As filed with the Securities and Exchange Commission on March 30, 2005
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
KRONOS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 2810 22-2949593
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation) Classification Code Number) Number)
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
(972) 233-1700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Robert D. Graham
Vice President
Kronos International, Inc.
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240-2697
(972) 233-1700
Facsimile: (972) 448-1445
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Don M. Glendenning, Esq.
Toni Weinstein, Esq.
Locke Liddell & Sapp LLP
2200 Ross Avenue
Suite 2200
Dallas, Texas 75201
(214) 740-8000
Facsimile: (214) 740-8800
Approximate date of commencement of proposed sale to the public: Upon
consummation of the exchange offer referred to herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
CALCULATION OF REGISTRATION FEE
=============================================== ================== =============== ================ ====================
Proposed
maximum Proposed
offering maximum Amount of
Title of each class of securities to be Amount to be price per aggregate registration fee
registered registered unit (1) offering price (3)
----------------------------------------------- ------------------ --------------- ---------------- --------------------
8 7/8% Senior Secured Notes due 2009 (2) (euro)90,000,000 100% (euro)90,000,000 $13,665
=============================================== ================== =============== ================ ====================
(1) Estimated solely for purposes of determining the registration fee.
(2) Calculated pursuant to Rule 457(f) under the Securities Act of 1933.
(3) Calculated based on an exchange rate of (euro)1.00 = $1.29, being the
spot rate at 1:30 p.m., central time, on March 29, 2005 as quoted by
Bloomberg.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
=======================================================================================================================
Subject to Completion, dated March 30, 2005
PROSPECTUS
[LOGO GOES HERE]
KRONOS INTERNATIONAL, INC.
Offer to Exchange
All Outstanding
8 7/8% Senior Secured Notes due 2009
(euro)90,000,000 Aggregate Principal Amount
Issued on November 26, 2004
for
New 8 7/8% Senior Secured Notes due 2009
(euro)90,000,000 Aggregate Principal Amount
------------------
We are offering to exchange an aggregate principal amount of up to
(euro)90,000,000 of our new 8 7/8% senior secured notes due 2009 (the "new
notes"), which have been registered under the Securities Act of 1933, for a like
amount of our old 8 7/8% senior secured notes due 2009 issued on November 26,
2004 (the "old notes").
------------------
o The exchange offer expires at 5:00 p.m., New York City time, on
_____________, 2005, unless we extend it.
o We previously issued (euro)285,000,000 of our 8 7/8% senior secured notes
due 2009 ("initial notes"). This exchange offer relates solely to the old
notes and does not apply to any of the initial notes.
o The terms of the new notes to be issued are substantially identical to the
terms of the old notes, except for transfer restrictions and registration
rights relating to the old notes.
o No established trading market for the new notes currently exists. We will
apply to list the new notes on the Luxembourg Stock exchange in accordance
with the rules of the Luxembourg Stock Exchange.
o You may withdraw tenders of old notes at any time prior to the expiration
of the exchange offer.
o We will not receive any proceeds from the exchange offer.
See "Risk Factors" beginning on page 8 for a discussion of risk factors
that you should consider before deciding to exchange your old notes for new
notes.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
------------------
The date of this prospectus is ______________, 2005.
TABLE OF CONTENTS
Page
Notice to Non-U.S. Investors.......................................... ii
Prospectus Summary.................................................... 1
Risk Factors.......................................................... 8
Disclosure Regarding Forward-Looking Statements....................... 15
The Exchange Offer.................................................... 17
Use of Proceeds....................................................... 26
Capitalization........................................................ 26
Selected Financial and Other Data..................................... 27
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 28
Business.............................................................. 43
Management............................................................ 49
Certain Relationships and Related Transactions........................ 53
Description of the New Notes.......................................... 55
Registration Rights................................................... 89
Book-Entry; Delivery and Form......................................... 90
Certain Tax Considerations............................................ 93
Plan of Distribution.................................................. 101
Where You Can Find More Information................................... 102
General Listing Information........................................... 102
Legal Matters......................................................... 102
Experts............................................................... 103
Index of Financial Statements......................................... F-1
.........
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this prospectus. We will
provide you without charge, on your request, a copy of any document that is
incorporated by reference into this prospectus, other than exhibits to those
documents that are not specifically incorporated by reference into those
documents, by writing Kronos International, Inc., 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240-2697, Attention: Robert D. Graham, Vice President. To ensure
timely delivery, please make your request as soon a practicable and, in any
event, no later than five business days prior to the expiration of the exchange
offer.
You should rely only on the information provided in this prospectus. We
have not authorized anyone to provide you with any different information. The
information in this prospectus is current only as of the date on the cover, and
our business or financial condition and other information in this prospectus may
change after that date.
We accept responsibility for the information contained in this prospectus.
To the best of our knowledge, the information we give in this prospectus is in
accordance with the facts and contains no omissions likely to affect the import
of the Luxembourg Stock Exchange listing particulars.
i
NOTICE TO NON-U.S. INVESTORS
This prospectus does not constitute an offer to sell or an invitation to
subscribe for or purchase any of the new notes in any jurisdiction in which such
offer or invitation is not authorized or to any person to whom it is unlawful to
make such an offer or invitation. The distribution of this prospectus and this
exchange offer may be restricted by law in certain jurisdictions. Persons into
whose possession this prospectus comes are required to inform themselves about
and to observe any such restrictions. Each prospective purchaser of the new
notes must comply with all applicable laws and regulations in force in any
jurisdiction in which it purchases, offers or sells the new notes or possesses
or distributes this prospectus. In addition, each prospective purchaser must
obtain any consent, approval or permission required under the regulations in
force in any jurisdiction to which it is subject or in which it purchases,
offers or sells the new notes. We shall have no responsibility for obtaining
such consent, approval or permission.
Austria
The new notes may only be offered in the Republic of Austria in compliance
with the provisions of the Austrian Capital Markets Act and other laws
applicable in the Republic of Austria governing the offer and sale of the new
notes in the Republic of Austria. The new notes are not registered or otherwise
authorized for public offer either under the Capital Markets Act or the
Investment Fund Act. The recipients of this prospectus and other selling
material in respect of the new notes have been individually selected and are
targeted exclusively on the basis of a private placement. Accordingly, the new
notes must not be, and are not being, offered or advertised and no offering or
marketing materials relating to the new notes may be made available or
distributed in any way which could constitute a public offer under either the
Capital Markets Act or the Investment Fund Act (whether presently or in the
future). This exchange offer may not be made to any persons other than the
recipients of this prospectus.
Belgium
The exchange offer is exclusively conducted under applicable private
placement exemptions and is limited to (as amended from time to time): ( i)
investors required to invest a minimum of (euro)250,000 (per investor and per
transaction); (ii) institutional investors as defined in Article 3.2(degree) of
the Belgian Royal Decree of July 7, 1999 on the public character of financial
transactions, acting for their own account; and (iii) persons for which the
acquisition of the new notes subject to the exchange offer is necessary to
enable them to exercise their professional activity.
Denmark
The new notes have not been offered or sold and may not be offered, sold or
delivered, directly or indirectly, in the Kingdom of Denmark, unless in
compliance with Chapter 12 of the Danish Executive Order 166 of 13 March 2003 in
the First Public Offer of Certain Securities, issued pursuant to the Danish Act
on Trading in Securities.
Finland
The new notes are not publicly offered or brought into general circulation
in the Republic of Finland other than in compliance with the all applicable
provisions of the laws of the Republic of Finland and especially in compliance
with the Finnish Securities Markets Act (1989/495) and any regulation made
thereunder, as supplemented and amended from time to time.
France
In France, the new notes may not be directly or indirectly offered or sold
to the public, and offers and sales of the new notes will only be made in France
to qualified investors for their own account, in accordance with Articles L411-1
and L411-2 of the Code Monetaire et Financier and Decree no. 98-880, dated
October 1, 1998. Accordingly, this prospectus has not been submitted to the
Commission des Operations de Bourse. Neither this prospectus nor any other
offering material may be distributed to the public or used in connection with
ii
any offer for subscription or sale of the new notes to the public in France or
offered to any investors other than those (if any) to whom offers and sales of
the new notes in France may be made as described above and no prospectus
(document d'information) shall be prepared and submitted for approval (visa) to
the Commission des Operations de Bourse.
Les titres ne peuvent etre offerts ni vendus directement ou indirectement
au public en France et l'offre ou la vente de ces titres ne pourra etre proposee
qu'a des investisseurs qualifies, pour leur proper compte conformement aux
Articles L411-1 et L411-2 du Code Montetaire et Financier et au decret no.
98-880 du 1 octobre 1998. Par consequent, ce prospectus n'a pas ete soumis au
visa de la Commission des Operations de Bourse et aucun document d'information
ne sera prepare ou soumis puor visa a la Commission des Operations de Bourse. Ni
ce prospectus ni aucun autre document promotionnel ne pourront etre communiques
en France au public ou utilise dans le cadre do l'offre de souscription ou la
vente ou l'offre de titres au public ou a toute personne autre que les
investisseurs (le cas echeant) decrits cidessus auxquels les titres peuvent etre
offerts et vendus en France.
Germany
The new notes have not been and will not be publicly offered in Germany
and, accordingly, no securities sales prospectus (Verkaufsprospekt) for a public
offering of the new notes in Germany in accordance with the Securities Sales
Prospectus Act of 13 December 1990, as amended
(Wertpapier-Verkaufsprospektgesetz), has been or will be published or circulated
in the Federal Republic of Germany. New notes have only been offered and sold
and will only be offered and sold in the Federal Republic of Germany in
accordance with the provisions of the Securities Sales Prospectus Act and any
other laws applicable in the Federal Republic of Germany governing the issue,
sale and offering of securities. Any resale of the new notes in the Federal
Republic of Germany may only be made in accordance with the provisions of the
Securities Sales Prospectus Act and any other laws applicable in the Federal
Republic of Germany governing the sale and offering of securities.
Greece
This prospectus and the new notes to which it relates and any other
material related thereto may not be advertised, distributed or otherwise made
available to the public in Greece. The Greek Capital Market Committee has not
authorized any public offering of the subscription of new notes. Accordingly,
new notes may not be advertised, distributed or in any way offered or sold in
Greece or to residents thereof except as permitted by Greek law.
Ireland
The new notes will not and may not be offered, sold, transferred or
delivered, whether directly or indirectly, otherwise and in circumstances which
do not constitute an offer to the public within the meaning of the Irish
Companies Acts 1963 - 2001 and the new notes will not and may not be the subject
of an offer in the Republic of Ireland to which the European Community
(Transferable Securities and Stock Exchange) Regulations, 1992 of Ireland will
apply. No application form has been issued or will be issued in the Republic of
Ireland in respect of the new notes.
Italy
In Italy, this prospectus has not been submitted to the clearance procedure
of the Commissione Nazaionale per le Societa e la Borsa ("CONSOB") and the
offering of the new notes has not been notified to the Bank of Italy pursuant to
Article 129 of the Banking Act; therefore, the new notes may not be offered,
exchanged or delivered, nor may copies of this prospectus or of any other
document relating to the new notes or the exchange offer be distributed in
Italy.
Luxembourg
The new notes may not be directly or indirectly offered or sold to the
public in the Grand-Duchy of Luxembourg and neither this prospectus nor any form
of application, advertisement or other material in connection therewith may be
distributed, published or made otherwise available in the Grand-Duchy of
Luxembourg, unless the requirements of Luxembourg law concerning public
iii
offerings of securities have first been met. A listing on the Luxembourg Stock
Exchange of the new notes does not necessarily imply that a public offering
thereof has been authorized.
Netherlands
The new notes are not and will not be offered in the Netherlands other than
to persons who trade or invest in securities in the conduct of their profession
or trade (which includes banks, securities intermediaries (including dealers and
brokers), insurance companies, pension funds, other institutional investors and
commercial enterprises which as an ancillary activity regularly invest in
securities).
Portugal
The new notes have not been offered, advertised, sold or delivered and will
not be directly or indirectly offered, advertised, sold, re-sold, re-offered or
delivered in circumstances which could qualify as a public offer pursuant to the
Codigo dos Valores Mobiliarios or in circumstances which could qualify the issue
of the new notes as an issue in the Portuguese market to Portuguese residents,
and the new notes have not been directly or indirectly distributed and the
agreement, any other document, circular, advertisement or any offering material
will not be directly or indirectly distributed except in accordance with all
applicable laws and regulations. In particular, the new notes will not be
offered to more than 200 Portuguese (non-institutional) investors; the notes
will not be offered to unidentified addressees, nor will the offer of the new
notes be preceded or performed by prospecting or solicitation of investment
intentions of unidentified addressees, or with promotional material.
Sweden
A prospectus has not and will not be registered with the Swedish Financial
Supervisory Authority. Accordingly, this prospectus may not be made available,
nor may the new notes otherwise be marketed and offered for sale, to the public
in Sweden under the Financial Instruments Trading Act (1991:980).
Switzerland
This prospectus has been prepared for private information purposes of
investors only. It may not be used for and shall not be deemed a public offering
of the new notes. No application has been made under Swiss law to publicly
market the new notes in or out of Switzerland. Therefore, no public offer of the
new notes or public distribution of this prospectus may be made in or out of
Switzerland. This prospectus is strictly for private use by its holder and may
not be passed on to third parties.
United Kingdom
The new notes will only be available for subscription pursuant to this
exchange offer to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances that do not, and will
not, constitute an offer to the public in the United Kingdom within the meaning
of the Public Offers of Securities Regulations 1995, as amended. This prospectus
is being distributed on the basis that each person in the United Kingdom to whom
this prospectus is delivered is a person of the kind described in Article 19(5)
of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001
(the "FPO") or a high net worth company or unincorporated association or high
value trust or other person of a kind described in Article 49(2) of the FPO and,
accordingly, by accepting delivery of this prospectus the recipient warrants and
acknowledges that it is such a person.
iv
PROSPECTUS SUMMARY
In this prospectus, "KII," "we," "us" and "our" refer to Kronos
International, Inc. and its consolidated subsidiaries except where we expressly
state that we are only referring to Kronos International, Inc. As used in this
prospectus, "new notes" means our new 8 7/8% senior secured notes due 2009 that
are being offered in this exchange offer and "old notes" means our outstanding 8
7/8% senior secured notes due 2009 issued on November 26, 2004. In June 2002, we
issued (euro)285,000,000 aggregate principal amount of our 8 7/8% senior secured
notes due 2009, which were subject to an earlier exchange offer for notes
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and which we collectively refer to in this prospectus as the "initial notes." In
this prospectus, "notes" means the new notes, the old notes and the initial
notes, collectively. The following summary contains basic information about us,
the new notes and this exchange offer. This prospectus and the exchange offer do
not apply to any of the initial notes. It likely does not contain all the
information that is important to you. For a more complete understanding of us,
the exchange offer and the new notes, we encourage you to read this prospectus
in its entirety and the other documents we have referred you to.
The Company
We are a wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos"). We
conduct Kronos' European value-added titanium dioxide pigments ("TiO2")
operations.
Titanium dioxide pigments are inorganic chemical products used for
imparting whiteness, brightness and opacity to a diverse range of customer
applications and end-use markets, including coatings, plastics, paper and other
industrial and consumer "quality-of-life" products. TiO2 is considered a
"quality-of-life" product with demand affected by gross domestic product in
various regions of the world. TiO2, the largest commercially used whitening
pigment by volume, derives its value from its whitening properties and
opacifying ability (commonly referred to as hiding power). As a result of TiO2's
high refractive index rating, it can provide more hiding power than any other
commercially produced white pigment. In addition, TiO2 demonstrates excellent
resistance to chemical attack, good thermal stability and resistance to
ultraviolet degradation. TiO2 is supplied to customers in either a powder or
slurry form.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant regions for TiO2
consumption could emerge in Eastern Europe, the Far East or China as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, experience greater demand.
We currently produce over 40 different TiO2 grades, sold under the Kronos
trademark, which provide a variety of performance properties to meet customers'
specific requirements. Our major customers include domestic and international
paint, plastics and paper manufacturers.
We and our distributors and agents sell and provide technical services for
our products to over 4,000 customers in over 100 countries with the majority of
sales in Europe. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos, KII and our predecessors have produced and marketed
TiO2 in North America and Europe for over 80 years, and Kronos is the only
leading TiO2 producer committed to producing TiO2 and related products as its
sole business. We believe that we have developed considerable expertise and
efficiency in the manufacture, sale, shipment and service of our products.
Sales of TiO2 represented about 90% of our total sales in 2004. Sales of
other products, complementary to our TiO2 business, comprise the following:
o 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
reserves that are expected to last at least 20 years. Ilmenite sales
to third-parties represented approximately 6% of our consolidated net
sales in 2004.
o We manufacture and sell iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process.
These co-product chemicals are marketed through our Ecochem division,
1
and are used primarily as treatment and conditioning agents for
industrial effluents and municipal wastewater as well as in the
manufacture of ore pigments, cement and agricultural products. Sales
of iron-based chemical products were about 5% of sales in 2004.
o We manufacture and sell certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from
the production of TiO2. 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. Sales of these products were about 1% of sales in 2004.
2
The Exchange Offer
In the exchange offer, we are offering to exchange your old notes for new
notes, which are identical in all material respects to the old notes, except
that:
o the new notes will be registered under the Securities Act of 1933, as
amended (the "Securities Act");
o the new notes will not contain transfer restrictions and registration
rights that relate to the old notes; and
o the new notes will not contain provisions relating to the payment of
additional interest to be made to the holders of the old notes under
circumstances related to the timing of the exchange offer.
The summary below describes the principal terms of the exchange offer. The
"Exchange Offer" section of this prospectus contains a more detailed description
of the exchange offer.
Old Notes........................ On November 26, 2004, we completed a private
offering of (euro)90,000,000 aggregate
principal amount of 8 7/8% senior secured
notes due 2009, which we refer to in this
prospectus as the old notes.
Registration Rights Agreement.... Simultaneously with the sale of the old
notes, we entered into a registration rights
agreement, which provides for the exchange
offer. The exchange offer satisfies your
rights under the registration rights
agreement. After the exchange offer is over,
you will not be entitled to any exchange or
registration rights with respect to your old
notes, except under limited circumstances.
The Exchange Offer............... We are offering to exchange the old notes
for up to (euro)90,000,000 aggregate
principal amount of 8 7/8% senior secured
notes due 2009 that have been registered
under the Securities Act, which we refer to
in this prospectus as the new notes. You may
exchange old notes only in integral
multiples of (euro)1,000 principal amount.
Expiration of the Exchange Offer. The exchange offer will expire at 5:00 p.m.,
New York City time, on _________________,
2005, or a later date and time to which we
may extend it.
Withdrawal....................... You may withdraw your tender of old notes
pursuant to the exchange offer at any time
before the expiration of the exchange offer.
We will return any old notes not accepted
for exchange for any reason without expense
to you promptly after the expiration or
termination of the exchange offer.
Conditions to the Exchange Offer. The exchange offer is subject to customary
conditions, which we may waive. Please read
"The Exchange Offer--Conditions to the
Exchange Offer" for more information
regarding the conditions to the exchange
offer.
3
Acceptance of Old Notes We will accept and exchange any and all old
and Delivery of New Notes notes that are validly tendered in the
exchange offer and not withdrawn before the
exchange offer expires. The new notes will
be delivered promptly following the exchange
offer.
Resale of New Notes.............. We believe that the new notes issued
pursuant to the exchange offer in exchange
for old notes may be offered for resale,
resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the
Securities Act if:
o you are not our "affiliate"
within the meaning of Rule 405
under the Securities Act;
o you are acquiring the new notes
in the ordinary course of your
business; and
o you have not engaged in, do not
intend to engage in, and have no
arrangement or understanding
with any person to participate
in, a distribution of the new
notes.
If you are an affiliate of ours, or are
engaging in or intend to engage in, or have
any arrangement or understanding with any
person to participate in, a distribution of
the new notes, then:
o you will not be permitted to
tender old notes in the exchange
offer; and
o you must comply with the
registration and prospectus
delivery requirements of the
Securities Act in connection
with any resale of the old
notes.
Each participating broker-dealer that
receives new notes for its own account under
the exchange offer in exchange for old notes
that were acquired by the broker-dealer as a
result of market-making or other trading
activity must acknowledge that it will
deliver a prospectus in connection with any
resale of the new notes. See "Plan of
Distribution."
Consequences of Failing to
Exchange........................ If you are a holder of old notes and you do
not tender your old notes in the exchange
offer, then you will continue to hold your
old notes and will be entitled to all the
rights and will be subject to all the
limitations applicable to the old notes in
the indenture. All untendered old notes will
remain subject to the restrictions on
transfer provided for in the old notes and
in the indenture. Generally, untendered old
notes will remain restricted securities and
may not be offered or sold, unless
4
registered under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the Securities
Act and applicable state securities laws.
Other than in connection with the exchange
offer, we do not currently anticipate that
we will register the old notes under the
Securities Act. The trading market for old
notes could be adversely affected if some
but not all of the old notes are tendered
and accepted in the exchange offer.
Tax Considerations............... The exchange of old notes for new notes in
the exchange offer will not be a taxable
event for U.S. federal income tax purposes.
See "Certain Tax Considerations" for a more
detailed description of the tax consequences
of the exchange.
Use of Proceeds.................. We will not receive any cash proceeds from
the issuance of new notes pursuant to the
exchange offer.
Exchange Agent................... The Bank of New York is the exchange agent
for the exchange offer. The address and
telephone number of the exchange agent are
set forth under "The Exchange
Offer--Exchange Agent."
5
The New Notes
The new notes will evidence the same debt as the old notes and the
initial notes and will be governed by the same indenture under which the old
notes and the initial notes were issued. The summary below describes the
principal terms of the new notes. The "Description of the New Notes" section of
this prospectus contains a more detailed description of the terms and conditions
of the new notes.
Issuer........................... Kronos International, Inc.
Securities Offered............... (euro)90,000,000 principal amount of 8 7/8%
senior secured notes due 2009. We previously
issued of (euro)285,000,000 aggregate
principal amount of 8 7/8% Senior Secured
Notes due 2009, which we refer to in this
prospectus as the "initial notes". The new
notes and the old notes constitute part of a
single class of securities together with the
initial notes.
Maturity......................... June 30, 2009.
Interest Rate.................... 8 7/8% per year (calculated using a 360-day
year).
Interest Payment Dates........... June 30 and December 30.
Ranking.......................... The new notes will rank equally in right of
payment with the old notes, the initial
notes and with all of our senior debt and
senior in right of payment to all of our
subordinated debt. The new notes will be
structurally subordinated to the debt and
liabilities of our subsidiaries. As of
December 31, 2004, our subsidiaries had
approximately $248 million of debt and other
liabilities recorded on our balance sheet,
excluding approximately $93 million that
subsidiaries have available to borrow under
a credit facility. See "Capitalization."
Security......................... The new notes will be secured by pledges in
favor of the trustee for the new notes or a
collateral agent on behalf of the holders of
65% of the stock or other equity interests
of certain of our first-tier subsidiaries,
which is the same collateral that secures
the old notes and the initial notes.
Sinking Fund..................... None.
Optional Redemption.............. We cannot redeem the new notes until
December 30, 2005. On that date and
thereafter we may redeem some or all of the
new notes at the redemption prices listed in
the "Description of the New Notes" section
under the heading "Optional Redemption,"
plus accrued interest.
Optional Redemption After Public
Equity Offerings................. At any time (which may be more than once) on
or before June 30, 2005, we can choose to
redeem up to 35% of the outstanding notes
with money that we, Kronos or NL Industries,
Inc. ("NL") raise in one or more public
equity offerings, as long as:
o pay 108.875% of the face amount
of the outstanding notes, plus
interest;
o we redeem the outstanding notes
within 90 days of completing the
public equity offering; and
o at least 65% of the aggregate
principal amount of outstanding
notes originally issued remains
outstanding afterwards.
6
Change of Control Offer.......... If we undergo a change of control, we must
give holders of the notes the opportunity to
sell us their notes at 101% of their face
amount, plus accrued interest. See
"Description of the New Notes -- Repurchase
at the Option of Holders upon Change of
Control."
Asset Sale Proceeds.............. If we or our subsidiaries engage in asset
sales, we generally must either invest the
net cash proceeds from such sales in our
business within a period of time, prepay
senior debt or make an offer to purchase a
principal amount of the notes equal to the
excess net cash proceeds. The purchase price
of the new notes will be 100% of their
principal amount, plus accrued interest. See
"Description of the New Notes -- Certain
Covenants -- Limitation on Asset Sales."
Restrictive Covenants............ The indenture governing the new notes
contains covenants limiting our (and most or
all of our subsidiaries') ability to:
o incur additional debt or enter
into sale and leaseback
transactions;
o pay dividends or distributions
on our capital stock or
repurchase our capital stock;
o issue stock of subsidiaries;
o make certain investments;
o create liens on our assets to
secure debt;
o enter into transactions with
affiliates;
o merge or consolidate with
another company; and
o transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions.
Market for the New Notes......... The initial notes are listed on the
Luxembourg Stock Exchange. We will apply for
the new notes to be listed on the Luxembourg
Stock Exchange upon the completion of the
exchange offer. The initial notes are quoted
in the over the counter market in the United
States. We cannot provide any assurance as
to the liquidity of any market for the new
notes.
Risk Factors..................... Investing in the new notes involves
substantial risks. See "Risk Factors" for a
description of certain of the risks you
should consider before investing in the new
notes.
7
RISK FACTORS
Before you decide to exchange your old notes for new notes, you should
carefully consider the following factors in addition to the other information
contained in this prospectus. Each of the risks described in this section with
respect to the new notes is equally applicable to the old notes.
Risks Related to the Exchange Offer
You may have difficulty selling the old notes that you do not exchange.
If you do not exchange your old notes for the new notes offered in this
exchange offer, then you will continue to be subject to transfer restrictions of
your old notes. Those transfer restrictions are described in the indenture
governing the new notes and in the legend contained on the old notes, and arose
because we originally issued the old notes under exemptions from, and in
transactions not subject to, the registration requirements of the Securities
Act.
In general, you may offer or sell your old notes only if they are
registered under the Securities Act and applicable state securities laws, or if
they are offered and sold under an exemption from those requirements. We do not
intend to register the old notes under the Securities Act.
If a large number of old notes are exchanged for new notes issued in the
exchange offer, then it may be more difficult for you to sell your unexchanged
old notes. In addition, if you do not exchange your old notes in the exchange
offer, then you will no longer be entitled to have those notes registered under
the Securities Act.
See "The Exchange Offer--Consequences of Failing to Exchange Old Notes" for
a discussion of the possible consequences of failing to exchange your old notes.
Risks Related to the Notes
Our leverage may impair our financial condition.
We currently have a significant amount of debt. As of December 31, 2004,
our total consolidated debt was approximately $533.2 million, substantially all
of which relates to the notes (including the initial notes).
Our level of debt could have important consequences to you, including:
o making it more difficult for us to satisfy our obligations with
respect to the notes;
o increasing our vulnerability to adverse general economic and industry
conditions;
o requiring that a substantial portion of our cash flow from operations
be used for the payment of interest on our debt, therefore reducing
our ability to use our cash flow to fund working capital, capital
expenditures, acquisitions and general corporate requirements;
o limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and general
corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate; and
o placing us at a competitive disadvantage relative to other less
leveraged competitors.
Subject to specified limitations, the indenture permits us and our
subsidiaries to incur additional debt, including secured debt that may be
secured by the collateral on a pari passu basis. In addition, as of December 31,
8
2004, our subsidiaries have unused borrowing availability of approximately $93
million under our subsidiaries' credit facility, subject to certain tests, all
of which borrowings are senior, structurally, to the notes and are secured by
substantially all of the current assets of such subsidiaries. If new debt is
added to our and our subsidiaries' current debt levels, then the related risks
that we and they now face could intensify.
The notes (including the initial notes) are secured only by pledges of 65% of
the stock or other equity interests of certain of our first-tier subsidiaries,
and assets of our subsidiaries will first be applied to repay indebtedness and
liabilities of our subsidiaries and may not be sufficient to repay the notes.
The notes (including the initial notes) are secured only by pledges of 65%
of the stock or other equity interests of certain of our first-tier
subsidiaries. Each of the stock pledges securing the notes has been made in
favor of the trustee or a collateral agent appointed under the indenture
governing the notes and is governed by the local law of Denmark, France, Germany
and the United Kingdom, as applicable, the jurisdictions where our pledged
subsidiaries are formed. As a result, the validity of those pledges and the
ability of the trustee or a collateral agent, as applicable, or noteholders to
realize any benefits associated with the pledged shares may be limited under
applicable local law as any action to enforce the stock pledges must be taken
under the laws of the applicable jurisdiction and such laws may differ in
significant respects from the laws of the United States. The rights of the
trustee or a collateral agent, as applicable, or the noteholders to foreclose
upon and sell the pledged shares upon the occurrence of a default is subject to
limitations under applicable local bankruptcy laws if a bankruptcy proceeding
were commenced by or against us or our subsidiaries. Any delay or inability to
realize any benefit associated with the security interest in any jurisdiction or
the application of local bankruptcy laws that are contrary to noteholders'
interests could have a material adverse effect on the security interest we have
granted in our subsidiaries and could result in an inability to realize the full
value of the share pledges.
In addition to the foregoing, the old notes are and the new notes will be
effectively subordinated in right of payment to all of the indebtedness and
other liabilities of our subsidiaries, which, as of December 31, 2004, were
approximately $248 million. Furthermore, our debt under our subsidiaries' credit
facility is secured by liens on substantially all of the current assets of our
subsidiaries. The new notes will not, and the old notes do not, have the benefit
of this collateral, nor any other assets of our subsidiaries. Accordingly, if an
event of default occurs under our subsidiaries' credit facility, the lenders
under our subsidiaries' credit facility will have a right to such assets and may
foreclose upon the collateral. In that case, such assets would first be used to
repay in full amounts outstanding under our subsidiaries' credit facility and
may not be available to repay the notes. In the event of a bankruptcy event
affecting any of our subsidiaries, local bankruptcy law would be likely to
apply. In general, such local bankruptcy law affords significant protection for
senior secured creditors, and, in the event of a bankruptcy event, such
creditors may take actions that would materially and adversely affect the value
of our ongoing business and the equity value of such subsidiaries. The remaining
value, if any, of our assets may not be sufficient to repay the notes.
If the priority of the liens securing the new notes and the old notes becomes
subordinated to the liens securing the initial notes, your ability to recover
your investment in the new notes may be adversely impacted.
The priority of the liens securing the new notes and the old notes relative
to the liens securing the Initial Notes are governed by the indenture described
herein. Under the laws of certain jurisdictions governing the share pledges that
secure the notes, the priority of liens on such shares is generally determined
by the date of the filing or recording of the associated security document or,
where applicable, the date of perfection of the security interest. This means
that indebtedness that is intended to benefit from an equal security interest in
an item of collateral may have a junior interest, as a matter of local law, when
compared to a previously filed or perfected security interest notwithstanding
that the original security interest is intended to rank equally with the new
security interest. In such jurisdictions the liens securing the initial notes
may have a priority lien to the lien securing the old notes and the new notes as
a matter of law. Through the indenture, the trustee on behalf of the holders of
the initial notes has agreed that its liens would rank equally with the liens
securing the old notes and the new notes. If, notwithstanding the fact the
indenture is governed by New York law, a court in one or more of such
jurisdictions were to find that these lien ranking terms were invalid or
unenforceable with respect to one or more items of collateral securing the old
notes and the new notes, the holders of the initial notes may be entitled to
recover amounts realized from the liquidation of such collateral before the
holders of the old notes and the new notes. As a result, the holders of the old
notes and the new notes may recover less (or nothing at all) relative to the
holders of the initial notes.
9
Servicing our debt requires a significant amount of cash and our ability to
generate sufficient cash depends on many factors, some of which are beyond our
control.
Our ability to make payments on and refinance our debt and to fund planned
capital expenditures depends on our future ability to generate cash flow. To
some extent, this is subject to general economic, financial, competitive,
legislative and regulatory and other factors that are beyond our control. In
addition, our ability to borrow funds under our subsidiaries' credit facility in
the future will depend on these subsidiaries' ability to maintain specified
financial ratios and satisfy certain financial covenants contained in the credit
agreement for our subsidiaries' credit facility. Our business may not generate
cash flow from operations and future borrowings may not be available to us under
our subsidiaries' credit facility in an amount sufficient to enable us to pay
our debt or to fund other liquidity needs. As a result, we may need to refinance
all or a portion of our debt before maturity, and it is likely that we will need
to refinance all or a portion of our debt on maturity. Our subsidiaries' credit
facility matures in 2005. 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.
Covenant restrictions under our subsidiaries' credit facility and the indenture
may limit our ability to operate our business.
Our subsidiaries' credit facility and the indenture governing the notes
contain, among other things, covenants that may restrict our ability to finance
future operations or capital needs or to engage in other business activities.
Our subsidiaries' credit facility and the indenture restrict, among other
things, our ability and the ability of our restricted subsidiaries to:
o borrow money, pay dividends or make distributions;
o purchase or redeem stock;
o make investments and extend credit;
o engage in transactions with affiliates;
o engage in sale-leaseback transactions;
o freely distribute the proceeds from certain asset sales;
o effect a consolidation or merger or sell, transfer, lease or otherwise
dispose of all or substantially all of our assets; and
o create liens on our assets.
In addition, our subsidiaries' credit facility requires these subsidiaries
to maintain specified financial ratios and satisfy certain financial condition
tests, which may require that action be taken to reduce debt or to act in a
manner contrary to our business objectives. Events beyond our control, including
changes in general business and economic conditions, may affect our ability to
meet those financial ratios and financial condition tests. We cannot assure you
that we will meet those tests or that the lenders will waive any failure to meet
those tests. A breach of any of these covenants would result in a default under
our subsidiaries' credit facility and any resulting acceleration under the
credit facility may result in a default under the indenture. If an event of
default under our subsidiaries' credit facility occurs, the lenders could elect
to declare all amounts outstanding thereunder, together with accrued interest,
to be immediately due and payable. See "Description of the New Notes" for
additional information.
10
If our subsidiaries do not make sufficient distributions to us, we will not be
able to make payments on our debt, including the notes.
Our assets consist primarily of investments in our operating subsidiaries.
Our cash flow and our ability to service indebtedness, including our ability to
pay the interest on and principal of the notes, depend upon cash dividends and
distributions or other transfers from our subsidiaries. In addition, any payment
of dividends, distributions, loans or advances by our subsidiaries to us could
be subject to restrictions on or taxation of dividends or repatriation of
earnings under applicable local law, monetary transfer restrictions and foreign
currency exchange regulations in the jurisdictions in which our subsidiaries
operate, and any restrictions imposed by the current and future debt instruments
of our subsidiaries. Such payments to us by our subsidiaries are contingent upon
our subsidiaries' earnings.
Our subsidiaries are separate and distinct legal entities that have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
notes or to make any funds available therefor, whether by dividends, loans,
distributions or other payments, and do not guarantee the payment of interest
on, or principal of, the notes. Any right that we have to receive any assets of
any of our subsidiaries upon the liquidation or reorganization of any such
subsidiary, and the consequent right of holders of notes to realize proceeds
from the sale of such assets, will be effectively subordinated to the claims of
that subsidiary's creditors, including trade creditors and holders of debt
issued by the subsidiary.
No public market exists for the new notes, and any market for the new notes may
be illiquid.
The initial notes are listed on the Luxembourg Stock Exchange and
application will be made to list the new notes on the Luxembourg Stock Exchange.
The initial notes are quoted in the over the counter market in the United
States. The initial purchaser of the old notes has informed us that it intends
to make a market in the notes. However, the initial purchaser is not obligated
to do so, and may cease market-making activities at any time. Accordingly, we
cannot give any assurance as to:
o the likelihood that an active market for the new notes will develop;
o the liquidity of any such market;
o the ability of holders to sell their new notes; or
o the prices that holders may obtain for their new notes upon any sale.
In addition, the liquidity of the trading market for the new notes, if any,
and the market price quoted for the new notes, will depend on many factors,
including our operating results, the market for similar securities, currency
exchange rates and interest rates. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the new notes. We cannot
guarantee that the market for the new notes will not be subject to similar
disruptions or that any such disruptions will not have an adverse effect on the
value or marketability of the new notes.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture.
Upon a change of control, we are required to offer to repurchase all
outstanding notes at 101% of the face amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The source of funds for any such
purchase of notes will be our available cash or cash generated from our
subsidiaries' operations or other sources, including borrowing, sales of assets
or sales of equity. We cannot assure you that sufficient funds will be available
at the time of any change of control to make any required repurchases of notes
tendered. If the holders of the notes exercise their right to require us to
repurchase all of the notes upon a change of control, the financial effect of
this repurchase could cause a default under our other debt, even if the change
of control itself would not cause a default. Accordingly, it is possible that we
will not have sufficient funds at the time of the change of control to make the
required repurchase of notes. See "Description of the New Notes -- Change of
Control" for additional information.
11
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 result in
reduced earnings or operating losses.
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. This may result in
reduced earnings or operating losses, which may in turn adversely affect our
ability repay the notes.
Historically, the markets for many of our products have experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of capacity additions, resulting in oversupply and
declining prices and profit margins. Our average TiO2 selling prices were
generally (i) decreasing during all of 2001 and the first quarter of 2002, (ii)
flat during the second quarter of 2002, (iii) increasing during the last half of
2002 and the first quarter of 2003, (iv) flat during the second quarter of 2003,
(v) decreasing during the second half of 2003 and the first half of 2004 and
(vi) increasing during the second half of 2004. Our overall average TiO2 selling
prices in billing currencies:
o decreased by 10% during 2002 as compared to 2001;
o were generally flat in 2003 as compared to 2002; and
o were 3% lower in 2004 as compared to 2003.
Future growth in demand for our products may not be sufficient to alleviate
any future conditions of excess industry capacity, and such conditions may not
be sustained or may be further aggravated by anticipated or unanticipated
capacity additions 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.
As a global business, we are exposed to local business risks in different
countries, which could result in operating losses.
We conduct all 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, which may in turn adversely affect our
ability to repay the notes.
We may incur losses from fluctuations in currency exchange rates.
We operate our business in several different countries, and sell our
products worldwide. Therefore, we are 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 future gains or losses depending
on fluctuations in exchange rates. These losses may adversely affect our ability
to repay the notes.
We sell our products in a mature and highly competitive industry and face price
pressures in the markets in which we operate, which may result in reduced
earnings or operating losses.
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
12
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
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 result in reduced demand for our products. The recurrence of any
of these events could have a material adverse effect on our results of
operations, which may in turn adversely affect our ability to repay the notes.
Higher costs or limited availability of our raw materials may decrease our
liquidity, which may decrease our ability to repay the notes.
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, either of which may decrease our
liquidity, which may in turn adversely affect our ability to repay the notes.
If we are unable to maintain our relationship with Kronos and its affiliates, we
may not be able to replace on favorable terms our contracts with them and
facilities that they provide, if at all.
We have entered into and intend to continue to enter into certain
agreements, including service, supply and buy/sell agreements, with Kronos and
its affiliates. If Kronos or any of its affiliates fails to perform its
obligations under any of these agreements, or if any of these agreements
terminate or we are otherwise unable to obtain the benefit thereunder for any
reason, there could be a material adverse effect on our business, financial
condition, results of operations or cash flows, which may in turn adversely
affect our ability to repay the notes, if we are unable to obtain similar
agreements on the same terms from third parties.
Kronos and its affiliates may have conflicts of interest with us, and these
conflicts could adversely affect our business and our ability to repay the
notes.
For so long as Kronos and its affiliates retain their direct and indirect
ownership of us, conflicts of interest could arise with respect to transactions
involving business dealings between us and them, potential acquisitions of
businesses or properties, the issuance of additional securities, our payment of
dividends and other matters. In addition, affiliates of Kronos are also engaged
in the business of producing and selling TiO2 and may compete with us. See
"Description of New Notes--Certain Covenants--Limitations on Transactions with
Affiliates."
We are subject to many environmental and safety regulations that may result in
unanticipated costs or liabilities. If these costs or liabilities are
significant, our ability to pay dividends on our securities and the prices of
our securities may decrease.
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 or substantial fines,
penalties, damages or other costs, including as a result of private litigation.
13
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.
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 result in decreasing our cash flows, which could adversely
affect our ability to pay dividends on our securities and the prices of our
securities. 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 the same effects.
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.
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 do not have binding employment agreements with any of
these managers. This increases the risks that 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.
Our relationships with our union employees could deteriorate, which could
adversely impact our operations, which may in turn adversely impact our ability
to pay dividends on our securities and the prices of our securities.
As of December 31, 2004, we employed approximately 1,950 full-time persons.
A significant number of our 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 ability to repay the notes.
14
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution that the statements in this prospectus
relating to matters that are not historical facts, including, but not limited
to, statements found in the sections entitled "Risk Factors," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that represent management's beliefs
and assumptions based on currently available information. Forward-looking
statements can be identified by the use of words such as "believes," "intends,"
"may," "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:
o Future supply and demand for our products;
o The extent of the dependence of certain of our businesses on certain
market sectors;
o The cyclicality of our businesses;
o 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);
o Changes in raw material and other operating costs (such as energy
costs);
o The possibility of labor disruptions;
o 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);
o Competitive products and substitute products;
o Customer and competitor strategies;
o The impact of pricing and production decisions;
o Competitive technology positions;
o The introduction of trade barriers;
o Fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the euro and the
Norwegian kroner);
o Operating interruptions (including, but not limited to, labor
disputes, leaks, fires, explosions, unscheduled or unplanned downtime
and transportation interruptions);
o Our ability to renew or refinance credit facilities;
o The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters;
15
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria;
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities);
o Government laws and regulations and possible changes therein;
o The ultimate resolution of pending litigation; and
o 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.
16
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
When we issued the old notes on November 26, 2004, we entered into a
registration rights agreement with the initial purchaser of the old notes. A
copy of the registration rights agreement is filed as an exhibit to the
registration statement of which this prospectus is a part. Under the
registration rights agreement, we agreed to:
o file and cause to become effective a registration statement with
respect to an offer to exchange the old notes for new notes that have
been registered under the Securities Act; or
o file and cause to become effective a shelf registration statement with
respect to the resale of the old notes.
If we complete the exchange offer within 300 days after the issuance of the
old notes, then we will satisfy those requirements under the registration rights
agreements. If we do not complete the exchange offer within 300 days of the
issuance of the old notes and a shelf registration statement has not been
declared effective, then we will be required to pay additional interest to the
holders of the old notes.
Terms of the Exchange Offer
As of the date of this prospectus, (euro)90.0 million aggregate principal
amount of the old notes are outstanding. This prospectus and the accompanying
letter of transmittal together constitute the exchange offer. This prospectus
and the letter of transmittal are being sent to all registered holders of old
notes. There will be no fixed record date for determining registered holders of
old notes entitled to participate in the exchange offer.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn before expiration of the exchange offer. We
will issue (euro)1,000 principal amount of new notes in exchange for each
(euro)1,000 principal amount of old notes surrendered under the exchange offer.
Old notes may be tendered only in integral multiples of (euro)1,000. The
exchange offer is not conditioned upon any minimum aggregate principal amount of
old notes being tendered for exchange.
The form and terms of the new notes will be substantially identical to the
form and terms of the old notes, except that the new notes:
o will be registered under the Securities Act;
o will not contain transfer restrictions and registration rights that
relate to the old notes; and
o will not contain provisions relating to the payment of additional
interest to be made to the holders of the old notes under
circumstances related to the timing of the exchange offer.
The new notes will evidence the same debt as the old notes. The new notes
will be issued under and entitled to the benefits of the same indenture that
authorized the issuance of the old notes. For a description of the indenture,
see "Description of the New Notes."
In connection with the exchange offer, holders of the old notes do not have
any appraisal or dissenters' rights under applicable law or the Indenture. We
intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the SEC. The
exchange offer is not being made to, nor will we accept tenders for exchange
from, holders of old notes in any jurisdiction in which the exchange offer or
the acceptance of it would not be in compliance with the securities or blue sky
laws, or other applicable laws, of the jurisdiction.
17
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than applicable taxes described below,
in connection with the exchange offer. It is important that you read "--Fees and
Expenses" for more details regarding fees and expenses incurred in the exchange
offer.
We expressly reserve the right, in our sole discretion:
o to extend the expiration date;
o to delay accepting any old notes;
o if any of the conditions set forth below under "--Conditions to the
Exchange Offer" have not been satisfied, to terminate the exchange
offer and not accept any notes for exchange; and
o to amend the exchange offer in any manner.
We will give written and oral notice of any extension, delay,
non-acceptance, termination or amendment as promptly as practicable by public
announcement, and, in the case of an extension, no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.
During an extension, all old notes previously tendered will remain subject
to the exchange offer and may be accepted for exchange by us. Any old notes not
accepted for exchange for any reason will be returned without cost to the holder
that tendered them as promptly as practicable after the expiration or
termination of the exchange offer.
Expiration of the Exchange Offer
The exchange offer will expire at 5:00 p.m., New York City time, on
____________, 2005. We can extend the exchange offer in our sole discretion, in
which case the term "expiration date" shall mean the latest date and time to
which we extend the exchange offer.
Conditions to the Exchange Offer
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes or to issue new notes in the exchange offer.
We may terminate or amend the exchange offer as provided in this prospectus
before accepting any old notes for exchange if in our reasonable judgment:
o the exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation
of the staff of the SEC;
o any action or proceeding has been instituted or threatened in any
court or by any governmental agency with respect to the exchange offer
that would reasonably be expected to impair our ability to proceed
with the exchange offer, or a material adverse development has
occurred in any existing action or proceeding that relates to us; and
o we have not obtained all governmental approvals that we deem necessary
for the consummation of the exchange offer.
We will not be obligated to accept for exchange any old notes that are not
validly tendered in accordance with the exchange offer.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. We may
waive the preceding conditions in whole or in part at any time or from time to
time in our sole discretion. If we do so, the exchange offer will remain open
18
for at least three business days following the waiver of any of the preceding
conditions. If we fail at any time to exercise any of the foregoing rights, this
failure will not constitute a waiver of that right. Each of these rights will be
deemed an ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue
new notes in exchange for any old notes, if at that time a stop order is
threatened or in effect with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the indenture under the
Trust Indenture Act of 1939.
Procedures for Tendering
We have forwarded to you, along with this prospectus, a letter of
transmittal relating to this exchange offer. Because all the old notes are held
in book-entry accounts maintained by the exchange agent at Euroclear Bank
S.A./N.V., as operator of the Euroclear System ("Euroclear"), or Clearstream
Banking, Societe Anonyme, Luxembourg ("Clearstream"), a holder need not submit a
letter of transmittal if the holder tenders old notes in accordance with the
procedures mandated by Euroclear or Clearstream, as the case may be. To tender
old notes without submitting a letter of transmittal, the electronic
instructions sent to Euroclear or Clearstream and transmitted to the exchange
agent must contain your acknowledgment of receipt of and your agreement to be
bound by and to make all of the representations contained in the letter of
transmittal. In all other cases, a letter of transmittal must be manually
executed and delivered as described in this prospectus.
To tender in the exchange offer, a holder must comply with the procedures
of Euroclear or Clearstream, as applicable, and either:
o complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal; have the signature on the letter of
transmittal guaranteed if the letter is transmittal so requires; and
deliver the letter of transmittal or facsimile to the exchange agent
prior to 5:00 p.m., New York City time, on the expiration date; or
o in lieu of delivering a letter of transmittal, instruct Euroclear or
Clearstream, as the case may be, to transmit on behalf of the holder
an agent's message to the exchange agent, which agent's message must
be received by the exchange agent prior to 5:00 p.m., New York City
time, on the expiration date.
In addition, either:
o the exchange agent must receive the certificates for the old notes
along with the letter of transmittal; or
o the exchange agent must receive, before the expiration date, timely
confirmation of the book-entry transfer of the old notes being
tendered into the exchange agent's account at Euroclear or Clearstream
according to the procedure for book-entry described below, along with
the letter of transmittal or an agent's message.
The term "agent's message" means a message, transmitted by Euroclear or
Clearstream and received by the exchange agent, which states that Euroclear or
Clearstream has received an express acknowledgment from a participant tendering
old notes that the participant has received and agrees to be bound by the terms
of the letter of transmittal, and that we may enforce that agreement against the
participant.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange Agent" before the expiration of the
exchange offer. To receive confirmation of valid tender of old notes, a holder
should contact the exchange agent at the telephone number listed under
"--Exchange Agent."
The tender by a holder that is not withdrawn before expiration of the
exchange offer will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
19
prospectus and in the letter of transmittal. Only a registered holder of old
notes may tender the old notes in the exchange offer. If a holder completing a
letter of transmittal tenders less than all of the old notes held by that
holder, then that tendering holder should fill in the applicable box of the
letter of transmittal. The amount of old notes delivered to the exchange agent
will be deemed to have been tendered unless otherwise indicated.
If old notes, the letter of transmittal or any other required documents are
physically delivered to the exchange agent, the method of delivery is at the
holder's election and risk. Rather than mail these items, we recommend that
holders use an overnight or hand delivery service. In all cases, holders should
allow sufficient time to assure delivery to the exchange agent before expiration
of the exchange offer. Holders should not send the letter of transmittal or old
notes to us. Holders may request their respective brokers, dealers, commercial
banks, trust companies or other nominees to effect the above transactions for
them.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If the beneficial owner wishes to tender on its
own behalf, then it must, prior to completing and executing the letter of
transmittal and delivering its old notes, either:
o make appropriate arrangements to register ownership of the old notes
in the owner's name; or
o obtain a properly completed bond power from the registered holder of
old notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
If the applicable letter of transmittal is signed by the record holder(s)
of the old notes tendered, then the signature must correspond with the name(s)
written on the face of the old note without alteration, enlargement or any
change whatsoever. If the applicable letter of transmittal is signed by a
participant in Euroclear or Clearstream, as applicable, then the signature must
correspond with the name as it appears on the security position listing as the
holder of the old notes. Except as set forth below, a signature on a letter of
transmittal or a notice of withdrawal must be guaranteed by an eligible
guarantor institution.
Eligible guarantor institutions include banks, brokers, dealers, municipal
securities dealers, municipal securities brokers, government securities dealers,
government securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
The signature need not be guaranteed by an eligible guarantor institution if the
old notes are tendered:
o by a registered holder of old notes who has not completed the box
entitled "Special Registration Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
o for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, then the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes
and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, then
these persons should so indicate when signing. Unless we waive this requirement,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
20
tendered old notes. Our determination will be final and binding. We reserve the
absolute right to reject any old notes not properly tendered or any old notes
the acceptance of which would, in the opinion of our counsel, be unlawful. We
also reserve the right to waive any defects, irregularities or conditions of
tender as to particular old notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties.
Unless waived, holders of old notes must cure any defects or irregularities
in connection with tenders of old notes within the time that we determine.
Although we intend to notify holders of defects or irregularities with respect
to tenders of old notes, neither we, the exchange agent nor any other person
will incur any liability for failure to give notification. Tenders of old notes
will not be deemed made until those defects or irregularities have been cured or
waived. Any old notes received by the exchange agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the exchange agent without cost to the tendering
holder, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
By signing the letter of transmittal, or causing Euroclear or Clearstream,
as applicable, to transmit an agent's message to the exchange agent, each
tendering holder of old notes will represent to us that, among other things:
o any new notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person or
entity to participate in the distribution of the new notes;
o if the holder is not a broker-dealer, that it is not engaged in and
does not intend to engage in the distribution of the new notes;
o if the holder is a broker-dealer that will receive new notes for its
own account in exchange for old notes that were acquired as a result
of market-making activities or other trading activities, that it will
deliver a prospectus, as required by law, in connection with any
resale of those new notes (see "Plan of Distribution"); and
o the holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or, if the holder is our affiliate, it will comply
with any applicable registration and prospectus delivery requirements
of the Securities Act.
If any holder or any such other person is our "affiliate," or is engaged in
or intends to engage in or has an arrangement or understanding with any person
to participate in a distribution of the new notes to be acquired in the exchange
offer, then that holder or any such other person:
o may not rely on the applicable interpretations of the staff of the
SEC;
o is not entitled and will not be permitted to tender old notes in the
exchange offer; and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any
resale transaction.
Each broker-dealer who acquired its old notes as a result of market-making
activities or other trading activities and thereafter receives new notes issued
for its own account in the exchange offer, must acknowledge that it will deliver
a prospectus in connection with any resale of such new notes issued in the
exchange offer. The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution" for a discussion of the exchange and resale obligations of
broker-dealers in connection with the exchange offer.
21
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes registered under the Securities Act. For
purposes of the exchange offer, we shall be deemed to have accepted properly
tendered old notes for exchange when, as and if we have given oral or written
notice to the exchange agent, with written confirmation of any oral notice to be
given promptly thereafter. See "--Conditions to the Exchange Offer" for a
discussion of the conditions that must be satisfied before we are required to
accept any old notes for exchange.
For each old note accepted for exchange, the holder will receive a new note
registered under the Securities Act having a principal amount equal to, and in
the denomination of, that of the surrendered old note. Accordingly, registered
holders of new notes on the relevant record date for the first interest payment
date following the consummation of the exchange offer will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid on the old notes, from the date of issuance of the old
notes. Old notes that we accept for exchange will cease to accrue interest from
and after the date of consummation of the exchange offer. Under the registration
rights agreement, we may be required to make additional payments of additional
interest to the holders of the old notes under circumstances relating to the
timing of exchange offer.
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent has timely
received:
o the certificates representing the old notes, or a timely confirmation
from Euroclear or Clearstream of book-entry transfer of the old notes
into the exchange agent's account;
o a properly completed and duly executed letter of transmittal, or in
the case of a book-entry tender, a properly transmitted agent's
message; and
o all other required documents.
Book-Entry Transfer
The exchange agent has advised us that it will establish an account with
respect to the old notes at Euroclear and Clearstream as book-entry transfer
facilities, for purposes of the exchange offer within two business days after
the date of this prospectus. Any financial institution that is a participant in
the book-entry transfer facility's system may make book-entry delivery of old
notes by causing the book-entry transfer facility to transfer the old notes into
the exchange agent's account at the facility in accordance with the facility's
procedures for transfer. However, although delivery of old notes may be effected
through book-entry transfer at the facility, a properly completed and duly
executed letter of transmittal or an agent's message, and any other required
documents, must nonetheless be transmitted to, and received by, the exchange
agent at the address set forth below under "--Exchange Agent" prior to 5:00
p.m., New York City time, on the expiration date.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders of old notes may
withdraw their tenders at any time before expiration of the exchange offer.
For a withdrawal to be effective, the exchange agent must receive a notice
of withdrawal transmitted by Euroclear or Clearstream on behalf of the holder in
accordance with the standard operating procedures of Euroclear or Clearstream,
or a written notice of withdrawal, which may be by telegram, facsimile
transmission or letter, at one of the addresses set forth below under
"--Exchange Agent."
Any notice of withdrawal must:
o specify the name of the person who tendered the old notes to be
withdrawn;
22
o identify the old notes to be withdrawn, including the principal amount
of the old notes to be withdrawn; and
o where certificates for old notes have been transmitted, specify the
name in which the old notes were registered, if different from that of
the withdrawing holder.
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of those certificates, the
withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an
eligible institution, unless the withdrawing holder is an eligible
institution.
If old notes have been tendered pursuant to the procedures for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at Euroclear or Clearstream, as applicable, to be credited
with the withdrawn old notes and otherwise comply with the procedures of the
facility.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal, and our determination shall
be final and binding on all parties. We will deem any old notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
We will return any old notes that have been tendered for exchange but that are
not exchanged for any reason to their holder without cost to the holder. You may
retender properly withdrawn old notes by following one of the procedures
described under "--Procedures for Tendering" above at any time on or before
expiration of the exchange offer.
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. All executed letters of transmittal should be delivered to our exchange
agent at the address set forth below. You should direct questions and requests
for assistance, requests for additional copies of this prospectus or of the
letter of transmittal to the exchange agent addressed as follows:
By Registered Mail, Hand Delivery or Overnight Courier:
The Bank of New York
Lower Ground Floor
30 Cannon Street
London
EC4M 6XH
Attn: Julie McCarthy
For Information, Call:
011 44 (207) 964-6513 or
011 44 (207) 964-7235
By Facsimile Transmission:
(for Eligible Institutions Only)
011 44 (207) 964-6369 or
011 44 (207) 964-7294
Confirm by Telephone:
011 44 (207) 964-7235
Delivery of the letter of transmittal to an address other than as shown
above or transmission of the letter of transmittal via facsimile other than as
set forth above does not constitute a valid delivery of the letter of
transmittal.
23
Fees and Expenses
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We will pay the cash expenses to be incurred
in connection with the exchange offer, including the following:
o SEC registration fees;
o fees and expenses of the exchange agent and trustee;
o our accounting and legal fees; and
o our printing and mailing costs.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. A tendering holder of old notes, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
o certificates representing old notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued
in the name of, any person other than the registered holder of old
notes tendered;
o new notes are to be delivered to, or issued in the name of, any person
other than the registered holder of the old notes;
o tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the exchange of
old notes under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted with
the letter of transmittal, then the amount of any transfer taxes will be billed
to the tendering holder.
Accounting Treatment
We will record the new notes in our accounting records at the same carrying
value as the old notes, which is the aggregate principal amount, as reflected in
our accounting records on the date of exchange, plus any unamortized premium
related to the issuance of the old notes. Accordingly, we will not recognize any
gain or loss for accounting purposes in connection with the exchange offer. The
expenses of the exchange offer will be amortized over the term of the new notes.
Resale of New Notes
Based on interpretations of the staff of the SEC, as set forth in no-action
letters to third parties, we believe that new notes issued under the exchange
offer in exchange for old notes may be offered for resale, resold and otherwise
transferred by any old note holder without further registration under the
Securities Act and without delivery of a prospectus that satisfies the
requirements of Section 10 of the Securities Act if:
24
o the holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act;
o the new notes are acquired in the ordinary course of the holder's
business; and
o the holder does not intend to participate in a distribution of the new
notes.
Any holder who exchanges old notes in the exchange offer with the intention
of participating in any manner in a distribution of the new notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of new notes. With regard to broker-dealers, only broker-dealers that
acquired the old notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives new notes for its own account in exchange for old notes, where the old
notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the new notes. Please read "Plan of
Distribution" for more details regarding the transfer of new notes.
Consequences of Failing to Exchange Old Notes
Holders who desire to tender their old notes in exchange for new notes
registered under the Securities Act should allow sufficient time to ensure
timely delivery. Neither we nor the exchange agent is under any duty to give
notification of defects or irregularities with respect to the tenders of old
notes for exchange.
Old notes that are not tendered or are tendered but not accepted will,
following the consummation of the exchange offer, continue to be subject to the
provisions in the indenture regarding the transfer and exchange of the old notes
and the existing restrictions on transfer set forth in the legend on the old
notes and in the offering memorandum dated November 26, 2004, relating to the
old notes. Except in limited circumstances with respect to specific types of
holders of old notes, we will have no further obligation to provide for the
registration under the Securities Act of such old notes. In general, old notes,
unless registered under the Securities Act, may not be offered or sold except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not anticipate that
we will take any action to register the untendered old notes under the
Securities Act or under any state securities laws.
Upon completion of the exchange offer, holders of the old notes will not be
entitled to any further registration rights under the registration rights
agreement, except under limited circumstances.
Old notes that are not exchanged in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits their holders have under the indenture relating to the old notes
and the new notes. Holders of the new notes and any old notes that remain
outstanding after consummation of the exchange offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage of the class have taken certain actions or exercised certain rights
under the indenture.
25
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes
under the exchange offer. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive the old notes in like principal
amount, the terms of which are identical in all material respects to the new
notes. The old notes surrendered in exchange for the new notes will be retired
and canceled and cannot be reissued. Accordingly, the issuance of the new notes
will not result in any increase or decrease in our indebtedness.
CAPITALIZATION
The following table sets forth our unaudited historical consolidated cash
and cash equivalents and capitalization as of December 31, 2004. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
consolidated financial statements and the related notes included elsewhere in
this prospectus. Euro amounts have been presented in U.S. dollars at an exchange
rate of (euro)1.00 to $1.3622, based on the closing spot rate on December 31,
2004 reported by Bloomberg.
(In millions)
Cash, cash equivalents and restricted cash equivalents................... $ 19.0
=======
Debt:
Senior secured notes due 2009.......................................... $ 519.2
Revolving credit facilities of subsidiaries............................ 13.6
Other.................................................................. .4
-------
Total debt.......................................................... 533.2
Stockholder's equity..................................................... 206.5
-------
Total capitalization................................................ $ 739.7
=======
26
SELECTED FINANCIAL AND OTHER DATA
The statement of operations data for the years ended December 31, 2002,
2003 and 2004, and the balance sheet data as of December 31, 2003 and 2004, have
been derived from our audited consolidated financial statements included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 2000 and 2001, and the balance sheet data as of December 31,
2000, 2001 and 2002, have been derived from our audited consolidated financial
statements not separately presented herein. The selected financial and other
data below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included elsewhere in this prospectus.
Year Ended December 31,
----------------------------------------------------------
2000 2001 2002 2003 2004
--------- -------- -------- -------- --------
(in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 620.5 $ 554.6 $ 579.7 $ 715.9 $ 808.0
Net income..................................... 80.1 113.7 52.3 81.8 326.0
BALANCE SHEET DATA (at year end):
Total assets................................... 530.1 532.5 611.3 750.5 985.2
Long-term debt including current maturities.... 196.1 482.9 325.9 356.7 533.2
Redeemable preferred stock and profit
participation certificates................... 504.9 617.4 - - -
Stockholders' equity (deficit)................. (427.7) (777.5) 76.8 111.6 206.5
TiO2 OPERATING STATISTICS:
Sales volume*.................................. 294 265 297 310 336
Production volume*............................. 297 269 293 320 328
Production rate as a percentage of capacity.... Full 87% 93% Full Full
---------------
*Metric tons in thousands
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("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
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:
o 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 2002,
2003 and 2004, 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 15% to
24%.
o We provide reserves for estimated obsolescence or unmarketable
inventories 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.
o We recognize an impairment charge associated with our long-lived
assets, including property and equipment, whenever we determine that
recovery of such long-lived asset is not probable. Such determination
is made in accordance with the applicable GAAP requirements associated
with the long-lived asset, and is based upon, among other things,
estimates of the amount of future net cash flows to be generated by
the long-lived asset and estimates of the current fair value of the
asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
o 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 2004, no such impairment indicators, as
defined, were present.
o We maintain various defined benefit pension plans. The amounts
recognized as defined benefit pension expenses, and the reported
28
amounts of prepaid and accrued pension 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 these actuarially assumed rates will
result in increases or decreases, as applicable, in the recognized
pension obligations, pension expenses and funding requirements. These
assumptions are more fully described below under "--Assumptions on
defined benefit pension plans."
o 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 that would either increase or
decrease, as applicable, reported net income in the period such change
in estimate was made. For example, during 2004, we concluded that the
"more-likely-than-not" recognition criteria had been met with respect
to the income tax benefit associated with our German net operating
loss carryforwards. We have substantial net operating loss
carryforwards in Germany (the equivalent of $671 million for German
corporate purposes and $232 million for German trade tax purposes at
December 31, 2004). Prior to the complete utilization of such
carryforwards, it is possible that we might conclude in the future
that the benefit of such carryforwards would no longer meet the
"more-likely-than-not" recognition criteria, at which point we would
be required to recognize a valuation allowance against the
then-remaining tax benefit associated with the carryforwards.
o 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).
Income from operations are impacted by certain of these significant
judgments and estimates, such as allowance for doubtful accounts, reserves for
obsolete or unmarketable inventories, impairment of equity method investees,
goodwill and other long-lived assets, defined benefit pension plans and loss
accruals. In addition, other income (expense) is impacted by the significant
judgments and estimates for deferred income tax asset valuation allowances and
loss accruals.
Executive Summary
We reported net income of $326.0 million in 2004. Net income in 2004
includes a second quarter income tax benefit related to the reversal of our
deferred income tax asset valuation allowance in Germany of $277.3 million. Net
income in 2003 includes an income tax benefit relating to the refund of prior
year German income taxes of $24.6 million. Net income in 2002 includes (i) an
income tax benefit related to the reduction in the Belgian corporate income tax
rate of $2.3 million and (ii) income of $1.8 million related to KII's foreign
currency transaction gain resulting from the extinguishment of certain
intercompany indebtedness. Each of these items is more fully discussed below
and/or in the notes to the consolidated financial statements included elsewhere
in this prospectus.
We currently expect income from operations will be higher in 2005 compared
to 2004, but this increase will not offset the decline in income tax benefits in
2005 as compared to 2004.
Relative changes in our TiO2 sales and operating income during the past
three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates.
Selling prices (in billing currencies) for TiO2, our principal product,
were generally: decreasing during the first quarter of 2002, flat during the
29
second quarter of 2002, increasing during the second half of 2002 and the first
quarter of 2003, flat during the second quarter of 2003, decreasing during the
second half of 2003 and the first half of 2004 and increasing during the second
half of 2004.
Results of Operations
Years ended December 31, % Change
----------------------------- -----------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In millions, except selling price data)
Net sales $ 579.7 $ 715.9 $ 808.0 +23% +13%
Cost of sales 454.2 516.9 609.6 +14% +18%
---------- ---------- ----------
Gross margin 125.5 199.0 198.4 +59% **
Selling, general and administrative expense (72.0) (87.0) (104.1) +21% +20%
Currency transaction gains (losses), net 12.4 (3.7) (2.2)
Royalty income 5.8 6.1 6.0
Other operating income (expense), net (.2) - (.5)
---------- ---------- ----------
Income from operations $ 71.5 $ 114.4 $ 97.6 +60% -15%
========== ========== ==========
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency exchange
rates +20% + 4%
Impact of changes in foreign currency
exchange rates -20% - 7%
------ ---
In billing currencies **% - 3%
==== ===
Sales volumes* 297 310 336 + 4% + 8%
Production volumes* 293 320 328 + 9% + 3%
Production rate as percent of capacity 93% Full Full
----------------------------
* Thousands of metric tons
** less that 1%
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Our sales increased $92.1 million (13%) in 2004 as compared to 2003 as
higher sales volumes and the favorable effect of fluctuations in foreign
currency exchange rates, which increased sales by approximately $56 million as
further discussed below, 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 were 3% lower in 2004 as compared to 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 2004 increased 4% as compared to 2003. See " - Effects of foreign currency
exchange rates" below for a discussion of the impact of relative changes in
currency exchange rates on our operations.
Our TiO2 sales volumes in 2004 increased 8% compared to 2003, due to higher
sales volumes in Europe and export markets. By volume, approximately 77% of our
2004 TiO2 sales were attributable to markets in Europe, with 14% attributable to
export markets and the balance to North America. Demand for TiO2 has remained
strong throughout 2004, and while we believe that the strong demand is largely
attributable to the end-use demand of our customers, it is possible that some
portion of the strong demand resulted from customers increasing their inventory
30
levels of TiO2 in advance of implementation of announced or anticipated price
increases. Our operating income comparisons were also favorably impacted by
higher production levels, which increased 3%. Our operating rates were near full
capacity in both periods, and our sales and production volumes in 2004 were both
new records for us, setting new volume records for us for the third consecutive
year.
Our cost of sales increased $92.7 million (18%) in 2004 compared to 2003
due to higher raw material and maintenance costs as well as higher sales volumes
and related effects of translating foreign currencies into the U.S. dollar. Our
cost of sales, as a percentage of net sales, increased from 72% in 2003 to 75%
in 2004 due primarily to the effects of lower average selling prices and higher
costs.
Our gross margins decreased $.6 million (less than 1%) from 2003 to 2004
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling, general and administrative expenses
were relatively consistent from 2003 to 2004, increasing marginally from 12% to
13%, and increasing proportionately with the increased sales and production
volume.
Our income from operations decreased $16.8 million (15%) in 2004 as
compared to 2003, as the effect of lower average TiO2 selling prices and higher
raw material and maintenance costs more than offset the impact of higher sales
and production volumes. See also " - Effects of foreign currency exchange rates"
below for a discussion of the impact of relative changes in currency exchange
rates on our operations.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Our sales increased $136.2 million (23%) 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. 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 consistent with 2002. 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 20%
compared to 2002. See " - Effects of Foreign Currency Exchange Rates" below for
a discussion of the impact of relative changes in currency exchange rates on our
operations.
Our TiO2 sales volumes in 2003 set a new record, increasing 4% from the
previous record achieved in 2002, with higher volumes in European and North
American markets more than offsetting a decline in volumes to other regions. By
volume, approximately 75% of our 2002 and 2003 TiO2 sales volumes were
attributable to markets in Europe, with approximately 10% attributable to North
America and the balance to other regions. Our operating income comparisons were
also favorably impacted by higher production levels, which increased 9%.
Operating rates were near full capacity during most of 2003, setting a new
company production record.
Our cost of sales increased $62.7 million (14%) in 2003 compared to 2002
due to the higher sales volumes. Our cost of sales, as a percentage of net
sales, decreased from 78% in 2002 to 72% 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.
Our gross margins increased $73.5 million (59%) from 2002 to 2003 due to
the net effects of the aforementioned changes in sales and cost of sales during
such periods.
As a percentage of net sales, selling general and administrative expenses
remained consistent at 12%, increasing proportionately with the increased sales
and production volume.
Our income from operations increased $42.9 million (60%) in 2003 compared
to 2002 due primarily to higher average TiO2 selling prices and higher TiO2
sales and production volumes. See also " - Effects of Foreign Currency Exchange
Rates" below for a discussion of the impact of relative changes in currency
exchange rates on our operations.
31
Effects of Foreign Currency Exchange Rates
Our sales are denominated in various currencies, including the euro and
other major European currencies. 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 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 20% and 4% increases in our average TiO2 selling prices during 2003 and
2004, respectively, as compared to the respective prior year using actual
foreign currency exchange rates prevailing during the respective periods (the
GAAP measure), and the minimal percentage change and 3% decrease in our average
TiO2 selling prices in billing currencies (the non-GAAP measure) during such
periods 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).
Our operations and assets are located outside of the United States
(primarily in Germany, Belgium and Norway). A significant amount of our sales
generated from our operations are denominated in currencies other than the U.S.
dollar, principally the euro and other major European currencies. A portion of
our sales generated from our 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 by a net $56 million in 2004 as
compared to 2003, and increased sales by a net $89 million in 2003 as 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 2004 and 2003 compared to the same
periods in prior years. Overall, currency exchange rate fluctuations resulted in
a net $9 million increase in our operating income in 2004 as compared to 2003,
and resulted in a net increase in our operating income in 2003 of approximately
$5 million as compared to 2002.
Outlook
Reflecting the impact of partial implementation of prior price increase
announcements, our average TiO2 selling prices in billing currencies in the
fourth quarter of 2004 were 2% higher than the third quarter of 2004. In 2005,
we expect income from operations will be higher than 2004, primarily due to
higher expected selling prices in 2005. The anticipated higher selling prices in
2005 reflects the expected continued implementation of price increase
announcements, including our latest price increases announced in March 2005. The
extent to which any of such price increases which have previously been
announced, and any additional price increases which may be announced
subsequently in 2005, will be realized will depend on, among other things,
economic factors.
Our efforts to debottleneck our production facilities to meet long-term
demand continue to prove successful. Our production capacity has increased by
approximately 30% over the past ten years due to debottlenecking programs, with
only moderate capital investment. We believe our annual attainable production
capacity for 2005 is approximately 334,000 metric tons, with some slight
additional capacity available in 2006 through our continued debottlenecking
efforts.
32
We expect our TiO2 production volumes in 2005 will be slightly higher than
our 2004 volumes, with sales volumes comparable to or slightly lower in 2005 as
compared to 2004. Our average TiO2 selling prices, which started to increase
during the second half of 2004, are expected to continue to increase during
2005, and consequently we currently expect our average TiO2 selling prices, in
billing currencies, will be higher in 2005 as compared to 2004. Overall, we
expect our income from operations in 2005 will be higher than 2004, due
primarily to higher expected selling prices. Our expectations as to the future
prospects of KII and the TiO2 industry 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.
Years ended December 31, Change
----------------------------- ------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In millions)
Currency transaction gains $ 2.7 $ - $ - $ (2.7) $ -
Interest income from affiliates 22.8 - 2.8 (22.8) 2.8
Trade interest income 1.6 .7 1.1 (.9) .4
Interest expense to affiliates (18.7) (.1) - 18.6 .1
Interest expense (16.7) (32.5) (36.7) (15.8) (4.2)
---------- ---------- ---------- ---------- ----------
$ (8.3) $ (31.9) $ (32.8) $ (23.6) $ (.9)
=========== ========== ========== ========== ==========
Interest income fluctuates in part based upon the amount of funds invested
and yields thereon. Aggregate interest income increased $3.2 million in 2004
compared to 2003 due primarily to interest on our notes receivable from Kronos
entered into during the fourth quarter of 2004. Aggregate interest income
declined $23.7 million in 2003 compared to 2002 primarily due to lower average
yields on invested funds and lower average levels of funds available for
investment. We expect interest income will be higher in 2005 than 2004 due to
our notes receivable from Kronos which are expected to be outstanding during the
full year.
We have a significant amount of indebtedness denominated in the euro,
including our euro-denominated initial notes. Accordingly, the reported amount
of interest expense will vary depending on relative changes in foreign currency
exchange rates. Interest expense in 2004 was higher than 2003 due primarily to
relative changes in foreign currency exchange rates, which increased the U.S.
dollar equivalent of interest expense on the (euro)285 million principal amount
of our initial notes outstanding during both years by approximately $3 million
as compared to the respective prior year. In addition, we issued an additional
(euro)90 million principal amount of senior secured notes in November 2004, and
the interest expense associated with these additional notes was $1 million in
2004.
Interest expense decreased $2.8 million in 2003 as compared to 2002 due
primarily to the net effects of lower average levels of indebtedness, associated
currency effects and lower average interest rates on our indebtedness.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense in 2005 is expected to be
higher than 2004 due primarily to the effect of the issuance of an additional
(euro)90 million principal amount of our senior secured notes in November 2004.
At December 31, 2004, approximately $519.2 million of consolidated
indebtedness, principally our senior secured notes, bears interest at fixed
interest rates averaging 8.4% (2003 - $356 million with a weighted average
interest rate of 8.9%; 2002 - $297 million with a weighted average fixed
interest rate of 8.9%). The weighted average interest rate on $14 million of
outstanding variable rate borrowings at December 31, 2004 was 3.9% (2003 - none
outstanding; 2002 - $27 million outstanding at 6.5%). See Note 6 to the
consolidated financial statements included elsewhere in this prospectus.
33
We had certain loans to affiliates that were outstanding during 2002. We
transferred such notes receivable from affiliates to Kronos in July 2002, and
accordingly no longer reports interest income on such loans to affiliates after
that date.
As noted above, we have a certain amount of indebtedness denominated in
currencies other than the U.S. dollar. See "Quantitative and Qualitative
Disclosures About Market Risk."
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 9 to the consolidated financial statements included
elsewhere in this prospectus. 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 December 31, 2004, we had the equivalent of $671 million and $232
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in Note 9 to the consolidated financial statements included elsewhere
in this prospectus, 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
they 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 met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004, we
reversed $268.6 million of the valuation allowance (the portion related to
future years), and we reversed the remaining $3.4 million during the last six
months of 2004. Because the benefit of such net operating loss carryforwards and
other deductible temporary differences in Germany has now been recognized, our
effective income tax rate in 2005 is expected to be higher than what it would
have otherwise been, although our future cash income tax rate will not be
affected by the reversal of the valuation allowance. Prior to the complete
utilization of such carryforwards, it is possible that we might conclude in the
future that the benefit of such carryforwards would no longer meet the
more-likely-than-not recognition criteria, at which point we would be required
to recognize a valuation allowance against the then-remaining tax benefit
associated with the carryforwards.
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 upon the level of taxable income earned in Germany.
During 2003, we reduced our deferred income tax asset valuation allowance
by an aggregate of 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 an aggregate of approximately $2.8 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.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact us. These
provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
34
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. See Note 9 to the consolidated financial statements
included elsewhere in this prospectus.
Accounting Principles Newly Adopted in 2002, 2003 and 2004. See Note 14 to
the consolidated financial statements included elsewhere in this prospectus.
Accounting Principles Not Yet Adopted. See Note 15 to consolidated
financial statements included elsewhere in this prospectus.
Defined Benefit Pension Plans. We maintain various defined benefit pension
plans in Europe. See Note 10 to the consolidated financial statements included
elsewhere in this prospectus.
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 $5.7 million in 2002, $5.8 million in 2003 and $10.4 million in
2004. 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. We made aggregate contributions to all of our
plans of $7.8 million in 2002, $10.2 million in 2003 and $11.7 million in 2004.
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, 2004, approximately 76% and 20% of the projected benefit
obligation related our plans in Germany 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 Europe and the interest rate
environment differs from country to country.
We used the following discount rates for our defined benefit pension plans:
Discount rates used for:
----------------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2002 and expense in December 31, 2003 and expense December 31, 2004 and
2003 in 2004 expense in 2005
----------------------------------- -------------------------------- -----------------------------
Germany 5.5% 5.3% 5.0%
Norway 6.0% 5.5% 5.0%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit 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
35
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, 2004, approximately 70% and 26% of the plan assets related
to our plans in Germany 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 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:
o 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, 2004 was 23% to equity
managers, 48% to fixed income managers and 29% to real estate.
o In Norway, we currently have a plan asset target allocation of 14% to
equity managers, 62% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate
of return for such investments is approximately 8%, 4.5% to 6.5% and
2.5%, respectively. The plan asset allocation at December 31, 2004 was
16% to equity managers, 64% to fixed income managers and the remainder
primarily to cash and liquid investments.
o 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.
Our assumed long-term rates of return on plan assets for 2002, 2003 and
2004 were as follows:
2002 2003 2004
-------- -------- ------
Germany 6.8% 6.5% 6.0%
Norway 7.0% 6.0% 6.0%
We currently expect to utilize the same long-term rate of return on plan
asset assumptions in 2005 as we used in 2004 for purposes of determining the
2005 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 our 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 2005, we expect our defined benefit pension expense will approximate $11
million in 2005. In comparison, we expect to be required to make approximately
$4 million of contributions to such plans during 2005.
As noted above, defined benefit pension expense and the amounts recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
36
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, 2004, our aggregate projected benefit
obligations would have increased by approximately $11.1 million at that date,
and our defined benefit pension expense would be expected to increase by
approximately $1.4 million during 2005. 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 $500,000 during 2005.
Foreign Operations
Our operations are located in Europe where the functional currency is not
the U.S. dollar. As a result, the reported amount of our assets and liabilities,
and therefore our consolidated net assets, will fluctuate based upon changes in
currency exchange rates. At December 31, 2004, we had substantial net assets
denominated in the euro, Norwegian kroner and United Kingdom pound sterling.
Liquidity and Capital Resources
Consolidated Cash Flows
Our consolidated cash flows for each of the past three years are presented
below:
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Operating activities $ 68.2 $ 104.8 $ 142.2
Investing activities (29.7) (31.7) (34.2)
Financing activities (57.5) (54.9) (129.9)
---------- ----------- ---------
Net cash provided (used) by operating, investing and financing
activities $ (19.0) $ 18.2 $ (21.9)
========= ========== =========
Operating activities. 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, non-cash interest expense and asset impairment
charges. Non-cash interest expense relates to amortization of original issue
discount or premium on certain indebtedness and amortization of deferred
financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, the amount of periodic defined benefit pension plan expense
depends upon a number of factors, including certain actuarial assumptions, and
changes in such actuarial assumptions will result in a change in the reported
expense. In addition, the amount of such periodic expense generally differs from
the outflows of cash required to be currently paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect our liquidity. Relative changes in assets
and liabilities generally result from the timing of production, sales, purchases
37
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. 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,
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.
Cash flows provided from operating activities increased from $104.8 million
in 2003 to $142.2 million in 2004. This $37.4 million increase was due primarily
to the net effect of (i) higher net income of $244.2 million, (ii) a larger
deferred income tax benefit of $312.7 million, (iii) higher depreciation and
amortization expense of $4.1 million, (iv) a higher amount of net cash provided
from changes in our inventories, receivables, payables, accruals and accounts
with affiliates of $34.5 million and (v) higher cash received for income taxes
of $12.3 million.
Cash flows from operating activities increased from $68.2 million in 2002
to $104.8 million in 2003. This $36.6 million increase was due primarily to the
effect of (i) higher net income of $29.5 million, (ii) higher depreciation
expense of $6.5 million, (iii) a lower amount of net cash generated from
relative changes in our inventories, receivables, payables and accruals and
accounts with affiliates of $22.6 million in 2003 as compared to 2002 and (iv)
lower cash paid for income taxes of $18.3 million. 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 volume and sales volume.
Investing Cash Flows. Our capital expenditures were $27.6 million, $31.5
million and $33.7 million in 2002, 2003 and 2004, respectively. Capital
expenditures in 2002 included an aggregate of $3.1 million for the rebuilding of
our Leverkusen, Germany sulfate plant.
Our capital expenditures during the past three years include an aggregate
of approximately $14 million ($5.1 million in 2004) for our ongoing
environmental protection and compliance programs. Our estimated 2005 capital
expenditures are $37 million and include approximately $4 million in the area of
environmental protection and compliance.
Financing Cash Flows. During 2004, (i) we issued an additional (euro)90
million principal amount of our senior secured notes at 107% of par (equivalent
to $130 million when issued) and (ii) our operating subsidiaries in Germany,
Belgium and Norway borrowed an aggregate of (euro)90 million ($112 million when
borrowed) of borrowings under our three-year (euro)80 million secured revolving
credit facility ("European Credit Facility"), of which (euro)80 million ($100
million) were subsequently repaid. See Note 6 to the consolidated financial
statements included elsewhere in this prospectus.
In the fourth quarter of 2004, we transferred an aggregate (euro)163.1
million ($209.5 million) to Kronos in return for two promissory notes. Interest
on both notes is payable to us on a quarterly basis at an annual rate of 9.25%.
Due to the long-term investment nature of these notes, settlement of the
intercompany notes receivable is not contemplated within the foreseeable future
and as such have been presented as a separate component of our stockholder's
equity.
In March 2003, our 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 Credit
Facility.
In March 2002, we repaid $25 million principal amount of affiliate
indebtedness to Kronos. In June 2002, we repaid $169 million principal amount,
plus accrued interest of affiliate indebtedness, to Kronos with proceeds from
the June 2002 issuance of the (euro)285 million principal amount of the initial
notes ($280 million when issued). Further, in June 2002, we repaid (euro)113.8
million ($111.8 million), including interest, of a euro-denominated note payable
to Kronos with proceeds from the offering of the initial notes.
38
Also in June 2002, our 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 our 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 the European Credit Facility.
Deferred financing costs paid of $10.0 million in 2002 and $2.0 million in
2004 for the initial notes and the European Credit Facility are being amortized
over the lives of the respective agreements and are included in other noncurrent
assets as of December 31, 2004.
Cash dividends paid during 2003 and 2004 totaled $25.0 million and $60.0
million, respectively. (No dividends were paid in 2002).
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash inflow of $2.9 million in 2002. Such amounts
related principally to dividends or loans we received from, or capital
contributions or loans we made to affiliates (such notes receivable from
affiliates being reported as reductions to our stockholder's equity, and
therefore considered financing cash flows). We transferred our Canadian
operations to Kronos in April 2002, and accordingly we no longer report any such
capital transaction cash flows related to such Canadian operations subsequent to
April 2002. Additionally, settlement of the above-mentioned notes receivable
from affiliates was not then currently contemplated in the foreseeable future.
In July 2002, we transferred such notes receivable from affiliates to Kronos in
one or more non-cash transactions, and as a result we no longer report cash
flows related to such notes receivable from affiliates.
Provisions contained in certain of our credit agreements could result in
the acceleration of the applicable indebtedness prior to its stated maturity.
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. Other than operating lease commitments
disclosed in Note 12 to the consolidated financial statements included elsewhere
in this prospectus, we are not party to any material off-balance sheet financing
arrangements.
Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Debt
Securities and Borrowing Availability. At December 31, 2004, we had current cash
and cash equivalents aggregating $17.5 million, had current restricted cash
equivalents of $1.5 million and noncurrent restricted marketable debt securities
of $2.9 million. At December 31, 2004, certain of our subsidiaries had
approximately $93 million available for borrowing under the European Credit
Facility (based on borrowing availability). The European Credit Facility matures
in June 2005, and we expect to seek renewal of the facility in the first half of
2005. At December 31, 2004, we had approximately $49 million available for
payment of dividends and other restricted payments as defined in the senior
secured notes indenture.
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 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 12 to the
consolidated financial statements included elsewhere in this prospectus for
certain legal proceedings and environmental matters.
Foreign Operations. As discussed above, our operations are located outside
the United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of our assets and liabilities related to our
operations, and therefore our consolidated net assets, will fluctuate based upon
changes in currency exchange rates. At December 31, 2004, we had substantial net
assets denominated in the euro, Norwegian kroner and United Kingdom pound
sterling.
39
Redeemable Preferred Stock, Profit Participation Certificates and Notes
Receivable From Affiliates. We had issued and outstanding Series A and Series B
redeemable preferred stock and profit participation certificates totaling $694.8
million at June 30, 2002, including cumulative and unpaid dividends. The Series
A redeemable preferred stock was issued to Kronos in February 1999 as a result
of a capital contribution to us through the reduction of our affiliate notes
payable to NL and Kronos. The Series B redeemable preferred stock was issued to
Kronos in February 1999 as a result of a contribution of intellectual property
by Kronos to us. The intellectual property was contributed to us at Kronos'
carryover basis of zero due to common control of us and Kronos. The profit
participation certificates were issued to Kronos in December 1999 as part of a
recapitalization. We had $753.0 million of outstanding notes receivable from
affiliates at June 30, 2002. Settlement of such notes receivable was not
currently contemplated in the then foreseeable future, and consequently such
notes receivable from affiliates were reported in our consolidated balance sheet
as a reduction of our stockholder's equity in accordance with GAAP. These notes
arose between us, NL and Kronos through a series of transactions with
affiliates, a substantial portion of which were noncash in nature. We
periodically converted accrued interest receivable from affiliates to notes
receivable from affiliates. See Note 8 to the consolidated financial statements
included elsewhere in this prospectus for the effect of the recapitalization in
July 2002 on us.
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, debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, we in the past has sought, and in the future may seek, to reduce,
refinance, repurchase or restructure indebtedness; raise additional capital;
issue additional securities; restructure ownership interests; modify our
dividend policy; 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 such 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 6 to the consolidated financial statements included
elsewhere in this prospectus.
Summary of Debt and Other Contractual Commitments
As more fully described in the notes to the consolidated financial
statements included elsewhere in this prospectus, we are a party to various
debt, lease and other agreements which contractually and unconditionally commit
us to pay certain amounts in the future. See Notes 6 and 12 to the consolidated
financial statements included elsewhere in this prospectus. The following table
summarizes such contractual commitments of ours and our consolidated
subsidiaries as of December 31, 2004 by the type and date of payment.
Payment due date
-----------------------------------------------------------------------
2010 and
Contractual commitment 2005 2006/2007 2008/2009 after Total
------------------------------------- -------- --------- --------- ----------- ---------
(In millions)
Third-party indebtedness $ 13.8 $ .2 $ 519.2 $ - $ 533.2
Interest payments on third-party
indebtedness 45.0 89.4 44.7 - 179.1
Operating leases 3.4 4.0 3.0 20.9 31.3
Fixed asset acquisitions 5.5 - - - 5.5
Estimated tax obligations 17.1 - - - 17.1
------- ------- ------- ------ ----------
$ 84.8 $ 93.6 $ 566.9 $ 20.9 $ 766.2
======= ======= ======= ====== ==========
40
The timing and amount shown for our commitments related to indebtedness
(principal and interest), operating leases, fixed asset acquisitions, long-term
supply contracts are based upon the contractual payment amount and the
contractual payment date for such commitments. With respect to revolving credit
facilities, the amount shown for indebtedness is based upon the actual amount
outstanding at December 31, 2004, and the amount shown for interest for any
outstanding variable-rate indebtedness is based upon the December 31, 2004
interest rate and assumes that such variable-rate indebtedness remains
outstanding until the maturity of the facility. The amount shown for income
taxes is the consolidated amount of income taxes payable at December 31, 2004,
which is assumed to be paid during 2005. A significant portion of the amount
shown for indebtedness relates to our senior secured notes ($519.2 million at
December 31, 2004). Such indebtedness is denominated in euro. See "Quantitative
and Qualitative Disclosures About Market Risk" and Note 6 to the consolidated
financial statements included elsewhere in this prospectus.
The above table does not reflect any amounts that we might pay to fund our
defined benefit pension 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 are
discussed above in greater detail. The above table also does not reflect any
amounts that we might pay related to our asset retirement obligations, as the
terms and amounts of such future fundings are unknown. See Note 14 to the
consolidated financial statements included elsewhere in this prospectus.
Quantitative and Qualitative Disclosures About Market Risk
General. We are exposed to market risk from changes in foreign currency
exchange rates, interest rates and equity security prices. In the past, we have
periodically entered into currency forward contracts, 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, 2003 and 2004. See Notes 1 and 13 to the
consolidated financial statements included elsewhere in this prospectus.
Interest Rates. We are exposed to market risk from changes in interest
rates, primarily related to indebtedness. At December 31, 2003 and 2004,
substantially all of our aggregate indebtedness was comprised of fixed-rate
instruments. 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, 2004. At December 31,
2003 and 2004, all outstanding fixed-rate indebtedness was denominated in euros,
and the outstanding variable rate borrowings were denominated in euros.
Information shown below for such foreign currency denominated indebtedness is
presented in our U.S. dollar equivalent at December 31, 2004 using exchange
rates of 1.36 U.S. dollars per euro. Certain Norwegian kroner denominated
capital leases totaling $300,000 in 2004 have been excluded from the table
below.
Amount
-----------------
Carrying Fair Interest Maturity
Indebtedness value value rate date
------------ -------- ------- ---------- --------
(In millions)
Fixed-rate indebtedness -
Euro-denominated
Senior Secured Notes $ 519.2 $ 549.1 8.9% 2009
======= =======
Variable rate indebtedness -
European Credit Facility $ 13.6 $ 13.6 3.9% 2005
======= =======
At December 31, 2003, euro-denominated fixed rate indebtedness aggregated
$356.1 million (fair value - $356.1 million) with a weighted-average interest
rate of 8.9%.
41
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 Norwegian kroner and
the United Kingdom pound sterling.
As described above, at December 31, 2004, we had the equivalent of $532.8
million of outstanding euro-denominated indebtedness (2003 - the equivalent of
$356.1 million of euro-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 $52.4 million at December 31, 2004 (2003 - $35.6 million).
At December 31, 2003, we had entered into a short-term currency 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 analysis 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 as determined by GAAP, we have
disclosed certain non-GAAP information which we believe provides useful
information to financial statement users. As discussed above, we disclose
percentage changes in our average TiO2 prices in billing currencies, which
excludes the effects of foreign currency translation. Such disclosure of the
percentage change in our average TiO2 selling price in billing 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 GAAP measure. We disclose percentage
changes in our average TiO2 prices in billing currencies because we believe such
disclosure provides useful information to financial statement users to allow
them 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 using actual exchange rates prevailing during the respective periods.
42
BUSINESS
Kronos International, Inc. is incorporated in the State of Delaware,
U.S.A., and is registered in the Commercial Register of the Federal Republic of
Germany. Our principal place of business is in Leverkusen, Germany. We are a
wholly-owned subsidiary of Kronos. We conduct Kronos' European value-added TiO2
operations.
At December 31, 2004, (i) Valhi, Inc. and a wholly-owned subsidiary of
Valhi held approximately 57% of Kronos' common stock and NL held an additional
37% of Kronos' common stock, (ii) Valhi and such wholly-owned subsidiary of
Valhi held 83% of NL's outstanding common stock and (iii) Contran Corporation
and its subsidiaries held approximately 91% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of 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. Consequently, Mr. Simmons may
be deemed to control each of such companies.
Industry
Titanium dioxide pigments are inorganic chemical products used for
imparting whiteness, brightness and opacity to a diverse range of customer
applications and end-use markets, including coatings, plastics, paper and other
industrial and consumer "quality-of-life" products. TiO2 is considered a
"quality-of-life" product with demand affected by gross domestic product in
various regions of the world. TiO2, the largest commercially used whitening
pigment by volume, derives its value from its whitening properties and
opacifying ability (commonly referred to as hiding power). As a result of TiO2's
high refractive index rating, it can provide more hiding power than any other
commercially produced white pigment. In addition, TiO2 demonstrates excellent
resistance to chemical attack, good thermal stability and resistance to
ultraviolet degradation. TiO2 is supplied to customers in either a powder or
slurry form.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant regions for TiO2
consumption could emerge in Eastern Europe, the Far East or China as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, experience greater demand. Geographic information is contained
in Note 2 to the consolidated financial statements included elsewhere in this
prospectus.
Products and Operations
TiO2 is produced in two crystalline forms: rutile and anatase. Both the
chloride and sulfate production processes (discussed below) produce rutile TiO2.
Chloride process rutile is preferred for the majority of customer applications.
From a technical standpoint, chloride process rutile has a bluer undertone and
higher durability than sulfate process rutile TiO2. Although many end-use
applications can use either form of TiO2, chloride process rutile TiO2 is the
preferred form for use in coatings and plastics, the two largest end-use
markets. Anatase TiO2, which is produced only through the sulfate production
process, represents a much smaller percentage of annual global TiO2 production
and is preferred for use in selected paper, ceramics, rubber tires, and man-made
fibers, food and cosmetics.
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-used 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.
We currently produce over 40 different TiO2 grades, sold under the Kronos
trademark, which provide a variety of performance properties to meet customers'
specific requirements. Our major customers include domestic and international
paint, plastics and paper manufacturers.
43
We and our distributors and agents sell and provide technical services for
our products to over 4,000 customers in over 100 countries with the majority of
sales in Europe. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos, KII and our predecessors have produced and marketed
TiO2 in North America and Europe for over 80 years, and Kronos is the only
leading TiO2 producer committed to producing TiO2 and related products as its
sole business. We believe that we have developed considerable expertise and
efficiency in the manufacture, sale, shipment and service of our products.
Sales of TiO2 represented about 90% of our total sales in 2004. Sales of
other products, complementary to our TiO2 business, comprise the following:
o 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
reserves that are expected to last at least 20 years. Ilmenite sales
to third-parties represented approximately 6% of our consolidated net
sales in 2004.
o We manufacture and sell iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process.
These 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 ore pigments, cement and agricultural products. Sales
of iron-based chemical products were about 5% of sales in 2004.
o We manufacture and sell certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from
the production of TiO2. 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. Sales of these products were about 1% of sales in 2004.
Manufacturing Process and Raw Materials
We manufacture TiO2 using both the chloride process and the sulfate
process. Approximately 65% 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 bearing 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. Due to environmental factors and customer considerations, the
proportion of TiO2 industry sales represented by chloride-process pigments has
increased relative to sulfate-process pigments.
We produced a company record 328,000 metric tons of TiO2 in 2004, compared
to 320,000 metric tons produced in 2003 and 293,000 metric tons in 2002. Our
average production capacity utilization rate in 2004 was near capacity, up from
98% in 2003. The production rates in 2003 and 2004 were higher than 2002 due in
part to debottlenecking activities, with only moderate capital expenditures. We
believe our current annual attainable production capacity for 2005 is
approximately 334,000 metric tons, with some slight additional capacity
available in 2006 through Kronos' continuing debottlenecking efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited but increasing number of
suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. We purchased approximately 250,000 metric tons of
chloride feedstock in 2004, of which the vast majority was slag.
44
Through Kronos (US), Inc. ("KUS"), a wholly-owned subsidiary of Kronos, we
purchased chloride process grade slag in 2004 from a subsidiary of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia), a company formed through
the merger of Westralian Sands Limited (Australia) and RGC Mineral Sands, Ltd.,
under a long-term supply contract that expires at the end of 2007. We and KUS 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
chloride feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock derived primarily from rock and 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 our feedstock for our sulfate-process pigment plants in 2004. We
produced approximately 856,000 metric tons of ilmenite in 2004 of which
approximately 311,000 metric tons were used internally, with the remainder sold
to third parties.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, through KUS we purchase titanium-bearing ore from two different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain 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 consolidated financial position,
results of operations or liquidity.
Competition
The TiO2 industry is highly competitive. We compete primarily on the basis
of price, product quality and technical service, and the availability of high
performance pigment grades. Although certain TiO2 grades are considered
specialty pigments, the majority of our grades and substantially all of our
production are considered commodity pigments with price generally being the most
significant competitive factor. During 2004, we had an estimated 8% share of
worldwide TiO2 sales volume, and believes that we are the leading seller of TiO2
in Germany and are among the leading marketers in the Benelux and Scandinavian
markets.
We (along with KUS and Kronos Canada Inc., a wholly-owned subsidiary of
Kronos), principal competitors are E.I. du Pont de Nemours & Co.; Millennium
Chemicals, Inc.; Huntsman International Holdings LLC; Kerr-McGee Corporation;
and Ishihara Sangyo Kaisha, Ltd. Our five largest competitors have estimated
individual shares of TiO2 production capacity ranging from 24% to 4%, and an
estimated aggregate 70% share of worldwide TiO2 production volume.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in our experience). No greenfield
plants are currently under construction in North America or Europe. We expect
that industry capacity will increase as we and our competitors continue to
debottleneck our and their existing facilities. In addition to the potential
capacity additions through debottlenecking, certain competitors have recently
either idled or shut down facilities. In the past year, certain competitors have
announced the idling or shut down of an aggregate of approximately 135,000
metric tons of sulfate production capacity by early 2005. Based on the factors
described above, we expect that the average annual increase in industry capacity
from announced debottlenecking projects will be less than the average annual
demand growth for TiO2 during the next three to five years. However, no
assurance can be given that future increases in the TiO2 industry production
capacity and future average annual demand growth rates for TiO2 will conform to
our expectations. If actual developments differ from our expectations, we and
the TiO2 industry's performances could be unfavorably affected.
45
Research and Development
Our expenditures for research and development and certain technical support
programs were approximately $6 million in 2002, $7 million in 2003 and $8
million in 2004. Research and development activities are conducted principally
at our Leverkusen, Germany facility. Such activities are directed primarily
toward improving both the chloride and sulfate production processes, improving
product quality and strengthening our competitive position by developing new
pigment applications.
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 customers and increase product life cycle. Over the last five
years, ten new grades have been added for plastics, coatings, fiber and paper
laminate applications.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to us and to our continuing business activities. 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 existing patents generally have a term of 20 years from the
date of filing, and have remaining terms ranging from one to 19 years. We seek
to protect our intellectual property rights, including our patent rights, and
from time to time we are engaged in disputes relating to the protection and use
of intellectual property relating to our products.
Our major trademarks, including Kronos, are protected by registration in
the United States and elsewhere with respect to those products it manufactures
and sells. We also rely on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Our chloride production process is an important part of
our technology, and our business could be harmed if we should fail to maintain
confidentiality of our trade secrets used in this technology.
Foreign Operations
Our chemical businesses have operated in the European markets since the
1920s. Our current production capacity is located in Europe with our net
property and equipment aggregating approximately $396 million at December 31,
2004. Our operations include production facilities in Germany, Belgium and
Norway and sales and distribution facilities in England, France, Denmark and the
Netherlands. Approximately $666 million of our 2004 consolidated sales were to
European customers and approximately $142 million were to customers in areas
other than Europe, including approximately $42 million of sales to customers in
the U.S. through affiliates. 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 above in "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
Political and economic uncertainties in certain of the countries in which
we operate may expose us to risk of loss. We do not believe that there is
currently any likelihood of material loss through political or economic
instability, seizure, nationalization or similar event. We cannot predict,
however, whether events of this type in the future could have a material effect
on our operations. Our manufacturing and mining operations are also subject to
extensive and diverse environmental regulation in each of the foreign countries
in which they operate. See "Regulatory and Environmental Matters."
Customer Base and Annual Seasonality
We believe that neither our aggregate sales nor those of any of our
principal product groups are concentrated in or materially dependent upon any
single customer or small group of customers. Our largest ten TiO2 pigment
customers, excluding sales to Kronos and affiliates, accounted for approximately
21% of net sales in 2004. Neither our business as a whole nor that of any of our
principal product groups is seasonal to any significant extent. Due in part to
the increase in paint production in the spring to meet the spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
46
Employees
As of December 31, 2004, we employed approximately 1,950 persons. Hourly
employees in European production facilities are represented by a variety of
labor unions, with labor agreements having various expiration dates. Our union
employees are covered by master collective bargaining agreements in the
chemicals industry that are renewed annually. 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 maintain
compliance 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.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. We believe that we have 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. We have a contract with a third party to treat
certain sulfate-process effluents at our German sulfate plant. 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.
From time to time, our facilities may be subject to environmental
regulatory enforcement under various non-U.S. statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on our
consolidated financial position, results of operations or liquidity. We believe
that all of our plants are in substantial compliance with applicable
environmental laws.
Our capital expenditures related to our ongoing environmental protection
and improvement programs in 2004 were approximately $5 million, and are
currently expected to be approximately $4 million in 2005.
Properties
During 2004, we operated four TiO2 plants (one in Leverkusen, Germany; one
in Nordenham, Germany; one in Langerbrugge, Belgium; and one in Fredrikstad,
Norway). We also operate an ilmenite ore mine in Hauge i Dalane, Norway pursuant
to a governmental concession with an unlimited term. TiO2 is produced using the
chloride process at the Leverkusen and Langerbrugge facilities and is
manufactured using the sulfate process in Nordenham, Leverkusen and Fredrikstad.
Our co-products are produced at our Norwegian and Belgian facilities and our
titanium chemicals are produced at our Belgian facility.
We own all of our principal production facilities described above, except
for the land under the Leverkusen and Fredrikstad facilities. The Norwegian
47
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, with about 50% 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 ownership and use of the
Leverkusen facility.
We have under lease various corporate and administrative offices located in
Leverkusen, Germany and Brussels, Belgium and various sales offices located in
France, the Netherlands, Denmark and the United Kingdom.
Legal Matters
We are involved in various environmental, contractual, product liability
and other claims and disputes incidental to our business. See Note 12 to the
consolidated financial statements included elsewhere in this prospectus, which
information is incorporated herein by reference.
48
MANAGEMENT
The table below sets forth information about our directors and executive
officers as of March __, 2005.
Name Age Principal Positions and Directorship
------------------------------------ --- ---------------------------------------------------
Harold C. Simmons................... 73 Chairman of the Board and Chief Executive Officer
Dr. Ulfert Fiand.................... 56 President, Manufacturing and Technology and Director
Dr. Henry Basson.................... 63 President, Sales and Marketing and a Director
Volker Roth......................... 60 Vice President, Controller, Secretary and Director
Andrew Kasprowiak................... 58 Vice President, Treasurer and Director
James W. Brown...................... 48 Vice President and Assistant Controller
Robert D. Graham.................... 49 Vice President and Assistant Secretary
John A. St. Wrba.................... 48 Vice President and Assistant Treasurer
Gregory M. Swalwell................. 48 Vice President, Finance and Chief Financial Officer
Kelly D. Luttmer.................... 41 Vice President, Tax Director
Harold C. Simmons has served as our chairman of the board since 2004 and
chief executive officer since 2003. He has served as chairman of the board and
chief executive officer of Kronos since 2003. Mr. Simmons has served as chief
executive officer of NL since 2003 and chairman of the board of NL since prior
to 2000. Mr. Simmons has been chairman of the board of Valhi, Inc., a parent
company of NL, and Contran since prior to 2000 and was chief executive officer
of Valhi from prior to 2000 to 2002. Mr. Simmons has been an executive officer
or director of various companies related to Valhi and Contran since 1961.
Dr. Ulfert Fiand has served as our president of manufacturing and
technology and one of our directors since 2001 and has served as president,
manufacturing and technology of Kronos since October 2004. He previously served
as senior vice president, manufacturing and technology of Kronos since 2003. Dr.
Fiand joined us 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. Dr. Fiand also serves as company manager of
Kronos Titan GmbH.
Dr. Henry Basson has served as our president of sales and marketing and one
of our directors since 1997. From 1992 to 1997, Dr. Basson was president of
Rheox Europe, a former subsidiary of NL. Prior to 1992, Dr. Basson held
positions in sales, marketing and general management at Rohm and Haas Company.
Volker Roth has served as our vice president, controller and secretary and
one of our directors since 1992. Mr. Roth also serves as company manager of
Unterstutzungskasse Kronos Titan GmbH, Kronos Titan GmbH and Kronos Chemie,
GmbH, subsidiaries of Kronos.
Andrew Kasprowiak joined us and our affiliates in 1986 and has served as
our vice president, treasurer and director since 1998. Prior to this time, he
served in various positions with our affiliates, including general manager and
European treasurer of Kronos World Services NV/SA.
James W. Brown has served as our vice president and assistant controller
since February 2004. He has served as vice president and controller of NL and
Kronos since 2003. From 1998 to 2002, he served as vice president and chief
financial officer 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 1994 to 1998, Mr. Brown served as vice president,
corporate accounting of Affiliated Computer Services, Inc., a provider business
process and information technology outsourcing solutions.
Robert D. Graham has served as our vice president and assistant secretary
since February 2004. He has served as vice president, general counsel and
secretary of Kronos since 2003, vice president, general counsel and secretary of
NL since 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 SSI. 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.
49
John A. St. Wrba has served as our vice president and assistant treasurer
since February 2004. He has served has served as vice president of Kronos since
May 2004 and treasurer since 2003. He has also served as vice president and
treasurer of Valhi since February 2005, Contran since October 2004 and NL since
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, a leading
producer of fabricated aluminum products.
Gregory M. Swalwell has served as or chief financial officer since February
2004 and vice president, finance since 2003. He has served as chief financial
officer of Kronos and NL since May 2004, vice president, finance of Kronos and
NL since 2003 and vice president and controller of Valhi and Contran since prior
to 2000. Mr. Swalwell has served in accounting positions with various companies
related to Valhi and Contran since 1988.
Kelly D. Luttmer has served as our vice president, tax director since
October 2004 and tax director since 2003. She has served as vice president of
Kronos, CompX, Contran, Valhi and NL since October 2004, tax director of Kronos
and NL since 2003 and tax director of Valhi and Contran since 1998. Ms. Luttmer
has served in tax accounting positions with various companies related to Valhi
and Contran since 1989.
Compensation of Directors
During 2004, no fees were paid to any director for service as a director.
Directors are reimbursed for reasonable expenses incurred in attending board of
directors and committee meetings.
Summary of Cash and Certain Other Compensation of Executive Officers
The summary compensation table below provides information concerning annual
and long-term compensation paid or accrued by us and our subsidiaries for
services rendered to us and our subsidiaries during 2004, 2003 and 2002 by our
chief executive officer and our two other executive officers with total salary
and bonus, or charge to us or our subsidiaries pursuant to intercorporate
services agreements, in excess of $100,000 in 2004.
SUMMARY COMPENSATION TABLE (1)
Annual Compensation (2)
------------------------------------------
Name and
Principal Position Year Salary Bonus
------------------------------------------------- ---- --------- ----------
Harold C. Simmons (3) 2004 $ -0- $ -0-
Chairman of the Board and Chief Executive Officer 2003 -0- -0-
Dr. Ulfert Fiand 2004 209,664 (4) 153,044 (4)(5)
President, Manufacturing and Technology 2003 173,786 (4) 121,650 (4)(5)
2002 128,827 (4) 89,388 (4)(5)
James W. Brown (3) 2004 151,400 (3) -0-
Vice President and Assistant Controller
----------------
(1) For the periods presented for each named executive officer, no stock
options or shares of restricted stock were granted to them nor payouts made
to them pursuant to long-term incentive plans. In addition for the periods
presented, none of the named executive officers received any compensation
from us that would be reportable under the other compensation column.
Therefore, the columns for such compensation have been omitted.
(2) Other than Dr. Fiand, no named executive officer received other annual
compensation from us or our subsidiaries. For each of the three years
50
presented, Dr. Fiand received an annual car allowance that is less than the
amount required to be reported pursuant to SEC rules. Therefore, the column
for other annual compensation has been omitted.
(3) Messrs. Simmons and Brown are employees of Contran. The amount shown in the
summary compensation table as salary for Mr. Brown represents the portion
of the fees we paid pursuant to an intercorporate services agreement with
Contran with respect to the services he rendered to us. Mr. Brown became
one of our executive officers in February 2004.
(4) Dr. Fiand receives his cash compensation in euros. We report these amounts
in the summary compensation table above in U.S. dollars based on an average
exchange rate for each of 2004, 2003 and 2002 of $1.2347, $1.1212 and
$0.9360 per (euro)1.00, respectively.
(5) Represents amounts we paid pursuant to our share-in-performance plan.
No Grants of Stock Options or Stock Appreciation Rights
We did not grant any stock options or stock appreciation rights ("SARs") to
the named executive officers during 2004, nor did any of our parent or
subsidiary companies.
Stock Option Exercises and Holdings
The following table provides information with respect to each of the named
executive officers concerning the aggregate amount the named executive officer
realized in 2004 upon the exercise of stock options for NL common stock and the
value of unexercised stock options for NL common stock such officer held as of
December 31, 2004. Other than stock options exercisable for NL common stock, no
named executive officer exercised or held any stock options exercisable for
common stock of any of our parent or subsidiary companies nor have any or our
parent or subsidiary companies granted any SARs.
AGGREGATE STOCK OPTION EXERCISES IN 2004 AND
DECEMBER 31, 2004 OPTION VALUES
Number of Shares
Shares Underlying Value of Unexercised
Acquired Unexercised Options at In-the-Money Options
on December 31, 2004 (#) at December 31, 2004 (1)
Exercise Value --------------------------- ---------------------------
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------- ---------- ------------ ----------- ------------- ----------- -------------
Harold C. Simmons
NL Stock Options....... -0- $ -0- 6,000 -0- $ 86,829 $ -0-
Dr. Ulfert Fiand
NL Stock Options....... 7,000 62,533 (2) 3,600 3,400 38,214 27,475
James W. Brown
NL Stock Options....... -0- -0- -0- -0- -0- -0-
--------------------
(1) The aggregate amount is based on the difference between the exercise price
of the individual stock options and the closing sales price of $22.10 per
share for NL common stock on December 31, 2004.
(2) The amount realized is based on the difference between the same-day sales
price per share of the underlying NL common stock issued upon exercise and
the exercise price per share.
51
Pension Plan
Dr. Fiand is eligible to receive his pension through the Bayer
Pensionskasse and the Supplemental Pension Promise. All of our employees in
Germany (including wage earners) who have contributed for five years and are
less than 55 years of age are covered by the Bayer Pensionskasse. Each employee
contributes 2% of eligible earnings excluding bonus, up to the social security
contribution ceiling (currently (euro)62,400) 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 our employees in Germany who have completed ten years
of service. In Germany, Kronos accrues 11.25% of participants' eligible annual
earnings excluding bonus in excess of the social security contribution ceiling,
up to a maximum of (euro)109,200. The Supplemental Pension Promise provides an
annual retirement benefit of 20% of all accruals made by us. 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
2004. As of December 31, 2004, the estimated accrued annual benefit payable upon
normal retirement at normal retirement age for Dr. Fiand is (euro)27,588.
Compensation Committee Interlocks and Insider Participation
Compensation for the named executive officers is set by the management
development and compensation committee of the board of directors of Kronos. None
of the named executive officers served on this committee during 2004.
52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We may be deemed to be controlled by Harold C. Simmons. Corporations that
may be deemed to be controlled by or affiliated with Mr. Simmons sometimes
engage in (a) intercorporate transactions such as guarantees, management and
expense sharing arrangements, shared fee arrangements, 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 us other than as set forth in the
consolidated financial statements included elsewhere in this prospectus, we
continuously consider, review and evaluate, 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 we
might be a party to one or more such transactions in the future.
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.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between us 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 Contran,
Kronos and NL, we believe we 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 net ISA fee charged to us
was $1.1 million in 2002, $1.5 million in 2003 and $2.8 million in 2004.
Sales of TiO2 to Kronos (US), Inc. ("KUS"), an affiliate, were $38.5
million in 2002, $57.8 million in 2003 and $41.9 million in 2004. Sales of TiO2
to Kronos Canada, Inc. ("KC") were $7.7 million in 2002, $10.9 million in 2003
and $8.9 million in 2004.
KUS purchases the rutile and slag feedstock used as a raw material in all
of our chloride process TiO2 facilities. We purchase such feedstock from KUS for
use in our facilities for an amount equal to the amount paid by KUS to the
third-party supplier plus a 2.5% administrative fee. Such feedstock purchases
were $102.5 million in 2002, $93.3 million in 2003 and $106.2 million in 2004.
Purchases of TiO2 from KUS were $2.6 million in 2002, $100,000 in 2003 and
$3.5 million in 2004. Purchases of TiO2 from KC were $500,000 in each of 2002
and 2003 and $700,000 in 2004.
Royalty income received from KC for use of certain of our intellectual
property was $5.8 million in 2002, $6.1 million in 2003 and $6.0 million in
2004.
We are party to master global NL insurance coverage policies with regard to
property, business interruption, excess liability and other coverages. The costs
associated with these policies aggregated $7.0 million, $5.2 million and $5.3
million in 2002, 2003 and 2004, respectively.
Contran and certain of its subsidiaries and affiliates, including us,
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
53
the balance of the policy period. As a result, Contran and certain of its
subsidiaries and its affiliates, including us, 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 justifies the risk associated with the potential for uninsured
loss.
Net amounts between us and KUS were generally related to product sales and
raw material purchases. Net amounts between the Company and KC were generally
related to product sales and royalties. See Note 8 to the consolidated financial
statements included elsewhere in this prospectus for discussion of notes
receivable from affiliates.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
2003 2004
---- ----
(In thousands)
Current receivables from affiliates:
KC $ 1,877 $ 2,516
Other 7 1
------- -------
$ 1,884 $ 2,517
======= =======
Current payables to affiliates:
KUS $ 8,697 $11,033
NL - 9
------- -------
$ 8,697 $11,042
======= =======
Interest income on all loans to related parties was $22.8 million in 2002,
less than $50,000 in 2003 and $2.8 million in 2004. Interest expense on all
loans from related parties was $18.7 million in 2002, less than $100,000 in 2003
and nil in 2004.
In July 2002, all outstanding Series A shares and Series B shares (with
aggregate values of $219.0 million and $192.7 million, respectively, at the time
of conversion) were converted into 1,385 shares of our common stock. As a result
of the conversion, the Series A and B shares were canceled. See Note 8 to the
consolidated financial statements included elsewhere in this prospectus.
5,500,000 profit participation certificates ("PPCs") are designated
nonvoting cumulative preferred PPCs and yielded an annual dividend of 4% per
share based our earnings and before any common stock dividends to Kronos. Kronos
waived its right to dividend distributions for all periods presented and through
December 2002. The PPCs were issued to Kronos ($284.3 million) in December 1999
as part of our recapitalization. In July 2002, all outstanding PPCs (with an
aggregate value of $284.3 million at the time of redemption) were redeemed in
exchange for various notes receivable from NL. As a result of the redemption,
the PPCs were canceled.
54
DESCRIPTION OF THE NEW NOTES
The Company issued the initial notes and the old notes, and will issue the
new notes, under an indenture (the "Indenture") between itself and The Bank of
New York, as Trustee (the "Trustee"). The following is a summary of the material
provisions of the Indenture. It does not include all of the provisions of the
Indenture. We urge you to read the Indenture because it defines your rights. The
terms of the new notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "TIA"). We have filed the Indenture as an exhibit to the registration
statement of which this prospectus is a part and incorporate by reference that
exhibit into this prospectus. You can find definitions of certain capitalized
terms used in this description under "-- Certain Definitions." For purposes of
this section, references to the "Company" include only KII and not its
Subsidiaries.
The new notes will be senior obligations of the Company, ranking equally in
right of payment with the old notes, the initial notes and all our other senior
indebtedness. The new notes will be secured by a senior Lien on 65% of the
Capital Stock of each of the first-tier operating Subsidiaries of the Company,
which is the same collateral that secures the old notes.
The Company will issue the new notes in fully registered form in
denominations of (euro)1,000 and integral multiples thereof. The Trustee will
initially act as Paying Agent and Registrar for the new notes. The new notes may
be presented for registration or transfer and exchange at the offices of the
Registrar. The Company may change any Paying Agent and Registrar without notice
to holders of the notes (the "Holders"). The Company will pay principal (and
premium, if any) on the new notes at the Trustee's corporate office in New York.
At the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of Holders. So long as the
new notes are listed on the Luxembourg Stock Exchange, the Company will maintain
a special agent or, as the case may be, a paying and transfer agent in
Luxembourg. Any new notes that remain outstanding after the completion of the
exchange offer, together with the new notes issued in connection with the
exchange offer, will be treated as a single class of securities under the
Indenture.
Principal, Maturity and Interest
An aggregate principal amount of (euro)90 million of new notes will be
issued in the exchange offer. The new notes will mature on June 30, 2009.
Additional Notes may be issued from time to time, subject to the limitations set
forth under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness." Interest on the new notes will accrue at the rate of 8 7/8% per
annum and will be payable semiannually in cash on each June 30 and December 30
commencing on June 30, 2005, to the persons who are registered Holders at the
close of business on the June 15 and December 15 immediately preceding the
applicable interest payment date. Interest on the new notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The new notes will not be entitled to the benefit of any mandatory sinking
fund.
Redemption
Optional Redemption. Except as described below, the new notes are not
redeemable before December 30, 2005. Thereafter, the Company may redeem the
notes at its option, in whole or in part, upon not less than 30 nor more than 60
days notice, at the following redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve-month period (or, in the
case of the period commencing on December 30, 2008, six-month period) commencing
on December 30 of the year set forth below:
Year Percentage
---- -----------
2005................................................................................ 104.437%
2006................................................................................ 102.958%
2007................................................................................ 101.479%
2008 and thereafter................................................................. 100.000%
55
In addition, the Company must pay accrued and unpaid interest on the notes
redeemed.
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to June 30, 2005, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to 35% of the principal amount of the notes issued under the Indenture
at a redemption price of 108.875% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption; provided that:
(1) at least 65% of the principal amount of notes issued under the
Indenture remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 90 days after the
consummation of any such Public Equity Offering.
"Public Equity Offering" means an underwritten public offering of Qualified
Capital Stock of the Company, Kronos or NL pursuant to a registration statement
filed with the SEC in accordance with the Securities Act (or pursuant to a
similar or reasonably equivalent process in the European Union or in any one or
more states that are members of the European Union as of the Issue Date or in
Norway); provided that, in the event of a Public Equity Offering by Kronos or
NL, such issuer directly or indirectly contributes to the equity capital of the
Company the portion of the net cash proceeds of such Public Equity Offering
necessary to pay the aggregate redemption price (plus accrued interest to the
date of redemption) of the notes to be redeemed pursuant to the preceding
paragraph.
Optional Redemption upon a Change of Control. At any time on or prior to
December 30, 2005, the notes may also be redeemed or purchased (by the Company
or any other Person) in whole but not in part, at the Company's option, upon the
occurrence of a Change of Control, at a price equal to 100% of the principal
amount thereof plus the Applicable Premium as of, and accrued but unpaid
interest, if any, to the date of redemption or purchase (the "Redemption Date")
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date). Such redemption or
purchase may be made upon notice mailed by first-class mail to each Holder's
registered address, not less than 30 nor more than 60 days prior to the
Redemption Date (but in no event shall such notice be mailed more than 180 days
after the occurrence of such Change of Control). The Company may provide in such
notice that payment of such price and performance of the Company's obligations
with respect to such redemption or purchase may be performed by another Person.
Any such notice may be given prior to the occurrence of the related Change of
Control, and any such redemption, purchase or notice may, at the Company's
discretion, be subject to the satisfaction of one or more conditions precedent,
including but not limited to the occurrence of the related Change of Control.
"Applicable Premium" means, with respect to a note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such note and (ii) the excess
of (A) the present value at such Redemption Date of (1) the redemption price of
such note on December 30, 2005 (such redemption price being that described in
the first paragraph of this "Redemption" section) plus (2) all required
remaining scheduled interest payments due on such note through December 30,
2005, computed using a discount rate equal to the Adjusted Bund Rate, over (B)
the principal amount of such note on such Redemption Date. Calculation of the
Applicable Premium will be made by the Company or on behalf of the Company by
such Person as the Company shall designate; provided, however, that such
calculation shall not be a duty or obligation of the Trustee.
"Adjusted Bund Rate" means, with respect to any Redemption Date, the
mid-market yield, under the heading which represents the average for the
immediately prior week, appearing on Reuters page AABBUND01, or its successor,
for the maturity corresponding to June 30, 2009 (if no maturity date is within
three months before or after June 30, 2009, yields for the two published
maturities most closely corresponding to June 30, 2009 shall be determined and
the Bund yield shall be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month), plus 0.50%. The Bund Rate
shall be calculated on the third Business Day preceding such Redemption Date.
56
Selection and Notice of Redemption
In the event that the Company chooses to redeem less than all of the notes,
selection of the notes for redemption will be made by the Trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or
(2) on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate.
No notes of a principal amount of (euro)1,000 or less shall be redeemed in
part. If a partial redemption is made with the proceeds of a Public Equity
Offering, the Trustee will select the notes only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to the procedures of
Euroclear and Clearstream). Notice of redemption will be mailed by first-class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of notes to be redeemed at its registered address. In the event notes are
to be redeemed, the Company will also publish a notice of redemption in
accordance with the procedures described under "-- Notices." On and after the
redemption date, interest will cease to accrue on notes or portions thereof
called for redemption as long as the Company has deposited with the Paying Agent
funds in satisfaction of the applicable redemption price.
Holding Company Structure
The Company's assets consist primarily of investments in its operating
Subsidiaries. The Company's cash flow and its ability to service Indebtedness,
including the Company's ability to pay the interest on and principal of the
notes, depends upon the distribution of the earnings of its Subsidiaries,
whether in the form of dividends, partnership distributions, advances or
payments on account of intercompany obligations, to service its debt
obligations. In addition, the claims of the Holders are subject to the prior
payment of all liabilities (whether or not for borrowed money) and to any
preferred stock interest of such Subsidiaries of the Company. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets available from the Company and its Subsidiaries to satisfy the claims of
the Holders of notes. See "Risk Factors -- If our subsidiaries do not make
sufficient distributions to us, then we will not be able to make payments on our
debt, including the new notes" and "Risk Factors -- The new notes are secured
only by the pledge of 65% of the stock or other equity interests of certain of
our first-tier subsidiaries, and assets of our subsidiaries will first be
applied to repay indebtedness and liabilities of our subsidiaries and may not be
sufficient to repay the new notes."
In addition to the foregoing, the new notes will be structurally
subordinated in right of payment to all of the Indebtedness and other
liabilities of the Company's Subsidiaries, which, as of December 31, 2004, were
approximately $248 million. Furthermore, the Indebtedness of certain of the
Company's Subsidiaries under the Credit Agreement is secured by Liens on
substantially all current assets of such Subsidiaries. The new notes will not
have the benefit of this collateral, nor any other assets of the Company's
Subsidiaries. Accordingly, if an event of default occurs under the Credit
Agreement, the lenders under the Credit Agreement will have a right to such
assets and may foreclose upon their collateral. In that case, such assets would
first be used to repay in full amounts outstanding under the Credit Agreement
and may not be available to repay the new notes. In the event of a bankruptcy
event affecting any of the Subsidiaries, local bankruptcy law would be likely to
apply. In general, such local bankruptcy law affords significant protection for
senior secured creditors and there can be no assurances that, in the event of
bankruptcy events affecting Subsidiaries of the Company, senior secured
creditors could take actions that would materially and adversely affect the
value of the Company's ongoing business and the equity value of such
Subsidiaries. The remaining value, if any, of the Company's assets may not be
sufficient to repay the new notes.
Security
The new notes will be secured only by the pledge of 65% of the Capital
Stock of the Company's first-tier operating Subsidiaries, which is the same
collateral that secures the old notes and the initial notes. Each of the pledges
securing the new notes will be in favor of either the Trustee or a collateral
57
agent appointed under the Indenture and will be governed by the local law of the
jurisdiction where each of our pledged Subsidiaries are formed; those
jurisdictions are Denmark, France, Germany and the United Kingdom. As a result,
the validity of those pledges, and the ability of the Trustee or a collateral
agent, as applicable, or the Holders to realize any benefit associated with the
pledged shares, may be limited under applicable local law as any action to
enforce the stock pledges must be taken under the laws of the applicable
jurisdiction and such laws may differ in significant respects from the laws of
the United States. Furthermore, the rights of the Trustee or a collateral agent,
as applicable, or the Holders to foreclose upon and sell the pledged shares upon
the occurrence of a default will be subject to limitations under applicable
local bankruptcy laws if a bankruptcy proceeding were commenced against the
Company or its Subsidiaries. Any delay or inability to realize any benefit
associated with the Lien in any jurisdiction or the application of local
bankruptcy laws that are contrary to Holders' interests could have a material
adverse effect on the Lien we have granted on certain of the Company's
first-tier Subsidiaries and could result in an inability to realize the full
value of the share pledges entered into in connection with the issuance of the
notes.
Change of Control
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company purchase all or a portion of such Holder's notes
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued interest to the date of purchase.
Within 60 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). In the event of a Change of Control, the Company will also
publish a notice of the offer to purchase in accordance with the procedures
described under "-- Notices." Holders electing to have a note purchased pursuant
to a Change of Control Offer will be required to surrender the note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
58
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any of its Restricted
Subsidiaries that is, or, upon such incurrence, becomes, a Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) and any
Restricted Subsidiary of the Company that is not or will not, upon such
incurrence, become a Guarantor may incur Acquired Indebtedness, in each case if
on the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.5 to 1.0.
The Company and any Restricted Subsidiary that is a Guarantor will not
incur any Indebtedness that is expressly subordinated to any senior Indebtedness
of the Company or any such Guarantor unless such Indebtedness is also expressly
subordinated on the same basis to the notes or any such guarantees.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the Company) on
or in respect of shares of the Company's Capital Stock to holders of such
Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock;
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled final
maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes; or
(4) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being referred to
as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto,
(i) a Default or an Event of Default shall have occurred and be continuing;
or
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; provided,
however, that for purposes of this clause (ii), the Consolidated Fixed Charge
Coverage Ratio of the Company, after giving effect to such Restricted Payment,
must be greater than 3.0 to 1.0; or
(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined in good faith by the Board of Directors of the Company)
shall exceed the sum of:
59
(v) 75% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company
earned subsequent to the Issue Date and on or prior to the date the Restricted
Payment occurs (the "Reference Date") (treating such period as a single
accounting period); plus
(w) 100% of the aggregate net cash proceeds received by the Company from
any Person (other than a Restricted Subsidiary of the Company) from the issuance
and sale subsequent to the Issue Date and on or prior to the Reference Date of
Qualified Capital Stock of the Company or warrants, options or other rights to
acquire Qualified Capital Stock of the Company (but excluding any debt security
that is convertible into, or exchangeable for, Qualified Capital Stock); plus
(x) without duplication of any amounts included in clause (iii)(w) above,
100% of the aggregate net cash proceeds of any equity contribution received by
the Company from a holder of the Company's Capital Stock (excluding, in the case
of clause (iii)(w) and this clause (iii)(x), any net cash proceeds from a Public
Equity Offering to the extent used to redeem the notes in compliance with the
provisions set forth under "Redemption -- Optional Redemption upon Public Equity
Offerings"); plus
(y) without duplication, the sum of:
(1) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to the Issue
Date whether through interest payments, principal payments, dividends or
other distributions or payments;
(2) the net cash proceeds received by the Company or any of its
Restricted Subsidiaries from the disposition of all or any portion of
Investments (other than Permitted Investments) made subsequent to the Issue
Date other than to a Restricted Subsidiary of the Company; and
(3) upon redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary, the fair market value of such Subsidiary; provided, however,
that the sum of amounts governed by clauses (1), (2) and (3) above shall
first be included under this clause (y) and, to the extent that the sum of
clauses (1), (2) and (3) above exceeds the aggregate amount of all
Investments (other than Permitted Investments) made subsequent to the Issue
Date, shall be included under clause (v) above as included in Consolidated
Net Income; plus
(z) $25 million.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been permitted on the
date of declaration;
(2) the acquisition or redemption of any shares of Capital Stock of the
Company, either (i) solely in exchange for shares of Qualified Capital Stock of
the Company or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the Company)
of shares of Qualified Capital Stock of the Company;
(3) the acquisition or redemption of any Indebtedness of the Company that
is subordinate or junior in right of payment to the notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company or (ii) through
the application of net proceeds of (a) a substantially concurrent sale for cash
(other than to a Restricted Subsidiary of the Company) of shares of Qualified
Capital Stock of the Company or (b) if no Default or Event of Default shall have
occurred and be continuing, Refinancing Indebtedness;
(4) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Common Stock of the Company (or
options or warrants to purchase such Common Stock) from directors, officers and
60
employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability, retirement or termination of
employment of such directors, officers and employees, in an aggregate amount not
to exceed $3 million in any calendar year;
(5) on or before 200 days after the Issue Date, the partial or complete
redemption of any one or more of (i) the 738 shares of the Company's outstanding
Series A Preferred Stock, $100 par value, (ii) the 647 shares of the Company's
outstanding Series B Preferred Stock, $100 par value, and (iii) the 5,500,000
shares of the Company's outstanding Profit Participation Certificates, DM100 par
value, in each case including any accrued and unpaid dividends thereon, using as
consideration the Company's notes or loans receivable from its Affiliates and
existing as of the Issue Date (including accrued and unpaid interest thereon);
(6) on or before 200 days from the Issue Date, the partial or complete
conversion into Qualified Capital Stock of the Company of any one or more of (i)
the 738 shares of the Company's outstanding Series A Preferred Stock, $100 par
value, (ii) the 647 shares of the Company's outstanding Series B Preferred
Stock, $100 par value, and (iii) the 5,500,000 shares of the Company's
outstanding Profit Participation Certificates, DM100 par value, in each case
including any accrued and unpaid dividends thereon;
(7) on or before 200 days from the Issue Date, the dividend or other
transfer by the Company to Kronos of all or a portion of the Company's notes or
loans receivable from its Affiliates and existing as of the Issue Date
(including accrued and unpaid interest thereon);
(8) on or before 200 days from the Issue Date, the redemption of any
Qualified Capital Stock of the Company, using as consideration all or a portion
of the Company's notes receivable from Affiliates and existing as of the Issue
Date (including accrued and unpaid interest thereon); and
(9) one or more Restricted Payments of the net proceeds from the issuance
and sale of the notes, on or promptly after the Issue Date as set forth in, and
for the purposes described under, "Use of Proceeds" and, if any net proceeds
remain after such Restricted Payment(s), additional Restricted Payment(s),
promptly after the Issue Date, in an aggregate amount up to the amount of such
remaining net proceeds from such issuance and sale.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(ii) (to the extent
included in the calculation of net cash proceeds in clause (iii)(w) above),
3(ii)(a) (to the extent included in the calculation of net cash proceeds in
clause (iii)(w) above) and (4) shall be included in such calculation and amounts
expended pursuant to clauses (2)(i), (2)(ii) (to the extent not included in the
calculation of net cash proceeds in clause (iii)(w) above), (3)(i), (3)(ii)(a)
(to the extent not included in the calculation of net cash proceeds in clause
(iii)(w) above), 3(ii)(b), (5), (6), (7), (8) and (9) shall be excluded from
such calculation, in each case without duplication.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of (as determined in
good faith by the Company's Board of Directors);
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the
form of cash or Cash Equivalents and is received at the time of such
disposition; provided, however, that for the purposes of this provision, the
amount of any liability that would be shown on a consolidated balance sheet of
the Company or such Restricted Subsidiary, as the case may be, in accordance
with GAAP and immediately prior to the time of such Asset Sale, other than
liabilities that are by their terms expressly subordinated to the notes, that
are assumed by the transferee of any such Asset Sale, will be deemed to be cash;
and
(3) upon the consummation of an Asset Sale, the Company shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to
such Asset Sale within 365 days of receipt thereof either:
61
(a) to prepay any secured senior Indebtedness of the Company or senior
Indebtedness of a Restricted Subsidiary and, in the case of any such senior
Indebtedness under any revolving credit facility, effect a permanent
reduction in the availability under such revolving credit facility;
(b) to acquire or otherwise make an investment or enter into a binding
commitment to acquire or otherwise make an investment in properties and
assets (including Capital Stock) that replace the properties and assets
(including Capital Stock) that were the subject of such Asset Sale or in
properties and assets (including Capital Stock) that will be used in the
business of the Company and its Restricted Subsidiaries as existing on the
Issue Date or in businesses reasonably related thereto ("Replacement
Assets"); and/or
(c) a combination of prepayment and investment permitted by the
foregoing clauses (3)(a) and (3)(b).
On the 366th day after an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (3)(a), (3)(b) and (3)(c) of the preceding paragraph (each, a "Net
Proceeds Offer Trigger Date"), the aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(a), (3)(b) and (3)(c) of the preceding paragraph (each
a "Net Proceeds Offer Amount") shall be applied by the Company or such
Restricted Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on
a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45
days following the applicable Net Proceeds Offer Trigger Date, from all Holders
on a pro rata basis, that amount of notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Restricted Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant.
Notwithstanding the foregoing provision, the Company and its Restricted
Subsidiaries may consummate an Asset Sale without complying with such provision
to the extent that (1) at least 80% of the consideration for such Asset Sale
constitutes Replacement Assets and (2) such Asset Sale is for fair market value.
Any consideration that does not constitute Replacement Assets that is received
by the Company or any of its Restricted Subsidiaries in connection with any
Asset Sale permitted under this paragraph will constitute Net Cash Proceeds and
will be subject to the provisions set forth in the preceding paragraph.
The Company or such Restricted Subsidiary may defer the Net Proceeds Offer
until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in
excess of $20 million resulting from one or more Asset Sales (at which time, the
entire unutilized Net Proceeds Offer Amount, and not just the amount in excess
of $20 million, shall be applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," which transaction does not constitute a Change of Control,
the successor corporation shall be deemed to have sold the properties and assets
of the Company and its Restricted Subsidiaries not so transferred for purposes
of this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value of such properties and assets of the Company or its Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their notes in whole or in part in integral multiples of
62
(euro)1,000 in exchange for cash. To the extent Holders properly tender notes in
an amount exceeding the Net Proceeds Offer Amount, notes of tendering Holders
will be purchased on a pro rata basis (based on amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 business days or such longer
period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
After consummation of any Net Proceeds Offers, any Net Proceeds Offer
Amount not applied to any such purchase may be used by the Company for any
purpose permitted by the other provisions of the Indenture.
To the extent that any or all of the Net Cash Proceeds related to an Asset
Sale of a Restricted Subsidiary are prohibited or delayed by applicable law from
being repatriated (in the form of dividends, loans or otherwise) to the Company,
the portion of such Net Cash Proceeds so affected shall not be required to be
applied at the time provided above, but may be retained by the applicable
Restricted Subsidiary so long, but only so long, as such applicable law will not
permit repatriation to the Company (the Company having agreed to cause the
applicable Restricted Subsidiary to promptly take all actions required by the
applicable law to permit such repatriation). After such repatriation of any such
affected Net Cash Proceeds is permitted under such applicable law, such
repatriation shall be immediately effected and such repatriated Net Cash
Proceeds will be applied in a manner as described in this covenant.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to:
(1) pay dividends or make any other distributions on or in respect of its
Capital Stock;
(2) make loans or advances or to pay any Indebtedness or other obligation
owed to the Company or any other Restricted Subsidiary of the Company; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company,
except, in each case, for such encumbrances or restrictions existing under or by
reason of:
(a) applicable law;
(b) the notes or the Indenture;
(c) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary of the Company;
(d) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to properties or assets other than the properties
or assets so acquired;
(e) agreements existing on the Issue Date to the extent and in the manner
such agreements are in effect on the Issue Date and any amendments, extensions,
renewals or substitutions thereof provided that the terms of such amendments,
extensions, renewals or substitutions are not materially more restrictive in the
aggregate as determined by the Board of Directors of the Company in its good
faith judgment;
(f) customary restrictions in the Credit Agreement, to the extent and in
the manner in effect on the date of effectiveness thereof, and customary
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restrictions in other agreements governing Permitted Indebtedness to the extent
such restrictions would not reasonably be expected to have an adverse effect on
the ability of the Company to timely pay the principal and interest on the
notes;
(g) customary restrictions on the transfer of assets subject to any Lien
permitted under the Indenture imposed by the holder of such Lien;
(h) customary restrictions imposed by any agreement to sell assets or
Capital Stock permitted under the Indenture to any Person pending the closing of
such sale;
(i) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(j) in the case of a joint venture or similar entity 50% owned by the
Company or a Restricted Subsidiary, customary provisions in joint venture
agreements and other similar agreements (in each case relating solely to the
respective joint venture or similar entity or the equity interests therein)
entered into in the ordinary course of business; or
(k) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (b), (d), (e) or (f) above; provided, however, that the provisions
relating to such encumbrance or restriction contained in any such Indebtedness
are not materially more restrictive in the aggregate as determined by the Board
of Directors of the Company in its good faith judgment than the provisions
relating to such encumbrance or restriction contained in agreements referred to
in such clause (b), (d), (e) or (f).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens of any kind against or upon any property
or assets of the Company or any of its Restricted Subsidiaries whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or
assign or otherwise convey any right to receive income or profits therefrom,
unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the notes, the notes are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Liens; and
(2) in all other cases, the notes are equally and ratably secured, except
for:
(a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date and any amendments,
extensions, renewals or substitutions thereof provided that the property
subject to such Liens as amended, extended, renewed or substituted is not
materially different from that initially subject to such Liens as
determined by the Board of Directors of the Company in their good faith
judgment;
(b) Liens securing Indebtedness under the Credit Agreement;
(c) Liens securing senior Indebtedness incurred pursuant to clauses
(11) or (12) of the definition of Permitted Indebtedness;
(d) Liens securing the notes and any Guarantees;
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(e) Liens of the Company or a Wholly Owned Restricted Subsidiary of
the Company on assets of any Restricted Subsidiary of the Company;
(f) Liens securing Indebtedness incurred to Refinance any Indebtedness
which has been secured by a Lien permitted under the Indenture and which
has been incurred without violation of the Indenture; provided, however,
that such Liens do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness
so Refinanced; and
(g) Permitted Liens.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Company's Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity"):
(x) shall be a corporation organized and validly existing under
the laws of the United States, any State thereof or the District of
Columbia; and
(y) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and delivered to
the Trustee, the due and punctual payment of the principal of, and
premium, if any, and interest on all of the notes and the performance
of every covenant of the notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or
observed;
(2) immediately after giving effect to such transaction and the assumption
contemplated by clause (1)(b)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (a) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (b) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the "--
Limitation on Incurrence of Additional Indebtedness" covenant;
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(b)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the Trustee
an officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
65
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the notes with the same effect as if such
surviving entity had been named as such.
Without limiting any of the activities and transactions that Kronos
Titan-GmbH & Co. OHG, a partnership, may engage in or undertake consistent with
the Indenture, Kronos Titan-GmbH & Co. OHG may through a merger, consolidation
or other business combination transaction continue or succeed as a corporation
incorporated under the laws of Germany; provided that such transaction does not
adversely affect the Lien on the Capital Stock of Kronos Titan-GmbH & Co. OHG
for the benefit of the Holders.
Notwithstanding the foregoing, neither the Company nor any Subsidiary will
consolidate or merge with NL or any successor to NL.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "-- Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or any
other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger (if
other than the Guarantor) or to which such sale, lease, conveyance or other
disposition shall have been made is a corporation organized and existing under
the laws of the European Union, any state that is a member of the European Union
on the Issue Date, the United States, any State thereof, the District of
Columbia or Norway;
(2) such entity assumes by supplemental indenture all of the obligations of
the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of any
net proceeds therefrom on a pro forma basis, the Company (a) shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction and (b) shall be able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the "-- Limitation on Incurrence of Additional Indebtedness"
covenant. Any merger or consolidation of a Guarantor with and into the Company
(with the Company being the surviving entity) or another Guarantor need only
comply with clause (4) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than Affiliate
Transactions on terms that are no less favorable than those that might
reasonably have been obtained in a comparable transaction at such time on an
arm's-length basis from a Person that is not an Affiliate of the Company or such
Restricted Subsidiary.
66
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $2 million
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $12.5 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
The restrictions set forth in the first paragraph of this covenant shall
not apply to, and the term "Affiliate Transactions" shall not include, any of
the following (each of the following being a "Permitted Affiliate Transaction"):
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of officers, directors, employees or consultants of the Company or any
Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management;
(2) transactions to the extent exclusively between or among the Company and
any of its Restricted Subsidiaries or to the extent exclusively between or among
such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture;
(3) arrangements under the Company's transfer pricing guidelines, the
Services Agreement, dated as of January 1, 1995 (and amended as of April 1,
2002) among NL, Kronos (US), Inc. and the Company, the Tax Agreement, dated as
of May 28, 2002, by and between Kronos and the Company, the United States Sales
Agreement, effective as of January 1, 1995, among Kronos (US), Inc., Rheox,
Inc., the Company, Kronos Limited, Societe Industrielle du Titane, S.A., Kronos
Titan-GmbH, Kronos Canada, Inc., Kronos B.V., Kronos Europe S.A./N.V., Kronos
Titan A/S, Rheox Limited, Rheox GmbH, Abbey Chemicals Limited, Bentone-Chemie
GmbH and Rheox Canada, a division of Rheox, Inc., the United States Sales
Agreement, effective as of January 1, 1995, among Kronos (US), Inc., Rheox,
Inc., the Company, Kronos Europe S.A./N.V., Kronos Canada, Inc., Kronos Titan
GmbH, Rheox Limited, Rheox GmbH and Kronos Titan A/S, the Assignment and
Assumption Agreement, dated as of January 1, 1999, by and between Kronos (US),
Inc. and the Company, the Amended and Restated Technology Transfer and License
Agreement, dated as of May 30, 1990, between Kronos and Kronos Titan-GmbH, the
Amended and Restated Technology, the Patent and Trademark License Agreement,
dated as of May 30, 1990, by and between Kronos (US), Inc. and Kronos Europe
S.A./N.V., the Amended and Restated Technology, Patent and Trademark License
Agreement, dated as of May 30, 1990, by and between Kronos (USA), Inc. and
Kronos Canada, Inc., the Cross License Agreement, effective January 1, 1999,
between Kronos Inc. (formerly known as Kronos (USA), Inc.) and the Company and
the Trademark Use Agreement, dated as of May 30, 1990, between Kronos, Inc. (now
Kronos (US), Inc.), Kronos (USA), Inc. (now Kronos, Inc.), Kronos Titan-GmbH and
Kronos Titan A/S and amended effective as of October 16, 1993 and January 1,
1999, in each case as in effect as of the Issue Date or any amendment thereto or
any transaction contemplated thereby (including pursuant to any amendment
thereto) in any replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the Holders in any material
respect than the original agreement as in effect on the Issue Date or is
required by law or regulatory authority;
(4) purchases and sales of product and raw materials, insurance
arrangements and payments, all of the foregoing in the ordinary course of
business consistent with past practice or as may be necessary to accommodate
legal, regulatory or other changes in the business of the Company and its
Restricted Subsidiaries; and
(5) Restricted Payments (or Permitted Investments set forth in clauses (4),
(7) and (12) of the definition thereof) permitted by the Indenture.
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any of its Restricted Subsidiaries, directly or indirectly, by way of the
pledge of any intercompany note or otherwise, to assume, guarantee or in any
67
other manner become liable with respect to any Indebtedness of the Company or
any other Restricted Subsidiary of the Company (other than: (1) Indebtedness and
other obligations under the Credit Agreement; (2) Permitted Indebtedness of a
Restricted Subsidiary of the Company; (3) Indebtedness under Currency Agreements
or Commodity Agreements in reliance on clause (5) of the definition of Permitted
Indebtedness; or (4) Interest Swap Obligations incurred in reliance on clause
(4) of the definition of Permitted Indebtedness), unless, in any such case:
(1) such Restricted Subsidiary executes and delivers a supplemental
indenture to the Indenture, providing a guarantee of payment of the notes by
such Restricted Subsidiary; and
(2) if such assumption, guarantee or other liability of such Restricted
Subsidiary is provided in respect of Indebtedness that is expressly subordinated
to the notes (or a Guarantee of the notes), the guarantee or other instrument
provided by such Restricted Subsidiary in respect of such subordinated
Indebtedness shall be subordinated to the Guarantee pursuant to subordination
provisions no less favorable to the Holders of the notes than those contained in
such other Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the notes shall (and shall provide by its terms that it shall) be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon:
(1) the unconditional release of such Restricted Subsidiary from its
assumption, guarantee or other liability in respect of the Indebtedness in
connection with which such Guarantee was executed and delivered pursuant to the
preceding paragraph; or
(2) any sale or other disposition (by merger or otherwise) to any Person
which is not a Restricted Subsidiary of the Company of all of the Capital Stock
in, or all or substantially all of the assets of, such Restricted Subsidiary;
provided that (a) such sale or disposition of such Capital Stock or assets is
otherwise in compliance with the terms of the Indenture and (b) such assumption,
guarantee or other liability of such Restricted Subsidiary has been released by
the holders of the other Indebtedness so guaranteed.
Provision of Security. The Company will not form, acquire or maintain any
direct Restricted Subsidiary (other than Kronos Chemie-GmbH and Kronos World
Services, S.A./N.V., so long as each such company shall have gross assets of
less than $3 million (net of assets contributed thereto for the express purposes
of expunging contingent liabilities), and any other direct Restricted Subsidiary
having gross assets of less than $1 million), unless, concurrently with the
formation, acquisition or maintenance of such Subsidiary, the Company shall
execute and deliver, or cause to be executed and delivered, to the Trustee for
the benefit of Holders, one or more pledge agreements, in form and substance
reasonably satisfactory to the Trustee, pursuant to which not less than 65% of
the Capital Stock of such Subsidiary is pledged to the Trustee for the benefit
of the Holders and the Company shall, concurrently therewith, execute and
deliver all documents, instruments and agreements in form and substance
reasonably satisfactory to the Trustee reasonably necessary in the opinion of
the Trustee to grant and maintain at all times a fully perfected senior Lien on
the collateral pledged pursuant to such pledge agreements.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related
to, or ancillary or complementary to, the businesses in which the Company and
its Restricted Subsidiaries are engaged on the Issue Date.
Reports to Holders. The Indenture provides that, whether or not required by
the rules and regulations of the SEC, so long as any notes are outstanding, the
Company will furnish the Holders of notes (or make publicly available through
the SEC's electronic data gathering and retrieval ("EDGAR") database):
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
68
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company, if any) and, with respect to the
annual information only, a report thereon by the Company's certified independent
accountants; and
(2) all current reports that would be required to be filed with the SEC on
Form 8-K if the Company were required to file such reports, in each case within
the time periods specified in the SEC's rules and regulations.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the rules and
regulations of the SEC, the Company will file a copy of all such information and
reports with the SEC for public availability within the time periods specified
in the SEC's rules and regulations (unless the SEC will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request. So long as the new notes are listed on the
Luxembourg Stock Exchange, copies of such reports shall be available at the
specified office of the Paying Agent and Transfer Agent in Luxembourg. In
addition, the Company has agreed that, for so long as any notes remain
outstanding, it will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Release of Security Upon Satisfaction of Conditions. The Company will have
the right to obtain a release of items of Collateral from the Lien of the
Collateral Documents (the "Released Collateral") subject to a sale or
disposition in accordance with the Indenture (including, without limitation, the
"-- Limitation on Transactions with Affiliates" covenant) and the Trustee will
release the Released Collateral from the Lien of the relevant Collateral
Documents and reconvey the Released Collateral to the Company immediately prior
to such sale or disposition upon compliance with the condition that the Company
deliver to the Trustee the following:
(a) an officers' certificate of the Company stating that (i) all Net Cash
Proceeds, if any, from the sale of any of the Released Collateral will be
applied pursuant to the provisions of the Indenture in respect of Asset Sales,
(ii) there is no Default or Event of Default in effect and continuing on the
date thereof, (iii) the release of the Collateral and the sale or disposition
will not result in a Default or Event of Default under the Indenture and (v) all
conditions precedent in the Indenture relating to the release in question have
been complied with; and
(b) all documentation, if any, required by the TIA prior to the release of
the Released Collateral by the Trustee.
The Indenture provides that the Company shall be entitled to obtain a full
release of all of the Collateral following legal defeasance or covenant
defeasance of the Indenture as described below under "-- Legal Defeasance and
Covenant Defeasance."
Events of Default
The following events are defined in the Indenture as "Events of Default":
(1) the failure to pay interest on any notes when the same becomes due and
payable and the default continues for a period of 30 days;
(2) the failure to pay the principal on any notes when such principal
becomes due and payable, at maturity, upon redemption or otherwise (including
the failure to make a payment to purchase notes tendered pursuant to a Change of
Control Offer or a Net Proceeds Offer);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of 45
days after the Company receives written notice specifying the default (and
demanding that such default be remedied) from the Trustee or the Holders of at
least 25% of the outstanding principal amount of the notes (except in the case
of a default with respect to the "Merger, Consolidation and Sale of Assets"
covenant, which will constitute an Event of Default with such notice requirement
but without such passage of time requirement);
69
(4) the failure to pay at final maturity (giving effect to any applicable
grace periods and any extensions thereof) the principal amount of any
Indebtedness of the Company or any Restricted Subsidiary of the Company, or the
acceleration of the final stated maturity of any such Indebtedness (which
acceleration is not rescinded, annulled or otherwise cured within 20 days of
receipt by the Company or such Restricted Subsidiary of notice of any such
acceleration) if the aggregate principal amount of such Indebtedness, together
with the principal amount of any other such Indebtedness in default for failure
to pay principal at final maturity or which has been accelerated (in each case
with respect to which the 20-day period described above has elapsed), aggregates
$20 million or more at any time;
(5) the repudiation by the Company of any of its obligations under any
Collateral Document, or the unenforceability of any Collateral Document against
the Company if such unenforceability reasonably would be expected to result in a
material adverse effect on the Liens granted by the Company pursuant to such
Collateral Documents;
(6) one or more judgments in an aggregate amount in excess of $20 million
shall have been rendered against the Company or any of its Restricted
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a
period of 60 days after such judgment or judgments become final and
non-appealable; or
(7) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(6) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding notes
may declare the principal of and accrued interest on all the notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
If an Event of Default specified in clause (6) above with respect to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the notes may rescind and
cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances; and
(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the description above of Events of Default, the
Trustee shall have received an officers' certificate and an opinion of counsel
that such Event of Default has been cured or waived. No such rescission shall
affect any subsequent Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any notes.
70
Holders of the notes may not enforce the Indenture or the notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding notes, except for:
(1) the rights of Holders to receive payments in respect of the principal
of, premium, if any, and interest on the notes when such payments are due;
(2) the Company's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or stolen
notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and the
Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders, cash in Euros or Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be and, in
the event that the Trustee at any time determines the amount on deposit is
insufficient to pay the principal of, premium, if any, and interest on the notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be, the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders, additional cash in Euros or Government
Securities, or a combination thereof, in such amounts as will be, together with
prior deposit(s), sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on the notes on the stated date for payment thereof or on the
applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
71
the Trustee confirming that the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had not
occurred;
(4) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit and the granting of
Liens to secure such borrowing and such deposit) or insofar as Events of Default
from bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound (other than a breach, violation or default resulting from the borrowing of
funds to be applied to such borrowing and such deposit and the granting of Liens
to secure such deposit);
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent specified in the Indenture providing for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with; and
(8) the Company shall have delivered to the Trustee an opinion of counsel
to the effect that:
(a) either (i) the Company has irrevocably assigned all of its
ownership interest in the trust funds to the Trustee or (ii) the Trustee
has a valid perfected security interest in the trust fund; and
(b) assuming no intervening bankruptcy of the Company between the date
of deposit and the 91st day following the date of deposit and that no
Holder is an insider of the Company, after the 91st day following the date
of deposit, the trust funds will not be subject to avoidance as a
preference under Section 547 of the U.S. Bankruptcy Code.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the Trustee for cancellation (1) have become due
and payable or (2) will become due and payable on the maturity date within one
year under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the Indenture) as to all outstanding notes
when:
(1) either:
(a) all the notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or paid and notes
72
for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation; or
(b) all notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to
apply such funds to the payment thereof at maturity or redemption, as the
case may be;
(2) the Company has paid all other sums payable under the Indenture by the
Company; and
(3) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
Modification of the Indenture
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture or Collateral Documents for certain specified
purposes, including curing ambiguities, defects or inconsistencies, so long as
such change does not, in the opinion of the Trustee, adversely affect the rights
of any of the Holders in any material respect. In formulating its opinion on
such matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel.
Other modifications and amendments of the Indenture or Collateral Documents may
be made with the consent of the Holders of a majority in principal amount of the
then outstanding notes issued under the Indenture, except that, without the
consent of each Holder affected thereby, no amendment may:
(1) reduce the amount of notes whose Holders must consent to an amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any notes, or change the date on which any notes may be
subject to redemption or reduce the redemption price therefor;
(4) make any notes payable in money other than that stated in the notes;
(5) make any change in provisions of the Indenture protecting the right of
each Holder to receive payment of principal of and interest on such note on or
after the due date thereof or to bring suit to enforce such payment, or
permitting Holders of a majority in principal amount of notes to waive Defaults
or Events of Default;
(6) after the Company's obligation to purchase notes arises thereunder,
amend, change or modify in any material respect the obligation of the Company to
make and consummate a Change of Control Offer in the event of a Change of
Control or make and consummate a Net Proceeds Offer with respect to any Asset
Sale that has been consummated or, after such Change of Control has occurred or
such Asset Sale has been consummated, modify any of the provisions or
definitions with respect thereto; or
(7) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the Indebtedness evidenced by the notes.
Governing Law
The Indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
73
The Trustee
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
Notices
All notices shall be deemed to have been given by (1) the mailing by
first-class mail, postage prepaid, of such notices to Holders of the notes at
their registered addresses as recorded in the Register; and (2) so long as the
new notes are listed on the Luxembourg Stock Exchange and it is required by the
rules of the Luxembourg Stock Exchange, publication of such notice to the
holders of the new notes in English in a leading newspaper having general
circulation in Luxembourg (which is expected to be the Luxemburger Wort) or, if
such publication is not practicable, in one other leading English language daily
newspaper with general circulation in Europe, such newspaper being published on
each business day in morning editions, whether or not it shall be published on
Saturday, Sunday or holiday editions.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with or into the Company or
any of its Restricted Subsidiaries or assumed in connection with the acquisition
of assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation, except for Indebtedness of a Person or any of its Subsidiaries
that is repaid at the time such Person becomes a Restricted Subsidiary of the
Company or at the time it merges with or into the Company or any of its
Restricted Subsidiaries other than from the assets of the Company and its other
Restricted Subsidiaries.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (1) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or of any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (2) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprise any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
74
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of: (1) any Capital Stock of any Restricted Subsidiary of the Company;
or (2) any other property or assets of the Company or any Restricted Subsidiary
of the Company other than in the ordinary course of business; provided, however,
that asset sales or other dispositions shall not include: (a) a transaction or
series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration of less than $2 million; (b) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of the Company as permitted under "Merger, Consolidation and
Sale of Assets"; (c) sales or grants of licenses to use the patents, trade
secrets, know-how and other intellectual property of the Company or any of its
Restricted Subsidiaries to the extent that any such license does not prohibit
the Company or any of its Restricted Subsidiaries from using any material
technologies licensed or require the Company or any of its Restricted
Subsidiaries to pay fees (other than de minimis fees) for use of any material
technologies; (d) the sale or discount, in each case without recourse, of
accounts receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof; (e) disposals or
replacements of obsolete, surplus or unused equipment in the ordinary course of
business; (f) any Restricted Payment not prohibited by the "Limitation on
Restricted Payments" covenant or that constitutes a Permitted Investment; (g)
the sale, lease, conveyance, disposition or other transfer of assets or Capital
Stock of Kronos Invest A/S or Capital Stock of Tinfoss Titan & Iron A/S to the
extent the aggregate consideration therefrom is less than $10 million; and (h)
Permitted Affiliate Transactions.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means:
(1) with respect to any Person that is a corporation, any and all
shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of
Common Stock and Preferred Stock of such Person, and all options, warrants
or other rights to purchase or acquire any of the foregoing; and
(2) with respect to any Person that is not a corporation, any and all
partnership, membership or other equity interests of such Person, and all
options, warrants or other rights to purchase or acquire any of the
foregoing.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the government of any member of the European Union on the
Issue Date or Norway or the United States government or issued by any
agency of any of the foregoing governments and backed by the full faith and
credit of any such member of the European Union on the Issue Date or Norway
or the United States, in each case maturing within one year from the date
of acquisition thereof;
(2) marketable direct obligations issued by any member of the European
Union on the Issue Date or Norway or any state of the United States of
America or the District of Columbia or any political subdivision of any
such state or District or any public instrumentality thereof maturing
75
within one year from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof and having, at the time of
acquisition, a rating of at least A-1 from S&P or at least P-1 from Moody's
and issued by any bank organized under the laws of any member of the
European Union on the Issue Date or Norway or the United States of America
or any state thereof or the District of Columbia or any U.S. branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $250 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) Investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through
(5) above.
"Change of Control" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets
of the Company to any Person or group of related Persons (other than the
Permitted Holders) for purposes of Section 13(d) of the Exchange Act (a
"Group"), together with any Affiliates thereof (whether or not otherwise in
compliance with the provisions of the Indenture);
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indenture);
(3) any Person or Group (other than the Permitted Holders) shall
become the owner, directly or indirectly, beneficially or of record, of
shares representing more than 50% of the aggregate ordinary voting power
represented by the issued and outstanding Capital Stock of the Company; or
(4) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement shall not have been (A) approved by a vote of at least a
majority of the Board of Directors of the Company then still in office who
either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was
previously so approved or (B) approved by the Permitted Holders so long as
the Permitted Holders then beneficially own a majority of the Capital Stock
of the Company.
"Collateral" means, collectively, all of the property described under
"Security," together with all property that is from time to time subject to the
Lien of the Collateral Documents.
"Collateral Documents" means, collectively, the pledge agreements and all
other security agreements or instruments evidencing or creating any security
interests in favor of the Trustee for the benefit of the Holders in all or any
portion of the Collateral, in each case, as amended, amended and restated,
extended, renewed, supplemented or otherwise modified from time to time, in
accordance with the terms thereof and the Indenture.
"Commodity Agreements" means any commodity futures contract, commodity
option or other similar agreement or arrangement entered into by the Company or
76
any of its Restricted Subsidiaries and designed to protect the Company or any of
its Restricted Subsidiaries against fluctuations in the price of commodities
actually at that time used in the ordinary course of business of the Company or
its Restricted Subsidiaries.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby:
(a) all income taxes of such Person and its Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period;
(b) Consolidated Interest Expense; and
(c) Consolidated Non-cash Charges;
all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
(1) the incurrence or repayment of any Indebtedness of such Person or
any of its Restricted Subsidiaries (and the application of the proceeds
thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness
in the ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or at
any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on the
first day of the Four Quarter Period; and
(2) any asset sales (other than disposals or replacements of obsolete
or unused equipment in the ordinary course of business) or other
dispositions or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a
result of such Person or one of its Restricted Subsidiaries (including any
Person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any pro
forma expense and cost reductions calculated on a basis consistent with
Regulation S-X under the Exchange Act) attributable to the assets which are
the subject of the Asset Acquisition or asset sale or other disposition
77
during the Four Quarter Period) occurring during the Four Quarter Period or
at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such asset sale or other disposition
or Asset Acquisition (including the incurrence, assumption or liability for
any such Acquired Indebtedness) occurred on the first day of the Four
Quarter Period. If such Person or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the
preceding sentence shall give effect to the incurrence of such guaranteed
Indebtedness as if such Person or any Restricted Subsidiary of such Person
had directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered
by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation
of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all dividend payments on any
series of Preferred Stock of such Person (other than dividends paid in
Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued
during such period times (y) a fraction, the numerator of which is one and
the denominator of which is one minus the then current effective
consolidated federal, state and local income tax rate of such Person,
expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without limitation: (a) any amortization
of debt discount and amortization or write-off of deferred financing costs;
(b) the net cash costs under Interest Swap Obligations; (c) all capitalized
interest; and (d) the interest portion of any deferred payment obligation;
and
(2) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom:
(1) after-tax gains from Asset Sales (without regard to the $2 million
limitation set forth in the definition thereof) or abandonments or reserves
relating thereto;
(2) after-tax items classified as extraordinary gains in accordance
with GAAP;
(3) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary of
the referent Person or is merged or consolidated with the referent Person
or any Restricted Subsidiary of the referent Person;
(4) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is restricted by
78
a contract, operation of law or otherwise; provided, however, that if the
Restricted Subsidiary is able despite any such restriction to distribute
income or otherwise transfer cash to the referent Person by way of an
intercompany loan or otherwise, then such income or cash, to the extent of
such ability, shall not be excluded pursuant to this clause (4);
(5) the net income of any Person, other than a Restricted Subsidiary
of the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or to a Wholly Owned Restricted
Subsidiary of the referent Person by such Person;
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or
not such operations were classified as discontinued); provided, however,
that such income or loss shall be included in Consolidated Net Income for
the purpose of calculating Consolidated Net Income of the Company in clause
(iii)(v) of the "Limitation on Restricted Payments" covenant;
(7) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or
transfer of assets;
(8) non-cash charges relating to compensation expense in connection
with benefits provided under employee stock option plans, restricted stock
option plans and other employee stock purchase or stock incentive plans;
and
(9) income or loss attributable solely to fluctuations in currency
values and related tax effects, in either case related to notes and
accounts payable existing prior to or as of the Issue Date and payable to
Affiliates of the Company.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Credit Agreement" means the (euro)80 million Facility Agreement, dated
June 25, 2002, among Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V.,
Kronos Titan A/S and Titania A/S, the lenders party thereto in their capacities
as lenders thereunder, and Deutsche Bank AG, as agent, together with the related
documents thereto (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant
above) or adding Restricted Subsidiaries of the Company as additional borrowers
or guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
79
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable, in either case at the option of the holder
thereof), or upon the happening of any event (other than an event which would
constitute a Change of Control), matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or is redeemable at the sole option
of the holder thereof (except, in each case, upon the occurrence of a Change of
Control) on or prior to the final maturity date of the notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Government Securities" means securities issued or directly and fully
guaranteed or insured by the government of any member of the European Union on
the Issue Date rated AAA or above.
"Guarantor" means each of the Company's Restricted Subsidiaries that in the
future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor; provided that
any Person constituting a Guarantor as described above shall cease to constitute
a Guarantor when its respective Guarantee is released in accordance with the
terms of the Indenture.
"Indebtedness" means with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding from all of
the foregoing trade accounts payable and other accrued liabilities arising
in the ordinary course of business;
(5) all Obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of
the Obligation so secured;
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(8) Obligations under Currency Agreements, Interest Swap Obligations
of such Person and Commodity Agreements; and
(9) all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference
and its maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock.
"Independent Financial Advisor" means a firm: (1) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company; and (2) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude (i) extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be, provided that nothing in this clause shall
prevent the Company or any Restricted Subsidiary from providing such
concessionary trade terms as management deems reasonable in the circumstances;
and (ii) loans or extensions of credit which otherwise are Permitted Affiliate
Transactions. If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, at least 50% of
the outstanding Common Stock of such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means June 28, 2002, the date of original issuance of the
initial notes.
"Kronos" means Kronos Worldwide, Inc. (formerly known as Kronos, Inc.), a
Delaware corporation.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of:
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(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions);
(2) taxes paid or payable or reasonably reserved for after taking into
account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements;
(3) repayment of Indebtedness that is secured by the property or
assets that are the subject of such Asset Sale; and
(4) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and retained
by the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale.
"Net Proceeds Offer" shall have the meaning set forth under "-- Limitation
on Asset Sales."
"Net Proceeds Offer Trigger Date" shall have the meaning set forth under
"-- Limitation on Asset Sales."
"NL" means NL Industries, Inc., a New Jersey corporation, and its
successors.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Affiliate Transaction" shall have the meaning set forth under
"Limitations on Transactions with Affiliates."
"Permitted Holder(s)" means (1) Harold C. Simmons ("Simmons"), (2) any
trust established primarily for the benefit of Simmons or members of his family
(including his spouse and/or his descendants (whether natural or adopted)) or
both ("Simmons Trust"), (3) trustees, acting in such capacity, or beneficiaries
of a Simmons Trust to the extent of the beneficial interest therein and for so
long as such Simmons Trust exists ("Simmons Beneficiaries and Trustees"), (4)
NL, (5) any employee plan or pension fund of NL, the Company or any of their
Subsidiaries, (6) any Person holding Capital Stock for or pursuant to the terms
of any such plan or fund and (7) any Person controlled by, or any group made up
of, any one or more of the Persons specified in (1) through (6) above.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the notes in an aggregate principal amount not
to exceed (euro)285 million and Guarantees in respect thereof;
(2) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed (euro)80
million less the amount of any principal payments made by the Company under
the Credit Agreement with the Net Cash Proceeds of any Asset Sale (which
are accompanied by a corresponding permanent commitment reduction) pursuant
to clause 3(a) of the first sentence of "-- Limitation on Asset Sales" or
under clause (3) of the definition of Net Cash Proceeds);
(3) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date;
(4) Interest Swap Obligations of the Company or any Restricted
Subsidiary of the Company covering Indebtedness of the Company or any of
its Restricted Subsidiaries; provided, however, that such Interest Swap
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Obligations are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates on its outstanding
Indebtedness to the extent the notional principal amount of such Interest
Swap Obligation does not, at the time of the incurrence thereof, exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(5) Indebtedness under Commodity Agreements and Currency Agreements;
provided that in the case of Currency Agreements which relate to
Indebtedness, such Currency Agreements do not increase the Indebtedness or
trade payables (as applicable) of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(6) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company, in each case subject to no Lien held by a Person other than the
Company or a Restricted Subsidiary of the Company or lenders in respect of
the Credit Agreement or other Permitted Indebtedness; provided that if as
of any date any Person other than the Company or a Restricted Subsidiary of
the Company owns or holds any such Indebtedness or any Person other than
the Company or a Restricted Subsidiary of the Company or lenders in respect
of the Credit Agreement or other Permitted Indebtedness holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness pursuant to this clause (6);
(7) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company, in each case subject to no Lien other than a Lien of the
lenders in respect of the Credit Agreement or other Permitted Indebtedness
of such Restricted Subsidiary; provided that if as of any date any Person
other than a Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person other than the lenders in respect of the Credit
Agreement or other Permitted Indebtedness of such Restricted Subsidiary
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company pursuant to this clause (7);
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(9) Indebtedness of the Company or any of its Restricted Subsidiaries
in respect of bid, payment or performance bonds, bankers' acceptances,
workers' compensation claims, surety or appeal bonds, payment obligations
in connection with self-insurance or similar obligations, and bank
overdrafts (and letters of credit in respect thereof) and commercial
letters of credit, in all such cases in the ordinary course of business;
(10) Refinancing Indebtedness;
(11) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $20 million at any one time outstanding;
(12) additional Indebtedness of one or more Restricted Subsidiaries of
the Company in an aggregate principal amount not to exceed $20 million at
any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement);
(13) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of
customary purchase price adjustments in connection with the acquisition or
disposition of assets; and
83
(14) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $15 million at
any one time outstanding.
For purposes of determining compliance with the "Limitation on Incurrence
of Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted Indebtedness
described in clauses (1) through (14) above or is entitled to be incurred
pursuant to the Consolidated Fixed Charge Coverage Ratio provisions of such
covenant, the Company shall, in its sole discretion, classify (or later
reclassify) such item of Indebtedness in any manner that complies with such
covenant. Accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, the payment of dividends on Disqualified
Capital Stock in the form of additional shares of the same class of Disqualified
Capital Stock, and changes in the amount outstanding due solely to fluctuations
in currency exchange rates, will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Capital Stock for purposes of the
"Limitations on Incurrence of Additional Indebtedness" covenant.
"Permitted Investments" means, without duplication:
(1) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Restricted Subsidiary of the Company or that will merge or
consolidate into the Company or a Restricted Subsidiary of the Company;
(2) Investments in the Company by any Restricted Subsidiary of the
Company;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to employees and officers of the Company and
its Restricted Subsidiaries in the ordinary course of business for bona
fide business purposes;
(5) Commodity Agreements, Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture;
(6) additional Investments not to exceed $20 million at any one time
outstanding;
(7) Investments existing on the Issue Date;
(8) Investments resulting from settlements or compromises of accounts
receivable or trade payables in the ordinary course of business,
Investments in securities of trade creditors or customers received pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers or in good faith
settlements of delinquent obligations of such trade creditors or customers;
(9) Investments made by the Company or its Restricted Subsidiaries as
a result of consideration received or investments deemed made in connection
with an Asset Sale made in compliance with the "Limitation on Asset Sales"
covenant;
(10) Investments represented by guarantees that are otherwise
permitted under the Indenture;
(11) Investments the payment for which is Qualified Capital Stock of
the Company; and
(12) Investments by the Company consisting of loans to one or more
officers, directors or other employees of the Company or any of its
Subsidiaries in connection with such officers', directors' or employees'
acquisition of shares of Capital Stock of the Company or its Affiliates,
pursuant to the exercise of stock options or in connection with other
equity-based compensation.
84
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, performance bonds, leases,
government contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money), or to secure letters of credit, bankers' acceptances, payment
obligations in connection with self-insurance or similar obligations and
bank overdrafts (and letters of credit in respect thereof), in each case in
the ordinary course of business;
(4) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(7) purchase money Liens to finance the construction, acquisition,
repair of or improvements or additions to property or assets of the Company
or any Restricted Subsidiary of the Company, in each case in the ordinary
course of business; provided, however, that (a) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired
and (b) the Lien securing such Indebtedness shall be created within 90 days
of such construction, acquisition, repair, improvement or addition;
(8) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit in the ordinary course of business and
products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
85
(11) Liens securing Interest Swap Obligations that relate to
Indebtedness that is otherwise permitted under the Indenture;
(12) Liens securing Indebtedness under Commodity Agreements or
Currency Agreements;
(13) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that:
(a) such Liens secured such Acquired Indebtedness at the time of
and prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary of the Company and were not granted
in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company; and
(b) such Liens do not extend to or cover any property or assets
of the Company or of any of its Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or
a Restricted Subsidiary of the Company;
(14) leases, subleases, licenses and sublicenses granted to others
that do not materially interfere with the ordinary course of business of
the Company and its Restricted Subsidiaries;
(15) banker's Liens, rights of setoff and similar Liens with respect
to cash and Cash Equivalents on deposit in one or more bank accounts in the
ordinary course of business;
(16) Liens arising from filing Uniform Commercial Code financing
statements (or similar or equivalent notice-type filings in jurisdictions
in which the Uniform Commercial Code has not been adopted or adopted in
substantial part) regarding leases;
(17) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(18) Liens in favor of the Company securing Indebtedness owed to the
Company by one or more of its Subsidiaries;
(19) rights of customers with respect to inventory which arise from
deposits and progress payments made in the ordinary course of business; and
(20) escrow agreements and similar arrangements with respect to
Indebtedness permitted to be incurred by the Company or its Restricted
Subsidiaries pursuant to clause (13) of the definition of Permitted
Indebtedness.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Redemption Date" shall have the meaning set forth under "Redemption --
Optional Redemption upon Change of Control."
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"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness existing on the Issue Date
or incurred in accordance with the "Limitation on Incurrence of Additional
Indebtedness" covenant (other than pursuant to clause (2), (4), (5), (6), (7),
(8), (9), (11), (12), (13) or (14) of the definition of Permitted Indebtedness),
in each case that does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Company in connection with such Refinancing); or
(2) create Indebtedness with: (a) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced; or (b) a final maturity earlier than the final maturity
of the Indebtedness being Refinanced; provided that (x) if such
Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and
(y) if such Indebtedness being Refinanced is subordinate or junior to the
notes, then such Refinancing Indebtedness shall be subordinate to the notes
at least to the same extent and in the same manner as the Indebtedness
being Refinanced.
"Replacement Assets" has the meaning set forth under "-- Limitation on
Asset Sales."
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Significant Subsidiary," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange Act.
"Subsidiary," with respect to any Person, means:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned, directly
or indirectly, by such Person; or
(2) any other Person of which at least a majority of the voting
interest under ordinary circumstances is at the time, directly or
indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means:
(1) any Subsidiary of such Person that at the time of determination
shall be or continue to be designated an Unrestricted Subsidiary by the
Board of Directors of such Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
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The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any Restricted Subsidiary; provided that:
(1) the Company certifies to the Trustee that such designation
complies with the "Limitation on Restricted Payments" covenant; and
(2) each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness pursuant to which the lender has recourse
to any of the assets of the Company or any of its Restricted Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if:
(1) immediately after giving effect to such designation, the Company
is able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant; and
(2) immediately before and immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Wholly Owned
Subsidiary of such Person which at the time of determination is a Restricted
Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than in the case of a
foreign Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by such Person or any Wholly Owned Subsidiary of such Person; provided,
however, that each of Societe Industrielle du Titane and Kronos Titan-GmbH & Co.
OHG shall be deemed to be a Wholly Owned Subsidiary for all purposes of the
Indenture so long as the ownership of outstanding voting securities of such
Subsidiary by the Permitted Holders does not decrease after the Issue Date
(other than in respect of directors' qualifying shares or in respect of an
immaterial amount of shares required to be owned by other Persons pursuant to
applicable law).
88
REGISTRATION RIGHTS
We and the initial purchaser entered into a registration rights agreement
on November 26, 2004 pursuant to which we agreed that we will, at our expense,
for the benefit of the holders of the old notes, (i) within 120 days after
November 26, 2004 (the "Filing Date"), file an exchange offer registration
statement on an appropriate registration form with respect to a registered offer
to exchange the old notes for new notes, which new notes will have terms
substantially identical in all material respects to the old notes (except that
the new notes will not contain terms with respect to transfer restrictions) and
(ii) cause the exchange offer registration statement to be declared effective
under the Securities Act within 270 days after November 26, 2004. Upon the
exchange offer registration statement being declared effective, we will offer
the new notes in exchange for surrender of the old notes. We will keep the
exchange offer open for not less than 30 days (or longer if required by
applicable law) after the date notice of the exchange offer is mailed to the
holders of the old notes. For each of the old notes surrendered to us pursuant
to the exchange offer, the holder who surrendered such old note will receive a
new note having a principal amount equal to that of the surrendered old note.
Interest on each new note will accrue (A) from the later of (i) the last
interest payment date on which interest was paid on the old note surrendered in
exchange therefor, or (ii) if the old note is surrendered for exchange on a date
in a period which includes the record date for an interest payment date to occur
on or after the date of such exchange and as to which interest will be paid, the
date of such interest payment date, or (B) if no interest has been paid on such
old note, from November 26, 2004.
If (i) because of any change in law or in currently prevailing
interpretations of the Staff of the SEC, we are not permitted to effect an
exchange offer, (ii) the exchange offer is not consummated within 300 days of
November 26, 2004 or (iii) in certain circumstances, certain holders of
unregistered new notes so request, or (iv) in the case of any holder that
participates in the exchange offer, such holder does not receive new notes on
the date of the exchange that may be sold without restriction under state and
federal securities laws (other than due solely to the status of such holder as
our affiliate within the meaning of the Securities Act), then in each case, we
will (x) promptly deliver to the holders and the Trustee written notice thereof
and (y) at our sole expense, (a) as promptly as practicable, file a shelf
registration statement covering resales of the notes, and (b) use our best
efforts to keep effective the shelf registration statement until the earliest of
two years after November 26, 2004, such time as all of the applicable notes have
been sold thereunder. We will, in the event that a shelf registration statement
is filed, provide to each holder copies of the prospectus that is a part of the
shelf registration statement, notify each such holder when the shelf
registration statement for the notes has become effective and take certain other
actions as are required to permit unrestricted resales of the old notes. A
holder that sells notes pursuant to the shelf registration statement will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the registration rights agreement that are
applicable to such a holder (including certain indemnification rights and
obligations).
If we fail to meet the targets listed above, then additional interest will
become payable in respect of the old notes as follows:
(i) if (A) neither the exchange offer registration statement nor the
shelf registration statement is filed with the SEC on or prior to 120 days
after November 26, 2004 or (B) notwithstanding that we have consummated or
will consummate an exchange offer, we are required to file a shelf
registration statement and such shelf registration statement is not filed
on or prior to the date required by the registration rights agreement, then
commencing on the day after either such required filing date, additional
interest will accrue on the principal amount of the notes at a rate of
0.25% per annum for the first 90 days immediately following each such
filing date, such additional interest rate increasing by an additional
0.25% per annum at the beginning of each subsequent 90-day period; or
(ii) if (A) neither the exchange offer registration statement nor a
shelf registration statement is declared effective by the SEC on or prior
to 270 days after November 26, 2004 or (B) notwithstanding that we have
consummated or will consummate an exchange offer, we are required to file a
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shelf registration statement and such shelf registration statement is not
declared effective by the SEC on or prior to the date required by the
registration rights agreement, then, commencing on the day after either
such required effective date, additional interest will accrue on the
principal amount of the notes at a rate of 0.25% per annum for the first 90
days immediately following such date, such additional interest rate
increasing by an additional 0.25% per annum at the beginning of each
subsequent 90-day period; or
(iii) if (A) we have not exchanged new notes for all old notes validly
tendered in accordance with the terms of the exchange offer on or prior to
the 300th day after November 26, 2004 or (B) if applicable, the shelf
registration statement has been declared effective and such shelf
registration statement ceases to be effective at any time prior to the
second anniversary of November 26, 2004 (other than after such time as all
notes have been disposed of thereunder), then additional interest will
accrue on the principal amount of the notes at a rate of 0.25% per annum
for the first 90 days commencing on (x) the 300th day after November 26,
2004, in the case of (A) above, or (y) the day such shelf registration
statement ceases to be effective, in the case of (B) above, such additional
interest rate increasing by an additional 0.25% per annum at the beginning
of each subsequent 90-day period;
provided, however, that the additional interest rate on the old notes may
not accrue under more than one of the foregoing clauses (i) - (iii) at any one
time and at no time shall the aggregate amount of additional interest accruing
exceed in the aggregate 0.75% per annum; provided, further, that (1) upon the
filing of the exchange offer registration statement or a shelf registration
statement (in the case of clause (i) above), (2) upon the effectiveness of the
exchange offer registration statement or a shelf registration statement (in the
case of clause (ii) above), or (3) upon the exchange of new notes for all old
notes tendered (in the case of clause (iii) (A) above), or upon the
effectiveness of the shelf registration statement that had ceased to remain
effective (in the case of clause (iii) (B) above), additional interest on the
old notes as a result of such clause (or the relevant subclause thereof), as the
case may be, will cease to accrue.
Any amounts of additional interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on the same original interest payment dates
as the notes.
BOOK-ENTRY; DELIVERY AND FORM
The new notes to be issued in this exchange offer will be issued in
registered, global form in minimum denominations of (euro)1,000 and integral
multiples thereof. The new notes will be represented by one or more global notes
in fully registered form without interest coupons and will be deposited with The
Bank of New York, London Branch, as common depositary for Euroclear and
Clearstream (the "Common Depositary"), and registered in the name of a nominee
of the Common Depositary. The notes will not be eligible for clearance through
The Depository Trust Company.
All holders of new notes who exchanged their old notes in this exchange
offer will hold their interests through the global note regardless of whether
they purchased their interests pursuant to Rule 144A or Regulation S. Except in
the limited circumstances described below, owners of beneficial interests in the
global note will not be entitled to receive physical delivery of certificated
notes. Transfers of beneficial interests in the global note will be subject to
the applicable rules and procedures of Euroclear and Clearstream and their
respective direct or indirect participants, which rules and procedures may
change from time to time.
Global Note
The following description of the operations and procedures of Euroclear and
Clearstream are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. We take no responsibility
for these operations and procedures and urge investors to contact the system or
their participants directly to discuss these matters.
Upon the issuance of the global note, the Common Depositary will credit, on
its internal system, the respective principal amount of the beneficial interests
represented by such global notes to the accounts of Euroclear or Clearstream, as
the case may be. Euroclear or Clearstream, as the case may be, will credit, on
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its internal systems, the respective principal amounts of the individual
beneficial interests in such global notes to the accounts of persons who have
accounts with Euroclear or Clearstream, as the case may be. Ownership of
beneficial interests in the global note will be limited to participants or
persons who hold interests through participants in Euroclear or Clearstream, as
the case may be. Ownership of beneficial interests in the global note will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by Euroclear or Clearstream, as the case may be, or their
nominees (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
As long as the Common Depositary, or its nominee, is the registered holder
of a global note, the Common Depositary or such nominee, as the case may be,
will be considered the sole owner and holder of the new notes represented by
such global note for all purposes under the indenture and the notes. Unless (1)
Euroclear or Clearstream notifies us that it is unwilling or unable to continue
as a clearing agency, (2) the Common Depositary notifies us that it is unwilling
or unable to continue as Common Depositary and a successor Common Depositary is
not appointed within 120 days of such notice or (3) in the case of any new note,
an event of default has occurred and is continuing with respect to such note,
owners of beneficial interests in a global note will not be entitled to have any
portions of such global note registered in their names, will not receive or be
entitled to receive physical delivery of notes in certificated form and will not
be considered the owners or holders of the global note (or any notes represented
thereby) under the indenture or the new notes. In addition, no beneficial owner
of an interest in a global note will be able to transfer that interest except in
accordance with Euroclear's and Clearstream's applicable procedures (in addition
to those under the indenture referred to herein).
Investors may hold their interests in the global note through Euroclear or
Clearstream, if they are participants in such systems, or indirectly through
organizations that are participants in such systems. Clearstream and Euroclear
will hold interests in the global note on behalf of their participants through
customers' securities accounts in their respective names on the books of the
Common Depositary. All interests in the global note may be subject to the
procedures and requirements of Euroclear and Clearstream.
Payments of the principal of and interest on the global note will be made
to the order of the Common Depositary or its nominee as the registered owner
thereof. Neither KII, the Trustee, the Common Depositary nor any of their
respective agents will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the global note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
We expect that the Common Depositary, in its capacity as paying agent, upon
receipt of any payment or principal or interest in respect of a global note
representing any new notes held by it or its nominee, will immediately credit
the accounts of Euroclear or Clearstream, as the case may be, which in turn will
immediately credit accounts of participants in Euroclear or Clearstream, as the
case may be, with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such global note for such new
notes as shown on the records of Euroclear or Clearstream, as the case may be.
We also expect that payments by participants to owners of beneficial interests
in such global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." Such payments will be
the responsibility of such participants.
Because Euroclear and Clearstream can act only on behalf of their
respective participants, who in turn act on behalf of indirect participants and
certain banks, the ability of a holder of a beneficial interest in a global note
to pledge such interest to persons or entities that do not participate in the
Euroclear or Clearstream systems, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some countries and some U.S. states require that certain
persons take physical delivery of securities in certificated form. Consequently,
the ability to transfer beneficial interests in a global note to such persons
may be limited.
Transfers of interests in a global note between participants in Euroclear
and Clearstream will be effected in the ordinary way in accordance with their
respective rules and operating procedures.
Euroclear and Clearstream have advised us that they will take any action
permitted to be taken by a holder of notes (including the presentation of notes
for exchange as described below) only at the direction of one or more
participants to whose account with Euroclear or Clearstream, as the case may be,
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interests in a global note are credited and only in respect of such portion of
the aggregate principal amount of the notes as to which such participant or
participants has or have given such direction. However, if there is an event of
default under the notes, Euroclear and Clearstream reserve the right to exchange
the global note for legended notes in certificated form, and to distribute such
notes to their respective participants.
Euroclear and Clearstream have advised us as follows: Euroclear and
Clearstream each hold securities for their account holders and facilitate the
clearance and settlement of securities transactions by electronic book-entry
transfer between their respective account holders, thereby eliminating the need
for physical movements of certificates and any risk from lack of simultaneous
transfers of securities.
Euroclear and Clearstream each provide various services including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Euroclear and Clearstream each
also deal with domestic securities markets in several countries through
established depository and custodial relationships. The respective systems of
Euroclear and Clearstream have established an electronic bridge between their
two systems across which their respective account holders may settle trades with
each other.
Account holders in both Euroclear and Clearstream are world-wide financial
institutions including underwriters, securities brokers and dealers, trust
companies and clearing corporations. Indirect access of both Euroclear and
Clearstream is available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
An account holder's overall contractual relations with either Euroclear or
Clearstream are governed by the respective rules and operation procedures of
Euroclear or Clearstream and any applicable laws. Both Euroclear and Clearstream
act under such rules and operating procedures only on behalf of their respective
account holders, and have no record of or relationship with persons holding
through their respective account holders.
Although Euroclear and Clearstream currently follow the foregoing
procedures to facilitate transfers of interests in global notes among
participants of Euroclear and Clearstream, they are under no obligation to do
so, and such procedures may be discontinued or modified at any time. Neither we
nor the Trustee will have any responsibility for the performance by Euroclear or
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If any depositary is at any time unwilling or unable to continue as a
depositary for the notes for the reasons set forth above, we will issue
certificates for such notes in definitive, fully registered, non-global form
without interest coupons in exchange for the global note. Certificates for notes
delivered in exchange for any global note or beneficial interests therein will
be registered in the names, and issued in any approved denominations, requested
by Euroclear, Clearstream or the Common Depositary (in accordance with their
customary procedures). Upon transfer or partial redemption of any note, new
certificates may be obtained from the Transfer Agent in Luxembourg.
Notwithstanding any statement herein, we and the Trustee reserve the right
to impose such transfer, certification, exchange or other requirements, and to
require such restrictive legends on certificates evidencing notes, as they may
determine are necessary to ensure compliance with the securities laws of the
United States and the states therein and any other applicable laws or as
Euroclear or Clearstream may require.
Same-Day Settlement and Payment
The indenture requires that payments in respect of the notes represented by
a global note, including principal, premium, if any, interest and liquidated
damages, if any, be made by wire transfer of immediately available funds to the
accounts specified by the global note holder. With respect to notes in
certificated form, we will make all payments of principal, premium, if any,
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interest and liquidated damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. Certificated notes may be surrendered for payment at the offices of the
Trustee or, so long as the notes are listed on the Luxembourg Stock Exchange,
the Paying Agent in Luxembourg on the maturity date of the notes. We expect that
secondary trading in any certificated notes will also be settled in immediately
available funds.
CERTAIN TAX CONSIDERATIONS
United States Tax Considerations
The following discussion is a summary of some material United States
federal income tax considerations relevant to the exchange of old notes for new
notes in the exchange offer and the subsequent ownership and disposition of the
new notes, but does not purport to be a complete analysis of all potential tax
considerations relating to the notes. This summary is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations, rulings of
the Internal Revenue Service (the "IRS") and judicial decisions in existence on
the date hereof, all of which are subject to change. Any such change could apply
retroactively and could affect adversely the tax consequences described below.
We have obtained an opinion from our counsel, Locke Liddell & Sapp LLP, with
respect to the anticipated material United States federal income tax
consequences of the exchange offer and the ownership and disposition of the new
notes, which are summarized below. No advance tax ruling has been sought or
obtained from the IRS regarding the tax consequences of the transactions
described herein and there can be no assurance that the IRS will not challenge
one or more of the tax consequences described in this prospectus.
For purposes of this discussion, a U.S. Person is:
o an individual who is a citizen of the United States or who is resident
in the United States for United States federal income tax purposes;
o a corporation (including any entity treated as a corporation for
United States federal income tax purposes), that is organized under
the laws of the United States or any state thereof;
o an estate the income of which is subject to United States federal
income taxation regardless of its source; or
o a trust that is subject to the supervision of a court within the
United States and is subject to the control of one or more United
States persons as described in Section 7701(a)(30) of the Code, or
that has a valid election in effect under applicable Treasury
regulations to be treated as a United States person.
For purposes of this discussion, a U.S. Holder is a beneficial owner of the
notes who or which is a U.S. Person and a Non-U.S. Holder is a beneficial owner
of the notes other than a U.S. Holder.
This summary does not discuss all United States federal tax considerations,
such as estate and gift tax consequences to U.S. Holders, that may be relevant
to a Holder in light of its particular circumstances. This summary does not
address the federal income tax consequences that may be relevant to certain
Holders that may be subject to special treatment (including, without limitation,
Holders subject to the alternative minimum tax, banks, insurance companies,
tax-exempt organizations, financial institutions, small business investment
companies, partnerships or other pass-through entities, dealers in securities or
currencies, broker-dealers, persons who hold notes as part of a straddle,
hedging, constructive sale, or conversion transaction, and U.S. Holders whose
functional currency is not the U.S. dollar). Furthermore, this summary does not
address any aspects of state, local or other taxation. This summary is limited
to those Holders who purchased notes in the initial offering at the initial
offering price and who hold notes as "capital assets" within the meaning of
Section 1221 of the Code. In the case of any Non-U.S. Holder who is an
individual, the following discussion assumes that this individual was not a
former United States citizen, and was not formerly a resident of the United
States for United States federal income tax purposes.
If a partnership (including for this purpose any entity treated as a
partnership for United States federal income tax purposes) is a beneficial owner
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of the notes, the treatment of a partner in the partnership will generally
depend upon the status of the partner and upon the activities of the
partnership. A Holder of notes that is a partnership and partners in such
partnership should consult their tax advisors about the United States federal
income tax consequences of holding and disposing of the notes.
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal, business or tax advice to any particular
Holder. Holders are urged to consult their tax advisors regarding the United
States federal income tax consequences of exchanging, holding and disposing of
the notes as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdictions.
Exchange of Notes
The exchange of old notes for new notes in the exchange offer will not
constitute a taxable event. As a result:
o no Holder should recognize taxable gain or loss as a result of
exchanging old notes for new notes pursuant to the exchange offer;
o each Holder's holding period of the new notes should include the
holding period of the old notes exchanged;
o each Holder's adjusted tax basis of the new notes should be the same
as the adjusted tax basis of the old notes exchanged immediately
before such exchange;
o each Holder's unamortized bond premium on the new notes will be the
same as the unamortized bond premium on the old notes exchanged
immediately before such exchange; and
o each Holder who elected to amortize bond premium will continue to
amortize the bond premium using the same amortization method.
Consequences to U.S. Holders
Stated Interest. Stated interest on the notes will be taxable to a U.S.
Holder as ordinary income at the time the interest accrues or is received in
accordance with the U.S. Holder's method of accounting for United States federal
income tax purposes.
We intend to take the position for United States federal income tax
purposes that any redemption premium paid upon a change in control should be
taxable to a U.S. Holder as ordinary income when received or accrued in
accordance with the U.S. Holder's method of accounting for federal income tax
purposes. This position is based in part on our determination that, as of the
date of issuance of the new notes, the possibility that any such additional
payment will actually be made is a "remote" or "incidental" contingency within
the meaning of applicable Treasury regulations. Accordingly, we will not treat
the new notes as "contingent payment debt instruments." Our determination that
the possibility is a remote or incidental contingency is binding on each U.S.
Holder, unless the U.S. Holder explicitly discloses to the IRS, on its federal
income tax return for the year during which the note is acquired, that the U.S.
Holder is taking a different position. Regardless of our position, however, this
matter is not free from doubt and the IRS may assert that the possibility that
such an additional payment will actually be made is not a remote or incidental
contingency. If such an assertion by the IRS is successful, you could be subject
to tax consequences that differ materially and adversely from those described
below. The remainder of this discussion assumes that the contingent payment debt
rules will not apply to the new notes.
The interest on the new notes will be paid in euros rather than in United
States dollars. In general, a U.S. Holder that uses the cash method of
accounting will be required to include in income the United States dollar value
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of the amount of interest income received, whether or not the payment is
received in United States dollars or converted into United States dollars. The
United States dollar value of the amount of interest received is the amount of
foreign currency interest paid, translated at the spot rate on the date of
receipt. The U.S. Holder will not have exchange gain or loss on the interest
payment, but may have exchange gain or loss when the U.S. Holder disposes of any
foreign currency received.
A U.S. Holder that uses the accrual method of accounting is generally
required to include in income the United States dollar value of interest accrued
during the accrual period. Accrual basis U.S. Holders may determine the amount
of income recognized with respect to such interest in accordance with either of
two methods. Under the first method, the U.S. dollar value of accrued interest
is translated at the average rate for the interest accrual period (or, with
respect to an accrual period that spans two taxable years, the average rate for
the partial period within the taxable year). For this purpose, the average rate
is the simple average of spot rates of exchange for each business day of such
period or other average exchange rate for the period reasonably derived and
consistently applied by the U.S. Holder. Under the second method, a U.S. Holder
can elect to accrue interest at the spot rate on the last day of an interest
accrual period (in the case of a partial accrual period, the last day of the
taxable year) or, if the last day of an interest accrual period is within five
business days of the receipt or payment, the spot rate on the date of receipt or
payment. Any such election will apply to all debt instruments held by the U.S.
Holder at the beginning of the first taxable year to which the election applies
and thereafter acquired, and may not be revoked without the consent of the IRS.
An accrual basis U.S. Holder will recognize exchange gain or loss on the receipt
of a foreign currency interest payment if the exchange rate on the date payment
is received differs from the rate applicable to the previous accrual of that
interest income. The foreign currency gain or loss of a U.S. Holder will
generally be treated as United States sourced ordinary income or loss.
Bond Premium. The old notes were issued with "bond premium." A U.S. Holder
may elect to amortize bond premium on a note as described below. If a U.S.
Holder elected to amortize bond premium on an old note, such U.S. Holder's
unamortized bond premium on the new note will be the same as the unamortized
bond premium on an old note exchanged immediately before such exchange, and such
U.S. Holder will continue to amortize the bond premium on the new note using the
same amortization method used on the old note. If a U.S. Holder did not elect to
amortize bond premium on an old note but elects to amortize bond premium on a
new note exchanged therefor, such U.S. Holder may not amortize amounts that
would have been amortized on the old note in prior taxable years had an election
been in effect for those prior years.
In general, bond premium is the amount by which the actual purchase price
of a note exceeds the sum of all amounts payable on the note after the
acquisition date (other than payments of qualified stated interest). Qualified
stated interest is generally defined as interest that is unconditionally payable
in cash or in property at least annually at a single fixed rate. If a note
provides for the payment of only qualified stated interest and the principal at
maturity, the bond premium is generally the amount by which the actual purchase
price of the note exceeds the amount payable upon maturity. The bond premium is
generally amortized over the term of the note on a constant yield basis. The
note holder generally amortizes the bond premium by offsetting the interest
allocable to an accrual period with the premium allocable to that accrual
period.
Notwithstanding these general rules, the bond premium calculation may
differ where a note is callable prior to maturity at a price other than the face
amount of the note. This exception to the general rule can apply to the notes
because of the optional redemption feature applicable to the notes. Where a note
is callable prior to maturity at a price other than the face amount of the note,
the bond premium is the amount by which the actual purchase price of a note
exceeds the amount payable upon a redemption of the note if it results in a
smaller amount of bond premium attributable to the period prior to the
redemption date (irrespective of whether the note is in fact redeemed). In such
a case, the period of amortization is the period from issuance of the note to
the redemption date. This calculation must be repeated with respect to each
possible redemption date, and the redemption date that results in the least
amount of bond premium attributable to each period will govern. If the note is
not in fact redeemed on such redemption date, the note will be treated for
purposes of recomputing amortizable bond premium as maturing on that redemption
date for the amount payable upon redemption and then reissued on that redemption
date for the amount so payable. The amount of bond premium attributable to the
taxable year in which the note is actually redeemed includes an amount equal to
the excess of the amount of the adjusted basis (for determining loss on sale or
exchange) of such note as of the beginning of the taxable year over the amount
received on redemption of the note or (if greater) the amount payable on
maturity.
Because of the rules described in the preceding paragraph, the optional
redemption feature of the notes could reduce the bond premium allocable to a
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particular period compared to the result under the general rules described
above. A U.S. Holder may be able to vary this result by making an election under
Treasury Regulation Section 1.1272-3 to treat all interest attributable to the
notes as accruing on a constant yield basis. Prospective investors are urged to
consult with their tax advisors concerning such election.
If a U.S. Holder elects to amortize bond premium, the amount of interest
that must be included in the U.S. Holder's income for each period will be
reduced by the portion of bond premium allocable to that period under the rules
discussed above. Bond premium is determined and amortized in euros. The United
States dollars equivalent of the reduced amount of interest is included in the
U.S. Holder's income as determined pursuant to the discussion above. In
addition, a U.S. Holder will recognize exchange gain or loss on the portion of
bond premium amortized with respect to each period based on the difference
between the spot exchange rate on the date the bond premium is paid and the
exchange rate at which the bond premium is applied against interest.
If a U.S. Holder does not elect to amortize bond premium, the U.S. Holder
must include the full amount of each interest payment in income in accordance
with its regular method of accounting (as discussed above). The U.S. Holder will
receive a tax benefit from the bond premium only in computing its gain or loss
upon the sale or other disposition or payment of the principal amount of the
note.
An election to amortize bond premium will apply to amortizable bond premium
on all notes and other bonds, the interest on which is includible in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first taxable
year to which the election applies or thereafter acquired. The election may be
revoked only with the consent of the IRS.
Disposition of Notes. In the case of a sale or other disposition (including
a retirement, but excluding the exchange) of a note, a U.S. Holder will
recognize gain or loss equal to the difference, if any, between the amount
received (other than any amount representing accrued but unpaid stated interest,
which is taxable as ordinary income) and the U.S. Holder's adjusted tax basis in
the note. A U.S. Holder's adjusted tax basis in a note generally will equal the
U.S. Holder's cost of the note in United States dollars, reduced by any
amortized bond premium (measured in United States dollars using the spot rate in
effect on the date such holder acquired the note). Except as described below
with respect to currency exchange gain or loss, gain or loss recognized by a
U.S. Holder on a sale or other disposition of a note generally will constitute
capital gain or loss. Capital gains of non-corporate taxpayers from the sale or
other disposition of a note held for more than one year are eligible for reduced
rates of United States federal income taxation. The deductibility of a capital
loss realized on the sale or other disposition of a note may be subject to
limitations.
With respect to the sale or other disposition (including a retirement, but
excluding the exchange) of a note denominated in euros, the amount realized in
euros will be considered to be (1) first, the payment of accrued but unpaid
interest (on which exchange gain or loss will be recognized as described in the
section entitled "Stated Interest" above), and (2) second, a payment of
principal. For purposes of determining gain or loss (as discussed above), the
amount realized in euros will be translated on the date of sale or other
disposition. Additionally, exchange gain or loss will be separately computed in
euros on the amount of principal (including unamortized bond premium) to the
extent that the rate of exchange on the date of sale or other disposition
differs from the rate of exchange on the date the note was acquired. Exchange
gain or loss computed on accrued interest and principal will be recognized,
however, only to the extent of total gain or loss realized on the transaction.
In the case of a note denominated in euros, the cost of the note to the
U.S. Holder will be the United States dollar value of the purchase price in
euros translated at the spot rate for the date of purchase. The conversion of
United States dollars into euros and the immediate use of that currency to
purchase a note generally will not result in a taxable gain or loss for a U.S.
Holder.
Disposition of Euros. A U.S. Holder will have a tax basis in any euros
received as interest on a note, or received on the sale or other disposition of
a note, equal to the United States dollar value of such euros on the date of
receipt. Any gain or loss realized by a U.S. Holder on a sale or other
disposition of such euros will be ordinary income or loss.
Backup Withholding and Information Reporting. We, our paying agent or a
broker may be required to provide the IRS with certain information, including
96
the name, address and taxpayer identification number of U.S. Holders, the
aggregate amount of principal and interest (and premium, if any) and sales
proceeds paid to that Holder during the calendar year, and the amount of tax
withheld, if any. This obligation, however, does not apply with respect to
certain U.S. Holders including corporations, tax-exempt organizations, qualified
pension and profit sharing trusts and individual retirement accounts. In the
event that a U.S. Holder subject to the reporting requirements described above
fails to supply its correct taxpayer identification number in the manner
required by applicable law or is notified by the IRS that it has failed to
properly report payments of interest and dividends, we, our paying agent or a
broker may be required to "backup" withhold tax at a rate equal to 28% on each
payment of interest and principal (and premium, if any) and sales proceeds on or
with respect to the notes.
Backup withholding is not an additional tax; any amounts so withheld may be
credited against the United States federal income tax liability of the Holder or
refunded if the amounts withheld exceed such liability, provided that the
required information is furnished to the IRS.
Consequences to Non-U.S. Holders
Interest Income. Interest earned on a note by a Non-U.S. Holder will be
considered "portfolio interest," and will not be subject to United States
federal income tax or withholding, if:
o the certification requirements described generally below are satisfied
and the Non-U.S. Holder is not (i) a "controlled foreign corporation"
that is related to us as described in Section 881(c)(3)(C) of the
Code, (ii) a bank receiving the interest on a loan made in the
ordinary course of its business, or (iii) a person who owns, directly
or under the attribution rules of Section 871(h)(3)(C) of the Code,
10% or more of the total combined voting power of all our stock;
o the interest is not effectively connected with the conduct of a trade
or business within the United States by the Non-U.S. Holder; and
o we do not have actual knowledge or reason to know that the beneficial
Holder is a U.S. Person and we can reliably associate the interest
payment with the certification documents provided to us.
The certification requirements will be satisfied if either (i) the
beneficial owner of the note timely certifies to us or our paying agent, under
penalties of perjury, that such owner is a Non-U.S. Holder and provides its name
and address, or (ii) a custodian, broker, nominee, or other intermediary acting
as an agent for the beneficial owner (such as a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business) that holds the notes
in such capacity timely certifies to us or our paying agent, under penalties of
perjury, that such statement has been received from the beneficial owner of the
notes by such intermediary, or by any other financial institution between such
intermediary and the beneficial owner, and furnishes to us or our paying agent a
copy thereof. The foregoing certification may be provided on a properly
completed IRS Form W-8BEN or W-8IMY, as applicable, or any successor forms, duly
executed under penalties of perjury. With respect to the certification
requirement for notes that are held by an entity that is classified for United
States federal income tax purposes as a foreign partnership, the applicable
Treasury Regulations provide that, unless the foreign partnership has entered
into a withholding agreement with the IRS, the foreign partnership will be
required, in addition to providing an intermediary Form W-8IMY, to attach an
appropriate certification by each partner.
Any payments to a Non-U.S. Holder of interest that do not qualify for the
"portfolio interest" exemption, and that are not effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Holder,
will be subject to United States federal income tax and withholding at a rate of
30% (or at a lower rate under an applicable tax treaty).
Disposition of Notes. Any gain recognized by a Non-U.S. Holder on a sale or
other disposition (including a retirement, but excluding the exchange) of a note
will not be subject to United States federal income tax or withholding if (i)
the gain is not effectively connected with the conduct of a trade or business
97
within the United States by the Non-U.S. Holder, and (ii) in the case of a
Non-U.S. Holder who is an individual, such individual is not present in the
United States for 183 days or more in the taxable year of the sale or other
disposition, or the individual does not have a "tax home" in the United States
and the gain is not attributable to an office or other fixed place of business
maintained in the United States by the individual.
Effectively Connected Income. Any interest earned on a note, and any gain
realized on a sale or other disposition (including a retirement, but excluding
the exchange) of a note, that is effectively connected with the conduct of a
trade or business within the United States by a Non-U.S. Holder will be subject
to United States federal income tax at regular graduated rates as if the
Non-U.S. Holder were a U.S. Holder. In addition, if the Non-U.S. Holder is a
corporation, the Non-U.S. Holder may also be subject to a 30% branch profits tax
(unless reduced or eliminated by an applicable treaty) imposed on any such
effectively connected earnings and profits. However, such income will not be
subject to United States federal income tax withholding if the Non-U.S. Holder
furnishes a properly completed IRS Form W-8ECI to us or our paying agent.
Estate Tax Consequences. Any note that is owned by an individual who is not
a citizen or resident (as specially defined for United States federal estate tax
purposes) of the United States at the date of death will not be included in such
individual's estate for United States federal estate tax purposes, unless the
individual owns, directly or indirectly, 10% or more of the voting power of all
our stock, or, at the time of such individual's death, payments in respect of
the notes would have been effectively connected with the conduct by such
individual of a trade or business in the United States.
Backup Withholding and Information Reporting. We must report annually to
the IRS and to each Non-U.S. Holder any interest on the notes that is subject to
withholding or that is exempt from U.S. withholding tax pursuant to a tax treaty
or the "portfolio interest" exemption. Copies of these information returns may
also be made available under the provisions of a specific treaty or agreement to
the tax authorities of the country in which the Non-U.S. Holder resides.
In the case of payments of interest on the notes, backup withholding and
information reporting will not apply if the Non-U.S. Holder has made the
requisite certification, described in the section entitled "Interest Income"
above or otherwise establishes an exemption, provided that neither we nor our
paying agent has actual knowledge that (i) the holder is a U.S. Holder, or (ii)
the conditions of any other exemption are not, in fact, satisfied.
The payment of the proceeds on the disposition (including a redemption) of
a note to or through the U.S. office of a broker generally will be subject to
information reporting and potential backup withholding unless a holder either
certifies its status as a Non-U.S. Holder under penalties of perjury on IRS Form
W-8BEN (or a suitable substitute form) and meets certain other conditions or
otherwise establishes an exemption. If the foreign office of a foreign broker
(as defined in applicable Treasury regulations) pays the proceeds of the
disposition of a note to the seller thereof, backup withholding and information
reporting generally will not apply. Information reporting requirements (but not
backup withholding) will apply, however, to a payment of the proceeds of the
disposition of a note by (1) a foreign office of a custodian, nominee, other
agent or broker that is a U.S. Person, (2) a foreign custodian, nominee, other
agent or broker that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, (3) a foreign
custodian, nominee, other agent or broker that is a controlled foreign
corporation for United States federal income tax purposes or (4) a foreign
partnership if at any time during its tax year one or more of its partners are
U.S. Persons who, in the aggregate, hold more than 50% of the income or capital
interest of the partnership or if, at any time during its taxable year, the
partnership is engaged in the conduct of a trade or business within the United
States, unless the custodian, nominee, other agent, broker or foreign
partnership has documentary evidence in its records that the holder is not a
U.S. Person and certain other conditions are met or the holder otherwise
establishes an exemption.
Backup withholding is not an additional tax; any amounts so withheld may be
credited against the United States federal income tax liability of the holder or
refunded if the amounts withheld exceed such liability, provided that the
required information is furnished to the IRS.
Luxembourg Tax Considerations
The following discussion is a summary of some of the material Luxembourg
income tax consequences relevant to the acquisition, ownership and disposition
98
of the notes offered by this prospectus for a non-resident Holder of a note.
This summary is based on Luxembourg laws, regulations, rulings and decisions now
in effect, all of which are subject to change.
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal, business or tax advice to any particular
Holder. Prospective investors are urged to consult their tax advisors regarding
the Luxembourg income tax consequences of exchanging, holding and disposing of
the notes as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdictions.
Withholding Tax
Under Luxembourg tax laws currently in effect, there is no withholding tax
on payments of principal, interest, accrued but unpaid interest or accretions of
yield to maturity in respect of the notes, nor is any Luxembourg withholding tax
payable by such Holders on redemption or repurchase of the notes. There is no
income tax due upon redemption or repurchase of, or on capital gains on the sale
of, any notes held by a non-resident, as long as the notes are not held through
a permanent establishment in Luxembourg.
No stamp, value added, registration or similar taxes or duties will, under
present Luxembourg law, be payable in Luxembourg by the Holders of notes in
connection with the issuance of the notes.
EU Directive on the Taxation of Savings Income
On June 3, 2003, the European Union Council of Economic and Finance
Ministers adopted a directive on the taxation of savings income in the form of
interest payments. The Luxembourg government on February 9, 2004 submitted a
bill to parliament to approve the implementation of this directive. The ultimate
aim of this directive is to enable savings income in the form of interest
payments made in one member state to beneficial owners who are individuals
resident in another EU member state to be made subject to effective taxation in
accordance with the laws of the latter member state. In principle this will be
achieved by the automatic exchange of information concerning interest payments
between member states.
Luxembourg is allowed by way of exception not to apply the automatic
exchange of information at the same time as the other EU member states but is
required to apply a withholding tax to the savings income covered by this
directive during a transitional period, starting as of the effective date of
this directive at a rate of 15% during the first three years, increased to 20%
for the subsequent three years and 35% thereafter. Luxembourg will apply the
above described system of withholding tax from July 1, 2005 provided that
certain non-EU countries and overseas territories of EU countries apply from
that same date the automatic exchange of information in the equivalent manner as
provided for in this directive, (or, during the transitional period, apply a
withholding tax on the same terms as are contained in this directive).
Beneficial owners of interest payments who wish to avoid the Luxembourg
withholding tax that may be due if the interest is paid to them by a Luxembourg
paying agent will have the choice of at least one of the two following
procedures allowing an exemption to the withholding tax system: they either
authorize the Luxembourg paying agent to exchange information with the tax
authorities of their country of residence or they provide the Luxembourg paying
agent with a tax certificate issued by the competent tax authority of their
member state of residence.
German Tax Considerations
The following discussion is a summary of some of the material German income
tax consequences relevant to the acquisition, ownership and disposition of notes
for a resident and non-resident Holder of a note. This summary is based on
German laws, regulations, rulings and decisions now in effect, all of which are
subject to change.
Under German tax law, the new notes should be treated as identical with the
old notes so that the exchange should not be a taxable transaction under German
99
tax law, and the cost basis of the old notes should carry over to the new notes.
However, prospective investors are urged to consult their tax advisors regarding
the German income tax consequences of exchanging, holding and disposing of the
notes as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdictions.
Tax Residents
Payments of interest on the notes, including interest having accrued up to
the sale of a note and credited separately ("Accrued Interest") to persons who
are tax residents of Germany (i.e., persons whose residence, habitual abode,
statutory seat or place of effective management and control is located in
Germany) are subject to German income tax (plus a solidarity surcharge of 5.5%
thereon (Solidaritaetszurschlag)). Such interest is also subject to trade tax if
the notes form part of the property of a German trade or business.
The notes were issued with a bond premium. In general, bond premium is the
amount by which the actual price of the note exceeds the amount payable upon
maturity. Generally, bond premium should be amortized ratably over the term of
the note in the form of return of capital. Notwithstanding this general rule,
the bond premium may be amortized over the term of the note in the form of
return of capital. Notwithstanding this general rule, the bond premium may be
amortized over a shorter period of time where a note is callable prior to
maturity at a price other than the face amount of the note. This exception could
apply to the notes exchanged pursuant to this offering because of the optional
redemption feature applicable to the notes. German resident holders are urged to
consult their tax advisors regarding the German income, trade and solidarity tax
consequences of amortizing any bond premium in connection with the notes
exchanged pursuant to this offer.
Capital gains from the disposal of notes by German-resident corporate
Holders of notes will be subject to corporate income tax (plus a solidarity
surcharge at a rate of 5.5% thereon) and trade tax. For purposes of computing
the capital gain amount on the disposal of a note issued with a bond premium, a
holder's basis should include any unamortized bond premium remaining on the note
at the disposition date. German resident holders are urged to consult their tax
advisors regarding the German income, trade and solidarity tax consequences of
disposing of a note issued with any bond premium pursuant to this offer.
If the notes are held in a custodial account that the holder maintains with
a German branch of a German or non-German financial or financial services
institution (the "Disbursing Agent"), a 30% withholding tax on interest payments
(Zinsabschlagsteuer), plus a 5.5% solidarity surcharge on such tax, will be
levied, resulting in a total tax charge of 31.65% of the gross interest payment.
Withholding tax is also imposed on Accrued Interest.
In computing the tax to be withheld, the Disbursing Agent may deduct from
the basis of the withholding tax any Accrued Interest paid by the holder of a
note to the Disbursing Agent during the same calendar year. No withholding tax
will be deducted if the holder of the note has submitted to the Disbursing Agent
a certificate of non-assessment (Nichtveranlagungsbescheinigung) issued by the
relevant local tax office.
Withholding tax and the solidarity surcharge thereon are credited as
prepayments against the German income tax and the solidarity surcharge liability
of the German resident. Amounts overwithheld will entitle the holder to a
refund, based on an assessment to tax.
Nonresidents
Interest, including Accrued Interest, and capital gains with respect to a
note held by a German nonresident are not subject to German taxation, unless:
(1) the note forms part of the business property of a permanent
establishment, including a permanent representative, or a fixed base
maintained in Germany by the Holder; or
(2) the interest income otherwise constitutes German-source income (such
as income from the letting and leasing of certain property located in
Germany).
100
In situations (1) and (2), a tax regime similar to that explained above
under "Tax Residents" applies. Capital gains from the disposition of the Notes
are, however, only taxable in situation (1).
Nonresidents of Germany are, in general, exempt from German withholding tax
on interest and the solidarity surcharge thereon. However, where the interest is
subject to German taxation as set forth in the preceding paragraph and the notes
are held in a custodial account with a disbursing agent, withholding tax is
levied as explained above under "Tax Residents."
Other Taxes
No stamp, issue, registration or similar taxes or duties will be payable in
Germany in connection with the issuance, delivery or execution of the notes.
Currently, a net assets tax is not levied in Germany.
PLAN OF DISTRIBUTION
If you are a broker-dealer and hold old notes for your own account as a
result of market-making activities or other trading activities and you receive
new notes in exchange for old notes in the exchange offer, then you may be a
statutory underwriter and must acknowledge that you will deliver a prospectus in
connection with any resale of these new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We acknowledge and, unless you are a broker-dealer, you must
acknowledge that you are not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate in a distribution of
new notes. For a period of 120 days after the consummation of the exchange
offer, we will make this prospectus, as amended and supplements, available to
any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of those methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
these new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of new notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 120 days after the consummation of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests those documents in the letter of transmittal.
We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the notes other than
commissions or concessions of any broker-dealers and will indemnify the holders
of the new notes, including any broker-dealers, against various liabilities,
including liabilities under the Securities Act. We note, however, that, in the
opinion of the SEC, indemnification against liabilities arising under federal
securities laws is against public policy and may be unenforceable.
101
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act. In
accordance with the Exchange Act, we file periodic reports, registration
statements and other information with the SEC. You may read and copy our
reports, registration statements and other information we file with the SEC at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms. In addition, reports and other
filings are available to the public on the SEC's web site at www.sec.gov.
If for any reason we are not subject to the reporting requirements of the
Exchange Act in the future, we will still be required under the indenture
governing the notes to furnish the holders of the notes with certain financial
and reporting information. See "Description of the New Notes--Certain
Covenants--Reports to Holders" for a description of the information that we are
required to provide.
We do not maintain a website on the Internet. However, Kronos maintains a
website on the Internet with the address of www.kronostio2.com. Copies of our
Annual Report on Form 10-K for the year ended December 31, 2004 and copies of
our Quarterly Reports on Form 10-Q for 2003 and 2004 and any Current Reports on
Form 8-K for 2003 and 2004, 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. Information contained on Kronos' website is not part of this
prospectus.
GENERAL LISTING INFORMATION
We will apply to list the new notes on the Luxembourg Stock Exchange in
accordance with its rules once the exchange offer has been completed. Prior to
the listing, a legal notice relating to the issuance of the new notes and our
certificate of incorporation will be deposited with the Chief Registrar of the
District Court of Luxembourg (Greffier en Chef du Tribunal d'Arrondissement de
et a Luxembourg), where these documents are available for inspection and where
copies of these documents may be obtained free of charge on request.
As long as the notes are listed on the Luxembourg Stock Exchange and the
rules of the Luxembourg Stock Exchange so require, copies of our certificate of
incorporation and the indenture and the registration rights agreement relating
to the new notes may be inspected, and our most recent audited annual
consolidated financial statements and unaudited quarterly consolidated financial
statements may be obtained, on any business day free of charge, at the office of
the paying agent in Luxembourg.
Our board of directors approved the issuance of the new notes on November
17, 2004.
Except as disclosed in this prospectus, we are not involved in, or have any
knowledge of a threat of, any litigation, administrative proceeding or
arbitration which, in our judgment, is or may be material in the context of the
issuance of the notes.
Except as disclosed in this prospectus, there has been no material adverse
change in our consolidated financial position since December 31, 2004.
The new notes have been accepted for clearance through Euroclear and
Clearstream with a Common Code of 015591412 and an International Securities
Identification Number of XS0155914129.
LEGAL MATTERS
Certain legal matters with regard to the validity of the new notes will be
passed upon for us by Locke Liddell & Sapp LLP, Dallas, Texas.
102
EXPERTS
The consolidated financial statements of Kronos International, Inc. and its
subsidiaries as of December 31, 2003 and 2004 and for each of the three years in
the period ended December 31, 2004 included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of Kronos Titan GmbH and its
subsidiary as of December 31, 2003 and 2004 and for each of the three years in
the period ended December 31, 2004 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.
The consolidated financial statements of Kronos Denmark ApS and its
subsidiaries as of December 31, 2003 and 2004 and for each of the three years in
the period ended December 31, 2004 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.
103
KRONOS INTERNATIONAL, INC.
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2003 and 2004 F-3
Consolidated Statements of Income -
Years ended December 31, 2002, 2003 and 2004 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2002, 2003 and 2004 F-6
Consolidated Statements of Stockholder's Equity -
Years ended December 31, 2002, 2003 and 2004 F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004 F-8
Notes to Consolidated Financial Statements F-10
Financial Statement Schedules
Report of Independent Registered Public Accounting Firm S-1
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-7
Schedules III and IV are omitted because they are not applicable.
Other Financial Statements filed pursuant to Rule 3-16 of Regulation S-X
Financial Statements of Kronos Titan GmbH FA-1
Financial Statements of Kronos Denmark ApS FB-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and Board of Directors of Kronos International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kronos International, Inc. and Subsidiaries as of December 31, 2003
and 2004, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with 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 30, 2005
F-2
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except share data)
ASSETS
2003 2004
---- ----
Current assets:
Cash and cash equivalents $ 37,121 $ 17,505
Restricted cash 1,313 1,529
Accounts and other receivables 112,797 130,729
Receivables from affiliates 1,884 2,517
Refundable income taxes 35,150 2,586
Inventories 168,131 170,261
Prepaid expenses 3,349 3,141
Deferred income taxes 943 -
-------- --------
Total current assets 360,688 328,268
-------- --------
Other assets:
Deferred financing costs, net 9,761 10,404
Restricted marketable debt securities 2,586 2,877
Unrecognized net pension obligation 7,812 7,524
Deferred income taxes - 238,284
Other 1,266 1,591
-------- --------
Total other assets 21,425 260,680
-------- --------
Property and equipment:
Land 31,106 34,164
Buildings 139,665 153,442
Equipment 644,733 724,904
Mining properties 63,701 71,980
Construction in progress 7,565 13,560
-------- --------
886,770 998,050
Less accumulated depreciation and
amortization 518,383 601,815
-------- --------
Net property and equipment 368,387 396,235
-------- --------
$750,500 $985,183
======== ========
F-3
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
2003 2004
---- ----
Current liabilities:
Current maturities of long-term debt $ 288 $ 13,792
Accounts payable and accrued liabilities 103,804 126,949
Payable to affiliates 8,697 11,042
Income taxes 12,007 17,080
Deferred income taxes 3,436 2,722
---------- ----------
Total current liabilities 128,232 171,585
---------- ----------
Noncurrent liabilities:
Long-term debt 356,451 519,403
Deferred income taxes 86,622 22,358
Accrued pension cost 53,010 48,441
Other 14,098 16,840
---------- ----------
Total noncurrent liabilities 510,181 607,042
---------- ----------
Minority interest 525 76
---------- ----------
Stockholder's equity:
Common stock, $100 par value; 100,000 shares
authorized; 2,968 shares issued 297 297
Additional paid-in capital 1,944,185 1,944,185
Retained deficit (1,665,098) (1,399,118)
Notes receivable from affiliate - (209,526)
Accumulated other comprehensive loss:
Currency translation (133,425) (99,764)
Pension liabilities (34,397) (29,594)
---------- ----------
Total stockholder's equity 111,562 206,480
---------- ----------
$ 750,500 $ 985,183
========== ==========
Commitments and contingencies (Notes 9 and 12)
See accompanying notes to consolidated financial statements.
F-4
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net sales $579,665 $715,906 $807,970
Cost of sales 454,154 516,864 609,559
-------- -------- --------
Gross margin 125,511 199,042 198,411
Selling, general and administrative expense 72,008 86,965 104,110
Other operating income (expense):
Currency transaction gains (losses), net 12,439 (3,721) (2,243)
Disposition of property and equipment (534) (394) (895)
Royalty income 5,779 6,122 6,034
Other income 458 489 426
Other expense (169) (130) (72)
-------- -------- --------
Income from operations 71,476 114,443 97,551
Other income (expense):
Currency transaction gain 2,718 - -
Interest income from affiliates 22,754 30 2,767
Trade interest income 1,597 700 1,147
Interest expense to affiliates (18,698) (81) (4)
Other interest expense (16,696) (32,529) (36,688)
-------- -------- --------
Income before income taxes and minority interest 63,151 82,563 64,773
Provision (benefit) for income taxes 10,805 730 (261,260)
Minority interest 55 72 53
-------- -------- --------
Net income 52,291 81,761 325,980
Dividends and accretion applicable to redeemable
preferred stock and profit participation
certificates (78,600) - -
-------- -------- --------
Net income (loss) available to
common stock $(26,309) $ 81,761 $325,980
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net income $ 52,291 $ 81,761 $ 325,980
-------- -------- ---------
Other comprehensive (loss) income, net of tax:
Minimum pension liabilities adjustment (2,781) (27,647) 4,803
Currency translation adjustment 30,733 5,600 33,661
-------- -------- ---------
Total other comprehensive income (loss) 27,952 (22,047) 38,464
-------- -------- ---------
Comprehensive income $ 80,243 $ 59,714 $ 364,444
======== ======== =========
See accompanying notes to consolidated financial statements.
F-6
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Common stockholder's equity (deficit)
---------------------------------------------------------------------------------------
Redeemable Accumulated other
preferred comprehensive Total
stock and Notes income (loss) common
profit Additional Retained receivable ------------------------ stockholder's
participation Common paid-in earnings from Currency Pension equity
certificates stock capital (deficit) affiliates translation liabilities (deficit)
------------- ------- ----------- ------------ ----------- ----------- ----------- -------------
Balance at December 31, 2001 $ 617,409 $ 320 $1,870,935 $(1,774,150) $(700,843) $(169,758) $ (3,969) $(777,465)
Net income - - - 52,291 - - - 52,291
Other comprehensive income
(loss), net of tax - - - - - 30,733 (2,781) 27,952
Change in notes receivable
from affiliates - - - - 156,661 - - 156,661
Preferred dividends and
accretion 78,600 - (78,600) - - - - (78,600)
Capital contribution - - 217,000 - (217,000) - - -
Recapitalization (696,009) (23) (65,150) - 761,182 - - 696,009
---------- ----- ---------- ---------- --------- --------- -------- ---------
Balance at December 31, 2002 - 297 1,944,185 (1,721,859) - (139,025) (6,750) 76,848
Net income - - - 81,761 - - - 81,761
Other comprehensive income
(loss), net of tax - - - - 5,600 (27,647) (22,047)
Cash dividends - - - (25,000) - - - (25,000)
---------- ----- ---------- ---------- --------- --------- -------- ---------
Balance at December 31, 2003 - 297 1,944,185 (1,665,098) - (133,425) (34,397) 111,562
Net income - - - 325,980 - - - 325,980
Other comprehensive income
(loss), net of tax - - - - - 33,661 4,803 38,464
Change in notes receivable
from affiliates - - - - (209,526) - - (209,526)
Cash dividends - - - (60,000) - - - (60,000)
---------- ----- ---------- ---------- --------- --------- -------- ---------
Balance at December 31, 2004 $ - $ 297 $1,944,185 $(1,399,118) $(209,526) $ (99,764) $(29,594) $ 206,480
========== ===== ========== =========== ========= ========= ======== =========
See accompanying notes to consolidated financial statements.
F-7
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 52,291 $ 81,761 $ 325,980
Depreciation and amortization 27,144 33,634 37,726
Noncash currency transaction gain (13,121) - -
Noncash interest expense to affiliates 5,521 - -
Noncash interest income from affiliates (21,849) - -
Noncash interest expense 860 1,944 2,044
Deferred income taxes 5,514 38,690 (273,985)
Minority interest 55 72 53
Net loss from disposition of property and equipment 534 394 895
Pension cost, net (2,118) (3,805) (800)
Other, net 351 250 987
Change in assets and liabilities:
Accounts and other receivables 10,726 1,104 (6,227)
Inventories (1,907) 232 11,582
Prepaid expenses 903 1,345 (233)
Accounts payable and accrued liabilities (6,135) 5,495 27,922
Income taxes (2,114) (37,231) 25,557
Accounts with affiliates 12,189 (14,424) (6,103)
Other noncurrent assets 162 (3,779) 1,981
Other noncurrent liabilities (788) (894) (5,124)
--------- -------- ---------
Net cash provided by operating activities 68,218 104,788 142,255
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures (27,632) (31,518) (33,679)
Purchase of interest in subsidiary - - (575)
Change in restricted cash equivalents and restricted
marketable debt securities, net (2,891) (554) (70)
Proceeds from disposition of property and equipment 864 383 99
--------- -------- ---------
Net cash used by investing activities (29,659) (31,689) (34,225)
--------- -------- ---------
F-8
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $335,768 $ 16,106 $ 241,648
Principal payments (84,814) (46,006) (100,073)
Deferred financing fees (9,963) - (1,989)
Repayments on loans from affiliates (301,432) - -
Loans to affiliates - - (209,524)
Other capital transactions with affiliates, net 2,925 - -
Dividends paid - (25,000) (60,000)
Distributions to minority interests (11) (14) -
-------- --------- ---------
Net cash used by financing activities (57,527) (54,914) (129,938)
-------- --------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (18,968) 18,185 (21,908)
Currency translation 3,648 3,913 2,292
-------- --------- ---------
(15,320) 22,098 (19,616)
Balance at beginning of year 30,343 15,023 37,121
-------- --------- ---------
Balance at end of year $ 15,023 $ 37,121 $ 17,505
======== ========= =========
Supplemental disclosures - cash paid (received) for:
Interest $ 34,061 28,147 $ 33,425
Income taxes 6,748 (11,480) (23,776)
F-9
KORNOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. Kronos International, Inc. ("KII")
is incorporated in the state of Delaware, U.S.A., with its seat of management in
Leverkusen, Germany. KII or the Company is a wholly-owned subsidiary of Kronos
Worldwide, Inc. ("Kronos") (NYSE:KRO). At December 31, 2004, (i) Valhi, Inc.
(NYSE:VHI) and a wholly-owned subsidiary of Valhi held approximately 57% of
Kronos' outstanding common stock and NL Industries, Inc. (NYSE:NL) held an
additional 37% of Kronos' common stock, (ii) Valhi and such wholly-owned
subsidiary of Valhi owned approximately 83% of NL's outstanding common stock and
(iii) Contran Corporation and its subsidiaries held approximately 91% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of 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.
Consequently, Mr. Simmons may be deemed to control each of such companies.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("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 KII and its wholly-owned and majority-owned subsidiaries. All
material intercompany accounts and balances have been eliminated. Minority
interest relates to the Company's majority-owned subsidiary in France, which
conducts the Company's marketing and sales activities in that country. During
2004, the Company increased its ownership interest by approximately 5% to 99% in
such subsidiary by acquiring shares previously held by certain of its other
stockholders for an aggregate of $575,000.
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 stockholder's equity as part of accumulated other comprehensive
income (loss), net of related deferred income taxes and minority interest.
Currency transaction gains and losses are recognized in income currently. In
2002, the Company recognized a $2.7 million currency transaction gain related to
the extinguishments of certain intercompany indebtedness.
In 2002, a $2.7 million currency transaction gain is classified as a
component of other income (expense) in the accompanying Consolidated Statement
of Income. Such gain related to the extinguishment of certain intercompany
loans. Prior to June 28, 2002, KII had certain intercompany indebtedness payable
to Kronos, a portion of which was denominated in U.S. dollars, and a portion of
which was denominated in euro. Through June 19, 2002, such intercompany
indebtedness was deemed to be of a long-term nature for which settlement was not
planned or anticipated in the foreseeable future, and in accordance with GAAP,
the foreign currency transaction gains and losses related to such intercompany
F-10
indebtedness were not recognized in net income, but instead were reported as
part of accumulated other comprehensive income. On June 19, 2002, when the
purchase agreement was entered into in connection with KII's 2002 issuance of
the KII Senior Secured Notes discussed in Note 6, the expectation that such
intercompany indebtedness was of a long-term nature was no longer applicable, as
KII had stated that it intended to use a portion of the net proceeds of such
offering to repay such intercompany indebtedness owed to Kronos. Accordingly,
from the time period of June 19, 2002 (the date the purchase agreement related
to KII Senior Secured Notes was executed) until June 28, 2002 (the closing date
for the 2002 issuance of the KII Senior Secured Note offering, and the date such
intercompany indebtedness was repaid), the foreign currency transaction gains
and losses related to such intercompany indebtedness during such time period was
recognized in net income in accordance with GAAP.
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.
Cash and cash equivalents. Cash equivalents include bank deposits with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.6
million and $2.9 million at December 31, 2003 and 2004, 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.
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
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.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. 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 other current liabilities and
consisting primarily of materials and supplies, was $4.5 million and $3.9
million at December 31, 2003 and 2004, respectively.
F-11
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 2002, 2003 or 2004.
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," which among other things provided certain
implementation guidance in relation to prior GAAP. See Note 14.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness, all included
in interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 10.
Income taxes. Prior to December 2003, KII, 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"). The NL Tax Group, including
KII, is 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 KII,
compute provisions for U.S. income taxes on a separate-company basis using the
tax elections made by Contran. Pursuant to the Kronos Tax Sharing Agreement and
using the tax elections made by Contran, KII made payments to or received
payments from Kronos 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.
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, including KII, ceased being members of the NL Tax
Group, but 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. Kronos and its consolidating subsidiaries, including
KII, are also included in Contran's consolidated unitary state income tax
returns in certain qualifying U.S. jurisdictions. The terms of the Contran Tax
Agreement also apply to state provisions in these jurisdictions.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed earnings of foreign subsidiaries which
are not deemed to be permanently reinvested. Earnings of foreign subsidiaries
deemed to be permanently reinvested aggregated $496.8 million at December 31,
F-12
2003 and $526.5 million at December 31, 2004. 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.
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.
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 $33 million in 2002, $43 million in
2003 and $49 million in 2004. Advertising costs are expensed as incurred and
were $1 million in each of 2002, 2003 and 2004. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$6 million in 2002, $7 million in 2003 and $8 million in 2004.
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 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 $400,000 in 2002, $300,000 in 2003 and $1.0 million
in 2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2002, 2003 and 2004 if the
Company had applied the fair value-based recognition provisions of SFAS No. 123,
for all awards granted subsequent to January 1, 1995.
F-13
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Net income (loss) as reported $(26.3) $ 81.8 $ 326.0
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 .3 .1 .6
Stock-based employee compensation expense
determined under SFAS No. 123 (.3) (.1) -
------ ------- -------
Pro forma net income (loss) $(26.3) $ 81.8 $ 326.6
====== ======= =======
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. All of the Company's net assets are located in Europe.
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,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 404,299 $ 510,105 $ 576,138
Belgium 123,760 150,728 186,445
Norway 111,811 131,457 144,492
Other 89,560 110,358 124,784
Eliminations (149,765) (186,742) (223,889)
--------- --------- ---------
$ 579,665 $ 715,906 $ 807,970
========= ========= =========
F-14
Years ended December 31,
-----------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net sales - point of destination:
Europe $ 456,299 $ 567,630 $ 666,271
United States 39,104 58,293 42,015
Latin America 12,808 12,258 20,684
Asia 39,832 42,974 43,842
Other 31,622 34,751 35,158
--------- --------- ---------
$ 579,665 $ 715,906 $ 807,970
========= ========= =========
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Identifiable assets -
net property and equipment:
Germany $ 252,411 $ 269,922
Belgium 64,895 68,314
Norway 50,811 57,808
Other 270 191
--------- ---------
$ 368,387 $ 396,235
========= =========
Note 3 - Accounts and other receivables:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Trade receivables $ 106,246 $120,969
Insurance claims 58 32
Recoverable VAT and other receivables 8,715 11,388
Allowance for doubtful accounts (2,222) (1,660)
--------- ---------
$ 112,797 $ 130,729
========= =========
Note 4 - Inventories
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Raw materials $ 30,261 $ 34,303
Work in process 15,623 13,044
Finished products 92,009 90,083
Supplies 30,238 32,831
--------- ---------
$ 168,131 $ 170,261
========= =========
Note 5 - Accounts payable and accrued liabilities:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Accounts payable $ 50,626 $ 67,463
Employee benefits 23,592 27,863
Other 29,586 31,623
--------- ---------
$ 103,804 $ 126,949
========= =========
F-15
Note 6 - Long-term debt:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Long-term debt:
8.875% Senior Secured Notes $ 356,136 $ 519,225
Bank credit facility - 13,622
Other 603 348
--------- ---------
356,739 533,195
Less current maturities 288 13,792
--------- ---------
$ 356,451 $ 519,403
========= =========
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009, and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII Senior Secured Notes (collectively,
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
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, 2004, KII was in compliance with all the
covenants, and the quoted market price of the Notes was approximately euro 1,075
per euro 1,000 principal amount (2003 - euro 1,000 per euro 1,000 principal
amount). At December 31, 2004, the carrying amount of the Notes includes euro
6.2 million ($8.4 million) of unamortized premium associated with the November
2004 issuance.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway (collectively, the "Borrowers") entered into a euro 80 million secured
revolving bank credit facility that matures in June 2005 ("European Credit
Facility"). 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
Borrowers, KII and its other subsidiaries. At December 31, 2004, euro 10 million
($13.6 million) was outstanding under the European Credit Facility at an
interest rate of 3.85%, and the equivalent of $92.6 million was available for
additional borrowing by the subsidiaries.
F-16
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). The
European Credit Facility contains provisions that allow the lender to accelerate
the maturity of the applicable facility in the event of a change of control, as
defined, of the applicable borrower. 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.
Aggregate maturities of long-term debt at December 31, 2004 are shown in
the table below.
Years ending December 31, Amount
------------------------- --------------
(In thousands)
2005 $ 13,792
2006 159
2007 19
2008 -
2009 519,225
2010 and thereafter -
--------
$533,195
========
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2004, the restricted net
assets of consolidated subsidiaries approximated $158 million.
Note 7 - Other noncurrent liabilities:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Insurance claims and expenses $ 1,222 $ 1,505
Employee benefits 4,849 5,107
Asset retirement obligations 766 958
Other 7,261 9,270
--------- ---------
$ 14,098 $ 16,840
========= =========
The asset retirement obligations are discussed in Note 14.
Note 8 - Common stock and notes receivable from affiliates:
NL common stock options held by employees of the Company. At December 31,
2004, employees of the Company held options to purchase approximately 85,000
F-17
shares of NL common stock, of which 49,000 were granted in 2001 and are
exercisable at various dates through 2011 at an exercise price of $11.49 per
share. The remaining exercisable options are exercisable at various dates
through 2010 at an exercise price ranging from $2.66 to $9.34 per share.
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 1. No options were granted in 2002, 2003 or 2004. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting periods.
Common stock dividends. KII paid $25.0 million in cash dividends to Kronos
during 2003 and $60.0 million during 2004.
Preferred stock. In July 2002, KII and Kronos agreed to a recapitalization
of the Company as contemplated in the euro 285 million Notes offering. See Note
6. In connection with the recapitalization agreement, KII converted the Series A
(738 shares) and Series B (647 shares) redeemable preferred stock (including
liquidation and redemption preferences and accrued and unpaid dividends) held by
Kronos totaling $411.7 million into 1,385 shares of KII, $100 par value, common
stock. As a result of the conversion, the Series A and B redeemable preferred
stock certificates were canceled. Further, KII redeemed its profit participation
certificates held by Kronos totaling $284.3 million in exchange for various
notes receivable from NL. As a result of the redemption, the profit
participation certificates were canceled. Finally, KII redeemed 1,613 shares of
KII common stock held by Kronos in exchange for its remaining notes receivable
from NL and Kronos totaling $479.4 million. As a result of the recapitalization
in July 2002, KII's common stockholder's equity increased a net $696.0 million.
Notes receivable from affiliates - contra equity. The Company periodically
converted interest receivable from affiliates to notes receivable from
affiliates. For the year ended 2002 the interest transferred to notes receivable
from affiliates totaled $12.6 million (nil for 2003 and 2004).
In the fourth quarter of 2004, KII loaned an aggregate euro 163.1 million
($209.5 million) to Kronos in return for two promissory notes. Interest on both
notes is payable to KII on a quarterly basis at an annual rate of 9.25%. Due to
the long-term investment nature of these notes, settlement of the intercompany
notes receivable is not contemplated within the foreseeable future and as such
have been presented as a separate component of the Company's stockholder's
equity.
Cash flows related to principal amounts on such loans made to affiliates
included in contra equity are reflected in financing activities in the
accompanying Consolidated Statements of Cash Flows.
F-18
Note 9 - Income taxes:
Years ended December 31,
-------------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Pre-tax income (loss):
Germany $ 46.8 $ 45.8 $ 30.2
Non-U.S. 16.4 36.8 34.6
------ ------ -------
$ 63.2 $ 82.6 $ 64.8
====== ====== =======
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ 22.1 $ 28.9 $ 22.7
Non-U.S. tax rates (5.2) (.9) .3
Nondeductible expenses 2.8 2.7 4.2
Change in deferred income tax valuation
allowance, net
(2.8) (6.7) (280.7)
Currency transaction gains and losses
for which no income taxes are provided (4.6) - -
Change in Belgian income tax law (2.3) - -
NL tax contingency reserve adjustment, net .1 13.4 (4.6)
Refund of prior year income taxes - (38.0) (2.6)
Other, net .7 1.3 (.6)
------ ------ -------
$ 10.8 $ .7 $(261.3)
====== ====== =======
Components of income tax expense (benefit):
Currently payable (refundable):
Germany $ (1.2) $(56.9) $ (.2)
Other non - U.S. 6.5 18.9 12.9
------ ------ -------
5.3 (38.0) 12.7
------ ------ -------
Deferred income taxes (benefit):
Germany 7.9 44.4 (270.5)
Other non - U.S. (2.4) (5.7) (3.5)
------ ------ -------
5.5 38.7 (274.0)
------ ------ -------
$ 10.8 $ .7 $(261.3)
====== ====== =======
Comprehensive provision for
income taxes (benefit) allocable to:
Net income $ 10.8 $ .7 $(261.3)
Other comprehensive income -
pension liabilities (.7) (9.5) (8.1)
------ ------ -------
$ 10.1 $ (8.8) $(269.4)
====== ====== =======
The components of the net deferred tax liability at December 31, 2003 and
2004, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
F-19
December 31,
--------------------------------------------------
2003 2004
------------------------ -----------------------
Assets Liabilities Assets Liabilities
------- ------------ ------ -----------
(In millions)
Tax effect of temporary differences
related to:
Inventories $ .9 $ (3.4) $ 1.5 $ (4.4)
Property and equipment 46.0 (21.6) 37.8 (22.9)
Accrued (prepaid) pension cost 11.3 (33.5) 19.4 (40.4)
Other accrued liabilities and
deductible differences 3.8 - 46.1 -
Other taxable differences - (67.2) - (43.5)
Investment in subsidiaries/
affiliates not in tax group - - 1.9 -
Tax loss and tax credit carryforwards 137.3 - 217.8 -
Valuation allowance (162.7) - - -
------ ------- ------ --------
Adjusted gross deferred tax assets 324.5
(liabilities) 36.6 (125.7) (111.2)
Netting of items by tax jurisdiction (35.7) 35.7 (86.2) 86.2
------ ------- ------ --------
.9 (90.0) 238.3 (25.0)
Less net current deferred tax
asset (liability) .9 (3.4) - (2.7)
------ ------- ------ --------
Net noncurrent deferred tax asset
(liability) $ - $ (86.6) $238.3 $ (22.3)
====== ======= ====== =======
Years ended December 31,
-------------------------------------
2002 2003 2004
---- ---- ----
(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 $(2.8) $ (6.7) $ (280.7)
Foreign currency translation 21.6 28.2 (3.0)
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 13.2 (12.5) 121.0
----- ------ --------
$32.0 $ 9.0 $ (162.7)
===== ====== ========
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 the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. 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
F-20
recognized the benefit for these net funds in its 2003 results of operations.
For the year ended December 31, 2004, the Company recognized a net refund of
euro 2.5 million ($3.1 million) related to additional net interest which has
accrued on the outstanding refund amount. Through December 2004, KII and its
German operating subsidiary had received net refunds of euro 35.6 million ($44.7
million when received). All refunds relating to the periods 1990 to 1997 were
received by December 31, 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 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 ($8 million at December 31, 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 9 million ($13 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response.
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2004) relating to the years 1998 to 2000. The Company has
objected 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, a
wholly-owned subsidiary of Kronos, principally during the 1990s 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. KII had generated positive taxable income in
Germany for both German corporate and trade tax purposes since 2000, and
starting with the quarter ended December 31, 2002 and for each quarter
thereafter, KII had cumulative taxable income in Germany for the most recent
twelve quarters. However, offsetting this positive evidence was the fact that
F-21
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 the uncertainty caused by this
negative evidence, Kronos had concluded the 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 at that time 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 positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience), Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased, or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. 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 and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. 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 believed its selling prices
would continue to increase during the second half of 2004 after Kronos and its
major competitors announced an additional round of price increases. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflected
taxable income for Germany in 2004 as well as 2005. Accordingly, based on all
available evidence, including the fact that (i) KII had generated positive
taxable income in Germany since 2000, and starting with the quarter ended
December 31, 2002 and for each quarter thereafter, KII had cumulative taxable
income in Germany for the most recent twelve quarters, (ii) Kronos was now
projecting positive taxable income in Germany for 2004 and 2005 and (iii) the
German net operating loss carryforwards have no expiration date, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, Kronos believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given the number of years for which Kronos has now generated positive taxable
income in Germany, combined with the fact that the net operating loss
carryforwards were generated during a time when KII had a significantly higher
level of outstanding indebtedness than it currently has outstanding, and the
fact that the net operating loss carryforwards have no expiration date, Kronos
concluded it was now appropriate to reverse all of the valuation allowance
related to the net operating loss carryforwards because the benefit of such
operating loss carryforwards now meet the "more-likely-than-not" recognition
criteria. Under applicable GAAP related to accounting for income taxes at
interim periods, a change in estimate at an interim period resulting in a
decrease in the valuation allowance is segregated into two components, the
portion related to the remaining interim periods of the current year and the
portion related to all future years. The portion of the valuation allowance
reversal related to the former is recognized over the remaining interim periods
of the current year, and the portion of the valuation allowance related to the
latter is recognized at the time the change in estimate is made. Accordingly,
Kronos has recognized a $280.7 million income tax benefit in 2004 related to the
complete 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 $280.7 million, (i) $8.7 million relates
primarily to the utilization of the German net operating loss carryforwards
F-22
during the first six months of 2004, the benefit of which had previously not met
the "more-likely-than-not" recognition criteria, (ii) $268.6 million relates to
the valuation allowance reversal recognized as of June 30, 2004 and (iii) $3.4
million relates to the valuation allowance reversal recognized during the last
six months of 2004. At December 31, 2004, the net operating loss carryforwards
for German corporate and trade tax purposes aggregated the equivalent of $671
million and $232 million, respectively, all of which have no expiration date.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. The Company is still studying the new law, including the
technical provisions related to the two complex provisions noted above. The
effect on the Company of the new law, if any, has not yet been determined, in
part because the Company has not definitively determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction. If the Company determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned. With respect to the special dividends received deduction
for certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its evaluation of whether it would benefit
from the special dividends received deduction until sometime after the U.S.
government has issued clarifying regulations regarding this provision of the
Act, the timing for the issuance of which is not known. The aggregate amount of
unremitted earnings that is potentially subject to the special dividends
received deduction is approximately $527 million at December 31, 2004. The
Company is unable to reasonably estimate a range of income tax effects if such
unremitted earnings would be repatriated and become eligible for the special
dividends received deduction, as the calculation would be extremely complex.
Note 10 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Employees are covered by plans in their respective countries.
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, 2004, the Company currently expects to
contribute the equivalent of approximately $4 million to all of its defined
benefit pension plans during 2005.
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 their defined benefit pension plans.
F-23
Years ended December 31,
-------------------------
2003 2004
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 213,183 $ 272,204
Service cost 4,060 5,398
Interest cost 12,378 14,132
Participant contributions 1,295 1,362
Plan amendments 3,200 -
Actuarial (gains) losses 17,337 3,134
Change in foreign exchange rates 36,547 26,588
Benefits paid (15,796) (15,236)
--------- ---------
Benefit obligations at end of the year $ 272,204 $ 307,582
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 160,860 $ 167,302
Actual return on plan assets (12,559) 14,175
Employer contributions 10,240 11,726
Participant contributions 1,295 1,362
Change in foreign exchange rates 23,262 17,244
Benefits paid (15,796) (15,236)
--------- ---------
Fair value of plan assets at end of year $ 167,302 $ 196,573
========= =========
Funded status at end of the year:
Plan assets less than PBO $(104,902) $(111,009)
Unrecognized actuarial losses 98,368 107,581
Unrecognized prior service cost 6,678 6,829
Unrecognized net transition obligations 1,228 952
--------- ---------
$ 1,372 $ 4,353
========= =========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 7,812 $ 7,524
Accrued pension costs:
Current (7,877) (8,587)
Noncurrent (53,010) (48,441)
Accumulated other comprehensive income 54,447 53,857
--------- ---------
$ 1,372 $ 4,353
========= =========
Years ended December 31,
-------------------------------------
2002 2003 2004
---- ---- ----
(In thousands
Net periodic pension cost:
Service cost benefits $ 3,395 $ 4,060 $ 5,398
Interest cost on PBO 10,965 12,378 14,132
Expected return on plan assets (10,294) (12,264) (12,318)
Amortization of prior service cost 223 255 463
Amortization of net transition
obligations 332 527 368
Recognized actuarial losses 1,029 827 2,335
-------- -------- --------
$ 5,650 $ 5,783 $ 10,378
======== ======== ========
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of the Company's plan assets is established to
satisfy the requirements of the German insurance commissioner. The current
plan asset allocation at December 31, 2004 was 23% to equity managers, 48%
to fixed income managers and 29% to real estate.
F-24
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers, 62% to fixed income managers and the remainder
primarily to liquid investments and cash. The expected long-term rate of
return for such investments is approximately 8% and 4.5% to 6.5% and 2.5%,
respectively. The current plan asset allocation at December 31, 2004 was
16% to equity managers, 64% to fixed income managers and the remainder
primarily to cash and liquid investments.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
------------------------
2003 2004
---- ----
Discount rate 5.4% 5.0%
Increase in future compensation levels 2.8% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 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,
----------------------------------------
2002 2003 2004
---- ---- ----
Discount rate 6.0% 5.8% 5.3%
Increase in future compensation levels 2.8% 2.6% 2.8%
Long-term return on plan assets 7.3% 6.9% 6.4%
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, 100% of the projected benefit
obligations of such plans relate to non-U.S. plans.
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Projected benefit obligation $272,204 $307,582
Accumulated benefit obligation 230,893 257,308
Fair value of plan assets 167,302 196,573
F-25
The Company expects future benefits paid from all defined benefit pension
plans to be as follows:
Amount
Years ending December 31, (In thousands)
------------------------- --------------
2005 $ 15,592
2006 16,974
2007 15,978
2008 17,729
2009 16,497
2010 to 2014 89,950
Note 11 - 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.
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 Contran, Kronos and 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
net ISA fee charged to the Company was $1.1 million in 2002, $1.5 million in
2003 and $2.8 million in 2004.
Sales of TiO2 to Kronos (US), Inc. ("KUS"), an affiliate, were $38.5
million in 2002, $57.8 million in 2003 and $41.9 million in 2004. Sales of TiO2
to Kronos Canada, Inc. ("KC") were $7.7 million in 2002, $10.9 million in 2003
and $8.9 million in 2004.
KUS purchases the rutile and slag feedstock used as a raw material in all
of the Company's chloride process TiO2 facilities. The Company purchases such
F-26
feedstock from KUS for use in its facilities for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $102.5 million in 2002, $93.3 million in 2003 and
$106.2 million in 2004.
Purchases of TiO2 from KUS were $2.6 million in 2002, $100,000 in 2003 and
$3.5 million in 2004. Purchases of TiO2 from KC were $500,000 in each of 2002
and 2003 and $700,000 in 2004.
Royalty income received from KC for use of certain of the Company's
intellectual property was $5.8 million in 2002, $6.1 million in 2003 and $6.0
million in 2004.
The Company is party to master global NL insurance coverage policies with
regard to property, business interruption, excess liability and other coverages.
The costs associated with these policies aggregated $7.0 million, $5.2 million
and $5.3 million in 2002, 2003 and 2004, respectively.
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 its 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 uninsured loss.
Net amounts between the Company and KUS were generally related to product
sales and raw material purchases. Net amounts between the Company and KC were
generally related to product sales and royalties. See Note 8 for discussion of
notes receivable from affiliates.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Current receivables from affiliates:
KC $ 1,877 $ 2,516
Other 7 1
------- -------
$ 1,884 $ 2,517
======= =======
Current payables to affiliates:
KUS $ 8,697 $11,033
NL - 9
------- -------
$ 8,697 $11,042
======= =======
Interest income on all loans to related parties was $22.8 million in 2002,
less than $50,000 in 2003 and $2.8 million in 2004. Interest expense on all
loans from related parties was $18.7 million in 2002, less than $100,000 in 2003
and nil in 2004.
In July 2002, all outstanding Series A shares and Series B shares (with
aggregate values of $219.0 million and $192.7 million, respectively, at the time
F-27
of conversion) were converted into 1,385 shares of KII, $100 par value, common
stock. As a result of the conversion, the Series A and B shares were canceled.
See Note 8.
Profit Participation Certificates ("PPCs") - PPCs with DM100 par value:
5,500,000 shares authorized, issued and outstanding are designated nonvoting
cumulative preferred PPCs and yielded an annual dividend of 4% per share based
on earnings of the Company and before any common stock dividends to Kronos.
Kronos waived its right to dividend distributions for all periods presented and
through December 2002. The PPCs were issued to Kronos ($284.3 million) in
December 1999 as part of a recapitalization of the Company. In July 2002 all
outstanding PPCs (with an aggregate value of $284.3 million at the time of
redemption) were redeemed in exchange for various notes receivable from NL. As a
result of the redemption, the PPCs were canceled.
Note 12 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's 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 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 maintain compliance with
applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. 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 believes all its plants are in
substantial compliance with applicable environmental laws.
Litigation matters. The Company's Belgian subsidiary and certain of its
employees are the subject of civil and criminal proceedings relating to an
accident that resulted in two fatalities at the Company's Belgian facility in
2000. In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against the Company and fines aggregating less than euro 40,000
against various Company employees. The Company and the individual employees have
appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses.
The Company 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
F-28
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 21%, 20% and 21%, respectively of net sales in 2002,
2003 and 2004. Approximately 73% of the Company's TiO2 sales by volume were to
Europe in each of 2002 and 2003 and approximately 77% of the Company's TiO2
sales were to Europe in 2004. Approximately 13% of sales by volume were
attributable to North America in 2002 and 2003 and 9% attributable to North
America in 2004.
Capital expenditures. At December 31, 2004 the estimated cost to complete
capital projects in process approximated $5.5 million.
Long-term contracts. KUS has long-term supply contracts that provide for
certain of its affiliates', including the Company's, TiO2 feedstock requirements
through 2009. The agreements require KUS to purchase certain minimum quantities
of feedstock with minimum annual purchase commitments aggregating approximately
$525 million at December 31. 2004. The agreements require that the Company and
certain of its affiliates purchase chloride feedstock underlying these long-term
supply contracts from KUS.
Operating leases. The Company's 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-half of
the Company's 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 ownership and
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 $7 million in
2002, $9 million in 2003 and $8 million in 2004. At December 31, 2004, 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)
2005 $ 3,357
2006 2,130
2007 1,896
2008 1,698
2009 1,290
2010 and thereafter 20,895
-------
$31,266
=======
Approximately $25.3 million of the $31.3 million aggregate future minimum
rental commitments at December 31, 2004 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, 2004.
F-29
Note 13 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31, December 31,
2003 2004
-------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ---------- ---------- ----------
(In millions)
Cash, cash equivalents, restricted
cash and current and noncurrent
restricted marketable debt securities $ 41.0 $ 41.0 $ 21.9 $ 21.9
Long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 356.1 $ 356.1 $519.2 $ 549.1
Variable rate debt - - 13.6 13.6
Other fixed rate debt .6 .6 .4 .4
Fair value of the Company's noncurrent restricted marketable debt
securities and 8.875% Senior Secured Notes 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, 2003 or 2004. See Note 1.
Note 14 - Accounting principles newly adopted in 2002, 2003 and 2004:
Impairment of long-lived assets. The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of prior GAAP
with respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Lived-Lived Assets to be Disposed Of." However, SFAS No. 144 provides
new guidance intended to address certain implementation issues associated with
SFAS No. 121, including expanded guidance with respect to appropriate cash flows
to be used to determine whether recognition of any long-lived asset impairment
is required, and if required how to measure the amount of the impairment. SFAS
No. 144 also requires that net assets to be disposed of by sale are to be
reported at the lower of carrying value or fair value less cost to sell, and
expands the reporting of discontinued operations to include any component of an
entity with operations and cash flows that can be clearly distinguished from the
rest of the entity. Adoption of SFAS No. 144 did not have a significant effect
on the Company.
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
F-30
long-lived asset. Over time, the liability would be accreted to its present
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) and to December 31, 2004 ($1 million)
is primarily due to accretion expense and the effects of currency translation.
Accretion expense, which is reported as a component of cost of goods sold in the
accompanying Consolidated Statement of Operations, approximated $100,000 for
each of the years ended December 31, 2003 and 2004.
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.
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
F-31
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.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("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 that would require the Company to consolidate such entity under 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.
Note 15 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of July 1, 2005. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Scholes or a lattice model). Under the transition
alternatives permitted under SFAS No. 123R, the Company will apply the new
standard to all new awards granted on or after July 1, 2005, and to all awards
existing as of June 30, 2005 which are subsequently modified, repurchased or
cancelled. Additionally, as of July 1, 2005, the Company will be required to
recognize compensation cost for the portion of any non-vested award existing as
of June 30, 2005 over the remaining vesting period. Because the Company has not
granted any options to purchase its common stock and is not expected to grant
any options prior to July 1, 2005 and because the number of non-vested awards as
of June 30, 2005 with respect to options granted by NL to employees of the
Company is not expected to be material, the effect of adopting SFAS No. 123R is
not expected to be significant in so far as it relates to existing stock
options. Should the Company, however, grant a significant number of options in
the future, the effect on the Company's consolidated financial statements could
be material.
F-32
Note 16 - 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, 2003
Net sales $ 178.2 $ 182.9 $ 173.4 $ 181.4
Cost of sales 130.8 134.2 124.2 127.7
Net income $ 14.8 $ 36.7 $ 14.2 $ 16.1
Year ended December 31, 2004
Net sales $ 192.2 $ 208.1 $ 203.4 $ 204.3
Cost of sales 142.6 156.3 156.1 154.6
Net income $ 13.2 $ 290.5 $ 9.1 $ 13.2
During the fourth quarter of 2004, the Company determined that it should
have recognized an additional $26.8 million net deferred income tax benefit
during the second quarter of 2004, related to the amount of the valuation
allowance related to the Company's German operations which should have been
reversed. While the additional tax benefit is not material to the Company's
second quarter 2004 results, the quarterly results of operations for 2004, as
presented above, reflects this additional tax benefit. Accordingly, income from
continuing operations for the second quarter of 2004 of $290.5 million, as
reflected above, differs from the $263.7 million previously reported by the
Company due to such $26.8 million deferred income tax benefit.
F-33
KRONOS TITAN GMBH AND SUBSIDIARY
Index of Consolidated Financial Statements
Financial Statements Pages
Report of Independent Registered Public Accounting Firm FA-2
Consolidated Balance Sheets - December 31, 2003 and 2004 FA-3
Consolidated Statements of Income - Years ended
December 31, 2002, 2003 and 2004 FA-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 2002, 2003 and 2004 FA-6
Consolidated Statements of Partners' Capital/Owners'
Equity - Years ended December 31, 2002, 2003 and 2004 FA-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2003 and 2004 FA-8
Notes to Consolidated Financial Statements FA-10
FA-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Owner of Kronos Titan GmbH:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, owners' equity
and cash flows present fairly, in all material respects, the financial position
of Kronos Titan GmbH and Subsidiary at December 31, 2003 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with 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 30, 2005
FA-2
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 30,859 $ 6,444
Accounts and notes receivable 66,565 76,732
Receivable from affiliates 82,166 32,355
Refundable income taxes 128,956 59
Inventories 100,133 101,850
Prepaid expenses 2,389 2,078
-------- --------
Total current assets 411,068 219,518
-------- --------
Other assets:
Note receivable from Kronos Titan A/S - 5,449
Unrecognized net pension obligations 3,636 3,672
Deferred income taxes 19,832 18,077
Other 1,211 1,201
-------- --------
Total other assets 24,679 28,399
-------- --------
Property and equipment:
Land 13,539 14,929
Buildings 101,819 111,349
Machinery and equipment 442,838 496,428
Construction in progress 6,624 10,022
-------- --------
564,820 632,728
Less accumulated depreciation and depletion 323,313 373,938
-------- --------
Net property and equipment 241,507 258,790
-------- --------
$677,254 $506,707
======== ========
FA-3
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 61,252 $ 76,952
Payable to affiliates 21,685 35,260
Deferred income taxes 1,407 1,912
-------- --------
Total current liabilities 84,344 114,124
-------- --------
Noncurrent liabilities:
Note payable to affiliate 89,710 12,941
Accrued pension cost 50,826 45,015
Other 11,530 12,193
-------- --------
Total noncurrent liabilities 152,066 70,149
-------- --------
Owners' equity:
Subscribed capital 12,496 12,496
Paid in capital 376,634 227,037
Retained deficit - (9,685)
Accumulated other comprehensive income (loss):
Currency translation 75,524 111,996
Pension liabilities (23,810) (19,410)
-------- --------
Total owners' equity 440,844 322,434
-------- --------
$677,254 $506,707
======== ========
Commitments and contingencies (Notes 6, 10 and 13)
See accompanying notes to consolidated financial statements.
FA-4
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net sales $384,361 $487,337 $552,216
Cost of sales 323,306 379,187 451,888
-------- --------- --------
Gross margin 61,055 108,150 100,328
Selling, general and administrative expense 34,633 42,925 47,824
Other operating income (expense):
Currency transaction gains (losses), net 93 (3,519) (2,533)
Disposition of property and equipment (300) (390) (293)
-------- --------- --------
Income from operations 26,215 61,316 49,678
Other income (expense):
Trade interest income 518 447 949
Interest and other expense to affiliates (4,493) (442) (304)
Interest and other income from affiliates 3,694 3,918 8,813
Interest expense (198) (368) (651)
-------- --------- --------
Income before income taxes 25,736 64,871 58,485
Income tax provision (benefit) 3,306 (205,670) 17,507
-------- --------- --------
Net income $ 22,430 $ 270,541 $ 40,978
======== ========= ========
See accompanying notes to consolidated financial statements.
FA-5
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net income $ 22,430 $ 270,541 $ 40,978
-------- --------- --------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (2,915) (17,946) 4,400
Currency translation adjustment 22,892 37,674 36,472
-------- --------- --------
Total other comprehensive income 19,977 19,728 40,872
-------- --------- --------
Comprehensive income $42,407 $ 290,269 $ 81,850
======== ========= ========
See accompanying notes to consolidated financial statements.
FA-6
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL / OWNERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Accumulated other
comprehensive
Owners' Equity income (loss)
Partners' -------------------------- Retained -----------------------------
capital Subscribed Paid-in earnings Currency Pension
(deficit) capital capital (deficit) translation liabilities Total
---------- ---------- -------- ---------- ----------- ----------- -----
Balance at December 31, 2001 $108,865 $ - $ - $ - $ 14,958 $ (2,949) $120,874
Net income 22,430 - - - - - 22,430
Other comprehensive income
(loss), net of tax - - - - 22,892 (2,915) 19,977
Cash contribution (12,706) - - - - - (12,706)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 118,589 - - - 37,850 (5,864) 150,575
Net income 270,541 - - - - - 270,541
Other comprehensive income
(loss), net of tax - - - - 37,674 (17,946) 19,728
Partnership conversion (389,130) 12,496 376,634 - - - -
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2003 - 12,496 376,634 - 75,524 (23,810) 440,844
Net income - - - 40,978 - - 40,978
Dividends declared - - - (50,663) - - (50,663)
Other comprehensive income,
net of tax - - - - 36,472 4,400 40,872
Noncash capital transaction - - (149,597) - - - (149,597)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2004 $ - $ 12,496 $227,037 $ (9,685) $111,996 $(19,410) $322,434
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
FA-7
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 22,430 $ 270,541 $ 40,978
Depreciation, depletion and amortization 16,387 20,452 23,583
Noncash interest expense 57 140 200
Deferred income taxes 2,875 (39,770) 6,178
Net loss from disposition of property and equipment 300 390 293
Pension, net (2,745) (5,021) (4,540)
Other, net 25 12 167
Change in assets and liabilities:
Accounts and notes receivable (27,322) 1,827 (3,205)
Inventories (2,678) 1,830 5,837
Prepaid expenses 25 1,107 559
Accounts payable and accrued liabilities (4,677) 3,542 13,683
Income taxes (1,164) (130,136) 126,599
Accounts with affiliates 25,616 (85,431) (82,855)
Accrued environmental costs 259 (905) -
Other noncurrent assets (222) 481 (146)
Other noncurrent liabilities (1,018) (555) (5,334)
-------- --------- --------
Net cash provided by operating activities 28,148 38,504 121,997
-------- --------- --------
Cash flows from investing activities:
Capital expenditures (15,818) (18,715) (20,396)
Loans to affiliates - collections 18,097 - -
Proceeds from disposition of property and equipment 3 4 -
-------- --------- --------
Net cash provided (used) by investing activities 2,282 (18,711) (20,396)
-------- --------- --------
FA-8
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ - $ - $ 49,984
Principal payments - - (49,984)
Loans from affiliates:
Loans - - 11,597
Repayments (12,090) - (88,656)
Cash distributions (12,706) - (50,663)
Deferred financing fees (410) - -
-------- --------- --------
Net cash used by financing activities (25,206) - (127,722)
-------- --------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing
activities 5,224 19,793 (26,121)
Currency translation 924 3,241 1,706
Balance at beginning of year 1,677 7,825 30,859
-------- --------- --------
Balance at end of year $ 7,825 $ 30,859 $ 6,444
======== ========= ========
Supplemental disclosures:
Cash paid (received) for:
Interest $ 4,463 $ 674 $ 626
Income taxes 938 (166) (132,629)
See accompanying notes to consolidated financial statements.
FA-9
KRONOS TITAN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Titan GmbH ("TG") is a wholly-owned subsidiary of Kronos
International, Inc. ("KII"). KII is a wholly-owned subsidiary of Kronos
Worldwide, Inc. (NYSE:KRO) ("Kronos"). At December 31, 2004, (i) Valhi, Inc.
(NYSE: VHI) and a wholly-owned subsidiary of Valhi held approximately 57% of
Kronos' common stock and NL Industries, Inc. (NYSE: NL) held an additional 37%
of the outstanding common stock of Kronos, (ii) Valhi and its wholly-owned
subsidiary owned 83% of NL's outstanding common stock and (iii) Contran
Corporation and its subsidiaries held approximately 91% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of 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. Consequently, Mr.
Simmons may be deemed to control each of such companies.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), with the U.S. dollar as the reporting currency. TG also
prepares financial statements on other bases, as required in Germany.
Effective December 31, 2003, Kronos Titan GmbH & Co. OHG was converted from
a partnership into a limited liability company under German law, and was renamed
TG. The conversion resulted in a reclassification of partner's capital
aggregating $389 million at the date of conversion into other capital accounts
(subscribed capital and paid-in capital) and had no material effect on TG's
consolidated financial statements, other than with respect to deferred income
taxes. See Note 10. In 2004, the Company forgave a $150 million receivable from
KII which is reflected as a noncash capital transaction in the accompanying
Consolidated Statement of Partners' Capital/Owners' Equity.
TG is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and therefore is not subject to the SEC's periodic reporting
requirements, except as may be required by Rule 3-16 of Regulation S-X.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates The accompanying
consolidated financial statements include the accounts of TG and its
wholly-owned subsidiary (collectively, the "Company"). All material intercompany
accounts and balances have been eliminated. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ from previously estimated amounts
under different assumptions or conditions. The Company has no involvement with
any variable interest entity covered by the scope of FASB Interpretation ("FIN")
No. 46R, "Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51," as amended as of March 31, 2004.
Translation of foreign currencies. The functional currency of the Company
is the euro. Assets and liabilities of the Company are translated to U.S.
dollars at year-end rates of exchange and revenues and expenses are translated
at weighted average exchange rates prevailing during the year. Resulting
translation adjustments are included in other comprehensive income (loss), net
of related income taxes, if applicable. Currency transaction gains and losses
are recognized in income currently.
FA-10
Derivatives and hedging activities. Derivative instruments 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 is dependent
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, as amended, the Company exempted from the scope of
SFAS No. 133 all host contracts containing embedded derivatives which were
issued or acquired prior to January 1, 1999. See Note 14.
Cash equivalents. Cash equivalents include bank deposits with original
maturities of three months or less.
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 the accounts.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for obsolete or
slow-moving inventories. Amounts are removed from inventories at average cost.
Cost of sales includes costs for materials, packaging and finishing, utilities,
salary and benefits, maintenance and depreciation.
Property, equipment, depreciation and depletion. Property and equipment are
stated at cost. Interest costs related to major, long-term capital projects are
capitalized as a component of construction costs. Expenditures for maintenance,
repairs and minor renewals are expensed; expenditures for major improvements are
capitalized. The Company performs planned major maintenance activities
throughout the year. Repair and maintenance costs estimated to be incurred in
connection with planned major maintenance activities, consisting primarily of
materials and supplies, are accrued in advance and are included in cost of goods
sold. At December 31, 2004, accrued repair and maintenance costs, included in
other current liabilities, was $3.2 million (2003 - $3.3 million).
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to forty years for buildings and three to twenty
years for machinery and equipment.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company accounts for the impairment of its property and equipment
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144.
Deferred financing costs. Deferred financing costs are amortized over the
term of the applicable issue by the interest method.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 8.
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
FA-11
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 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 $25,000 in 2002, $12,000 in 2003 and $167,000 in 2004.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
Years ended December 31,
-------------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net income - as reported $22,430 $270,541 $ 40,978
Adjustments, net of applicable income
tax effects:
Stock-based employee compensation
expense determined under APBO No. 25 21 10 102
Stock-based employee compensation
expense determined under SFAS No. 123 (21) (9) (4)
------- -------- --------
Pro forma net income $22,430 $270,542 $ 41,076
======= ======== ========
Environmental remediation costs. Environmental remediation costs are
accrued when estimated future expenditures are probable and reasonably
estimable. The estimated future expenditures are generally not discounted to
present value. Recoveries of remediation costs from other parties, if any, are
reported as receivables when their receipt is deemed probable. At December 31,
2003 and 2004, no receivables for recoveries have been recognized.
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.
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.
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 salary and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $15.1 million in 2002, $19.8 million
in 2003 and $22.3 million in 2004.
Income taxes. As a partnership under German law during 2002 and 2003, TG
was not subject to corporate income taxes, but was subject to trade income
FA-12
taxes. Deferred trade income tax assets and liabilities were recognized for the
expected future tax consequences of temporary differences between the trade
income tax and financial reporting carrying amounts of assets and liabilities.
Effective December 31, 2003, the Company was converted from a partnership to a
limited liability company. See Note 10. Subsequent to that date, the Company is
subject to the German corporation tax, with a statutory rate of 25%, in addition
to solidarity-surcharge of 5.5% of corporate income tax and trade income taxes.
The Company periodically evaluates its deferred trade income tax assets and
adjusts any related valuation allowance.
Note 3 - Accounts and notes receivable:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Trade receivables $ 62,225 $ 71,914
Insurance claims receivable 9 12
Recoverable VAT and other receivables 5,800 6,046
Allowance for doubtful accounts (1,469) (1,240)
--------- ---------
$ 66,565 $ 76,732
========= =========
Note 4 - Inventories:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Raw materials $ 13,424 $ 20,379
Work in process 14,169 10,173
Finished products 57,267 55,349
Supplies 15,273 15,949
--------- ---------
$ 100,133 $ 101,850
========= =========
Note 5 - Accounts payable and accrued liabilities:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Accounts payable $ 29,886 $ 39,732
Accrued liabilities:
Employee benefits 13,180 15,957
Waste acid recovery 8,187 9,598
Other 9,999 11,665
--------- ---------
$ 61,252 $ 76,952
========= =========
Note 6 - Long-term debt:
In June 2002 the Company and KII's operating subsidiaries in Belgium and
Norway (Kronos Europe S.A./N.V.-"KEU", Kronos Titan A/S - "TAS" and Titania A/S
- "TIA"), referred to as the "Borrowers", entered into a three-year euro 80
million secured revolving credit facility ("Credit Facility"). During 2004,
Kronos Norge A/S, the parent company of TAS and TIA, and Kronos Denmark ApS, the
parent company of both Kronos Norge and KEU, were added as Borrowers under the
Credit Facility. Borrowings may be denominated in multiple currencies, including
U.S. dollars, euros and Norwegian kroner, and bear interest at the applicable
interbank market rate plus 1.75%. As of December 31, 2004, the Company had no
amounts outstanding under the Credit Facility. However at December 31, 2004, KEU
had borrowed a net euro 10 million ($13.6 million) under the Credit Facility. At
December 31, 2004, euro 68 million ($92.6 million) was available for borrowing
by the Borrowers.
FA-13
The Credit Facility is collateralized by accounts receivable and inventory
of certain of the Borrowers, plus a limited pledge of certain other assets of
the Belgian operating subsidiary. The Credit Facility contains, among others,
various restrictive covenants, including restrictions on incurring liens, asset
sales, additional financial indebtedness, mergers, investments and acquisitions,
transactions with affiliates and dividends. The Company, KEU and Kronos Denmark
are unconditionally jointly and severally liable for any and all outstanding
borrowings under the Credit Facility. TAS, TIA and Kronos Norge A/S are jointly
and severally liable for any and all outstanding borrowings under the Credit
Facility to the extent permitted by Norwegian law. The Borrowers have a euro 5
million sub-limit for issuing letters of credit with euro 2 million ($3 million)
letters of credit issued at December 31, 2004. The Borrowers were in compliance
with all the covenants as of December 31, 2004.
Deferred financing costs of $1.4 million for the Credit Facility ($.4
million paid by the Company, with the remaining $1.0 million paid by KII's
Belgian and Norwegian operating subsidiaries) are being amortized over the life
of the Credit Facility and are included in other noncurrent assets as of
December 31, 2004.
In January 2004, the Company borrowed euro 40 million ($50 million, when
borrowed) under the Credit Facility at an interest rate of 3.86% and used the
proceeds to fund a $60 million dividend to KII. In February 2004, the Company
repaid the euro 40 million borrowing from proceeds collected from KEU and TAS in
settlement of outstanding intercompany balances. KEU and TAS utilized funds
borrowed under the Credit Facility, euro 26 million ($32 million when borrowed)
borrowed by KEU and euro 14 million ($18 million when borrowed) borrowed by TAS,
to settle the outstanding intercompany balances. Such amounts were repaid in the
second quarter of 2004.
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009 and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII senior secured notes (collectively
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
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, 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.
FA-14
Note 7 - Other noncurrent liabilities:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Employee benefits $ 3,962 $ 4,111
Insurance claims expense 1,112 1,362
Other 6,456 6,720
--------- ---------
$ 11,530 $ 12,193
========= =========
Note 8 - Employee benefit plans:
Company-sponsored pension plans. The Company maintains a defined benefit
pension plan and certain other benefits covering substantially all employees.
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below. The Company uses a
September 30th measurement date for their defined benefit pension plans.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
------------------------
Rate 2003 2004
---- ---- ----
Discount rate 5.3% 5.0%
Increase in future compensation levels 2.8% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 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 at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Years ended December 31,
2002 2003 2004
---- ---- ----
Rate
----
Discount rate 5.5% 5.3% 5.3%
Increase in future compensation levels 2.5% 2.8% 2.8%
Long-term return on plan assets 6.8% 6.5% 6.5%
Plan assets are comprised primarily of investments in corporate equity and
debt securities, short-term investments, mutual funds and group annuity
contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. The
accumulated benefit obligation of the Company's defined benefit pension plan was
$193.6 million at December 31, 2004 (2003 - $177.3 million). Variances from
actuarially assumed rates will change the actuarial valuation of accrued pension
liabilities, pension expense and funding requirements in future periods.
FA-15
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 2,120 $ 2,621 $ 3,289
Interest cost on projected benefit
obligation ("PBO") 8,353 9,354 10,558
Expected return on plan assets (8,210) (8,831) (9,448)
Amortization of prior service cost - - 196
Amortization of net transition obligation 210 251 69
Recognized actuarial losses 329 20 782
------- ------- -------
$ 2,802 $ 3,415 $ 5,446
======= ======= =======
The funded status of the Company's defined benefit pension plan is set
forth below.
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Change in PBO:
Beginning of year $ 160,871 $ 205,440
Service cost 2,621 3,289
Interest 9,354 10,558
Participant contributions 1,156 1,206
Plan amendments 3,200 -
Actuarial losses 6,398 4,968
Benefits paid (10,947) (12,442)
Change in currency exchange rates 32,787 19,289
--------- ---------
End of year $ 205,440 $ 232,308
--------- ---------
Change in fair value of plan assets:
Beginning of year $ 112,674 $ 116,275
Actual return on plan assets (15,643) 10,026
Employer contributions 8,919 10,432
Participant contributions 1,156 1,206
Benefits paid (10,947) (12,442)
Change in currency exchange rates 20,116 11,422
--------- ---------
End of year $ 116,275 $ 136,919
--------- ---------
Funded status at year end:
Plan assets less than PBO $ (89,165) $ (95,389)
Unrecognized actuarial loss 68,627 79,381
Unrecognized prior service cost 3,566 3,672
Unrecognized net transition obligation 70 -
--------- ---------
$ (16,902) $ (12,336)
========= =========
Amounts recognized in the balance sheet:
Accrued pension cost:
Current $ (7,878) $ (8,587)
Noncurrent (50,826) (45,015)
Unrecognized net pension obligations 3,636 3,672
Accumulated other comprehensive loss 38,166 37,594
--------- ---------
$ (16,902) $ (12,336)
========= =========
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
FA-16
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. The composition of the Company's plan assets is
established to satisfy the requirements of the German insurance commissioner.
The current plan asset allocation at December 31, 2004 was 23% to equity
managers, 48% to fixed income managers and 29% to real estate. The Company
regularly reviews its actual asset allocation for each of its plans, and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
At December 31, 2004, the Company expects to contribute the equivalent of
approximately $3 million to its defined benefit pension plan during 2005.
The Company expects total defined benefit pension plan expense to be
approximately $7 million in 2005. The Company expects future benefits paid from
all defined benefit pension plans to be as follows:
Amount
--------
Years ending December 31, (In thousands)
2005 $12,700
2006 12,838
2007 12,963
2008 13,088
2009 13,213
2010 to 2014 67,938
Note 9 - Other items:
Advertising costs are expensed as incurred and were $.3 million in each of
2002, 2003 and 2004.
Interest capitalized in connection with long-term capital projects was nil
in each of 2002, 2003 and 2004.
Note 10 - Income taxes:
The components of (i) the difference between the provision for income taxes
attributable to pretax income and the amounts that would be expected using the
German statutory corporation tax rate of 25% in 2002 and 2003 and 26.4% in 2004,
(ii) the provision for income taxes and (iii) the comprehensive tax provision
are presented below.
FA-17
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Pretax income $ 25,736 $ 64,871 $ 58,485
======== ========= ========
Expected tax expense $ 6,434 $ 16,218 $ 15,440
Trade income tax 2,561 11,365 7,773
German tax refund - (123,033) (2,508)
Change in deferred income tax
valuation allowance, net - - (3,146)
Organschaft adjustment - (94,079) -
No corporation tax provision
due to partnership structure (6,434) (16,218) -
Other, net 745 77 (52)
-------- --------- --------
Income tax expense (benefit) $ 3,306 $(205,670) $ 17,507
======== ========= ========
Provision for income taxes:
Current income tax expense (benefit) $ 431 (165,900) 11,329
Deferred income tax expense (benefit) 2,875 (39,770) 6,178
-------- --------- --------
$ 3,306 $(205,670) $ 17,507
======== ========= ========
Comprehensive provision (benefit) for income
taxes allocable to:
Pretax income $ 3,306 $(205,670) $ 17,507
Other comprehensive loss - pension
liabilities (732) (5,331) (8,081)
-------- --------- --------
$ 2,574 $(211,001) $ 9,426
======== ========= ========
The components of the net deferred tax liability are summarized below.
FA-18
December 31,
--------------------------------------------------
2003 2004
------------------------ -----------------------
Assets Liabilities Assets Liabilities
------- ------------ ------ -----------
(In millions)
Tax effect of temporary differences
relating to:
Inventories $ - $ (1,407) $ - $ (1,816)
Property and equipment 38,400 - 38,327 -
Accrued (prepaid) pension cost 6,690 (22,716) 14,770 (27,598)
Other taxable differences - (2,880) - (7,518)
Tax loss and tax credit carryforwards 338 - - -
-------- --------- -------- --------
Gross deferred tax assets (liabilities) 45,428 (27,003) 53,097 (36,932)
Reclassification, principally netting by
tax jurisdiction (25,596) 25,596 (35,020) 35,020
-------- --------- -------- --------
Net total deferred tax liabilities 19,832 (1,407) 18,077 (1,912)
Net current deferred tax liabilities - (1,407) - (1,912)
-------- --------- -------- --------
Net noncurrent deferred tax liabilities $ 19,832 $ - $ 18,077 $ -
======== ========= ======== ========
The Company's has no deferred income tax valuation allowance as of December
31, 2003 and 2004.
Certain of the Company's tax returns are being examined and the German tax
authorities may propose tax deficiencies, including penalties and interest.
No assurance can be given that the Company's tax matters will be favorably
resolved due to 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 the Company's
consolidated financial position, results of operations or liquidity.
During 2002 and 2003, the Company's legal form was as a partnership. As a
partnership, the Company was not subject to corporation tax, although the
Company was subject to trade income tax. Effective December 31, 2003, the
Company was converted to a limited liability company and will also be subject to
the German corporation tax in years following 2003. As a result of the
conversion of the Company from a partnership, the Company recognized net
deferred income tax assets of approximately $52 million related to the expected
future tax consequences of temporary differences between the corporate income
tax and financial reporting carrying amounts of its assets and liabilities.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. The Company was 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 the Company of euro 103.2 million ($123.0 million) and the Company
recognized the benefit for these net funds in its 2003 results of operations.
For the year ended December 31, 2004, the Company recognized a refund of euro
4.0 million ($5.3 million) related to additional net interest which has accrued
on the outstanding refund amount. Through December 2004, TG had received net
refunds of euro 107.2 million ($135.4 million when received). All refunds
FA-19
relating from the periods 1990 to 1997 were received by December 31, 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.
Pursuant to the Company's conversion to a limited liability company
effective December 31, 2003, the Company is included in KII's Organschaft
effective January 1, 2004.
Note 11 - 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, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate, such transactions. Depending upon the business,
tax and other objectives then relevant, and restrictions under the KII
indenture, the Credit Facility and other agreements, it is possible that the
Company might be a party to one or more such transactions in the future.
The Company is a party to services and cost sharing agreements among
several affiliates of the Company whereby Kronos, KII, KEU and other affiliates
provide certain management, financial, insurance and administrative services to
the Company on a fee basis. The Company's expense was approximately $5.7 million
in 2002, $7.1 million in 2003 and $7.8 million in 2004 related to these services
and costs.
The Company charges affiliates for certain management, financial and
administrative services costs, which totaled approximately $3.4 million, $4.3
million, and $4.4 million in 2002, 2003 and 2004, respectively. These charges to
affiliates were reflected primarily as a reduction of selling, general and
administrative expense.
The Company is also party to master global insurance coverage policies with
NL with regard to property, business interruption, excess liability, and other
coverages. Tall Pines, Valmont Insurance Company (which merged into Tall Pines
in December 2004, with Tall Pines surviving the merger) and EWI RE, Inc. ("EWI")
provide for or broker certain insurance policies for Contran and certain of its
subsidiaries and affiliates, including KII, Kronos and the Company. Tall Pines
is wholly owned by a subsidiary of Valhi, and EWI is a wholly-owned subsidiary
of NL. 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 costs associated with these policies
aggregated $5.6 million, $4.1 million and $4.0 million in 2002, 2003 and 2004,
respectively.
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
FA-20
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 its affiliates, including Kronos, 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 uninsured loss.
The Company purchases from and sells to its affiliates a significant amount
of titanium dioxide pigments ("TiO2"). Intercompany sales to (purchases from)
affiliates of TiO2 are summarized in the following table.
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Sales to:
Kronos (US), Inc. ("KUS") $ 24,511 $ 37,550 $ 21,448
Societe Industrielle du Titane, S.A. ("SIT") 23,681 32,969 39,091
KEU 19,141 22,417 23,872
Kronos Limited ("KUK") 16,864 22,151 18,677
Kronos Canada, Inc. ("KC") 4,494 5,026 5,414
Other affiliates 10,564 29,200 41,052
-------- -------- --------
$ 99,255 $149,313 $149,554
======== ======== ========
Purchases from:
KEU $ 26,868 $ 33,061 $ 42,836
TAS 3,209 5,722 10,796
KC - - 271
-------- -------- --------
$ 30,077 $ 38,783 $ 53,903
======== ======== ========
KUS purchases the rutile and slag feedstock used as a raw material in the
Company's chloride process TiO2 facility. The Company purchases such feedstock
from KUS for use in its facility for an amount equal to the amount paid by KUS
to the third-party supplier plus a 2.5% administrative fee. Such feedstock
purchases were $64.3 million in 2002, $56.2 million in 2003 and $66.7 million in
2004.
The Company sells water treatment chemicals (derived from co-products of
the TiO2 production processes) to KII. Such water treatment chemical sales were
$8.4 million in 2002, $12.8 million in 2003 and $15.9 million in 2004.
The Company purchases ilmenite (sulfate feedstock) from TIA on a
year-to-year basis. Such feedstock purchases were $13.4 million in 2002, $15.5
million in 2003 and $17.4 million in 2004.
At January 1, 2002, the Company was party to an accounts receivable
factoring agreement with KII pursuant to which the Company factored its export
accounts receivable without recourse to KII for a fee of 0.85%. KII, upon
non-recourse transfer from the Company, assumed all risk pertaining to the
factored receivables, including, but not limited to, exchange control risks,
risks pertaining to the bankruptcy of a customer and risks related to late
payments. Effective June 2002, this factoring agreement was terminated, and
certain European affiliates of the Company commenced factoring their export
accounts receivables to the Company on similar terms. Export receivables sold to
KII during 2002 aggregated $59 million, and export receivables purchased by the
Company during 2003 and 2004 aggregated $108 million and $129 million,
respectively.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
FA-21
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Receivable from:
KUK $ 886 $ 862
TAS 15,533 -
SIT - 1,632
KEU 32,342 -
Kronos B.V. - 2,055
KII 31,974 25,032
KC 92 1,496
Other affiliates 1,339 1,278
-------- --------
$ 82,166 $ 32,355
======== ========
Current payable to:
KII - income taxes $ - $ 14,386
KUS 5,856 5,390
TIA 6,631 8,817
Kronos B.V. 8,609 -
KEU - 4,456
TAS - 2,139
Other affiliates 589 72
-------- --------
$ 21,685 $ 35,260
======== ========
Noncurrent receivable from TAS $ - $ 5,449
======== ========
Noncurrent payables to:
KII $ 89,710 $ -
KDK - 12,941
-------- --------
$ 89,710 $ 12,941
======== ========
Such amounts receivable from affiliates were generally related to product
sales (including water treatment chemical sales to KII) and services rendered.
Amounts payable to affiliates, net were related primarily to raw material
purchases, accounts receivable factoring and services received.
The noncurrent euro-denominated note payable to KII was established prior
to 2002 during a recapitalization of the Company. The note payable (euro 71.8
million, or $89.7 million and nil, at December 31, 2003 and 2004, respectively)
bore interest through 2002 at EURIBOR plus 1% (4.30% at December 31, 2002). This
note was fully repaid in October 2004.
The Company borrowed euro 9.5 million from KDK in October 2004 ($12.9
million at December 31, 2004). This note bears an interest rate of 2.675% and is
due on June 30, 2005, with an option to renew.
The Company loaned TAS euro 4 million ($5.4 million) all of which was
outstanding at December 31, 2004. This note receivable bears interest at 3.1%
and is due on March 31, 2005.
Interest expense to affiliates related to the note payable to KII was $3.7
million in 2002, and nil in 2003 and 2004. Interest income from affiliates
related to a note receivable from KEU, repaid in June 2002, $.6 million in 2002.
Included in other affiliate income and other affiliate expense was other
affiliate interest income/expense, factoring fees and service fees.
FA-22
Note 12 - NL common stock options held by employees of the Company:
At December 31, 2004, employees of the Company held options to purchase
approximately 14,000 shares of NL common stock, of which 5,000 were granted in
2000 and are exercisable at various dates through 2010 at an exercise price of
$5.63 per share, and 9,000 were granted in 2001 and are exercisable at various
dates through 2011 at an exercise price of $11.49 per share.
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Notes 2 and 15. No options were granted during 2002, 2003 or 2004. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
Note 13 - Commitments and contingencies:
Operating leases. The Company leases, pursuant to operating leases, various
manufacturing facilities and equipment. Most of the leases contain purchase
and/or various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases.
The Company leases the land under its Leverkusen TiO2 production facility
pursuant to a lease expiring in 2050. The Leverkusen facility, with
approximately two-thirds of the Company's 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 ownership and use of the Leverkusen facility.
Net rent expense aggregated $4 million in 2002, $5 million in 2003 and $4
million in 2004. At December 31, 2004, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
Amount
-------------------
(in thousands)
Years ending December 31,
2005 $ 2,173
2006 1,357
2007 1,259
2008 1,150
2009 1,093
2010 and thereafter 20,736
-------
$27,768
=======
Approximately $25.3 million of the $27.8 million aggregate future minimum
rental commitments at December 31, 2004 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, 2004.
Capital expenditures. At December 31, 2004 the estimated cost to complete
capital projects in process approximated $3.9 million.
Purchase commitments. KUS has long-term supply contracts that provide for
certain affiliates' chloride feedstock requirements through 2009. The Company
purchases chloride feedstock underlying these long-term supply contracts from
KUS. The agreements require KUS to purchase certain minimum quantities of
feedstock with minimum purchase commitments aggregating approximately $525
million at December 31, 2004.
FA-23
Environmental, product liability and litigation matters. The Company's
operations are governed by various environmental laws and regulations. Certain
of the Company's operations 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
maintain compliance with applicable environmental laws and regulations at all of
its facilities and to strive to improve its environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Concentrations of credit risk. Sales of TiO2 accounted for more than 97% of
net sales during each of 2002, 2003 and 2004. The remaining sales result from
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, as well as fibers, rubber, ceramics, inks and
cosmetics markets. 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 1,000 customers, with
the top ten external customers approximating 20% of net sales in each of 2002
and 2003 and 22% of net sales in 2004. Approximately 75% of the Company's TiO2
sales by volume were to Europe in 2002, 68% in 2003 and 78% in 2004.
Approximately 8% in 2002, 12% in 2003 and 7% in 2004 of sales by volume were to
North America.
Note 14 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31,
-------------------------------------------------------
2003 2004
------------------------ ---------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- ------
(In millions)
Cash and cash equivalents $30.9 $30.9 $ 6.4 $ 6.4
Note payable to affiliate 89.7 89.7 12.9 12.9
The Company periodically uses currency forward contracts to manage foreign
exchange rate risk associated with anticipated transactions denominated in a
currency other than the euro. The Company has not entered into these contracts
for trading or speculative purposes in the past, nor does the Company currently
anticipate entering into such contracts for trading or speculative purposes in
the future. To manage such exchange rate risk, at December 31, 2003 the Company
held a contract maturing on January 2, 2004 to exchange an aggregate of euro 40
million for an equivalent amount of U.S. dollars at an exchange rate of $1.2496
U.S. dollars per euro. At December 31, 2003, the actual exchange rate was equal
to the contract rate. The contract was closed on January 2, 2004 at an
immaterial loss.
The Company periodically uses interest rate swaps, currency swaps and other
types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
FA-24
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 2002, 2003 and 2004.
Other than as described above, the Company was not a party to any material
derivative financial instruments during 2002, 2003 or 2004. There was no impact
on the Company's financial statements from adopting SFAS No. 133.
Note 15- Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment",
as of July 1, 2005. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Scholes or a lattice model). Under the transition
alternatives permitted under SFAS No. 123R, the Company will apply the new
standard to all new awards granted on or after July 1, 2005, and to all awards
existing as of June 30, 2005 which are subsequently modified, repurchased or
cancelled. Additionally, as of July 1, 2005, the Company will be required to
recognize compensation cost for the portion of any non-vested award existing as
of June 30, 2005 over the remaining vesting period. Because the Company has not
granted any options to purchase its common stock and is not expected to grant
any options prior to July 1, 2005, and because the number of non-vested awards
as of June 30, 2005 with respect to options granted by NL to employees of the
Company is not expected to be material, the effect of adopting SFAS No. 123R is
not expected to be significant in so far as it relates to existing stock
options. Should the Company or one of its affiliates, however, grant a
significant number of options in the future to employees of the Company, the
effect on the Company's consolidated financial statements could be material.
FA-25
KRONOS DENMARK APS AND SUBSIDIARIES
Index of Consolidated Financial Statements
Financial Statements
Pages
Report of Independent Registered Public Accounting Firm FB-2
Consolidated Balance Sheets - December 31, 2003 and 2004 FB-3
Consolidated Statements of Income - Years ended
December 31, 2002, 2003 and 2004 FB-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2002, 2003 and 2004 FB-6
Consolidated Statements of Stockholder's Equity -
Years ended December 31, 2002, 2003 and 2004 FB-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004 FB-8
Notes to Consolidated Financial Statements FB-10
FB-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Kronos Denmark ApS:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kronos Denmark ApS and Subsidiaries at December 31, 2003 and 2004,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with 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 30, 2005
FB-2
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except share data)
2003 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 4,681 $ 3,566
Restricted cash 1,313 1,529
Accounts and notes receivable 15,605 18,422
Receivable from affiliates 1,987 16,029
Refundable income taxes 587 1,542
Inventories 66,156 65,282
Prepaid expenses 834 908
Deferred income taxes 26 -
-------- --------
Total current assets 91,189 107,278
-------- --------
Other assets:
Note receivable from affiliate - 12,941
Other 7,387 7,013
-------- --------
Total other assets 7,387 19,954
-------- --------
Property and equipment:
Land 17,568 19,236
Buildings 37,025 41,196
Machinery and equipment 168,549 190,748
Mining properties 63,700 72,384
Construction in progress 237 3,443
-------- --------
287,079 327,007
Less accumulated depreciation and amortization 171,338 200,873
-------- --------
Net property and equipment 115,741 126,134
-------- --------
$214,317 $253,366
======== ========
FB-3
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except share data)
2003 2004
---- ----
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 288 $ 13,792
Accounts payable and accrued liabilities 31,536 38,776
Payable to affiliates 39,661 10,142
Income taxes 5,411 6,427
Deferred income taxes 2,030 2,363
--------- --------
Total current liabilities 78,926 71,500
--------- --------
Noncurrent liabilities:
Long-term debt 315 178
Note payable to affiliate - 5,449
Deferred income taxes 23,320 22,358
Accrued pension costs 1,191 2,493
Other 1,555 3,484
--------- --------
Total noncurrent liabilities 26,381 33,962
--------- --------
Stockholder's equity:
Common stock - 100 Danish kroner par value;
10,000 shares authorized; 10,000 shares
issued and outstanding 136 136
Additional paid-in capital 216,996 216,996
Accumulated deficit (93,459) (69,643)
Accumulated other comprehensive loss:
Currency translation adjustment (4,204) 9,686
Minimum pension liability (10,459) (9,271)
--------- --------
Total stockholder's equity 109,010 147,904
--------- --------
$ 214,317 $253,366
========= ========
Commitments and contingencies (Notes 7, 9 and 12)
See accompanying notes to consolidated financial statements.
FB-4
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net sales $ 243,412 $ 292,611 $ 345,962
Cost of sales 206,690 234,881 284,902
--------- --------- ---------
Gross margin 36,722 57,730 61,060
Selling, general and administrative expense 17,406 19,596 23,874
Other operating income (expense):
Currency transaction gains (losses), net 399 355 980
Disposition of property and equipment (239) 37 (596)
Other, net 176 350 286
--------- --------- ---------
Income from operations 19,652 38,876 37,856
Other income (expense):
Trade interest income 231 163 73
Interest and other expense to affiliates (2,938) (2,608) (2,943)
Interest and other income from affiliates 325 198 202
Interest expense (2,548) (2,309) (1,529)
--------- --------- ---------
Income before income taxes 14,722 34,320 33,659
Provision for income taxes 3,378 7,428 9,843
--------- --------- ---------
Net income $ 11,344 $ 26,892 $ 23,816
========= ========= =========
FB-5
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net income $ 11,344 $ 26,892 $ 23,816
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Currency translation adjustment 17,081 10,998 13,890
Minimum pension liability - (10,459) 1,188
--------- --------- ---------
Total other comprehensive income 17,081 539 15,078
--------- --------- ---------
Comprehensive income $ 28,425 $ 27,431 $ 38,894
========= ========= =========
FB-6
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Accumulated other
comprehensive income (loss)
----------------------------
Additional Currency Minimum
Common paid-in Accumulated translation pension
stock capital deficit adjustment liability Total
------ ----------- ----------- ----------- --------- -----
Balance at December 31, 2001 $ 136 $ 216,996 $(118,335) $ (32,283) $ - $ 66,514
Net income - - 11,344 - - 11,344
Other comprehensive income,
net of tax - - - 17,081 - 17,081
Common dividends declared - - (13,360) - - (13,360)
------ --------- --------- --------- -------- --------
Balance at December 31, 2002 136 216,996 (120,351) (15,202) - 81,579
Net income - - 26,892 - - 26,892
Other comprehensive income (loss),
net of tax - - - 10,998 (10,459) 539
------ --------- --------- --------- -------- --------
Balance at December 31, 2003 136 216,996 (93,459) (4,204) (10,459) 109,010
Net income - - 23,816 - - 23,816
Other comprehensive income,
net of tax - - - 13,890 1,188 15,078
------ --------- --------- --------- -------- --------
Balance at December 31, 2004 $ 136 $ 216,996 $ (69,643) $ 9,686 $ (9,271) $147,904
====== ========= ========= ========= ======== ========
FB-7
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 11,344 $ 26,892 $ 23,816
Depreciation and amortization 9,408 11,446 12,041
Noncash interest expense 150 332 358
Deferred income taxes (2,011) (5,405) (2,983)
Net loss (gain) from disposition of
property and equipment 239 (37) 596
Pension, net 1,132 2,278 4,372
Change in assets and liabilities:
Accounts and notes receivable (1,307) 437 (967)
Inventories 1,377 (2,250) 6,500
Prepaid expenses 909 143 17
Accounts payable and accrued liabilities 5,098 4,107 3,130
Income taxes (1,542) (2,902) (453)
Accounts with affiliates 19,152 10,403 (37,220)
Other noncurrent assets 263 (4,181) 2,257
Other noncurrent liabilities (73) 547 (1,420)
-------- -------- ---------
Net cash provided by operating activities 44,139 41,810 10,044
-------- -------- ---------
Cash flows from investing activities:
Capital expenditures (10,329) (10,274) (11,725)
Loans to affiliates - - (11,597)
Change in restricted cash equivalents and restricted (70)
marketable debt securities, net (2,891) (554)
Proceeds from disposition of property and equipment 823 350 100
-------- -------- ---------
Net cash used by investing activities (12,397) (10,478) (23,292)
======== ======== =========
FB-8
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 55,727 $ 16,106 $ 62,140
Principal payments (58,117) (46,006) (50,089)
Deferred financing fees (953) - -
Loans from affiliates - repayments (18,097) - -
Dividends paid (13,360) - -
--------- --------- ---------
Net cash provided (used) by financing activities (34,800) (29,900) 12,051
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing
activities (3,058) 1,432 (1,197)
Currency translation 541 336 82
Balance at beginning of period 5,430 2,913 4,681
--------- --------- ---------
Balance at end of period $ 2,913 $ 4,681 $ 3,566
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest $ 5,461 $ 4,638 $ 4,198
Income taxes 6,931 11,525 13,331
See accompanying notes to consolidated financial statements.
FB-9
KRONOS DENMARK APS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Denmark ApS ("KDK") was incorporated in Denmark in October 1999 and
is a wholly-owned subsidiary of Kronos International, Inc. ("KII"). KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc. (NYSE:KRO). At December 31,
2004, (i) Valhi, Inc (NYSE: VHI) and a wholly-owned subsidiary owned
approximately 57% of Kronos' common stock and NL Industries, Inc. (NYSE: NL)
held an additional 37% of the outstanding common stock of Kronos, (ii) Valhi and
its wholly-owned subsidiary owned 83% of NL's outstanding common stock and (iii)
Contran Corporation and its subsidiaries held approximately 91% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of 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.
Consequently, Mr. Simmons may be deemed to control each of such companies.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") with the U.S. dollar as the reporting currency. KDK and its
subsidiaries also prepare financial statements on other bases, as required in
countries in which such entities are resident.
KDK's current operations are conducted primarily through its Belgian and
Norwegian subsidiaries with a titanium dioxide pigments ("TiO2") plant in
Belgium and a TiO2 plant and ilmenite ore mining operation in Norway. KDK also
operates TiO2 sales and distribution facilities in Denmark and the Netherlands.
KDK is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and is not subject to the SEC's periodic reporting requirements, except
as may be required by Rule 3-16 of Regulation S-X.
Note 2 - Summary of significant accounting policies:
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("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 KDK and its wholly-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated. The Company has no involvement with any variable interest entity
covered by the scope of FASB Interpretation ("FIN") No. 46R, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51.," as amended as of
March 31, 2004.
Translation of foreign currencies. The functional currencies of the Company
include the Danish kroner, the euro and the Norwegian kroner. 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
FB-10
are translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholder's equity as part of
accumulated other comprehensive income, net of related deferred income taxes.
Currency transaction gains and losses are recognized in income currently.
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, as amended, 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.
Cash and cash equivalents. Cash equivalents include bank deposits with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.6
million and $2.9 million at December 31, 2003 and 2004, 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.
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
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.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. 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 other current liabilities and
consisting primarily of materials and supplies, was $1.1 million and $600,000 at
December 31, 2003 and 2004, 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 2002, 2003 or 2004.
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
FB-11
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. The Company assesses 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," which among
other things provided certain implementation guidance in relation to prior GAAP.
See Note 14.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 8.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities,
including investments in the Company's subsidiaries and affiliates who are not
members of the Contran Tax Group and 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.
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, packaging and finishing, utilities, salary and
benefits, maintenance and depreciation.
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 $9.2 million in 2002, $11.2 million
in 2003 and $13.1 million in 2004. Advertising costs are expensed as incurred
and were approximately $100,000 in each of 2002, 2003 and 2004. Research,
development and certain sales technical support costs are expensed as incurred
and approximated $300,000 in each of 2002 and 2003 and $200,000 in 2004.
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
FB-12
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. Compensation cost recognized by the Company
in accordance with APBO No. 25 and the amount charged to the Company by NL for
stock option exercises was $126,000 in 2002, $117,000 in 2003 and $319,000 in
2004.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands except per share amounts)
Net income - as reported $11,344 $26,892 $23,816
Adjustments, net of applicable income tax
effects:
Stock-based employee compensation
expense determined under APBO No. 25 75 77 223
Stock-based employee compensation
expense determined under SFAS No. 123 (79) (38) (8)
------- ------- -------
Pro forma net income $11,340 $26,931 $24,031
======= ======= =======
Note 3 - Accounts and notes receivable:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Trade receivables $13,117 $15,487
Recoverable VAT and other receivables 2,510 2,960
Allowance for doubtful accounts (22) (25)
------- -------
$15,605 $18,422
======= =======
FB-13
Note 4 - Inventories:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Raw materials $16,793 $13,804
Work in process 1,454 2,871
Finished products 32,943 31,725
Supplies 14,966 16,882
------- -------
$66,156 $65,282
======= =======
Note 5 - Other noncurrent assets:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Unrecognized net pension obligations $ 4,176 $ 3,852
Restricted marketable debt securities 2,586 2,877
Deferred financing costs, net 542 198
Other 83 86
------- -------
$ 7,387 $ 7,013
======= =======
Note 6 - Accounts payable and accrued liabilities:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Accounts payable $16,609 $21,695
------- -------
Accrued liabilities:
Employee benefits 8,786 10,462
Other 6,141 6,619
------- -------
14,927 17,081
------- -------
$31,536 $38,776
======= =======
Note 7 - Notes payable and long-term debt:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Long-term debt:
Bank credit facility $ - $ 13,622
Other 603 348
------- -------
603 13,970
Less current maturities 288 13,792
------- -------
$ 315 $ 178
======= =======
In June 2002 the Company's operating subsidiaries in Belgium ("KEU") Norway
("TAS" and "TIA") and KII's operating subsidiary in Germany ("TG"), referred to
as the "Borrowers" entered into a three-year euro 80 million secured revolving
bank credit facility ("Credit Facility"). Borrowings may be denominated in
FB-14
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 (euro 2 million, or $3 million, issued at
December 31, 2004). The Credit Facility is collateralized by the accounts
receivable and inventories of the borrowers, plus a limited pledge of all of the
other assets of KEU. The 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 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, 2004, euro 10 million ($13.6 million) were outstanding under the Credit
Facility. At December 31, 2004, euro 68.0 million ($92.6 million) was available
for borrowing by the Borrowers.
Deferred financing costs of $1.4 million for the Credit Facility ($1.0
million paid by the Company, with the remaining $.4 million paid by the German
operating subsidiary) are being amortized over the life of the Credit Facility
and are included in other noncurrent assets as of December 31, 2004.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $94.3 million at December 31, 2004.
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009, and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII Senior Secured Notes (collectively
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
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.
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 Credit Facility, any
outstanding borrowings under the 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). The
Credit Facility contains provisions that allow the lender to accelerate the
maturity of the Credit Facility in the event of a change of control, as defined,
of the applicable borrower. In the event any of these cross-default or
change-of-control provisions become applicable, and such indebtedness is
accelerated, KII would be required to repay such indebtedness prior to their
stated maturity.
FB-15
The aggregate maturities of long-term debt at December 31, 2004 are shown
in the table below.
Amount
(In thousands)
Years ending December 31,
-------------------------
2005 $13,792
2006 159
2007 19
-------
$13,970
=======
Note 8 - Employee benefit plans:
The Company maintains various defined benefit pension plans. Personnel are
covered by plans in their respective countries. Variances from actuarially
assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods. In 2002
the Company amended its defined benefit pension plans for KEU, TAS and TIA to
exclude the admission of new employees to the plans. New employees at these
locations are eligible to participate in Company-sponsored defined contribution
plans. The Company's expense related to the Company-sponsored defined
contribution plans was not material in 2003 or 2004. At December 31, 2004, the
Company expects to contribute the equivalent of approximately $1.4 million to
its defined benefit pension plans during 2005.
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below. The Company uses a
September 30th measurement date for their defined benefit pension plans.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
---------------------
2003 2004
---- ----
Discount rate 5.5% 5.0%
Increase in future compensation levels 3.0% 3.0%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 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.
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
Discount rate 6.0% 5.9% 5.5%
Increase in future compensation levels 3.0% 3.0% 3.0%
Long-term return on plan assets 6.9% 7.0% 6.0%
Plan assets are comprised primarily of investments in corporate equity and
debt securities, short-term investments, mutual funds and group annuity
contracts.
FB-16
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 1,264 $ 1,430 $ 2,096
Interest cost on projected benefit 3,436
obligation ("PBO") 2,508 2,907
Expected return on plan assets (2,660) (3,335) (2,815)
Amortization of prior service cost 223 255 267
Amortization of net transition obligation 140 296 321
Recognized actuarial losses 668 732 1,428
------- ------- -------
$ 2,143 $ 2,285 $ 4,733
======= ======= =======
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Change in PBO:
Beginning of year $ 50,061 $ 64,161
Service cost 1,430 2,096
Interest 2,907 3,436
Participant contributions 135 152
Actuarial gains (losses) 10,745 (1,891)
Benefits paid (4,736) (2,674)
Change in currency exchange rates 3,619 7,081
-------- --------
End of year $ 64,161 $ 72,361
-------- --------
Change in fair value of plan assets:
Beginning of year $ 47,324 $ 49,540
Actual return on plan assets 2,943 3,881
Employer contributions 1,223 1,170
Participant contributions 135 152
Benefits paid (4,736) (2,674)
Change in currency exchange rates 2,651 5,685
-------- --------
End of year $ 49,540 $ 57,754
-------- --------
Funded status at year end:
Plan assets less than PBO $(14,621) $(14,607)
Unrecognized actuarial loss 27,815 26,344
Unrecognized prior service cost 3,112 3,157
Unrecognized net transition obligation 1,223 999
-------- --------
$ 17,529 $ 15,893
======== ========
Amounts recognized in the balance sheet:
Accrued pension cost, noncurrent $ (1,174) $ (2,469)
Unrecognized net pension obligations 4,176 3,852
Accumulated other comprehensive loss 14,527 14,510
-------- --------
$ 17,529 $ 15,893
======== ========
FB-17
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The accumulated benefit obligation of the Company's defined benefit pension
plans was $60.8 million at December 31, 2004 (2003 - $51.1 million).
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. The Company currently has a plan asset target allocation
of 14% to equity managers, 62% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate of return
for such investments is approximately 8%, 4.5% to 6.5% and 2.5%, respectively.
The current plan asset allocation at December 31, 2004 was 16% to equity
managers, 64% to fixed income managers and the remainder primarily cash and
liquid investments. The Company regularly reviews its actual asset allocation
for each of its plans, and will periodically rebalance the investments in each
plan to more accurately reflect the targeted allocation when considered
appropriate.
The Company expects future benefits paid from its defined benefit plans to
be as follows:
Amount
Years ending December 31, (In thousands)
------------------------- ---------------
2005 $2,804
2006 4,046
2007 2,923
2008 4,545
2009 3,185
2010 to 2014 21,472
Note 9 - Income taxes:
The components of (i) income from continuing operations before income taxes
("pretax income"), (ii) the difference between the provision for income taxes
attributable to pretax income and the amounts that would be expected using the
Danish statutory income tax rate of 30% in 2002, 2003 and 2004, (iii) the
provision for income taxes and (iv) the comprehensive tax provision are
presented below.
FB-18
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Pretax income (loss):
Denmark $ 207 $ 170 $ (101)
Non-Denmark 14,515 34,150 33,760
------- ------- -------
$14,722 $34,320 $33,659
Expected tax expense $ 4,417 $10,296 $10,099
Non-Denmark tax rates 650 428 527
Valuation allowance 658 - -
Tax contingency reserve adjustment - (5,100) (125)
Refund of prior year taxes - - (595)
Tax on partnership income - 1,245 (358)
Rate change adjustment of deferred taxes (2,332) - -
Other, net (15) 559 295
------- ------- -------
Income tax expense $ 3,378 $ 7,428 $ 9,843
======= ======= =======
Provision for income taxes:
Current income tax expense:
Denmark $ 48 $ 63 $ 2
Non-Denmark 5,341 12,770 12,824
------- ------- -------
5,389 12,833 12,826
------- ------- -------
Deferred income tax expense (benefit):
Denmark (1) (5,104) (139)
Non-Denmark (2,010) (301) (2,844)
------- ------- -------
(2,011) (5,405) (2,983)
------- ------- -------
$ 3,378 $ 7,428 $ 9,843
======= ======= =======
Comprehensive provision for income taxes
allocable to:
Pretax income $ 3,378 $ 7,428 $ 9,843
Other comprehensive loss - pension liabilities - (4,068) 5
------- ------- -------
$ 3,378 $ 3,360 $ 9,848
======= ======= =======
FB-19
The components of the net deferred tax liability are summarized below.
December 31,
--------------------------------------------------
2003 2004
------------------------ -----------------------
Assets Liabilities Assets Liabilities
------- ------------ ------ -----------
(In millions)
Tax effect of temporary differences
relating to:
Inventories $ 26 $ (2,035) $ 61 $ (2,546)
Property and equipment 143 (18,856) 181 (20,214)
Accrued (prepaid) pension cost 4,068 (4,970) 4,063 (4,624)
Accrued liabilities and other
deductible differences 834 - 199 -
Other taxable differences - (3,851) - (3,746)
Incremental tax and rate
differences on equity in
earnings of non-tax group companies - - 1,905 -
Valuation allowance (683) - - -
------ -------- ------ --------
Gross deferred tax assets (liabilities) 4,388 (29,712) 6,409 (31,130)
Reclassification, principally netting by tax 4,362
jurisdiction (4,362) (6,409) 6,409
------ -------- ------ --------
Net total deferred tax assets
(liabilities) 26 (25,350) - (24,721)
Net current deferred tax assets
(liabilities) 26 (2,030) - (2,363)
------ -------- ------ --------
Net noncurrent deferred tax liabilities $ - $(23,320) $ - $(22,358)
====== ======== ====== ========
Changes in the Company's deferred income tax valuation allowance are
summarized below:
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Balance at beginning of year $ - $ 658 $ 683
Increase in certain deductible
temporary differences which the Company
believes do not meet the "more-likely-
than-not" recognition criteria 658 - -
Foreign currency translation - 25
Offset to the change in gross deferred
income tax assets due principally
to redeterminations of certain tax
attributes and implementation of
certain planning strategies - - (683)
---- ----- -----
Balance at end of year $658 $ 683 $ -
==== ===== =====
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.
FB-20
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 penalties
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 ($8 million at December 31, 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 9 million ($13 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response.
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2004) relating to the years 1998 to 2000. The Company has
objected 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.
Note 10 - 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, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate such transactions. Depending upon the business,
tax and other objectives then relevant, 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.
The Company is a party to services and cost sharing agreements among
several affiliates of the Company whereby Kronos, KII and other affiliates
FB-21
provide certain management, financial, insurance and administrative services to
the Company on a fee basis. The Company's expense was approximately $1.9 million
in each of 2002 and 2003 and $2.1 million in 2004 related to these services and
costs.
Tall Pines Insurance Company, Valmont Insurance Company (which merged into
Tall Pines in December 2004, with Tall Pines surviving the merger) and EWI RE,
Inc. provide for or broker certain insurance policies for Contran and certain of
its subsidiaries and affiliates, including the Company. Tall Pines is
wholly-owned by a subsidiary of Valhi, and EWI is a wholly-owned subsidiary of
NL. 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 $1.3 million in 2002,
$900,000 in 2003 and $1.1 million in 2004. 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. The Company expects
that these relationships with Tall Pines and EWI will continue in 2005.
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 its affiliates, including NL, 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 uninsured loss.
Intercompany sales to (purchases from) affiliates of TiO2 are summarized in
the following table.
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Sales to:
TG $ 30,077 $ 38,783 $ 53,631
Kronos Limited ("KUK") 17,148 18,856 25,285
Kronos (US), Inc. ("KUS") 13,189 18,792 19,180
Societe Industrielle du Titane, S.A. ("SIT") 8,924 8,138 8,868
Kronos Canada, Inc. ("KC") 3,231 4,308 2,596
-------- -------- --------
$ 72,569 $ 88,877 $109,560
======== ======== ========
Purchases from:
TG $ 29,706 $ 38,785 $ 48,808
KUS 2,553 101 3,489
KC 170 223 22
-------- -------- --------
$ 32,429 $ 39,109 $ 52,319
======== ======== ========
Sales of ilmenite to TG were $13.4 million in 2002, $15.5 million in 2003
and $17.4 million in 2004.
KUS purchases the rutile and slag feedstock used as a raw material in all
of the Company's chloride process TiO2 facilities. The Company purchases such
FB-22
feedstock from KUS for use in its facilities for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $32.9 million in 2002, $39.5 million in 2003 and $40.5
million in 2004.
Interest expense to affiliates related to a note payable to TG was $300,000
in 2002. Such note was repaid in full in 2002 and the underlying agreement was
cancelled. Included in other affiliate income and other affiliate expense was
other affiliate interest income/expense, factoring fees and service fees.
Royalties paid to KII for use of certain of KII's intellectual property
totaled $8.6 million in 2002, $10.4 million in 2003 and $12.5 million in 2004,
and was included as a component of cost of sales.
During 2002, 2003 and 2004, the Company was party to an accounts receivable
factoring agreement (the "Factoring Agreement") with one or more of its
affiliates whereby the Company factored its export accounts receivable without
recourse for a fee of 0.85% for the Company's export receivables related to
Kronos Europe S.A./N.V. ("KEU") and 1.2% for export receivables related to its
Norwegian operating subsidiaries, Kronos Titan A/S ("TAS") and Titania A/S
("TIA"). Upon non-recourse transfer from the Company, the affiliate assumed all
risk pertaining to the factored receivables, including, but not limited to,
exchange control risks, risks pertaining to the bankruptcy of a customer and
risks related to late payments. Export receivables sold by the Company pursuant
to the Factoring Agreement during 2002, 2003 and 2004 aggregated $92.0 million,
$101.4 million, and $119.9 million, respectively.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Receivable from:
SIT $ 501 $ 814
KUK 1,085 1,766
TG - 13,342
KC 401 -
Other - 107
-------- --------
$ 1,987 $ 16,029
======== ========
Noncurrent receivable from TG $ - $ 12,941
======== ========
Payable to:
KII $ 4,203 $ 4,266
KUS 2,770 5,486
TG 32,635 -
KC - 390
Other affiliates 53 -
-------- --------
$ 39,661 $ 10,142
======== ========
Noncurrent payable to TG $ - $ 5,449
======== ========
Net amounts between the Company, KUS, TG, SIT, KUK and KC were generally
related to product purchases and sales. Net amounts with TG also include
accounts receivable factoring fees.
FB-23
Note 11 - NL common stock options held by employees of the Company:
At December 31, 2004, employees of the Company held options to purchase
approximately 26,000 shares of NL common stock, of which 14,000 are exercisable
at various dates through 2010 at an exercise price ranging from $2.66 to $5.63
per share and 12,000 are exercisable at various dates through 2011 at an
exercise price of $11.49 per share.
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 2. No options were granted during 2002, 2003, or 2004. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period.
Note 12 - Commitments and contingencies:
Operating leases. The Company leases, pursuant to operating leases, various
manufacturing and office space and transportation equipment. Most of the leases
contain purchase and/or various term renewal options at fair market and fair
rental values, respectively. In most cases management expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
Net rent expense aggregated $2 million in 2002, $3 million in each of 2003
and 2004. At December 31, 2004, minimum rental commitments under the terms of
noncancellable operating leases were as follows:
Equipment
--------------
(in thousands)
Years ending December 31,
---------------------------
2005 $ 678
2006 579
2007 486
2008 489
2009 197
2010 and thereafter 159
------
$2,588
======
Long-term contracts. KUS has long-term supply contracts that provide for
certain of its affiliates', including KDK's, chloride feedstock requirements
through 2009. The Company and certain of its affiliates purchase chloride
feedstock underlying these long-term supply contracts from KUS. The agreements
require KUS to purchase certain minimum quantities of feedstock with minimum
purchase commitments aggregating approximately $525 million at December 31,
2004.
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's 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 and regulations. 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
FB-24
effort to minimize these risks. The Company's policy is to maintain compliance
with applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. 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 believes all of its plants are in
substantial compliance with applicable environmental laws.
Litigation matters. The Company's Belgian subsidiary and certain of its
employees are the subject of civil and criminal proceedings relating to an
accident that resulted in two fatalities at the Company's Belgian facility in
2000. In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against the Company and fines aggregating less than euro 40,000
against various Company employees. The Company and the individual employees have
appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses.
The Company 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 approximately
77%, 78% and 81% of net sales during 2002, 2003 and 2004, respectively. 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
certain titanium chemical products (derived from co-products of the TiO2
production process). 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 1,000 customers, with the top
ten external customers approximating 28% of net sales in 2002, 26% of net sales
in 2003 and 24% of net sales in 2004. Approximately 80% of the Company's TiO2
sales by volume were to Europe in each of 2002, 2003 and 2004. Approximately 10%
of sales by volume were to North America in each of 2002, 2003 and 2004.
Capital expenditures. At December 31, 2004, the estimated cost to complete
capital projects in process approximated $1.4 million.
Note 13 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31,
-------------------------------------------------------
2003 2004
------------------------ ---------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- ------
(In millions)
Cash, cash equivalents,
restricted cash equivalents
and noncurrent restricted
marketable debt securities $ 8.6 $ 8.6 $ 8.0 $ 8.0
Notes payable and long-term
debt - variable rate debt $ .6 $ .6 $ 14.0 $ 14.0
The Company held no derivative financial instruments during 2002, 2003 or
2004.
FB-25
Note 14 - Accounting principles recently adopted in 2002, 2003 and 2004:
Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003. Under SFAS No.
143, the fair value of a liability for an asset retirement obligation covered
under the scope of SFAS No. 143 would be recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would be accreted to its
present value, and the capitalized cost would be depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity would
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003, the Company will recognize (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 principle 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 liabilities previously accrued
for 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) and to December 31, 2004 ($1 million)
is primarily 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 Consolidated Statements of Income, approximated $100,000 for each
of the years ended December 31, 2003 and 2004.
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-26
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.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("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 that would require the Company to consolidate such entity under 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.
Note 15 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of July 1, 2005. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
FB-27
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Sholes or a lattice model). Under the transition alternatives
permitted under SFAS No. 123R, the Company will apply the new standard to all
new awards granted on or after July 1, 2005, and to all awards existing as of
June 30, 2005 which are subsequently modified, repurchased or cancelled.
Additionally, as of July 1, 2005, the Company will be required to recognize
compensation cost for the portion of any non-vested award existing as of June
30, 2005 over the remaining vesting period. Because the Company has not granted
any options to purchase its common stock and is not expected to grant any
options prior to July 1, 2005 and because the number of non-vested awards as of
June 30, 2005 with respect to options granted by NL to employees of the Company
is not expected to be material, the effect of adopting SFAS No. 123R is not
expected to be significant in so far as it relates to existing stock options.
Should the Company, however, grant a significant number of options in the
future, the effect on the Company's consolidated financial statements could be
material.
FB-28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors.
The Amended and Restated Bylaws the ("Bylaws") of Kronos International,
Inc. (the "Registrant") provide for the indemnification of a person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that the person is or was a director,
officer, employee or agent of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
entity to the fullest extent permitted by the Delaware General Corporation Law
(the "DGCL"). Each such person is specifically indemnified in the Bylaws against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful, except that, in the case of any action or suit brought by or in the
right of the Registrant, no indemnification will be made with respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the adjudicating
court determines that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses that such court deems proper.
The Registrant will pay expenses incurred by a present or former director
or officer of the Registrant in advance of the final disposition of an action,
suit or proceeding, if such person undertakes to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
Registrant.
Certain of the directors and officers of the Registrant have entered into
indemnity agreements with the registrant (the "Indemnity Agreements"), which
provide for the indemnification of such persons to the fullest extent permitted
by the DGCL.
The indemnification and expense advancement provisions in the Bylaws and
the Indemnity Agreements are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Bylaws, the Indemnity
Agreements or of other rights of indemnification or advancement of expenses
pursuant to any agreement, vote of the stockholder or directors or pursuant to
judicial direction. The Registrant is authorized to purchase insurance on behalf
of the indemnified persons for liabilities incurred, whether or not the
Registrant would have the power or obligation to indemnify such person pursuant
to the Bylaws, the Indemnity Agreements or the DGCL.
Item 21. Exhibit and Financial Statement Schedules.
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
3.1 Certificate of Incorporation of the Registrant - incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated March 15, 1989 - incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated January 1, 1999 - incorporated by reference to
Exhibit 3.3 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
II-1
3.4 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated February 8, 1999 - incorporated by reference to
Exhibit 3.4 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.5 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated December 15, 1999 - incorporated by reference
to Exhibit 3.5 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.6 Amended and Restated Bylaws of the Registrant - incorporated by
reference to Exhibit 3.6 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009,
dated as of June 28, 2002, between the Registrant and The Bank of
New York, as trustee - incorporated by reference to Exhibit 4.1
to the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit A to Exhibit 4.1) - incorporated by
reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
4.3 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit B to Exhibit 4.1) - incorporated by
reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
4.4 Purchase Agreement, dated as of June 19, 2002, among the
Registrant, Deutsche Bank AG London, Dresdner Bank AG, London
Branch, and Commerzbank Aktiengesellschaft, London Branch -
incorporated by reference to Exhibit 4.4 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.5 Purchase Agreement dated November 18, 2004 between Kronos
International, Inc. and Deutsche Bank AG London - incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K of the
Registrant dated November 24, 2004.
4.6 Form of Registration Rights Agreement as of November 26, 2004
between Kronos International, Inc. and Deutsche Bank AG London -
incorporated by reference to Exhibit 4.5 to the Current Report on
Form 8-K of the Registrant dated November 24, 2004.
4.7 Collateral Agency Agreement, dated as of June 28, 2002, among The
Bank of New York, U.S. Bank, N.A. and the Registrant (filed
herewith only with respect to Sections 2, 5, 6 and 8 thereof) -
incorporated by reference to Exhibit 4.6 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.8 Security Over Shares Agreement (shares of Kronos Limited), dated
June 28, 2002, between the Registrant and The Bank of New York,
U.S., as trustee - incorporated by reference to Exhibit 4.7 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002.
4.9 Pledge of Shares (shares of Kronos Denmark ApS), dated June 28,
2002, between the Registrant and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.8 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended
June 30, 2002.
4.10 Pledge Agreement (pledge of shares of Societe Industrielle du
Titane, S.A.), dated June 28, 2002, between the Registrant and
U.S. Bank, N.A., as collateral agent - incorporated by reference
to Exhibit 4.9 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002.
II-2
4.11 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28,
2002, between the Registrant and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.10 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002.
4.12 Recapitalization Agreement, dated as of June 5, 2002, between the
Registrant and Kronos, Inc. - incorporated by reference to
Exhibit 4.12 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
4.13 Redemption Agreement, dated as of June 6, 2002, between the
Registrant and NL Industries, Inc. - incorporated by reference to
Exhibit 4.13 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
4.14 Form of Profit Participation Certificate (English translation
from German language document) - incorporated by reference to
Exhibit 4.14 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
5.1*** Opinion of Locke Liddell & Sapp LLP.
8.1*** Opinion of Locke Liddell & Sapp LLP.
10.1 (euro)80,000,000 Facility Agreement, dated June 25, 2002, among
Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos
Titan A/S and Titania A/S, as borrowers, Kronos Titan GmbH & Co.
OHG, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors,
Kronos Denmark ApS, as security provider, Deutsche Bank AG, as
mandated lead arranger, Deutsche Bank Luxembourg S.A., as agent
and security agent, and KBC Bank NV, as fronting bank, and the
financial institutions listed in Schedule 1 thereto, as lenders -
incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
10.2 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 -
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of Kronos Worldwide, Inc. (File No.
333-119639).
10.3 Lease Contract, dated June 21, 1952, between Farbenfabriken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Annual Report
on Form 10-K of NL Industries, Inc. for the year ended December
31, 1985.
10.4 Contract on Supplies and Services, dated as of June 30, 1995,
among Bayer AG, Kronos Titan-GmbH & Co. OHG and the Registrant
(English translation from German language document) -
incorporated by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended September
30, 1995.
10.5 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).
10.6 Master Technology Exchange Agreement, dated as of October 18,
1993, among Kronos, Inc., Kronos Louisiana, Inc., the Registrant,
II-3
Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended
September 30, 1993.
10.7 Intercorporate Services Agreement, dated as of January 1, 2005,
among the Registrant, Kronos Worldwide, Inc., Kronos (US), Inc.
and Kronos Canada, Inc. - incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K for the Registrant for the
year ended December 31, 2004.
10.8 Tax Agreement, dated as of May 28, 2002, between Kronos, Inc. and
the Registrant - incorporated by reference to Exhibit 10.7 to the
Registrant's Registration Statement on Form S-4 (File No.
333-100047).
10.9 Services Agreement, dated as of January 1, 2004, among the
Registrant, Kronos Europe S.A./N.V., Kronos (US), Inc., Kronos
Titan GmbH, Kronos Denmark ApS, Kronos Canada, Inc., Kronos
Limited, Societe Industrielle Du Titane, S.A., Kronos B.V.,
Kronos Titan AS and Titania AS incorporated by reference to the
Annual Report on Form 10-K of the Registrant for the year ended
December 31, 2004.
10.10 Form of Assignment and Assumption Agreement, dated as of January
1, 1999, between Kronos, Inc. (formerly known as Kronos (USA),
Inc.) and the Registrant - incorporated by reference to Exhibit
10.9 to the Registrant's Registration Statement on Form S-4 (File
No. 333-100047).
10.11 Form of Cross License Agreement, effective as of January 1, 1999,
between Kronos, Inc. (formerly known as Kronos (USA), Inc.) and
the Registrant - incorporated by reference to Exhibit 10.10 to
the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
10.12** NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated
by reference to Appendix A to the Proxy Statement on Schedule 14A
of NL Industries, Inc. for the annual meeting of shareholders
held on May 6, 1998.
10.13** Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 of Kronos Worldwide,
Inc.'s Registration Statement on Form 10 (File No. 001-31763).
10.14** Form of Indemnity Agreement between the Registrant and the
officers and directors of the Registrant - incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
10.15* Richards Bay Slag Sales Agreement, dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos,
Inc. - incorporated by reference to Exhibit 10.17 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 1995.
10.16* Amendment to Richards Bay Slag Sales Agreement, dated May 1,
1999, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to Exhibit
10.4 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 1999.
10.17* Amendment to Richards Bay Slag Sales Agreement, dated June 1,
2001, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to Exhibit
10.5 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 2001.
10.18* Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc. - incorporated by reference to Exhibit 10.7 to
the Annual Report on Form 10-K for NL Industries, Inc. for the
year ended December 31, 2002.
II-4
10.19* Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc - incorporated by reference to Exhibit 10.17 to
Kronos Worldwide, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2003.
10.20 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
10.21 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
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.
10.22 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 Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.
10.23** Summary of Consulting Arrangement, beginning on August 1, 2003,
between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.50 to NL Industries,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
2004.
10.24 Agency Agreement, dated as of January 1, 2004, among Kronos
International, Inc., Kronos Titan GmbH, Kronos Europe S.A./N.V.,
Kronos Canada, Inc., Kronos Titan AS and Societe Industrielle Du
Titane, S.A. - incorporated by reference to Exhibit 10.24 to the
Annual Report on Form 10-K of the Registrant for the year ended
December 31, 2004.
10.25 Titanium Dioxide Products and Titanium Chemicals Distribution
Agreement, dated as of January 1, 2005, among Kronos Titan GmbH,
Kronos Europe S.A./N.V., Kronos Canada, Inc., Kronos Titan AS,
Kronos (US), Inc., Kronos Denmark ApS, Kronos Titan GmbH, Kronos
Limited, Societe Industrielle Du Titane, S.A. and Kronos B.V. -
incorporated by reference to Exhibit 10.25 to the Annual Report
on Form 10-K of the Registrant for the year ended December 31,
2004.
10.26 Raw Material Purchase and Sale Agreement, dated as of January 1,
2004, among Kronos (US), Inc., Kronos Titan GmbH, Kronos Europe
S.A./N.V. and Kronos Canada, Inc. - incorporated by reference to
Exhibit 10.26 to the Annual Report on Form 10-K of the Registrant
for the year ended December 31, 2004.
10.27 Promissory note in the amount of euro 65,000,000 dated as of
October 12, 2004 between the Registrant and Kronos Worldwide,
Inc. - incorporated by reference to Exhibit 10.27 to the Annual
Report on form 10-K of the Registration for the year ended
December 31, 2004.
10.28 Promissory note in the amount of euro 98,094,875, dated as of
November 26, 2004 between the Registrant and Kronos Worldwide,
Inc. - incorporated by reference to Exhibit 10.28 to the Annual
Report on Form 10-K of the Registrant for the year ended December
31, 2004.
12.1*** Statement re computation of ratio of earnings to combined fixed
charges and preferred dividends.
21.1*** Subsidiaries of the Registrant - incorporated by reference to
Exhibit No. 12.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2004.
23.1*** Consent of PricewaterhouseCoopers LLP relating to the financial
statements and financial statement schedules of the Registrant
and its subsidiaries.
23.2*** Consent of PricewaterhouseCoopers LLP relating to the financial
statements of Kronos Titan GmbH.
23.3*** Consent of PricewaterhouseCoopers LLP relating to the financial
statements of Kronos Denmark ApS.
23.4 Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1 and
8.1).
24.1 Powers of Attorney (included as part of signature page).
II-5
25.1 Form T-1 State of Eligibility of The Bank of New York to act as
Trustee under the Indenture-incorporated by reference to Exhibit
25.1 to the Registrant's Registration Statement on Form S-4 (File
No. 333-100047).
99.1*** Form of Letter of Transmittal.
99.2*** Letter to Brokers.
99.3*** Letter to Clients.
-----------------------------------
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contract, compensatory plan or arrangement
*** Filed herewith.
(b) Financial Statement Schedules.
Schedule I, Condensed Financial Information of Registrant and Schedule
II, - Valuation and Qualifying Accounts - see pages S-1 through S-7,
inclusive.
All other schedules have been omitted because they are not applicable.
(c) Not applicable.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to
the plan of distribution previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liabilities under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-6
(3) To remove from the registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) of 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide offering
thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of the
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by
means of post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Kronos International, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 30, 2005, appearing on page F-2 in this 2004 Annual Report on
Form 10-K of Kronos International, Inc., also included an audit of the financial
statement schedules listed in the index on page F-1 of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
S-1
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
Current assets:
Cash and cash equivalents $ 548 $ 6,283
Accounts and notes receivable 7,553 8,838
Receivable from affiliates 5,605 20,214
Deferred income taxes - 206
Other 21 48
-------- --------
Total current assets 13,727 35,589
-------- --------
Other assets:
Notes receivable from subsidiary 89,710 -
Investment in subsidiaries 563,171 493,532
Deferred income taxes - 222,643
Other 9,190 10,508
Property and equipment, net 6,454 6,917
-------- --------
Total other assets 668,525 733,600
-------- --------
$682,252 $769,189
======== ========
Current liabilities:
Payable to affiliates $ 32,218 $ 25,621
Accounts payable and accrued liabilities 5,305 6,072
Income taxes 95,293 10,638
Deferred income taxes - 15
-------- --------
Total current liabilities 132,816 42,346
-------- --------
Noncurrent liabilities:
Long-term debt 356,136 519,225
Deferred income taxes 80,741 -
Other 997 1,138
-------- --------
Total noncurrent liabilities 437,874 520,363
-------- --------
Stockholder's equity 111,562 206,480
-------- --------
$682,252 $769,189
======== ========
S-2
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Income
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Revenues and other income:
Net sales $ 28,326 $ 35,601 $ 40,038
Equity in earnings of subsidiaries 34,308 293,623 66,049
Interest income from affiliates 28,405 50 2,782
Royalty income 14,370 16,568 18,508
Currency translation gains (losses), net 14,656 (599) (575)
Other income, net 753 (38) 71
-------- -------- --------
120,818 345,205 126,873
-------- -------- --------
Costs and expenses:
Cost of sales 13,903 18,306 21,371
General and administrative 16,814 21,209 28,351
Interest 13,948 29,847 33,772
Interest expense to affiliates 20,530 - 5,754
-------- -------- --------
65,195 69,362 89,248
-------- -------- --------
Income before income taxes 55,623 275,843 37,625
Provision (benefit) for income taxes 3,332 194,082 (288,355)
-------- -------- --------
Net income 52,291 81,761 325,980
Dividends and accretion applicable
to redeemable preferred stock and
profit participation certificates (78,600) - -
-------- -------- --------
Net income (loss) available to common stock $(26,309) $ 81,761 $325,980
======== ======== ========
S-3
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income $ 52,291 $ 81,761 $325,980
Cash distributions from subsidiaries 26,249 402 50,902
Noncash currency transaction (gain) loss (13,121) - -
Noncash interest income (21,849) - -
Noncash interest expense 6,174 1,472 1,487
Deferred income taxes 5,037 238,814 (276,806)
Equity in earnings of subsidiaries (34,308) (293,623) (66,049)
Other, net 451 (3,570) (637)
-------- --------- --------
20,924 25,256 34,877
Net change in assets and liabilities 1,220 115 25,963
-------- --------- --------
Net cash provided by operating activities
22,144 25,371 60,840
-------- --------- --------
Cash flows from investing activities:
Capital expenditures (1,730) (2,406) (1,544)
Collection of loans to affiliates 12,090 - 88,656
Purchase of interest in subsidiaries - - (575)
Other, net 13 9 -
-------- --------- --------
Net cash provided (used) by investing activities 10,373 (2,397) 86,537
-------- --------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 280,041 - 129,524
Principal payments (26,697) - -
Deferred financing fees (8,600) - (1,989)
Repayments of loans from affiliates (301,432) - -
Loans to affiliates - - (209,524)
Dividends paid - (25,000) (60,000)
Other capital transactions with affiliates, net 2,925 - -
-------- --------- --------
Net cash used by financing activities (53,763) (25,000) (141,989)
-------- --------- --------
Net change during the year from operating investing and
financing activities (21,246) (2,026) 5,388
Currency translation 2,013 129 347
Balance at beginning of year 21,678 2,445 548
-------- --------- --------
Balance at end of year $ 2,445 $ 548 $ 6,283
======== ========= ========
S-4
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of Kronos International, Inc. and the
related Notes to Consolidated Financial Statements are incorporated herein by
reference.
Note 2 - Investment in and advances to subsidiaries:
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Current:
Receivable from:
Kronos Titan GmbH ("TG") - income taxes $ - $ 14,386
Kronos Titan A/S 1,567 1,667
Kronos Europe S.A./N.V 1,641 2,168
Kronos Canada 1,354 1,482
Kronos Denmark ApS ("KDK") 635 -
Titania A/S 360 432
Other 48 79
------- -------
$ 5,605 $20,214
======= =======
Payable to:
TG 31,974 25,032
Kronos (US), Inc. 48 145
Kronos Chemie GmbH 150 255
Other 46 189
------- -------
$32,218 $25,621
======= =======
Noncurrent:
Notes receivable from TG $89,710 $ -
======= =======
December 31,
------------------------
2003 2004
---- ----
(In thousands)
Investment in:
TG $440,844 $322,434
KDK 109,010 147,904
Other 13,317 23,194
-------- --------
$563,171 $493,532
======== ========
S-5
Years ended December 31,
------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Equity in income from continuing
operations of subsidiaries:
TG $ 22,430 $270,541 $ 40,951
KDK 11,344 26,892 23,816
Other 534 (3,810) 1,282
-------- -------- --------
$ 34,308 $293,623 $ 66,049
======== ======== ========
S-6
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other of year
----------------------------------- ---------- ----------- ---------- ----------- ------- ---------
Year ended December 31, 2002:
Allowance for doubtful accounts $ 1,626 $ 381 $ (397) $ 297 $ - $ 1,907
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 2,534 $ 1,616 $(1,374) $ 483 $ - $ 3,259
======= ======= ======= ======= ====== =======
Year ended December 31, 2003:
Allowance for doubtful accounts $ 1,907 $ 233 $ (281) $ 363 $ - $ 2,222
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 3,259 $ 1,432 $ (915) $ 684 $ - $ 4,460
======= ======= ======= ======= ====== =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 2,222 $ (169) $ (540) $ 147 $ - $ 1,660
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 4,460 $ 3,563 $(4,479) $ 310 $ - $ 3,854
======= ======= ======= ======= ====== =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.
S-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly executed this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Dallas, State of Texas,
on March 30, 2005.
KRONOS INTERNATIONAL, INC.
By: /s/ Robert D. Graham
------------------------------------
Robert D. Graham
Vice President
POWER OF ATTORNEY
We, the undersigned directors and officers of Kronos International, Inc. do
hereby constitute and appoint Robert D. Graham and Gregory M. Swalwell, and each
of them, our true and lawful attorneys-in-fact and agents, to do any and all
acts and things in our names and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our name in
the capacities indicated below, which said attorneys and agents, or either of
them, may deem necessary or advisable to enable said company to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with this registration
statement, or any registration statement for this offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
including specifically, but without limitation, the power and authority to sign
for us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto; and we do hereby ratify
and confirm all that said attorneys and agents, or any of them, shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dated indicated.
Signature Title and Capacity Date
--------- ------------------ ----
/s/ Dr. Ulfert Director March 30, 2005
--------------------------------
Fiand
Dr. Ulfert Fiand
/s/ Dr. Henry Director March 30, 2005
--------------------------------
Basson
Dr. Henry Basson
/s/ Volker Director March 30, 2005
--------------------------------
Roth
Volker Roth
/s/ Andrew Kasprowiak Director March 30, 2005
--------------------------------
Andrew Kasprowiak
/s/ Gregory M. Swalwell Vice President, Finance March 30, 2005
-------------------------------- (Principal Financial and Accouting Officer)
II-8
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
3.1 Certificate of Incorporation of the Registrant - incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated March 15, 1989 - incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated January 1, 1999 - incorporated by reference to
Exhibit 3.3 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated February 8, 1999 - incorporated by reference to
Exhibit 3.4 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.5 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated December 15, 1999 - incorporated by reference
to Exhibit 3.5 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
3.6 Amended and Restated Bylaws of the Registrant - incorporated by
reference to Exhibit 3.6 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
4.1 Indenture governing the 8.875% Senior Secured Notes due 2009,
dated as of June 28, 2002, between the Registrant and The Bank of
New York, as trustee - incorporated by reference to Exhibit 4.1
to the Quarterly Report on Form 10-Q of NL Industries, Inc. for
the quarter ended June 30, 2002.
4.2 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit A to Exhibit 4.1) - incorporated by
reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
4.3 Form of certificate of 8.875% Senior Secured Note due 2009
(included as Exhibit B to Exhibit 4.1) - incorporated by
reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
4.4 Purchase Agreement, dated as of June 19, 2002, among the
Registrant, Deutsche Bank AG London, Dresdner Bank AG, London
Branch, and Commerzbank Aktiengesellschaft, London Branch -
incorporated by reference to Exhibit 4.4 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
4.5 Purchase Agreement dated November 18, 2004 between Kronos
International, Inc. and Deutsche Bank AG London - incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K of the
Registrant dated November 24, 2004.
4.6 Form of Registration Rights Agreement as of November 26, 2004
between Kronos International, Inc. and Deutsche Bank AG London -
incorporated by reference to Exhibit 4.5 to the Current Report on
Form 8-K of the Registrant dated November 24, 2004.
4.7 Collateral Agency Agreement, dated as of June 28, 2002, among The
Bank of New York, U.S. Bank, N.A. and the Registrant (filed
herewith only with respect to Sections 2, 5, 6 and 8 thereof) -
incorporated by reference to Exhibit 4.6 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
II-9
4.8 Security Over Shares Agreement (shares of Kronos Limited), dated
June 28, 2002, between the Registrant and The Bank of New York,
U.S., as trustee - incorporated by reference to Exhibit 4.7 to
the Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002.
4.9 Pledge of Shares (shares of Kronos Denmark ApS), dated June 28,
2002, between the Registrant and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.8 to the Quarterly
Report on Form 10-Q of NL Industries, Inc. for the quarter ended
June 30, 2002.
4.10 Pledge Agreement (pledge of shares of Societe Industrielle du
Titane, S.A.), dated June 28, 2002, between the Registrant and
U.S. Bank, N.A., as collateral agent - incorporated by reference
to Exhibit 4.9 to the Quarterly Report on Form 10-Q of NL
Industries, Inc. for the quarter ended June 30, 2002.
4.11 Partnership Interest Pledge Agreement (pledge of fixed capital
contribution in Kronos Titan GmbH & Co. OHG), dated June 28,
2002, between the Registrant and U.S. Bank, N.A., as collateral
agent - incorporated by reference to Exhibit 4.10 to the
Quarterly Report on Form 10-Q of NL Industries, Inc. for the
quarter ended June 30, 2002.
4.12 Recapitalization Agreement, dated as of June 5, 2002, between the
Registrant and Kronos, Inc. - incorporated by reference to
Exhibit 4.12 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
4.13 Redemption Agreement, dated as of June 6, 2002, between the
Registrant and NL Industries, Inc. - incorporated by reference to
Exhibit 4.13 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
4.14 Form of Profit Participation Certificate (English translation
from German language document) - incorporated by reference to
Exhibit 4.14 to the Registrant's Registration Statement on Form
S-4 (File No. 333-100047).
5.1*** Opinion of Locke Liddell & Sapp LLP.
8.1*** Opinion of Locke Liddell & Sapp LLP.
10.1 (euro)80,000,000 Facility Agreement, dated June 25, 2002, among
Kronos Titan GmbH & Co. OHG, Kronos Europe S.A./N.V., Kronos
Titan A/S and Titania A/S, as borrowers, Kronos Titan GmbH & Co.
OHG, Kronos Europe S.A./N.V. and Kronos Norge AS, as guarantors,
Kronos Denmark ApS, as security provider, Deutsche Bank AG, as
mandated lead arranger, Deutsche Bank Luxembourg S.A., as agent
and security agent, and KBC Bank NV, as fronting bank, and the
financial institutions listed in Schedule 1 thereto, as lenders -
incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended June
30, 2002.
10.2 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 -
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of Kronos Worldwide, Inc. (File No.
333-119639).
10.3 Lease Contract, dated June 21, 1952, between Farbenfabriken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Annual Report
on Form 10-K of NL Industries, Inc. for the year ended December
31, 1985.
10.4 Contract on Supplies and Services, dated as of June 30, 1995,
among Bayer AG, Kronos Titan-GmbH & Co. OHG and the Registrant
(English translation from German language document) -
incorporated by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q of NL Industries, Inc. for the quarter ended September
30, 1995.
II-10
10.5 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).
10.6 Master Technology Exchange Agreement, dated as of October 18,
1993, among Kronos, Inc., Kronos Louisiana, Inc., the Registrant,
Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 to the Quarterly Report
on Form 10-Q of NL Industries, Inc. for the quarter ended
September 30, 1993.
10.7 Intercorporate Services Agreement, dated as of January 1, 2005,
among the Registrant, Kronos Worldwide, Inc., Kronos (US), Inc.
and Kronos Canada, Inc. - incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K for the Registrant for the
year ended December 31, 2004.
10.8 Tax Agreement, dated as of May 28, 2002, between Kronos, Inc. and
the Registrant - incorporated by reference to Exhibit 10.7 to the
Registrant's Registration Statement on Form S-4 (File No.
333-100047).
10.9 Services Agreement, dated as of January 1, 2004, among the
Registrant, Kronos Europe S.A./N.V., Kronos (US), Inc., Kronos
Titan GmbH, Kronos Denmark ApS, Kronos Canada, Inc., Kronos
Limited, Societe Industrielle Du Titane, S.A., Kronos B.V.,
Kronos Titan AS and Titania AS incorporated by reference to the
Annual Report on Form 10-K of the Registrant for the year ended
December 31, 2004.
10.10 Form of Assignment and Assumption Agreement, dated as of January
1, 1999, between Kronos, Inc. (formerly known as Kronos (USA),
Inc.) and the Registrant - incorporated by reference to Exhibit
10.9 to the Registrant's Registration Statement on Form S-4 (File
No. 333-100047).
10.11 Form of Cross License Agreement, effective as of January 1, 1999,
between Kronos, Inc. (formerly known as Kronos (USA), Inc.) and
the Registrant - incorporated by reference to Exhibit 10.10 to
the Registrant's Registration Statement on Form S-4 (File No.
333-100047).
10.12** NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated
by reference to Appendix A to the Proxy Statement on Schedule 14A
of NL Industries, Inc. for the annual meeting of shareholders
held on May 6, 1998.
10.13** Form of Kronos Worldwide, Inc. Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 of Kronos Worldwide,
Inc.'s Registration Statement on Form 10 (File No. 001-31763).
10.14** Form of Indemnity Agreement between the Registrant and the
officers and directors of the Registrant - incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-4 (File No. 333-100047).
10.15* Richards Bay Slag Sales Agreement, dated May 1, 1995, between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos,
Inc. - incorporated by reference to Exhibit 10.17 to the Annual
Report on Form 10-K for NL Industries, Inc. for the year ended
December 31, 1995.
10.16* Amendment to Richards Bay Slag Sales Agreement, dated May 1,
1999, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to Exhibit
10.4 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 1999.
10.17* Amendment to Richards Bay Slag Sales Agreement, dated June 1,
2001, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to Exhibit
10.5 to the Annual Report on Form 10-K for NL Industries, Inc.
for the year ended December 31, 2001.
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10.18* Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc. - incorporated by reference to Exhibit 10.7 to
the Annual Report on Form 10-K for NL Industries, Inc. for the
year ended December 31, 2002.
10.19* Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc - incorporated by reference to Exhibit 10.17 to
Kronos Worldwide, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2003.
10.20 Agreement between Sachtleben Chemie GmbH and Kronos Titan-GmbH
effective December 30, 1986 - incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002.
10.21 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
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.
10.22 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 Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.
10.23** Summary of Consulting Arrangement, beginning on August 1, 2003,
between Lawrence A. Wigdor and Kronos Worldwide, Inc. -
incorporated by reference to Exhibit 10.50 to NL Industries,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
2004.
10.24 Agency Agreement, dated as of January 1, 2004, among Kronos
International, Inc., Kronos Titan GmbH, Kronos Europe S.A./N.V.,
Kronos Canada, Inc., Kronos Titan AS and Societe Industrielle Du
Titane, S.A. - incorporated by reference to Exhibit 10.24 to the
Annual Report on Form 10-K of the Registrant for the year ended
December 31, 2004.
10.25 Titanium Dioxide Products and Titanium Chemicals Distribution
Agreement, dated as of January 1, 2005, among Kronos Titan GmbH,
Kronos Europe S.A./N.V., Kronos Canada, Inc., Kronos Titan AS,
Kronos (US), Inc., Kronos Denmark ApS, Kronos Titan GmbH, Kronos
Limited, Societe Industrielle Du Titane, S.A. and Kronos B.V. -
incorporated by reference to Exhibit 10.25 to the Annual Report
on Form 10-K of the Registrant for the year ended December 31,
2004.
10.26 Raw Material Purchase and Sale Agreement, dated as of January 1,
2004, among Kronos (US), Inc., Kronos Titan GmbH, Kronos Europe
S.A./N.V. and Kronos Canada, Inc. - incorporated by reference to
Exhibit 10.26 to the Annual Report on Form 10-K of the Registrant
for the year ended December 31, 2004.
10.27 Promissory note in the amount of euro 65,000,000 dated as of
October 12, 2004 between the Registrant and Kronos Worldwide,
Inc. - incorporated by reference to Exhibit 10.27 to the Annual
Report on form 10-K of the Registration for the year ended
December 31, 2004.
10.28 Promissory note in the amount of euro 98,094,875, dated as of
November 26, 2004 between the Registrant and Kronos Worldwide,
Inc. - incorporated by reference to Exhibit 10.28 to the Annual
Report on Form 10-K of the Registrant for the year ended December
31, 2004.
12.1*** Statement re computation of ratio of earnings to combined fixed
charges and preferred dividends.
21.1*** Subsidiaries of the Registrant - incorporated by reference to
Exhibit No. 12.1 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2004.
23.1*** Consent of PricewaterhouseCoopers LLP relating to the financial
statements and financial statement schedules of the Registrant
and its subsidiaries.
23.2*** Consent of PricewaterhouseCoopers LLP relating to the financial
statements of Kronos Titan GmbH.
23.3*** Consent of PricewaterhouseCoopers LLP relating to the financial
statements of Kronos Denmark ApS.
23.4 Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1 and
8.1).
24.1 Powers of Attorney (included as part of signature page).
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25.1 Form T-1 State of Eligibility of The Bank of New York to act as
Trustee under the Indenture-incorporated by reference to Exhibit
25.1 to the Registrant's Registration Statement on Form S-4 (File
No. 333-100047).
99.1*** Form of Letter of Transmittal.
99.2*** Letter to Brokers.
99.3*** Letter to Clients.
-----------------------------------
* Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
** Management contract, compensatory plan or arrangement
*** Filed herewith.
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