriting agreement with the representative. Subject
to the terms and conditions of the underwriting agreement, the underwriters have
severally agreed to purchase, the number of shares of common stock listed next
to its name in the following table:
Underwriters Number of shares
- --------------------------------------------------------------------------------------------------- -----------------
UBS Securities LLC..............................................................................
-----------------
Total...................................................................................... 7,500,000
=================
The underwriting agreement provides that the underwriters must buy all of the
shares if they buy any of them. However, the underwriters are not required to
take or pay for the shares covered by the underwriters' over-allotment option
described below.
Our common stock is offered subject to a number of conditions, including:
>> receipt and acceptance of our common stock by the underwriters, and
>> the underwriters' right to reject orders in whole or in part.
In connection with this offering, certain of the underwriters or securities
dealers may distribute prospectuses electronically.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option to buy up to 750,000 additional
shares of our common stock. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, made in connection with this
offering. The underwriters have 30 days from the date of this prospectus to
exercise this option. If the underwriters exercise this option, they will each
purchase additional shares approximately in proportion to the amounts specified
in the table above.
COMMISSIONS AND DISCOUNTS
Shares sold by the underwriters to the public will initially be offered at the
initial offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per share from the initial public offering price. Any of these securities
dealers may resell any shares purchased from the underwriters to other brokers
or dealers at a discount of up to $ per share from the initial public offering
price. If all the shares are not sold at the initial public offering price, the
representatives may change the offering price and the other selling terms. Sales
of shares made outside of the United States may be made by affiliates of the
underwriters. Upon execution of the underwriting agreement, the underwriters
will be obligated to purchase the shares at the prices and upon the terms stated
therein, and, as a result, will thereafter bear any risk associated with
changing the offering price to the public or other selling terms.
83
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters assuming both no exercise and full
exercise of the underwriters' option to purchase up to an additional 750,000
shares.
No exercise Full exercise
------------- ---------------
Per share..................
Total..................
We estimate that the total expenses of this offering payable by us, not
including the underwriting discounts and commissions, will be approximately $1.0
million.
NO SALES OF SIMILAR SECURITIES
We, Valhi, NL and certain other persons and entities related to Harold C.
Simmons and our executive officers and directors have entered into lock-up
agreements with the underwriters. Under these agreements and subject to certain
exceptions, we and each of these persons or entities may not, without the prior
written approval of UBS Securities LLC, offer, sell, contract to sell or
otherwise dispose of or hedge our common stock or securities convertible into or
exchangeable for our common stock. These restrictions will be in effect for a
period of 120 days after the date of this prospectus.
At any time and without public notice, UBS Securities LLC may, in its sole
discretion and without notice, release all or some of the securities from these
lock-up agreements.
INDEMNIFICATION
We have agreed to indemnify the underwriters against certain liabilities,
including certain liabilities under the Securities Act. If we are unable to
provide this indemnification, we will contribute to payments the underwriters
may be required to make in respect of those liabilities.
NEW YORK STOCK EXCHANGE LISTING
Our common stock is listed on the New York Stock Exchange under the symbol
"KRO."
PRICE STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in activities that
stabilize, maintain or otherwise affect the price of our common stock including:
>> stabilizing transactions;
>> short sales;
>> purchases to cover positions created by short sales;
>> imposition of penalty bids; and
>> syndicate covering transactions.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our common stock while
this offering is in progress. These transactions may also include making short
sales of our common stock, which involves the sale by the underwriters of a
84
greater number of shares of common stock than they are required to purchase in
this offering, and purchasing shares of common stock on the open market to cover
positions created by short sales. Short sales may be "covered" shorts, which are
short positions in an amount not greater than the underwriters' over allotment
option referred to above, or may be "naked" shorts, which are short positions in
excess of that amount.
The underwriters may close out any covered short position by either exercising
their over allotment option, in whole or in part, or by purchasing shares in the
open market. In making this determination, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option.
Naked short sales are in excess of the over-allotment option. The underwriters
must close out any naked short position, by purchasing shares in the open
market. A naked short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price of the common
stock in the open market that could adversely affect investors who purchased in
this offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock may be higher
than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. The underwriters may carry out these transactions on the New York Stock
Exchange, in the over-the-counter market or otherwise.
85
Legal matters
The validity of the shares of common stock issued in this offering will be
passed upon for us by Locke Liddell & Sapp LLP, Dallas, Texas. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Baker Botts L.L.P., Dallas, Texas.
From time to time, Baker Botts L.L.P. represents Contran, Valhi and certain of
their affiliates, other than NL and Kronos, on general business, regulatory and
litigation matters.
Experts
The consolidated financial statements as of December 31, 2002 and 2003 and for
each of the three years in the period ended December 31, 2003 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
given on the authority of said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the SEC, under the Securities Act, a registration statement
on Form S-1, including the exhibits and schedules thereto under the Securities
Act of 1933, as amended, with respect to the common stock offered by this
prospectus. This prospectus, which constitutes part of the registration
statement, does not contain all the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement, portions of which are omitted as permitted by the rules and
regulations of the SEC. Statements made in this prospectus regarding the
contents of any contract or other documents are summaries of the material terms
of the contract or document. With respect to each contract or document filed as
an exhibit to the registration statement, reference is made to the corresponding
exhibit. For further information pertaining to us and to the common stock
offered by this prospectus, reference is made to the registration statement,
including the exhibits and schedules thereto, copies of which may be inspected
without charge at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the SEC at prescribed rates.
Information on the public reference facilities may be obtained by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site that contains
reports, proxy and information statements and other information that is filed
electronically with the SEC. The web site can be accessed at www.sec.gov.
We are required to comply with the informational requirements of the Securities
Exchange Act of 1934 and, accordingly, file current reports on Form 8-K,
quarterly reports on Form 10-Q, annual reports on Form 10-K, proxy statements
and other information with the SEC. Those reports, proxy statements and other
information are available for inspection and copying at the Public Reference
Room and internet site of the SEC referred to above. We intend to furnish our
shareholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
We maintain a website on the Internet with the address of www.kronostio2.com.
Copies of our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q and
any Current Reports on Form 8-K, and any amendments thereto, are or will be
available free of charge at such website as soon as reasonably practical after
they are filed with the SEC. Additional information regarding us, including our
audit committee charter, our code of business conduct and ethics and our
corporate governance guidelines, can also be found at this website as required.
Information contained on our website is not part of this prospectus.
86
KRONOS WORLDWIDE, INC.
INDEX OF FINANCIAL STATEMENTS
Page
Kronos Worldwide, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements
--------------------------------------------------------------------------------------
Summary..........................................................................................FA-1
Unaudited Pro Forma Condensed Consolidated Balance Sheet -
June 30, 2004..................................................................................FA-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations -
Year ended December 31, 2003 and Six months ended June 30, 2004.............................F-3/F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements......................F-5/F-6
Kronos Worldwide, Inc. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm..........................................FB-1
Consolidated Balance Sheets - December 31, 2002 and 2003; June 30, 2004 (unaudited)..............FB-2
Consolidated Statements of Income -
Years ended December 31, 2001, 2002 and 2003; Six months ended June 30,
2003 and June 30, 2004 (unaudited) FB-3/FB-4
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2001, 2002 and 2003; Six months ended June 30,
2003 and June 30, 2004 (unaudited) FB-5
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2001, 2002 and 2003; Six months ended June 30,
2004 (unaudited).......FB-6 Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2002 and 2003; Six months ended June 30,
2003 and June 30, 2004 (unaudited) FB-7/FB-8
Notes to Consolidated Financial Statements.................................................FB-9/FB-35
F-1
KRONOS WORLDWIDE, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2004 gives effect to the offering and the application of the proceeds thereof as
if such transactions had occurred on June 30, 2004. The Unaudited Pro Forma
Condensed Consolidated Statement of Income for the year ended December 31, 2003
and the six months ended June 30, 2004 gives effect to such transactions as if
they had occurred as of January 1, 2003. You should read this information in
conjunction with:
o The accompanying Notes to Pro Forma Condensed Consolidated Financial
Statements; and
o Our audited consolidated financial statements as of and for the year
ended December 31, 2003 and our unaudited consolidated financial
statements as of and for the six months ended June 30, 2004, which are
included in this prospectus.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
presented to aid you in your analysis of the financial aspects of the offering.
The Unaudited Pro Forma Condensed Consolidated Financial Statements have been
derived from our historical consolidated financial statements. The pro forma
adjustments, as described in the notes that follow, are based upon available
information and upon certain assumptions that we believe to be reasonable and
factually supportable. The Unaudited Pro Forma Condensed Consolidated Financial
Statements are not necessarily indicative of what our financial position or
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 our future
financial position or results of operations following completion of the
offering.
FA-1
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2004
(In millions)
Pro forma adjustments
---------------------------------
Kronos Issue common Repay Kronos
historical stock indebtedness pro forma
--------------- -------------- ---------------- -------------
Current assets:
Cash and cash equivalents $ 88.4 $ 288.4 $ (200.0) $ 176.8
Other current assets 420.0 - - 420.0
------------- -------------- --------------- -------------
Total current assets 508.4 288.4 (200.0) 596.8
Property and equipment, net 413.2 - - 413.2
Investment in TiO2 joint venture 120.7 - - 120.7
Deferred income taxes 179.6 - - 179.6
Other assets 29.5 - - 29.5
------------- -------------- --------------- -------------
Total assets $ 1,251.4 $ 288.4 $ (200.0) $ 1,339.8
============= ============== =============== =============
Current liabilities $ 156.7 $ - $ - $ 156.7
------------- -------------- --------------- -------------
Noncurrent liabilities:
Long-term debt 346.7 - - 346.7
Note payable to NL 200.0 - (200.0) -
Other noncurrent liabilities 141.0 - - 141.0
------------- -------------- --------------- -------------
Total noncurrent liabilities 687.7 - (200.0) 487.7
------------- -------------- --------------- -------------
Minority interest .5 - - .5
------------- -------------- --------------- -------------
Stockholders' equity:
Preferred stock - - - -
Common stock .5 .1 - .6
Additional paid-in capital 1,060.2 288.3 - 1,348.5
Retained deficit (476.4) - - (476.4)
Accumulated other comprehensive income (177.8) - - (177.8)
------------- -------------- --------------- -------------
Total stockholders' equity 406.5 288.4 - 694.9
------------- -------------- --------------- -------------
$ 1,251.4 $ 288.4 $ (200.0) $ 1,339.8
============= ============== =============== =============
FA-2
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 2003
(In millions, except per share amounts)
Pro forma
adjustment -
Kronos repay Kronos
historical indebtedness pro forma
-------------- --------------- -------------
Net sales $ 1,008.2 $ - $ 1,008.2
Cost of sales 739.2 - 739.2
------------- --------------- -------------
Gross margin 269.0 - 269.0
Selling, general and administrative expenses 124.4 - 124.4
Other expenses, net 12.1 - 12.1
------------- --------------- -------------
Income from operation 132.5 - 132.5
Interest expense 34.9 (1.1) 33.8
Other nonoperating income, net 1.7 - 1.7
------------- --------------- -------------
Income before income taxes and minority interest 99.3 1.1 100.4
Provision for income taxes 11.7 .4 12.1
Minority interest .1 - .1
------------- --------------- -------------
Net income $ 87.5 $ .7 $ 88.2
============= =============== =============
Net income per share $ 1.79 $ 1.79
============= =============
Common shares used in calculation of per share amounts 48.9 49.3
============= =============
FA-3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Six months ended June 30, 2004
(In millions except per share amounts)
Pro forma
adjustment -
Kronos repay Kronos
historical indebtedness pro forma
-------------- ---------------- -------------
Net sales $ 559.1 $ - $ 559.1
Cost of sales 429.8 - 429.8
------------- ---------------- -------------
Gross margin 129.3 - 129.3
Selling, general and administrative expenses 70.2 - 70.2
Other income, net 5.6 - 5.6
------------- ---------------- -------------
Income from operation 64.7 - 64.7
Interest expense 26.8 (9.0) 17.8
Other nonoperating income, net .8 - .8
------------- ---------------- -------------
Income before income taxes and minority interest 38.7 9.0 47.7
Provision for income taxes (benefit) (238.6) 3.6 (235.0)
------------- ---------------- -------------
Net income $ 277.3 $ 5.4 $ 282.7
============= =============== =============
Net income per share $ 5.67 $ 5.24
============= =============
Common shares used in calculation of per share amounts 48.9 53.9
============= =============
FA-4
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 Balance Sheet as of June 30,
2004 gives effect to the following transactions as if they had occurred on June
30, 2004. The Unaudited Pro Forma Condensed Consolidated Statements of Income
for the year ended December 31, 2003 and the six months ended June 30, 2004
gives effect to such transactions as if they had occurred as of January 1, 2003.
o The issuance of 7.5 million shares of our common stock in the offering
(assuming no exercise of the underwriters' over-allotment option) at a
price of $40.20 per share, the estimated price to the public, with net
proceeds to the Company after deducting the underwriting discount and
expenses of the offering.
o The repayment of our 9% long-term notes payable to affiliates in the
aggregate principal amount of $200.0 million using a portion of the
net proceeds of the offering.
The pro forma adjustments are explained in more detail below.
Note 2 - Pro forma adjustments - Unaudited Condensed Consolidated Balance Sheet:
The Offering
The issuance of 7.5 million shares of our common stock (excluding the
issuance of shares under the underwriters' over-allotment option), with net
proceeds as shown in the table below:
Amount
----------------
($ in millions,
except price
amounts)
Number of shares of our common stock issued in the offering 7.5
Price to the public $ 40.20
---------
Gross proceeds $ 301.5
Less estimated:
Underwriting discount (4%) 12.1
Expenses of the offering 1.0
---------
Net proceeds $ 288.4
=========
If the underwriters' over allotment option is exercised in full, we would
issue 8.25 million shares for net proceeds of $317.4 million, and the pro forma
cash and cash equivalents, total assets and stockholders' equity at June 30,
2004 would be $205.8 million, $1,368.8 million and $723.9 million, respectively.
Repay indebtedness
Upon completion of the offering, we will use a portion of the net proceeds
of the offering to repay our 9% long-term notes payable to affiliates in the
aggregate principal amount of $200.0 million. The remaining net proceeds will be
available for our general corporate purposes.
FA-5
Note 3- Pro forma adjustments - Unaudited Condensed Consolidated Statement of
Operations:
Upon completion of the offering, we will use a portion of the net proceeds
of the offering to repay our 9% long-term notes payable to affiliates in the
aggregate principal amount of $200.0 million. The remaining net proceeds will be
available for our general corporate purposes. The pro forma adjustment related
to interest expense represents the elimination of interest expense on such $200
million of indebtedness, net of the incremental income tax effect using the
estimated combined U.S. federal and state effective income tax rate of 40%.
Our $200 million long-term note payable to affiliates was issued to NL on
December 8, 2003 (subsequently, on September 24, 2004, NL transferred $168.6
million of such $200.0 million note to Valhi and a wholly-owned subsidiary of
Valhi in connection with a transaction involving those three companies). The
$1.1 million pro forma adjustment to interest expense for the year ended
December 31, 2003 represents the interest expense on such indebtedness included
in our historical results of operations from the date of issuance, and is
computed as 23/365ths of the annual interest expense of $18 million ($200
million, at 9% annual interest rate). The $9 million pro forma adjustment to
interest expense for the six months ended June 30, 2004 represents the interest
expense on such indebtedness included in our historical results of operations
for such period, and is computed as one-half of the annual interest expense of
$18 million.
In accordance with guidance of the SEC staff, the accompanying pro forma
condensed consolidated statements of income do not reflect any adjustment
related to any earnings which might be generated on the portion of the net
proceeds assumed to be used for our general corporate purposes.
Per share amounts
As required by guidance of the SEC staff, the pro forma net income per
share is based upon the 48.9 million weighted average number of shares of our
common stock actually outstanding during the year ended December 31, 2003 and
six months ended June 30, 2004, as increased for the number of our common shares
that would be issued in the offering which, at the issue price to the public of
$40.20 per share, would generate proceeds sufficient to repay our $200 million
long-term notes payable to affiliates (5.0 million shares, or $200 million
divided by $40.20). For the year ended December 31, 2003, such additional shares
would be weighted from the December 8, 2003 issuance of the $200 million note
payable to NL (equivalent to 23/365th of 5.0 million, or .4 million shares).
FA-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Kronos Worldwide, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Kronos Worldwide, Inc. and Subsidiaries as of December 31, 2002 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, 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 financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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
Dallas, Texas
March 5, 2004
FB-1
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
---------------------------------
ASSETS 2002 2003 June 30, 2004
------------ --------------- ---------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 40,685 $ 55,876 $ 88,434
Restricted cash 1,226 1,313 1,047
Accounts and other receivables, net 134,243 156,212 200,845
Receivable from affiliates 1,032 1,209 -
Refundable income taxes 1,777 35,336 1,332
Inventories 209,882 266,020 209,816
Prepaid expenses 5,164 4,456 4,151
Deferred income taxes 4,404 2,755 2,814
----------- ------------ -----------
Total current assets 398,413 523,177 508,439
----------- ------------ -----------
Other assets:
Notes receivable from NL Industries, Inc. 44,600 - -
Investment in TiO2 manufacturing joint venture 130,009 129,011 120,711
Prepaid pension cost 17,572 - -
Deferred income taxes 1,934 6,682 179,588
Other 20,259 28,040 29,517
----------- ------------ -----------
Total other assets 214,374 163,733 329,816
----------- ------------ -----------
Property and equipment:
Land 26,568 32,339 31,530
Buildings 148,701 179,472 174,946
Equipment 636,336 765,231 752,919
Mining properties 65,296 63,701 62,542
Construction in progress 8,702 9,666 11,589
----------- ------------ -----------
885,603 1,050,409 1,033,526
Less accumulated depreciation and amortization 509,845 615,442 620,355
----------- ------------ -----------
Net property and equipment 375,758 434,967 413,171
----------- ------------ -----------
$ 988,545 $ 1,121,877 $ 1,251,426
=========== ============= ===========
FB-2
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31,
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2003 June 30, 2004
--------------- ----------------- -------------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 1,298 $ 288 $ 148
Accounts payable and accrued liabilities 148,257 166,664 140,478
Payable to affiliates 7,933 8,919 9,266
Income taxes 6,193 12,354 6,809
Deferred income taxes 3,219 3,436 -
------------- ------------- --------------
Total current liabilities 166,900 191,661 156,701
------------- ------------- --------------
Noncurrent liabilities:
Long-term debt 324,608 356,451 346,682
Deferred income taxes 79,234 119,825 50,730
Notes payable to affiliates 44,600 200,000 200,000
Accrued pension cost 33,098 68,161 66,227
Accrued postretirement benefits cost 11,806 11,176 10,677
Other 13,742 14,727 13,408
------------- ------------- --------------
Total noncurrent liabilities 507,088 770,340 687,724
------------- ------------- --------------
Minority interest 383 525 505
------------- ------------- --------------
Stockholders' 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
Additional paid-in capital 1,060,157 1,060,157 1,060,247
Retained deficit (584,909) (729,260) (476,442)
Accumulated other comprehensive loss:
Currency translation (148,082) (133,009) (138,772)
Pension liabilities (13,481) (39,026) (39,026)
------------- ------------- --------------
Total stockholders' equity 314,174 159,351 406,496
------------- ------------- --------------
$ 988,545 $ 1,121,877 $ 1,251,426
============= ============= ==============
Commitments and contingencies (Notes 13 and 17)
See accompanying notes to consolidated financial statements.
FB-3
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Six months ended
December 31, June 30,
--------------------------------------- -----------------------------
2001 2002 2003 2003 2004
------------- ----------- ----------- ------------- -------------
(Unaudited)
Net sales $ 835,099 $ 875,188 $ 1,008,177 $ 519,604 $ 559,056
Cost of sales 578,060 671,830 739,237 386,066 429,736
----------- --------- ----------- --------- ---------
Gross margin 257,039 203,358 268,940 133,538 129,320
Selling, general and administrative expense 98,667 107,675 124,446 60,354 70,214
Other operating income (expense):
Currency transaction gains (losses), net 1,188 (547) (7,743) (3,841) 556
Disposition of property and equipment (735) (625) (480) (44) (2)
Insurance recoveries, net 7,222 - - - -
Other income 886 459 490 112 6,280
Corporate expense (4,878) (3,288) (4,140) (1,684) (1,279)
Other expense (78) (172) (128) - -
----------- --------- ----------- --------- ---------
Income from operations 161,977 91,510 132,493 67,727 64,661
Other income (expense):
Currency transaction gain - 6,271 - - -
Insurance recoveries, net 17,468 - - - -
Trade interest income 2,332 1,709 771 361 412
Other interest income 349 702 180 74 373
Interest expense to affiliates (22,969) (12,290) (1,887) (703) (8,951)
Interest income from affiliates 33,379 20,754 723 723 -
Interest expense (4,305) (16,837) (33,002) (16,350) (17,809)
----------- --------- ----------- --------- ---------
Income before income taxes and
minority interest 188,231 91,819 99,278 51,832 38,686
Provision for income taxes (benefit) 33,759 25,500 11,657 (6,674) (238,625)
----------- --------- ----------- --------- ---------
Income before minority interest 154,472 66,319 87,621 58,506 277,311
Minority interest 16 55 72 43 20
----------- --------- ----------- --------- ---------
Net income $ 154,456 $ 66,264 $ 87,549 $ 58,463 $ 277,291
=========== ========= =========== ======== =========
Net income per basic and diluted share $ 3.16 $ 1.35 $ 1.79 $ 1.19 $ 5.67
=========== ========= =========== ======== =========
Basic and diluted weighted average shares used
in the calculation of net income per share 48,943 48,943 48,943 48,943 48,944
=========== ========= =========== ======== =========
See accompanying notes to consolidated financial statements.
FB-4
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended
Years ended December 31, June 30,
------------------------------------------------ ----------------------------
2001 2002 2003 2003 2004
--------------- ---------------- ------------- ------------ -------------
(Unaudited)
Net income $ 154,456 $ 66,264 $ 87,549 $ 58,463 $ 277,291
-------------- --------------- -------------- ------------ -------------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (6,352) (7,129) (25,545) - -
Currency translation adjustment (15,974) 51,803 15,073 12,712 (5,763)
-------------- --------------- -------------- ------------ -------------
Total other comprehensive income (loss) (22,326) 44,674 (10,472) 12,712 (5,763)
-------------- --------------- -------------- ------------ -------------
Comprehensive income $ 132,130 $ 110,938 $ 77,077 $ 71,175 $ 271,528
============== =============== ============== ============ =============
See accompanying notes to consolidated financial statements.
FB-5
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2002 and 2003 and
six months ended June 30, 2003 (Unaudited)
(In thousands)
Accumulated other
comprehensive
Notes income (loss)
Additional Retained receivable -------------------------
Common paid-in earnings from Currency Pension
stock capital (deficit) affiliates translation liabilities Total
--------- ---------- ----------- ----------- ------------ ------------- -----------
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)
Dividends declared - - (30,500) - - - (30,500)
Change in notes receivable from affiliates - - - (69,678) - - (69,678)
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 - - 87,549 - - - 87,549
Other comprehensive income (loss), net of tax - - - - 15,073 (25,545) (10,472)
Dividends declared:
Cash - - (7,000) - - - (7,000)
Noncash - - (224,900) - - - (224,900)
---- ---------- --------- --------- ---------- -------- ----------
Balance at December 31, 2003 489 1,060,157 (729,260) - (133,009) (39,026) 159,351
---- ---------- --------- --------- ---------- -------- ----------
Unaudited:
Net income - - 277,291 - - - 277,291
Dividends - - (24,473) - - - (24,473)
Issuance of common stock - 90 - - - - 90
Other comprehensive loss - - - - (5,763) - (5,763)
---- ---------- --------- --------- ---------- -------- ----------
Balance at June 30, 2004 $489 $1,060,247 $(476,442) $ - $ (138,772) $ (39,026) $ 406,496
==== ========== ========= ======== =========== ========= ===========
See accompanying notes to consolidated financial statements.
FB-6
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, Six months ended June 30,
---------------------------------------------- -----------------------------
2001 2002 2003 2003 2004
---------- ------------- ------------ ------------- ------------
(Unaudited)
Cash flows from operating activities:
Net income $ 154,456 $ 66,264 $ 87,549 $ 58,463 $ 277,291
Depreciation and amortization 28,907 32,152 39,421 19,287 21,806
Noncash interest income from affiliates (22,201) (20,629) - - -
Noncash interest expense - 932 2,197 1,102 1,222
Deferred income taxes (4,242) 10,755 36,489 5,852 (245,059)
Minority interest 16 55 72 43 20
Net loss from disposition of
property and equipment 735 625 480 44 2
Pension cost, net (2,332) (1,866) (5,792) (1,410) 227
Other postretirement benefits, net (1,236) (1,250) (1,032) (555) (427)
Distributions from TiO2 manufacturing
joint venture, net 11,313 7,950 875 800 8,300
Insurance recoveries, net (17,468) - - - -
Other, net 261 - - - 949
Change in assets and liabilities:
Accounts and other receivable 2,507 5,547 1,264 (36,570) (48,004)
Inventories (32,698) 42,249 (26,041) 25,301 51,362
Prepaid expenses (322) 882 1,494 2,901 414
Accounts payable and accrued
liabilities 26,274 (25,049) 10,494 (27,168) (26,059)
Income taxes (4,211) (2,239) (38,706) (24,131) 28,016
Accounts with affiliates (652) (4,440) 1,920 5,244 1,858
Other noncurrent assets (1,314) 74 (3,919) 337 (3,463)
Other noncurrent liabilities (2,111) (866) 916 (209) (998)
---------- -------- ----------- ---------- ----------
Net cash provided by operating
activities 135,682 111,146 107,681 29,331 67,457
---------- -------- ----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (53,656) (32,571) (35,245) (13,766) (10,828)
Property damaged by fire:
Insurance proceeds 23,361 - - - -
Other, net (3,205) - - - -
Change in restricted cash equivalents
and restricted marketable debt
securities, net (577) (2,891) (554) (1,005) 273
Proceeds from disposition of property
and equipment 399 864 381 47 84
---------- -------- ----------- ---------- ----------
Net cash used by investing
activities (33,678) (34,598) (35,418) (14,724) (10,471)
---------- -------- ----------- ---------- ----------
See accompanying notes to consolidated financial statements.
FB-7
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Years ended December 31, Six months ended June 30,
----------------------------------------------- -------------------------------
2001 2002 2003 2003 2004
--------------- --------------- ------------- -------------- ------------
(Unaudited)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 1,437 $ 335,768 $ 16,106 $ 16,106 $ 99,968
Principal payments (22,428) (84,814) (46,006) (11,615) (99,994)
Deferred financing fees - (10,706) - - -
Dividends paid (30,500) (120,149) (7,000) (7,000) (24,473)
Loans from affiliates:
Loans - 44,600 8,000 8,000 -
Repayments - (194,000) (52,600) (52,600) -
Other capital transactions with affiliates,
net (47,477) (64,600) 19,700 19,700 -
Other, net 3 (11) (14) - -
----------- ---------- ---------- ---------- ----------
Net cash used by financing activities (98,965) (93,912) (61,814) (27,409) (24,499)
----------- ---------- ---------- ---------- ----------
Cash and cash equivalents - net change from:
Operating, investing and financing
activities 3,039 (17,364) 10,449 (12,802) 32,487
Currency translation (1,301) 3,332 4,742 1,682 71
----------- ---------- ---------- ---------- ----------
1,738 (14,032) 15,191 (11,120) 32,558
Balance at beginning of year 52,979 54,717 40,685 40,685 55,876
----------- ---------- ---------- ---------- ----------
Balance at end of year $ 54,717 $ 40,685 $ 55,876 $ 29,565 $ 88,434
=========== ========== =========== =========== ===========
Supplemental disclosures - cash paid for:
Interest $ 27,239 $ 33,169 $ 30,152 $ 17,048 $ 25,638
Income taxes 43,422 17,369 1,597 7,534 (22,208)
See accompanying notes to consolidated financial statements.
FB-8
KRONOS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. Kronos Worldwide, Inc. ("Kronos" or
the "Company") (NYSE: KRO) is a 50.5% owned subsidiary of NL Industries, Inc.
(NYSE: NL) at June 30, 2004. NL Industries, Inc. (NYSE: NL) conducts its
titanium dioxide pigments ("TiO2") operations through Kronos. At June 30, 2004,
Valhi, Inc. and a wholly-owned subsidiary of Valhi, held approximately 83% of
NL's outstanding common stock, and Contran Corporation and its subsidiaries held
approximately 90% of Valhi's outstanding common stock. At June 30, 2004, Valhi
and a wholly-owned subsidiary of Valhi held an additional approximate 43.6% 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, or
is held by Mr. Simmons or persons or other entities related to Mr. Simmons. Mr.
Simmons, the Chairman of the Board of Valhi, Contran, NL and the Company, may be
deemed to control each of such companies.
Prior to December 2003, Kronos was a wholly-owned subsidiary of NL. On
December 8, 2003, NL completed the pro-rata distribution to its stockholders of
approximately 48.8% of Kronos' common stock (including Valhi and a wholly-owned
subsidiary of Valhi). Stockholders of NL received 1 share of Kronos common stock
for every 2 shares of NL held. Immediately prior to NL's distribution of shares
of Kronos' common stock, the Company distributed a $200 million dividend to NL
in the form of a long-term note payable. See Note 11.
Information included in the consolidated financial statements and related
notes to the consolidated financial statements as of June 30, 2004 and for the
six months ended June 30, 2003 and 2004 is unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations and cash flows for such 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
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") has been condensed
or omitted for such 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.
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
FB-9
directors unrelated to Contran, and the purchase price was negotiated by the
special committee based upon its consideration of relevant factors, including
but 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.
Management's estimates. 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.
Principles of consolidation. The consolidated financial statements include
the accounts of Kronos and its majority-owned subsidiaries. All material
intercompany accounts and balances have been eliminated.
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 average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently, and in 2002
included a $6.3 million gain related to the extinguishments of certain
intercompany indebtedness that is classified as a component of other income
(expense) in the accompanying Consolidated Statement of Income.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). 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.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Amounts are removed from inventories at average cost. Cost of sales
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Cash and cash equivalents. Cash equivalents include bank time deposits and
U.S. Treasury securities purchased under short-term agreements to resell with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities, and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.5
million and $2.6 million at December 31, 2002 and 2003, respectively). The
restricted marketable debt securities are generally classified as either a
current or noncurrent asset depending upon the maturity date of each such debt
security and are carried at market which approximates cost.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in TiO2 manufacturing joint venture. Investments in a 50%-owned
manufacturing joint venture is accounted for by the equity method.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
FB-10
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 for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
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
sales. Accrued repair and maintenance costs, included in current liabilities,
was $4.0 million and $6.3 million at December 31, 2002 and 2003, respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2001, 2002 or 2003.
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 assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
Long-term debt. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, the Company has exempted from the scope of SFAS
No. 133 all host contracts containing embedded derivatives that were issued or
acquired prior to January 1, 1999.
Income taxes. Prior to December 2003, Kronos and its qualifying
subsidiaries were 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 was 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 provisions 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 made payments to or received 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 NL Tax
Sharing Agreement. See Note 13.
Effective December 2003, following NL's distribution of 48.8% of the
outstanding shares of Kronos common stock to NL stockholders, Kronos and its
qualifying subsidiaries ceased being members of the NL Tax Group, but Kronos and
its qualifying subsidiaries remained as members of the Contran Tax Group. Kronos
entered into a new tax sharing agreement with Valhi and Contran, which contains
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
FB-11
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and including undistributed earnings of foreign
subsidiaries which are not deemed to be permanently reinvested. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance
based on the estimate of the amount of such deferred tax assets that the Company
believes does not meet the "more-likely-than-not" recognition criteria. Earnings
of foreign subsidiaries deemed to be permanently reinvested aggregated $261
million at December 31, 2002 and $304 million at December 31, 2003.
Stock options. The Company has not issued any stock options. 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, and to
account for its stock-based employee compensation related to 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 and 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). Upon exercise of such options to purchase NL common stock held by
employees of the 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 nil in 2001, $2.3 million
in 2002 and $1.0 million in 2003, and aggregate compensation expense was nil in
the six months ended June 30, 2003 and $900,000 in the six months ended June 30,
2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been if the Company had applied the
fair value-based recognition provisions of SFAS No. 123, for all awards granted
subsequent to January 1, 1995.
Six months ended
Years ended December 31, June 30,
------------------------------------- ---------------------
2001 2002 2003 2003 2004
----------- ---------- ---------- ----------- --------
(Unaudited)
(In millions, except per share amounts)
Net income as reported $ 154.4 $ 66.3 $ 87.5 $ 58.5 $ 277.3
Adjustments, net of applicable income tax effects
and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 - 1.5 .7 - .6
Stock-based employee compensation expense
determined under SFAS No. 123 (1.1) (.7) (.3) (.2) -
---------- ---------- ---------- ---------- ----------
Pro forma net income $ 153.3 $ 67.1 $ 87.9 $ 58.3 $ 277.9
========== ========== ========== ========== ==========
Basic and diluted earnings per share:
As reported $ 3.16 $ 1.35 $ 1.79 $ 1.19 $ 5.67
Pro forma $ 3.13 $ 1.37 $ 1.80 $ 1.19 $ 5.68
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal and
administrative functions such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $49 million in 2001, $51 million in
2002 and $63 million in 2003. Advertising costs are expensed as incurred and
were $1 million in each of 2001, 2002 and 2003. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$6 million in each of 2001 and 2002 and $7 million in 2003.
FB-12
Other. Accounting and funding policies for retirement and post retirement
benefits other than pensions ("OPEB") plans are described in Note 14.
Note 2 - Geographic information:
The Company's operations are 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, 2002 and 2003, the net assets of non-U.S.
subsidiaries included in consolidated net assets approximated $159 million and
$193 million, respectively.
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.
Years ended December 31,
-------------------------------------------------
2001 2002 2003
----------- ---------- -----------
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 398,470 $ 404,299 $ 510,105
United States 278,624 291,823 310,694
Canada 149,412 157,773 173,297
Belgium 126,782 123,760 150,728
Norway 102,843 111,811 131,457
Other 82,320 89,560 110,358
Eliminations (303,352) (303,838) (378,462)
----------- ----------- -----------
$ 835,099 $ 875,188 $ 1,008,177
=========== =========== ===========
Net sales - point of destination:
Europe $ 425,338 $ 456,834 $ 567,496
United States 258,347 271,865 296,643
Canada 47,061 53,371 53,170
Latin America 25,514 19,970 15,920
Asia 46,169 47,549 49,020
Other 32,670 25,599 25,928
----------- ----------- -----------
$ 835,099 $ 875,188 $ 1,008,177
=========== =========== ===========
December 31,
------------------------------------
2002 2003
(In thousands)
Identifiable assets - net property and equipment:
Germany $ 213,170 $ 252,411
Canada 54,719 63,623
Belgium 54,625 64,895
Norway 49,737 50,811
Other 3,507 3,227
----------- -----------
$ 375,758 $ 434,967
=========== ===========
FB-13
Note 3 - Accounts and other receivables, net:
December 31, June 30,
------------------------------ 2004
2002 2003 -----------
------------- -------------- (Unaudited)
(In thousands)
Trade receivables $ 124,044 $ 146,971 $ 192,788
Insurance claims 312 58 -
Recoverable VAT and other receivables 12,492 12,103 10,906
Allowance for doubtful accounts (2,605) (2,920) (2,849)
----------- ----------- -----------
$ 134,243 $ 156,212 $ 200,845
=========== =========== ===========
Note 4 - Inventories:
December 31, June 30,
------------------------------- 2004
2002 2003 -----------
------------- ------------ (Unaudited)
(In thousands)
Raw materials $ 54,077 $ 61,959 $ 35,409
Work in progress 15,936 19,855 17,078
Finished products 109,203 147,270 121,659
Supplies 30,666 36,936 35,670
----------- ----------- -----------
$ 209,882 $ 266,020 $ 209,816
=========== =========== ===========
Note 5 - Other noncurrent assets:
December 31, June 30,
------------------------------- 2004
2002 2003 -----------
-------------- -------------- (Unaudited)
(In thousands)
Deferred financing costs, net $ 10,550 $ 10,417 $ 9,100
Restricted marketable debt securities 2,492 2,586 2,548
Unrecognized net pension obligation 5,561 13,747 13,426
Other 1,656 1,290 4,443
----------- ----------- -----------
$ 20,259 $ 28,040 $ 29,517
=========== =========== ===========
Note 6 - 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 LLC. 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
FB-14
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. 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. Such distributions are reported net of any contributions made to LPC
during the periods. Net distributions of $11.3 million in 2001, $8.0 million in
2002, and $.9 million in 2003 are stated net of contributions of $6.2 million in
2001, $14.2 million in 2002 and $13.1 million in 2003.
LPC made net cash distributions of $22.6 million in 2001, $15.9 million in
2002 and $1.8 million in 2003, equally split between the partners.
Summary balance sheets of LPC are shown below:
December 31,
------------------------------------
2002 2003
--------------- -----------------
(In thousands)
ASSETS
Current assets $ 56,745 $ 57,028
Property and equipment, net 235,739 226,971
----------- ------------
$ 292,484 $ 283,999
=========== ============
Other liabilities, primarily current $ 29,716 $ 23,229
Partners' equity 262,768 260,770
----------- ------------
$ 292,484 $ 283,999
=========== ============
Summary income statements of LPC are shown below:
Years ended December 31,
-------------------------------------------------------
2001 2002 2003
--------------- -------------- -------------
(In thousands)
Revenues and other income:
Kronos $ 93,393 $ 92,428 $ 101,293
Tioxide 94,009 93,833 101,619
Interest 303 53 73
---------- ------------ -----------
187,705 186,314 202,985
---------- ------------ -----------
Cost and expenses:
Cost of sales 187,295 185,946 201,947
General and administrative 410 368 398
---------- ------------ -----------
187,705 186,314 202,345
---------- ------------ -----------
Net income from continuing operations - - 640
Cumulative effect of change in accounting principles - - (640)
---------- ------------ -----------
Net income $ - $ - $ -
========== ============ ===========
FB-15
Note 7 - Accounts payable and accrued liabilities:
December 31, June 30,
--------------------------------- ---------------
2002 2003 2004
-------------- --------------- ---------------
(Unaudited)
(In thousands)
Accounts payable $ 89,602 $ 97,446 $ 65,634
Employee benefits 27,042 31,732 28,217
Other 31,613 37,486 46,627
----------- ------------ -----------
$ 148,257 $ 166,664 $ 140,478
=========== ============ ===========
Note 8 - Long-term debt:
December 31, June 30,
------------------------------- 2004
2002 2003 ------------
------------ ----------- (Unaudited)
(In thousands)
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes $ 296,942 $ 356,136 $ 346,446
Bank credit facility 27,077 - -
Other 1,887 603 384
----------- ------------ -----------
325,906 356,739 346,830
Less current maturities 1,298 288 148
----------- ------------ -----------
$ 324,608 $ 356,451 $ 346,682
=========== ============ ===========
In June 2002, Kronos International, Inc. ("KII"), a wholly-owned subsidiary
of the Company which conducts the Company's TiO2 operations in Europe, issued
euro 285 million principal amount ($280 million when issued) of its 8.875%
Senior Secured Notes (the "Notes") due 2009. The Notes are collateralized by
first priority liens on 65% of the common stock or other ownership interests of
certain of KII's first-tier operating subsidiaries. In addition, the indenture
contains customary cross-default provisions with respect to other debt and
obligations of KII or its 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. 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 the 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, 2003, the quoted market price of
the Notes was approximately (euro)1,000 per (euro)1,000 principal amount (2002 -
(euro)1,010 per (euro)1,000 principal amount). The Notes require cash interest
payments on June 30 and December 30. KII completed an exchange offer in November
2002 to exchange the Notes for registered publicly traded notes that have
substantially identical terms as the Notes.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway (collectively, the "Borrowers") entered into a (euro)80 million secured
FB-16
revolving bank credit facility that matures in June 2005 ("European Credit
Facility"). Borrowings under this facility were used in part to repay and
terminate Kronos' short-term non-U.S. bank credit agreements. Borrowings may be
denominated in euros, Norwegian kroners or U.S. dollars, and bear interest at
the applicable interbank market rate plus 1.75%. The facility also provides for
the issuance of letters of credit up to (euro)5 million. The European Credit
Facility is collateralized by the accounts receivable and inventories of the
borrowers, plus a limited pledge of all of the other assets of the Belgian
borrower. The European Credit Facility contains certain restrictive covenants
which, among other things, restricts the ability of the Borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of the Borrowers, KII and its other
subsidiaries. At December 31, 2003, no amounts were outstanding under the
European Credit Facility, and the equivalent of $97.5 million was available for
additional borrowing by the subsidiaries.
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 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, certain of the Company's U.S. subsidiaries entered into
a $50 million revolving credit facility (nil outstanding at December 31, 2003)
that matures in September 2005 ("U.S. Credit Facility"). The facility is
collateralized by the accounts receivable, inventories and certain fixed assets
of the borrowers. Borrowings under this facility are limited to the lesser of
$45 million or a formula-determined amount based upon the accounts receivable
and inventories of the borrowers. Borrowings bear interest at either the prime
rate or rates based upon the eurodollar rate. The facility contains certain
restrictive covenants which, among other things, restricts the abilities of the
borrowers to incur debt, incur liens, pay dividends in certain circumstances,
sell assets or enter into mergers. At December 31, 2003, $39 million was
available for borrowing under the facility.
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 December 31, 2003.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $99.9 million at December 31, 2003 (including
approximately $97.5 million under the European Credit Facility).
During the first quarter of 2004, certain of KII's operating subsidiaries
borrowed a net (euro)40 million ($50 million when borrowed) under the European
Credit Facility at an interest rate of 3.8%. Such amounts were repaid in the
second quarter of 2004.
In January 2004, Kronos' Canadian subsidiary entered into a new Cdn. $30
million revolving credit facility that matures in January 2009. The facility is
collateralized by the accounts receivable and inventories of the borrower.
Borrowings under this facility are limited to the lesser of Cdn. $26 million or
a formula-determined amount based upon the accounts receivable and inventories
of the borrower. Borrowings bear interest at rates based upon either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive covenants which, among other things, restricts the ability of the
borrower to incur debt, incur liens, pay dividends in certain circumstances,
sell assets or enter into mergers.
FB-17
Aggregate maturities of long-term debt at December 31, 2003 are shown in
the table below.
Years ending December 31, Amount
------------------------- ------------------
(In thousands)
2004 $ 288
2005 153
2006 145
2007 18
2008 -
2009 and thereafter 356,135
-----------
$ 356,739
===========
Note 9 - Other noncurrent liabilities:
December 31, June 30,
-------------------------------- 2004
2002 2003 -----------
-------------- ------------- (Unaudited)
(In thousands)
Insurance claims and expenses $ 1,480 $ 1,673 $ 1,047
Employee benefits 4,025 4,849 4,622
Other 8,237 8,205 7,739
----------- ------------ -----------
$ 13,742 $ 14,727 $ 13,408
=========== ============ ===========
Note 10 - Other income:
Years ended December 31, Six months ended
----------------------------------------- ---------------------------
2001 2002 2003 2003 2004
---------- --------- ----------- ----------- -----------
(Unaudited)
Contract dispute settlement $ - $ - $ - $ - $ 6,289
Other income (expense) 886 459 490 112 (9)
--------- --------- --------- --------- ---------
$ 886 $ 459 $ 490 $ 112 $ 6,280
========= ========= ========= ========= =========
The contract dispute settlement relates to the Company's settlement with a
customer. As part of the settlement, the customer agreed to make payments to the
Company through 2007 aggregating $7.3 million. The $6.3 million gain recognized
represents the present value of the future payments to be paid by the customer
to the Company.
FB-18
Note 11 - Notes receivable from and payable to affiliates:
December 31, June 30,
-------------------------------- 2004
2003 2004 ------------
------------- ------------- (Unaudited)
(In thousands)
Notes receivable from affiliates:
Variable rate - NL $ 44,600 $ - $ -
=========== =========== ===========
Notes payable to affiliates:
Revolving credit facility $ 44,600 $ - $ -
Note payable to NL - 200,000 200,000
----------- ----------- -----------
$ 44,600 $ 200,000 $ 200,000
=========== =========== ===========
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 on December 31, 2005. This note
receivable from NL is included in noncurrent assets at December 31, 2002 (rather
than classified as contra-equity), 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. In December 2003, immediately prior to NL's
distribution of approximately 48.8% of the outstanding shares of Kronos' common
stock to NL stockholders, the Company distributed a $200 million dividend to NL
in the form of a long-term note payable. The $200 million long-term note payable
to NL is unsecured and bears interest at 9% per annum, with interest payable
quarterly and all principal due in 2010.
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 - Common stock and notes receivable from affiliates:
NL common stock options held by employees of the Company. Certain employees
of the Company have been granted nonqualified options to purchase NL common
stock under the terms of certain option plans sponsored by NL. Generally, the
stock options are granted at a price equal to or greater than 100% of the market
price of NL's common stock at the date of grant, vest over a five-year period
and expire ten years from the date of grant. Following NL's distribution of
approximately 48.8% of the outstanding shares of Kronos' common stock to NL
stockholders, the exercise prices for all options to purchase NL common stock
were adjusted.
FB-19
Changes in outstanding options to purchase NL common stock granted to
certain employees of the Company are summarized in the table below.
Weighted- Weighted-
Amount average average fair
Exercise price payable upon exercise value at
Shares per share exercise price grant
----------- ----------------- ------------- -------------- -----------------
(In thousands, except per share amounts)
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
Exercised (20) 11.28-11.88 (226) $ 11.55
Canceled (69) 11.28-20.11 (1,150) $ 16.67
Adjusted for Kronos common stock
distribution - 8.69-21.97 (4,913) $ 8.63
----- ---------------- ----------
Outstanding at December 31, 2003 570 $ 0.06-13.34 $ 4,889 $ 8.58
===== ================ ==========
At December 31, 2001, 2002 and 2003 options to purchase 261,000, 240,400
and 351,900 shares, respectively, were exercisable, and options to purchase
103,200 shares become exercisable in 2004. Of the exercisable options, options
to purchase 321,900 shares at December 31, 2003 had exercise prices less than
NL's December 31, 2003 quoted market price of $11.70 per share. Outstanding
options at December 31, 2003 expire at various dates through 2011.
The following table summarizes NL's stock options outstanding and held by
certain employees of the Company, and those which are exercisable as of December
31, 2003 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 12/31/03 life price 12/31/03 Price
- --------------------------------- -------------- ---------------- ------------- ----------------- ----------------
$ 0.06 - $ 3.56 59,500 4.6 $ 2.89 44,000 $ 2.83
5.06 - 7.13 180,500 5.5 5.75 98,300 5.83
8.63 - 11.49 299,600 6.1 10.94 179,600 10.58
13.34 30,000 4.1 13.34 30,000 13.34
----------- ----------
569,600 5.8 $ 8.58 351,900 $ 8.52
=========== ==========
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. In July 2002 the Company
distributed its affiliate notes receivable to NL totaling $711.1 million in the
form of a noncash dividend.
FB-20
The Company periodically converted interest receivable from affiliates to
notes receivable from affiliates. For the years ended 2001 and 2002, the
interest transferred to notes receivable from affiliates totaled $22.2 million
and $20.6 million, respectively and totaled nil in 2003.
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 Statements of Cash Flows.
Note 13 - Income taxes:
Years ended December 31, Six months ended June30,
-------------------------------------------- -------------------------------
2001 2002 2003 2003 2004
-------------- -------------- ----------- --------------- -------------
(Unaudited)
(In millions)
Pre-tax income:
U.S. $ 34.2 $ 24.3 $ 13.2 $ 9.1 $ 2.5
Non-U.S. 154.0 67.5 86.1 42.7 36.2
----------- ---------- ----------- ----------- ---------
$ 188.2 $ 91.8 $ 99.3 $ 51.8 $ 38.7
=========== ========== =========== =========== =========
Expected tax expense, at U.S. federal statutory
income tax rate of 35% $ 65.9 $ 32.1 $ 34.8 $ 18.1 $ 13.5
Non-U.S. tax rates (7.2) (6.7) (1.1) (.4) .1
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies .5 .5 1.9 .1 -
Change in deferred income tax valuation allowance,
net (23.2) (1.8) (6.7) (.1) (254.3)
Nondeductible expenses .2 2.9 2.8 - 1.6
Nontaxable income (3.2) - - - -
Change in Belgian income tax law - (2.3) - - -
U.S. state income taxes, net .5 - - .2
NL tax contingency reserve adjustment, net (3.4) .2 14.8 - -
Refund of prior year German income taxes - - (38.0) (24.6) (3.1)
Other, net 3.7 .6 3.2 - 3.6
----------- ---------- ----------- ----------- ---------
$ 33.8 $ 25.5 $ 11.7 $ (6.7) $ (238.6)
=========== ========== =========== =========== =========
Components of income tax expense:
Currently payable (refundable):
U.S. federal and state $ 9.0 $ 4.3 $ 10.5 $ 4.2 $ .2
Non-U.S. 29.0 10.4 (35.3) (16.7) 6.2
----------- ---------- ----------- ----------- ---------
38.0 14.7 (24.8) (12.5) 6.4
----------- ---------- ----------- ----------- ---------
Deferred income taxes (benefit)
U.S. federal and state 4.0 5.2 (1.0) (.9) .8
Non-U.S. (8.2) 5.6 37.5 6.7 (245.8)
----------- ---------- ----------- ----------- ---------
(4.2) 10.8 36.5 5.8 (245.0)
----------- ---------- ----------- ----------- ---------
$ 33.8 $ 25.5 $ 11.7 $ (6.7) $ (238.6)
Comprehensive provision for income taxes allocable to:
Net income $ 33.8 $ 25.5 $ 11.7 $ (6.7) $ (238.6)
Other comprehensive income - pension
liabilities (2.2) (2.9) (11.3) - -
----------- ---------- ----------- ----------- ---------
$ 31.6 $ 22.6 $ .4 $ (6.7) $ (238.6)
=========== ========== =========== =========== =========
FB-21
The components of the net deferred tax liability at December 31, 2002 and
2003, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
-----------------------------------------------------
2002 2003
-------------------------- -------------------------
Assets Liabilities Assets Liabilities
---------- -------------- ---------- -------------
(In millions)
Tax effect of temporary differences related to:
Inventories $ 3.4 $ (3.3) $ 1.5 $ (4.1)
Property and equipment 43.9 (59.1) 46.0 (62.7)
Accrued OPEB costs 4.5 - 4.3 -
Accrued (prepaid) pension cost 3.1 (24.8) 15.9 (33.5)
Other accrued liabilities and deductible differences 9.6 - 19.8 -
Other taxable differences - (35.3) - (71.3)
Tax on unremitted earnings of non-U.S. subsidiaries - (4.1) - (4.3)
Tax loss and tax credit carryforwards 139.7 - 137.3 -
Valuation allowance (153.7) - (162.7) -
-------- -------- --------- ---------
Adjusted gross deferred tax assets (liabilities) 50.5 (126.6) 62.1 (175.9)
Netting of items by tax jurisdiction (44.2) 44.2 (52.7) 52.7
-------- -------- --------- ---------
6.3 (82.4) 9.4 (123.2)
Less net current deferred tax asset (liability) 4.4 (3.2) 2.8 (3.4)
-------- -------- --------- ---------
Net noncurrent deferred tax asset (liability) $ 1.9 $ (79.2) $ 6.6 $ (119.8)
======== ========= ======== =========
Years ended December 31,
--------------------------------------------------
2001 2002 2003
------------ ------------- -------------
(In millions)
Increase (decrease) in valuation allowance:
Recognition of certain deductible tax attributes for which
the benefit had not previously been recognized under the
"more-likely-than-not" recognition criteria $ (23.2) $ (1.8) $ (6.7)
Foreign currency translation (7.5) 21.6 28.2
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 (3.2) 12.2 (12.5)
---------- -------- ---------
$ (33.9) $ 32.0 $ 9.0
========== ======== ==========
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
In 2001, the Company completed a restructuring of its German subsidiaries,
and as a result the Company recognized a $17.6 million net income tax benefit.
This benefit is comprised of a $23.2 million decrease in the Company's deferred
income tax asset 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, offset by $5.6
million of incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
FB-22
In the first quarter of 2003, KII 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. KII and the Company's German operating
subsidiary were required to file amended tax returns with the German tax
authorities in order to receive its refunds for such years, and all of such
amended returns were filed during 2003. Such amended returns reflected an
aggregate refund of taxes and related interest to KII and its German operating
subsidiary of (euro)26.9 million ($32.1 million), and the Company recognized the
benefit for these net funds in its 2003 results of operations. During the first
six months of 2004, the Company recognized a net of (euro)2.5 million ($3.1
million) related to additional net interest which has accrued on the outstanding
refund amount. Assessments and refunds will be processed by year as the
respective returns are reviewed by the tax authorities. Certain interest
components may also be refunded separately. Through June 2004, KII's German
operating subsidiary had received net refunds of (euro)24.5 million ($28.4
million when received). KII believes it will receive the remainder of the net
refunds of taxes and related interest for the remaining years during the
remainder of 2004. In addition to the refunds for the 1990 to 1997 periods, the
court ruling also resulted in a refund of 1999 income taxes and interest, and
the Company received (euro)21.5 million ($24.6 million) in 2003.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including non-income
related items and interest. For example:
o The Company has received a preliminary tax assessment related to 1993
from the Belgian tax authorities proposing tax deficiencies, including
interest, of approximately (euro)6 million ($7 million at June 30,
2004). The Company has filed a protest to this assessment and believes
that a significant portion of the assessment is without merit. The
Belgian tax authorities have filed a lien on the fixed assets of the
Company's Belgian TiO2 operations in connection with this assessment.
In April 2003, the Company received a notification from the Belgian
tax authorities of their intent to assess a tax deficiency related to
1999 that, including interest, is expected to be approximately
(euro)13 million ($16 million). The Company believes the proposed
assessment is substantially without merit, and the Company has filed a
written response. In December 2003, the Belgian tax authorities agreed
to a settlement of certain tax assessments separate from the
assessments noted previously, for the years 1991 to 1997. Including
interest, the proposed (euro)10.1 million tax deficiency ($12.6
million at December 31, 2003) was settled for (euro)5.0 million ($6.3
million).
o The Norwegian tax authorities have notified NL of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million
at June 30, 2004) relating to the years 1998 to 2000. The Company has
filed a written protest to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, 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 its consolidated financial position, results of operations or
liquidity.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. Prior
to the end of 2003, Kronos believed there was significant uncertainty regarding
its ability to utilize such net operating loss carryforwards under German tax
law and, principally because of this uncertainty, Kronos had concluded the
FB-23
benefit of the net operating loss carryforwards did not meet the
"more-likely-than-not" criteria. By the end of 2003, and primarily as a result
of a favorable German court ruling in 2003 and the procedures Kronos had
completed during 2003 with respect to the filing of certain amended German tax
returns (as discussed below), Kronos had concluded that the significant
uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law had been eliminated. However, at the end of
2003, Kronos believed that it would generate a taxable loss in Germany during
2004. Such expectation was based primarily upon then current levels of prices
for TiO2, and the fact that Kronos was experiencing a downward trend in its TiO2
selling prices and Kronos did not have any indication that the downward trend
would improve. Accordingly, Kronos continued to conclude at the end of 2003 that
the benefit of the German net operating loss carryforwards did not meet the
"more-likely-than-not" criteria. The expectation for a taxable loss in Germany
continued through the end of the first quarter of 2004. By the end of the second
quarter of 2004, however, Kronos' TiO2 selling prices had started to increase,
and Kronos believes its selling prices will continue to increase during the
second half of 2004 after Kronos and its major competitors announced an
additional round of price increases. Consequently, Kronos' revised projections
now reflect taxable income for Germany in 2004 as well as 2005. Accordingly,
based on all available evidence, Kronos concluded that the benefit of the net
operating loss carryforwards and other German tax attributes now meet the
"more-likely-than-not" recognition criteria, and Kronos reversed the deferred
income tax asset valuation allowance related to Germany. Accordingly, in the
first six months of 2004, Kronos recognized a $254.3 million income tax benefit
related to the reversal of such deferred income tax asset valuation allowance
attributable to Kronos' income tax attributes in Germany (principally the net
operating loss carryforwards). Of such $254.3 million, $8.7 million relates
primarily to the utilization of the German net operating loss carryforwards
during the first six months of 2004, the benefit of which had previously not met
the "more-likely-than-not" recognition criteria, and $245.6 million relates to
the German deferred income tax asset valuation allowance attributable to the
remaining German net operating loss carryforwards and other tax attributes as of
June 30, 2004, the benefit of which Kronos has concluded now meet the
"more-likely-than-not" recognition criteria. At June 30, 2004, the net operating
loss carryforwards for German corporate and trade tax purposes aggregated the
equivalent of $594 million and $255 million, respectively, all of which have no
expiration date.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforward
effective January 1, 2004 to 60% of taxable income after the first (euro)1
million of taxable income. The new law will have a significant affect the
Company's cash tax payments in Germany going forward, the extent of which will
be dependent on the level of income earned in Germany.
Note 14 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. 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. Variances from actuarially assumed rates will result
in increases or decreases in accumulated pension obligations, pension expense
and funding requirements in future periods. At December 31, 2003, the Company
currently expects to contribute the equivalent of approximately $9 million to
all of its defined benefit pension plans during 2004.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost related to the Company's
consolidated business segments and charged to continuing operations and the
rates used in determining the actuarial present value of benefit obligations are
presented in the tables below. The Company uses a September 30th measurement
date for its defined benefit pension plans.
FB-24
Years ended December 31,
-----------------------------------
2002 2003
------------- -------------
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 218,162 $ 254,459
Service cost 4,278 5,127
Interest cost 13,641 15,373
Participant contributions 1,056 1,346
Plan amendments - 3,200
Actuarial losses (gains) (5,178) 21,919
Change in foreign exchange rates 36,436 42,770
Benefits paid (13,936) (18,234)
------------ ------------
Benefit obligations at end of the year $ 254,459 $ 325,960
============ ============
Change in plan assets:
Fair value of plan assets at beginning of the year $ 168,155 $ 189,936
Actual return on plan assets (2,054) (10,249)
Employer contributions 9,010 13,586
Participant contributions 1,056 1,346
Change in foreign exchange rates 27,705 26,899
Benefits paid (13,936) (18,234)
------------ ------------
Fair value of plan assets at end of year $ 189,936 $ 203,284
============ ============
Funded status at end of the year:
Plan assets less than PBO $ (64,523) $ (122,676)
Unrecognized actuarial losses 55,807 115,807
Unrecognized prior service cost 4,881 8,566
Unrecognized net transition obligations 5,247 5,275
------------ ------------
$ 1,412 $ 6,972
============ ============
Amounts recognized in the balance sheet:
Prepaid pension costs $ 17,572 $ -
Unrecognized net pension obligations 5,561 13,747
Accrued pension costs:
Current (6,677) (7,987)
Noncurrent (33,098) (68,161)
Accumulated other comprehensive income 18,054 69,373
------------ ------------
$ 1,412 $ 6,972
============ ============
FB-25
Six months ended
Years ended December 31, June 30,
------------------------------------------ ---------------------------
2001 2002 2003 2003 2004
------------- ------------ ----------- ------------ ---------
(Unaudited)
(In thousands)
Net periodic pension cost:
Service cost benefits $ 3,743 $ 4,278 $ 5,127 $ 2,518 $ 3,057
Interest cost on PBO 12,751 13,641 15,373 7,528 8,615
Expected return on plan assets (12,635) (12,778) (14,529) (7,855) (7,620)
Amortization of prior service cost 201 307 354 175 281
Amortization of net transition
obligations 563 570 793 384 323
Recognized actuarial losses 399 1,126 1,245 619 1,488
--------- --------- --------- ----------- ---------
$ 5,022 $ 7,144 $ 8,363 $ 3,369 $ 6,144
========= ========= ========= =========== =========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2002 and 2003 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
-------------------------------------
2002 2003
------------- --------------
Discount rate 5.9% 5.5%
Increase in future compensation levels 2.6% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2001, 2002 and 2003 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
December 31,
---------------------------------------------------
2001 2002 2003
------------- ------------- ------------
Discount rate 6.5% 6.2% 5.9%
Increase in future compensation levels 3.0% 2.8% 2.6%
Long-term return on plan assets 7.8% 7.5% 7.2%
As of December 31, 2003, the accumulated benefit obligations for all
defined benefit pension plans was approximately $290 million (2002 - $233
million). At December 31, 2003, the projected benefit obligations for all
defined benefit pension plans was comprised of $13 million related to U.S. plans
and $313 million related to non-U.S. plans (2002 - $11 million and $243 million,
respectively).
At December 31, 2003, the fair value of plan assets for all defined benefit
pension plans was comprised of $11 million related to U.S. plans and $192
million related to non-U.S. plans (2002 - $10 million and $180 million,
respectively).
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, 2002 and 2003, 94% and 96%, respectively, of
the projected benefit obligations of such plans relate to non-U.S. plans.
FB-26
December 31,
------------------------------------------
2002 2003
---------------- ----------------
(In thousands)
Projected benefit obligation $ 204,398 $ 325,960
Accumulated benefit obligation 184,314 290,287
Fair value of plan assets:
U.S. plans 10,385 10,866
Non U.S. plans 132,227 192,418
At December 31, 2003, all of the assets attributable to U.S. plans were
invested in the Combined Master Retirement Trust ("CMRT"), a collective
investment trust established by Valhi to permit the collective investment by
certain master trusts which fund certain employee benefit plans sponsored by
Contran and certain of its affiliates.
At December 31, 2003, the asset mix of the CMRT was 50% in U.S. equity
securities, 24% in U.S. fixed income securities, 7% in international equity
securities and 19% in cash and other investments. At December 31, 2002, the
assets of the U.S. plans were allocated as 39% to equity managers and 61% to
fixed asset managers.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Harold Simmons. Mr. Simmons is
the trustee of the CMRT. The trustee of the CMRT, along with the CMRT's
investment committee, actively manage the investments of the CMRT. Such parties
have in the past, and may in the future, periodically change the asset mix of
the CMRT based upon, among other things, advice they receive from third-party
advisors and their expectations as to what asset mix will generate the greatest
overall return.
For the year ended December 31, 2003, the assumed long-term rate of return
for plan assets invested in the CMRT was 10%. In determining the appropriateness
of such long-term rate of return assumption, the Company considered, among other
things, the historical rates of return for the CMRT, the current and projected
asset mix of the CMRT and the investment objectives of the CMRT's managers.
During the 16-year history of the CMRT from its inception in 1987 through
December 31, 2003, the average annual rate of return has been 13%.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense approximated $.4 million in 2001,
$.4 million in 2002 and $.5 million in 2003.
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. Based on communications with a certain insurance provider of certain
retiree benefits of NL, and consultations with NL's actuaries, NL has been
released from certain life insurance retiree benefit obligations as of December
31, 2002 through the use of an equal amount of plan assets. 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 retiree.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
FB-27
future periods. At December 31, 2003, the expected rate of increase in future
healthcare costs is 8% to 10% in 2004, declining to 5.5% in 2009 and thereafter.
(In 2002, the expected rate of increase in future healthcare costs ranged from
9% in 2003 declining to 5.5% in 2007 and thereafter.) If the healthcare cost
trend rate was increased (decreased) by one percentage point for each year, OPEB
expense would have increased by $.1 million (decreased by $.1 million) in 2003,
and the actuarial present value of accumulated OPEB obligations at December 31,
2003 would have increased by $1.1 million (decreased by $.9 million).
Years ended December 31,
-------------------------------------
2002 2003
------------- --------------
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 11,407 $ 10,533
Service cost 103 152
Interest cost 660 684
Actuarial losses 103 1,434
Release of benefit obligations (787) -
Change in foreign exchange rates 32 772
Benefits paid - Company funds (985) (914)
----------- -----------
Obligations at end of the year $ 10,533 $ 12,661
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 787 $ -
Actual return on plan assets - -
Employer contributions 985 914
Release of benefit obligations (787) -
Benefits paid (985) (914)
----------- -----------
Fair value of plan assets at end of the year $ - $ -
=========== ===========
Funded status at end of the year:
Plan assets less than benefit obligations $ (10,533) $ (12,661)
Unrecognized net actuarial (gains) losses (335) 1,356
Unrecognized prior service credit (2,225) (1,170)
----------- -----------
$ (13,093) $ (12,475)
=========== ===========
Accrued OPEB costs recognized in the balance sheet:
Current $ (1,287) $ (1,299)
Noncurrent (11,806) (11,176)
----------- -----------
$ (13,093) $ (12,475)
=========== ===========
FB-28
Six months ended
Years ended December 31, June 30,
---------------------------------------- ---------------------------
2001 2002 2003 2003 2004
---------- ----------- ---------- --------- ----------
(Unaudited)
(In thousands)
Net periodic OPEB cost (credit):
Service cost $ 94 $ 103 $ 152 $ 73 $ 113
Interest cost 924 660 684 336 360
Expected return on plan assets (66) - - - -
Amortization of prior service credit (1,055) (1,055) (1,055) (528) (366)
Recognized actuarial losses 27 27 86 42 78
-------- -------- --------- ----------- ---------
$ (76) $ (265) $ (133) $ (77) $ 185
======== ======== ========= =========== =========
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2003 was 5.9% (2002 -
6.5%). Such weighted average rate was determined using the projected benefit
obligation as of such dates. The impact of assumed increases in future
compensation levels does not have a material effect on the actuarial present
value of the benefit obligation as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2003 was 6.5% (2002 - 7.0%; 2001 - 7.3%). Such weighted average
rate was determined using the projected benefit obligation as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material effect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable. The impact of assumed rate of return on plan assets also does not
have a material affect on the net periodic OPEB cost as there were no plan
assets as of December 31, 2002 or 2003.
As of December 31, 2003, the accumulated OPEB obligations for all OPEB
plans was approximately $12.7 million (2002 - $10.5 million). At December 31,
2003, the accumulated OPEB obligations for all OPEB plans was comprised of $7.1
million related to U.S. plans and $5.6 million related to non-U.S. plans (2002 -
$7.3 million and $3.2 million, respectively). The Company uses a September 30th
measurement date for their OPEB plans.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. Detailed regulations necessary to implement the
Medicare 2003 Act have not been issued, including those that would specify the
manner in which actuarial equivalency would be determined, the evidence required
to demonstrate actuarial equivalence and the documentation requirements
necessary to receive the subsidy. Until such definitive regulations are issued,
the Company is unable to determine whether the prescription drug benefit offered
under its postretirement benefit plans is at least actuarially equivalent to
Medicare Part D. Accordingly, the Company's accumulated postretirement benefit
obligation and net periodic postretirement benefit cost, as reflected in the
accompanying consolidated financial statements, do not reflect any effect of the
federal subsidy. When such definitive regulations are issued or at such other
time that the Company can determine whether the prescription drug benefit
offered under its postretirement benefit plans is at least actuarially
equivalent to Medicare Part D, the Company would account for the effect of the
federal subsidy, if any, prospectively from that date, as permitted by and in
accordance with FASB Staff Position No. 106-2.
Note 15 - Leverkusen fire and insurance claim:
In March 2001, the Company suffered a fire at its Leverkusen, Germany TiO2
facility. Production at the facility's chloride-process plant returned to full
capacity on April 8, 2001. The facility's sulfate-process plant became
FB-29
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, 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's operating income in 2001
includes $27.3 million of business interruption insurance recoveries related to
the Leverkusen fire. Of such business interruption proceeds amount, $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,
representing recovery of lost margin, was recorded as other income. The Company
also recognized insurance recoveries of $29.1 million in 2001 for property
damage and related cleanup and other extra costs, resulting in an insurance gain
of $17.5 million as such recoveries exceeded the carrying value of the property
destroyed and the cleanup and other extra expenses incurred.
Note 16 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. 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 and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
-------------------------------- June 30,
2002 2003 2004
-------------- -------------- -------------
(Unaudited)
(In thousands)
Current receivables from affiliates:
NL - income taxes $ 978 $ 1,209 $ -
Other 54 - $ -
----------- ----------- ----------
$ 1,032 $ 1,209 $ -
=========== =========== ==========
Current payables to affiliates:
NL $ 319 $ 359 $ 117
Income taxes payable to Valhi - - 119
LPC 7,614 8,560 9,030
----------- ----------- ----------
$ 7,933 $ 8,919 $ 9,266
=========== =========== ==========
Note payable to affiliate - NL $ - $ 200,000 $ 200,000
=========== =========== ==========
Amounts payable to LPC are generally for the purchase of TiO2 (see Note 6)
and amounts payable to NL principally relate to accrued interest on affiliate
loans. Purchases of TiO2 from LPC were $93.4 million in 2001, $92.4 million in
2002 and $101.3 million in 2003.
FB-30
From time to time, loans and advances are made between the Company and
various related parties pursuant to term and demand notes. These loans and
advances are entered into principally for cash management purposes. When the
Company loans funds to related parties, the lender is generally able to earn a
higher rate of return on the loan than the lender would earn if the funds were
invested in other instruments. While certain of such loans may be 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 applicable
loans. When the Company borrows from related parties, the borrower is generally
able to pay a lower rate of interest than the borrower would pay if it borrowed
from other parties. In addition, certain loans to and from affiliates not made
for cash management purposes are discussed in Notes 11 and 12.
Interest income on all loans to related parties was $33.4 million in 2001,
$20.8 million in 2002 and $.7 million in 2003. Interest expense on all loans
from related parties was $23.0 million in 2001, $12.3 million in 2002 and $1.9
million in 2003.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, 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 and associated
expenses of such persons. Because of the large number of companies affiliated
with NL, the Company believes it benefits from cost savings and economies of
scale gained by not having certain management, financial and administrative
staffs duplicated at each entity, thus allowing certain individuals to provide
services to multiple companies but only be compensated by one entity. These ISA
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements.
The Company is a party to an intercorporate services agreement with NL ("NL
ISA") whereby NL provides certain management services to the Company on a fee
basis. Intercorporate services fee expense related to the NL ISA was $3.5
million in 2001 and $3.7 million in each of 2002 and 2003.
Tall Pines, Valmont Insurance Company and EWI provide for or broker certain
insurance policies for Contran and certain of its subsidiaries and affiliates,
including the Company. Tall Pines and Valmont are wholly-owned subsidiaries of
Valhi, and EWI is currently a wholly-owned subsidiary of NL. Prior to January
2002, EWI was owned by Contran or parties related to Contran. 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 aggregate premiums paid to Tall Pines, Valmont and EWI by
the Company and its joint venture were $9.7 million in 2001, $10.1 million in
2002 and $7.2 million in 2003. These amounts principally included payments for
insurance and reinsurance premiums paid to 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 in 2004.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
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 1.
FB-31
Note 17 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
federal, state, local and 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 Company's policy is to comply with
environmental laws and regulations at all of its plants and to continually
strive to improve environmental performance in association with applicable
industry initiatives. The Company believes that its operations are in
substantial compliance with applicable requirements of environmental laws. From
time to time, the Company may be subject to environmental regulatory enforcement
under various statutes, resolution of which typically involves the establishment
of compliance programs. It is possible that future developments, such as
stricter requirements of environmental laws and enforcement policies thereunder,
could adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances.
The Company's production facilities operate within an environmental
regulatory framework in which governmental authorities typically are granted
broad discretionary powers that 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. With respect to the
Company's plants, neither the Company nor any of its subsidiaries have been
notified of any material 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.
Litigation matters. Our Belgian subsidiary and various Belgian employees
are the subject of civil and criminal proceedings related to an accident that
resulted in two fatalities in such facility in 2000. In May 2004, the court
ruled and, among other things, imposed a fine of euro 200,000 against us with an
aggregate amount of less than euro 40,000 against various of our employees, the
liability for which we have undertaken. We and the individuals have appealed the
ruling
Kronos is also involved in various other environmental, contractual,
product liability and other claims and disputes incidental to its business.
Kronos currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its consolidated financial 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. By
volume, approximately one-half of the Company's TiO2 sales by volume were to
Europe in each of the past three years and approximately 38% of sales in 2001,
39% in 2002 and 40% in 2003 were attributable to North America.
At December 31, 2003, consolidated cash, cash equivalents and restricted
cash includes $13.7 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2002 - $13.8 million).
Capital expenditures. At December 31, 2003 the estimated cost to complete
capital projects in process approximated $9.6 million.
Long-term contracts. The Company has long-term supply contracts that
provide for the Company's chloride-process TiO2 feedstock requirements through
2007. The agreements require the Company to purchase certain minimum quantities
of feedstock with average minimum annual purchase commitments aggregating
approximately $165 million.
FB-32
Operating leases. Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, with approximately one-third of Kronos'
current TiO2 production capacity, is located within the lessor's extensive
manufacturing complex. 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, 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.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Net rent expense approximated $8 million in
2001, $10 million in 2002 and $12 million in 2003. At December 31, 2003, future
minimum payments under noncancellable operating leases having an initial or
remaining term of more than one year were as follows:
Years ending December 31, Amount
------------------------- -----------------------
(In thousands)
2004 $ 3,255
2005 2,271
2006 1,468
2007 1,316
2008 1,194
2009 and thereafter 19,881
-----------
$ 29,385
===========
Approximately $19.4 million of the $29.4 million aggregate future minimum
rental commitments at December 31, 2003 relates to the Company's Leverkusen
facility lease discussed above. The minimum commitment amounts for such lease
included in the table above for each year through the 2050 expiration of the
lease are based upon the current annual rental rate as of December 31, 2003.
Note 18 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, 2002 December 31, 2003
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- ------------- -------------
(In millions)
Cash, cash equivalents, restricted cash and noncurrent
restricted marketable debt securities $ 44.4 $ 44.4 $ 59.8 $ 59.8
Notes payable and long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 296.9 $ 299.9 $ 356.1 $ 356.1
Variable rate debt $ 29.0 $ 29.0 $ .6 $ .6
Note payable to affiliate $ 44.6 * $ 200.0 *
Common stockholders' equity $ 314.2 $ 314.2 $ 159.4 $ 1,086.5
- ------------------------------------
* Due to the related party nature of the Company's long-term note payable to NL,
it is not practicable, without incurring substantial cost, to estimate the fair
value of such indebtedness.
FB-33
Fair value of the Company's restricted marketable debt securities and Notes
and the fair value of the Company's common stockholders' equity, are based upon
quoted market prices at each balance sheet date.
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing January 2, 2004 to exchange an aggregate of (euro)40
million for an equivalent amount of U.S. dollars at an exchange rate of U.S.
$1.25 per euro. Such contract was entered into in conjunction with the January
2004 payment of an intercompany dividend from one of the Company's European
subsidiaries. At December 31, 2003, the actual exchange rate was U.S. $1.25 per
euro. The estimated fair value of such foreign currency contract was not
material at December 31, 2003. The Company held no other significant derivative
financial instruments at December 31, 2002 or 2003. See Note 1.
Note 19 - Accounting principles newly adopted in 2003:
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, on 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 would be 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 either settles the
obligation for its recorded amount or incurs 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 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
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, is 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, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, 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 carrying value of previously-accrued closure and post-closure activities .3
Asset retirement obligation recognized (.6)
-----------
Net impact $ -
===========
The increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) is due to accretion expense and the
effects of currency translation. Accretion expense, which is reported as a
component of cost of sales in the accompanying Statement of Income, approximated
$100,000 for the year ended December 31, 2003. If the Company had adopted SFAS
No. 143 as of January 1, 2001, the asset retirement obligations would have been
approximately $500,000 at December 31, 2001.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
FB-34
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Note 20 - Quarterly results of operations (unaudited):
Quarter ended
-----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------------- ------------- ------------- -------------
(In millions, except per share data)
Year ended December 31, 2002
Net sales $ 202.4 $ 226.9 $ 234.1 $ 211.9
Cost of sales 156.3 176.2 177.5 161.8
Net income $ 17.0 $ 23.3 $ 16.8 $ 9.2
Basic and diluted earnings per common share $ .35 $ .48 $ .34 $ .19
Year ended December 31, 2003
Net sales $ 253.0 $ 266.6 $ 242.9 $ 245.7
Cost of sales 188.4 197.6 177.4 175.8
Net income $ 16.7 $ 41.8 $ 16.0 $ 13.1
Basic and diluted earnings per common share $ .34 $ .85 $ .33 $ .27
Year ended December 31, 2004
Net sales $ 263.3 $ 295.8
Cost of sales 202.2 227.5
Net income $ 9.8 $ 267.5
Basic and diluted earnings per common share $ .20 $ 5.47
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
Note 21 - Accounting principle newly adopted in 2004 (unaudited):
The Company complied with the consolidation requirements of FIN No. 46R,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,"
as amended, as of March 31, 2004. The Company does not have any involvement with
any variable interest entity (as that term is defined in FIN No. 46R) covered by
the scope of FIN No. 46R which had not already been consolidated under prior
applicable GAAP, and therefore the impact to the Company of adopting the
consolidation requirements of FIN No. 46R was not material.
FB-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than selling
or underwriting discounts and commissions, to be incurred by us in connection
with the issuance and distribution of the securities being registered hereby.
With the exception of the SEC registration fee, NASD filing fee and NYSE listing
fee, all fees and expenses set forth below are estimates.
SEC registration fee $ 42,020
NASD filing fee 30,500
NYSE filing fee 28,975
Printing and engraving expenses *
Blue sky fees and expenses *
Transfer agent and registrar fees *
Legal fees and expenses *
Accounting fees and expenses *
Director's and officer's insurance * *
Miscellaneous
Total $ *
===========
- -----------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
Section 102(b)(7) of the Delaware General Corporate Law (the "DGCL")
permits a Delaware corporation to limit the personal liability of its directors
in accordance with the provisions set forth therein. The Registrant's First
Amended and Restated Certificate of Incorporation provides that the personal
liability of its directors shall be limited to the fullest extent permitted by
applicable law.
Section 145 of the DGCL contains provisions permitting Delaware
corporations to indemnify their directors, officers, employees or agents against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person was or
is 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 corporation, partnership, joint venture, trust or other
enterprise, provided that (i) such person acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and (ii) in the case of a criminal action or proceeding, such
person had no reasonable cause to believe his or her conduct was unlawful. In
the case of actions or suits by or in the right of the corporation, no
indemnification shall be made in a case in which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
have determined upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such court shall deem proper. Indemnification as described above shall only
be granted in a specific case upon a determination that indemnification is
proper in the circumstances because the indemnified person has met the
applicable standard of conduct. Such determination shall be made, with respect
to a person who is a director or officer at the time of such determination, (a)
by a majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, (b) by a committee of such directors
II-1
designated by a majority vote of such directors, even though less than a quorum,
(c) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion or (d) by the stockholders of the
corporation. To the extent that a director or officer of the corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) or (b) of Section 145, or in defense
of any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.
The amended and restated bylaws (the "Bylaws") of the Registrant provide
for indemnification of its directors and officers to the fullest extent
permitted by the DGCL 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 registrant. The Bylaws also provide that the
registrant may indemnify any person who is not at the time a current director or
officer of the registrant to the fullest extent permitted by the DGCL. As
provided in the Bylaws, 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 registrant or services rendered by such persons in
such capacities or otherwise at the request of the registrant shall be paid by
the registrant 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 registrant as authorized in the Bylaws.
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit No. Description
1.1++ Underwriting Agreement dated __________, 2004 between Kronos
Worldwide, Inc. and UBS Securities LLC as representative of the
several underwriters named therein.
2.1 Form of Distribution Agreement between NL Industries, Inc. and
Kronos Worldwide, Inc. - incorporated by reference to Exhibit 2.1
of the Registration Statement on Form 10 of the Registrant (File
No. 001-31763).
3.1 First Amended and Restated Certificate of Incorporation of Kronos
Worldwide, Inc. - incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form 10 of the Registrant (File No.
001-31763).
3.2 Amended and Restated Bylaws of Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 3.2 of the Registration
Statement on Form 10 of the Registrant (File No. 001-31763).
4.1 Form of common stock certificate - incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form 10 of the
Registrant (File No. 001-31763).
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. (File No. 1-640) for the quarter ended June 30,
2002.
II-2
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 of the Registration Statement on Form
S-4 of Kronos International, Inc. (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 of the Registration Statement on Form
S-4 of Kronos International, Inc. (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. (File No. 1-640) for
the quarter ended June 30, 2002.
4.6 Collateral Agency Agreement, dated as of June 28, 2002, among The
Bank of New York, U.S. Bank, N.A. and 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. (File No.
1-640) for the quarter ended June 30, 2002.
4.7 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.
(File No. 1-640) for the quarter ended June 30, 2002.
4.8 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. (File
No. 1-640) for the quarter ended June 30, 2002.
4.9 Pledge Agreement (pledge of shares of Societe Industrielle du
Titane, S.A.), dated June 28, 2002, between 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. (File No. 1-640) for the quarter ended June
30, 2002.
4.10 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28,
2002, between 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. (File
No. 1-640) for the quarter ended June 30, 2002.
5.1++ Opinion of Locke Liddell & Sapp LLP as to the validity of the
securities being registered hereunder.
10.1 Form of Tax Agreement between Valhi, Inc. and Kronos Worldwide,
Inc. - incorporated by reference to Exhibit 10.1 of the
Registration Statement on Form 10 of the Registrant (File No.
001-31763).
10.2 Intercorporate Services Agreement by and between Contran
Corporation and Kronos Worldwide, Inc., effective as of January
1, 2004 - incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of the Registrant (File No.
001-31763) for the quarter ended March 31, 2004.
II-3
10.3 Promissory Note, dated September 24, 2004, made by Kronos
Worldwide, Inc. in favor of NL Industries, Inc. - incorporated by
reference to Exhibit 10.2 to a Current Report on Form 8-K of NL
Industries, Inc. (File No. 1-640) dated September 24, 2004.
10.4 Promissory Note, dated September 24, 2004, made by Kronos
Worldwide, Inc. in favor of Valcor, Inc. - incorporated by
reference to Exhibit 99.1 to a Current Report on Form 8-K of NL
Industries, Inc. (File No. 1-640) dated September 24, 2004.
10.5 Promissory Note, dated September 24, 2004, made by Kronos
Worldwide, Inc. in favor of Valhi, Inc. - incorporated by
reference to Exhibit 99.2 to a Current Report on Form 8-K of NL
Industries, Inc. (File No. 1-640) dated September 24, 2004.
10.6** Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 of the Registration
Statement on Form 10 of the Registrant (File No. 001-31763).
10.7 (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. (File No. 1-640) for the
quarter ended June 30, 2002.
10.8+ First Amendment Agreement, dated September 3, 2004, Relating to a
Facility Agreement dated June 25, 2002 among Kronos Titan GmbH,
Kronos Europe S.A./N.V., Kronos Titan AS and Titania A/S, as
borrowers, Kronos Titan GmbH, Kronos Europe S.A./N.V. and Kronos
Norge AS, as guarantors, Kronos Denmark ApS, as security
provider, with Deutsche Bank Luxembourg S.A., acting as agent.
10.9 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. (File No. 1-640) for the year
ended December 31, 1985.
10.10 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. (File No.
1-640) for the quarter ended September 30, 1995.
10.11 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. (File No. 1-640) for the quarter ended
September 30, 1993.
10.12 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 the Registration Statement on Form S-4 of Kronos
International, Inc. (File No. 333-100047).
10.13 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.
II-4
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 the Registration Statement on Form S-4 of Kronos
International, Inc. (File No. 333-100047).
10.14 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 the Registration
Statement on Form S-4 of Kronos International, Inc. (File No.
333-100047).
10.15 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 the Registration Statement on Form S-4 of Kronos
International, Inc. (File No. 333-100047).
10.16* 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 of NL
Industries, Inc. (File No. 1-640) for the year ended December 31,
1995.
10.17* 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 of NL Industries, Inc. (File No. 1-640) for the year
ended December 31, 1999.
10.18* 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 of NL Industries, Inc. (File No. 1-640) for the year
ended December 31, 2001.
10.19* 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 of NL Industries, Inc. (File No. 1-640) for the year
ended December 31, 2002.
10.20* Amendment to Richards Bay Slag Sales Agreement, dated October 31,
2003, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporate by reference to Exhibit
10.17 to the Annual Report on Form 10-K of the Registrant (File
No. 001-31763) for the year ended December 31, 2003.
10.21 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH,
effective December 30, 1986 - incorporated by reference to
Exhibit 10.1 of the Quarterly Report on Form 10-Q of Kronos
International, Inc. (File No. 333-100047) for the quarter ended
September 30, 2002.
10.22 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 the
Quarterly Report on Form 10-Q of Kronos International, Inc. (File
No. 333-100047) for the quarter ended September 30, 2002.
10.23 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 the Quarterly Report on Form 10-Q of Kronos International,
Inc. (File No. 333-100047) for the quarter ended September 30,
2002.
10.24 Formation Agreement, dated as of October 18, 1993, among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment
II-5
Company, L.P. - incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. (File No.
1-640) for the quarter ended September 30, 1993.
10.25 Joint Venture Agreement, dated as of October 18, 1993, between
Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q
of NL Industries, Inc. (File No. 1-640) for the quarter ended
September 30, 1993.
10.26 Kronos Offtake Agreement, dated as of October 18, 1993, between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.4 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. (File No. 1-640) for the
quarter ended September 30, 1993.
10.27 Amendment No. 1 to Kronos Offtake Agreement, dated as of December
20, 1995, between Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.22 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. (File No.
1-640) for the quarter ended September 30, 1995.
10.28 Tioxide Americas Offtake Agreement, dated as of October 18, 1993,
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P.
- incorporated by reference to Exhibit 10.5 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. (File No. 1-640) for
the quarter ended September 30, 1993.
10.29 Amendment No. 1 to Tioxide Americas Offtake Agreement, dated as
of December 20, 1995, between Tioxide Americas Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit
10.24 to the Quarterly Report on Form 10-Q of NL Industries, Inc.
(File No. 1-640) for the quarter ended September 30, 1995.
10.30 TCI/KCI Output Purchase Agreement, dated as of October 18, 1993,
between Tioxide Canada Inc. and Kronos Canada, Inc. -
incorporated by reference to Exhibit 10.6 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. (File No. 1-640) for the
quarter ended September 30, 1993.
10.31 TAI/KLA Output Purchase Agreement, dated as of October 18, 1993,
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. (File No. 1-640) for the
quarter ended September 30, 1993.
10.32 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. (File No. 1-640) for the quarter ended
September 30, 1993.
10.33 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 the
Quarterly Report on Form 10-Q of NL Industries, Inc. (File No.
1-640) for the quarter ended September 30, 1993.
10.34 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 the Quarterly
Report on Form 10-Q of NL Industries, Inc. (File No. 1-640) for
the quarter ended September 30, 1993.
II-6
10.35 Amendment, dated August 11, 2003, to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit 10.32 of the Registration
Statement on Form 10 of the Registrant (File No. 001-31763).
10.36 Insurance sharing agreement, dated October 30, 2003, by and among
CompX International Inc., Contran Corporation, Keystone
Consolidated Industries, Inc., Titanium Metals Corp., Valhi,
Inc., NL Industries, Inc. and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.48 to the Annual Report
on Form 10-K of NL Industries, Inc. (File No. 1-640) for the year
ended December 31, 2003.
10.37** Summary of Consulting Arrangement, beginning on August 1, 2003,
as amended, between Lawrence A. Wigdor and Kronos Worldwide, Inc.
- incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of the Registrant for the quarter ended March
31, 2004.
21.1+ Subsidiaries.
23.1 Consent of Locke Liddell & Sapp LLP (included in Exhibit 5.1)
23.2+ Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on the signature page hereto).
- -----------------------------------
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contract, compensatory plan or arrangement.
+ Filed herewith.
++ To be filed by amendment.
(b) Financial Statement Schedules.
Schedule I and Schedule II, including the report of the independent
auditors related thereto, are incorporated by reference to Schedule I and
Schedule II, respectively, to the Annual Report on Form 10-K of the Registrant
(File No. 001-31763) for the year ended December 31, 2003.
Schedules III and IV are omitted because they are not applicable.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to deliver
to the underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery
to each purchaser.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions
referenced in Item 14 of this Registration Statement or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
II-7
such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in the form of prospectus filled by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Dallas, state of Texas,
on October 8, 2004.
KRONOS WORLDWIDE, INC.
By: /s/ Gregory M. Swalwell
---------------------------------
Gregory M. Swalwell
Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Gregory M. Swalwell, James W. Brown and
Robert D. Graham, each his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and any registration
statement related to the offering contemplated by this registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission
and any state or other securities authority, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title and Capacity Date
--------- ------------------ ----
/s/ Harold C. Simmons Chairman of the Board and Chief Executive
- ------------------------------------ Officer
Harold C. Simmons (Principal Executive Officer) October 8, 2004
/s/ Steven L. Watson Vice Chairman of the Board October 8, 2004
- ------------------------------------
Steven L. Watson
/s/ George E. Poston Director October 8, 2004
- ------------------------------------
George E. Poston
/s/ Glenn R. Simmons Director October 8, 2004
- ------------------------------------
Glenn R. Simmons
/s/ R. Gerald Turner Director October 8, 2004
- ------------------------------------
R. Gerald Turner
/s/ C. H. Moore, Jr. Director October 8, 2004
- ------------------------------------
C. H. Moore, Jr.
/s/ Gregory M. Swalwell Vice President and Chief Financial Officer October 8, 2004
- ------------------------------------
Gregory M. Swalwell (Principal Financial Officer)
/s/ James W. Brown Vice President and Controller October 8, 2004
- ------------------------------------
James W. Brown (Principal Accounting Officer)
II-9
Dated 3 September 2004
Kronos Titan GmbH
KRONOS Europe S.A./N.V.
Kronos Titan AS
and
Titania AS
as Borrowers
Kronos Titan GmbH
KRONOS Europe S.A./N.V.
and
Kronos Norge AS
as Guarantors
Kronos Denmark aps
as security provider
with
Deutsche Bank Luxembourg S.a.
acting as Agent
---------------------------------------------------------------------------
FIRST amendment agreement
relating to a
facility agreement
dated 25 June 2002
---------------------------------------------------------------------------
THIS FIRST AMENDMENT AGREEMENT is dated 3 September 2004 (the "Agreement") and
is made between:
(1) Kronos Titan GmbH (formerly known as Kronos Titan GmbH & Co. oHG), a
limited liability company (Gesellschaft mit beschrankter Haftung) organised
under the laws of the Federal Republic of Germany, having its business
address at Peschstrasse 5, 51373 Leverkusen, Federal Republic of Germany,
which is registered in the commercial register (Handelsregister) of the
local court (Amtsgericht) of Koln under HRB 48718 (the "German Borrower");
(2) Kronos Europe S.A./N.V., a Belgian company with its registered office at
Langerbruggekaai 10, 9000 Ghent, Belgium, registered nationally under RPR
0449.103.862 (the "Belgian Borrower");
(3) Kronos Titan AS, a Norwegian company with registered office at Titangt. 1,
1630 Gamle Fredrikstad, Norway, registered under no. 948 616 491 (the
"Norwegian Borrower 1");
(4) Titania AS, a Norwegian company with registered office at 4380 Hauge i
Dalane, Norway, registered under no. 916 769 318 (the "Norwegian Borrower
2");
(5) Kronos Norge AS, a Norwegian company with registered office at Titangt. 1,
1630 Gamle Fredrikstad, Norway, registered under no. 816 769 132;
(6) Kronos Denmark ApS, a Danish company with registered office is at Hanne
Nielsens Vej 10, 2840 Holte, Denmark, with registration number CVR. no. 24
24 27 81;
(7) Deutsche Bank AG as mandated lead arranger;
(8) THE LENDERS as specified on the signature page; and
(9) Deutsche Bank Luxembourg S.A. as agent for the Finance Parties (as defined
in the Original Facility Agreement) (the "Agent") and as security agent for
the Secured Parties (as defined in the Original Facility Agreement).
RECITALS:
(A) The Lenders made a facility available to the German Borrower, the Belgian
Borrower, the Norwegian Borrower 1 and the Norwegian Borrower 2 pursuant to
the terms and conditions under the Original Facility Agreement (as defined
below).
- 1 -
(B) The Obligors that are parties to the Original Facility Agreement have
requested that each of Kronos Denmark ApS and Kronos Norge AS shall become
a borrower and Kronos Denmark ApS also shall become a guarantor under the
Amended Facility Agreement.
IT IS AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Agreement:
"Amended Facility Agreement" means the Original Facility Agreement, as
amended by this Agreement.
"Effective Date" means the date on which the Agent confirms to the Lenders
and the German Borrower in writing that it has received each of the
documents listed in Schedule 1 (Conditions Precedent) in a form and
substance satisfactory to the Agent.
"Original Facility Agreement" means the EUR 80,000,000 multicurrency
revolving facility agreement dated 25 June 2002 between, inter alia, Kronos
Titan GmbH (formerly known as Kronos Titan GmbH & Co. oHG), Kronos Europe
S.A./N.V. and others as borrowers, Kronos Titan GmbH (formerly known as
Kronos Titan GmbH & Co. oHG), Kronos Europe S.A./N.V. and others as
guarantors, Deutsche Bank AG as mandated lead arranger, Deutsche Bank
Luxembourg S.A. as agent and security agent and others.
1.2 Unless a contrary indication appears, terms used in the Original Facility
Agreement shall, when used in this Agreement have the same meaning as in
the Original Facility Agreement.
1.3 Any reference in this Agreement to a "Clause" or a "sub-clause" shall,
subject to any contrary indication, be construed as a reference to a clause
or a sub-clause hereof.
2. AMENDMENT
2.1 Borrower and Guarantor Accession
(a) Kronos Norge AS hereby agrees with effect from the Effective Date to
become a borrower under the Amended Facility Agreement and to be bound
- 2 -
by the terms of the Amended Facility Agreement and the other Finance
Documents as a Borrower.
(b) Kronos Denmark ApS hereby agrees with effect from the Effective Date
to become a borrower and a guarantor under the Amended Facility
Agreement and to be bound by the terms of the Amended Facility
Agreement and the other Finance Documents as a Borrower and a
Guarantor.
(c) The Lenders and all other parties hereto hereby expressly agree with
effect from the Effective Date to the accession of Kronos Norge AS as
a Borrower under the Amended Facility Agreement and Kronos Denmark ApS
as a Borrower and Guarantor under the Amended Facility Agreement.
(d) The parties hereto agree that as of the Effective Date any reference
in the Original Facility Agreement to a Borrower or the Borrowers
shall include a reference to Kronos Norge AS and Kronos Denmark ApS
and any reference to a Guarantor or the Guarantors shall include a
reference to Kronos Denmark ApS.
2.2 Further Amendments
(a) As of the Effective Date, the definition of "Norwegian Borrowers"
contained in Clause 1.1 of the Original Facility Agreement shall be
amended as follows:
"Norwegian Borrowers" means the Norwegian Borrower 1, the Norwegian
Borrower 2 and Kronos Norge AS.
(b) As of the Effective Date, the definition of "Permitted Obligor Loan"
is amended by deleting all references to "or Kronos Denmark".
(c) As of the Effective Date, the phrase "the two Norwegian Borrowers"
contained in each of Clause 15.1(a), 15.2(b), 15.3 and 15.6 of the
Original Facility Agreement shall be amended to read "the Norwegian
Borrowers".
(d) As of the Effective Date, the first sentence of Clause 22
(Representations) of the Original Facility Agreement shall be amended
to read as follows:
"Each Obligor makes the representations and warranties set out in this
Clause 22 as to itself and its Subsidiaries (in each case to the
extent applicable) to each Finance Party on the date of this
Agreement."
(e) The parties hereto agree that as of the Effective Date and solely with
respect to Kronos Denmark ApS the definition of "Original Financial
Statements" shall be construed as a reference to the financial
- 3 -
statements to be delivered by Kronos Denmark ApS pursuant to Schedule
1, paragraph 1(f) hereof.
(f) For purposes of clarification, the parties hereto agree that any
reference to "the Norwegian Borrowers" or "the two Norwegian
Borrowers" in Clauses 4(a)(i) and (4)(a)(ii) of Schedule 2 of the
Original Facility Agreement shall solely denote a reference to the
Norwegian Borrower 1 and the Norwegian Borrower 2.
(g) As of the Effective Date, the form attached as part II of Schedule 10
(Form of Combining Schedule) is amended and replaced by the new as
part II of Schedule 10 (Form of Combining Schedule) attached hereto.
2.3 Security Confirmation
(a) The German Borrower hereby confirms that, deviating from Section 418
of the German Civil Code (Burgerliches Gesetzbuch), the Security
Documents entered into by the German Borrower also shall secure the
obligations of Kronos Norge AS, Kronos Denmark ApS and any of the
other Obligors under the Amended Facility Agreement.
(b) The Belgian Borrower hereby confirms that the Security Documents
entered into by them also shall secure the obligations of Kronos Norge
AS, Kronos Denmark ApS and any of the Obligors under the Amended
Facility Agreement.
(c) Kronos Denmark ApS hereby confirms that the Security Documents entered
into by it also shall secure its obligations and the obligations of
Kronos Norge AS and any of the Obligors under the Amended Facility
Agreement
(d) Each of the Norwegian Borrower 1 and the Norwegian Borrower 2 hereby
confirms that the Security Documents entered into by them also shall
secure the obligations of Kronos Norge AS under the Amended Facility
Agreement, in each case to the extent as permitted under the Norwegian
Companies Act 1997 Section 8-7.
3. REPRESENTATIONS
As of the Effective Date, the Obligors and Kronos Denmark ApS make the
representations set out in Clause 22 (Representations) (other than Clause
22.10) of the Original Facility Agreement as if each reference in those
representations to "this Agreement" or "the Finance Documents" includes a
reference to (a) this Agreement and (b) the Amended Facility Agreement.
- 4 -
4. CONTINUITY AND FURTHER ASSURANCE
4.1 Continuing obligations
The provisions of the Original Facility Agreement shall, save as amended in
this Agreement, continue in full force and effect.
4.2 Further assurance
Each of the Obligors and Kronos Denmark ApS shall, at the request of the
Agent and at its own expense, do all such acts and things necessary or
desirable to give effect to the amendments effected or to be effected
pursuant to this Agreement.
5. FEES, COSTS AND EXPENSES
5.1 Transaction expenses
Each of the Borrowers shall within three Business Days of demand, pay the
Agent the amount of all reasonable out-of-pocket costs and expenses
(including reasonable legal fees of outside counsel) reasonably incurred by
the Agent in connection with the negotiation, preparation, printing and
execution of this Agreement and any other documents referred to in this
Agreement.
5.2 Enforcement costs
Each of the Borrowers shall, within three Business Days of demand, pay to
each Secured Party and the Mandated Lead Arranger the amount of all
reasonable out-of-pocket costs and expenses (including legal fees)
reasonably incurred by that Secured Party or the Mandated Lead Arranger in
connection with the enforcement of, or the preservation of any rights,
powers and remedies under this Agreement.
5.3 Stamp taxes
The Borrowers shall pay and, within three Business Days of demand,
indemnify each Finance Party against any cost, loss or liability that
Finance Party incurs in relation to all stamp duty, registration and other
similar Taxes payable in respect of this Agreement.
- 5 -
6. MISCELLANEOUS
6.1 Incorporation of terms
The provisions of Clause 37 (Partial Invalidity), Clause 38 (Remedies and
waivers), Clause 40 (Governing Law) and Clause 41.1 (Jurisdiction of German
Courts) of the Original Facility Agreement shall be incorporated into this
Agreement as if set out in full in this Agreement and as if references in
those clauses to "this Agreement" or "the Finance Documents" are references
to this Agreement.
6.2 Service of process
Kronos Denmark ApS:
(a) irrevocably appoints the German Borrower as its agent for service of
process in relation to any proceedings before the German courts in
connection with any Finance Document; and
(b) agree that failure by a process agent to notify them of the process
will not invalidate the proceedings concerned.
6.3 Designation as Finance Document
The German Borrower and the Agent designate this Agreement as a Finance
Document by execution of this Agreement for the purposes of the definition
of Finance Document in the Original Facility Agreement.
THIS AGREEMENT has been entered into on the date stated at the beginning of this
Agreement.
- 6 -
- 7 -
SIGNATURES
The Borrowers
Kronos Titan GmbH
By: /s/ Ulfert Fiand
Kronos Europe S.A./N.V.
By: /s/ Erik Van der Auwera
Kronos Titan AS
By: /s/ Terje Karlsen
Titania AS
By: /s/ Terje Karlsen
Kronos Norge AS
By: /s/ Terje Karlsen
Kronos Denmark ApS
By: /s/ Volker Roth
The Guarantors
Kronos Titan GmbH
By: /s/ Ulfert Fiand
- 8 -
Kronos Europe S.A./N.V.
By: /s/ Erik Van der Auwera
Kronos Norge AS
By: /s/ Terje Karlsen
Kronos Denmark ApS
By: /s/ Volker Roth
The Mandated Lead Arranger
Deutsche Bank AG
By: /s/ Inge Palzer
The Agent and Security Agent
Deutsche Bank Luxembourg S.A.
By: /s/ Inge Palzer
The Lenders
Deutsche Bank Luxembourg S.A.
By: /s/ Inge Palzer
- 9 -
Commerzbank Aktiengesellschaft, Filiale Koln
By: /s/ Inge Palzer
Den norske Bank ASA, Filiale Deutschland
By: /s/ Inge Palzer
Dexia Bank Belgium N.V./S.A.
By: /s/ Inge Palzer
KBC Bank N.V.
By: /s/ Inge Palzer
Dresdner Bank AG in Koln
By: /s/ Inge Palzer
- 10 -
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
incorporation or % of Voting Securities Held
Name of Corporation organization at December 31, 2003(a)
------------------- ------------ -----------------------
Kronos Canada, Inc. Canada 100
Kronos International, Inc. Delaware 100
Kronos Titan GmbH Germany 100
Unterstutzungskasse Kronos Titan-GmbH Germany 100
Kronos Chemie-GmbH Germany 100
NL Industries Chemie, GmbH Germany 100
Kronos World Services S.A./N.V. Belgium 100
Societe Industrielle du Titane, S.A. France 94
Kronos Limited United Kingdom 100
Kronos Denmark ApS Denmark 100
Kronos Europe S.A./N.V. Belgium 100
Kronos B.V. Holland 100
Kronos Norge A/S Norway 100
Kronos Titan A/S Norway 100
Titania A/S Norway 100
The Jossingfjord Manufacturing Company A/S Norway 100
Kronos Invest A/S Norway 100
Kronos Louisiana, Inc. Delaware 100
Kronos (US) Inc. Delaware 100
Louisiana Pigment Company, L.P. Delaware 50
(a) Held by the Registrant or the indicated subsidiary of the Registrant
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 5, 2004 relating to the consolidated financial statements of
Kronos Worldwide, Inc., which appears in such Registration Statement. We also
consent to the incorporation by reference in this Registration Statement on Form
S-1 of our report dated March 5, 2004 relating to the financial statement
schedules, which appears in Kronos Worldwide, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2003. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
October 7, 2004