SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------- ------------------------
Common stock ($.125 par value) New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 14, 2002 approximated $137 million.
There were 48,820,984 shares of common stock outstanding at March 14, 2002.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
Forward-Looking Information.
The statements contained in this Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found (i) under the captions "Industry," "Products and operations,"
"Manufacturing process and raw materials," "Competition," "Patents and
Trademarks," "Foreign Operations," and "Regulatory and Environmental Matters,"
all contained in Item 1. Business; (ii) under the captions "Lead pigment
litigation," "Environmental matters and litigation," and "Other Litigation," all
contained in Item 3. Legal Proceedings; (iii) under the captions "Results of
Operations" and "Liquidity and Capital Resources," both contained in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; (iv) under the captions "Currency exchange rates," "Marketable
equity security prices," and "Other," all contained in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk; and (v) in Note 20, "Commitments and
contingencies - Legal proceedings" to the Consolidated Financial Statements, are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "will,"
"should," "anticipates," "expects," "could" or comparable terminology or by
discussions of strategy or trends. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve risks and uncertainties that could
significantly affect expected results, and actual future results could differ
materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ
materially are the risks and uncertainties discussed in this Annual Report and
those described from time to time in the Company's other filings with the
Securities and Exchange Commission. While it is not possible to identify all
factors, the Company continues to face many risks and uncertainties including,
but not limited to, the cyclicality of the titanium dioxide industry, global
economic and political conditions, global productive capacity, customer
inventory levels, changes in product pricing, changes in product costing,
changes in foreign currency exchange rates, competitive technology positions,
operating interruptions (including, but not limited to, labor disputes, leaks,
fires, explosions, unscheduled downtime, transportation interruptions, war and
terrorist activities), recoveries from insurance claims and the timing thereof,
the ultimate resolution of pending or possible future lead pigment litigation
and legislative developments related to the lead paint litigation, the outcome
of other litigation, and other risks and uncertainties included in the Company's
filings with the Securities and Exchange Commission. Should one or more of these
risks materialize (or the consequences of such a development worsen), or should
the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected. The Company disclaims any
intention or obligation to update publicly or revise such statements whether as
a result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
General
NL Industries, Inc., organized as a New Jersey corporation in 1891,
conducts its operations through its principal wholly owned subsidiary, Kronos,
Inc. Kronos is the world's fifth largest producer of titanium dioxide pigments
("TiO2") with an estimated 11% share of worldwide TiO2 sales volume in 2001.
Approximately one-half of Kronos' 2001 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. NL and its consolidated subsidiaries are
sometimes referred to herein collectively as the "Company."
The Company's primary objective is to maximize total shareholder return.
The Company continues to take steps towards achieving its objective, including
(i) controlling costs, (ii) investing in certain cost effective debottlenecking
projects to increase TiO2 production capacity and efficiency, (iii) maintaining
its regular quarterly dividend of $.20 per share, and (iv) improving its capital
structure. The Company periodically considers mergers or acquisitions, which may
be within or outside the chemical industry, and acquisitions of additional TiO2
production capacity to meet its objective.
Industry
Titanium dioxide pigments are chemical products used for imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics, paper, fibers and ceramics. TiO2 is considered a "quality-of-life"
product with demand affected by gross domestic product in various regions of the
world.
Pricing within the global TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact the Company's earnings and
operating cash flows. The Company's average TiO2 selling price on a billing
currency basis decreased from the preceding quarter during each quarter of 2001,
reversing the upward trend in prices that began in the fourth quarter of 1999
and continued through the fourth quarter of 2000. Industry-wide demand for TiO2
weakened throughout 2001, with full year demand estimated as 7% lower than the
previous year. This is believed to have been the result of a slowdown in
economic growth and a reduction in customer inventory levels. Volume demand in
2002 is anticipated to increase, if an expected recovery in worldwide economic
growth materializes.
Kronos has an estimated 18% share of European TiO2 sales volume and an
estimated 13% share of North American TiO2 sales volume. Per capita consumption
of TiO2 in the United States and Western Europe far exceeds that in other areas
of the world and these regions are expected to continue to be the largest
consumers of TiO2. Significant regions for TiO2 consumption could emerge in
Eastern Europe, the Far East or China if the economies in these regions develop
to the point that quality-of-life products, including TiO2, are in greater
demand. Kronos believes that, due to its strong presence in Western Europe, it
is well positioned to participate in growth in consumption of TiO2 in Eastern
Europe. Geographic segment information is contained in Note 3 to the
Consolidated Financial Statements.
-1-
Products and operations
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile
TiO2 is a more tightly bound crystal that has a higher refractive index than
anatase TiO2 and, therefore, better opacification and tinting strength in many
applications. Although many end-use applications can use either form of TiO2,
rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase
TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it is
often preferred for use in paper, ceramics, rubber and man-made fibers.
The Company believes that there are no effective substitutes for TiO2.
However, extenders such as kaolin clays, calcium carbonate and polymeric
opacifiers are used in a number of Kronos' markets. Generally, extenders are
used to reduce to some extent the utilization of higher-cost TiO2. The use of
extenders has not significantly changed TiO2 consumption over the past decade
because, to date, extenders generally have failed to match the performance
characteristics of TiO2. As a result, the Company believes that the use of
extenders will not materially alter the growth of the TiO2 business in the
foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, plastics and paper manufacturers.
Kronos is one of the world's leading producers and marketers of TiO2.
Kronos and its distributors and agents sell and provide technical services for
its products to over 4,000 customers with the majority of sales in Europe and
North America. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos' manufacturing facilities are located in Germany,
Canada, Belgium and Norway and Kronos owns a one-half interest in a TiO2
manufacturing joint venture located in Louisiana, U.S.A. Kronos has sales and
marketing activities in over 100 countries worldwide. Kronos and its
predecessors have produced and marketed TiO2 in North America and Europe for
over 80 years. As a result, Kronos believes that it has developed considerable
expertise and efficiency in the manufacture, sale, shipment and service of its
products in domestic and international markets. By volume, approximately
one-half of Kronos' 2001 TiO2 sales were to Europe, with 38% to North America
and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used as a feedstock by sulfate-process TiO2 plants) and has estimated
ilmenite reserves that are expected to last at least 20 years. Kronos is also
engaged in the manufacture and sale of iron-based water treatment chemicals
(derived from co-products of the pigment production processes). Kronos' water
treatment chemicals (marketed under the name Ecochem) are used as treatment and
conditioning agents for industrial effluents and municipal wastewater, and in
the manufacture of iron pigments.
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant. On April 8, 2001, repairs to the damaged support
equipment were substantially completed and full production resumed at the
Chloride Plant. The Sulfate Plant became approximately 50% operational in
September 2001 and became fully operational in late October 2001. See Note 17 to
the Consolidated Financial Statements.
-2-
Manufacturing process and raw materials
TiO2 is manufactured by Kronos using both the chloride process and the
sulfate process. Approximately 70% of Kronos' current production capacity is
based on its chloride process which generates less waste than the sulfate
process. The sulfate process is a batch chemical process that uses sulfuric acid
to extract TiO2. Sulfate technology normally produces either anatase or rutile
pigment. The chloride process is a continuous process in which chlorine is used
to extract rutile TiO2. In general, the chloride process is also less intensive
than the sulfate process in terms of capital investment, labor and energy.
Because much of the chlorine is recycled and higher titanium-containing
feedstock is used, the chloride process produces less waste. Once an
intermediate TiO2 pigment has been produced by either the chloride or sulfate
process, it is 'finished' into products with specific performance
characteristics for particular end-use applications through proprietary
processes involving various chemical surface treatments and intensive milling
and micronizing.
Due to environmental factors and customer considerations, the proportion
of TiO2 industry sales represented by chloride-process pigments has increased
relative to sulfate-process pigments and, in 2001, chloride-process production
facilities represented approximately 60% of industry capacity.
Kronos produced 412,000 metric tons of TiO2 in 2001, compared to a
record 441,000 metric tons produced in 2000 and 411,000 metric tons in 1999.
Kronos' average production capacity utilization rate in 2001 was 91%, down from
near full capacity in 2000, primarily due to lost production volume resulting
from the Leverkusen fire and the Company's decision to curtail production in the
fourth quarter of 2001 as demand remained soft. Kronos believes its current
annual attainable production capacity is approximately 455,000 metric tons,
including its one-half interest in the joint venture-owned Louisiana plant (see
"TiO2 manufacturing joint venture"). The Company expects its production capacity
will be increased by approximately 25,000 metric tons primarily at its chloride
facilities, with moderate capital expenditures, bringing Kronos' capacity to
approximately 480,000 metric tons during 2005.
The primary raw materials used in the TiO2 chloride production process
are titanium-containing feedstock derived from beach sand ilmenite, natural
rutile ore, chlorine and coke. Chlorine and coke are available from a number of
suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, South Africa, Canada, India and the United States.
Kronos purchases slag refined from ilmenite sand from Richards Bay Iron
and Titanium (Proprietary) Limited (South Africa), a 51%-owned subsidiary of Rio
Tinto plc (U.K.), under a long-term supply contract that expires at the end of
2006. 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 2005. The Company does not expect to encounter
difficulties obtaining long-term extensions to existing supply contracts prior
to the expiration of the contracts. Raw materials purchased under these
contracts and extensions thereof are expected to meet Kronos' chloride feedstock
requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process
are titanium-containing feedstock derived primarily from rock and beach sand
ilmenite and sulfuric acid. Sulfuric acid is available from a number of
-3-
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, Kronos operates a rock ilmenite mine in Norway, which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2001. For its Canadian sulfate-process plant, Kronos also purchases
sulfate grade slag from Q.I.T. Fer et Titane Inc. (Canada), a wholly owned
subsidiary of Rio Tinto Iron & Titanium, Inc., under a long-term supply contract
which expires in 2006.
Kronos believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, the Company
may incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on the Company's financial
position, results of operations or liquidity.
TiO2 manufacturing joint venture
Subsidiaries of Kronos and Huntsman International Holdings LLC
("Huntsman") each own a 50%-interest in a manufacturing joint venture, Louisiana
Pigment Company ("LPC"). LPC owns and operates a chloride-process TiO2 plant
located in Lake Charles, Louisiana. Production from the plant is shared equally
by Kronos and Huntsman (the "Partners") pursuant to separate offtake agreements.
A supervisory committee, composed of four members, two of whom are
appointed by each Partner, directs the business and affairs of LPC including
production and output decisions. Two general managers, one appointed and
compensated by each Partner, manage the operations of the joint venture acting
under the direction of the supervisory committee.
The manufacturing joint venture operates on a break-even basis and,
accordingly, the Company reports no equity in earnings of the joint venture.
Kronos' cost for its share of the TiO2 produced is equal to its share of the
joint venture's costs. Kronos' share of net costs is reported as cost of sales
as the related TiO2 acquired from the joint venture is sold.
Competition
The TiO2 industry is highly competitive. Kronos competes primarily on
the basis of price, product quality and technical service, and the availability
of high performance pigment grades. Although certain TiO2 grades are considered
specialty pigments, the majority of Kronos' grades and substantially all of
Kronos' production are considered commodity pigments with price generally being
the most significant competitive factor. During 2001 Kronos had an estimated 11%
share of worldwide TiO2 sales volume, and Kronos believes that it is the leading
seller of TiO2 in a number of countries, including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co.
("DuPont"); Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and
Ishihara Sangyo Kaisha, Ltd. Kronos' five largest competitors have estimated
individual shares of TiO2 production capacity ranging from 23% to 5%, and an
-4-
estimated aggregate 70% share of worldwide TiO2 production volume. DuPont has
about one-half of total U.S. TiO2 production capacity and is Kronos' principal
North American competitor.
Capacity additions that are the result of construction of greenfield
plants in the worldwide TiO2 market require significant capital and substantial
lead time, typically three to five years in the Company's experience. No
greenfield plants have been announced, but industry capacity can be expected to
increase as Kronos and its competitors debottleneck existing plants. In addition
to potential capacity additions, certain competitors have announced that they
have either idled or shut down facilities. Based on the factors described under
the caption "Industry" above, the Company expects that the average annual
increase in industry capacity from announced debottlenecking projects will be
less than the average annual demand growth for TiO2 over the next three to five
years.
No assurance can be given that future increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to the Company's expectations. If actual developments differ from the
Company's expectations, the Company and the TiO2 industry's performance could be
unfavorably affected.
Research and Development
The Company's expenditures for research and development and certain
technical support programs have averaged approximately $6 million annually
during the past three years. Research and development activities are conducted
principally at the Leverkusen, Germany facility. Such activities are directed
primarily toward improving both the chloride and sulfate production processes,
improving product quality and strengthening Kronos' competitive position by
developing new pigment applications.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to the Company and to the continuing business activities of Kronos.
The Company continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties.
The Company's major trademarks, including Kronos, are protected by
registration in the United States and elsewhere with respect to those products
it manufactures and sells.
Foreign Operations
The Company's chemical businesses have operated in non-U.S. markets
since the 1920s. Most of Kronos' current production capacity is located in
Europe and Canada with non-U.S. net property and equipment aggregating $323
million at December 31, 2001. Net property and equipment in the U.S., including
50% of the property and equipment of LPC, was $132 million at December 31, 2001.
Kronos' European operations include production facilities in Germany, Belgium
and Norway. Approximately $577 million of the Company's 2001 consolidated sales
were to non-U.S. customers, including $104 million to customers in areas other
than Europe and Canada. Sales to customers in the U.S. aggregated $258 million
in 2001. Foreign operations are subject to, among other things, currency
exchange rate fluctuations and the Company's results of operations have, in the
-5-
past, been both favorably and unfavorably affected by fluctuations in currency
exchange rates. Effects of fluctuations in currency exchange rates on the
Company's results of operations are discussed in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."
Political and economic uncertainties in certain of the countries in
which the Company operates may expose it to risk of loss. The Company does not
believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's 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 Seasonality
The Company believes that neither its aggregate sales nor those of any
of its principal product groups are concentrated in or materially dependent upon
any single customer or small group of customers. Kronos' largest ten customers
accounted for approximately 25% of net sales in 2001. Neither the Company's
business as a whole nor that of any of its principal product groups is seasonal
to any significant extent. Due in part to the increase in paint production in
the spring to meet the spring and summer painting season demand, TiO2 sales are
generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.
Employees
As of December 31, 2001, the Company employed approximately 2,500
persons, excluding the joint venture employees, with approximately 100 employees
in the United States and approximately 2,400 at sites outside the United States.
Hourly employees in production facilities worldwide, including LPC, are
represented by a variety of labor unions, with labor agreements having various
expiration dates. The Company believes its labor relations are good.
Regulatory and Environmental Matters
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
-6-
The Company's U.S. manufacturing operations are governed by federal
environmental and worker health and safety laws and regulations, principally the
Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. The Company believes LPC and a slurry facility owned by the Company in
Lake Charles, Louisiana are in substantial compliance with applicable
requirements of these laws or compliance orders issued thereunder. The Company
has no other U.S. plants. From time to time, the Company's facilities may be
subject to environmental regulatory enforcement under such statutes. Resolution
of such matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. The Company believes that all its
plants are in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. The Company believes that Kronos
is in substantial compliance with agreements reached with European regulatory
authorities and with an EU directive to control the effluents produced by TiO2
production facilities.
The Company has a contract with a third party to treat certain effluents
of its German sulfate-process plants. Either party may terminate the contract
after giving four years advance notice with regard to its Nordenham, Germany
plant. Under certain circumstances, Kronos may terminate the contract after
giving six months notice with respect to treatment of effluents from the
Leverkusen, Germany plant.
The Company's capital expenditures related to its ongoing environmental
protection and improvement programs in 2001 were approximately $5 million, and
are currently expected to be approximately $5 million in 2002 and $4 million in
2003.
The Company has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by the
Company, or its subsidiaries, or their predecessors, certain of which are on the
U.S. Environmental Protection Agency's ("U.S. EPA") Superfund National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."
Principal Shareholders
At December 31, 2001, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"), each affiliates of Contran Corporation ("Contran"), held
approximately 61% and 21%, respectively, of NL's outstanding common stock. At
-7-
December 31, 2001, Contran and its subsidiaries held approximately 94% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by NL held approximately 80% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons, the Chairman of
the Board of NL and the Chairman of the Board and Chief Executive Officer of
Contran and Valhi and a director of Tremont, may be deemed to control each of
such companies.
ITEM 2. PROPERTIES
Kronos currently operates four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec, Canada and, through the
manufacturing joint venture described above, a one-half interest in a plant in
Lake Charles, Louisiana. The Company also owns a slurry plant in Lake Charles,
Louisiana. See Notes 11 and 14 to the Consolidated Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Kronos is the only unrelated party so situated. Under a separate supplies
and services agreement expiring in 2011, Bayer 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 agreement
have certain restrictions regarding Kronos' ability to transfer ownership or use
of the Leverkusen facility.
All of Kronos' principal production facilities described above are
owned, except for the land under the Leverkusen facility. Kronos has a
governmental concession with an unlimited term to operate its ilmenite mine in
Norway.
The Company has under lease various corporate and administrative offices
located in the U.S. and various sales offices located in the U.S., France, the
Netherlands, Denmark and the U.K. In January 2002 the Company announced its
intent to close its New York administrative office.
-8-
ITEM 3. LEGAL PROCEEDINGS
Lead pigment litigation
The Company was formerly involved in the manufacture of lead pigments
for use in paint and lead-based paint. During the past 14 years, the Company has
been named as a defendant or third party defendant in various legal proceedings
alleging that the Company and approximately seven other companies that formerly
manufactured lead pigments for use in paint (together, the "former pigment
manufacturers") and lead-based paint are responsible for personal injury,
property damage and governmental expenditures allegedly associated with the use
of these products. These cases assert a combination of claims that generally
include negligent product design, negligent failure to warn, supplier
negligence, fraud and deceit, public and private nuisance, restitution,
indemnification, conspiracy, concert of action, aiding and abetting, strict
liability/failure to warn, and strict liability/defective design, violations of
state consumer protection statutes, enterprise liability, market share
liability, and similar claims. The Company has neither lost nor settled any of
these cases. Considering the Company's previous involvement in the lead pigment
and lead-based paint businesses, there can be no assurance that additional
litigation, similar to that described below, will not be filed.
The Company has not accrued any amounts for this litigation. There is no
assurance that the Company will not incur future liability in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases. However, based on, among
other things, the results of such litigation to date, the Company believes that
the pending cases are without merit and will continue to defend the cases
vigorously. Liability that may result, if any, cannot reasonably be estimated.
In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed
third-party complaints against the former pigment manufacturers and the Lead
Industries Association (the "LIA") in 14 actions commenced by residents of HANO
units seeking compensatory and punitive damages for injuries allegedly caused by
lead pigment. All but two of these actions, Hall v. HANO, et al. (No. 89-3552)
and Allen v. HANO, et al. (No. 89-427) Civil District Court for the Parish of
Orleans, State of Louisiana, have been dismissed. These two cases have been
inactive since 1992.
In June 1989 a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages in excess of $50 million for monitoring and
abating alleged lead paint hazards in public and private residential buildings,
diagnosing and treating children allegedly exposed to lead paint in city
buildings, the costs of educating city residents to the hazards of lead paint,
and liability in personal injury actions against the City and the Housing
Authority based on alleged lead poisoning of city residents (The City of New
York, the New York City Housing Authority and the New York City Health and
Hospitals Corp. v. Lead Industries Association, Inc., et al., No. 89-4617). As a
result of pre-trial motions, the New York City Housing Authority is the only
remaining plaintiff in the case and is pursuing damage claims only with respect
to two housing projects. Discovery is proceeding.
In August 1992 the Company was served with an amended complaint in
Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga
County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and
punitive damages for personal injury caused by the ingestion of lead, and an
order directing defendants to abate lead-based paint in buildings. Plaintiffs
-9-
purport to represent a class of similarly situated persons throughout the State
of Ohio. While the trial court has denied plaintiffs' motion for class
certification, discovery and pre-trial proceedings are continuing with the
individual plaintiffs.
In December 1998 the Company was served with a complaint on behalf of
four children and their guardians in Sabater, et al. v. Lead Industries
Association, et al. (Supreme Court of the State of New York, County of Bronx,
Index No. 25533/98). Plaintiffs purport to represent a class of all children and
mothers similarly situated in New York State. The complaint seeks damages from
the LIA and other former pigment manufacturers for establishment of property
abatement and medical monitoring funds and compensatory damages for alleged
injuries to plaintiffs. Discovery regarding class certification is proceeding.
In September 1999 an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and the
Company has denied liability. Pre-trial motions and discovery are proceeding.
Trial is scheduled for June 2003.
In October 1999 the Company was served with a complaint in State of
Rhode Island v. Lead Industries Association, et al. (Superior Court of Rhode
Island, No. 99-5226). The State seeks compensatory and punitive damages for
medical, school, and public and private building abatement expenses that the
State alleges were caused by lead paint, and for funding of a public education
campaign and health screening programs. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. A trial
date has been set for September 2002 at which the issue of whether lead pigment
in paint on Rhode Island buildings is a public nuisance will be tried, and
discovery is proceeding.
In October 1999 the Company was served with a complaint in Cofield, et
al. v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to
represent a class of all owners of nonrental residential properties in Maryland.
Plaintiffs seek compensatory and punitive damages in excess of $20,000 per
household for the existence of lead-based paint in their homes, including funds
for monitoring, detecting and abating lead-based paint in those residences.
Plaintiffs allege that the former pigment manufacturers and other companies
alleged to have manufactured paint and/or gasoline additives, the LIA, and the
National Paint and Coatings Association (the "NPCA") are jointly and severally
liable. In August 2001 plaintiffs voluntarily dismissed substantially all of
their claims, and in December 2001 the trial court dismissed the remaining
claim. The time for appeal of that ruling has not expired.
In October 1999 the Company was served with a complaint in Smith, et al.
v. Lead Industries Association, et al. (Circuit Court for Baltimore City,
Maryland, Case No. 24-C-99-004490). Plaintiffs, seven minors, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA, and the NPCA are jointly and severally
liable. The Company has denied liability, and all defendants filed motions to
dismiss various of the claims. In February 2002 the trial court dismissed all
claims except those relating to product liability for lead paint and the
Maryland Consumer Protection Act. Pre-trial proceedings and discovery are
continuing.
-10-
In February 2000 the Company was served with a complaint in City of St.
Louis v. Lead Industries Association, et al. (Missouri Circuit Court 22nd
Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff
seeks compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. The
defendants' motion to dismiss the case is currently pending.
In April 2000 the Company was served with a complaint in County of Santa
Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of
California, County of Santa Clara, Case No. CV788657) brought against the former
pigment manufacturers, the LIA and certain paint manufacturers. The County of
Santa Clara seeks to represent a class of California governmental entities
(other than the state and its agencies) to recover compensatory damages for
funds the plaintiffs have expended or will in the future expend for medical
treatment, educational expenses, abatement or other costs due to exposure to, or
potential exposure to, lead paint, disgorgement of profit, and punitive damages.
Santa Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. Pre-trial proceedings and discovery are continuing.
In June 2000 two complaints were filed in Texas state court, Spring
Branch Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-31175), and Houston
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-33725). The School Districts seek past
and future damages and exemplary damages for costs they have allegedly incurred
or will incur due to the presence of lead-based paint in their buildings from
the former pigment manufacturers and the LIA . The Company has denied all
liability. Discovery and pre-trial motions are proceeding in both cases. Trial
is scheduled in the Spring Branch case for September 2002.
In June 2000 a complaint was filed in Illinois state court, Lewis, et
al. v. Lead Industries Association, et al. (Circuit Court of Cook County,
Illinois, County Department, Chancery Division, Case No. 00CH09800). Plaintiffs
seek to represent two classes, one of all minors between ages six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between ages six and twenty years who lived between ages six months
and six years in Illinois housing built before 1978 and had blood lead levels of
10 micrograms/deciliter or more. The complaint seeks damages jointly and
severally from the former pigment manufacturers and the LIA to establish a
medical screening fund for the first class to determine blood lead levels, a
medical monitoring fund for the second class to detect the onset of latent
diseases, and a fund for a public education campaign. Pre-trial motions by the
defendants to dismiss all claims are pending.
In October 2000 the Company was served with a complaint filed in
California state court, Justice, et al. v. Sherwin-Williams Company, et al.
(Superior Court of California, County of San Francisco, No. 314686). Plaintiffs
are two minors who seek general, special and punitive damages from the former
pigment manufacturers and the LIA for injuries alleged to be due to ingestion of
paint containing lead in their residence. The Company has denied all liability.
Discovery is proceeding.
In January 2001 the Company was served with a complaint in Gaines, et
al., v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-0604). The complaint seeks joint and several
-11-
liability for compensatory and punitive damages from the Company,
Sherwin-Williams, and four local paint retailers on behalf of a minor and his
mother alleging injuries due to exposure to lead pigment and/or paint. The case
has been removed to federal court and that court has dismissed the local paint
retailers. Discovery and pre-trial motions are proceeding.
In February 2001 the Company was served with a complaint in Borden, et
al. v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including the Company, on behalf of
18 adult residents of Mississippi who were allegedly exposed to lead during
their employment in construction and repair activities. Pre-trial proceedings
are continuing.
In May 2001 the Company was served with a complaint in City of Milwaukee
v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead, and punitive damages. The Company has denied all
liability. Pre-trial proceedings are continuing.
In May 2001 the Company was served with a complaint in Harris County,
Texas v. Lead Industries Association, et al. (District Court of Harris County,
Texas, No. 2001-21413). The complaint seeks actual and punitive damages and
asserts claims jointly and severally against the former pigment manufacturers
and the LIA for past and future damages due to the presence of lead paint in
County-owned buildings. The Company has denied all liability. Discovery and
pre-trial motions are continuing.
In June 2001 a complaint was filed in Jefferson County School District
v. Lead Industries Association, et al. (Circuit Court of Jefferson County,
Mississippi, Case No. 2001-69). The complaint seeks joint and several liability
for compensatory and punitive damages for the abatement of lead paint in
Jefferson County Schools from the former pigment manufacturers and local paint
retailers. The Company has denied all liability. The case was removed to federal
court and pre-trial proceedings are continuing.
In December 2001 the Company was served with a complaint in Quitman
County School District v. Lead Industries Association, et al. (Circuit Court of
Quitman County, Mississippi, Case No. 2001-0106). The complaint asserts joint
and several liability and seeks compensatory and punitive damages for the
abatement of lead paint in Quitman County schools from the former pigment
manufacturers, local paint retailers and others. The Company has denied all
liability. Pre-trial proceedings, including those related to the removal of the
case to federal court, are continuing.
In January and February 2002 the Company was served with complaints by
22 New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation, Superior Court of New Jersey, Middlesex County, Case Code
702. Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. The Company intends to deny
all allegations of liability.
In January 2002 the Company was served with a complaint in Jackson, et
al., v. Phillips Building Supply of Laurel, et al., Circuit Court of Jones
-12-
County, Mississippi, Dkt. Co. 2002-10-CV1. The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of four adults for
injuries alleged to have been caused by the use of lead paint. The case has been
removed to federal court. The Company has denied all allegations of liability
and pre-trial proceedings are continuing.
In February 2002 the Company was served with a complaint in Liberty
Independent School District v. Lead Industries Association, et al. , District
Court of Liberty County, Texas, No. 63,332. The school district seeks
compensatory and punitive damages jointly and severally from the former pigment
manufacturers and the LIA for property damage to its buildings. The Company has
denied all allegations of liability.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to (a) impose various obligations on present and former manufacturers
of lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and (b) effectively overturn court
decisions in which the Company and other pigment manufacturers have been
successful. Examples of such proposed legislation include bills which would
permit civil liability for damages on the basis of market share, rather than
requiring plaintiffs to prove that the defendant's product caused the alleged
damage, and bills which would revive actions barred by the statute of
limitations. While no legislation or regulations have been enacted to date which
are expected to have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity, the imposition of market
share liability or other legislation could have such an effect.
The Company has filed actions seeking declaratory judgment and other
relief against various insurance carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124,
- -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment
litigation defense costs filed in May 1990 against Commercial Union Insurance
Company ("Commercial Union") sought to recover defense costs incurred in the
City of New York lead pigment case and two other lead pigment cases which have
since been resolved in the Company's favor. The action relating to lead paint
litigation defense costs has been settled. The Company has also settled
insurance coverage claims concerning environmental claims with certain of the
defendants in the New Jersey environmental coverage litigation, including the
Company's principal former carriers, as more fully described below. The settled
claims are to be dismissed from the New Jersey litigation in accordance with the
terms of the settlement agreements. The Company also continues to negotiate with
several other insurance carriers with respect to possible settlement of claims
that are being asserted in the New Jersey environmental litigation, although
there can be no assurance that settlement agreements can be reached with these
other carriers. No further material settlements relating to litigation
concerning environmental remediation coverage are expected. The issue of whether
insurance coverage for defense costs or indemnity or both will be found to exist
for lead pigment litigation depends upon a variety of factors, and there can be
no assurance that such insurance coverage will be available. The Company has not
considered any potential insurance recoveries for lead pigment or environmental
litigation in determining related accruals.
-13-
Environmental matters and litigation
The Company has been named as a defendant, PRP, or both, pursuant to
CERCLA and similar state laws in approximately 75 governmental and private
actions associated with waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by the Company, or its
subsidiaries, or their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage, and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
The extent of CERCLA liability cannot accurately be determined until the
Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. The Company believes it has provided
adequate accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31, 2001, the Company had accrued $107
million for those environmental matters which are reasonably estimable. The
Company determines the amount of accrual on a quarterly basis by analyzing and
estimating the range of reasonably possible costs to the Company. Such costs
include, among other things, expenditures for remedial investigations,
monitoring, managing, studies, certain legal fees, cleanup, removal and
remediation. It is not possible to estimate the range of costs for certain
sites. The Company has estimated that the upper end of the range of reasonably
possible costs to the Company for sites for which it is possible to estimate
costs is approximately $160 million. The Company's estimate of such liability
has not been discounted to present value and the Company has not reduced its
accruals for any potential insurance recoveries. No assurance can be given that
actual costs will not exceed either accrued amounts or the upper end of the
range for sites for which estimates have been made, and no assurance can be
given that costs will not be incurred with respect to sites as to which no
estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes with respect to site cleanup costs or allocation of such costs among
PRPs, or a determination that the Company is potentially responsible for the
release of hazardous substances at other sites could result in expenditures in
excess of amounts currently estimated by the Company to be required for such
matters. Furthermore, there can be no assurance that additional environmental
matters will not arise in the future. More detailed descriptions of certain
legal proceedings relating to environmental matters are set forth below.
In June 2000 the Company recognized a $43 million net gain from a
settlement with one of the two principal former insurance carriers, and in
December 2000 the Company recognized a $26.5 million net gain from a settlement
with certain members of the other principal former insurance carrier. The
settlement gains are stated net of $3.1 million in commissions, and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts established to pay future remediation and other environmental
expenditures of the Company. A settlement with remaining members of the second
carrier group was reached in January 2001, and the Company recognized a $10.3
million gain in the first quarter of 2001. In 2001 the Company also recognized
$1.4 million of other litigation settlement gains. The settlements resolved
court proceedings that the Company initiated to seek reimbursement for legal
defense expenditures and indemnity coverage for certain of its environmental
remediation expenditures. No further material settlements relating to litigation
-14-
concerning environmental remediation coverage are expected. See Note 16 to the
Consolidated Financial Statements.
In July 1991 the United States filed an action in the U.S. District
Court for the Southern District of Illinois against the Company and others
(United States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578)
with respect to the Granite City, Illinois lead smelter formerly owned by the
Company. The complaint seeks injunctive relief to compel the defendants to
comply with an administrative order issued pursuant to CERCLA, and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties did not implement the order, believing that the remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected
in accordance with law. The complaint also seeks recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have been notified by the U.S. EPA. Some of those notified were also
respondents to the administrative order. In September 1995 the U.S. EPA released
its amended decision selecting cleanup remedies for the Granite City site. In
September 1997 the U.S. EPA informed the Company that past and future cleanup
costs are estimated to total approximately $63.5 million. In 1999 the U.S. EPA
and certain other PRPs entered into a consent decree settling their liability at
the site for approximately 50% of the site costs. The Company and the U.S. EPA
reached an agreement in principle in 1999 to settle the Company's liability at
the site for $31.5 million. The Company and the U.S. EPA are negotiating a
consent decree embodying the terms of this agreement in principle.
The Company reached an agreement in 1999 with the other PRPs at a
formerly owned lead smelter site in Pedricktown, New Jersey to settle the
Company's liability for $6 million, of which $4.8 million has been paid as of
December 31, 2001. The settlement does not resolve issues regarding the
Company's potential liability in the event site costs exceed $21 million. The
Company does not presently expect site costs to exceed such amount and has not
provided accruals for such contingency.
In 1998 the Company reached an agreement to settle litigation with the
other PRPs at a lead smelter site in Portland, Oregon that was formerly owned by
the Company. Under the agreement, the Company agreed to pay a portion of future
cleanup costs. In 2000 the construction of the remediation was completed and is
now in the operation and maintenance phase.
In 2000 the Company reached an agreement with the other PRPs at the
Baxter Springs subsite in Cherokee County, Kansas, to resolve the Company's
liability. The Company and others formerly mined lead and zinc in the Baxter
Springs subsite. Under the agreement, the Company agreed to pay a portion of the
cleanup costs associated with the Baxter Springs subsite. The U.S. EPA has
estimated the total cleanup costs in the Baxter Springs subsite to be $5.4
million. The remedial action phase of the cleanup is underway.
In 1996 the U.S. EPA ordered the Company to perform a removal action at
a formerly owned facility in Chicago, Illinois. The Company has complied with
the order and has completed the on-site work at the facility. The Company is
conducting an investigation regarding potential offsite contamination.
Residents in the vicinity of the Company's former Philadelphia lead
chemicals plant commenced a class action allegedly comprised of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
-15-
from the plant. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No.
87-4420, Court of Common Pleas, Philadelphia County. The complaint sought
compensatory and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence, strict
liability, and nuisance. A class was certified to include persons who resided,
owned or rented property, or who work or have worked within up to approximately
three-quarters of a mile from the plant from 1960 through the present. In
December 1994 the jury returned a verdict in favor of the Company and the
verdict was affirmed on appeal. Residents also filed consolidated actions in the
United States District Court for the Eastern District of Pennsylvania, Shinozaki
v. Anzon, Inc. and Wagner and Antczak v. Anzon and NL Industries, Inc. Nos.
87-3441, 87-3502, 87-4137 and 87-5150. The consolidated action is a putative
class action seeking CERCLA response costs, including cleanup and medical
monitoring, declaratory and injunctive relief and civil penalties for alleged
violations of the RCRA, and also asserting pendent common law claims for strict
liability, trespass, nuisance and punitive damages. The court dismissed the
common law claims without prejudice, dismissed two of the three RCRA claims as
against the Company with prejudice, and stayed the case pending the outcome of
the state court litigation.
In 2000 the Company reached an agreement with the other PRPs at the
Batavia Landfill Superfund Site in Batavia, New York to resolve the Company's
liability. The Batavia Landfill is a former industrial waste disposal site.
Under the agreement, the Company agreed to pay 40% of the future remedial
construction costs, which the U.S. EPA has estimated to be approximately $11
million in total. Under the settlement, the Company is not responsible for costs
associated with the operation and maintenance of the remedy. In addition, the
Company received approximately $2 million from settling PRPs. The remedial
action phase of the remedy is underway.
In October 2000 the Company was served with a complaint in Pulliam, et
al. v. NL Industries, Inc., et al., No. 49F12-0104-CT-001301, filed in superior
court in Marion County, Indiana, on behalf of an alleged class of all persons
and entities who own or have owned property or have resided within a one-mile
radius of an industrial facility formerly owned by a subsidiary of the Company
in Indianapolis, Indiana. Plaintiffs allege that they and their property have
been injured by lead dust and particulates from the facility and seek
unspecified actual and punitive damages and a removal of all alleged lead
contamination under various theories, including negligence, strict liability,
battery, nuisance and trespass. In December 2000 the Company answered the
complaint denying all allegations of wrongdoing and liability. Discovery is
proceeding.
See Item 1. "Business - Regulatory and Environmental Matters."
Other litigation
The Company has been named as a defendant in various lawsuits in a
variety of jurisdictions alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly owned
operations. Various of these actions remain pending, including the following
matters.
In March 1997 the Company was served with a complaint in Ernest Hughes,
et al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in
the Fifth Judicial District Court of Cass County, Texas, on behalf of
approximately 4,000 plaintiffs and their spouses alleging injury due to exposure
to asbestos and seeking compensatory and punitive damages. The Company has filed
an answer denying the material allegations. The case has been inactive since
1998.
-16-
In February 1999 and October 2000 the Company was served with complaints
in Cosey, et al. v. Bullard, et al., No. 95-0069, and Pierce, et al. v. GAF, et
al., No. 2006-150, filed in the Circuit Court of Jefferson County, Mississippi,
on behalf of approximately 4,600 plaintiffs and 275 plaintiffs, respectively,
alleging injury due to exposure to asbestos and/or silica and seeking
compensatory and punitive damages. The Cosey case was removed to federal court
and has been transferred to the eastern district of Pennsylvania for
consolidated proceedings. The Company has filed answers in both cases denying
the material allegations of the complaint.
In addition, the Company is a defendant in various asbestos, silica
and/or mixed dust cases pending in various jurisdictions on behalf of
approximately 6,900 personal injury claimants.
In August and September 2000 the Company and one of its subsidiaries,
NLO, Inc. ("NLO"), were named as defendants in four lawsuits filed in federal
court in the Western District of Kentucky against the Department of Energy
("DOE") and a number of other defendants alleging that nuclear materials
supplied by, among others, the Feed Materials Production Center ("FMPC") in
Fernald, Ohio, owned by the DOE and formerly managed under contract by NLO,
harmed employees and others at the DOE's Paducah, Kentucky Gaseous Diffusion
Plant ("PGDP"). With respect to each of the cases listed below, the Company
believes that the DOE is obligated to provide defense and indemnification
pursuant to its contract with NLO, and pursuant to its statutory obligation to
do so, as the DOE has in several previous cases relating to management of the
FMPC, and the Company has so advised the DOE. Answers in the four cases have not
been filed. The Company and NLO have moved to dismiss the complaints in all four
actions and, as described below, three of the cases have been settled subject to
court approval. If those motions are not granted, the Company and NLO intend to
deny all allegations of wrongdoing and liability and to defend the cases
vigorously.
* In Rainer, et al. v. E.I. du Pont de Nemours, et al., ("Rainer I") No.
5:00CV-223-M, plaintiffs purport to represent a class of former
employees at the PGDP and a class consisting of members of the former
employees' households and seek actual and punitive damages of $5 billion
each for alleged negligence, infliction of emotional distress,
ultra-hazardous activity/strict liability, strict products liability and
battery. No answer or response to that complaint is yet due.
* In Rainer, et al. v. Bill Richardson, et al. ("Rainer II"), No.
5:00CV-220-M, plaintiffs purport to represent the same classes regarding
the same matters alleged in Rainer I, and allege a violation of
constitutional rights and seek the same recovery sought in Rainer I, as
well as asserting claims for battery, fraud, deceit, and
misrepresentation, infliction of emotional distress, negligence, and
conspiracy, concert of action, joint venture and enterprise liability.
No answer or response to that complaint is yet due.
* In Dew, et al. v. Bill Richardson, et al. ("Dew"), No. 5:00CV-221-M,
plaintiffs purport to represent classes of all PGDP employees who
sustained pituitary tumors or cancer as a result of exposure to
radiation and seek actual and punitive damages of $2 billion each for
alleged violation of constitutional rights, assault and battery, fraud
and misrepresentation, infliction of emotional distress, negligence,
ultra-hazardous activity/strict liability, strict products liability,
conspiracy, concert of action, joint venture and enterprise liability,
and equitable estoppel. Pre-trial proceedings and discovery continue.
-17-
* In Shaffer, et al. v. Atomic Energy Commission, et al. ("Shaffer"), No.
5:00CV-307-M, plaintiffs purport to represent classes of PGDP employees
and household members, subcontractors at PGDP, and landowners near the
PGDP and seek actual and punitive damages of $1 billion each and medical
monitoring for the same counts alleged in Dew. In March 2001, the
magistrate judge ordered that the landowner plaintiffs be severed from
the action and pursue their claims in a separate action, Oreskovich v.
Atomic Energy Commission, No. 01CV-63-M. All of the Oreskovich
plaintiffs subsequently dismissed their claims against the Company and
NLO with prejudice.
Subject to court approval, the Company and NLO have reached an agreement
pursuant to which the Rainer I, Rainer II, and Shaffer cases against the Company
and NLO will be settled and dismissed with prejudice. The trial court approved
the settlement in March 2002; the time during which the approval may be appealed
has not yet expired. The DOE has agreed to reimburse the Company for the
settlement amount.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
present and former businesses, and the disposition of past properties and former
businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2001.
-18-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NL's common stock is listed and traded on the New York Stock Exchange
and the Pacific Exchange under the symbol "NL." As of March 14, 2002, there were
approximately 6,000 holders of record of NL common stock. The following table
sets forth the high and low sales prices for NL common stock on the New York
Stock Exchange ("NYSE") Composite Tape. On March 14, 2002, the closing price of
NL common stock according to the NYSE Composite Tape was $16.17.
Dividends
High Low Declared
--------- --------- ----------
Year ended December 31, 2001:
First quarter ................... $ 24.31 $ 16.25 $ .20
Second quarter .................. 18.00 11.60 .20
Third quarter ................... 16.75 13.80 .20
Fourth quarter .................. 15.70 12.04 .20
Year ended December 31, 2000:
First quarter ................... $ 16.38 $ 13.00 $ .15
Second quarter .................. 19.00 13.13 .15
Third quarter ................... 24.38 15.50 .15
Fourth quarter .................. 25.00 18.94 .20
The Company's indenture to its 11.75% Senior Secured Notes due 2003
limits the ability of the Company to pay dividends, acquire treasury shares and
make other restricted payments, as defined. The aggregate amount of dividends
and other restricted payments since October 1993 may not exceed 50% of the
aggregate consolidated net income, as defined in the indenture, since October
1993. At December 31, 2001, $20 million was available for restricted payments
including dividends, acquisition of treasury shares and affiliate stock
purchases.
The Company paid four quarterly $.20 per share cash dividends in 2001.
On February 6, 2002, the Company's Board of Directors declared a regular
quarterly dividend of $.20 per share to shareholders of record as of March 8,
2002 to be paid on March 22, 2002. The declaration and payment of future
dividends is discretionary, and the amount, if any, will be dependent upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Company's Board of Directors.
Pursuant to its share repurchase program, the Company purchased
1,059,000 shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9 million in 2000 and 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999. Approximately 1,207,000
additional shares are available for purchase under the Company's share
repurchase program. The available shares may be purchased over an unspecified
period of time, and are to be held as treasury shares available for general
corporate purposes.
-19-
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with the Consolidated Financial Statements and Notes thereto, and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Certain amounts have been reclassified to conform with the
current year's consolidated financial statement presentation.
Years ended December,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------ ------------ ------------- ---------------
(In millions, except per share amounts)
INCOME STATEMENT DATA:
Net sales ...................................... $ 835.1 $ 922.3 $ 908.4 $ 894.7 $ 837.2
Operating income ............................... 169.2 212.5 145.7 171.2 82.5
Income (loss) from continuing operations ....... 121.4 155.3 159.8 89.9 (29.9)
Net income (loss) .............................. 121.4 154.6 159.8 366.7 (9.5)
Earnings per share:
Basic:
Income (loss) from continuing operations $ 2.44 $ 3.08 $ 3.09 $ 1.75 $ (.58)
Net income (loss) ...................... 2.44 3.07 3.09 7.13 (.19)
Diluted:
Income (loss) from continuing operations $ 2.44 $ 3.06 $ 3.08 $ 1.73 $ (.58)
Net income (loss) ...................... 2.44 3.05 3.08 7.05 (.19)
Cash dividends per share ....................... $ .80 $ .65 $ .14 $ .09 $ --
BALANCE SHEET DATA at year end:
Cash, cash equivalents, current and
noncurrent restricted cash equivalents and
current and noncurrent marketable debt
securities ................................... $ 199.0 $ 207.6 $ 151.8 $ 163.1 $ 106.1
Current assets ................................. 559.1 553.8 506.4 546.8 454.9
Total assets ................................... 1,151.1 1,120.8 1,056.2 1,155.6 1,098.5
Current liabilities ............................ 299.1 298.0 264.8 310.7 276.7
Long-term debt including current maturities .... 196.5 196.1 244.5 357.6 744.2
Shareholders' equity (deficit) ................. 386.9 344.5 271.1 152.3 (222.3)
CASH FLOW DATA:
Operating activities ........................... $ 129.7 $ 139.7 $ 108.3 $ 45.1 $ 89.2
Investing activities ........................... (57.2) (56.2) (38.4) 417.3 (11.1)
Financing activities ........................... (75.5) (95.7) (88.0) (396.2) (82.6)
Operating, investing and financing activities .. (3.0) (12.2) (18.1) 66.2 (4.5)
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) ..................................... $ 206.7 $ 286.3 $ 162.5 $ 187.4 $ 67.6
-20-
Years ended December,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In millions, except per share amounts)
OTHER DATA:
Net debt at year end (2) .............. $ 43.7 $ 58.5 $149.8 $226.7 $652.0
Interest expense, net (3) ............. 18.7 22.9 30.3 43.1 63.0
Cash interest expense, net (4) ........ 21.8 23.8 28.6 24.8 39.9
Capital expenditures .................. 53.7 31.1 35.6 22.4 28.2
TiO2 OPERATING STATISTICS:
Average selling price in billing
currencies index (1983=100) ..... 156 161 153 154 133
Sales volumes (metric tons in
thousands) ...................... 402 436 427 408 427
Production volume (metric tons in
thousands) ...................... 412 441 411 434 408
Production capacity at beginning of
year (metric tons in thousands) . 450 440 440 420 400
Production rate as a percentage of
capacity ........................ 91% Full 93% Full Full
(1) EBITDA, as presented, represents operating income less corporate
expense, plus (i) litigation settlement gains, net, (ii) other corporate
income, (iii) depreciation, depletion and amortization and (iv)
insurance recoveries, net. EBITDA is presented as a supplement to the
Company's operating income and cash flow from operations because the
Company believes that EBITDA is a widely accepted financial indicator of
cash flows and the ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, operating
income or net income determined under U.S. generally accepted accounting
principles ("GAAP") as an indicator of the Company's operating
performance, or cash flows from operating, investing and financing
activities determined under GAAP as a measure of liquidity. EBITDA is
not intended to depict funds available for reinvestment or other
discretionary uses, as the Company has significant debt requirements and
other commitments. Investors should consider certain factors in
evaluating the Company's EBITDA, including interest expense, income
taxes, noncash income and expense items, changes in assets and
liabilities, capital expenditures, investments in joint ventures and
other items included in GAAP cash flows as well as future debt repayment
requirements and other commitments, including those described in
Notes11, 14 and 20 to the Consolidated Financial Statements. The Company
believes that the trend of its EBITDA is consistent with the trend of
its GAAP operating income, except in (i) 1997 when EBITDA decreased and
operating income increased from 1996 amounts due to a $30 million
noncash charge related to the Company's adoption of SOP 96-1,
"Environmental Remediation Liabilities" and (ii) 2000 when $70 million
of net litigation settlement gains are included in EBITDA and excluded
from operating income, which treatment results in a higher percentage
increase over 1999 for EBITDA as compared to the percentage increase
over 1999 for operating income. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a
discussion of operating income and cash flows during the last three
years and the Company's outlook. EBITDA as a measure of a company's
performance may not be comparable to other companies, unless
substantially all companies and analysts determine EBITDA as computed
and presented herein.
(2) Net debt represents notes payable and long-term debt less cash, cash
equivalents, current and noncurrent restricted cash equivalents and
current and noncurrent marketable debt securities.
-21-
(3) Interest expense, net represents interest expense less general corporate
interest and dividend income.
(4) Cash interest expense, net represents interest expense, net as defined
in (3) above less noncash interest expense plus noncash interest income.
Noncash interest expense includes deferred interest expense on the
Senior Secured Discount Notes in 1996 through 1998 and amortization of
deferred financing costs. Noncash interest income includes interest
income on restricted cash and restricted marketable debt securities in
2001 and 2000.
ITEM 7. 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 the Company's consolidated
financial statements, which have been prepared in accordance with generally
accepted accounting principles in the U.S. ("GAAP"). The preparation of these
financial statements requires the Company 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, the Company evaluates its estimates, including those related to
inventory reserves, impairments of investments in marketable equity securities
and investments accounted for by the equity method, the recoverability of other
long-lived assets, pension and other post-retirement benefit obligations and the
underlying actuarial assumptions related thereto, and the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements:
* The Company provides reserves for estimated obsolescence or unmarketable
finished goods inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about
future demand for its products and market conditions. If actual market
conditions are less favorable than those projected by management,
additional finished goods inventory reserves may be required. The
Company provides reserves for tools and supplies inventory generally
based on both historical and expected future usage requirements.
-22-
* The Company owns investments in certain companies that are accounted for
either as marketable equity securities or under the equity method. For
all of such investments, the Company records an impairment charge when
it believes an investment has experienced a decline in fair value that
is other than temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in losses
or an inability to recover the carrying value of the investments that
may not be reflected in an investment's current carrying value, thereby
possibly requiring an impairment charge in the future.
* The Company recognizes an impairment charge associated with its
long-lived assets, including property and equipment, whenever it
determines that recovery of such long-lived asset is not probable. Such
determination is made in accordance with applicable GAAP requirement
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.
* The Company records a valuation allowance to reduce its deferred income
tax assets to the amount that is believed to be realizable under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it
is possible that in the future the Company may change its estimate of
the amount of the deferred income tax assets that would
"more-likely-than-not" be realized, resulting in an adjustment to the
deferred income tax asset valuation allowance that would either increase
or decrease, as applicable, reported net income in the period such
change in estimate was made.
* The Company records an accrual for environmental, legal, income tax and
other contingencies when estimated future expenditures associated with
such contingencies become probable, and the amounts can be reasonably
estimated. However, new information may become available, or
circumstances (such as applicable laws and regulations) may change,
thereby resulting in an increase or decrease in the amount required to
be accrued for such matters (and therefore a decrease or increase in
reported net income in the period of such change).
RESULTS OF OPERATIONS
General
The Company's operations are conducted by Kronos in the TiO2 business
segment. As discussed below, average TiO2 selling prices in billing currencies
(which excludes the effects of foreign currency translation) decreased in 2001
compared with 2000 and increased in 2000 compared with 1999. Kronos' operating
income declined $43.3 million in 2001 compared with 2000 and increased $66.8
million in 2000 compared with 1999. Gross profit margins were 31% in 2001, 34%
in 2000 and 27% in 1999.
-23-
Many factors influence TiO2 pricing levels, including (i) industry
capacity, (ii) worldwide demand growth, (iii) customer inventory levels and
purchasing decisions and (iv) relative changes in foreign currency exchange
rates. Kronos believes that the TiO2 industry has long-term growth potential, as
discussed in "Item 1. Business - Industry" and "- Competition."
Years ended December 31, % Change
--------------------------------- ---------------------
2001 2000 1999 2001-00 2000-99
---------- ---------- ----------- ---------- ----------
(In millions)
Net sales and operating income
Net sales ........................ $835.1 $922.3 $908.4 -9% + 2%
Operating income ................. $169.2 $212.5 $145.7 -20% +46%
Operating income margin percentage 20% 23% 16%
TiO2 operating statistics
Percent change in average selling
prices (in billing currencies) . -3% +6%
Sales volume (metric tons in
thousands) ..................... 402 436 427 -8% +2%
Production volume (metric tons in
thousands) ..................... 412 441 411 -6% +7%
Production rate as a percent of
capacity ....................... 91% Full 93%
Kronos' operating income in 2001, including business interruption
proceeds of $27.3 million, was lower than 2000, primarily due to lower average
TiO2 selling prices in billing currencies and lower sales and production
volumes. Kronos' operating income for 2000 was higher than 1999 due to higher
average TiO2 selling prices in billing currencies and higher production and
sales volumes.
Average TiO2 selling prices in billing currencies during 2001 were 3%
lower than 2000, with lower prices in all major regions. Pigment prices
decreased from the preceding quarter during each quarter of 2001, reversing the
upward trend that began in the fourth quarter of 1999 and continued through the
fourth quarter of 2000. The rate of price declines increased in the fourth
quarter of 2001 to 5% over the third quarter of 2001, and December 2001 prices
were 2% lower than the average selling price for the quarter. The average
selling price in billing currencies in December 2001 was 13% below the December
2000 average selling price. The most significant price erosion during this time
period occurred in the European and export markets. TiO2 average selling prices
continued to trend downward in the first quarter of 2002. Average TiO2 selling
prices in billing currencies in 2000 were 6% higher than 1999, with higher
prices in all major regions.
Industry-wide demand was weak throughout 2001 as compared to 2000 and
1999 levels. Sales volume of 402,000 metric tons of TiO2 in 2001 was 8% lower
than 2000, primarily due to lower sales in Europe and North America. Kronos'
sales volume in the fourth quarter of 2001 decreased 1% from the fourth quarter
of 2000 and 11% from the third quarter of 2001. Approximately one-half of
Kronos' 2001 TiO2 sales volume was attributable to markets in Europe with
approximately 38% attributable to North America, and the balance to other
regions. Sales volume in 2000 was 2% higher than 1999, primarily due to higher
sales in Europe and North America. Industry-wide demand was weak in early 1999.
Demand in the second half of 1999 and the first three quarters of 2000 was
stronger than comparable year-earlier periods as a result of, among other
things, customers buying in advance of anticipated price increases. Demand
softened in the fourth quarter of 2000 and weakened throughout 2001.
-24-
The Company's production volume was 412,000 metric tons in 2001, a
decrease of 6% from a record 441,000 metric tons produced in 2000. Operating
rates were at 91% in 2001 down from near full capacity in 2000, primarily due to
lost production resulting from the Leverkusen fire and the Company's decision to
curtail production in the fourth quarter of 2001 as demand remained soft.
Kronos' production volume in 2000 increased 7% compared with the 411,000 metric
tons produced in 1999. Operating rates in 1999 were 93%. Production volume was
curtailed in the beginning of the first quarter of 1999 in order to manage
inventory levels. Finished goods inventory levels increased in the fourth
quarter of 2001 and at the end of 2001 represented approximately two and
one-half months of sales.
The Company settled the insurance coverage claim involving the
Leverkusen fire for $56.4 million during the fourth quarter of 2001 ($46.9
million received as of December 31, 2001, with the remaining $9.5 million
received in January 2002), of which $27.3 million related to business
interruption and $29.1 million related to property damage, clean-up costs and
other extra expenses. The Company recognized a $17.5 million pre-tax gain in
2001 related to the property damage recovery after deducting $11.6 million of
clean-up costs and other extra expenses incurred and the carrying value of
assets destroyed in the fire. The gain was excluded from the determination of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
offset unallocated period costs ($20.1 million). The business interruption
insurance proceeds distorted Kronos' operating income margin percentage in 2001
as there were no sales associated with the lost margin operating income
recognized. No additional insurance recoveries related to the Leverkusen fire
are expected to be received. See Notes 15 and 17 to the Consolidated Financial
Statements.
The Company's efforts to debottleneck Kronos' production facilities to
meet long-term demand continue to prove successful. The Company expects Kronos'
production capacity of 455,000 metric tons at the end of 2001 will be increased
to approximately 480,000 metric tons during 2005, primarily at its chloride
facilities, with moderate capital expenditures.
The Company expects TiO2 industry demand in 2002 will improve over 2001
levels, because it expects worldwide economic conditions to improve and customer
inventory levels to increase. Kronos' TiO2 production volume in 2002 is expected
to approximate Kronos' 2002 TiO2 sales volume. In January 2002, Kronos announced
price increases in all major markets of approximately 5% to 8% above existing
December 2001 prices, scheduled to be implemented late in the first quarter of
2002 and early in the second quarter of 2002. Kronos is hopeful that it will
realize such announced prices increases, but the extent to which Kronos can
realize these and possibly other price increases during 2002 will depend on
improving market conditions and global economic recovery. However, because TiO2
prices were generally declining during all of 2001, the Company believes that
its average 2002 prices in billing currencies will be significantly below its
average 2001 prices, even if the recently-announced price increases are
realized. Overall, the Company expects its TiO2 operating income in 2002 will be
significantly lower than 2001, primarily due to lower average TiO2 selling
prices. The Company's expectations as to the future prospects of the Company and
the TiO2 industry are based upon a number of factors beyond the Company's
control, including worldwide growth of gross domestic product, competition in
the market place, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from the Company's
expectations, the Company's results of operations could be unfavorably affected.
-25-
Excluding the effects of foreign currency translation, which reduced the
Company's expenses in both 2001 and 2000 compared to the year-earlier periods,
Kronos' cost of sales in 2001 was lower than 2000 due to lower sales volume
partially offset by higher unit costs, which resulted primarily from lower
production levels. The effects of lower TiO2 sales volume and production volume
were partially offset by business interruption proceeds. Kronos' cost of sales
in 2000 was lower than 1999 primarily due to lower unit costs, which resulted
primarily from higher production levels. Cost of sales, as a percentage of net
sales, increased in 2001 primarily due to the impact on net sales of lower
average selling prices and higher unit costs partially offset by business
interruption insurance recoveries, and decreased in 2000 primarily due to the
impact on net sales of higher average selling prices and lower unit costs.
Excluding the effects of foreign currency translation, which reduced the
Company's expense in both 2001 and 2000 compared to the year-earlier periods,
selling, general and administrative expenses ("SG&A"), excluding corporate
expenses, decreased in 2001 from the year-earlier period due to lower variable
compensation expense and lower selling and distribution expenses associated with
lower 2001 sales volume. SG&A, excluding corporate expenses, increased in 2000
from the year-earlier period primarily due to higher variable compensation
expense and higher selling and distribution expenses associated with higher 2000
sales volumes. SG&A, excluding corporate expenses, as a percentage of net sales,
was 12% in each of 2001, 2000 and 1999. See discussion of corporate expenses
below.
The Company has substantial operations and assets located outside the
United States (principally Germany, Norway, Belgium and Canada). The Company's
non-U.S. sales and operating costs are subject to currency exchange rate
fluctuations which may impact reported earnings and may affect the comparability
of period-to-period revenues and expenses expressed in U.S. dollars. A
significant amount of the Company's sales (57% in 2001) are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. Certain purchases of raw materials,
primarily titanium-containing feedstocks, are denominated in U.S. dollars, while
labor and other production costs are primarily denominated in local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies,
primarily a stronger U.S. dollar compared to the euro, decreased sales by $19
million and $68 million during 2001 and 2000, respectively, compared with the
year-earlier period. When translated to U.S. dollars using currency exchange
rates prevailing during the respective periods, Kronos' average selling prices
for 2001 decreased 5% from 2000. Kronos' average selling prices in U.S. dollars
for 2000 decreased 1% from 1999. The effect of the stronger U.S. dollar on
Kronos' operating costs that are not denominated in U.S. dollars reduced
operating costs in 2001 and 2000 compared with the respective prior year. In
addition, sales to export markets are typically denominated in U.S. dollars and
a stronger U.S. dollar improves margins on these sales at the Company's non-U.S.
subsidiaries. The favorable margin on export sales tends to offset the
unfavorable effect of translating local currency profits to U.S. dollars when
the dollar is stronger. As a result, the net impact of currency exchange rate
fluctuations on operating income in 2001 and 2000 was not significant when
compared to the year-earlier periods.
-26-
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Years ended December 31, Change
--------------------------- ------------------
2001 2000 1999 2001-00 2000-99
------- ------- ------- ------- -------
(In millions)
Securities earnings:
Interest and dividends ..... $ 8.9 $ 8.3 $ 6.6 $ .6 $ 1.7
Securities transactions, net (1.1) 2.5 -- (3.6) 2.5
Corporate income ............... 16.3 73.7 4.6 (57.4) 69.1
Corporate expense .............. (25.9) (29.6) (21.5) 3.7 (8.1)
Interest expense ............... (27.6) (31.2) (36.9) 3.6 5.7
------- ------- ------- ------- -------
$ (29.4) $ 23.7 $ (47.2) $ (53.1) $ 70.9
======= ======= ======= ======= =======
Corporate interest and dividend income, including noncash interest
income on restricted cash balances and restricted marketable debt securities,
fluctuate in part based upon the amount of funds invested and yields thereon.
Average funds invested in 2001 and 2000 were higher compared with the respective
prior year primarily due to the increase in restricted cash related to
litigation settlement proceeds in January 2001 and July 2000. See Note 16 to the
Consolidated Financial Statements. The Company expects security earnings to be
lower in 2002 than 2001 due to (i) lower average yields and (ii) lower average
levels of funds available for investment due to lower 2002 operating cash flow
and the Company's decision to prepay $25 million of its 11.75% Senior Secured
Notes. See Note 23 to the Consolidated Financial Statements.
Securities transactions, net in 2001 related to a second-quarter $1.1
million noncash securities loss related to an other-than-temporary decline in
value of certain available-for-sale securities held by the Company. Securities
transactions, net in 2000 included a second-quarter $5.6 million securities gain
related to common stock received from the demutualization of an insurance
company from which the Company had purchased certain insurance policies and a
fourth-quarter $3.1 million noncash securities loss related to an
other-than-temporary decline in value of certain available-for-sale securities
held by the Company. See Note 6 to the Consolidated Financial Statements.
Corporate income in 2001 and 2000 included gains of $11.7 million and
$69.5 million, respectively, related principally to settlements with former
insurance carrier groups. No further material settlements relating to litigation
concerning environmental remediation coverage are expected. See Note 16 to the
Consolidated Financial Statements. The Company recognized $4.0 million in each
of 2001, 2000 and 1999 of income related to the straight-line, five-year
amortization of $20 million of proceeds received in conjunction with the 1998
sale of its specialty chemicals business attributable to a five-year agreement
by the Company not to compete in the rheological products business.
Corporate expense in 2001 decreased from 2000, primarily as a result of
lower legal expenses and lower variable compensation expense. The Company
expects corporate expense in 2002 will be comparable to or somewhat higher than
2001 levels.
-27-
Interest expense in 2001 declined compared with the prior year primarily
due to reduced levels of its outstanding 11.75% Senior Secured Notes (resulting
from a $50 million prepayment in December 2000) and lower euro-denominated debt.
Interest expense in 2000 declined compared to 1999 due to reduced levels of
outstanding euro-denominated debt. Assuming no significant change in interest
rates, interest expense in 2002 is expected to be lower compared with 2001 due
to lower levels of outstanding indebtedness. See Note 23 to the Consolidated
Financial Statements.
Provision for income taxes
The principal reasons for the difference between the U.S. Federal
statutory income tax rates and the Company's effective income tax rates are
explained in Note 14 to the Consolidated Financial Statements. The Company's
operations are conducted on a worldwide basis and the geographic mix of income
can significantly impact the Company's effective income tax rate. In 2001 the
Company's effective income tax rate varied from the normally expected rate
primarily due to the recognition of certain German income tax attributes which
previously did not meet the "more-likely-than-not" recognition criteria and
incremental U.S. taxes on undistributed earnings of certain non-U.S.
subsidiaries. In 2000 the Company's effective income tax rate varied from the
normally expected rate primarily due to the geographic mix of income, changes in
the German income tax "base" rate and the recognition of certain deductible tax
assets which previously did not meet the "more-likely-than-not" recognition
criteria. In 1999 the Company's effective tax rate varied from the normally
expected rate due predominantly to the recognition of certain deductible tax
attributes which previously did not meet the "more-likely-than-not" recognition
criteria. Also in 2000 and 1999, the Company recognized certain one-time
benefits related to German tax settlements.
Effective January 1, 2001, the Company and its qualifying subsidiaries
were included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran Tax Agreement and using the tax elections made by Contran, the
Company makes payments to or receives payments from Valhi in amounts it would
have paid to or received from the U.S. Internal Revenue Service had it not been
a member of the Contran Tax Group. Refunds are limited to amounts previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate-company basis. Pursuant to
the Contran Tax Agreement, the Company has a $2.2 million receivable from Valhi
related to capital loss carrybacks which would have been recoverable from the
U.S. Internal Revenue Service. See Note 14 to the Consolidated Financial
Statements.
Other
Minority interest
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of the Company's environmental liabilities. EMS' earnings are based, in
part, upon its ability to favorably resolve these liabilities on an aggregate
basis. The minority interest shareholders of EMS actively manage the
-28-
environmental liabilities and share in 39% of EMS' cumulative earnings, as
defined in the formation documents. The Company includes liabilities
contractually assumed by EMS in its consolidated balance sheet.
Related party transactions
The Company is a party to certain transactions with related parties. See
"Liquidity and Capital Resources - Investing Cash Flows" and Note 19 to the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years
are presented below.
Years ended December 31,
--------------------------------
2001 2000 1999
--------- -------- ---------
(In millions)
Operating activities:
Before changes in assets and liabilities .. $ 135.3 $ 153.1 $ 115.7
Changes in assets and liabilities ......... (5.6) (13.4) (7.4)
-------- -------- --------
129.7 139.7 108.3
Investing activities .......................... (57.2) (56.2) (38.4)
Financing activities .......................... (75.5) (95.7) (88.0)
-------- -------- --------
Net cash used by operating, investing and financing
activities ...................................... $ (3.0) $ (12.2) $ (18.1)
======== ======== ========
Operating cash flows
Certain items included in the determination of net income do not
represent current inflows or outflows of cash. For example, the net litigation
settlement proceeds of $10.3 million and $69.5 million received in 2001 and
2000, respectively, that were transferred by the insurance carriers to special
purpose trusts did not result in an increase in operating cash flow. Further,
insurance recoveries, net of $17.5 million in 2001 are excluded from the
determination of operating cash flow. These insurance proceeds are shown in the
statement of cash flows under investing activities to partially offset the cash
outflow impact of capital expenditures related to the Leverkusen sulfate plant
reconstruction. Noncash interest income consists of earnings on restricted cash
and restricted marketable debt securities which is not available for general
corporate purposes. Certain other items included in the determination of net
income have an impact on cash flows from operating activities, but the impact of
such items on cash will differ from their impact on net income. For example, the
amount of income or expense recorded for pension and OPEB assets and obligations
(which depend upon a number of factors, including actuarial assumptions used to
value obligations) will generally differ from the outflows of cash for such
benefits. See Note 12 to the Consolidated Financial Statements.
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly impact the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities
decreased $17.8 million in 2001 and increased $37.4 million in 2000 from the
preceding year.
Operating cash flows, before changes in assets and liabilities, in 2001
compared with 2000 were unfavorably affected by $43.3 million of lower operating
-29-
income, partially offset by $9.0 million of lower payments to fund the Company's
pension plans, $6.6 million of lower current tax expense, $3.8 million of higher
distributions from LPC, $3.8 million of lower corporate expenses and $2.0
million of lower cash interest expense, net.
Operating cash flows in 2000 compared with 1999 were favorably affected
by $66.8 million higher operating income and $4.8 million of lower cash interest
expense, net, partially offset by $5.3 million of higher payments to fund the
Company's pension plans, $8.2 million of higher corporate expenses, $16.1
million of higher current tax expense, and $6.1 million of lower distributions
from LPC.
Changes in the Company's assets and liabilities (excluding the effect of
currency translation) in 2001 compared with 2000 were favorably affected by
higher accounts payable of $21.8 million and a net decrease in accrued
environmental costs of $8.4 million primarily related to the use of assets from
the Company's special purpose trusts. The Company's assets and liabilities were
unfavorably affected by higher inventories of $9.3 million, lower accounts with
affiliates, net of $5.5 million, and payment of accrued supplemental retirement
benefits of $4.5 million. In 2001 and 2000, pursuant to terms of certain
titanium ore contracts, the Company purchased, in advance of receipt, $31.6
million and $15.3 million, respectively, of titanium ore, a raw material, which
is reflected in both inventory and accounts payable and had no net effect on
operating cash flow.
Changes in the Company's assets and liabilities (excluding the effect of
currency translation) in 2000 compared with 1999 were unfavorably affected by
higher inventories of $44.1 million partially offset by lower receivables of
$23.7 million and lower environmental accruals of $12.6 million.
Investing cash flows
The Company's capital expenditures were $53.7 million, $31.1 million and
$35.6 million in 2001, 2000 and 1999, respectively. Capital expenditures in 2001
include an aggregate of $22.3 million for the rebuilding of the Company's
Leverkusen, Germany sulfate plant. The Company received $23.4 million of
insurance proceeds for property damage resulting from the Leverkusen fire and
paid $3.2 million of expenses related to repairs and clean-up costs. Capital
expenditures in 1999 were higher due to $6.0 million of expenditures for a
landfill expansion for the Company's Belgian facility. Capital expenditures at
LPC were approximately $4.0 million in each of 2001, 2000 and 1999 and are not
included in the Company's capital expenditures.
The Company's capital expenditures during the past three years include
an aggregate of $23.0 million ($5.0 million in 2001) for the Company's ongoing
environmental protection and compliance programs. The Company's estimated 2002
and 2003 capital expenditures are $32.0 million for each year, and include $5.0
million and $4.0 million, respectively, in the area of environmental protection
and compliance. Included in the 2002 capital expenditure estimate is $4.0
million to complete reconstruction of the Leverkusen, Germany sulfate plant.
In February 2001, EMS loaned $13.4 million to Tremont Corporation
("Tremont") under a reducing revolving loan agreement. See Notes 1 and 7 to the
Consolidated Financial Statements. The loan was approved by special committees
of the Company's and EMS's Boards of Directors. The loan bears interest at prime
plus 2% (8% at December 31, 2001), is due March 31, 2003 and is collateralized
by 10.2 million shares of NL common stock owned by Tremont. The creditworthiness
-30-
of Tremont is dependent, in part, on the value of the Company as Tremont's
interest in the Company is one of Tremont's more substantial assets. The maximum
amount available for borrowing by Tremont reduces by $250,000 per quarter. In
each of the second, third and fourth quarters of 2001, Tremont repaid $250,000
of the loan. At December 31, 2001, the outstanding loan balance was $12.7
million and no amounts were available for additional borrowings by Tremont.
In May 2001, a wholly owned subsidiary of EMS loaned $20.0 million to
the Harold C. Simmons Family Trust No. 2 (the "Family Trust"), one of the trusts
described in Notes 1 and 7 to the Consolidated Financial Statements, under a
$25.0 million revolving credit agreement. The loan was approved by special
committees of the Company's and EMS's Boards of Directors. The loan bears
interest at prime (6% at December 31, 2001), is due on demand with 60 days
notice and is collateralized by 13,749 shares, or approximately 35%, of
Contran's outstanding Class A voting common stock and 5,000 shares, or 100%, of
Contran's Series E Cumulative preferred stock, both of which are owned by the
Family Trust. The value of the collateral is dependent, in part, on the value of
the Company as Contran's interest in the Company, through its beneficial
ownership of Valhi, is one of Contran's more substantial assets. At December 31,
2001, $5.0 million was available for additional borrowing by the Family Trust.
In November 2001, $7.9 million of restricted cash related to certain
letters of credit supporting certain insurance related contracts was released.
In January 2002, the Company purchased EWI RE, Inc. and EWI RE, Ltd.
(collectively "EWI") for approximately $9.0 million. See Notes 19 and 23 to the
Consolidated Financial Statements.
During 2000 the Company purchased 1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26 million. See Notes 1 and 6
to the Consolidated Financial Statements. Tremont owns 10.2 million shares, or
21%, of NL's outstanding common stock.
Financing cash flows
In the second and third quarters of 2001, the Company repaid euro 7.6
million ($6.5 million when paid) and euro 16.4 million ($14.9 million when
paid), respectively, of its euro-denominated short-term debt with excess cash
flow from operations.
In the second and third quarters of 2000 the Company repaid euro 17.9
million ($16.7 million when paid) and euro 13.0 million ($12.2 million when
paid), respectively, of its euro-denominated short-term debt with cash flow from
operations. In December 2000 the Company borrowed $43 million of short-term
non-U.S. dollar-denominated bank debt and used the proceeds along with cash on
hand to redeem $50 million (par value) of the Company's 11.75% Senior Secured
Notes.
In the first quarter of 1999 the Company prepaid the remaining balance
of DM 107 million ($60 million when paid) of a term loan that was part of the
Company's previous DM bank credit facility, principally by drawing DM 100
million ($56 million when drawn) on the revolving portion of the DM credit
facility. In the second and third quarters of 1999, the Company repaid DM 60
million ($33 million when paid) of the DM revolving credit facility with cash
provided from operations. The revolver's outstanding balance of DM 120 million
was further reduced in October 1999 by DM 20 million ($11 million when paid). In
-31-
December 1999 the Company borrowed $26 million of short-term unsecured
euro-denominated bank debt and used the proceeds along with cash on hand to
prepay the remaining balance of DM 100 million ($52 million when paid) of the
revolving portion of the DM credit facility. The DM credit facility was then
terminated, which released collateral and eliminated certain restrictive loan
covenants.
On February 6, 2002, the Company gave notice to the trustee of its
intention to redeem $25 million principal amount of the 11.75% Senior Secured
Notes due 2003 on March 22, 2002, at the current call price of 100%. See Note 23
to the Consolidated Financial Statements. The Company may redeem additional
11.75% Senior Secured Notes in 2002.
The 11.75% Senior Secured Notes are issued pursuant to an indenture
which contains a number of covenants and restrictions which, among others,
restrict the ability of the Company and its subsidiaries to incur debt, incur
liens, pay dividends, merge or consolidate with, or sell or transfer all or
substantially all of their assets to another entity. In the event of a Change of
Control, as defined in the indenture, the Company would be required to make an
offer to purchase the 11.75% Senior Secured Notes at 101% of the principal
amount. The Company would also be required to make an offer to purchase a
specified amount of the 11.75% Senior Secured Notes at par value in the event
the Company 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. See Note 11 to the
Consolidated Financial Statements. Other than operating lease commitments
disclosed in Note 20 to the Consolidated Financial Statements, the Company is
not party to any off-balance sheet financing arrangements.
Dividends paid during 2001, 2000 and 1999 totaled $39.8 million, $32.7
million and $7.2 million, respectively. At December 31, 2001, the Company had
$20 million available for payment of dividends, acquisition of treasury shares,
acquisition of affiliate stock and other restricted payments as defined in the
11.75% Senior Secured Notes indenture. On February 6, 2002, the Company's Board
of Directors declared a regular quarterly dividend of $.20 per share to
shareholders of record as of March 8, 2002 to be paid on March 22, 2002.
Pursuant to its share repurchase program, the Company purchased
1,059,000 shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9 million in 2000 and 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999. Approximately 1,207,000
additional shares are available for purchase under the Company's share
repurchase program. The available shares may be purchased over an unspecified
period of time, and are to be held as treasury shares available for general
corporate purposes.
Cash, cash equivalents, restricted cash and restricted marketable debt
securities and borrowing availability
At December 31, 2001, the Company had cash and cash equivalents
aggregating $116 million (29% held by non-U.S. subsidiaries) and $83 million of
restricted cash equivalents and restricted marketable debt securities held by
U.S. subsidiaries, of which $16 million was classified as a noncurrent asset. At
December 31, 2001, the Company's subsidiaries had $8 million available for
borrowing under non-U.S. credit facilities. At December 31, 2001, the Company
had complied with all financial covenants governing its debt agreements.
-32-
Based upon the Company's expectations for the TiO2 industry and
anticipated demands on the Company's cash resources as discussed herein, the
Company expects to have sufficient liquidity to meet its near-term obligations
including operations, capital expenditures, debt service and current dividend
policy. To the extent that actual developments differ from Company's
expectations, the Company's liquidity could be adversely affected.
Income taxes
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest. See Note 14 to the
Consolidated Financial Statements.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax asset related to certain German tax attributes. The Company
does not expect its future current income tax expense to be affected by the rate
change in Germany.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately euro 10.4 million ($9.2 million at December
31, 2001). The Company has filed protests to the assessments for the years 1991
to 1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At December 31, 2001, the Company had net deferred tax liabilities of
$133 million. The Company operates in numerous tax jurisdictions, in certain of
which it has temporary differences that net to deferred tax assets (before
valuation allowance). The Company has provided a deferred tax valuation
allowance of $154 million at December 31, 2001, principally related to Germany,
partially offsetting deferred tax assets which the Company believes do not
currently meet the "more-likely-than-not" recognition criteria.
-33-
Environmental matters and litigation
The Company has been named as a defendant, PRP, or both, in a number of
legal proceedings associated with environmental matters, including waste
disposal sites, mining locations and facilities currently or previously owned,
operated or used by the Company, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant, including sites for which EMS has
contractually assumed the Company's obligation. The Company believes it has
adequate accruals for reasonably estimable costs of such matters, but the
Company's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs.
The Company is also a defendant in a number of legal proceedings seeking
damages for personal injury and property damage arising out of the sale of lead
pigments and lead-based paints. There is no assurance that the Company will not
incur future liability in respect of this pending litigation in view of the
inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, the Company believes that the pending lead pigment and
paint litigation is without merit. The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot reasonably be
estimated. The Company currently believes the disposition of all claims and
disputes, individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity. There can be no assurance that additional matters of these types
will not arise in the future. See Item 3. "Legal Proceedings" and Note 20 to the
Consolidated Financial Statements.
Foreign operations
As discussed above, the Company has substantial operations located
outside the United States for which the functional currency is not the U.S.
dollar. As a result, the reported amount of the Company's assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets, will fluctuate based upon changes in currency exchange rates. At
December 31, 2001, the Company had substantial net assets denominated in the
euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling.
Euro currency
Beginning January 1, 1999, certain members of the European Union ("EU"),
including Germany, Belgium, the Netherlands and France, adopted a new European
currency unit (the "euro") as their common legal currency. Following the
introduction of the euro, the participating countries' national currencies
remain legal tender as denominations of the euro from January 1, 1999 through
January 1, 2002, and the exchange rates between the euro and such national
currency units are fixed. Beginning January 1, 2002, national currency units
were exchanged for euros and the euro became the primary legal tender currency.
The Company conducts substantial operations in Europe. As of January 1,
2001, the functional currency of the Company's German, Belgian, Dutch and French
operations have been converted to the euro from their respective national
currencies. The Company has assessed and evaluated the impact of the euro
conversion on its business and made the necessary system conversions. The euro
-34-
conversion may impact the Company's operations including, among other things,
changes in product pricing decisions necessitated by cross-border price
transparencies. Such changes in product pricing decisions could impact both
selling prices and purchasing costs and, consequently, favorably or unfavorably
impact results of operations, financial condition or liquidity.
Other
The Company periodically evaluates its liquidity requirements,
alternative uses of capital, capital needs and availability of resources in view
of, among other things, its debt service and capital expenditure requirements
and estimated future operating cash flows. As a result of this process, the
Company in the past has sought, and in the future may seek, to reduce,
refinance, repurchase or restructure indebtedness; raise additional capital;
issue additional securities; repurchase shares of its common stock; modify its
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets; or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business, the
Company may review opportunities for the acquisition, divestiture, joint venture
or other business combinations in the chemicals or other industries, as well as
the acquisition of interests in related companies. In the event of any
acquisition or joint venture transaction, the Company may consider using
available cash, issuing equity securities or increasing its indebtedness to the
extent permitted by the agreements governing the Company's existing debt. See
Note 11 to the Consolidated Financial Statements.
Summary of debt and other contractual commitments
As more fully described in the Notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 11 and 20 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments that are
unconditional both in terms of timing and amount by the type and date of
payment.
Unconditional Payment Due Date
-----------------------------------------------
2003 - 2005 - 2007 and
Contractual Commitment 2002 2004 2006 after Total
---------------------- ------ ------- ------ -------- --------
(In millions)
Indebtedness .................. $ 47.2 $ 195.2 $ .2 $ -- $ 242.6
-------- -------- ------- -------- --------
Property and equipment ........ 11.0 -- -- -- 11.0
-------- -------- ------- -------- --------
Operating leases .............. 4.0 5.2 2.8 20.1 32.1
-------- -------- ------- -------- --------
$ 62.2 $ 200.4 $ 3.0 $ 20.1 $ 285.7
======== ======== ======= ======== ========
-35-
In addition, the Company is a party to certain other agreements that
contractually and unconditionally commit the Company to pay certain amounts in
the future. However, while the Company believes it is probable that amounts will
be spent in the future under such contracts, the amount and/or the timing of
such future payments will vary depending on certain provisions of the applicable
contract. Agreements to which the Company is a party that fall into this
category, more fully described in Note 20 to the Consolidated Financial
Statements, includes the Company's long-term supply contracts for the purchase
of chloride-process TiO2 feedstock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The Company is exposed to market risk from changes in currency exchange
rates, interest rates and equity security prices. In the past, the Company has
periodically entered into interest rate swaps or other types of contracts in
order to manage a portion of its interest rate market risk. Otherwise, the
Company has not generally entered into forward or option contracts to manage
such market risks, nor has the Company entered into any such contract or other
type of derivative instrument for trading purposes. The Company was not a party
to any forward or derivative option contracts related to currency exchange
rates, interest rates or equity security prices at December 31, 2001 or 2000.
See Notes 2 and 21 to the Consolidated Financial Statements.
Interest rates
The Company is exposed to market risk from changes in interest rates,
primarily related to indebtedness. At December 31, 2001, the Company's aggregate
indebtedness was split between 81% of fixed-rate instruments and 19% of
variable-rate borrowings (2000 - 73% fixed-rate and 27% variable-rate). The
large percentage of fixed-rate debt instruments minimizes earnings volatility
which would result from changes in interest rates. The following table presents
principal amounts and weighted-average interest rates, by contractual maturity
dates, for the Company's aggregate indebtedness at December 31, 2001 and 2000.
At December 31, 2001 and 2000, all outstanding fixed-rate indebtedness was
denominated in U.S. dollars, and all outstanding variable-rate indebtedness was
denominated in either euros or Norwegian kroner. Information shown below for
such euro- and kroner-denominated indebtedness is presented in its U.S. dollar
equivalent at December 31, 2001 using that date's exchange rate of 1.13 euro per
U.S. dollar (2000 - 1.08 euro per U.S. dollar) and 9.02 kroner per U.S. dollar
(2000 - 8.90 kroner per U.S. dollar). Certain kroner-denominated capital leases
totaling $2.5 million in 2001 and $2.1 million in 2000 have been excluded from
the table below.
-36-
Fair value at
Contractual Maturity Date December 31,
---------------------------------- -------------
N/A 2002 2003 Total 2001
--- ---- ---- ----- -------------
(In millions)
December 31, 2001:
Fixed-rate debt (U.S. dollar-
denominated):
Principal amount .................. $ -- $ 194.0 $ 194.0 $ 194.9
Weighted-average interest rate .... -- 11.75% 11.75%
Variable-rate debt (Non-U.S. dollar
-denominated):
Principal amount - euro-denominated $ 24.0 $ -- $ 24.0 $ 24.0
Weighted-average interest rate .... 3.8% -- 3.8%
Principal amount - kroner
denominated ..................... $ 22.2 $ -- $ 22.2 $ 22.2
Weighted-average interest rate .... 7.3% -- 7.3%
2001 2002 2003 Total 2000
---- ---- ---- ----- ----
(In millions)
December 31, 2000:
Fixed-rate debt (U.S.dollar-
denominated):
Principal amount .................. $ -- $ -- $ 194.0 $ 194.0 $ 195.9
Weighted-average interest rate .... -- -- 11.75% 11.75%
Variable-rate debt (Non-U.S. dollar-
denominated):
Principal amount - euro-denominated $ 47.5 $ -- $ -- $ 47.5 $ 47.5
Weighted-average interest rate .... 5.3% -- -- 5.3%
Principal amount - kroner
denominated ..................... $ 22.5 $ -- $ -- $ 22.5 $ 22.5
Weighted-average interest rate .... 7.9% -- -- 7.9%
Currency exchange rates
The Company is exposed to market risk arising from changes in currency
exchange rates as a result of manufacturing and selling its products worldwide.
Earnings are primarily affected by fluctuations in the value of the U.S. dollar
relative to the euro, Canadian dollar, Norwegian kroner and the United Kingdom
pound sterling. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of risks and uncertainties
related to the conversion of certain of these currencies to the euro.
At December 31, 2001, the Company had $24.0 million of indebtedness
denominated in euros (2000 - $47.5 million) and $22.2 million of indebtedness
denominated in Norwegian kroner (2000 - $22.5 million). The potential increase
in the U.S. dollar equivalent of the principal amount outstanding resulting from
a hypothetical 10% adverse change in exchange rates would be approximately $4.6
million (2000 - $7.0 million).
-37-
Marketable equity and marketable debt security prices
The Company is exposed to market risk due to changes in prices of the
marketable equity securities which are held. The fair value of such equity
securities at December 31, 2001 and 2000 was $45.2 million and $47.2 million,
respectively. The potential change in the aggregate fair value of these
investments, assuming a 10% change in prices, would be $4.5 million and $4.7
million, respectively. The fair value of marketable debt securities at December
31, 2001 was $19.7 million. The potential change in the aggregate fair value of
these investments assuming a 10% change in prices would be $2.0 million. The
Company did not hold any investments in marketable debt securities at December
31, 2000.
Other
The Company believes there are certain shortcomings in the sensitivity
analyses presented above, which analyses are required under the Securities and
Exchange Commission's regulations. For example, the hypothetical affect of
changes in interest rates discussed above ignores the potential effect on other
variables which affect the Company's results of operations and cash flows, such
as demand for the Company's products, sales volumes and selling prices and
operating expenses. Contrary to the above assumptions, changes in interest rates
rarely result in simultaneous parallel shifts along the yield curve.
Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses the Company would incur assuming the
hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions could differ materially from such
assumptions. Accordingly, such forward-looking statements should not be
considered to be projections by the Company of future events, gains or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "NL Proxy Statement").
-38-
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the NL Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the NL Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the NL Proxy Statement. See also Note 19 to the Consolidated Financial
Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
----------------------------------
The consolidated financial statements and schedules listed by
the Registrant on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of
this Annual Report.
(b) Reports on Form 8-K
-------------------
There were no Reports on Form 8-K filed during the quarter
ended December 31, 2001 and through the date of this report.
(c) Exhibits
--------
Included as exhibits are the items listed in the Exhibit
Index. NL will furnish a copy of any of the exhibits listed
below upon payment of $4.00 per exhibit to cover the costs to
NL of furnishing the exhibits. Instruments defining the rights
of holders of debt issues which do not exceed 10% of
consolidated total assets will be furnished to the Securities
and Exchange Commission upon request.
-39-
Item No. Exhibit Index
- -------- -------------
3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference
to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1990.
3.2 Certificate of Amended and Restated Certificate of Incorporation
dated June 28, 1990 - incorporated by reference to Exhibit 1 to
the Registrant's Proxy Statement on Schedule 14A for the annual
meeting held on June 28, 1990.
4.1 Registration Rights Agreement dated October 30, 1991, by and
between the Registrant and Tremont Corporation - incorporated by
reference to Exhibit 4.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991.
4.2 Indenture dated October 20, 1993 governing the Registrant's
11.75% Senior Secured Notes due 2003, including form of Senior
Note - incorporated by reference to Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
4.3 Senior Mirror Notes dated October 20, 1993 - incorporated by
reference to Exhibit 4.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.4 Senior Note Subsidiary Pledge Agreement dated October 20, 1993
between Registrant and Kronos, Inc. - incorporated by reference
to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
4.5 Third Party Pledge and Intercreditor Agreement dated October 20,
1993 between Registrant, Chase Manhattan Bank (National
Association) and Chemical Bank - incorporated by reference to
Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993.
10.1 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985.
10.2 Contract on Supplies and Services among Bayer AG, Kronos
Titan-GmbH and Kronos International, Inc. dated June 30, 1995
(English translation from German language document) -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
10.3** 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
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
-40-
10.4** 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
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.5** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.
10.6 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
10.7 Joint Venture Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993.
10.8 Kronos Offtake Agreement dated as of October 18, 1993 between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.9 Amendment No. 1 to Kronos Offtake Agreement dated as of December
20, 1995 between Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.10 Tioxide Americas Offtake Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Louisiana Pigment Company, L.P.
- incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.11 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
December 20, 1995 between Tioxide Americas Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit
10.24 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.12 TCI/KCI Output Purchase Agreement dated as of October 18, 1993
between Tioxide Canada Inc. and Kronos Canada, Inc. -
incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.13 TAI/KLA Output Purchase Agreement dated as of October 18, 1993
between Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
-41-
10.14 Master Technology Exchange Agreement dated as of October 18, 1993
among Kronos, Inc., Kronos Louisiana, Inc., Kronos International,
Inc., Tioxide Group Limited and Tioxide Group Services Limited -
incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993.
10.15 Parents' Undertaking dated as of October 18, 1993 between ICI
American Holdings Inc. and Kronos, Inc. - incorporated by
reference to Exhibit 10.9 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
10.16 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and
Kronos Louisiana, Inc. - incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993.
10.17 Form of Director's Indemnity Agreement between NL and the
independent members of the Board of Directors of NL -
incorporated by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987.
10.18* 1989 Long Term Performance Incentive Plan of NL Industries, Inc.
- incorporated by reference to Exhibit B to the Registrant's
Proxy Statement on Schedule 14A for the annual meeting of
shareholders held on May 8, 1996.
10.19* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
8, 1996.
10.20* NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit B to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
9, 2001.
10.21* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan,
as adopted by the Board of Directors on February 13, 1992 -
incorporated by reference to Appendix A to the Registrant's Proxy
Statement on Schedule 14A for the annual meeting of shareholders
held April 30, 1992.
10.22* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated
by reference to Appendix A to the Registrant's Proxy Statement on
Schedule 14A for the annual meeting of shareholders held on May
6, 1998.
10.23 Intercorporate Services Agreement by and between Contran
Corporation and the Registrant effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
-42-
10.24 Intercorporate Service Agreement by and between Titanium Metals
Corporation and the Registrant effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
10.25 Intercorporate Services Agreement by and between Tremont
Corporation and the Registrant effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
10.26 Insurance Sharing Agreement, effective January 1, 1990, by and
between the Registrant, NL Insurance, Ltd. (an indirect
subsidiary of Tremont Corporation) and Baroid Corporation -
incorporated by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991.
10.27* Executive severance agreement effective as of March 9, 1995 by
and between the Registrant and Lawrence A. Wigdor - incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
10.28* Executive severance agreement effective as of July 24, 1996 by
and between the Registrant and J. Landis Martin - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
10.29* Supplemental Executive Retirement Plan for Executives and
Officers of NL Industries, Inc. effective as of January 1, 1991 -
incorporated by reference to Exhibit 10.26 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
10.30* Amended and Restated Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. effective as of
May 1, 2001.
10.31* Agreement to Defer Bonus Payment dated February 20, 1998 between
the Registrant and Lawrence A. Wigdor and related trust agreement
- incorporated by reference to Exhibit 10.48 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.32* Agreement to Defer Bonus Payment dated January 10, 2002 between
the Registrant and Lawrence A. Wigdor and related trust
agreements.
10.33* Agreement to Defer Bonus Payment dated February 20, 1998 between
the Registrant and J. Landis Martin and related trust agreement -
incorporated by reference to Exhibit 10.49 to the Registrant's
Annual Report of Form 10-K for the year ended December 31, 1997.
10.34 Revolving Loan Note dated February 9, 2001 with Tremont
Corporation as Maker and NL Environmental Management Services,
Inc. as Payee - incorporated by reference to Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
-43-
10.35 Security Agreement dated February 9, 2001 by and between Tremont
Corporation and NL Environmental Management Services, Inc. -
incorporated by reference to Exhibit 10.35 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000.
10.36 Tax Agreement between Valhi, Inc. and NL Industries, Inc.
effective as of January 1, 2001- incorporated by reference to
Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.37 Subscription Agreement by and among Valhi, Inc., Tremont
Holdings, LLC and Tremont Group, Inc. effective as of December
31, 2000 - incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000.
10.38 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001.
10.39 Security Agreement dated May 4, 2001 by and between Harold C.
Simmons Family Trust No. 2 and EMS Financial, Inc. - incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001.
10.40 Purchase Agreement dated January 4, 2002 by and among Kronos,
Inc. as the Purchaser, and Big Bend Holdings LLC and Contran
Insurance Holdings, Inc., as Sellers regarding the sale and
purchase of EWI RE, Inc. and EWI RE, Ltd.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
99.1 Annual Report of NL Industries, Inc. Retirement Savings Plan
(Form 11-K) to be filed under Form 10-K/A to the Registrant's
Annual Report on Form 10-K within 180 days after December 31,
2001.
All documents in the Exhibit Index above that have been incorporated by
reference were previously filed by the Registrant under SEC File Number 1-640.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
-44-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NL Industries, Inc.
(Registrant)
By /s/ J. Landis Martin
-----------------------------------
J. Landis Martin, March 14, 2002
President and Chief Financial Officer
/s/ J. Landis Martin /s/ Harold C. Simmons
- ------------------------------------- -----------------------------------
J. Landis Martin, March 14, 2002 Harold C. Simmons, March 14, 2002
Director, President and Chief Chairman of the Board
Executive Officer
(Principal Executive Officer)
/s/ Glenn R. Simmons /s/ Steven L. Watson
- ------------------------------------- -----------------------------------
Glenn R. Simmons, March 14, 2002 Steven L. Watson, March 14, 2002
Director Director
/s/ Kenneth R. Peak /s/ Dr. Lawrence A. Wigdor
- ------------------------------------- -----------------------------------
Kenneth R. Peak, March 14, 2002 Dr. Lawrence A. Wigdor,
Director March 14,2002
Director, President and Chief
Executive Officer of Kronos
/s/ General Thomas P. Stafford /s/ Ann Manix
- ------------------------------------- -----------------------------------
General Thomas P. Stafford, Ann Manix, March 14, 2002
March 14, 2002 Director
Director
/s/ Robert D. Hardy
- -------------------------------------
Robert D. Hardy, March 14, 2002
Vice President, Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
-45-
NL INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Pages
- -------------------- -----
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2001 and 2000 F-3 / F-4
Consolidated Statements of Income - Years ended
December 31, 2001, 2000 and 1999 F-5 / F-6
Consolidated Statements of Comprehensive Income - Years
ended December 31, 2001, 2000 and 1999 F-7
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 2001, 2000 and 1999 F-8
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 F-9 / F-11
Notes to Consolidated Financial Statements F-12 / F-56
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I - Condensed Financial Information of Registrant S-2 / S-7
Schedule II - Valuation and Qualifying Accounts S-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of NL Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of NL Industries, Inc. at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 1, 2002
F-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except per share data)
ASSETS 2001 2000
---------- ----------
Current assets:
Cash and cash equivalents ........................ $ 116,037 $ 120,378
Restricted cash equivalents ...................... 63,257 69,242
Restricted marketable debt securities ............ 3,583 --
Accounts and notes receivable .................... 125,721 131,540
Receivable from affiliates ....................... 3,698 214
Refundable income taxes .......................... 1,530 12,302
Inventories ...................................... 231,056 205,973
Prepaid expenses ................................. 3,193 2,458
Deferred income taxes ............................ 11,011 11,673
---------- ----------
Total current assets ......................... 559,086 553,780
---------- ----------
Other assets:
Marketable equity securities ..................... 45,227 47,186
Receivable from affiliates ....................... 31,650 --
Investment in TiO2 manufacturing joint venture ... 138,428 150,002
Prepaid pension cost ............................. 18,411 22,789
Restricted marketable debt securities ............ 16,121 --
Restricted cash equivalents ...................... -- 17,942
Unrecognized net pension obligations ............. 5,901 --
Other ............................................ 6,517 4,707
---------- ----------
Total other assets ........................... 262,255 242,626
---------- ----------
Property and equipment:
Land ............................................. 24,579 24,978
Buildings ........................................ 130,710 129,019
Machinery and equipment .......................... 537,958 530,920
Mining properties ................................ 67,649 67,134
Construction in progress ......................... 5,071 4,586
---------- ----------
765,967 756,637
Less accumulated depreciation and depletion ...... 436,217 432,255
---------- ----------
Net property and equipment ................... 329,750 324,382
---------- ----------
$1,151,091 $1,120,788
========== ==========
F-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2001 and 2000
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
----------- -----------
Current liabilities:
Notes payable ...................................... $ 46,201 $ 69,970
Current maturities of long-term debt ............... 1,033 730
Accounts payable and accrued liabilities ........... 176,223 147,877
Payable to affiliates .............................. 6,919 10,634
Accrued environmental costs ........................ 59,891 53,307
Income taxes ....................................... 7,277 13,616
Deferred income taxes .............................. 1,530 1,822
----------- -----------
Total current liabilities ...................... 299,074 297,956
----------- -----------
Noncurrent liabilities:
Long-term debt ..................................... 195,465 195,363
Deferred income taxes .............................. 143,256 145,673
Accrued environmental costs ........................ 47,589 57,133
Accrued pension cost ............................... 26,985 21,220
Accrued postretirement benefits cost ............... 29,842 29,404
Other .............................................. 14,729 23,272
----------- -----------
Total noncurrent liabilities ................... 457,866 472,065
----------- -----------
Minority interest ...................................... 7,208 6,279
----------- -----------
Shareholders' equity:
Preferred stock - 5,000 shares authorized, no shares
issued or outstanding ............................ -- --
Common stock - $.125 par value; 150,000 shares
authorized; 66,845 and 66,839 shares issued ...... 8,355 8,355
Additional paid-in capital ......................... 777,597 777,528
Retained earnings .................................. 222,722 141,073
Accumulated other comprehensive income (loss):
Currency translation ........................... (208,349) (190,757)
Marketable securities .......................... 8,350 8,885
Pension liabilities ............................ (6,352) --
Treasury stock, at cost (17,808 and 16,787 shares) . (415,380) (400,596)
----------- -----------
Total shareholders' equity ..................... 386,943 344,488
----------- -----------
$ 1,151,091 $ 1,120,788
=========== ===========
Commitments and contingencies (Notes 7, 14 and 20)
See accompanying notes to consolidated financial statements.
F-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
2001 2000 1999
----------- ----------- -----------
Revenues and other income:
Net sales .............................. $ 835,099 $ 922,319 $ 908,387
Litigation settlement gains, net ....... 11,730 69,465 --
Insurance recoveries, net .............. 17,468 -- --
Other income, net ...................... 23,136 23,283 23,646
----------- ----------- -----------
887,433 1,015,067 932,033
----------- ----------- -----------
Costs and expenses:
Cost of sales .......................... 578,060 610,449 662,315
Selling, general and administrative .... 124,512 137,178 134,342
Interest ............................... 27,569 31,243 36,884
----------- ----------- -----------
730,141 778,870 833,541
----------- ----------- -----------
Income before income taxes, minority
interest and extraordinary item .. 157,292 236,197 98,492
Income tax expense (benefit) ............... 34,925 78,420 (64,601)
----------- ----------- -----------
Income before minority interest and
extraordinary item ............... 122,367 157,777 163,093
Minority interest .......................... 960 2,436 3,322
----------- ----------- -----------
Income before extraordinary item ... 121,407 155,341 159,771
Extraordinary item - early extinguishment of
debt, net of tax benefit of $394 ......... -- (732) --
----------- ----------- -----------
Net income ......................... $ 121,407 $ 154,609 $ 159,771
=========== =========== ===========
F-5
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
2001 2000 1999
---------- ---------- ----------
Basic earnings per share:
Income before extraordinary item ... $ 2.44 $ 3.08 $ 3.09
Extraordinary item ................. -- (.01) --
---------- ---------- ----------
Net income ..................... $ 2.44$ 3.07 $ 3.09
========== ========== ==========
Diluted earnings per share:
Income before extraordinary item ... $ 2.44 $ 3.06 $ 3.08
Extraordinary item ................. -- (.01) --
---------- ---------- ----------
Net income ..................... $ 2.44 $ 3.05 $ 3.08
========== ========== ==========
Weighted average shares used in the
calculation of earnings per share:
Basic .............................. 49,732 50,415 51,774
Dilutive impact of stock options ... 124 334 93
---------- ---------- ----------
Diluted ............................ 49,856 50,749 51,867
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Net income ................................... $ 121,407 $ 154,609 $ 159,771
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gains (losses)
arising during the period .......... (1,275) 4,064 (1,641)
Add: reclassification adjustment
for loss included in net income .... 740 1,964 --
--------- --------- ---------
(535) 6,028 (1,641)
Minimum pension liabilities adjustment ... (6,352) 1,756 1,431
Currency translation adjustment .......... (17,592) (30,735) (26,582)
--------- --------- ---------
Total other comprehensive loss ....... (24,479) (22,951) (26,792)
--------- --------- ---------
Comprehensive income ..................... $ 96,928 $ 131,658 $ 132,979
========= ========= =========
See accompanying notes to consolidated financial statements.
F-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
Accumulated other
comprehensive income (loss)
Additional Retained ---------------------------------------
Common paid-in earnings Currency Pension Marketable
stock capital (deficit) translation liabilities securities
--------- ---------- --------- ----------- ----------- ----------
Balance at December 31, 1998 .................... $ 8,355 $ 774,288 $(133,379) $(133,440) $ (3,187) $ 4,498
Net income ...................................... -- -- 159,771 -- -- --
Other comprehensive income (loss), net of tax ... -- -- -- (26,582) 1,431 (1,641)
Common dividends declared - $.14 per share ..... -- -- (7,242) -- -- --
Tax benefit of stock options exercised .......... -- 16 -- -- -- --
Treasury stock:
Acquired (552 shares) ....................... -- -- -- -- -- --
Reissued (25 shares) ........................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 .................... 8,355 774,304 19,150 (160,022) (1,756) 2,857
Net income ...................................... -- -- 154,609 -- -- --
Other comprehensive income (loss), net of tax ... -- -- -- (30,735) 1,756 6,028
Common dividends declared - $.65 per share ...... -- -- (32,686) -- -- --
Tax benefit of stock options exercised .......... -- 3,224 -- -- -- --
Treasury stock:
Acquired (1,682 shares) ..................... -- -- -- -- -- --
Reissued (450 shares) ....................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 .................... 8,355 777,528 141,073 (190,757) -- 8,885
Net income ...................................... -- -- 121,407 -- -- --
Other comprehensive loss, net of tax ............ -- -- -- (17,592) (6,352) (535)
Common dividends declared - $.80 per share ...... -- -- (39,758) -- -- --
Tax benefit of stock options exercised .......... -- 69 -- -- -- --
Treasury stock:
Acquired (1,059 shares) ..................... -- -- -- -- -- --
Reissued (38 shares) ........................ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2001 .................... $ 8,355 $ 777,597 $ 222,722 $(208,349) $ (6,352) $ 8,350
========= ========= ========= ========= ========= =========
Treasury
stock Total
---------- --------
Balance at December 31, 1998 .................... $ (364,801) $152,334
Net income ...................................... -- 159,771
Other comprehensive income (loss), net of tax ... -- (26,792)
Common dividends declared - $.14 per share ..... -- (7,242)
Tax benefit of stock options exercised .......... -- 16
Treasury stock:
Acquired (552 shares) ....................... (7,210) (7,210)
Reissued (25 shares) ........................ 210 210
---------- --------
Balance at December 31, 1999 .................... (371,801) 271,087
Net income ...................................... -- 154,609
Other comprehensive income (loss), net of tax ... -- (22,951)
Common dividends declared - $.65 per share ...... -- (32,686)
Tax benefit of stock options exercised .......... -- 3,224
Treasury stock:
Acquired (1,682 shares) ..................... (30,886) (30,886)
Reissued (450 shares) ....................... 2,091 2,091
---------- --------
Balance at December 31, 2000 .................... (400,596) 344,488
Net income ...................................... -- 121,407
Other comprehensive loss, net of tax ............ -- (24,479)
Common dividends declared - $.80 per share ...... -- (39,758)
Tax benefit of stock options exercised .......... -- 69
Treasury stock:
Acquired (1,059 shares) ..................... (15,502) (15,502)
Reissued (38 shares) ........................ 718 718
---------- --------
Balance at December 31, 2001 .................... $ (415,380) $386,943
========== ========
See accompanying notes to consolidated financial statements.
F-8
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income ................................ $ 121,407 $ 154,609 $ 159,771
Depreciation, depletion and amortization .. 29,599 29,733 33,730
Noncash interest income on restricted cash
and restricted marketable debt securities (3,580) (1,531) --
Noncash interest expense .................. 467 599 1,682
Deferred income taxes ..................... 3,256 40,186 (86,772)
Minority interest ......................... 960 2,436 3,322
Net (gains) losses from:
Securities transactions ............... 1,133 (2,531) --
Disposition of property and equipment . 735 1,562 429
Pension cost, net ......................... (2,967) (11,816) (4,702)
Other postretirement benefits, net ........ 531 1,062 (5,459)
Distributions from TiO2 manufacturing joint
venture ................................. 11,313 7,550 13,650
Litigation settlement gains, net .......... (10,307) (69,465) --
Insurance recoveries, net ................. (17,468) -- --
Extraordinary item ........................ -- 732 --
Other, net ................................ 261 -- --
--------- --------- ---------
135,340 153,126 115,651
Change in assets and liabilities:
Accounts and notes receivable ........... 902 1,417 (22,289)
Inventories ............................. (32,698) (23,395) 20,663
Prepaid expenses ........................ (526) (244) (463)
Accounts payable and accrued liabilities 31,091 9,301 7,315
Income taxes ............................ 4,107 4,843 6,729
Accounts with affiliates ................ (5,670) (123) (3,572)
Accrued environmental costs ............. 7,068 (1,279) (13,856)
Other noncurrent assets ................. (1,937) (168) 1,090
Other noncurrent liabilities ............ (7,944) (3,723) (2,960)
--------- --------- ---------
Net cash provided by operating
activities ........................ 129,733 139,755 108,308
--------- --------- ---------
F-9
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ......................... $ (53,669) $ (31,089) $ (35,559)
Property damaged by fire:
Insurance proceeds ....................... 23,361 -- --
Other, net ............................... (3,205) -- --
Loans to affiliates:
Loans .................................... (33,400) -- --
Collections .............................. 750 -- --
Purchase of Tremont Corporation common stock . -- (26,040) --
Change in restricted cash equivalents and
restricted marketable debt securities, net . 8,509 630 (5,176)
Proceeds from disposition of property and
equipment .................................. 419 139 2,344
Proceeds from disposition of marketable
securities ................................. 4 158 --
Other, net ................................... -- (33) --
--------- --------- ---------
Net cash used by investing activities .... (57,231) (56,235) (38,391)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................... 1,437 44,923 82,038
Principal payments ....................... (22,428) (79,162) (155,787)
Dividends paid ............................... (39,758) (32,686) (7,242)
Treasury stock:
Purchased ................................ (15,502) (30,886) (7,210)
Reissued ................................. 718 2,091 210
Distributions to minority interests .......... (5) (6) (6)
--------- --------- ---------
Net cash used by financing activities .... (75,538) (95,726) (87,997)
--------- --------- ---------
Net change during the year from operating,
investing and financing activities ..... $ (3,036) $ (12,206) $ (18,080)
========= ========= =========
F-10
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and financing activities $ (3,036) $ (12,206) $ (18,080)
Currency translation ......................... (1,305) (1,640) (2,649)
--------- --------- ---------
(4,341) (13,846) (20,729)
Balance at beginning of year ................. 120,378 134,224 154,953
--------- --------- ---------
Balance at end of year ....................... $ 116,037 $ 120,378 $ 134,224
========= ========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 27,143 $ 32,354 $ 35,540
Income taxes ..................................... 29,770 33,398 14,963
F-11
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. ("NL") conducts its titanium dioxide pigments
("TiO2") operations through its wholly owned subsidiary, Kronos, Inc.
("Kronos"). At December 31, 2001, Valhi, Inc. ("Valhi") and Tremont Corporation
("Tremont"), each affiliates of Contran Corporation ("Contran"), held
approximately 61% and 21%, respectively, of NL's outstanding common stock. At
December 31, 2001, Contran and its subsidiaries held approximately 94% of
Valhi's outstanding common stock, and a company 80% owned by Valhi and 20% owned
by NL held approximately 80% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board of NL and the Chairman of the Board and Chief Executive Officer of Contran
and Valhi and a director of Tremont, may be deemed to control each of such
companies. See Notes 7 and 19.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates
The accompanying consolidated financial statements include the accounts
of NL and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated. Certain
prior-year amounts have been reclassified to conform to the current year
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles in the U.S. ("GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Actual results may differ from previously
estimated amounts under different assumptions or conditions.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is
other than the U.S. dollar are translated at year-end rates of exchange and
revenues and expenses are translated at weighted average exchange rates
prevailing during the year. Resulting translation adjustments are included in
other comprehensive income (loss), net of related income taxes. Currency
transaction gains and losses are recognized in income currently.
Cash equivalents
Cash equivalents include U.S. Treasury securities purchased under
short-term agreements to resell and bank deposits with original maturities of
three months or less.
F-12
Restricted cash equivalents and restricted marketable debt securities
Restricted cash equivalents and restricted marketable debt securities
are primarily invested in U.S. government securities and money market funds that
invest primarily in U.S. government securities. At December 31, 2001 and 2000,
restricted cash equivalents of approximately $8.6 million and $17.1 million,
respectively, collateralized undrawn letters of credit, and restricted cash
equivalents and restricted marketable debt securities of approximately $74.4
million and $70.1 million, respectively, were held by special purpose trusts
established to pay future environmental remediation obligations and other
environmental expenditures of the Company. Generally, restricted cash and
restricted marketable debt securities are classified as either a current or
noncurrent asset depending upon the classification of the liability to which the
restricted amount relates. Additionally, restricted marketable debt securities
are generally classified as either current or noncurrent assets depending upon
the maturity date of each marketable debt security and are carried at market
which approximates cost. Unrealized gains and losses on available-for-sale debt
securities are included in other comprehensive income (loss), net of related
deferred income taxes. See Note 6. Gains and losses on available-for-sale debt
securities are recognized in income upon realization and are computed based on
specific identification of the debt securities sold.
Marketable equity securities and securities transactions
Marketable equity securities are carried at market based on quoted
market prices. Unrealized gains and losses on available-for-sale equity
securities are included in other comprehensive income (loss), net of related
deferred income taxes. See Note 6. Gains and losses on available-for-sale equity
securities are recognized in income upon realization and are computed based on
specific identification of the equity securities sold. Declines in value that
are judged to be other-than-temporary are reported in other income, net.
Inventories
Inventories are stated at the lower of cost (principally average cost)
or market. Amounts are removed from inventories at average cost.
Investment in TiO2 manufacturing joint venture
Investment in a 50%-owned manufacturing joint venture is accounted for
by the equity method.
Property, equipment, depreciation and depletion
Property and equipment are stated at cost. Interest costs related to
major, long-term capital projects are capitalized as a component of construction
costs. Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.
Depreciation is computed principally by the straight-line method over
the estimated useful lives of ten to forty years for buildings and three to
twenty years for machinery and equipment. Depletion of mining properties is
computed by the unit-of-production and straight-line methods.
F-13
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 will assess impairment of other
long-lived assets (such as property and equipment and mining properties) in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 as
discussed under "New accounting principles not yet adopted."
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID is amortized over the period during which cash interest payments
are not required and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 12.
The Company accounts for stock-based employee compensation in accordance
with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. Compensation
cost recognized by the Company in accordance with APBO No. 25 was nil in 2001,
$1.7 million in 2000 and nil in 1999.
Environmental remediation costs
Environmental remediation costs are accrued when estimated future
expenditures are probable and reasonably estimable. The estimated future
expenditures generally are not discounted to present value. Recoveries of
remediation costs from other parties, if any, are reported as receivables when
their receipt is deemed probable. At December 31, 2001 and 2000, no receivables
for recoveries have been recognized.
Net sales
The Company adopted the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended, in 2000. Revenue generally is realized or realizable
and earned when all of the requirements of SAB No. 101 are met, including when
title and the risks and rewards of ownership passes to the customer (generally
at the time the product is shipped to the customer). The impact of adopting SAB
No. 101 was not material. Amounts charged to customers for shipping and handling
are included in net sales.
F-14
Repair and maintenance costs
The Company performs planned major maintenance activities during the
year. Repair and maintenance costs estimated to be incurred in connection with
planned major maintenance activities are accrued in advance and are included in
cost of goods sold.
Shipping and handling costs
Shipping and handling costs are included in selling, general and
administrative expense and were $49 million in 2001, $50 million in 2000 and $54
million in 1999.
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 subsidiaries and unconsolidated affiliates not included in the
Company's U.S. tax group (the "NL Tax Group"). The Company periodically
evaluates its deferred tax assets in the various taxing jurisdictions in which
it operates and adjusts any related valuation allowance. The Company's valuation
allowance is equal to the amount of deferred tax assets which the Company
believes do not meet the "more-likely-than-not" recognition criteria.
Effective January 1, 2001, the Company and its qualifying subsidiaries
were included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, the Company is a
party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that the Company compute its provision for U.S. income taxes
on a separate-company basis using the tax elections made by Contran. Pursuant to
the Contran Tax Agreement and using the tax elections made by Contran, the
Company makes payments to or receives payments from Valhi in amounts it would
have paid to or received from the U.S. Internal Revenue Service had it not been
a member of the Contran Tax Group. Refunds are limited to amounts previously
paid under the Contran Tax Agreement unless the Company was entitled to a refund
from the U.S. Internal Revenue Service on a separate company basis. Pursuant to
the Contran Tax Agreement, the Company has a $2.2 million receivable from Valhi
related to capital loss carrybacks which would have been recoverable from the
U.S. Internal Revenue Service.
Derivatives and hedging activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, effective January 1, 2001. SFAS No. 133
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, all derivatives are recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair value
of derivatives is dependent upon the intended use of the derivative. As
permitted by the transition requirements of SFAS No. 133, as amended, the
Company exempted from the scope of SFAS No. 133 all host contracts containing
embedded derivatives which were issued or acquired prior to January 1, 1999. The
Company is not a party to any significant derivative or hedging instrument
covered by SFAS No. 133 at December 31, 2001, and there was no impact on the
Company's financial statements from adopting SFAS No. 133.
F-15
The Company periodically uses interest rate swaps, currency swaps and
other types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 2001, 2000 and 1999.
Earnings per share
Basic earnings per share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share is
based on the weighted average number of common shares outstanding and the
dilutive impact of outstanding stock options. The weighted average number of
outstanding stock options which were excluded from the calculation of diluted
earnings per share because their impact would have been antidilutive aggregated
876,000, 222,000 and 1,511,000 in 2001, 2000 and 1999, respectively. There were
no adjustments to income from continuing operations or net income in the
computation of the diluted earnings per share amounts.
Other
Effective July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations," for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations will be accounted for by the purchase method,
and the pooling-of-interests method will be prohibited.
New accounting principles not yet adopted
The Company will adopt SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), will not be amortized
on a periodic basis. Instead, goodwill (other than equity method goodwill) will
be subject to an impairment test to be performed at least on an annual basis,
and impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill will not be tested for impairment in accordance
with SFAS No. 142; rather, the overall carrying amount of an equity method
investee will continue to be reviewed for impairment in accordance with existing
GAAP. There is currently no equity method goodwill associated with any of the
Company's equity method investees. All goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001
would not be periodically amortized from the date of such combination. The
Company had no goodwill at December 31, 2001.
The Company will adopt SFAS No. 143, "Accounting for Asset Retirement
Obligations," no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
F-16
whether it has any asset retirement obligations which are covered under the
scope of SFAS No. 143, and the effect, if any, to the Company of adopting SFAS
No. 143 has not yet been determined.
The Company will adopt SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental provisions of existing GAAP with respect to the recognition and
measurement of long-lived asset impairment contained in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant implementation issues associated with SFAS No. 121,
including expanded guidance with respect to appropriate cash flows to be used to
determine whether recognition of any long-lived asset impairment is required,
and if required how to measure the amount of the impairment. SFAS No. 144 also
requires that any net assets to be disposed of by sale to be reported at the
lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity. The Company believes the adoption of SFAS No. 144 will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
Note 3 - Business and geographic segments:
The Company's operations are conducted by Kronos in one operating
business segment - the production and sale of TiO2. Titanium dioxide pigments
are used to impart whiteness, brightness and opacity to a wide variety of
products, including paints, plastics, paper, fibers and ceramics. At December
31, 2001 and 2000, the net assets of non-U.S. subsidiaries included in
consolidated net assets approximated $394 million and $352 million,
respectively.
The Company evaluates its TiO2 segment performance based on operating
income. Operating income is defined as income before income taxes, minority
interest, extraordinary items, interest expense, certain nonrecurring items and
certain general corporate items. Corporate items excluded from operating income
include corporate expense, interest and dividend income not attributable to TiO2
operations, litigation settlement gains, securities transaction gains and losses
and gains and losses from the disposal of long-lived assets outside the ordinary
course of business. The accounting policies of the TiO2 segment are the same as
those described in Note 2. Interest income included in the calculation of TiO2
operating income is disclosed in Note 15 as "Trade interest income."
Segment assets are comprised of all assets attributable to the
reportable operating segment. The Company's investment in the TiO2 manufacturing
joint venture (see Note 8) is included in TiO2 business segment assets.
Corporate assets are not attributable to the TiO2 operating segment and consist
principally of cash, cash equivalents, restricted cash equivalents, restricted
marketable debt securities, marketable equity securities and certain receivables
from affiliates. For geographic information, net sales are attributed to the
place of manufacture (point of origin) and the location of the customer (point
of destination); property and equipment are attributed to their physical
location.
F-17
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Business segment - TiO2
Net sales ............................... $ 835,099 $ 922,319 $ 908,387
Other income, excluding corporate ....... 10,815 8,167 12,484
--------- --------- ---------
845,914 930,486 920,871
Cost of sales ........................... 578,060 610,449 662,315
Selling, general and administrative,
excluding corporate ................... 98,667 107,554 112,888
--------- --------- ---------
Operating income .................... 169,187 212,483 145,668
Insurance recoveries, net ............... 17,468 -- --
--------- --------- ---------
Income before corporate items, income
taxes, minority interest and
extraordinary item ................ 186,655 212,483 145,668
General corporate income (expense):
Securities earnings:
Interest and dividends .......... 8,886 8,346 6,597
Securities transactions, net .... (1,133) 2,531 --
Litigation settlement gains, net and
other income ...................... 16,298 73,704 4,565
Corporate expense ................... (25,845) (29,624) (21,454)
Interest expense .................... (27,569) (31,243) (36,884)
--------- --------- ---------
Income before income taxes, minority
interest and extraordinary item ... $ 157,292 $ 236,197 $ 98,492
========= ========= =========
Capital expenditures:
Kronos .............................. $ 53,656 $ 31,066 $ 32,703
General corporate ................... 13 23 2,856
--------- --------- ---------
$ 53,669 $ 31,089 $ 35,559
========= ========= =========
Depreciation, depletion and amortization:
Kronos .............................. $ 28,907 $ 28,989 $ 33,047
General corporate ................... 692 744 683
--------- --------- ---------
$ 29,599 $ 29,733 $ 33,730
========= ========= =========
F-18
Years ended December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Geographic areas
Net sales - point of origin:
Germany ......................... $ 398,470 $ 444,050 $ 459,467
United States ................... 278,624 313,426 299,520
Canada .......................... 149,412 154,579 162,746
Belgium ......................... 126,782 137,829 138,671
Norway .......................... 102,843 98,300 88,277
Other ........................... 82,320 92,691 90,442
Eliminations .................... (303,352) (318,556) (330,736)
--------- --------- ---------
$ 835,099 $ 922,319 $ 908,387
========= ========= =========
Net sales - point of destination:
Europe .......................... $ 425,338 $ 480,388 $ 478,652
United States ................... 258,347 283,327 268,037
Canada .......................... 47,061 53,060 60,834
Latin America ................... 25,514 27,104 35,308
Asia ............................ 46,169 45,922 41,612
Other ........................... 32,670 32,518 23,944
--------- --------- ---------
$ 835,099 $ 922,319 $ 908,387
========= ========= =========
December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Identifiable assets
Net property and equipment:
Germany ...................... $ 182,387 $ 173,385 $ 190,292
Canada ....................... 54,676 57,929 62,334
Belgium ...................... 46,841 46,778 49,146
Norway ....................... 38,549 38,361 39,845
Other ........................ 7,297 7,929 6,841
---------- ---------- ----------
$ 329,750 $ 324,382 $ 348,458
========== ========== ==========
Total assets:
Kronos ....................... $ 900,401 $ 893,340 $ 972,549
General corporate ............ 250,690 227,448 83,624
---------- ---------- ----------
$1,151,091 $1,120,788 $1,056,173
========== ========== ==========
F-19
Note 4 -Accounts and notes receivable:
December 31,
-------------------------
2001 2000
--------- ---------
(In thousands)
Trade receivables .............................. $ 99,989 $ 114,776
Insurance claims receivable .................... 11,505 2,236
Recoverable VAT and other receivables .......... 16,585 16,750
Allowance for doubtful accounts ................ (2,358) (2,222)
--------- ---------
$ 125,721 $ 131,540
========= =========
Note 5 - Inventories:
December 31,
---------------------------
2001 2000
-------- --------
(In thousands)
Raw materials ............................ $ 79,162 $ 66,061
Work in process .......................... 9,675 7,117
Finished products ........................ 117,201 107,120
Supplies ................................. 25,018 25,675
-------- --------
$231,056 $205,973
======== ========
Note 6- Marketable equity securities and securities transactions:
December 31,
--------------------
2001 2000
-------- --------
(in thousands)
Available-for-sale marketable equity securities:
Unrealized gains ................................... $ 14,917 $ 14,912
Unrealized losses .................................. (2,070) (1,244)
Cost ............................................... 32,380 33,518
-------- --------
Aggregate fair value ........................... $ 45,227 $ 47,186
======== ========
During 2000 the Company purchased 1,000,000 shares of Tremont's common
stock in market transactions for an aggregate of $26.0 million. Before the close
of business on December 31, 2000, the Company held 16% of Tremont's outstanding
common stock, including approximately 36,000 shares previously held by the
Company, and Valhi held an additional 64% of Tremont's outstanding common stock.
Effective with the close of business on December 31, 2000, the Company
contributed substantially all of its Tremont shares, and Valhi contributed all
of its Tremont shares, to a newly formed company, Tremont Group, Inc. ("Tremont
Group"), in return for a 20% and 80% respective ownership interest in Tremont
Group. After the contributions, Tremont Group held the 80% of Tremont previously
owned by the Company and Valhi. At December 31, 2001 and 2000, the aggregate
fair value of the Company's indirect investment in Tremont was $29.9 million and
$33.1 million, respectively.
The Company's stock of Tremont Group is redeemable at the option of the
Company for fair value based upon the value of the underlying Tremont shares,
F-20
and the Company accounts for its investment in Tremont Group as an
available-for-sale marketable equity security. The Company also held 1,186,200
shares of Valhi's outstanding common stock (approximately 1%) at December 31,
2001 and 2000. At December 31, 2001, the aggregate adjusted cost basis and fair
value of the Valhi common stock was $5.9 million ($5.9 million in 2000) and
$15.1 million ($13.6 million in 2000), respectively. The Company accounts for
investments in its parent companies as available-for-sale marketable equity
securities carried at fair value. See Note 1.
In 2000 the Company received approximately 390,000 shares of common
stock pursuant to the demutualization of an insurance company from which the
Company had purchased certain insurance policies. The Company recognized a $5.6
million securities gain based on the insurance company's initial public offering
price of $14.25 per share. The shares were placed in a Voluntary Employees'
Beneficiary Association ("VEBA") trust, the assets of which may only be used to
pay for certain retiree benefits. The Company accounted for the $5.6 million
contribution of the insurance company's common stock to the trust as a reduction
of its accrued postretirement benefits cost liability. The shares were sold by
the trust in 2000 for $7.8 million or $20 per share. See Notes 12 and 15.
In 2001 and 2000 the Company recognized noncash securities losses of
$1.1 million and $3.1 million, respectively, related to other-than-temporary
declines in value of certain available-for-sale marketable equity securities
held by the Company. See Note 15.
Note 7 - Receivable from affiliates:
A majority-owned subsidiary of the Company, NL Environmental Management
Services, Inc. ("EMS"), loaned $13.4 million to Tremont under a reducing
revolving loan agreement in the first quarter of 2001. See Note 1. The loan was
approved by special committees of the Company's and EMS's Boards of Directors.
The loan bears interest at prime plus 2% (8% at December 31, 2001), is due March
31, 2003 and is collateralized by 10.2 million shares of NL common stock owned
by Tremont. The creditworthiness of Tremont is dependent in part on the value of
the Company as Tremont's interest in the Company is one of Tremont's more
substantial assets. The maximum amount available for borrowing by Tremont
reduces by $250,000 per quarter. In each of the second, third and fourth
quarters of 2001, Tremont repaid $250,000 of the loan. At December 31, 2001, the
outstanding loan balance was $12.7 million and no amounts were available for
additional borrowings by Tremont. See Note 19.
In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the
Harold C. Simmons Family Trust No. 2 ("Family Trust"), one of the trusts
described in Note 1, under a $25 million revolving credit agreement. The loan
was approved by special committees of the Company's and EMS's Boards of
Directors. The loan bears interest at prime (6% at December 31, 2001), is due on
demand with sixty days notice and is collateralized by 13,749 shares, or
approximately 35%, of Contran's outstanding Class A voting common stock and
5,000 shares, or 100%, of Contran's Series E Cumulative preferred stock, both of
which are owned by the Family Trust. The value of this collateral is dependent
in part on the value of the Company as Contran's interest in the Company,
through its beneficial ownership of Valhi, is one of Contran's more substantial
assets. At December 31, 2001, $5 million was available for additional borrowing
by the Family Trust. The loan was classified as noncurrent at December 31, 2001
as the Company does not expect to demand repayment within one year. See Note 19.
F-21
Note 8 - Investment in TiO2 manufacturing joint venture:
Kronos Louisiana, Inc. ("KLA"), a wholly owned subsidiary of Kronos,
owns a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a
manufacturing joint venture that is also 50%-owned by Tioxide Americas Inc.
("Tioxide"), a wholly owned subsidiary of Huntsman International Holdings LLC, a
60%-owned subsidiary of Huntsman Corporation. LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.
KLA is required to purchase one-half of the TiO2 produced by LPC. LPC
operates on a break-even basis and, accordingly, the Company reports no equity
in earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to
its share of LPC's costs. Kronos' share of net costs is reported as cost of
sales as the related TiO2 acquired from LPC is sold.
LPC made cash distributions of $22.6 million in 2001, $15.1 million in
2000 and $27.3 million in 1999, equally split between the partners.
Summary balance sheets of LPC are shown below.
December 31,
-----------------------
2001 2000
-------- --------
(In thousands)
ASSETS
Current assets ................................... $ 45,872 $ 56,063
Property and equipment, net ...................... 250,501 264,918
-------- --------
$296,373 $320,981
======== ========
LIABILITIES AND PARTNERS' EQUITY
Other liabilities, primarily current ............. $ 16,767 $ 18,749
Partners' equity ................................. 279,606 302,232
-------- --------
$296,373 $320,981
======== ========
F-22
Summary income statements of LPC are shown below.
Years ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Revenues and other income:
Kronos ........................... $ 93,393 $ 92,530 $ 85,304
Tioxide .......................... 94,009 93,366 86,309
Interest ......................... 303 578 569
-------- -------- --------
187,705 186,474 172,182
-------- -------- --------
Cost and expenses:
Cost of sales .................... 187,295 186,045 171,829
General and administrative ....... 410 429 353
-------- -------- --------
187,705 186,474 172,182
-------- -------- --------
Net income ................... $ -- $ -- $ --
======== ======== ========
Note 9 - Accounts payable and accrued liabilities:
December 31,
---------------------------
2001 2000
-------- --------
(In thousands)
Accounts payable ......................... $ 99,358 $ 64,553
-------- --------
Accrued liabilities:
Employee benefits .................... 29,722 34,160
Interest ............................. 4,980 5,019
Deferred income ...................... 4,000 4,000
Other ................................ 38,163 40,145
-------- --------
76,865 83,324
-------- --------
$176,223 $147,877
======== ========
Note 10 - Other noncurrent liabilities:
December 31,
-------------------------
2001 2000
------- -------
(In thousands)
Insurance claims expense ................... $ 8,789 $10,314
Employee benefits .......................... 3,476 7,721
Deferred income ............................ 333 4,333
Other ...................................... 2,131 904
------- -------
$14,729 $23,272
======= =======
F-23
Note 11 - Notes payable and long-term debt:
December 31,
-----------------------
2001 2000
-------- --------
(In thousands)
Notes payable .................................... $ 46,201 $ 69,970
======== ========
Long-term debt:
NL - 11.75% Senior Secured Notes ............. $194,000 $194,000
Kronos ....................................... 2,498 2,093
-------- --------
196,498 196,093
Less current maturities ...................... 1,033 730
-------- --------
$195,465 $195,363
======== ========
The Company's $194 million of 11.75% Senior Secured Notes due 2003 (the
"Notes") are collateralized by a series of intercompany notes from Kronos
International, Inc. ("KII"), a wholly owned subsidiary of Kronos, to NL, the
interest rate and payment terms of which mirror those of the respective Notes
(the "Mirror Notes"). The Notes are also collateralized by a first priority lien
on the stock of Kronos.
In the event of foreclosure, the holders of the Notes would have access
to the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent of a full and unconditional guarantee of the
Notes by Kronos. In lieu of providing separate audited financial statements of
Kronos, the Company has included condensed consolidating financial information
in accordance with Rule 3-10 (e) of the SEC's Regulation S-X. See Note 24.
The Company redeemed $50 million (par value) of the Notes on December
29, 2000 at 101.5%. The remaining Notes are redeemable, at the Company's option,
at a redemption price of 100% of the principal amount. The Notes are issued
pursuant to an indenture which contains a number of covenants and restrictions
which, among others, restrict the ability of the Company and its subsidiaries to
incur debt, incur liens, pay dividends, merge or consolidate with, or sell or
transfer all or substantially all of their assets to another entity. In the
event of a Change of Control, as defined in the indenture, the Company would be
required to make an offer to purchase the Notes at 101% of the principal amount
of the Notes. The Company would also be required to make an offer to purchase a
specified amount of the Notes at par value in the event the Company 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, 2001, $20 million was
available for payment of dividends pursuant to the terms of the indenture. The
quoted market price of the Notes per $100 principal amount was $100.47 and $101
at December 31, 2001 and 2000, respectively.
On February 6, 2002, the Company gave notice to the trustee of its
intention to redeem $25 million principal amount of the Notes on March 22, 2002,
at the current call price of 100%.
Notes payable consist of short-term borrowings denominated in non-U.S.
currencies due within one year from non-U.S. banks. Borrowings total $46 million
F-24
(euro 27 million and NOK 200 million) at December 31, 2001 and $70 million (euro
51 million and NOK 200 million) at December 31, 2000. Interest rates on notes
payable ranged from 3.84% to 7.27% at December 31, 2001 and from 5.33% to 7.92%
at December 31, 2000.
Unused lines of credit available for borrowing under the Company's
non-U.S. credit facilities approximated $8 million at December 31, 2001.
The aggregate maturities of long-term debt at December 31, 2001 are
shown in the table below.
Years ending December 31, Amount
- ------------------------- ----------------
(In thousands)
2002 $ 1,033
2003 195,008
2004 216
2005 115
2006 112
2007 14
----------------
$ 196,498
================
Note 12 - Employee benefit plans:
Company-sponsored pension plans
The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees. Non-U.S. employees are
covered by plans in their respective countries and a majority of U.S. employees
are eligible to participate in a contributory savings plan.
The Company contributes to eligible U.S. employees' accounts an amount
equal to approximately 4% (4% in 2000 and 3% in 1999) of the employee's annual
eligible earnings and partially matches employee contributions to the U.S.
contributory savings plan. The Company also has a nonqualified defined
contribution plan covering certain executives, and participants receive benefits
based on a formula involving eligible earnings. The Company's expense related to
these plans was $.8 million in 2001, $1.6 million in 2000 and $1.1 million in
1999.
F-25
Certain actuarial assumptions used in measuring the defined benefit
pension assets, liabilities and expenses are presented below.
December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(Percentages)
Discount rate ................................. 5.8 to 7.3 6.0 to 7.8 5.8 to 7.5
Rate of increase in future compensation levels. 2.8 to 4.5 3.0 to 4.5 2.5 to 4.5
Long-term rate of return on plan assets ....... 6.8 to 8.5 7.0 to 9.0 6.0 to 9.0
Plan assets are comprised primarily of investments in U.S. and non-U.S.
corporate equity and debt securities, short-term investments, mutual funds and
group annuity contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
Years ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Net periodic pension cost:
Service cost benefits ....................... $ 3,976 $ 4,063 $ 3,942
Interest cost on projected benefit obligation
("PBO") ................................... 15,605 15,088 16,170
Expected return on plan assets .............. (16,143) (15,403) (15,567)
Amortization of prior service cost .......... 201 238 267
Amortization of net transition obligation ... 510 530 578
Recognized actuarial losses ................. 443 226 1,144
-------- -------- --------
$ 4,592 $ 4,742 $ 6,534
======== ======== ========
F-26
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
-------------------------
2001 2000
--------- ---------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 248,355 $ 260,186
Service cost ................................. 3,976 4,063
Interest ..................................... 15,605 15,088
Participant contributions .................... 1,005 1,027
Amendments ................................... 1,819 --
Actuarial loss ............................... 10,149 1,022
Benefits paid ................................ (15,849) (16,993)
Change in currency exchange rates ............ (3,255) (16,038)
--------- ---------
End of year .............................. 261,805 248,355
--------- ---------
Change in fair value of plan assets:
Beginning of year ............................ 216,984 218,942
Actual return on plan assets ................. 4,711 11,762
Employer contributions ....................... 7,559 16,558
Participant contributions .................... 1,005 1,027
Benefits paid ................................ (15,849) (16,993)
Change in currency exchange rates ............ (6,143) (14,312)
--------- ---------
End of year .............................. 208,267 216,984
--------- ---------
Funded status at year end:
Plan assets less than PBO .................... (53,538) (31,371)
Unrecognized actuarial loss .................. 44,744 24,191
Unrecognized prior service cost .............. 4,371 1,693
Unrecognized net transition obligation ....... 4,269 786
--------- ---------
$ (154) $ (4,701)
========= =========
Amounts recognized in the balance sheet:
Prepaid pension cost ......................... $ 18,411 $ 22,789
Accrued pension cost:
Current .................................. (5,993) (6,270)
Noncurrent ............................... (26,985) (21,220)
Unrecognized net pension obligations ......... 5,901 --
Accumulated other comprehensive loss ......... 8,512 --
--------- ---------
$ (154) $ (4,701)
========= =========
Selected information related to the Company's defined benefit pension
plans that have accumulated benefit obligations in excess of fair value of plan
assets is presented below. At December 31, 2001 and 2000, 78% and 76%,
respectively, of the projected benefit obligations of such plans relate to
non-U.S. plans.
F-27
December 31,
-------------------------
2001 2000
-------- --------
(In thousands)
Projected benefit obligation ................. $228,647 $190,141
Accumulated benefit obligation ............... 206,669 169,077
Fair value of plan assets .................... 174,832 149,767
Incentive bonus programs
Certain employees are eligible to participate in the Company's various
incentive bonus programs. The programs provide for annual payments, which may be
in the form of cash or NL common stock. The amount of the annual payment paid to
an employee, if any, is based on formulas involving the profitability of Kronos
in relation to the annual operating plan and, for most of these employees,
individual performance.
Postretirement benefits other than pensions
In addition to providing pension benefits, the Company currently
provides certain health care and life insurance benefits for eligible retired
employees. Certain of the Company's Canadian employees may become eligible for
such postretirement health care and life insurance benefits if they reach
retirement age while working for the Company. In 1989 the Company began phasing
out such benefits for currently active U.S. employees over a ten-year period and
U.S. employees retiring after 1998 are not entitled to any such benefits. The
majority of all retirees are required to contribute a portion of the cost of
their benefits and certain current and future retirees are eligible for reduced
health care benefits at age 65. With the exception of the $5.6 million
contributed in 2000 to the VEBA trust discussed in Note 6, the Company's policy
is to fund medical claims as they are incurred, net of any contributions by the
retirees.
For measuring the OPEB liability at December 31, 2001, the expected rate
of increase in health care costs is 8% in 2002 decreasing to 5.5% in 2007 and
thereafter. Other weighted-average assumptions used to measure the liability and
expense are presented below.
December 31,
----------------------
2001 2000 1999
----- ----- ----
(Percentages)
Discount rate ....................................... 7.0 7.3 7.5
Long-term rate for compensation increases ........... 6.0 6.0 6.0
Long-term rate of return on plan assets ............. 7.7 7.7 9.0
Variances from actuarially assumed rates will change accrued OPEB
liabilities, net periodic OPEB expense and funding requirements in future
periods. If the health care cost trend rate was increased (decreased) by one
percentage point for each year, postretirement benefit expense would have
increased approximately $.2 million (decreased by $.1 million) in 2001, and the
projected benefit obligation at December 31, 2001 would have increased by
approximately $1.6 million (decreased by $1.4 million).
F-28
The components of the Company's net periodic postretirement benefit cost
are set forth below.
Years ended December 31,
--------------------------------
2001 2000 1999
------- ------- -------
(In thousands)
Net periodic OPEB cost (benefit):
Service cost benefits .................. $ 94 $ 84 $ 40
Interest cost on PBO ................... 2,536 2,646 2,069
Expected return on plan assets ......... (773) (521) (526)
Amortization of prior service cost ..... (2,075) (2,075) (2,075)
Recognized actuarial losses (gains) .... 27 24 (573)
------- ------- -------
$ (191) $ 158 $(1,065)
======= ======= =======
December 31,
------------------------
2001 2000
-------- --------
(In thousands)
Change in PBO:
Beginning of year ............................ $ 37,040 $ 37,354
Service cost ................................. 94 84
Interest cost ................................ 2,536 2,646
Actuarial losses ............................. 792 1,672
Plan asset reimbursements .................... 1,197 --
Benefits paid from:
Company funds ............................ -- (1,790)
Plan assets .............................. (6,377) (2,859)
Change in currency exchange rates ............ (145) (67)
-------- --------
End of year .............................. 35,137 37,040
-------- --------
Change in fair value of plan assets:
Beginning of year ............................ 11,842 5,968
Actual return on plan assets ................. 460 2,705
Employer contributions ....................... 475 6,028
Benefits paid ................................ (6,377) (2,859)
-------- --------
End of year .............................. 6,400 11,842
-------- --------
Funded status at year end:
Plan assets less than PBO .................... (28,737) (25,198)
Unrecognized actuarial gain .................. (105) (1,135)
Unrecognized prior service cost .............. (5,783) (7,858)
-------- --------
$(34,625) $(34,191)
======== ========
Amounts recognized in the balance sheet:
Current ...................................... $ (4,783) $ (4,787)
Noncurrent ................................... (29,842) (29,404)
-------- --------
$(34,625) $(34,191)
======== ========
F-29
Note 13 - Shareholders' equity:
Common stock
Shares of common stock
-------------------------------------
Treasury
Issued stock Outstanding
------- -------- -----------
(In thousands)
Balance at December 31, 1998 .......... 66,839 15,028 51,811
Treasury shares acquired .......... -- 552 (552)
Treasury shares reissued .......... -- (25) 25
------- ------- -------
Balance at December 31, 1999 .......... 66,839 15,555 51,284
Treasury shares acquired .......... -- 1,682 (1,682)
Treasury shares reissued .......... -- (450) 450
------- ------- -------
Balance at December 31, 2000 .......... 66,839 16,787 50,052
Treasury shares acquired .......... -- 1,059 (1,059)
Treasury shares reissued .......... -- (38) 38
Other ............................. 6 -- 6
------- ------- -------
Balance at December 31, 2001 .......... 66,845 17,808 49,037
======= ======= =======
Pursuant to its share repurchase program, the Company purchased
1,059,000 shares of its common stock in the open market at an aggregate cost of
$15.5 million in 2001, 1,682,000 shares of its common stock at an aggregate cost
of $30.9 million in 2000 and 552,000 shares of its common stock in the open
market at an aggregate cost of $7.2 million in 1999. Approximately 1,207,000
additional shares are available for purchase under the Company's share
repurchase program. The available shares may be purchased over an unspecified
period of time, and are to be held as treasury shares available for general
corporate purposes.
The Company increased the regular quarterly dividend from $.03 per share
to $.035 per share in February 1999 and subsequently paid four quarterly $.035
per share cash dividends in 1999. In February 2000 the Company increased the
regular quarterly dividend to $.15 per share and subsequently paid three
quarterly $.15 per share cash dividends in the first nine months of 2000. In
October 2000 the Company increased the regular quarterly dividend to $.20 per
share and subsequently paid a quarterly $.20 per share cash dividend in the
fourth quarter of 2000. The Company paid four quarterly $.20 per share cash
dividends in 2001. On February 6, 2002, the Company's Board of Directors
declared a regular quarterly dividend of $.20 per share to shareholders of
record as of March 8, 2002 to be paid on March 22, 2002.
Common stock options
The NL Industries, Inc. 1998 Long-Term Incentive Plan ("NL Option Plan")
provides for the discretionary grant of restricted common stock, stock options,
stock appreciation rights ("SARs") and other incentive compensation to officers
and other key employees of the Company and non-employee directors. Although
certain stock options granted pursuant to a similar plan which preceded the NL
Option Plan ("Predecessor Option Plan") remain outstanding at December 31, 2001,
no additional options may be granted under the Predecessor Option Plan.
F-30
Up to five million shares of NL common stock may be issued pursuant to
the NL Option Plan and, at December 31, 2001, 3,663,000 shares were available
for future grants. The NL Option Plan provides for the grant of options that
qualify as incentive options and for options which are not so qualified.
Generally, stock options and SARs (collectively, "options") are granted at a
price equal to or greater than 100% of the market price at the date of grant,
vest over a five year period and expire ten years from the date of grant.
Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. No SARs have been granted under the NL Option Plan.
Changes in outstanding options granted pursuant to the NL Option Plan,
the Predecessor Option Plan and the nonemployee director plan are summarized in
the table below.
Exercise price Amount
per share payable
-------------------- upon
Shares Low High exercise
------ --------- --------- --------
(In thousands, except per share amounts)
Outstanding at December 31, 1998 2,119 $ 5.00 $ 24.19 $ 31,019
Granted .................... 410 11.28 15.19 5,377
Exercised .................. (25) 5.00 11.81 (209)
Forfeited .................. (67) 8.69 22.63 (1,244)
----- --------- --------- --------
Outstanding at December 31, 1999 2,437 5.00 24.19 34,943
Granted .................... 432 14.25 14.44 6,165
Exercised .................. (918) 5.00 17.97 (9,508)
Forfeited .................. (349) 8.69 24.19 (7,237)
----- --------- --------- --------
Outstanding at December 31, 2000 1,602 5.00 21.97 24,363
Granted .................... 484 20.11 20.51 9,737
Exercised .................. (38) 11.28 21.97 (627)
Forfeited .................. (34) 11.28 20.11 (513)
----- --------- --------- --------
Outstanding at December 31, 2001 2,014 $ 5.00 $ 21.97 $ 32,960
===== ========= ========= ========
At December 31, 2001, 2000 and 1999 options to purchase 658,560, 363,480
and 1,255,901 shares, respectively, were exercisable and options to purchase
391,000 shares become exercisable in 2002. Of the exercisable options, options
to purchase 386,760 shares at December 31, 2001 had exercise prices less than
the Company's December 31, 2001 quoted market price of $15.27 per share.
Outstanding options at December 31, 2001 expire at various dates through 2011,
with a weighted-average remaining life of seven years.
The pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation," is based on an estimation of the fair value of
options issued subsequent to January 1, 1995. The weighted-average fair values
of options granted during 2001, 2000 and 1999 were $7.52, $4.83 and $6.94 per
share, respectively. The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 2001, 2000 and 1999: stock price volatility of
46%, 48% and 50% in 2001, 2000 and 1999, respectively; risk-free rate of return
F-31
of 5% in 2001 and 2000 and 6% in 1999; dividend yield of 4.0% in 2001, 4.9% in
2000 and 1.2% in 1999; and an expected term of 9 years in 2001, 2000 and 1999.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma net income and basic net income per common share
were as follows. The pro forma impact on earnings per common share for 2001,
2000 and 1999 is not necessarily indicative of future effects on earnings per
share.
Years ended December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(In thousands except per share amounts)
Net income - as reported ...................... $ 121,407 $ 154,609 $ 159,771
Net income - pro forma ........................ $ 118,959 $ 152,201 $ 156,868
Net income per basic common share - as reported $ 2.44 $ 3.07 $ 3.09
Net income per basic common share - pro forma . $ 2.39 $ 3.02 $ 3.03
Preferred stock
The Company is authorized to issue a total of five million shares of
preferred stock. The rights of preferred stock as to dividends, redemption,
liquidation and conversion are determined upon issuance.
Note 14 - Income taxes:
The components of (i) income from continuing operations before income
taxes and minority interest ("pretax income"), (ii) the difference between the
provision for income taxes attributable to pretax income and the amounts that
would be expected using the U.S. federal statutory income tax rate of 35%, (iii)
the provision for income taxes and (iv) the comprehensive tax provision are
presented below.
F-32
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Pretax income:
U.S ........................................ $ 3,267 $ 73,646 $ 23,642
Non-U.S .................................... 154,025 162,551 74,850
--------- --------- ---------
$ 157,292 $ 236,197 $ 98,492
========= ========= =========
Expected tax expense ........................... $ 55,052 $ 82,669 $ 34,472
Non-U.S. tax rates ............................. (3,887) (6,445) 6,119
Resolution of German income tax audits ......... -- (5,500) (36,490)
Change in valuation allowance:
Corporate restructuring in Germany and other (23,247) -- (77,580)
Change in German income tax law ............ -- -- 24,070
Recognition of certain deductible tax
attributes which previously
did not meet the "more-likely-than-not"
recognition criteria ..................... (1,460) (2,600) (15,807)
Incremental tax on income of companies not
included in the NL Tax Group ................. 6,009 1,943 2,747
German rate change adjustment of deferred taxes -- 5,695 --
U.S. state income taxes ........................ 459 1,348 (680)
Other, net ..................................... 1,999 1,310 (1,452)
--------- --------- ---------
Income tax expense (benefit) ............... $ 34,925 $ 78,420 $ (64,601)
========= ========= =========
Provision for income taxes:
Current income tax expense (benefit):
U.S. federal ........................... $ 1,352 $ (8,255) $ 193
U.S. state ............................. 1,309 622 (2,489)
Non-U.S ................................ 29,008 45,867 24,467
--------- --------- ---------
31,669 38,234 22,171
--------- --------- ---------
Deferred income tax expense (benefit):
U.S. federal ........................... 12,369 32,128 (47,426)
U.S. state ............................. (850) 726 1,809
Non-U.S ................................ (8,263) 7,332 (41,155)
--------- --------- ---------
3,256 40,186 (86,772)
--------- --------- ---------
$ 34,925 $ 78,420 $ (64,601)
========= ========= =========
Comprehensive provision (benefit) for income
taxes allocable to:
Pretax income .............................. $ 34,925 $ 78,420 $ (64,601)
Extraordinary item ......................... -- (394) --
Additional paid-in capital ................. (69) (3,224) (16)
Other comprehensive income (loss):
Marketable equity securities ........... (287) 3,244 (883)
Pension liabilities .................... (2,160) -- --
--------- --------- ---------
$ 32,409 $ 78,046 $ (65,500)
========= ========= =========
F-33
The components of the net deferred tax liability are summarized below:
December 31,
--------------------------------------------------
2001 2000
----------------------- -----------------------
Deferred tax Deferred tax
----------------------- -----------------------
Assets Liabilities Assets Liabilities
--------- ----------- -------- -----------
(In thousands)
Tax effect of temporary differences
relating to:
Inventories ........................ $ 3,202 $ (2,849) $ 4,027 $ (2,966)
Property and equipment ............. 42,721 (54,084) 61,738 (53,753)
Accrued postretirement benefits cost 11,398 -- 13,145 --
Accrued (prepaid) pension cost ..... 2,711 (21,224) 4,348 (22,928)
Accrued environmental costs ........ 35,508 -- 37,761 --
Noncompete agreement ............... 1,517 -- 2,917 --
Other accrued liabilities and
deductible differences ........... 18,647 -- 18,327 --
Other taxable differences .......... -- (131,094) -- (122,561)
Tax on unremitted earnings of non-U.S ..
subsidiaries ......................... -- (3,933) -- (4,396)
Tax loss and tax credit carryforwards .. 118,828 -- 119,064 --
Valuation allowance .................... (154,437) -- (190,312) --
--------- --------- --------- ---------
Gross deferred tax assets
(liabilities) .................... 80,095 (213,184) 71,015 (206,604)
Reclassification, principally netting by
tax jurisdiction ..................... (68,398) 68,398 (59,109) 59,109
--------- --------- --------- ---------
Net total deferred tax assets
(liabilities) .................... 11,697 (144,786) 11,906 (147,495)
Net current deferred tax assets
(liabilities) .................... 11,011 (1,530) 11,673 (1,822)
--------- --------- --------- ---------
Net noncurrent deferred tax assets
(liabilities) .................... $ 686 $(143,256) $ 233 $(145,673)
========= ========= ========= =========
F-34
Changes in the Company's deferred income tax valuation allowance are
summarized below.
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Balance at the beginning of year .................... $ 190,312 $ 233,595 $ 134,477
Recognition of certain deductible tax
attributes which previously did not meet the
"more-likely-than-not" recognition criteria ... (24,707) (2,600) (70,946)
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria .......................... -- -- 1,629
Offset to the change in gross deferred income tax
assets due principally to redeterminations
of certain tax attributes and implementation
of certain tax planning strategies ............ (3,681) (24,955) 183,150
Foreign currency translation .................... (7,487) (15,728) (14,715)
--------- --------- ---------
Balance at the end of year .......................... $ 154,437 $ 190,312 $ 233,595
========= ========= =========
Certain of the Company's tax returns in various U.S. and non-U.S.
jurisdictions are being examined and tax authorities have proposed or may
propose tax deficiencies, including penalties and interest.
A reduction in the German "base" income tax rate from 30% to 25%,
enacted in October 2000, became effective January 1, 2001. The reduction in the
German income tax rate resulted in $5.7 million of additional deferred income
tax expense in the fourth quarter of 2000 due to a reduction of the Company's
deferred income tax asset related to certain German tax attributes. The Company
does not expect its future current income tax expense to be affected by the rate
change in Germany.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1997 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately (euro)10.4 million ($9.2 million at December
31, 2001). The Company has filed protests to the assessments for the years 1991
to 1997. The Company is in discussions with the Belgian tax authorities and
believes that a significant portion of the assessments is without merit.
No assurance can be given that the Company's tax matters will be
favorably resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
F-35
During the fourth quarter of 2001, the Company completed a restructuring
of its German subsidiaries, and as a result recognized a $17.6 million net
income tax benefit. This benefit is comprised of a $23.2 million decrease in the
valuation allowance due to a change in estimate of the Company's ability to
utilize certain German income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria offset by $5.6 million of
incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
The Company recognized a $90 million noncash income tax benefit in 1999
related to (i) a favorable resolution of the Company's previously reported tax
contingency in Germany ($36 million) and (ii) a net reduction in the Company's
deferred income tax valuation allowance due to a change in estimate of the
Company's ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($54 million).
The $54 million net reduction in the Company's deferred income tax
valuation allowance in 1999 is comprised of (i) a $78 million decrease in the
valuation allowance to recognize the benefit of certain deductible income tax
attributes which the Company now believes meets the recognition criteria as a
result of, among other things, a corporate restructuring of the Company's German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to
reduce the previously recognized benefit of certain other deductible income tax
attributes which the Company now believes do not meet the recognition criteria
due to a change in German tax law.
At December 31, 2001, the Company had, for U.S. federal income tax
purposes, a net operating loss carryforward of approximately $25 million, of
which $3 million expires in 2019 and $22 million expires in 2021 and
approximately $5.7 million of alternative minimum tax credit carryforwards with
no expiration date. The Company also has approximately $317 million of income
tax loss carryforwards in Germany with no expiration date. Unutilized foreign
tax credit carryovers of $2 million expired in 1999.
Note 15 - Other income, net:
Years ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends ................. $ 8,886 $ 8,346 $ 6,597
Securities gains (losses), net ......... (1,133) 2,531 --
-------- -------- --------
7,753 10,877 6,597
Currency transaction gains, net ............ 1,188 6,499 10,161
Noncompete agreement income ................ 4,000 4,000 4,000
Trade interest income ...................... 2,332 2,333 2,365
Disposition of property and equipment ...... (735) (1,562) (429)
Insurance recoveries, net (See Note 17) .... 7,222 -- --
Other, net ................................. 1,376 1,136 952
-------- -------- --------
$ 23,136 $ 23,283 $ 23,646
======== ======== ========
The Company received a $20 million fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological products business. The Company is amortizing the fee to income
F-36
using the straight-line method over the five-year noncompete period beginning
January 30, 1998.
Note 16 - Litigation settlement gains, net:
In June 2000 the Company recognized a $43 million net gain from a
settlement with one of its two principal former insurance carriers, and in
December 2000 the Company recognized a $26.5 million net gain from a settlement
with certain members of the other principal former insurance carrier. The
settlement gains are stated net of $3.1 million in commissions, and the gross
settlement proceeds of $72.6 million were transferred by the carriers to special
purpose trusts established to pay future remediation and other environmental
expenditures of the Company.
A settlement with remaining members of the second carrier group was
reached in January 2001, and the Company recognized a $10.3 million gain in the
first quarter of 2001. The gross settlement proceeds of $10.7 million were
transferred by the carriers to the above mentioned special purpose trusts. In
2001 the Company also recognized $1.4 million of other litigation settlement
gains.
The settlements resolved court proceedings that the Company initiated to
seek reimbursement for legal defense expenditures and indemnity coverage for
certain of its environmental remediation expenditures. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
Note 17 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001. The damages to property and the business
interruption losses caused by the fire were covered by insurance as noted below,
but the effect on the financial results of the Company on a quarter-to-quarter
basis was impacted by the timing and amount of insurance recoveries.
The Company reached an agreement and settled the coverage claim
involving the Leverkusen fire for $56.4 million during the fourth quarter of
2001 ($46.9 million received as of December 31, 2001, with the remaining $9.5
million received in January 2002), of which $27.3 million related to business
interruption and $29.1 million related to property damage, clean-up costs and
other extra expenses. The Company recognized a $17.5 million pre-tax gain in
2001 related to the property damage recovery after deducting $11.6 million of
clean-up costs and other extra expenses incurred and the carrying value of
assets destroyed in the fire. The gain was excluded from the determination of
operating income. The $27.3 million of business interruption proceeds recognized
in 2001 were allocated between other income, excluding corporate, which reflects
recovery of lost margin ($7.2 million) and as a reduction of cost of sales to
F-37
offset unallocated period costs ($20.1 million). No additional insurance
recoveries related to the Leverkusen fire are expected to be received.
Note 18 - Other items:
Advertising costs are expensed as incurred and were $1 million in each
of 2001, 2000 and 1999.
Research, development and certain sales technical support costs are
expensed as incurred and approximated $6 million in each of 2001 and 2000 and $7
million in 1999.
Interest capitalized in connection with long-term capital projects was
nil in each of 2001, 2000 and 1999.
Note 19 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in this Annual Report on Form
10-K, the Company continuously considers, reviews and evaluates, and understands
that Contran, Valhi and related entities consider, review and evaluate, such
transactions. Depending upon the business, tax and other objectives then
relevant, and restrictions under the indentures and other agreements, it is
possible that the Company might be a party to one or more such transactions in
the future.
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 various intercorporate services agreements
("ISA") with various related parties discussed below. Under the ISA's, employees
of one company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient, and the compensation of such persons.
Because of the number of companies affiliated with Contran, 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's are reviewed and
approved by the Company's Board of Directors including members who are not
officers or directors of any other entity that may be deemed to be related to
the Company.
F-38
The Company is a party to an intercorporate services agreement with
Contran ("Contran ISA") whereby Contran provides certain management services to
the Company on a fee basis. Intercorporate services fee expense related to the
Contran ISA was $1.2 million in 2001 and $1.0 million in each of 2000 and 1999.
The Company was a party in 2000 and 1999 to an intercorporate services
agreement with Valhi ("Valhi ISA") whereby Valhi and the Company provide certain
management, financial and administrative services to each other on a fee basis.
Net intercorporate services fee expense related to the Valhi ISA was $.2 million
in 2000 and $.1 million in 1999.
The Company is party to an intercorporate services agreement with
Tremont ("Tremont ISA"). Under the terms of the contract, the Company provides
certain management and financial services to Tremont on a fee basis.
Intercorporate services fee income related to the Tremont ISA was $.1 million in
each of 2001, 2000 and 1999.
The Company is party to an intercorporate services agreement ("TIMET
ISA") with Titanium Metals Corporation ("TIMET"), approximately 39% of the
outstanding common stock of which is currently held by Tremont at December 31,
2001. Under the terms of the contract, the Company provides certain management
and financial services to TIMET on a fee basis. Intercorporate services fee
income related to the TIMET ISA was $.2 million in 2001, $.4 million in 2000 and
$.3 million in 1999.
The Company was party in 2000 and 1999 to an intercorporate services
agreement ("CompX ISA") with CompX International, Inc. ("CompX"), a subsidiary
of Valhi, Under the terms of the contract, the Company provides certain
management and administrative services to CompX on a fee basis. Intercorporate
services fee income related to the CompX ISA was $.2 million in 2000 and $.1
million in 1999.
Purchases of TiO2 from LPC were $93.4 million in 2001, $92.5 million in
2000 and $85.3 million in 1999.
The Company and Tall Pines Insurance Company ("Tall Pines") (formerly NL
Insurance, Ltd. of Vermont), a wholly owned subsidiary of Tremont, are parties
to an Insurance Sharing Agreement with respect to certain loss payments and
reserves established by Tall Pines that (i) arise out of claims against other
entities for which the Company is contractually responsible and (ii) are subject
to payment by Tall Pines under certain reinsurance contracts. Also, Tall Pines
will credit the Company with respect to certain underwriting profits or credit
recoveries that Tall Pines receives from independent reinsurers that relate to
retained liabilities. At December 31, 2001, the Company has $1.7 million of
restricted cash that collateralizes certain of Tall Pines' outstanding letters
of credit.
Tall Pines, Valmont Insurance Company ("Valmont")and EWI RE, Inc. and
EWI RE, Ltd. (collectively "EWI") provide for or broker certain of the
Company's, its joint venture's and its affiliates' insurance policies. Valmont
is a wholly owned insurance company of Valhi. An entity controlled by one of
Harold C. Simmons' daughters and Contran owned all of the outstanding common
stock of EWI at December 31, 2001. On January 7, 2002, the Company purchased EWI
for $9 million. See Note 23. Through December 31, 2000, Harold C. Simmons'
son-in-law managed the operations of EWI. Subsequent to December 31, 2000, this
son-in-law provides advisory services to EWI as requested by EWI. Consistent
with insurance industry practices, Tall Pines, Valmont and EWI receive
F-39
commissions from the insurance and reinsurance underwriters for the policies
that they provide or broker. The Company and its joint venture paid
approximately $10.1 million, $5.7 million and $3.7 million in 2001, 2000 and
1999, respectively, for policies provided or brokered by Tall Pines, Valmont and
EWI. These amounts principally included payments for reinsurance and insurance
premiums paid to unrelated third parties, but also included commissions paid to
Tall Pines, Valmont and EWI. In the Company's opinion, the amounts that the
Company paid for these insurance policies and the allocation among the Company
and its affiliates of relative insurance premiums are reasonable and similar to
those they could have obtained through unrelated insurance companies and/or
brokers. The Company expects that these relationships with Tall Pines, Valmont
and EWI will continue in 2002.
During 2000 the Company purchased 414,000 shares of its common stock
from officers and directors of the Company for an aggregate of $9.4 million.
Such purchases were at market prices on the respective dates of purchase.
From time to time, the Company loans funds to related parties. See Note
7. These loans permit the Company to earn a higher rate of return on cash not
needed at the time for use in its operations than it could otherwise earn. While
such loans are of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the loans.
Amounts receivable from and payable to affiliates are summarized in the
following table.
December 31,
---------------------
2001 2000
------- -------
(In thousands)
Current receivable from affiliates:
Tremont ........................................ $ 1,000 $ --
Valhi - income taxes ........................... 2,194 --
TIMET .......................................... 459 1
CompX .......................................... 45 82
Other .......................................... -- 131
------- -------
$ 3,698 $ 214
======= =======
Current payable to affiliates:
Tremont ........................................ $ 544 $ 1,923
LPC ............................................ 6,362 8,711
Other .......................................... 13 --
------- -------
$ 6,919 $10,634
======= =======
Noncurrent receivable from affiliates:
Family Trust ................................... $20,000 $ --
Tremont ........................................ 11,650 --
------- -------
$31,650 $ --
======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note
8), and amounts payable to Tremont principally relate to the Company's Insurance
Sharing Agreement described above.
F-40
Note 20 - Commitments and contingencies:
Leases
The Company leases, pursuant to operating leases, various manufacturing
and office space and transportation equipment. Most of the leases contain
purchase and/or various term renewal options at fair market and fair rental
values, respectively. In most cases management expects that, in the normal
course of business, leases will be renewed or replaced by other leases.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, with approximately one-third of Kronos' current TiO2
production capacity, is located within the lessor's extensive manufacturing
complex, and Kronos is the only unrelated party so situated. Under a separate
supplies and services agreement expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. Both the lease and the supplies and services
agreements restrict the Company's ability to transfer ownership or use of the
Leverkusen facility.
Net rent expense aggregated $9 million in each of 2001, 2000 and 1999.
At December 31, 2001, minimum rental commitments under the terms of
noncancellable operating leases were as follows:
Real Estate Equipment
----------- ---------
(In thousands)
Years ending December 31,
2002 ............................................ $ 1,855 $ 2,190
2003 ............................................ 1,636 1,235
2004 ............................................ 1,440 903
2005 ............................................ 1,062 439
2006 ............................................ 1,026 245
2007 and thereafter ............................. 19,437 700
------- -------
$26,456 $ 5,712
======= =======
Capital expenditures
At December 31, 2001, the estimated cost to complete capital projects in
process approximated $11 million, including $4 million to complete the
reconstruction of the Leverkusen Sulfate Plant.
Purchase commitments
The Company has long-term supply contracts that provide for the
Company's chloride feedstock requirements through 2006. The agreements require
the Company purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $159 million.
Legal proceedings
Lead pigment litigation. Since 1987 the Company, other former
manufacturers of lead pigments for use in paint and lead-based paint, and the
Lead Industries Association have been named as defendants in various legal
F-41
proceedings seeking damages for personal injury and property damage allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by or on behalf of states, large U.S. cities or their public housing
authorities, school districts and certain others have been asserted as class
actions. These legal proceedings seek recovery under a variety of theories,
including public and private nuisance, negligent product design, failure to
warn, strict liability, breach of warranty, conspiracy/concert of action,
enterprise liability, market share liability, intentional tort, and fraud and
misrepresentation.
The plaintiffs in these actions generally seek to impose on the
defendants responsibility for lead paint abatement and asserted health concerns
associated with the use of lead-based paints, including damages for personal
injury, contribution and/or indemnification for medical expenses, medical
monitoring expenses and costs for educational programs. Most of these legal
proceedings are in various pre-trial stages; some are on appeal.
The Company believes that these actions are without merit, intends to
continue to deny all allegations of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation. Considering the Company's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. Some of the Company's current and
former facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, the Company has
been named as a defendant, potential responsible party ("PRP") or both, pursuant
to the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") and
similar state laws in approximately 75 governmental and private actions
associated with waste disposal sites, mining locations, and facilities currently
or previously owned, operated or used by the Company or its subsidiaries, or
their predecessors, certain of which are on the U.S. Environmental Protection
Agency's Superfund National Priorities List or similar state lists. These
proceedings seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. Certain of these proceedings
involve claims for substantial amounts. Although the Company may be jointly and
severally liable for such costs, in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.
At December 31, 2001, the Company had accrued $107 million for those
environmental matters which are reasonably estimable. It is not possible to
estimate the range of costs for certain sites. The upper end of the range of
reasonably possible costs to the Company for sites which it is possible to
estimate costs is approximately $160 million. The Company's estimates of such
liabilities have not been discounted to present value, and the Company has not
recognized any potential insurance recoveries other than the settlements in 2001
and 2000 discussed in Note 16.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that
the Company is potentially responsible for the release of hazardous substances
at other sites could result in expenditures in excess of amounts currently
estimated by the Company to be required for such matters. No assurance can be
given that actual costs will not exceed accrued amounts or the upper end of the
range for sites for which estimates have been made and no assurance can be given
that costs will not be incurred with respect to sites as to which no estimate
F-42
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
Certain of the Company's businesses are and have been engaged in the
handling, manufacture or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable environmental laws. As with
other companies engaged in similar businesses, certain past and current
operations and products of the Company have the potential to cause environmental
or other damage. The Company has implemented and continues to implement various
policies and programs in an effort to minimize these risks. The policy of the
Company is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect the Company's production, handling, use, storage,
transportation, sale or disposal of such substances as well as the Company's
consolidated financial position, results of operations or liquidity.
Other litigation. The Company is also involved in various other
environmental, contractual, product liability 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 the Company's consolidated financial condition, results of operations
or liquidity. See Item 3. "Legal Proceedings."
Concentrations of credit risk
Sales of TiO2 accounted for more than 90% of net sales from continuing
operations during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate pigment
production process), and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production processes). TiO2 is
generally sold to the paint, plastics and paper industries. Such markets are
generally considered "quality-of-life" markets whose demand for TiO2 is
influenced by the relative economic well-being of the various geographic
regions. TiO2 is sold to over 4,000 customers, with the top ten customers
approximating 25% of net sales in each of the last three years. Approximately
one-half of the Company's TiO2 sales by volume were to Europe in each of the
past three years and approximately 38% in 2001 and 37% in both 2000 and 1999 of
sales were attributable to North America.
Consolidated cash, cash equivalents, current and noncurrent restricted
cash equivalents includes $121 million and $159 million invested in U.S.
Treasury securities purchased under short-term agreements to resell at December
31, 2001 and 2000, respectively, of which $62 million and $67 million,
respectively, of such securities are held in trust for the Company by a single
U.S. bank.
F-43
Note 21 - Financial instruments:
Summarized below is the estimated fair value and related net carrying
value of the Company's financial instruments.
December 31, December 31,
2001 2000
------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- ----------
(In millions)
Cash, cash equivalents, current and noncurrent
restricted cash equivalents and current and
noncurrent marketable debt securities ......... $ 199.0 $ 199.0 $ 207.6 $ 207.6
Marketable equity securities - classified as
available-for-sale ............................ 45.2 45.2 47.2 47.2
Notes payable and long-term debt:
Fixed rate with market quotes - 11.75% Senior
Secured Notes ............................. $ 194.0 $ 194.9 $ 194.0 $ 195.9
Variable rate debt .......................... 48.7 48.7 72.1 72.1
Common shareholders' equity ..................... $ 386.9 $ 748.8 $ 344.5 $ 1,213.8
Fair value of the Company's marketable equity securities, marketable
debt securities and Notes are based upon quoted market prices and the fair value
of the Company's common shareholder's equity is based upon quoted market prices
for NL's common stock at the end of the year. The Company held no derivative
financial instruments at December 31, 2001 or 2000.
F-44
Note 22 - Quarterly financial data (unaudited):
Quarter ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(In thousands, except per share amounts)
Year ended December 31, 2001:
Net sales ............................... $226,060 $220,105 $206,952 $181,982
Cost of sales ........................... 149,902 151,320 145,945 130,893
Operating income ........................ 51,916 45,170 36,222 35,879(a)
Net income .............................. 34,559 25,424 20,538 40,886(a)
Earnings per share - net income:
Basic ............................... $ .69 $ .51 $ .41 $ .83(a)
======== ======== ======== ========
Diluted ............................. $ .69 $ .51 $ .41 $ .83(a)
======== ======== ======== ========
Weighted average common shares and
potential common shares outstanding:
Basic ............................... 50,079 49,932 49,621 49,304
Diluted ............................. 50,349 50,027 49,705 49,339
Year ended December 31, 2000:
Net sales ............................... $231,009 $251,126 $242,309 $197,875
Cost of sales ........................... 159,265 164,033 159,021 128,130
Operating income ........................ 46,235 62,743 57,511 45,994
Income from continuing operations ....... 23,708 63,438 30,169 38,026(b)
Net income .............................. 23,708 63,438 30,169 37,294(b)
Earnings per share:
Basic:
Income from continuing operations $ .47 $ 1.26 $ .60 $ .76(b)
======== ======== ======== ========
Net income ...................... $ .47 $ 1.26 $ .60 $ .75(b)
======== ======== ======== ========
Diluted:
Income from continuing operations $ .46 $ 1.25 $ .60 $ .75(b)
======== ======== ======== ========
Net income ...................... $ .46 $ 1.25 $ .60 $ .74(b)
======== ======== ======== ========
Weighted average common shares and
potential common shares outstanding:
Basic ............................... 50,920 50,499 50,203 50,045
Diluted ............................. 51,154 50,850 50,606 50,385
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
(a) Operating income in the fourth quarter of 2001 included $16.6 million of
pretax insurance recoveries for business interruption related to prior
quarters due to the Leverkusen fire. Net income in the fourth quarter of
2001 also included $11.6 million net of pretax insurance recoveries for
property damage related to the Leverkusen fire and a $17.6 million net
income tax benefit related to a restructuring of the Company's German
subsidiaries.
F-45
(b) Income from continuing operations in the fourth quarter of 2000 included
a $26.5 million pretax net litigation settlement gain (see Note 16) and
a $3.1 million noncash securities loss (see Note 6). Net income in the
fourth quarter of 2000 also included a $.7 million extraordinary item
for early extinguishment of debt, net of tax.
Note 23 - Subsequent events:
Through January 7, 2002, an entity controlled by one of Harold C.
Simmons' daughters (the wife of the son-in-law who provides services to EWI)
owned a majority of EWI, and Contran owned the remainder of EWI. On January 7,
2002, the Company purchased EWI from its previous owners for an aggregate cash
purchase price of approximately $9 million, and EWI became a wholly owned
subsidiary of the Company. The purchase was approved by a special committee of
the Company's Board of Directors consisting of two of its independent directors,
and the purchase price was negotiated by the special committee based upon its
consideration of relevant factors, including but not limited to due diligence
performed by independent consultants and an appraisal of EWI conducted by an
independent third party selected by the special committee.
On February 6, 2002, the Company gave notice to the trustee of its
intention to redeem $25 million principal amount of its 11.75% Senior Secured
Notes due 2003 on March 22, 2002, at the current call price of 100%.
Note 24 - Condensed consolidating financial information:
The Company's 11.75% Senior Secured Notes are collateralized by a series
of intercompany notes to NL (the "Parent Issuer"). The Notes are also
collateralized by a first priority lien on the stock of Kronos. A second
priority lien on the stock of NL Capital Corporation ("NLCC") collateralized the
notes until February 2000, at which time it was merged into KII and became
included in the first priority lien on the stock of Kronos.
In the event of foreclosure, the holders of the Notes would have access
to the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent of a joint and several, full and unconditional
guarantee of the Notes by Kronos and, prior to its merger into KII, NLCC.
Management believes that separate audited financial statements would not
provide additional material information that would be useful in assessing the
financial position of Kronos and NLCC (the "Guarantor Subsidiaries"). In lieu of
providing separate audited financial statements of the Guarantor Subsidiaries,
the Company has included condensed consolidating financial information of the
Parent Issuer, Guarantor Subsidiaries and non-guarantor subsidiaries in
accordance with Rule 3-10 (e) of the SEC's Regulation S-X. The Guarantor
Subsidiaries and the non-guarantor subsidiaries comprise all of the direct and
indirect subsidiaries of the Parent Issuer.
Investments in subsidiaries are accounted for by NL under the equity
method, wherein the parent company's share of earnings is included in net
income. The elimination entries eliminate (i) the parent's investment in
subsidiaries and the equity in earnings of subsidiaries, (ii) intercompany
payables and receivables and (iii) other transactions between subsidiaries.
F-46
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............ $ 10,413 $ 54,717 $ 50,907 $ -- $ 116,037
Restricted cash equivalents .......... 63,257 -- -- -- 63,257
Restricted marketable debt securities 3,583 -- -- -- 3,583
Accounts and notes receivable ........ 1,621 123,870 230 -- 125,721
Receivable from affiliates ........... 8,106 47 1,514 (5,969) 3,698
Refundable income taxes .............. -- 1,528 2 -- 1,530
Inventories .......................... -- 231,056 -- -- 231,056
Prepaid expenses ..................... 551 2,642 -- -- 3,193
Deferred income taxes ................ 6,371 4,640 -- -- 11,011
----------- ----------- ----------- ----------- -----------
Total current assets ............. 93,902 418,500 52,653 (5,969) 559,086
----------- ----------- ----------- ----------- -----------
Other assets:
Investment in subsidiaries ........... 1,072,551 -- 288 (1,072,839) --
Marketable equity securities ......... 216 -- 45,011 -- 45,227
Receivable from affiliates ........... 194,000 655,918 31,650 (849,918) 31,650
Investment in TiO2 manufacturing joint
venture ............................ -- 138,428 -- -- 138,428
Prepaid pension cost ................. 2,368 16,043 -- -- 18,411
Restricted marketable debt securities 16,121 -- -- -- 16,121
Other ................................ 1,318 11,100 -- -- 12,418
----------- ----------- ----------- ----------- -----------
Total other assets ............... 1,286,574 821,489 76,949 (1,922,757) 262,255
----------- ----------- ----------- ----------- -----------
Property and equipment, net .............. 3,725 326,025 -- -- 329,750
----------- ----------- ----------- ----------- -----------
$ 1,384,201 $ 1,566,014 $ 129,602 $(1,928,726) $ 1,151,091
=========== =========== =========== =========== ===========
F-47
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet, (Continued)
December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .......................... $ -- $ 46,201 $ -- $ -- $ 46,201
Current maturities of long-term debt ... -- 1,033 -- -- 1,033
Accounts payable and accrued liabilities 23,544 152,633 46 -- 176,223
Payable to affiliates .................. 1,083 11,365 440 (5,969) 6,919
Accrued environmental costs ............ 10,529 -- 49,362 -- 59,891
Income taxes ........................... 96 7,181 -- -- 7,277
Deferred income taxes .................. -- 1,530 -- -- 1,530
---------- ---------- ----------- ----------- ----------
Total current liabilities .......... 35,252 219,943 49,848 (5,969) 299,074
---------- ---------- ----------- ----------- ----------
Noncurrent liabilities:
Long-term debt ......................... 194,000 1,465 -- -- 195,465
Notes payable to affiliate ............. 655,918 194,000 -- (849,918) --
Deferred income taxes .................. 78,708 64,163 385 -- 143,256
Accrued environmental costs ............ 7,489 6,732 33,368 -- 47,589
Accrued pension cost ................... 1,427 25,558 -- -- 26,985
Accrued postretirement benefits cost ... 16,806 13,036 -- -- 29,842
Other .................................. 7,658 7,071 -- -- 14,729
---------- ---------- ----------- ----------- ----------
Total noncurrent liabilities ....... 962,006 312,025 33,753 (849,918) 457,866
---------- ---------- ----------- ----------- ----------
Minority interest .......................... -- 284 6,924 -- 7,208
---------- ---------- ----------- ----------- ----------
Shareholders' equity ....................... 386,943 1,033,762 39,077 (1,072,839) 386,943
---------- ---------- ----------- ----------- ----------
$1,384,201 $1,566,014 $ 129,602 $(1,928,726) $1,151,091
========== ========== =========== =========== ==========
F-48
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2000
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............ $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378
Restricted cash equivalents .......... 69,242 -- -- -- 69,242
Accounts and notes receivable ........ 172 131,295 73 -- 131,540
Receivable from affiliates ........... 6,189 -- 216 (6,191) 214
Refundable income taxes .............. 10,512 1,790 -- -- 12,302
Inventories .......................... -- 205,973 -- -- 205,973
Prepaid expenses ..................... 347 2,111 -- -- 2,458
Deferred income taxes ................ 6,394 5,279 -- -- 11,673
---------- ---------- ----------- ----------- ----------
Total current assets ............. 96,488 399,427 64,056 (6,191) 553,780
---------- ---------- ----------- ----------- ----------
Other assets:
Investment in subsidiaries ........... 687,300 -- 285 (687,585) --
Marketable equity securities ......... 452 -- 46,734 -- 47,186
Receivable from affiliates ........... 194,000 301,695 23,000 (518,695) --
Investment in TiO2 manufacturing joint
venture ............................ -- 150,002 -- -- 150,002
Prepaid pension cost ................. 1,772 21,017 -- -- 22,789
Restricted cash equivalents .......... 17,942 -- -- -- 17,942
Other ................................ 1,739 2,968 -- -- 4,707
---------- ---------- ----------- ----------- ----------
Total other assets ............... 903,205 475,682 70,019 (1,206,280) 242,626
---------- ---------- ----------- ----------- ----------
Property and equipment, net .............. 4,425 319,957 -- -- 324,382
---------- ---------- ----------- ----------- ----------
$1,004,118 $1,195,066 $ 134,075 $(1,212,471) $1,120,788
========== ========== =========== =========== ==========
F-49
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet, (Continued)
December 31, 2000
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .......................... $ -- $ 69,970 $ -- $ -- $ 69,970
Current maturities of long-term debt ... -- 730 -- -- 730
Accounts payable and accrued liabilities 24,098 123,555 224 -- 147,877
Payable to affiliates .................. 2,140 14,073 612 (6,191) 10,634
Accrued environmental costs ............ 5,046 -- 48,261 -- 53,307
Income taxes ........................... -- 13,604 12 -- 13,616
Deferred income taxes .................. -- 1,822 -- -- 1,822
---------- ---------- ----------- ----------- ----------
Total current liabilities .......... 31,284 223,754 49,109 (6,191) 297,956
---------- ---------- ----------- ----------- ----------
Noncurrent liabilities:
Long-term debt ......................... 194,000 1,363 -- -- 195,363
Notes payable to affiliate ............. 324,695 194,000 -- (518,695) --
Deferred income taxes .................. 70,985 73,699 989 -- 145,673
Accrued environmental costs ............ 6,729 8,699 41,705 -- 57,133
Accrued pension cost ................... 1,438 19,782 -- -- 21,220
Accrued postretirement benefits cost ... 15,039 14,365 -- -- 29,404
Other .................................. 15,460 7,812 -- -- 23,272
---------- ---------- ----------- ----------- ----------
Total noncurrent liabilities ....... 628,346 319,720 42,694 (518,695) 472,065
---------- ---------- ----------- ----------- ----------
Minority interest .......................... -- 299 5,980 -- 6,279
---------- ---------- ----------- ----------- ----------
Shareholders' equity ....................... 344,488 651,293 36,292 (687,585) 344,488
---------- ---------- ----------- ----------- ----------
$1,004,118 $1,195,066 $ 134,075 $(1,212,471) $1,120,788
========== ========== =========== =========== ==========
F-50
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Year ended December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
Revenues and other income:
Net sales ................................. $ -- $835,099 $ -- $ -- $835,099
Interest and dividends .................... 27,323 36,060 5,803 (57,968) 11,218
Equity in income of subsidiaries .......... 154,410 -- -- (154,410) --
Litigation settlement gains, net .......... 11,730 -- -- -- 11,730
Insurance recoveries, net ................. -- 17,468 -- -- 17,468
Other income (expense), net ............... 3,464 8,483 (11) (18) 11,918
-------- -------- --------- --------- --------
196,927 897,110 5,792 (212,396) 887,433
-------- -------- --------- --------- --------
Costs and expenses:
Cost of sales ............................. -- 578,060 -- -- 578,060
Selling, general and administrative ....... 13,831 109,535 1,146 -- 124,512
Interest .................................. 58,263 27,274 -- (57,968) 27,569
-------- -------- --------- --------- --------
72,094 714,869 1,146 (57,968) 730,141
-------- -------- --------- --------- --------
Income before income taxes and minority
interest ............................ 124,833 182,241 4,646 (154,428) 157,292
Income tax expense ............................ 3,426 31,483 16 -- 34,925
-------- -------- --------- --------- --------
Income before minority interest ....... 121,407 150,758 4,630 (154,428) 122,367
Minority interest ............................. -- 16 944 -- 960
-------- -------- --------- --------- --------
Net income ............................ $121,407 $150,742 $ 3,686 $(154,428) $121,407
======== ======== ========= ========= ========
F-51
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Year ended December 31, 2000
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales .................................... $ -- $ 922,319 $ -- $ -- $ 922,319
Interest and dividends ....................... 31,598 25,587 5,937 (52,443) 10,679
Equity in income of subsidiaries ............. 173,620 -- -- (173,620) --
Litigation settlement gains, net ............. 69,465 -- -- -- 69,465
Other income, net ............................ 12,595 5,834 -- (5,825) 12,604
--------- --------- --------- ----------- -----------
287,278 953,740 5,937 (231,888) 1,015,067
--------- --------- --------- ----------- -----------
Costs and expenses:
Cost of sales ................................ -- 610,449 -- -- 610,449
Selling, general and administrative .......... 25,381 112,429 (632) -- 137,178
Interest ..................................... 52,701 30,985 -- (52,443) 31,243
--------- --------- --------- ----------- -----------
78,082 753,863 (632) (52,443) 778,870
--------- --------- --------- ----------- -----------
Income before income taxes, minority
interest and extraordinary item ........ 209,196 199,877 6,569 (179,445) 236,197
Income tax expense ............................... 53,855 22,850 12 1,703 78,420
--------- --------- --------- ----------- -----------
Income before minority interest and
extraordinary item ..................... 155,341 177,027 6,557 (181,148) 157,777
Minority interest ................................ -- 47 2,389 -- 2,436
--------- --------- --------- ----------- -----------
Income before extraordinary item ......... 155,341 176,980 4,168 (181,148) 155,341
Extraordinary item - early extinguishment of debt,
net of tax benefit of $394 ..................... (732) -- -- -- (732)
--------- --------- --------- ----------- -----------
Net income ............................... $ 154,609 $ 176,980 $ 4,168 $ (181,148) $ 154,609
========= ========= ========= =========== ===========
F-52
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Year ended December 31, 1999
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales ......................... $ -- $908,387 $ -- $ -- $908,387
Interest and dividends ............ 30,843 24,425 6,823 (53,129) 8,962
Equity in income of subsidiaries .. 154,625 -- -- (154,625) --
Other income, net ................. 4,565 10,119 -- -- 14,684
-------- -------- --------- --------- --------
190,033 942,931 6,823 (207,754) 932,033
-------- -------- --------- --------- --------
Costs and expenses:
Cost of sales ..................... -- 662,315 -- -- 662,315
Selling, general and administrative 16,037 116,138 2,167 -- 134,342
Interest .......................... 49,872 40,141 -- (53,129) 36,884
-------- -------- --------- --------- --------
65,909 818,594 2,167 (53,129) 833,541
-------- -------- --------- --------- --------
Income before income taxes
and minority interest ....... 124,124 124,337 4,656 (154,625) 98,492
Income tax benefit .................... 35,647 26,955 1,999 -- 64,601
-------- -------- --------- --------- --------
Income before minority interest 159,771 151,292 6,655 (154,625) 163,093
Minority interest ..................... -- 48 3,274 -- 3,322
-------- -------- --------- --------- --------
Net income .................... $159,771 $151,244 $ 3,381 $(154,625) $159,771
======== ======== ========= ========= ========
F-53
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2001
(In thousands)
Combined
NL Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ ------------ ------------
Net cash provided (used) by operating activities $ (3,905) $ 157,306 $ (3,169) $(20,499) $ 129,733
-------- --------- -------- -------- ---------
Cash flows from investing activities:
Capital expenditures ....................... (13) (53,656) -- -- (53,669)
Property damaged by fire:
Insurance proceeds ..................... -- 23,361 -- -- 23,361
Other, net ............................. -- (3,205) -- -- (3,205)
Change in restricted cash equivalents and
restricted marketable debt securities, net 18,539 -- -- (10,030) 8,509
Loans to affiliates, net ................... -- (69,678) (9,650) 46,678 (32,650)
Other, net ................................. 24 399 (8) 8 423
-------- --------- -------- -------- ---------
Net cash provided (used) by investing
activities ........................... 18,550 (102,779) (9,658) 36,656 (57,231)
-------- --------- -------- -------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. -- 1,437 -- -- 1,437
Principal payments ..................... -- (22,428) -- -- (22,428)
Treasury stock purchased, net .............. (14,784) -- -- -- (14,784)
Dividends, net ............................. (39,758) (30,500) (29) 30,529 (39,758)
Loans from affiliates ...................... 46,678 -- -- (46,678) --
Other, net ................................. -- 3 -- (8) (5)
-------- --------- -------- -------- ---------
Net cash used by financing activities .. (7,864) (51,488) (29) (16,157) (75,538)
-------- --------- -------- -------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing
activities ........................... 6,781 3,039 (12,856) -- (3,036)
Currency translation ................... -- (1,301) (4) -- (1,305)
-------- --------- -------- -------- ---------
6,781 1,738 (12,860) -- (4,341)
Balance at beginning of year ............... 3,632 52,979 63,767 -- 120,378
-------- --------- -------- -------- ---------
Balance at end of year ..................... $ 10,413 $ 54,717 $ 50,907 $ -- $ 116,037
======== ========= ======== ======== =========
F-54
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 2000
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Net cash provided by operating activities ...... $ 12,318 $ 177,642 $ 4,795 $(55,000) $ 139,755
-------- --------- -------- -------- ---------
Cash flows from investing activities:
Capital expenditures ....................... (23) (31,066) -- -- (31,089)
Purchase of Tremont Corporation common stock (26,040) -- -- -- (26,040)
Change in restricted cash equivalents ...... 4,480 -- (3,850) -- 630
Loans to affiliates ........................ 50,000 (115,856) 55,000 10,856 --
Other, net ................................. 107 77 -- 80 264
-------- --------- -------- -------- ---------
Net cash provided (used) by investing
activities .......................... 28,524 (146,845) 51,150 10,936 (56,235)
-------- --------- -------- -------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. -- 44,923 -- -- 44,923
Principal payments ..................... (50,000) (29,162) -- -- (79,162)
Treasury stock:
Purchased .............................. (30,886) -- -- -- (30,886)
Reissued ............................... 2,091 -- -- -- 2,091
Dividends, net ............................. (32,686) (55,000) -- 55,000 (32,686)
Loans from affiliates ...................... 60,856 (50,000) -- (10,856) --
Other, net ................................. -- (6) 80 (80) (6)
-------- --------- -------- -------- ---------
Net cash provided (used) by financing
activities ........................... (50,625) (89,245) 80 44,064 (95,726)
-------- --------- -------- -------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing
activities ........................... (9,783) (58,448) 56,025 -- (12,206)
Currency translation ................... -- (1,635) (5) -- (1,640)
-------- --------- -------- -------- ---------
(9,783) (60,083) 56,020 -- (13,846)
Balance at beginning of year ............... 13,415 113,062 7,747 -- 134,224
-------- --------- -------- -------- ---------
Balance at end of year ..................... $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378
======== ========= ======== ======== =========
F-55
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Year ended December 31, 1999
(In thousands)
Combined Combined
NL Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ ------------- ------------ ------------
Net cash provided (used) by operating activities $ 28,742 $ 134,937 $(5,371) $(50,000) $ 108,308
-------- --------- ------- -------- ---------
Cash flows from investing activities:
Capital expenditures ....................... (2,856) (32,703) -- -- (35,559)
Change in restricted cash equivalents ...... (12,065) -- 6,889 -- (5,176)
Other, net ................................. (17) 2,334 -- 27 2,344
-------- --------- ------- -------- ---------
Net cash provided (used) by investing
activities ........................... (14,938) (30,369) 6,889 27 (38,391)
-------- --------- ------- -------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ............................. -- 82,038 -- -- 82,038
Principal payments ..................... -- (155,787) -- -- (155,787)
Treasury stock purchased ................... (7,000) -- -- -- (7,000)
Dividends, net ............................. (7,242) (50,030) 30 50,000 (7,242)
Other, net ................................. -- (6) 27 (27) (6)
-------- --------- ------- -------- ---------
Net cash provided (used) by financing
activities ........................... (14,242) (123,785) 57 49,973 (87,997)
-------- --------- ------- -------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing
activities ........................... (438) (19,217) 1,575 -- (18,080)
Currency translation ................... -- (2,649) -- -- (2,649)
-------- --------- ------- -------- ---------
(438) (21,866) 1,575 -- (20,729)
Balance at beginning of year ............... 13,853 134,928 6,172 -- 154,953
-------- --------- ------- -------- ---------
Balance at end of year ..................... $ 13,415 $ 113,062 $ 7,747 $ -- $ 134,224
======== ========= ======= ======== =========
F-56
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of NL Industries, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 1, 2002 appearing on page F-2 in the 2001 Annual Report to
Shareholders on Form 10-K of NL Industries, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules listed in Item
14(a) and (d) 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
Houston, Texas
March 1, 2002
S-1
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------
Condensed Balance Sheets
December 31, 2001 and 2000
(In thousands)
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 10,413 $ 3,632
Restricted cash equivalents ...................... 63,257 69,242
Restricted marketable debt securities ............ 3,583 --
Accounts and notes receivable .................... 1,621 172
Receivable from subsidiaries ..................... 8,106 6,189
Refundable income taxes .......................... -- 10,512
Prepaid expenses ................................. 551 347
Deferred income taxes ............................ 6,371 6,394
---------- ----------
Total current assets ......................... 93,902 96,488
---------- ----------
Other assets:
Marketable equity securities ..................... 216 452
Notes receivable from subsidiary ................. 194,000 194,000
Investment in subsidiaries ....................... 1,072,551 687,300
Restricted marketable debt securities ............ 16,121 17,942
Prepaid pension cost ............................. 2,368 1,772
Other ............................................ 1,318 1,739
---------- ----------
Total other assets ........................... 1,286,574 903,205
---------- ----------
Property and equipment, net .......................... 3,725 4,425
---------- ----------
$1,384,201 $1,004,118
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......... $ 23,544 $ 24,098
Payable to affiliates ............................ 1,083 2,140
Accrued environmental costs ...................... 10,529 5,046
Income taxes ..................................... 96 --
---------- ----------
Total current liabilities .................... 35,252 31,284
---------- ----------
Noncurrent liabilities:
Long-term debt ................................... 194,000 194,000
Notes payable to affiliates ...................... 655,918 324,695
Deferred income taxes ............................ 78,708 70,985
Accrued environmental costs ...................... 7,489 6,729
Accrued pension cost ............................. 1,427 1,438
Accrued postretirement benefits cost ............. 16,806 15,039
Other ............................................ 7,658 15,460
---------- ----------
Total noncurrent liabilities ................. 962,006 628,346
---------- ----------
Shareholders' equity ................................. 386,943 344,488
---------- ----------
$1,384,201 $1,004,118
========== ==========
Contingencies (Note 4)
S-2
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
--------------------------------------------------------------------
Condensed Statements of Income
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Revenues and other income:
Equity in income from continuing operations of
subsidiaries ................................. $ 154,410 $ 173,620 $ 154,625
Interest and dividends ......................... 4,354 2,961 1,184
Interest income from subsidiaries .............. 22,969 28,637 29,659
Securities transactions, net ................... (1,133) 8,356 --
Litigation settlement gains, net ............... 11,730 69,465 --
Other income, net .............................. 4,597 4,239 4,565
--------- --------- ---------
196,927 287,278 190,033
--------- --------- ---------
Costs and expenses:
General and administrative ..................... 13,831 25,381 16,037
Interest ....................................... 58,263 52,701 49,872
--------- --------- ---------
72,094 78,082 65,909
--------- --------- ---------
Income before income taxes and extraordinary
item ..................................... 124,833 209,196 124,124
Income tax expense (benefit) ....................... 3,426 53,855 (35,647)
--------- --------- ---------
Income before extraordinary item ........... 121,407 155,341 159,771
Extraordinary item ................................. -- (732) --
--------- --------- ---------
Net income ................................. $ 121,407 $ 154,609 $ 159,771
========= ========= =========
S-3
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
--------------------------------------------------------------------
Condensed Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income ................................... $ 121,407 $ 154,609 $ 159,771
Equity in income of subsidiaries ............. (154,410) (173,620) (154,625)
Distributions from subsidiaries .............. 30,500 55,000 50,000
Noncash interest income, net ................. (3,113) (932) (390)
Deferred income taxes ........................ 7,498 71,837 (18,071)
Securities gains, net ........................ 1,133 (8,356) --
Litigation settlement gains, net ............. (10,307) (69,465) --
Other, net ................................... 1,824 (4,399) (3,164)
--------- --------- ---------
(5,468) 24,674 33,521
Change in assets and liabilities, net ........ 1,563 (12,356) (4,779)
--------- --------- ---------
Net cash provided (used) by operating
activities ............................. (3,905) 12,318 28,742
--------- --------- ---------
Cash flows from investing activities:
Change in restricted cash equivalents and
restricted marketable debt securities, net . 18,539 4,480 (12,065)
Capital expenditures ......................... (13) (23) (2,856)
Purchase of Tremont Corporation common stock . -- (26,040) --
Loans to affiliates .......................... -- 50,000 --
Investments in subsidiaries .................. -- (80) (27)
Proceeds from disposition of marketable equity
securities ................................. 4 158 --
Other, net ................................... 20 29 10
--------- --------- ---------
Net cash provided (used) by investing
activities ............................. 18,550 28,524 (14,938)
--------- --------- ---------
S-4
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
--------------------------------------------------------------------
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------- -------- --------
Cash flows from financing activities:
Dividends ........................................ $(39,758) $(32,686) $ (7,242)
Treasury stock:
Purchased .................................... (15,502) (30,886) (7,210)
Reissued ..................................... 718 2,091 210
Indebtedness - principal payments ................ -- (50,000) --
Loans from affiliates ............................ 46,678 60,856 --
-------- -------- --------
Net cash used by financing activities ........ (7,864) (50,625) (14,242)
-------- -------- --------
Net change from operating, investing and financing
activities ..................................... 6,781 (9,783) (438)
Balance at beginning of year ..................... 3,632 13,415 13,853
-------- -------- --------
Balance at end of year ........................... $ 10,413 $ 3,632 $ 13,415
======== ======== ========
S-5
NL INDUSTRIES, 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 NL Industries, Inc. (the
"Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference.
Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31,
---------------------------
2001 2000
--------- ---------
(In thousands)
Current:
Receivable from:
Kronos:
Income taxes ..................... $ 64 $ 1,260
Other, net ....................... 4,943 4,103
Valhi - income taxes ................. 2,194 --
TIMET ................................ 459 1
CompX ................................ 45 82
Other ................................ 401 743
--------- ---------
$ 8,106 $ 6,189
========= =========
Payable to:
Tremont .............................. $ (553) $ (1,925)
EMS .................................. (74) (146)
Other ................................ (456) (69)
--------- ---------
$ (1,083) $ (2,140)
========= =========
Noncurrent:
Notes receivable from Kronos ............. $ 194,000 $ 194,000
========= =========
Notes payable to:
Kronos ............................... $(655,918) $(301,695)
EMS .................................. -- (23,000)
--------- ---------
$(655,918) $(324,695)
========= =========
S-6
Note 3 - Long-term debt:
See Note 11 of the Consolidated Financial Statements for a description
of the Notes. The Company's $194 million of 11.75% Senior Secured Notes at
December 31, 2001 are due October 2003. The Company has guaranteed Kronos'
non-U.S. dollar-denominated notes payable of $46 million.
Note 4 - Contingencies:
See Legal proceedings in Note 20 to the Consolidated Financial Statements.
S-7
NL INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Charges
Balance at (credits) Currency
beginning to costs and translation Balance at
Description of year expenses Deductions adjustments end of year
----------- ---------- ------------ ---------- ----------- -----------
Year ended December 31, 2001:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,222 $ 485 $ (245)(a) $ (104) $ 2,358
======= ====== ======== ======= =======
Amortization of intangibles ............. $ -- $ -- $ -- $ -- $ --
======= ====== ======== ======= =======
Year ended December 31, 2000:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,075 $ 342 $ (67)(a) $ (128) $ 2,222
======= ====== ======== ======= =======
Amortization of intangibles ............. $22,095 $ 113 $(20,429) $(1,779) $ --
======= ====== ======== ======= =======
Year ended December 31, 1999:
Allowance for doubtful accounts and notes
receivable ............................ $ 2,377 $ 140 $ (180)(a) $ (262) $ 2,075
======= ====== ======== ======= =======
Amortization of intangibles ............. $23,704 $1,851 $ -- $(3,460) $22,095
======= ====== ======== ======= =======
(a) Amounts written off, less recoveries.
Certain prior-year amounts have been reclassified to conform to the current year
presentation.
S-8
EXHIBIT 10.5
AMENDMENT TO RICHARDS BAY SLAG SALES AGREEMENT
THIS AMENDING AGREEMENT dated June 1st, 2001 is made by and between RICHARDS BAY
IRON AND TITANIUM (PROPRIETARY) LIMITED, a South African corporation with
offices at Richards Bay, Natal, South Africa (hereafter called "RBI") and KRONOS
INC., a Delaware corporation with offices at 5 Cedar Brook Drive, Cranbury, New
Jersey, 08512, USA (hereinafter "Buyer").
WHEREAS, RBIT and Buyer entered into an agreement for the purchase and sale of
titanium bearing slag produced at RBIT's plant at Richards Bay, Natal, South
Africa (hereafter "RBIT Product") dated as of the 1st day of May, 1995, amended
as of November 3, 1997 and May 1, 1999 (hereafter called the "Agreement");
WHEREAS, the parties wish to amend the Agreement to provide for the extension of
the Term of the Agreement;
NOW THEREFORE, for and in consideration of the covenants and conditions herein
contained, the parties hereto agree to amend the Agreement effective January 1,
2001 as follows:
1. Article III shall be replaced with the following:
This Agreement shall be in effect for a term of twelve (12) years
commending on January 1, 1995 up to and including December 31, 2006 (the
"Term"), subject to prior termination as hereinafter provided.
2. Paragraph D of Article IV of the Agreement shall be replaced by the
following:
2
"For 1998 onward the annual Contracted Quantity shall be as follows:
[***]
Buyer shall commit to the actual quantity to be purchased in each of such
years within the above range by written notice to RBIT on or before
September 30th of the previous year, failing which such quantity shall be
determined by RBIT.
[***]
3. The provisions of Paragraph E of Article IV of the Agreement shall also be
interpreted to apply to the Total Quantity and any required adjustments
shall be reflected in the Final Annual Invoice of January 2007.
4. Article V.A.3. shall be replaced with the following:
"3.For 1997 to 2000 inclusively, the Basic Price of RB Slag shall be the
previous year's Basic Price plus Escalation as herein defined. [***]
4.For 2002, the Basic Price of RB Slag shall be the 2001 Basic Price.
[***]
3
5.For 2003 to 2006 inclusively, the Basic Price of RB Slag shall be the
previous year's Basic Price plus Escalation as herein defined."
5. In the year 2004 and in each subsequent year during the Term of the
Agreement, if the difference in the escalated Basic Price of RB Slag to
Kronos and the average escalated Basic Price to RBIT's other major
contract customers in any such year is greater than the change in the US
All urban CPI over the 12-month period ending December 31st of the
preceding year, RIT will approach Kronos to realign the Basic Price. If
the parties are unable to agree on a new Basic Price, either party may
terminate the Agreement on 12 months written notice but no sooner than
July 1st, 2005. Contracted Quantities will be prorated if termination
occurs prior to year-end.
Should RBIT offer spot quantities of RB Slag for sale to major contract
customers during the Term of the Agreement, Kronos Inc. shall be offered a
quantity in proportion to its Contracted Quantity and have 7 days in which
to accept or decline such offer.
6. The parties hereby ratify and confirm the terms and conditions of the
Agreement not specifically amended pursuant to this Amending Agreement.
[***] - Confidential treatment requested.
4
IN WITNESS WHEREOF, the parties have caused this Amending Agreement to be
executed by their duly authorized representatives.
RICHARDS BAY IRON AND TITANIUM KRONOS, INC.
(PROPRIETARY) LIMITED
By: /s/ J. George Deyzel By: /s/ Lawrence A. Wigdor
Name: J. George Deyzel Name: Lawrence A. Wigdor
Title: Chief Executive Officer/ Title: Chief Executive Officer
Managing Director
EXHIBIT 10.20
VARIABLE COMPENSATION PLAN
ARTICLE I
GENERAL
1.1. Establishment and Purpose of the Plan:
NL Industries, Inc., a New Jersey corporation, hereby adopts this Variable
Compensation Plan (the "Plan"). The purpose of the Plan is to attract and retain
high quality executives, officers and employees and provide further incentives
to such executives and employees to maximize the Company's annual financial
performance and thereby increase shareholder value.
1.2. Definitions:
Whenever used in this Plan, the following terms shall have the meanings set
forth below unless otherwise expressly provided.
(a) "Award Group" means one of the following groups to which Participants may be
designated as provided in the Plan or such other groups as may be designated by
the Committee from time to time:
Group I
Group II
Group III
Group IV
(b) Except as provided in Article VI, "Base Salary" means the regular salary
actually paid during a Plan Year to a Participant while participating in the
Plan. Regular salary shall include any salary reduction contributions made to
the Company's 401(k) Plan or other deferred compensation plans, but shall be
exclusive of any Variable Compensation Awards under the Plan and of any other
bonuses, incentive pay, or special awards.
(c) "Board" means the Board of Directors of NL Industries, Inc.
(d) "CEO" means the Company's Chief Executive Officer.
(e) "Certain Executive Officers" means those Executive Officers of the Company
who are designated by the Committee to be Group III or Group IV Participants and
whose total non-performance based compensation from the Company for the
applicable Plan Year would otherwise be in excess of the amount deductible by
the Company pursuant to Section 162(m) of the Code, including Qualifying Group
III Participants.
(f) "Code" means the Internal Revenue Code of 1986, as amended (the "Code").
(g) "Committee" means the Management Development and Compensation Committee of
the Board or such other committee as may be designated from time to time by the
Board, which shall consist of two or more members who meet the requirements of
Section 162(m) of the Code. The members of the Committee shall be appointed by
the Board, and any vacancy on the Committee shall be filled by the Board.
(h) "Company" means NL Industries, Inc. and its direct or indirect subsidiaries.
(i) "Company Performance Level" means with respect to each Award Group the
Minimum Company Performance Level, Target Company Performance Level or Maximum
Company Performance Level (each as described in Section 4.3 below) achieved or
to be achieved by the Company or applicable Company business segment for the
applicable Plan Year.
(j) "Employee" means a regular U.S. salaried employee of the Company.
(k) "Executive Officers" shall have the meaning set forth in rule 16a-1(f)
promulgated under section 16(a) of the Securities Exchange Act of 1934.
(l) "401(k) Plan" means an employee welfare plan of the Company qualified under
the provisions and regulations of Section 401(k) of the Code.
(m) "Individual Performance Level" with respect to each Participant (excluding
Certain Executive Officers) means the individual performance rating assigned by
the Company to such Participant for the applicable Plan Year. Individual
performance rating initially shall consist of a relative rating scale from
"outstanding" to "marginal" for all Participants (excluding Certain Executive
Officers) for any Plan Year. The Committee may terminate, change or adopt a
different individual performance rating scale as it determines appropriate from
time to time.
(n) "Participant" means an Employee selected or designated for participation in
the Plan for a specified Plan Year including Certain Executive Officers.
(o) "Performance Percentage" with respect to Award Groups I, II, and III
(excluding Qualifying Group III Participants, as defined below) means the
percentage assigned by the Committee to each such Award Group at each different
combination of Individual Performance Level and Company Performance Level for
such Award Group. With respect to Participants in Award Group III whose total
non-performance based compensation from the Company for the applicable Plan Year
otherwise would be in excess of the amount deductible by the Company pursuant to
Section 162(m) of the Code ("Qualifying Group III Participants"), no Individual
Performance Level shall be assigned to such Qualifying Group III Participants in
determining the applicable Performance Percentage for such Plan Year. Instead
the Performance Percentage for Qualifying Group III Participants shall be the
highest Performance Percentage available at the applicable Company Performance
Level for Award Group III Participants in general. The Committee, in its sole
discretion, may decrease such Performance Percentage and the corresponding
Variable Compensation Awards applicable to such Qualifying Group III
Participants. With respect to Award Group IV Participants, the initial
Performance Percentages for the Company Performance Levels shall be as follows:
150% for Maximum Company Performance Level, 100% for Target Company Performance
Level and 50% for Minimum Company Performance Level. The Performance Percentages
with respect to each Award Group for any Plan Year may be set or changed by the
Committee during the first ninety (90) days of such Plan Year.
(p) "Plan Year" means the Company's fiscal year.
(q) "Variable Compensation Award" with respect to any Participant for any Plan
Year means an amount to be paid by the Company to such Participant under the
terms of the Plan equal to the product of (A) the applicable Performance
Percentage for such Participant for such Plan Year, times (B) the Base Salary of
such Participant for such Plan Year.
1.3 Gender and Number:
Except when otherwise indicated by the context, words in the masculine gender,
when used in the Plan, shall include the feminine gender, the singular shall
include the plural, and the plural shall include the singular.
ARTICLE II
ADMINISTRATION OF THE PLAN
2.1 Administration:
(a) The Plan shall be administered by the Committee. Except with respect to
Committee's administrative authority regarding Executive Officers, the Committee
may delegate its day-to-day administrative authority regarding the Plan to the
CEO. The CEO may in turn re-delegate from time to time said administrative
authority to such officers and employees of the Company as he deems appropriate.
The Company's management shall assist and provide such recommendations to the
Committee as the Committee may request from time to time in connection with the
administration of the Plan.
(b) Subject to the limitations of the Plan, the Committee shall: (i) designate
the Executive Officers who shall be Participants and the Award Groups in which
they shall be included, (ii) designate and approve Performance Percentages
applicable in determining Variable Compensation Awards for payment to
Participants in such forms and amounts as it shall determine from time to time,
(iii) impose such limitations, restrictions, and conditions upon such Variable
Compensation Awards as it shall deem appropriate, (iv) interpret the Plan and
adopt, amend, and rescind administrative guidelines relating to the Plan, (v)
correct any defects or omissions or reconcile any inconsistencies in the Plan,
the Performance Percentages or in any Variable Compensation Award granted
hereunder, and (vi) make all other necessary determinations and take all other
actions necessary or advisable for the implementation and administration of the
Plan. The Committee's determinations on matters within its authority shall be
conclusive and binding.
(c) All expenses associated with the Plan shall be borne by the Company subject
to such allocation to its subsidiaries and business segments as it deems
appropriate.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Eligibility and Participation:
The Company's management shall determine the Employees to be selected as
Participants under the Plan and the Award Group in which each such Participant
may be included, except that participation by Executive Officers shall be
determined by the Committee. Any Employee, except Certain Executive Officers,
may be designated and selected as a Participant in the Plan at any time during a
Plan Year, including after the ninetieth (90th) day of such Plan Year.
ARTICLE IV
VARIABLE COMPENSATION AWARDS
4.1 Designation of Variable Compensation Awards:
The Company's management shall approve, or in case of Executive Officers
recommend to the Committee, the Performance Percentage and the corresponding
Variable Compensation Award to be paid to each Participant in accordance with
the terms of the Plan for the immediately preceding Plan Year. Within the first
ninety (90) days after the end of each Plan Year, the Committee shall review
such recommendations, make any adjustment it deems appropriate in accordance
with the terms of the Plan, and approve the grant and payment of the
corresponding Variable Compensation Awards in the aggregate and to the Executive
Officers.
4.2 Establishment of Performance Percentages:
Management of the Company shall assist and provide to the Committee management's
recommendations regarding the Performance Percentages applicable to each
combination of Individual Performance Level and Company Performance Level for
Award Groups I, II and III. No later than the ninetieth (90th) day of each Plan
Year, the Committee shall review such recommendations, make any adjustments it
deems appropriate in accordance with the terms of the Plan, and approve the
Performance Percentages for Award Groups I, II and III for such Plan Year. At
that same time, the Committee also shall set the Performance Percentages for
Group IV Participants. As described in Section 1.2(o), Performance Percentages
with respect to Award Group III and Award Group IV Participants who qualify as
Certain Executive Officers shall be based solely on the achievement of Company
Performance Levels. In the event the Committee takes no action prior to the
ninetieth (90th) day of such Plan Year to change, amend or rescind the
Performance Percentages in effect for the immediately preceding Plan Year, the
Performance Percentages for such Plan Year shall be deemed to be the Performance
Percentages for said immediately preceding Plan Year.
4.3 Company Performance Levels:
Prior to the ninetieth (90th) day of a Plan Year, the Company's management shall
make recommendations to the Board regarding the annual operating plan for the
Company and each of the Company's business segments for such Plan Year (the
"Annual Operating Plan"). The Board shall approve the Annual Operating Plan with
any modifications it deems appropriate. Based on the approved Annual Operating
Plan for such Plan Year, the Committee shall establish the financial performance
goals for the Company and its applicable business segments at the following
three levels which shall be designed to help focus the Participants' attention
on achieving superior annual financial performance results in light of existing
conditions: a threshold level, which is the minimum financial performance income
level for any award to be made under the Plan (the "Minimum Company Performance
Level"), a target financial performance income level (the "Target Company
Performance Level"), and a maximum financial performance level (the "Maximum
Company Performance Level"). The Committee shall in its discretion establish the
applicable objective Company financial performance criteria for determining
Company Performance Levels.
4.4 Determination of Performance Percentages:
Performance Percentages for Award Group I, Award Group II and Award Group III
Participants (excluding Qualifying Group III Participants) shall be based upon
the Performance Percentage assigned by the Committee for such Participant's
Award Group with respect to each combination of achieved Company Performance
Level for such Plan Year and the Individual Performance Level achieved by such
Participant for such Plan Year. Performance Percentages for Award Group I
Participants will range from 2% to 32%; Award Group II Participants initially
will range from 9% to 65%; and Group III Participants initially will range from
14% to 120%. Variable Compensation Awards for Group IV Participants and
Qualifying Group III Participants shall be based solely upon the Performance
Percentage assigned by the Committee with respect to the achieved Company
Performance Level. Performance Percentages will range from 50% to 150% for Award
Group IV Participants and from 60% to 120% for Qualifying Group III
Participants, depending on the Company Performance Level achieved. In the event
that the Company Performance Level achieved is below the Minimum Company
Performance Level, the Variable Compensation Award for Group IV and for
Qualifying Group III Participants shall be 0%. The Performance Percentages with
respect to each Award Group for any Plan Year may be set or changed by the
Committee during the first ninety (90) days of such Plan Year.
4.5 Adjustment of Company Performance Levels:
Except with respect to Certain Executive Officers as provided in Article VI, if
during any Plan Year external or internal changes or other unanticipated
business conditions have materially affected the appropriateness of the Company
Performance Levels, the Committee may, in its sole discretion, determine
appropriate increases or decreases to the Company Performance Levels for such
Plan Year.
Participants shall not be entitled to any Variable Compensation Award under the
Plan unless the Company achieves at the corresponding Company Performance Level;
provided, however, except as provided in Article VI, the CEO in the case of
Participants other than Executive Officers, and the Committee in the case of
Executive Officers other than Certain Executive Officers, in their discretion,
may approve payment of special awards to designated Participants.
4.6 Determination of Company Performance Level Achieved and Payment of
Variable Compensation Awards:
Within ninety (90) days after the end of each Plan Year, the Company's
management shall report to the Committee the Company Performance Level achieved
by the Company and each applicable business segment for such Plan Year. The
Committee shall review such report and certify in writing or set forth in a
resolution of the Committee the Company Performance Level achieved by the
Company and each applicable Company business segment for such Plan Year. Such
achieved Company Performance Level shall be used in determining the
corresponding Performance Percentage and Variable Compensation Award for such
Plan Year as provided in Sections 4.1 and 4.4 above. The Committee shall approve
the grant and payment of the corresponding Variable Compensation Awards to
Participants pursuant to terms of the Plan. Payment of Variable Compensation
Awards shall be made following certification by the Committee of the Company
Performance Level achieved for such Plan Year and shall be paid in cash in a
lump sum or shares of NL Common Stock. Except as provided in Article 5,
Participants must be employed by the Company on the date the Committee approves
the Variable Compensation Awards to receive the approved award for such Plan
Year.
4.7 Limitation on Payments:
The amount payable to a Participant pursuant to this Plan with respect to any
Plan Year shall not exceed $3 million.
ARTICLE V
TERMINATION OF EMPLOYMENT
5.1 Termination of Employment Due to Death, Disability, Retirement, Or
Transfer To Affiliate Not Included In Plan:
In the event a Participant's employment with the Company is terminated by reason
of death, total and permanent disability, retirement, or a Participant is
transferred to an affiliate which does not participate in the Plan, the
Participant's Variable Compensation Award shall be based on (i) Participant's
actual Base Salary paid through the date of termination or transfer, and (ii)
the applicable Performance Percentage. The Variable Compensation Award shall be
paid in accordance with Article IV.
"Total and permanent disability" and "retirement" shall have the meaning as
defined in the Retirement Programs of NL Industries, Inc.
5.2 Termination For Any Other Reason:
Except for terminations listed in Section 5.1, in the event a Participant's
employment is terminated for any other reason including voluntary and
involuntary termination prior to certification by the Committee of the Company
Performance Level achieved for such Plan Year, the Participant shall not be
entitled to a Variable Compensation Award with respect to such Plan Year.
However, the CEO, in his sole discretion, may approve the payment to such
Participant of a Variable Compensation Award under the Plan with respect to such
Plan Year, except that in the case of Executive Officers the CEO may make such
recommendation to the Committee, which shall have sole discretion to approve
such award.
ARTICLE VI
CERTAIN EXECUTIVE OFFICERS
6.1 Applicability Of Article VI:
The provisions of this Article VI shall apply only to Certain Executive
Officers. In the event of any inconsistencies between this Article VI and the
other Plan provisions, the provisions of this Article VI shall control.
6.2 Definition Applicable To Article VI Only:
The following term shall have the meaning set forth below:
(a) "Base Salary" shall mean as to any Plan Year a Participant's actual regular
salary at the rate in effect prior to the ninetieth (90th) day of the Plan Year
and not after the date the Company Performance Levels are established. Regular
salary shall include any salary reduction contributions made to the Company's
401(k) Plan or other deferred compensation plans, but exclusive of any Variable
Compensation Awards under this Plan and of any other bonuses, incentive pay, or
special awards.
6.3 No Partial Plan Year Participation:
A Certain Executive Officer who becomes eligible after the ninetieth (90th) day
of a Plan Year may not participate in the Plan for such Plan Year, but may
participate in the Plan for the succeeding Plan Year.
6.4 Components Of Individual Awards:
Each Variable Compensation Award shall be based strictly on the Company's
achievement of predetermined Company Performance Levels. Prior to ninety (90)
days after the beginning of the Plan Year, the Committee shall determine the
Company Performance Levels for such Plan Year.
6.5 No Mid-Year Change In Award Percentages:
Variable Compensation Awards for Certain Executive Officers shall be based
solely on the Performance Percentage for the applicable Award Group as set by
the Committee during the first ninety (90) days of the Plan Year.
6.6 No Adjustments Of Performance Goals:
Once established, Company Performance Levels shall not be changed after the
first ninety (90) days of the Plan Year with respect to Certain Executive
Officers. Certain Executive Officers shall not receive any Variable Compensation
Award under this Plan when the Company or the applicable Company business
segment fails to achieve at least the applicable Minimum Company Performance
Level.
6.7 Individual Performance and Discretionary Adjustments:
Individual performance shall not be reflected in the Variable Compensation
Awards to Certain Executive Officers. However, the Committee retains the
discretion to eliminate or decrease the amount of the Variable Compensation
Award otherwise payable to a Certain Executive Officer.
6.8 Possible Modification:
If, on advice of the Company's tax counsel, the Committee determines that Code
Section 162(m) and the regulations thereunder will not adversely affect the
deductibility for federal income tax purposes of any amount paid to a Certain
Executive Officer under the Plan (i) by applying one or more of Sections 1.2(b),
1.2(m), 1.2(o), 3.1, 4.2, 4.4, or 4.5 to such Certain Executive Officer without
regard to the limitations regarding Certain Executive Officers in such
Section(s) or (ii) by not applying one or more Sections of this Article VI, then
the Committee may, in its sole discretion, disregard such limitations.
6.9 No Discretionary Awards or Bonuses:
No discretionary awards or bonuses shall be paid to Certain Executive Officers
pursuant to this Plan. However, nothing in this Plan shall be construed as
limiting the right of the Committee or the Board to make any other award or
bonus under their general authority or under any other plan.
ARTICLE VII
MISCELLANEOUS PROVISION
7.1 Nontransferability:
No right or interest of any Participant in the Plan shall be assignable or
transferable, or subject to any lien, directly, by operation of law or
otherwise, including execution, levy, garnishment, attachment, pledge, and
bankruptcy.
7.2 Tax Withholding:
The Company shall have the right to deduct from all awards or payments under
this Plan, whether paid in cash or stock, any foreign, Federal, state, or local
taxes required by law to be withheld with respect to such payments.
7.3 Amendments:
The Committee, in its sole discretion, without notice, at any time and from time
to time, may modify or amend, in whole or in part, any or all of the provisions
of this Plan, or suspend or terminate it entirely.
7.4 Indemnification:
Each person who is or shall have been a member of the Committee or the Board or
who is or shall have been an Employee of the Company acting on behalf of the
Committee shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense, including without limitation, fees and
expenses of legal counsel, that may have been imposed upon or reasonably
incurred by him in connection with or resulting from any claim, action, suit, or
proceeding to which he may be a party or in which he may be involved by reason
of any action taken or failure to act under the Plan and against and from any
and all amounts paid by him in settlement thereof, with the Company's approval,
or paid by him in satisfaction of any judgment in any such action, suit or
proceeding against him, provided he shall give the Company an opportunity, at
its own expense, to handle and defend the same before he undertakes to handle
and defend it on his own behalf. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such person may
be entitled under the Company's Certificate of Incorporation or Bylaws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
him or hold him harmless.
7.5 Beneficiary Designation:
Each Participant under the Plan may name, from time to time, any beneficiary or
beneficiaries (who may be named contingently or successively) to whom any
benefit under the Plan is to be paid in case of his death before he received any
or all of such benefit. Each designation will revoke all prior designations by
the same Participant, shall be in a form prescribed by the Company, and will be
effective only when filed by the Participant in writing with the Company during
his lifetime. In the absence of any such designation, or if the designated
beneficiary is no longer living, benefits shall be paid to the surviving
member(s) of the following classes of beneficiaries, with preference for classes
in the order listed below:
(a) Participant's spouse (unless the parties were divorced or legally separated
by court decree);
(b) Participant's children (including children by adoption);
(c) Participant's parents (including parents by adoption);
(d) Participant's executor or administrator.
Payment of benefits, in accordance with Section 5.1, shall be made exclusively
to the member(s) of the first class, in the order listed above, which has
surviving member(s). If that class has more than one member, benefit payments
shall be made in equal shares among members of the class.
7.6 Rights of Participants:
Nothing in this Plan shall interfere with or limit in any way the right of the
Company to terminate or change a Participant's employment at any time, nor
confer upon any Participant, any right to continue in the employ of the Company
for any period of time or to continue his present or any other rate of
compensation. No Participant in a previous Plan Year, or other employee at any
time, shall have a right to be selected for participation in a current or future
Plan Year.
7.7 Governing Law:
The Plan shall be construed in accordance with and governed by the laws of the
State of Texas.
7.8 Effective Date:
The Plan shall be deemed effective as of January 1, 2001.
EXHIBIT 10.30
AMENDED AND RESTATED
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FOR EXECUTIVES AND OFFICERS OF
NL INDUSTRIES, INC.
as effective May 1, 2001
TABLE OF CONTENTS
ARTICLE ONE
PURPOSES OF PLAN.............................................................1
ARTICLE TWO
DEFINITIONS..................................................................2
2.1 Administrative Committee.........................................2
2.2 Beneficiary......................................................2
2.3 Board............................................................2
2.4 Code.............................................................2
2.5 Company..........................................................2
2.6 Compensation.....................................................2
2.7 Determination Date...............................................4
2.8 Employee.........................................................4
2.9 Employment.......................................................4
2.10 Interest Credit Rate.............................................5
2.11 Interest Equivalents.............................................5
2.12 Participant......................................................5
2.13 Plan.............................................................5
2.14 Plan Year........................................................5
2.15 Principal........................................................6
2.16 Profitability Target Percentage..................................6
2.17 Qualified Plan...................................................6
2.18 Retirement Date................................................. 6
2.19 Subsidiary.......................................................6
2.20 Supplemental Compensation Ledger.................................7
2.21 Top Hat Earnings.................................................7
2.22 Total and Permanent Disability................................. 7
ARTICLE THREE
ADMINISTRATION...............................................................8
3.1 Composition of Administrative Committee..........................8
3.2 Administration of Plan...........................................9
3.3 Action by Committee..............................................9
3.4 Delegation.......................................................9
3.5 Reliance Upon Information........................................9
3.6 Responsibility and Indemnity....................................10
i
ARTICLE FOUR
PARTICIPATION...............................................................11
4.1 Eligibility of Employees........................................11
4.2 Designation of Participants.....................................11
4.3 Notification of Participants and Former Participants............12
4.4 Contributions...................................................12
4.5 Special Provisions for any Employee's Initial Plan Year of
Participation.................................................13
4.6 Vesting.........................................................13
4.7 Withholding.....................................................15
ARTICLE FIVE
CREDITING OF CONTRIBUTIONS AND AWARD
OF INTEREST EQUIVALENTS.....................................................16
5.1 Crediting of Contributions......................................16
5.2 Interest Equivalents............................................16
5.3 Determination of Account........................................18
ARTICLE SIX
DISTRIBUTIONS...............................................................18
6.1 "Parachute" Effect on Amount Distributed........................18
6.2 Determination Date..............................................19
6.3 Form and Date of Distributions..................................19
6.4 Payor of Benefits...............................................19
6.5 Claims and Appeals Procedures...................................20
6.6 Facility of Payments............................................22
6.7 Beneficiary Designations........................................22
ARTICLE SEVEN
RIGHTS OF PARTICIPANTS......................................................23
7.1 Periodic Statement to Participants..............................23
7.2 Limitation of Rights............................................24
7.3 Nonalienation of Benefits.......................................25
7.4 Prerequisites to Benefits.......................................26
ARTICLE EIGHT
MISCELLANEOUS...............................................................26
8.1 Amendment or Termination of the Plan............................26
8.2 Powers of the Company...........................................27
8.3 Waiver..........................................................27
8.4 Separability....................................................28
8.5 Gender, Tense and Headings......................................28
8.6 Governing Law...................................................28
8.7 Notice..........................................................28
ii
8.8 Incorporation of Certain Provisions of Participants' Contracts
with the Company............................................. 28
8.9 Effective Date..................................................29
iii
AMENDED AND RESTATED
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FOR EXECUTIVES AND OFFICERS OF
NL INDUSTRIES, INC.
ARTICLE ONE
PURPOSES OF PLAN
This Amended and Restated Supplemental Executive Retirement Plan of NL
Industries, Inc. and each designated Subsidiary is intended to provide greater
incentives for selected executives and officers to attain and maintain the
highest standards of performance by enabling such persons to make up for
benefits lost due to limits on benefits which are permissible under the
Qualified Plan.
The Plan was initially effective January 1, 1991.
The plan was amended and restated effective February 9, 2000, as to anyone
who became or remained a Participant on or after February 9, 2000. Former
Participants remained entitled to benefits under the terms and provisions of the
Plan as in effect before that amendment and restatement.
The Plan is amended and restated effective May 1, 2001, to provide for
immediate payment of all fully vested benefits under the plan.
1
ARTICLE TWO
DEFINITIONS
In addition to the terms defined in the text hereof, each term below shall
have the meanings assigned thereto for all purposes of the Plan unless the
context reasonably requires a broader, narrower or different meaning.
2.1 Administrative Committee. "Administrative Committee" means the Pension
and Employee Benefits Committee (PEBCO) of NL Industries, Inc. which shall
administer the Plan pursuant to Article Three hereof. The Board may remove an
Administrative Committee member pursuant to the applicable procedures
established by the Board.
2.2 Beneficiary. "Beneficiary" means a person designated by the
Participant, as provided in Section 6.7, to receive any amounts distributable
under the Plan on account of the death of the Participant.
2.3 Board. "Board" means the board of directors of the Company, or
equivalent governing authority, or the duly appointed delegate of such board of
directors.
2.4 Code. "Code" means the Internal Revenue Code of 1986, as amended, or
any successor thereto.
2.5 Company. "Company" means NL Industries, Inc. or any successor that
assumes the Plan.
2.6 Compensation. "Compensation" means for any Plan Year the total
earnings reportable on the Employee's Form W-2 from the Company, including:
(a) base salary or wages, and overtime;
(b) incentive awards or bonuses;
2
(c) foreign service allowances which the Company or a Subsidiary
pays. In addition, Compensation includes the following whether or not reportable
on Form W-2:
(d) amounts contributed by the Company or a Subsidiary as an
elective deferral on behalf of such Employee to a cafeteria plan described
in Section 125 of the Code or under a plan described in Section 401(k) or
Section 408(k) of the Code, or to any other health, retirement,
transportation, or other employee benefit plan;
(e) amounts paid through the Company for the Employee's services to
any other employer, or that would have been paid through the Company if
such payment had not been deferred to a qualified plan of such other
employer or to a non-qualified plan for officers, directors, or highly
compensated employees of such other employer;
(f) incentive awards or bonuses paid by foreign subsidiaries of the
Company.Compensation does not include relocation allowances or relocation
bonuses, hiring or "sign on" bonuses, imputed value of group life
insurance, tuition refunds, foreign service premiums, any income from
stock options, stock appreciation rights, restricted stock, performance
award rights, similar fringe benefits or perquisites, any "stay bonuses"
or "supplemental bonuses" paid in 1989 or 1990 in connection with the
restructuring of the Company.
If the Company and any Participant enter into any bonus deferral agreement
or arrangement, such deferred bonus shall be considered to be part of
Compensation in the year in which such bonus would have been received by such
Participant if said bonus deferral agreement or arrangement had not been entered
into by the Company and the Participant.
3
2.7 Determination Date. "Determination Date" means, with respect to a
Participant, (i) the date the Participant terminates Employment, whether by
retirement on his Retirement Date, death, Disability, or any other voluntary or
involuntary reason for departing from active service as a common law Employee of
the Company or of a designated Subsidiary, and (ii) effective May 1, 2001, for
fully vested Participants, "Determination Date" means May 15, 2001, and then
means the last day of each calendar month.
2.8 Employee. "Employee" means any individual who is a U. S. citizen or
U.S. resident, who is an executive or officer of the Company or of any
designated Subsidiary, and who is limited as to the benefits which might
otherwise be accrued on his behalf under the Qualified Plan because of (i) the
limit on projected annual benefits described in Section 415(b) of the Code (and,
for years prior to January 1, 2000, Section 415(e) of the Code), and/or (ii) the
limit on compensation that may be taken into account under Section 401(a)(17) of
the Code; or (in the event the Qualified Plan is frozen), who would be limited
as to the benefits theoretically accruable under the Qualified Plan as limited
by Section 401(a)(17) of the Code, if the Qualified Plan were an active defined
benefit pension plan.
2.9 Employment. "Employment" means employment by the Company or a
Subsidiary. In this regard, neither the transfer of a Participant from
employment by the Company to employment by a Subsidiary nor the transfer of a
Participant from Employment by a Subsidiary to employment by the Company shall
be deemed to be a termination of Employment of the Participant. Moreover, the
Employment of a Participant shall not be deemed to have been terminated because
of his absence from active employment on account of temporary illness or during
authorized vacation or during temporary leaves of absence from active employment
4
granted by the Company or a Subsidiary for reasons of professional advancement,
education, health, or government service, or during military leave for any
period if the Participant returns to active employment within 90 days after the
termination of his military leave, or during any period required to be treated
as a leave of absence by virtue of any valid law or agreement.
2.10 Interest Credit Rate. "Interest Credit Rate" means, (i) for unvested
Participants for all periods, and for both vested and unvested Participants for
periods prior to May 1, 2001, the assumed rate of return on assets used for
calculations required by Statement of Financial Accounting Standards No. 87,
unless the Board establishes a higher or lower rate with respect to a given Plan
Year; and (ii) for vested Participants for periods after April 30, 2001, zero,
except that for amounts payable on the May 15, 2001 Determination Date, interest
shall continue to be calculated under clause (i) in the preceding sentence until
May 15, 2001.
2.11 Interest Equivalents. "Interest Equivalents" means the amounts
credited as interest to a Participant's account in the Supplemental Compensation
Ledger, determined and credited as provided in Section 5.2.
2.12 Participant. "Participant" means an eligible Employee who has been
appointed to participate in the Plan pursuant to Section 4.2.
2.13 Plan. "Plan" means the Supplemental Executive Retirement Plan for
Executives and Officers of NL Industries, Inc. set forth herein, and as the same
may hereafter be amended from time to time.
2.14 Plan Year. "Plan Year" means the twelve consecutive month period
commencing on January 1 of a particular calendar year and ending on December 31
of such calendar year.
5
2.15 Principal. "Principal" means the total amount of all contributions
which have been made to the Plan as reflected in the Participant's account
maintained in the Supplemental Compensation Ledger, less any distribution of
contributions from the Participant's accounts.
2.16 Profitability Target Percentage. "Profitability Target Percentage"
means 6%, 8%, or 10% depending on whether the A, B, or C profitability target,
respectively, under the Company's Variable Compensation Plan, is determined to
have been achieved by the Company for the prior calendar year. If the Company
determines that a below-A year occurred, the Profitability Target Percentage is
zero.
2.17 Qualified Plan. "Qualified Plan" means the Retirement Programs of NL
Industries, Inc. or any successor defined benefit plan maintained by the Company
which is intended to qualify under Section 401(a) of the Code. For the purposes
of the Plan, the Qualified Plan will be assumed to be a plan that is qualified
under Section 401(a) of the Code whether or not the Qualified Plan is covered by
a favorable determination letter issued by the Internal Revenue Service.
If the Retirement Programs of NL Industries, Inc. are frozen or terminated
without being replaced by another defined benefit plan, this Supplemental
Executive Retirement Plan for Executives and Officers of NL Industries, Inc.
shall nevertheless continue to be operated as if an active defined benefit plan
still existed.
2.18 Retirement Date. "Retirement Date" means the date the Participant
retires under the terms of the Qualified Plan.
2.19 Subsidiary. "Subsidiary" means any wholly-owned subsidiary of the
Company or of any wholly-owned subsidiary thereof, or any other corporation or
business venture in which
6
the Company owns, directly or indirectly, a significant financial interest, if
the Board designates such corporation or business venture to be a Subsidiary for
the purposes of this Plan for any period of time, and if the board of directors
(or equivalent governing authority) of such corporation or business venture
consents to being designated as a Subsidiary.
2.20 Supplemental Compensation Ledger. "Supplemental Compensation Ledger"
means an appropriate record maintained by the Administrative Committee for each
Participant pursuant to Section 5.1 hereof which sets forth the name of the
Participant and contains separate accounts reflecting (i) the amount of any
contributions made to the Plan under the terms of applicable provisions of
Article Four of the Plan and (ii) the amount of Interest Equivalents credited
thereon pursuant to Section 5.2 hereof. The Supplemental Compensation Ledger
shall be utilized solely as a device for the measurement and determination of
the amounts to be paid to the Participant under the Plan. A Participant's
Supplemental Compensation Ledger shall not constitute or be treated as an escrow
or trust fund of any kind.
2.21 Top Hat Earnings. "Top Hat Earnings" means, for each Participant, his
cumulative earnings for the calendar year that exceed the Code Section
401(a)(17) limit for qualified pension benefit plans for the year. For any
single month, Top Hat Earnings are: the calendar year's cumulative earnings at
the end of the month, less the Code Section 401(a)(17) limit for the year, less
the cumulative Top Hat Earnings for all prior months of the calendar year. In
months in which the Code Section 401(a)(17) limit for the year has not yet been
reached, there are no Top Hat Earnings.
2.22 Total and Permanent Disability. "Total and Permanent Disability" or
"Disability" means a physical or mental condition which renders the Participant
incapable of
7
performing the work for which he was employed or is qualified by training and
experience and which entitles the Participant to participate in the NL
Industries, Inc. Long Term Disability Plan and/or qualifies the Participant to
receive Social Security disability payments.
ARTICLE THREE
ADMINISTRATION
3.1 Composition of Administrative Committee. The Administrative Committee
shall be the Pension and Employee Benefits Committee (PEBCO) of NL Industries,
Inc., which is a committee appointed by the Management Development &
Compensation (MD&C) Committee of the Board. The charter and bylaws of PEBCO
shall govern wherever such instruments are in direct conflict with the
provisions of this Article III. If, however, PEBCO should cease to exist, then
the MD&C Committee shall function as the Administrative Committee until the
Board appoints a new Administrative Committee of at least two persons.
Each member of the Administrative Committee shall serve at the pleasure of
the Board, and the Board may remove or replace a member of the Administrative
Committee pursuant to procedures which shall be established by the Board. A
member of the Administrative Committee may also be a Participant. A member of
the Administrative Committee who is also a Participant shall not vote or
otherwise act on any matter relating solely to himself.
8
3.2 Administration of Plan. The Administrative Committee shall operate,
administer, interpret and construe the Plan. The Administrative Committee shall
have all powers necessary or appropriate to implement the terms and provisions
of the Plan, including the power to determine, subject to the provisions of the
Plan, the Employees who shall be eligible to participate in the Plan. The
determination of the Administrative Committee as to the proper construction,
interpretation or application of any terms or provisions of the Plan shall be
final, binding, and conclusive with respect to all interested persons.
3.3 Action by Committee. A majority of the members of the Administrative
Committee shall constitute a quorum for the transaction of business, and the
vote of a majority of those members present at any meeting at which a quorum is
present shall decide any question brought before the meeting and shall be the
act of the Administrative Committee. In addition, the Administrative Committee
may take any other action otherwise proper under the Plan by an affirmative
vote, taken without a meeting, of a majority of its members.
3.4 Delegation. The Administrative Committee may, in its discretion,
delegate one or more of its duties to an officer or Employee of the Company or a
committee composed of officers and Employees of the Company, but may not
delegate its authority to construe the Plan or to make the determinations
specified in Section 3.2.
3.5 Reliance Upon Information. The Administrative Committee shall not be
liable for any decision made or action taken in good faith in connection with
the administration of the Plan. Without limiting the generality of the
foregoing, any such decision made or action taken by the Administrative
Committee in reliance upon any information supplied to it by any officer of the
Company or any Subsidiary, the Company's or any Subsidiary's legal counsel or
the
9
Company's or any Subsidiary's independent accountants in connection with the
administration of the Plan shall be deemed to have been taken in good faith.
3.6 Responsibility and Indemnity. No member of the Administrative
Committee shall be liable for any act done or any determination made hereunder
in good faith. The Company and each Subsidiary hereby agrees to indemnify and
hold harmless each member of the Administrative Committee from and against any
and all losses, claims, damages, liabilities, costs and expenses, including but
not limited to, liability for any judgments or settlements consented to in
writing by any such member of the Administrative Committee, which consent will
not be unreasonably withheld, and reasonable attorneys' fees arising out of or
in connection with or as a direct or indirect result of such member's serving on
the Administrative Committee, except only those losses, claims, damages,
liabilities, costs and expenses, if any, arising out of, or in connection with,
or as a direct or indirect result of, the Administrative Committee member's bad
faith, gross negligence or willful neglect of his duties hereunder. Each
affected member of the Administrative Committee shall promptly notify the
Company and each Subsidiary of any claim, action or proceeding for which such
member may seek indemnity. Such indemnity is a continuing obligation and shall
be binding on the Company and each Subsidiary and their successors, whether by
merger or otherwise, and assigns. In addition, such indemnity shall survive the
resignation or removal of the Administrative Committee member and/or the
termination of the Plan.
10
ARTICLE FOUR
PARTICIPATION
4.1 Eligibility of Employees. Each Employee shall be eligible to be
designated a participant in the Plan pursuant to Section 4.2. The Administrative
Committee may from time to time establish additional eligibility requirements
for participation in the Plan.
4.2 Designation of Participants.
(a) Discretionary Appointment of Participants. The chief executive
officer of the Company, in his sole discretion and subject only to the
approval of the Board, shall designate those Employees who shall be
considered to be active or inactive Participants in the Plan.
(b) Retroactive Participation. Designation of active participation
for any Employee may be made retroactively effective to include years
preceding the initial Plan Year in which the Employee is designated a
Participant, in which event the account of such active Participant shall
be credited with contributions required under the Plan and his account
shall be credited with Interest Equivalents required to be credited and
shall otherwise be subject to all other terms and provisions of the Plan.
(c) Discretionary Termination of Participation. The chief executive
officer of the Company shall likewise designate any Participant who shall
cease active participation in the Plan for reasons other than retirement,
death, Disability, or termination of employment, in which event such
Participant shall cease to be credited with contributions required under
the Plan, but the account of such Participant shall continue to be
credited
11
with Interest Equivalents required to be credited and shall otherwise be
subject to all other terms and provisions of the Plan.
For unvested Participants, any such discretionary termination of
participation shall not be retroactively effective earlier than the last
day of the preceding Plan Year. For vested Participants, effective April
30, 2001, discretionary termination of participation shall not be
retroactively effective earlier than the last day of the preceding month.
(d) CEO Participation. The chief executive officer of the Company
shall be a Participant (whether active or inactive) in the sole discretion
of the Board, subject only to the preceding provisions hereof regarding
the effective date of his active or inactive participation.
4.3 Notification of Participants and Former Participants. As soon as
administratively practicable after any Employee is initially designated to be an
active Participant, the Administrative Committee shall notify such Employee that
he has been designated to be a Participant in the Plan. Any Employee who is a
Participant, but whose active participation in the Plan has been designated to
cease (for reasons other than retirement, death, Disability, or termination of
employment), shall be notified as soon as administratively practicable after the
date on which such active participation is to cease, but in no event later than
ninety (90) days after such date of his inactive participation, unless a later
notification date is reasonably necessary under the circumstances.
4.4 Contributions. An account shall be established in each Participant's
Supplemental Compensation Ledger. For each calendar month of the Plan Year, the
amount to be credited for the month shall be calculated by multiplying the
Participant's Top Hat Earnings
12
for the month by the Profitability Target Percentage that applies for the month.
For the month in which a Participant terminates employment or otherwise ceases
to be eligible to continue being a Participant in the Plan, the amount to be
credited for such final month shall be based on the Participant's actual Top Hat
Earnings for that last month, whether a full or partial month.
4.5 Special Provisions for any Employee's Initial Plan Year of
Participation. In the case of any Participant who the Administrative Committee
determines was disadvantaged as a result of the Plan's not being adopted as of
an earlier date or the Plan's not being effective as to that Participant as of
an earlier date, solely with respect to such Participant's initial designation
of participation in the Plan, any designation pursuant to Section 4.2 shall set
forth the amount of any contribution credited under the Plan with respect to
such Participant's initial Plan Year that is to be credited for a previous year
or for previous months within the then current year, both for the purpose of
determining vesting in accordance with Section 4.6, and for the purpose of
determining Interest Equivalents in accordance with Section 5.2. Any such
amounts credited with respect to a previous year or previous months need not be
uniformly or consistently determined and may be totally withheld with respect to
any such Participant described in the immediately preceding sentence.
4.6 Vesting. For a Determination Date that is the date of the
Participant's death, Total and Permanent Disability, Retirement Date or date of
involuntary termination of employment with the Company and all Subsidiaries
other than for just cause, amounts credited under the Plan to the Supplemental
Compensation Ledger shall be fully vested with respect to such Participant.
"Just cause" shall mean any of the following:
13
(a) Any act of dishonesty, including, but not limited to, any
intentional misapplication of the Company's (or Subsidiary's) funds or
other property;
(b) The Participant's gross neglect of his duties; the Participant's
gross negligence in the performance of his duties; the Participant's
refusal to perform his duties; or willful disobedience of a lawful order
or directive given to the Participant by any superior officer of the
Company (or Subsidiary) or the Board and within the scope of the
Participant's duties;
(c) The Participant's unsatisfactory performance of his duties that
is not cured within fifteen (15) working days after written notice is
given to the Participant by the Board specifically identifying the
reason(s) why the Board, in its judgment, believes that the Participant's
performance is unsatisfactory and what the Participant can do to cure such
unsatisfactory performance to the full satisfaction of the Board;
(d) The Participant's participation in any criminal activity or an
activity involving moral turpitude;
(e) The Participant's immoderate use of alcohol and/or narcotics
which adversely affects the performance of his duties; and
(f) The Participant's violation of the Company's (or Subsidiary's)
rules concerning conflicts of interest. The existence of "just cause"
shall be determined by the Board in the exercise of its discretion after
consultation with legal counsel of the Board's choosing.
14
For any other Determination Date, amounts attributable to contributions
which are credited to each account maintained in the Supplemental Compensation
Ledger for a Participant shall be vested as follows:
Completed Years of Service
with the Company or Subsidiary Vested Percentage (%)
Less than 5 0%
5 or more 100%
For vesting purposes, years of service shall be determined and credited under
the Plan using the same concepts as are used to determine years of service under
the Qualified Plan. Any unvested contributions credited to the Participant's
account or accounts in the Supplemental Compensation Ledger Account shall be
forfeited upon his voluntary termination of Employment. Except as otherwise
provided in Section 8.2, notwithstanding any other provision of the Plan to the
contrary, should the Company or any Subsidiary dissolve, enter into a sale of
substantially all of its assets, or enter into any reorganization incident to
which it is not the surviving entity, all amounts which are attributable to
contributions which are not already fully vested and are credited to the
Supplemental Compensation Ledger account or accounts maintained for the benefit
of each Participant who is employed by the Company or the affected Subsidiary,
whichever is applicable, may become fully vested as of the earlier of the date
of closing or the effective date, whichever may be applicable, of such
transaction, provided that the Board consents.
4.7 Withholding. Required tax withholding for amounts credited to each
vested Participant's account will be deducted from such Participant's second
payroll of each month, so that vesting and tax withholding are properly
coordinated. Withholding taxes shall not affect the
15
amount credited under the Plan. If withholding laws change as to the withholding
taxability of amounts credited under the Plan, this section will automatically
be read as if the withholding tax changes were incorporated herein.
ARTICLE FIVE
CREDITING OF CONTRIBUTIONS AND AWARD
OF INTEREST EQUIVALENTS
5.1 Crediting of Contributions. The amount of contributions to the Plan on
behalf of a Participant for any calendar month shall be credited to the account
maintained for the Participant in the Supplemental Compensation Ledger, as of
the second payroll date of the month.
For the month during which a Participant terminates employment or
otherwise ceases to be eligible to be a Participant in the Plan, the amount of
contributions to the Plan on behalf of such Participant for that final calendar
month or partial calendar month shall be credited to the account maintained for
the Participant as of the last day of his or her participation in the Plan.
5.2 Interest Equivalents. For Participants with monthly determination
dates, contributions are not credited with interest. The remainder of this
Section 5.2 applies to unvested Participants only.
16
Contributions are credited with interest monthly. Each monthly
contribution is assumed, for the purpose of interest calculations, to have been
made on the first day of the month for which the contribution is credited; that
is, contributions start earning interest retroactively to the first of the month
for which the contribution is credited to the Plan, even though that credit does
not take place until the end of the month.
The interest credited each month is one-twelfth of the Interest Credit
Rate in effect for that Plan Year, times the amount of principle contributed to
the Plan during the current month, resulting in simple interest for months
during any current Plan Year. No interest is credited for any month on amounts
previously credited to the account as interest during the Plan Year.
In addition, for undistributed amounts from prior years, interest is
credited each month, at a rate of one-twelfth of the Interest Credit Rate in
effect for that Plan Year, times the total amount credited to the account
(interest plus principal) as of the last day of the Plan Year preceding the
current Plan Year, resulting in annually compounded interest for periods prior
to any current Plan Year.
For the month during which a Participant terminates employment or
experiences any other Determination Date on other than the last day of the
month, Interest Equivalents for that last month will be calculated on a pro rata
basis, so that the account continues to be credited with interest for as long as
the individual remains a Participant.
Interest Equivalents for unvested Participants continue accruing until the
account is distributed; however, interest will not be compounded for any payment
for which the period between the Determination Date and the payment date crosses
over a year end.
17
5.3 Determination of Account. The total amount credited to a Participant's
account maintained in the Supplemental Compensation Ledger with respect to a
given calendar month shall consist of (i) the aggregate amount of contributions
credited to the Participant's account pursuant to Sections 4.4 and 4.5, plus
(ii) the aggregate amount of Interest Equivalents credited to such account
pursuant to Section 5.2 hereof, minus (iii) the aggregate amount of
distributions, if any, made from such accounts pursuant to Article Six.
ARTICLE SIX
DISTRIBUTIONS
6.1 "Parachute" Effect on Amount Distributed. Any amount that is to be
distributed to a Participant or Beneficiary pursuant to this Article Six shall
be fixed and determined as of each Determination Date. In addition, if any
portion of the Participant's benefit is an "excess parachute payment" subject to
additional tax under Section 4999 of the Code, such Participant shall receive an
additional benefit (the "Parachute Gross-up") which shall be equal to the amount
of the additional tax under Section 4999 of the Code divided by the Gross-up
Percentage. The Gross-up Percentage is the difference between the number one (1)
and the rate imposed by Section 4999 of the Code. (In the year 2001, that rate
is 20%)
If the tax imposed by Section 4999 of the Code changes, (by a change in
the required formula or rate or in the applicability of the tax), the formula
described in the preceding
18
paragraph will automatically change to reflect the revised calculation of a
Parachute Gross-up.
The Parachute Gross-up payment shall be made at the same time as any
payment that constitutes an "excess parachute payment" is made to Participant.
6.2 Determination Date. The undistributed amount credited to a vested
Participant's account maintained in the Supplemental Compensation Ledger shall,
upon each Determination Date, become distributable in accordance with the
provisions of Section 6.3 hereof.
6.3 Form and Date of Distributions. Whenever an amount credited to a
Participant's account maintained in the Supplemental Compensation Ledger becomes
distributable, such amount shall be distributed to such Participant in the form
of a single lump sum payment. The distribution shall be paid by the Company or
Subsidiary, whichever is applicable. The distribution shall be paid on the
Determination Date, unless later payment is reasonably necessary under the
circumstances. For vested Participants, payments may be made on the date of the
Participant's second payroll of each month, if that second payroll is not more
than seven days prior to the Determination Date. The first distribution to newly
vested Participant shall be made on the second payroll of the month during which
such Participant became vested, if the vesting occurs before that second payroll
date, otherwise on the second payroll of the following month.
6.4 Payor of Benefits. Subject to the following provisions hereof,
benefits payable under the Plan with respect to a Participant's account
maintained under the Supplemental Compensation Ledger with respect to
contributions credited under the Plan, plus Interest Equivalents credited
pursuant to Section 5.2, shall be the obligation of and paid by the Company or
any Subsidiary, whichever may be applicable, or any successor pursuant to
Section 8.2, which
19
employed the Participant at the time of the effective date the contributions
were credited. Adoption and maintenance of the Plan by the Company and any
Subsidiary shall not create a joint venture or partnership relationship among or
between such persons for purposes of payment of benefits under the Plan or for
any other purpose.
6.5 Claims and Appeals Procedures. When a benefit is due and payable under
the Plan, the Administrative Committee may direct payment. If the Administrative
Committee does not so direct, the Participant or beneficiary may submit a claim
to the human resources department of the Company or Subsidiary. Under normal
circumstances, a final decision on a claimant's request for benefits shall be
made within ninety (90) days after receipt of the claim. However, if special
circumstances require an extension of time to process a claim, a final decision
may be deferred up to one hundred eighty (180) days after receipt of the claim
if prior to the end of the initial ninety (90) day period, the claimant is
furnished written notice of the special circumstances requiring the extension
and the anticipated date of a final decision. If the claim is denied, within the
applicable period of time set out above, the claimant shall receive written
notification of the denial, which notice shall set forth the specific reasons
for the denial, the relevant Plan provisions on which the denial is based, and
the claim review procedure under the Plan. In the event that a claim is denied
or in the event that no action is taken on the claim within the above-described
period(s) of time, the following procedure shall be used:
(a) First, in the event that the claimant does not timely receive
the above-described written notification, the claimant's request for
benefits shall be deemed to be denied as of the last day of the relevant
period and the claimant shall
20
be entitled to a full review of his claim in accordance with the following
provisions of this Section.
(b) Second, a claimant is entitled to a full review of his claim
after actual or constructive notification of a denial. A claimant desiring
a review must make a written request to the Administrative Committee
requesting such a review, which may include whatever comments or arguments
that the claimant wishes to submit. Incident to the review, the claimant
may represent himself or appoint a representative to do so, and shall have
the right to inspect all documents pertaining to the issue. The
Administrative Committee, in its sole discretion, may schedule any
meeting(s) with the claimant and/or the claimant's representative that it
deems necessary or appropriate to facilitate or expedite its review of a
denied claim.
A request for a review must be filed with the Administrative Committee within
ninety (90) days after the denial of the claim for benefits was actually or
constructively received by the claimant. If no request is received within the
90-day time limit, the denial of benefits will be final. However, if a request
for review of a denied claim is timely filed, the Administrative Committee must
render its decision under normal circumstances within sixty (60) days of its
receipt of the request for review. In special circumstances the decision may be
delayed if, prior to expiration of the initial 60-day period, the claimant is
notified of the extension, but must in any event be rendered no later than one
hundred twenty (120) days after receipt of the request. If the decision on
review is not furnished to the claimant within the applicable time period(s) set
above, the claim shall be deemed denied on the last day of the relevant period.
All decisions of the
21
Administrative Committee shall be in writing and shall include specific reasons
for whatever action has been taken, and the Plan provisions on which the
decision is based.
Any changes to the law governing timing requirements for the claims and
appeal process of this Plan, will automatically change the timings stated in
this Section 6.5.
6.6 Facility of Payments. If the Administrative Committee determines that
any person entitled to payments under the Plan is physically or mentally
incompetent to handle his or her own financial affairs, the Company or any
Subsidiary, whichever may be applicable, shall make such payment to the legal
guardian or other personal representative of such person for the use and benefit
of such person. If the Administrative Committee for any reason is unable to
determine with reasonable certainty the proper person to pay as legal guardian
or personal representative, the Company or Subsidiary shall pay the amount due
hereunder into a court of competent jurisdiction in an interpleader proceeding
for the purpose of being directed by such court as to the proper disposition of
the amount due hereunder. Any such payment to a legal guardian or personal
representative shall fully discharge the Company's and/or Subsidiary's
obligations hereunder.
6.7 Beneficiary Designations. Each person becoming a Participant shall
file with the Administrative Committee a designation of one or more
Beneficiaries to whom distribution otherwise due the Participant shall be made
in the event of his death while in the Employment of the Company or a Subsidiary
or after termination of Employment but prior to the complete distribution of the
amount in his accounts in the Supplemental Compensation Ledger. Such designation
shall be effective when received in writing by the Administrative Committee. The
22
Participant may from time to time revoke or change any such designation of the
Beneficiary by written document delivered to the Administrative Committee.
If there is no valid designation of Beneficiary on file with the
Administrative Committee at the time of the Participant's death, or if all of
the Beneficiaries designated therein shall have all predeceased the Participant
or otherwise ceased to exist, the Beneficiary shall be, and any payment
hereunder shall be made to, the Participant's spouse, if he or she survives the
Participant, otherwise to the Participant's estate.
If the Beneficiary, whether under a valid beneficiary designation or under
the preceding sentence, shall survive the Participant but die before receiving
payment hereunder, the benefits which would have been paid to the Beneficiary
had he or she lived shall, unless the Participant's designation provided
otherwise, be distributed to the Beneficiary's estate.
ARTICLE SEVEN
RIGHTS OF PARTICIPANTS
7.1 Periodic Statement to Participants. As soon as practicable after the
end of each calendar quarter, or at such other time determined to be suitable
(but not less often than yearly), the Administrative Committee shall cause to be
prepared and delivered to each Participant a written statement showing as of the
end of such calendar quarter the following information:
23
(a) The balance, if any, credited to his account in the Supplemental
Compensation Ledger as of the end of the preceding calendar quarter;
(b) The amount of contributions credited to his account in the
Supplemental Compensation Ledger for the calendar quarter;
(c) The adjustments to his account to reflect the crediting of
Interest Equivalents and any distributions made to the Participant for
such calendar quarter; and
(d) The new balance credited to his account as of the end of such
calendar quarter.
Notwithstanding the above provisions of this Section 7.1, effective May 1, 2001,
no periodic statements shall be required for any vested Participant for any
month that includes a Determination Date after the Participant's first
Determination Date, unless the Participant makes a written request for a
statement, in which case the statement shall be issued within 30 days of PEBCO
receiving the written request, unless a longer time is needed to issue the
statement due to circumstances not in PEBCO's control.
7.2 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any individual who is employed by the Company or any
Subsidiary any right to be a Participant in the Plan unless or until such
person shall become an Employee and be properly appointed a Participant;
(b) Give a Participant any rights whatsoever with respect to the
contributions, or Interest Equivalents credited in the Supplemental
Compensation Ledger until such contributions and Interest Equivalents
become distributable in accordance with the terms of the Plan;
24
(c) Limit in any way the right of the Company or any Subsidiary to
terminate a Participant's Employment with the Company or any Subsidiary at
any time;
(d) Except as otherwise provided under the Plan, give a Participant
or any other person any interest in any fund or in any specific asset or
assets of the Company or any Subsidiary;
(e) Give a Participant or any other person any interests or rights
other than those of any unsecured general creditor of the Company or any
Subsidiary; or
(f) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant in
any particular position or at any particular rate of remuneration.
7.3 Nonalienation of Benefits. No right or benefit under this Plan shall
be subject to anticipation, alienation, sale, assignment, pledge, encumbrance,
or charge, and any attempt to anticipate, alienate, sell, assign, pledge,
encumber, or charge the same will be void. No right or benefit hereunder shall
in any manner be liable for or subject to any debts, contracts, liabilities, or
torts of the person entitled to such benefits. If any Participant or Beneficiary
hereunder shall become bankrupt or attempt to anticipate, alienate, assign,
sell, pledge, encumber, or charge any right or benefit hereunder, or if any
creditor shall attempt to subject the same to a writ of garnishment, attachment,
execution, sequestration, or any other form of process or involuntary lien or
seizure, then such right or benefit shall, in the discretion of the
Administrative Committee, either cease and terminate absolutely or be held by
the Company or any Subsidiary for the sole benefit of the Participant or the
Beneficiary, his spouse, children, or other dependents, or any of them in
25
such manner and in such proportion as the Administrative Committee shall deem
proper, free and clear of the claims of any other part whatsoever.
7.4 Prerequisites to Benefits. No Participant, nor any person claiming
through a Participant, shall have any right or interest in the Plan, or any
benefits hereunder, unless and until all the terms, conditions, and provisions
of the Plan which affect such Participant or such other person shall have been
complied with as specified herein.
ARTICLE EIGHT
MISCELLANEOUS
8.1 Amendment or Termination of the Plan. The Board may amend or terminate
the Plan at any time. Provided, however, the provisions of Section 8.2 which
provides for payment of fully vested benefits upon termination of the Plan may
not be amended without the consent of at least two-thirds of all Participants.
For the purpose of the immediately preceding sentence, each Participant shall
have one vote. Any such amendment or termination shall not, however, adversely
affect the rights of any Participant or Beneficiary to any amounts then standing
to his credit in his account in the Supplemental Compensation Ledger. For
purposes of this Section 8.1, the primary Beneficiary of a deceased Participant
has the rights of a Participant to be counted in determining the two-thirds
number and to vote.
26
8.2 Powers of the Company. The existence of outstanding and unpaid
benefits under the Plan shall not affect in any way the right or power of the
Company or any Subsidiary to make or authorize any adjustments,
recapitalization, reorganization or other changes in the Company's or
Subsidiary's capital structure or in its business, or any merger or
consolidation of the Company or any Subsidiary, or any issue of bonds,
debentures, common or preferred stock, if applicable, or the dissolution or
liquidation of the Company or any Subsidiary, or any sale or transfer of all or
any part of its assets or business, or any other act or proceeding, whether of a
similar character or otherwise.
Should the Company or any Subsidiary (or any successor thereto) elect to
dissolve, enter into a sale of its assets, or enter into any reorganization
incident to which it is not the surviving entity, unless the surviving or
successor entity shall formally agree to assume the Plan, the Plan shall
terminate with respect to the Company or any Subsidiary (or any successor
thereto) on the earlier of the date of closing or the effective date, whichever
may be applicable, of such transaction and the full amount of any remaining
unpaid benefits credited to the Supplemental Compensation Ledger of each
Participant, whether or not vested, shall become fully vested and nonforfeitable
if the Board approves in accordance with Section 4.6, and then all fully vested
amounts shall be immediately paid to each such Participant (or Beneficiary) in a
single lump sum payment of cash.
8.3 Waiver. A waiver by the Company, any Subsidiary or any Participant of
any of the terms or conditions contained in the Plan shall not be construed as a
general waiver by such party of any other terms or conditions contained in the
Plan, and, except to the extent prohibited
27
by applicable law, the waiving party shall be free to reinstate any such term or
condition previously waived by giving written notice to the other party.
8.4 Separability. If any provision or provisions of the Plan shall be
found to be invalid, illegal, or unenforceable in any respect, such invalid,
illegal, or unenforceable provision shall be severed from the Plan and shall not
affect the validity, legality and enforceability of the remainder of the Plan.
8.5 Gender, Tense and Headings. Whenever the context requires, words of
the masculine gender used herein shall include the feminine and neuter, and
words used in the singular shall include the plural. Headings of Articles and
Sections, as used herein, are inserted solely for convenience and reference and
constitute no part of the Plan.
8.6 Governing Law. The Plan shall be subject to and governed by the laws
of the State of Texas and, to the extent applicable, the Employee Retirement
Income Security Act of 1974, as amended, and any other applicable laws of the
United States.
8.7 Notice. Any notice required or permitted to be given under this Plan
shall be sufficient if in writing and hand delivered, or sent by registered or
certified mail, to the Administrative Committee, Participant or Beneficiary at
the address last furnished by such person. Such notice shall be deemed given as
of the date of delivery or, if delivery is made by mail, as of the dates shown
on the postmark on the receipts for registration or certification.
8.8 Incorporation of Certain Provisions of Participants' Contracts with
the Company. If any contract between a Participant and the Company includes a
specific definition of just cause for termination of employment, of disability,
or of involuntary termination of
28
employment, such definition is hereby incorporated into the Plan by reference
and shall override any conflicting definitions in the Plan as to that
Participant.
8.9 Effective Date. The Plan was initially effective January 1, 1991. This
amendment and restatement of the Plan is effective May 1, 2001.
IN WITNESS WHEREOF, the Company has caused this amended and restated
Agreement to be executed this 8th day of March, 2002, to be effective the 1st
day of May, 2001.
NL INDUSTRIES, INC.
ATTEST:
By /s/Robert D. Hardy
----------------------
(Title:PEBCO CHAIRMAN)
David B. Garten
- ------------------------------
(Title:PEBCO SECRETARY)
29
EXHIBIT 10.32
AGREEMENT TO DEFER BONUS PAYMENT
This AGREEMENT TO DEFER BONUS PAYMENT (this "Agreement") is made
effective as of the 10th day of January 2002 between NL Industries, Inc., a New
Jersey corporation (the "Corporation") and Dr. Lawrence A. Wigdor ("Executive").
WHEREAS, Executive was awarded a Special Bonus in recognition of his
performance which substantially contributed to the success of the Corporation;
WHEREAS, The Corporation desires that payment of three hundred forty
thousand four hundred thirty-three dollars ($340,433) of such Special Bonus (the
"Deferred Special Bonus") be deferred until Executive ceases to be an employee
or executive officer of the Corporation or such earlier date as the Corporation,
acting through the Management Development & Compensation Committee of the Board
of Directors ("the Committee"), acting in its sole discretion, may determine,
subject to the conditions specified in Section 1 of this Agreement; and
WHEREAS, the Corporation and Darryl S. Kitay as trustee, will enter into
an agreement (the "Trust Agreement") which establishes an irrevocable trust (the
"Trust") which is intended to hold and invest an amount of funds equal to the
Deferred Special Bonus until such bonus is paid to Executive pursuant to this
Agreement;
NOW, THEREFORE, in consideration of the agreements set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. The Deferred Special Bonus shall be paid to Executive, or his
designated beneficiaries, upon the earliest to occur of (a) the termination of
Executive's employment (including Executive's resignation) for any reason, (b)
Executive's death, or (c) such date as shall be determined by the Committee in
its sole discretion.
2. The Deferred Special Bonus shall accrue interest beginning on
January __, 2002 up to and including the date such amount is paid to Executive
pursuant to Paragraph 1 hereof (the "Deferred Payment Date") and the entire
amount of such accrued interest shall be paid to Executive, or his designated
beneficiaries, on the Deferred Payment Date. Such interest shall accrue at the
rate of six and 15/32 percent (6.47%) per annum. Interest accrued pursuant to
this Paragraph 2 shall compound on a semi-annual basis and shall be computed for
the actual number of days elapsed on the basis of a year consisting of 365 or
366 days.
3. The Corporation shall immediately enter into the Trust
Agreement and thereby establish the Trust. The Corporation shall contribute an
amount equal to the Deferred Special Bonus to the Trust.
4. Subject to the terms of the Trust Agreement, the Corporation
may satisfy its payment obligations to Executive, or to his designated
beneficiaries, under this Agreement by (a) directing the Trustee to make such
payments from the principal and /or earnings of the Trust, (b) making such
payments directly from the Corporation's internal funds, or (c) by any
combination of (a) and (b), provided that all payments to Executive, or to his
designated beneficiaries, pursuant to this Agreement shall be made in
immediately available funds.
5. The Corporation shall withhold, either from the Deferred
Special Bonus in the year such amount is paid to Executive pursuant to Paragraph
1 hereof, or from any salary, bonus or other compensatory payment made to
Executive as the Corporation in its sole discretion may determine, such amounts
as is required by law to be withheld in 2002 or after, as the case may be,
pursuant to Code Sections 3101 and 3121(v)(2) or successor provisions thereof.
6. Title to and beneficial ownership of any assets, whether cash
or investments and whether held by the Corporation or the Trust, which the
Corporation may earmark to meet its payment obligations to Executive under this
Agreement, shall at all times remain in the Corporation or the Trust, as
applicable, and Executive and his designated beneficiaries shall not have any
property interest whatsoever in any specific assets of the Corporation or the
Trust. Any right of the Executive or any of his designated beneficiaries to
receive payments from the Corporation or the Trust under this Agreement shall be
no greater than the right of any unsecured general creditor of the Corporation.
7. The right of Executive or any other person to any payment
under this Agreement shall not be assigned, transferred, pledged or encumbered
except by will or by the laws of descent and distribution.
8. If the Committee shall find that any person to whom any
payment is payable under this Agreement is unable to care for his or her affairs
because of illness or accident, or is a minor, any payment due (unless a prior
claim therefore shall have been made by a duly appointed guardian or other legal
representative) may be paid to the spouse, a child, a parent, a brother or
sister, or the person or persons designated by the Executive in writing, or, in
the absence of any of the foregoing, to any one or more persons deemed by the
Committee to be appropriate. Any such payment shall be a complete discharge of
the liabilities of the Corporation under this Agreement.
9. Nothing contained herein shall be construed as conferring upon
Executive the right to continue in the employ of the Corporation as an executive
or in any other capacity.
10 This Agreement shall be binding upon and inure to the benefit
of the Corporation, it successors and assigns, and the Executive and his heirs,
executors, administrators and legal representatives.
11. This Agreement contains the entire agreement of and between
the parties with respect to the subject matter hereof, and supersedes any prior
understandings, agreements, or representations by or between the parties,
written or oral, which may have related to the subject matter hereof in any way.
In the event of any conflict between the terms and provisions of this Agreement
and the terms and provisions of any employment or severance agreement entered
into by the parties hereto, the terms and provisions of this Agreement shall
govern.
12. The Agreement shall be governed by the laws of the State of
Texas without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of Texas or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of Texas.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
NL INDUSTRIES, INC.
By: /s/ Robert D. Hardy
------------------------------------
Its: Vice President & Controller
EXECUTIVE
/s/ Dr. Lawrence A. Wigdor
------------------------------------
Dr. Lawrence A. Wigdor
TRUST AGREEMENT
This Agreement is made effective as of the 10th day of January,
2002 by and between NL Industries, Inc. (the "Corporation") and Darryl S. Kitay
(the "Trustee");
WHEREAS, the Corporation and Lawrence A. Wigdor (the "Executive")
have entered into the Agreement to Defer Bonus Payment (the "Deferral
Agreement") attached hereto as Exhibit A;
WHEREAS, the Corporation has incurred or expects to incur
liability under the terms of such Deferral Agreement with respect to the
Executive;
WHEREAS, the Corporation wishes to establish a trust (hereinafter
called the "Trust") and to contribute to the Trust assets that shall be held
therein, subject to the claims of the Corporation's creditors in the event of
the Corporation's Insolvency, as herein defined, until paid to the Executive and
his beneficiaries in such manner and at such times as specified in the Deferral
Agreement;
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Deferral Agreement as an unfunded plan maintained for the purpose of providing
deferred compensation for a member of the select group of management or highly
compensated employees for purposes of Title I of the Employee Retirement Income
Security Act of 1974; and
WHEREAS, it is the intention of the Corporation to make
contributions to the Trust to provide itself with a source of funds to assist it
in the meeting of its liabilities under the Deferral Agreement;
NOW, THEREFORE, the parties do hereby establish the Trust and
agree that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) The Corporation hereby deposits with the Trustee in trust
$100 or such other amount as determined by the Corporation, which shall become
the principal of the Trust to be held, administered and disposed of by the
Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which the
Corporation is the grantor, within the meaning of Subpart E, Part I, Subchapter
J, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and
shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of the Corporation and shall be used
exclusively for the uses and purposes as specified in the Deferral Agreement,
subject to the claims of the Corporation's general creditors as herein set
forth. The Executive and his beneficiaries shall have no preferred claim on, or
any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Deferral Agreement and this Trust Agreement shall be mere
unsecured contractual rights of the Executive and his beneficiaries against the
Corporation. Any assets held by the Trust will be subject to the claims of the
Corporation's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
(e) The Corporation shall make additional deposits of cash or
other property in trust with the Trustee in accordance with the terms of the
Deferral Agreement to augment the principal to be held, administered and
disposed of by the Trustee as provided in this Trust Agreement. Neither the
Trustee nor the Executive or any of his beneficiaries shall have any right to
compel additional deposits, except as may be required by the terms of the
Deferral Agreement.
Section 2. Payments to Executive and His Beneficiaries.
(a) Except as otherwise provided herein, the Trustee shall make
payments to the Executive and his beneficiaries in accordance with the Deferral
Agreement. The Trustee shall make provision for the reporting and withholding of
any federal, state or local taxes that may be required to be withheld with
respect to the payment of benefits pursuant to the terms of the Deferral
Agreement and shall pay amounts withheld to the appropriate taxing authorities
or determine that such amounts have been reported, withheld and paid by the
Corporation.
(b) The entitlement of the Executive or his beneficiaries to
benefits hereunder or under the Deferral Agreement shall be determined by the
Corporation in accordance with the terms of the Deferral Agreement, and any
claim for such benefits shall be considered and reviewed under the terms of the
Deferral Agreement.
(c) The Corporation may make payment of benefits directly to the
Executive or his beneficiaries as they become due under the terms of the
Deferral Agreement. The Corporation shall notify the Trustee of its decision to
make payment of benefits directly prior to the time amounts are payable to the
Executive or his beneficiaries.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When the Corporation Is Insolvent.
(a) The Trustee shall not make any payments to the Executive or
his beneficiaries if the Corporation is Insolvent. Notwithstanding any other
provision of this Trust Agreement, all determinations by the Trustee under this
Trust Agreement regarding whether the Corporation is solvent or Insolvent should
be based solely on the written representation to the Trustee from the
Corporation's Controller or Chief Financial Officer without any requirement of
independent investigation by the Trustee. The Corporation shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) the Corporation is
unable to pay its debts as they become due, or (ii) the Corporation is subject
to a pending proceeding as a debtor under the United States Bankruptcy Code.
2
(b) At all times during the continuance of this Trust, as
provided in Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of the Corporation under federal and
state law as set forth below.
(1) The Chief Financial Officer ("CFO") and the Controller
of the Corporation shall, jointly and severally, have the duty to inform the
Trustee in writing of the Corporation's Insolvency. If a person claiming to be a
creditor of the Corporation alleges in writing to the Trustee that the
Corporation has become Insolvent, the Trustee shall determine whether the
Corporation is Insolvent; such determination shall be made based solely on
written representation from the Corporation's Controller or Chief Financial
Officer. The Trustee shall in all events be entitled and required to rely on
such representation from the Corporation's Controller or Chief Financial Officer
in making a determination concerning the Corporation's solvency. Pending such
determination, the Trustee shall not make any payments to Executive or his
beneficiaries or any creditors of the Corporation.
(2) Unless the Trustee has received notice from the
Corporation that the Corporation is Insolvent, the Trustee shall have no duty at
any time to inquire whether the Corporation is Insolvent. The Trustee shall in
all events rely on such representation from the Corporation in making a
determination concerning the Corporation's solvency.
(3) In the event that the Corporation's Controller or
Chief Financial Officer has notified the Trustee in writing of the Corporation's
Insolvency, the Trustee shall not make any payments to the Executive or his
beneficiaries and shall hold the assets of the Trust for the benefit of the
Corporation's general creditors. Nothing in this Trust Agreement shall in any
way diminish or impair any rights of the Executive or his beneficiaries to
pursue their rights as general creditors of the Corporation with respect to
payments due under the Deferral Agreement or otherwise.
(4) The Trustee shall resume making payments to the
Executive or his beneficiaries in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the Corporation is not
Insolvent (or is no longer Insolvent); such determination shall be made as
described in Section 3(b)(1) above.
(c) Provided that there are sufficient Trust assets, if the
Trustee discontinues making payments from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to the
Executive or his beneficiaries under the terms of the Deferral Agreement for the
period of such discontinuance, less the aggregate amount of any payments made to
the Executive or his beneficiaries by the Corporation in lieu of the payments
provided for hereunder during any such period of discontinuance.
3
Section 4. Payments to the Corporation.
Except as provided in Section 3 hereof, the Corporation shall
have no right or power to direct the Trustee to return to the Corporation or to
divert to others any of the Trust assets before all payments have been made to
the Executive or his beneficiaries pursuant to the terms of the Deferral
Agreement.
Section 5. Investment Authority.
In no event may the Trustee invest in securities (including stock
or rights to acquire stock) or obligations issued by the Corporation, other than
a de minimis amount held in common investment vehicles in which the Trustee
invests. All rights associated with assets of the Trust shall be exercised,
solely in accordance with the directions of the Corporation, by the Trustee or
the person designated by the Trustee, and shall in no event be exercisable by or
rest with the Executive.
Section 6. Disposition of Income.
During the term of this Trust, all income received by the Trust,
net of expenses and taxes, shall be accumulated and reinvested.
Section 7. Accounting by the Trustee.
The Trustee shall keep records of such investments, receipts,
disbursements, and all other transactions required to be made, as shall be
agreed upon in writing between the Corporation and the Trustee. Within 60 days
following the close of each calendar year and within 60 days after the removal
or resignation of the Trustee, the Trustee shall deliver to the Corporation a
written account of its administration of the Trust during such year or during
the period from the close of the last preceding year to the date of such removal
or resignation, setting forth all investments, receipts, disbursements and other
transactions pertaining to Trust Assets effected by it, including a description
of all securities and investments purchased and sold with the cost or net
proceeds of such purchases or sales (accrued interest paid or receivable being
shown separately), and showing all cash, securities and other property held in
the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be. In the event the Trustee delegates the
obligatons of this section to an employee of the Corporation, such obligations
shall be deemed to be fulfilled by the Trustee. Trustee shall timely file, or
cause to be filed, any and all federal and state tax returns required to be
filed on behalf of the Trust.
4
Section 8. Responsibility of the Trustee.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims; provided, however, that the
Trustee shall incur no liability to any person for any action taken (or not
taken) pursuant to a direction, request or approval given by the Corporation in
connection, directly or indirectly, with the terms of the Deferral Agreement or
this Trust. In the event of a dispute between the Corporation and any party in
interest, the Trustee may apply to a court of competent jurisdiction to resolve
the dispute.
(b) The Corporation agrees to indemnify and hold the Trustee
harmless from any and all costs, fees, expenses (including without limitation
attorney's fees and expenses), claims or lawsuits by any person or entity,
liabilities or obligations of any type or nature arising or related, directly or
indirectly, to the Deferral Agreement, this Trust or any action or failure to
act by the Trustee in connection in any way with any of the foregoing.
Futhermore, if the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Corporation agrees to indemnify the Trustee
against the Trustee's costs, expenses and liabilities (including, without
limitation, attorneys' fees and expenses) relating thereto and to be solely
liable for such payments. If the Corporation does not pay such costs, expenses
and liabilities in a reasonably timely manner, the Trustee may obtain payment
from the Trust. The Corporation shall, if requested by the Trustee, assume the
defense of any litigation brought against the Trustee or the Trust, in which
event the Corporation shall have no liability to the Trustee for any costs or
expenses of litigation (absent a conflict of interest which reasonably
necessitates the Trustee's hiring separate counsel).
(c) The Trustee may consult with legal counsel (who may also be
counsel for the Corporation generally) with respect to any of its duties or
obligations hereunder.
(d) The Trustee may hire and the Corporation may make available
to the Trustee agents, accountants, actuaries, investment advisors, financial
consultants or other professionals to assist it in performing any of its duties
or obligations hereunder. In addition, the Trustee may delegate any of its
duties under this Trust to employees and management of the Corporation (other
than Executive) and the Trustee may conclusively rely on the reports of such
employees and management without further investigation.
(e) The Trustee shall have, without exclusion, all powers
conferred on trustees by applicable law, unless expressly provided otherwise
herein, provided, however, that if an insurance policy is held as an asset of
the Trust, the Trustee shall have no power to name a beneficiary of the policy
other than the Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor Trustee, or to loan to any
person the proceeds of any borrowing against such policy.
5
(f) Notwithstanding any powers granted to the Trustee pursuant to
this Trust Agreement or to applicable law, the Trustee shall not have any power
that could give this Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of section 301.7701-2 of the Procedure
and Administrative Regulations promulgated pursuant to the Internal Revenue
Code.
Section 9. Compensation and Expenses of Trustee.
The Corporation shall pay all administrative and Trustee's fees
and expenses. If not so paid, the fees and expenses shall be paid from the
Trust.
Section 10. Resignation and Removal of Trustee.
(a) The Trustee may resign at any time by written notice to the
Corporation, which shall be effective 15 days after receipt of such notice
unless the Corporation and the Trustee agree otherwise.
(b) The Trustee may be removed by the Corporation on 15 days
notice to the Trustee or upon shorter notice accepted by the Trustee.
(c) Upon a Change of Control, as defined in Section 13(d) below,
the Trustee may not be removed by the Corporation for 18 months.
(d) Upon resignation or removal of the Trustee and appointment of
a successor Trustee, all Trust assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within 30 days after receipt
of notice of resignation, removal or transfer, unless the Corporation extends
the time limit.
(e) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
the Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
Section 11. Appointment of Successor.
(a) If the Trustee resigns or is removed in accordance with
Section 10(a) or (b) hereof, the Corporation may appoint any person or any other
party, such as a bank trust department or other party that may be granted
corporate trustee powers under state law, as a successor to replace the Trustee
upon resignation or removal. The appointment shall be effective when accepted in
writing by the new Trustee, who shall have all of the rights and powers of the
former Trustee with respect to the Trust assets. The former Trustee shall
execute any instrument necessary or reasonably requested by the Corporation or
the successor Trustee to evidence the transfer.
6
(b) The successor Trustee need not examine the records and acts
of any prior Trustee and shall act in regard to the Trust assets, in accordance
with all the terms of this Trust Agreement. The successor Trustee shall not be
responsible for and the Corporation shall indemnify and defend the successor
Trustee from any claim or liability resulting from any action or inaction of any
prior Trustee or from any other past event, or any condition existing at the
time it becomes successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Corporation. Notwithstanding the foregoing, no
such amendment shall conflict with the terms of the Deferral Agreement or shall
make the Trust revocable.
(b) The Trust shall not terminate until the date on which the
Executive or his beneficiaries are no longer entitled to any payments pursuant
to the terms of the Deferral Agreement. Upon termination of the Trust any assets
remaining in the Trust shall be returned to the Corporation.
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall
be ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) No amount payable to the Executive or any of his
beneficiaries under this Trust Agreement may be anticipated, assigned (either at
law or in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of Texas.
(d) For purposes of this Trust, Change of Control shall mean the
purchase or other acquisition by any person, entity or group of persons, within
the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934
("Act"), or any comparable successor provisions, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Act) of thirty percent (30%) or
more of either the outstanding shares of common stock or the combined voting
power of the Corporation's then outstanding voting securities entitled to vote
generally in the election of directors, or the approval by the stockholders of
the Corporation of a reorganization, merger, or consolidation, in each case,
with respect to which persons who were stockholders of the Corporation
immediately prior to such reorganization, merger or consolidation do not,
immediately thereafter, own more than fifty percent (50%) of the combined voting
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Corporation's then outstanding securities,
or a liquidation or dissolution of the Corporation or of the sale of all or
substantially all of the Corporation's assets.
7
Section 14. Effective Date.
The effective date of this Trust Agreement shall be January ,
2002.
* * * * *
8
EXECUTED on the dates of the respective acknowledgments hereto,
to be effective as of the 10th day of January, 2002.
NL Industries, Inc.
/s/ Robert D. Hardy
------------------------------------
Vice President & Controller
- TRUSTOR -
/s/ Darryl S. Kitay
------------------------------------
- TRUSTEE -
THE STATE OF TEXAS '
'
COUNTY OF Harris '
This instrument was acknowledged before me on the 10th day of January,
2002, by Vonna E. Newsom.
/s/ Vonna E. Newsom
------------------------------------
Notary Public in and for
the State of T E X A S
My Commission Expires:
December 18, 2002
9
EXHIBIT 10.39
PURCHASE AGREEMENT
by and among
Kronos, Inc.,
as the Purchaser,
and
Big Bend Holdings LLC
and
Contran Insurance Holdings, Inc.,
as Sellers
January 4, 2002
TABLE OF CONTENTS
Section 1. Defined Terms......................................................1
Section 2. Agreement to Sell and Purchase.....................................4
Section 3. Purchase Price.....................................................4
Section 4. The Closing........................................................4
(a) Time and Place.........................................................4
(b) Obligations of Sellers at the Closing..................................5
(c) Obligation of the Purchaser at the Closing.............................5
Section 5. Representations and Warranties of the Sellers......................5
(a) Status.................................................................5
(b) Authorization..........................................................6
(c) No Violation...........................................................6
(d) Ownership..............................................................6
(e) Brokers' Fees..........................................................6
Section 6. Representations and Warranties of the Purchaser....................6
(a) Status.................................................................6
(b) Authorization..........................................................6
(c) No Violation...........................................................7
(d) Brokers' Fees..........................................................7
(e) Company Review.........................................................7
Section 7. Representations and Warranties Concerning the Companies............8
(a) Status.................................................................8
(b) No Violation...........................................................8
(c) Brokers' Fees..........................................................8
(d) Capitalization.........................................................8
(e) Records................................................................9
(f) Company Subsidiaries...................................................9
(g) Financial Statements...................................................9
(h) Subsequent Events......................................................9
(i) Legal Compliance......................................................10
(j) Tax Matters...........................................................11
(k) Title to and Condition of Assets......................................11
(l) Real Property.........................................................12
(m) Contracts.............................................................12
(n) Insurance.............................................................13
(o) Litigation............................................................13
(p) Labor; Employees......................................................14
(q) Employee Benefits.....................................................14
(r) Environmental, Health, and Safety Matters.............................14
(s) Customers.............................................................14
i
(t) Permits...............................................................14
(u) Foreign Corrupt Practices Act Compliance..............................15
Section 8. Indemnification...................................................15
(a) Indemnification Provisions for the Purchaser's Benefit................15
(b) Indemnification Provisions for the Sellers' Benefit...................16
(c) Indemnification Claim Procedures......................................16
(d) Notice of Claim.......................................................16
(e) Limitations on Indemnification Liability..............................17
(f) Other Indemnification Provisions......................................17
Section 9. Miscellaneous.....................................................17
(a) Transfer Taxes........................................................17
(b) Binding Effect, Benefits..............................................17
(c) Notices...............................................................18
(d) Entire Agreement; Amendment...........................................18
(e) Headings..............................................................18
(f) Attorneys' Fees.......................................................18
(g) Governing Law.........................................................18
(h) Severability..........................................................18
(i) Further Assurances....................................................18
(j) Counterparts..........................................................18
(k) Assignments...........................................................18
(l) Expenses..............................................................19
(m) Construction..........................................................19
(n) Remedies............................................................19
ii
PURCHASE AGREEMENT
This Purchase Agreement (this "Agreement") is entered into as of January
4, 2002, among Big Bend Holdings LLC, a Delaware limited liability company ("Big
Bend"), Contran Insurance Holdings, Inc., a Delaware corporation ("Contran
Insurance," and collectively with Big Bend, the "Sellers"), and Kronos, Inc., a
Delaware corporation ("Purchaser").
Recitals
A. EWI RE, Inc., a New York corporation ("EWI Inc."), has issued and
outstanding 900 shares of common stock, par value $1.00 per share (the "Common
Stock").
B. Big Bend is the record owner of 520 shares of Common Stock and a
57.8% membership interest (a "Membership Interest") in EWI RE, Ltd., a Nevada
limited liability company ("EWI Ltd." and collectively with EWI Inc., the
"Companies").
C. Contran Insurance is the record owner of 380 shares of Common Stock
and a 42.2% Membership Interest.
D. The Purchaser desires to purchase from the Sellers, and the Sellers
desire to sell to the Purchaser, all of the outstanding shares of Common Stock
and Membership Interests.
E. This Agreement is intended to further define the terms and conditions
of such purchases and sales of all of the outstanding shares of Common Stock and
the Membership Interests.
Agreement
NOW THEREFORE, in consideration of the premises and the mutual promises
and covenants below, the parties agree as follows:
Section 1. Defined Terms. The following terms will have the definitions
set forth below:
"Action" means any action, appeal, petition, plea, charge, complaint,
claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry, or
proceeding.
"Affiliate" or "Affiliated" with respect to any specified Person, means
a Person that, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, such specified
Person. For this definition, "control" (and its derivatives) means the
possession, directly or indirectly, or as trustee or executor, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of voting Equity Interests, as trustee or executor, by
contract or credit arrangements or otherwise.
"Agreement" is defined in the preamble to this Agreement.
"Balance Sheet Date" is defined in Section 7(g)(ii).
1
"Big Bend" is defined in the preamble to this Agreement.
"Big Bend Equity Interests" is defined in Section 2.
"Claim Notice" is defined in Section 8(e).
"Closing" is defined in Section 4(a).
"Closing Date" is defined in Section 4(a).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commitments" means (a) options, warrants, convertible securities,
exchangeable securities, subscription rights, conversion rights, exchange
rights, or other contracts that could require a Person to issue any of its
Equity Interests or to sell any Equity Interests it owns in another Person; (b)
any other securities convertible into, exchangeable or exercisable for, or
representing the right to subscribe for any Equity Interest of a Person or owned
by a Person; (c) statutory pre-emptive rights or pre-emptive rights granted
under a Person's Organizational Documents; and (d) stock appreciation rights,
phantom stock, profit participation, or other similar rights with respect to a
Person.
"Common Stock" is defined in the recitals to this Agreement.
"Companies" is defined in the recitals to this Agreement.
"Companies' Financial Statements" is defined in Section 7(g).
"Contran Insurance" is defined in the preamble to this Agreement.
"Contran Insurance Equity Interests" is defined in Section 2.
"Damages" is defined in Section 8(a).
"Environmental, Health, and Safety Requirements" means all orders and
laws enacted by any Governmental Body concerning or relating to public health
and safety, worker/occupational health and safety, and pollution or protection
of the environment, including those relating to the presence, use, production,
generation, handling, transportation, treatment, recycling, transfer, storage,
disposal, processing, discharge, release, control, or other action or failure to
act involving cleanup of any hazardous materials, substances or wastes, chemical
substances or mixtures, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls, noise, or
radiation, each as amended and as now in effect.
"Equity Interest" means (a) with respect to a corporation, any and all
shares of capital stock, (b) with respect to a partnership, limited liability
company, trust or similar Person, any and all units, interests or other
partnership/limited liability company interests, and (c) any other direct equity
ownership or participation in a Person.
2
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means each business or entity which is a member of a
"controlled group of corporations," under "common control" or an "affiliated
service group" with either Company within the meaning of Sections 414(b), (c) or
(m) of the Code, or required to be aggregated with either Company under Section
414(o) of the Code, or is under "common control" with either Company, within the
meaning of Section 4001(a)(14) of ERISA.
"EWI Inc." is defined in the recitals to this Agreement.
"EWI Ltd." is defined in the recitals to this Agreement.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Governmental Body" means any legislature, agency, bureau, branch,
department, division, commission, court, tribunal, magistrate, justice,
multi-national organization, quasi-governmental body, or other similar
recognized organization or body of any federal, state, county, municipal, local,
or foreign government or other similar recognized organization or body
exercising similar powers or authority.
"Indemnification Claim" is defined in Section 8(d)(i).
"Indemnified Parties" means, individually and as a group, the Purchaser
Indemnified Parties and the Seller Indemnified Parties.
"Indemnitor" means any party having any liability to any Indemnified
Party under this Agreement.
"Interim Financial Statements" is defined in Section 7(g)(ii).
"Knowledge" means with respect to (a) the Sellers, the actual conscious
knowledge of the following individuals with no investigation other than
performing their duties in the Ordinary Course of Business: Lisa S. Epstein and
officers of Contran Insurance and (b) the Purchaser, the actual conscious
knowledge of its executive officers.
"Material Adverse Change (or Effect)" means a change (or effect) in the
condition (financial or otherwise), in the properties, assets, liabilities,
rights, obligations, operations, business, or prospects of the Companies on a
combined basis which change (or effect), individually or in the aggregate, could
reasonably be expected to be materially adverse to such condition, properties,
assets, liabilities, rights, obligations, operations, or business of the
Companies on a combined basis.
"Membership Interest" is defined in the recitals to this Agreement.
"Most Recent Year End" is defined in Section 7(g)(i).
3
"Operating Agreement" means the First Amended and Restated Operating
Agreement effective April 6, 1998 among EWI Ltd.'s members and EWI Ltd.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity,
quality and frequency) of the relevant Person and its subsidiaries.
"Organizational Documents" means, as applicable, the articles of
incorporation, certificate of incorporation, charter, bylaws, articles of
formation, regulations, operating agreement, certificate of limited partnership,
partnership agreement, and all other similar documents, instruments or
certificates executed, adopted, or filed in connection with the creation,
formation, or organization of a Person, including any amendments thereto.
"Purchase Price" is defined in Section 3.
"Purchaser" is defined in the preamble to this Agreement.
"Purchaser Indemnified Parties" is defined in Section 8(c).
"Securities Act" means the Securities Act of 1933, as amended.
"Sellers" is defined in the preamble to this Agreement.
"Shareholders' Agreement" means the Second Amended and Restated
Shareholders' Agreement effective April 6, 1998 among EWI Inc.'s shareholders
and EWI Inc.
"Seller Indemnified Parties" is defined in Section 8(b).
"Threshold Amount" is defined in Section 8(f)(ii).
Section 2. Agreement to Sell and Purchase. Subject to the terms and
conditions of this Agreement, the Purchaser agrees to purchase concurrently 520
shares of Common Stock and a 57.8% Membership Interest from Big Bend
(collectively, the "Big Bend Equity Interests") and 380 shares of Common Stock
and a 42.2% Membership Interest from Contran Insurance (collectively, the
"Contran Insurance Equity Interests").
Section 3. Purchase Price. The Purchaser shall purchase the Big Bend
Equity Interests for an aggregate cash purchase price of $5,202,000.00 and the
Contran Insurance Equity Interests for an aggregate cash purchase price of
$3,798,000.00, respectively (collectively, the "Purchase Price"). In each
instance the Purchaser shall pay the Purchase Price by wire transfer to an
account designated in writing by the respective Seller.
Section 4. The Closing.
(a) Time and Place. The closing for the sale and purchase of the
Big Bend Equity Interests and the Contran Insurance Equity Interests
(the "Closing") shall take place on January 4, 2002, at Three Lincoln
Centre, 5430 LBJ Freeway Suite 1700, Dallas, Texas 75240-2697 or such
other date or place as the parties may mutually determine (the "Closing
Date").
4
(b) Obligations of Sellers at the Closing. At the Closing, each
of the Sellers shall deliver or cause to be delivered the following:
(i) a validly issued stock certificate registered in the
name of the Seller and representing the shares of Common Stock
to be sold by the Seller pursuant to this Agreement accompanied
by an assignment separate from certificate duly endorsing such
shares over to the Purchaser;
(ii) a validly issued membership certificate registered
in the name of the Seller and representing the Membership
Interest to be sold by the Seller pursuant to this Agreement
accompanied by an assignment separate from certificate duly
endorsing the such Membership Interests over to the Purchaser;
and
(iii) certified resolutions of the shareholders or
members, as applicable, authorizing such Seller to enter into
this Agreement, to consummate the transactions contemplated by
this Agreement, and to perform its obligations at the Closing.
(c) Obligation of the Purchaser at the Closing. At the Closing,
the Purchaser shall deliver or cause to be delivered the following:
(i) by wire transfer on behalf of Big Bend as follows:
(A) $466,906.06 to EWI Ltd. representing payment
in full of principal and interest on
outstanding loans by EWI Ltd. to Big Bend,
plus interest at a rate of $51.64 per day
subsequent to January 4, 2002;
(B) An amount equal to $5,202,000 less the
amount required to repay the loan by EWI
Ltd. to Big Bend as set forth above, to be
wired to the account of Big Bend;
(ii) by wire transfer, $3,798,000.00 to Contran
Insurance's designated account; and
(iii) certified resolutions of the board of directors,
authorizing the Purchaser to enter into this Agreement, to
consummate the transactions contemplated by this Agreement, and
to perform its obligations at the Closing.
Section 5. Representations and Warranties of the Sellers. Each Seller
represents and warrants as of the Closing Date as follows.
(a) Status. Such Seller is an entity duly created, formed or
organized, validly existing and in good standing under the laws of the
state of its incorporation or formation. There is no pending or
threatened Action (or basis therefor) for the dissolution, liquidation
or rehabilitation of such Seller.
5
(b) Authorization. Such Seller has all necessary power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All actions required to be taken by or
on behalf of it to authorize the execution, delivery and performance of
this Agreement and the transactions contemplated hereby have been duly
and properly taken. This Agreement, when duly executed and delivered by
such Seller, constitutes such Seller's lawful, valid and binding
obligation, enforceable against such Seller in accordance with their
terms.
(c) No Violation. The execution and delivery of this Agreement
and the consummation by such Seller of the transactions contemplated
hereby, are not prohibited by, do not violate or conflict with any
provision of, and do not result in a default under (i) such Seller's
Organizational Documents, (ii) any material contract, agreement or other
instrument to which it is a party or by which it is bound, (iii) any
order, writ, injunction, decree or judgment of any court or Governmental
Body applicable to it, or (iv) any law, rule or regulation applicable to
it; except in each case for such prohibitions, violations, conflicts or
defaults of or with respect to any item described in clauses (ii), (iii)
or (iv) that would not have a Material Adverse Effect.
(d) Ownership. Such Seller holds of record and owns the number
of shares of Common Stock and the Membership Interests set forth in the
recitals to this Agreement, free and clear of any encumbrances (other
than restrictions under the Securities Act and state securities laws).
Such Seller is not a party to any contract that could require it to
sell, transfer, or otherwise dispose of any of its Common Stock or its
Membership Interests (other than this Agreement, the Shareholders'
Agreement and the Operating Agreement), or any other contract with
respect to any capital stock of or other interest in either Company.
Such Seller's delivery of its shares of Common Stock and its Membership
Interests at the Closing will transfer to the Purchaser good and
marketable title to such shares and Membership Interest free and clear
of all liens, claims and encumbrances whatsoever.
(e) Brokers' Fees. Such Seller has no liability to pay any
compensation to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which the Purchaser
could become liable.
Section 6. Representations and Warranties of the Purchaser. The
Purchaser represents and warrants to each of the Sellers as of the Closing Date
as follows.
(a) Status. The Purchaser is an entity duly created, formed or
organized, validly existing and in good standing under the laws of the
state of its incorporation or formation. There is no pending or
threatened Action (or basis therefor) for the dissolution, liquidation
or rehabilitation of the Purchaser.
(b) Authorization. The Purchaser has all necessary power and
authority to execute and deliver this Agreement and to consummate the
transactions
6
contemplated hereby. All actions required to be taken by or on behalf of
it to authorize the execution, delivery and performance of this
Agreement and the transactions contemplated thereby have been duly and
properly taken. This Agreement, when duly executed and delivered by the
Purchaser, constitutes the Purchaser's lawful, valid and binding
obligations, enforceable against the Purchaser in accordance with their
terms.
(c) No Violation. The execution and delivery of this Agreement
and the consummation by the Purchaser of the transactions contemplated
hereby, are not prohibited by, do not violate or conflict with any
provision of, and do not result in a default under (i) the Purchaser's
Organizational Documents, (ii) any material contract, agreement or other
instrument to which the Purchaser is a party or by which the Purchaser
is bound, (iii) any order, writ, injunction, decree or judgment of any
court or Governmental Body applicable to the Purchaser, or (iv) any law,
rule or regulation applicable to the Purchaser; except in each case for
such prohibitions, violations, conflicts or defaults of or with respect
to any item described in clauses (ii), (iii) or (iv) that would not have
a material adverse effect on the Purchaser's ability to perform its
obligations under this Agreement.
(d) Brokers' Fees. The Purchaser has no liability to pay any
compensation to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which either Seller
could become liable.
(e) Company Review. The Purchaser:
(i) has such experience in financial and business
matters that it is capable of evaluating the merits and risks of
its investment in the Big Bend Equity Interests and Contran
Insurance Equity Interests contemplated hereby, and that the
Purchaser is able to bear the economic risk of such investment
indefinitely.
(ii) has (A) had the opportunity to meet with
representative officers and other representatives of each
Company to discuss its business, assets, liabilities, financial
condition, cash flow, and operations, and (B) received all
materials, documents and other information that it deems
necessary or advisable to evaluate the Big Bend Equity Interests
and Contran Insurance Equity Interests and the transactions
contemplated hereby.
(iii) has made its own independent examination,
investigation, analysis and evaluation of the Big Bend Equity
Interests and Contran Insurance Equity Interests, including its
own estimate of their value.
(iv) has undertaken such due diligence (including a
review of the Companies' assets, properties, liabilities, books,
records and contracts) as it deems adequate, including that
described above.
Nothing in this Section 6(e) will preclude the Purchaser
from relying on the representations, warranties, covenants, and
agreements of the Sellers herein or from pursuing their remedies
with respect to a breach thereof.
7
Section 7. Representations and Warranties Concerning the Companies. Each
Seller represents and warrants as of the Closing Date as follows:
(a) Status. Each Company is an entity duly created, formed or
organized, validly existing and in good standing under the laws of the
state of its incorporation or formation. There is no pending or
threatened Action (or basis therefor) for the dissolution, liquidation
or rehabilitation of such Company.
(b) No Violation. The execution and delivery of this Agreement
are not prohibited by, do not violate or conflict with any provision of,
and do not result in a default under (i) the Company's Organizational
Documents, (ii) any material contract, agreement or other instrument to
which such Company is a party or by which it is bound, (iii) any order,
writ, injunction, decree or judgment of any court or Governmental Body
applicable to such Company, or (iv) any law, rule or regulation
applicable to it; except in each case for such prohibitions, violations,
conflicts or defaults of or with respect to any item described in
clauses (ii), (iii) or (iv) that would not have a Material Adverse
Effect.
(c) Brokers' Fees. Neither Company has any liability to pay any
compensation to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which such Company could
become liable.
(d) Capitalization.
(i) EWI Inc.'s authorized Equity Interests consist of
20,000 shares of Common Stock, of which 900 shares are issued
and outstanding and 100 shares are held in treasury. All of the
EWI Inc.'s issued and outstanding shares: (A) have been duly
authorized and are validly issued, fully paid, and
nonassessable, (B) were issued in compliance with all applicable
New York and federal securities laws, (C) were not issued in
breach of any Commitments, and (D) are held of record and owned
beneficially by the Sellers. EWI Inc. has no Commitments
outstanding and has no obligation to issue any Commitments. No
additional Commitments will arise in connection with the
transactions contemplated by this Agreement. Other than as
provided in the Shareholders' Agreement, there are no contracts
with respect to the voting or transfer of the EWI Inc.'s Equity
Interests. EWI Inc. is not obligated to redeem or otherwise
acquire any of its outstanding Equity Interests.
(ii) All of the EWI Ltd.'s issued and outstanding
Membership Interests: (A) have been duly authorized and are
validly issued, fully paid, and nonassessable, (B) were issued
in compliance with all applicable Nevada and federal securities
laws, (C) were not issued in breach of any Commitments, and (D)
are held of record and owned beneficially by the Sellers. EWI
Ltd. has no Commitments outstanding and has no obligation to
issue any Commitments. No additional Commitments will arise in
connection with the transactions contemplated by this Agreement.
Other than as provided in the Operating Agreement, there are no
contracts with respect to the voting or transfer of the EWI
Ltd.'s Membership Interests. EWI Ltd. is not obligated to redeem
or otherwise acquire any of its outstanding Membership
Interests.
8
(e) Records. The copies of the Companies' Organizational
Documents that were made available to the Purchaser are accurate and
complete and reflect all amendments made through the date hereof. The
Companies' minute books and other records made available to the
Purchaser for review were correct and complete as of the date of such
review, no further entries have been made through the date of this
Agreement, such minute books and records contain the true signatures of
the persons purporting to have signed them, and such minute books and
records contain an accurate record of all actions of the stockholders,
directors, members, managers, or other such representatives of the
Companies taken by written consent, at a meeting, or otherwise since
formation.
(f) Company Subsidiaries. Neither Company owns or has ever owned
any Equity Interests in any Person.
(g) Financial Statements. Set forth on Schedule 7(g) are the
following financial statements (collectively the "Companies' Financial
Statements"):
(i) audited combined balance sheets and statements of
income, changes in stockholders' equity, and cash flow as of and
for the fiscal year ended December 31, 2000 (the "Most Recent
Year End") for the Companies; and
(ii) unaudited combined statements of income for the ten
months ended October 31, 2001 (the "Interim Financial
Statements") and the respective balance sheets of EWI Inc. and
EWI Ltd. as of and for the ten months ended October 31, 2001
(the "Balance Sheet Date") for the Companies.
The Financial Statements have been prepared on the income tax
basis of accounting applied on a consistent basis throughout the periods
covered thereby, present fairly the financial condition of the Companies
as of such dates and the results of operations of the Companies for such
periods on the income tax basis of accounting, are correct and complete,
and are consistent with the books and records of the Companies;
provided, however, that the Interim Financial Statements are subject to
normal year-end adjustments (which will not be material individually or
in the aggregate) and lack footnotes and other presentation items. Since
the Balance Sheet Date neither Company has effected any change in any
method of accounting or accounting practice.
(h) Subsequent Events. Since the Balance Sheet Date the
Companies have operated in the Ordinary Course of Business and, as of
the date hereof, there have been no events, series of events or the lack
of occurrence thereof, which singularly or in the aggregate, could
reasonably be expected to have a Material Adverse Effect. Without
limiting the foregoing, since that date, none of the following has
occurred:
(i) Neither Company has sold, leased, transferred, or
assigned any assets other than for a fair consideration in the
Ordinary Course of Business and sales of assets have not
exceeded $25,000 singularly or $50,000 in the aggregate.
9
(ii) Neither Company has entered into any contract (or
series of related contracts) either involving more than $50,000
or outside the Ordinary Course of Business.
(iii) Neither Company has made any capital expenditure
(or series of related capital expenditures) involving more than
$25,000 individually, $50,000 in the aggregate or outside the
Ordinary Course of Business.
(iv) Neither Company has made any capital investment in,
any loan to, or any acquisition of the securities or assets of,
any other Person involving more than $25,000 singularly, $50,000
in the aggregate or outside the Ordinary Course of Business.
(v) Neither Company has issued any note, bond, or other
debt security or created, incurred, assumed, or guaranteed any
liability for borrowed money or capitalized lease contract
either involving more than $25,000 individually or $50,000 in
the aggregate.
(vi) Neither Company has canceled, compromised, waived,
or released any Action (or series of related Actions) either
involving more than $50,000 or outside the Ordinary Course of
Business.
(vii) There has been no change made or authorized to be
made to the Organizational Documents of either Company.
(viii) Neither Company has issued, sold, or otherwise
disposed of any of its Equity Interests.
(ix) Neither Company has made any loan to, or entered
into any other transaction with, any of its directors, officers,
employees, shareholders, managers or members, as applicable.
(x) Neither Company has paid any dividend or made any
distribution, whether in cash, evidence of indebtedness, Equity
Interests or other securities or property.
(xi) There has not been any other occurrence, event,
incident, action, failure to act, or transaction with respect to
the Companies outside the Ordinary Course of Business.
(i) Legal Compliance. The Companies and their respective
predecessors and Affiliates have complied with all applicable laws and
no Action is pending or, to the Knowledge of the Sellers, threatened
(and there is no basis therefor) against it alleging any failure to so
comply, in each case that would have a Material Adverse Effect. No
material expenditures are, or based on applicable law, will be required
of either Company for it and its business and operations to remain in
compliance with applicable law.
10
(j) Tax Matters.
(i) Each Company has filed all tax returns that it was
required to file. All such tax returns were accurate, correct
and complete in all respects and accurately reflect the facts
regarding the income, business, assets, operations, activities,
status, or other matters of each Company or any other
information required to be shown thereon. All taxes each Company
owes (whether or not shown on any tax return) have been paid or
are being legally contested and any such contest has been
expressly disclosed in writing to the Purchaser. Neither Company
currently is the beneficiary of any extension of time within
which to file any tax return. No Action has ever been initiated
or, to the Knowledge of the Sellers, threatened by a
Governmental Body in a jurisdiction where a Company does not
file tax returns that it is or may be subject to taxation by
that jurisdiction. There are no encumbrances on any of the
assets of either Company that arose in connection with any
failure (or alleged failure) to pay any tax.
(ii) Each Company has withheld and paid all taxes
required to have been withheld and paid in connection with
amounts paid or owed to any employee, independent contractor,
creditor, holder of its Equity Interests, or other third party.
(iii) To the Knowledge of the Sellers, there is no
threatened assessment of, or any basis for, any additional taxes
for any period for which tax returns have been filed. There is
no Action concerning any tax liability of a Company either (A)
claimed or raised in writing or (B) as to which either Seller
has Knowledge.
(iv) Neither Company has waived any statute of
limitations in respect of taxes or agreed to any extension of
time with respect to a tax assessment or deficiency.
(v) Each Company has disclosed on its tax returns all
positions taken therein that could give rise to a substantial
understatement of federal income tax within the meaning of Code
Section 6662.
(vi) Neither Company is a party to any tax allocation or
sharing contract.
(k) Title to and Condition of Assets. The Companies have good
and indefeasible title to, or a valid leasehold interest in, all
buildings, machinery, equipment, and other tangible assets (i) located
on their premises, shown on the Interim Financial Statements, or
acquired after the Balance Sheet Date and (ii) necessary for the conduct
of their business as currently conducted, in each case free and clear of
all encumbrances, except for properties and assets disposed of in the
Ordinary Course of Business since the Balance Sheet Date. Each such
tangible asset is free from material defects (patent and latent), has
been maintained in accordance with normal industry practice, is in good
operating condition (subject to normal wear and tear), and is suitable
for the purposes for which it is currently used.
11
(l) Real Property.
(i) Neither Company owns or has ever owned any real
property.
(ii) With respect to each lease and sublease contract
for all real property leased or subleased to each Company:
(A) the contract is enforceable;
(B) the contract will continue to be enforceable
on identical terms following the
consummation of the transactions
contemplated by this Agreement;
(C) neither Company is in material breach of
such contract, and no event has occurred
which, with notice or lapse of time, would
constitute a material breach thereunder;
(D) no party to the contract has repudiated any
provision thereof;
(E) there are no actions, orders, or
forbearances in effect as to the contract;
(F) neither Company has granted or suffered to
exist any encumbrance in the leasehold or
subleasehold contract that is filed of
record;
(G) to the Knowledge of the Sellers, all
facilities leased or subleased under the
contract have received all permits required
in connection with the operation thereof and
have been operated and maintained in
accordance with applicable laws in all
material respects; and
(H) all facilities leased or subleased under the
contract are supplied with utilities and
other services necessary for the operation
of such facilities.
(m) Contracts. Neither Company is a party to :
(i) Any contract (or group of related contracts) for the
lease of personal property to or from any Person providing for
lease payments in excess of $50,000 per annum other than as
specifically disclosed in the Companies' Financial Statements.
(ii) Any contract (or group of related contracts) for
the purchase or sale of raw materials, commodities, supplies,
products, or other personal property, or for the furnishing or
receipt of services (other than pursuant to reinsurance
contracts and brokerage sharing agreements), the performance of
which will extend over a period of more than one year, result in
a Material Adverse Effect, or involve consideration in excess of
$100,000.
12
(iii) Any contract concerning a limited liability
company, partnership, joint venture or similar arrangement,
other than Organizational Documents of such Company.
(iv) Any contract (or group of related contracts) under
which it has created, incurred, assumed, or guaranteed any
liability for borrowed money or any capitalized lease in excess
of $150,000, or under which it has imposed or suffered to exist
an encumbrance on any of its assets other than purchase money
liens, unrecorded inchoate liens, or as specifically disclosed
in the Companies' Financial Statements.
(v) Any contract concerning confidentiality or
noncompetition other than with respect to present or past
employees of the Companies.
(vi) Except as specifically disclosed in the Companies'
Financial Statements, any profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance,
or other similar contract for the benefit of its current or
former directors, officers, and employees.
(vii) Any contract for the employment of any individual
on a full-time, part-time, consulting, or other basis providing
annual compensation (excluding any health and welfare benefits
and discretionary performance bonuses) in excess of $170,000 per
annum or any contract(s), plan(s) or commitment(s) providing
severance benefits in the aggregate for any employee of $150,000
or $250,000 in the aggregate for all employees.
(viii) Any contract under which it has advanced or
loaned any amount to any of its directors or officers or either
Seller or Affiliate of either Seller or, outside the Ordinary
Course of Business, to its employees that are not Sellers or
Affiliates of either Seller, other than as specifically
disclosed in the Companies' Financial Statements.
(ix) Any other contract the performance of which
involves receipt or payment of consideration in excess of
$250,000 per annum.
(n) Insurance. Each Company has been covered during the past
five years by insurance in scope and amount customary and reasonable for
the businesses in which it has engaged during the aforementioned period.
(o) Litigation. Neither of the Companies (i) is subject to any
outstanding order or (ii) is a party, the subject of, or to the
Knowledge of the Sellers is threatened to be made a party to or the
subject of any Action. No Action questions the enforceability of this
Agreement or the transactions contemplated hereby, or could result in
any Material Adverse Effect, and the Sellers have no Knowledge that any
such Action may be brought or threatened against either Company.
13
(p) Labor; Employees. To each Seller's Knowledge, no executive,
key employee, or group of employees has any plans to terminate
employment with either Company. Neither Company is a party to or bound
by any collective bargaining contract, nor has either of them
experienced any strikes, grievances, claims of unfair labor practices,
or other collective bargaining disputes. Neither Company has committed
any unfair labor practice (as determined under any law). Neither Seller
has any Knowledge of any organizational effort currently being made or
threatened by or on behalf of any labor union with respect to either
Company's employees.
(q) Employee Benefits. With respect to any employee benefit
plan, within the meaning of Section 3(3) of ERISA, which is subject to
ERISA and which is sponsored, maintained or contributed to, or has been
sponsored, maintained or contributed to, within six years prior to the
Closing Date, by either Company or any ERISA Affiliate, (i) no
withdrawal liability, within the meaning of Section 4201 of ERISA, has
been incurred, which withdrawal liability has not been satisfied, (ii)
no liability to the PBGC has been incurred by either Company or any
ERISA Affiliate, which liability has not been satisfied, (iii) no
accumulated funding deficiency, whether or not waived, within the
meaning of Section 302 of ERISA or Section 412 of the Code has been
incurred, and (iv) all contributions (including installments) to such
plan required by Section 302 of ERISA and Section 412 of the Code have
been timely made. With respect to any kind of employee benefit plan,
such plan has been funded and maintained in material compliance with all
laws applicable thereto and the requirements of such plan's governing
documents.
(r) Environmental, Health, and Safety Matters. To the Knowledge
of the Sellers, (i) each Company is in material compliance with all
Environmental, Health and Safety Requirements in connection with owning,
using, maintaining, or operating its business or assets; (ii) each
location at which either Company operates, or has operated, its business
is in compliance with all Environmental, Health and Safety Requirements;
and (iii) there are no pending, or any threatened allegations by any
Person that either Company's properties or assets is not, or that its
business has not been conducted, in compliance with all Environmental,
Health and Safety Requirements.
(s) Customers. The Companies have not received any notice of
termination of the broker of record designation or brokerage sharing
arrangements or an intention to terminate such relationships with the
Companies from any customer, the effect of which would be to cause the
Companies to achieve combined revenues below $3.4 million for the
calendar year 2001 as reflected in the Companies' combined budget
previously provided to Purchaser.
(t) Permits. The Companies possess all material permits required
for their businesses and operations. With respect to each such permit:
(i) it is valid, subsisting and in full force and
effect;
(ii) there are no material violations of such permit
that would result in a termination of such permit;
14
(iii) neither Company has received written notice that
such permit will not be renewed; and
(iv) the transactions contemplated by this Agreement
will not adversely affect the validity of such permit or cause a
cancellation of or otherwise adversely affect such permit.
(u) Foreign Corrupt Practices Act Compliance. Neither Seller nor
either Company has, directly or indirectly, in connection with the
Companies' businesses, made or agreed to make any payment to any Person
connected with or related to any Governmental Body, except payments or
contributions required or allowed by applicable law. The internal
accounting controls and procedures of the Companies are sufficient to
cause the Companies to comply with the Foreign Corrupt Practices Act.
Section 8. Indemnification.
(a) Survival of Representations and Warranties. Each
representation and warranty contained in this Agreement and any
certificate related to such representations and warranties will survive
the Closing and continue in full force and effect for a period of one
year thereafter, except with respect to representations and warranties
contained in Section 7 (j), which Section 7(j) representations and
warranties shall survive the closing and continue in full force and
effect for the applicable statute of limitations. The Purchaser on the
one hand, and the Sellers jointly and severally on the other, will be
liable for all damages, losses, liabilities, payments, amounts paid in
settlement, obligations, fines, penalties, and other costs (including
reasonable and necessary fees and expenses of outside attorneys,
accountants and other professional advisors and of expert witnesses) and
other costs of litigation in connection with any Action (collectively
"Damages") resulting from any breaches thereof.
(b) Indemnification Provisions for the Purchaser's Benefit. The
Sellers will, on a joint and several basis, indemnify and hold the
Purchaser and its officers, directors, managers, employees, agents,
representatives, controlling Persons, and stockholders (collectively,
the "Seller Indemnified Parties"), harmless from and pay any and all
Damages, directly or indirectly, resulting from, relating to, arising
out of, or attributable to any one of the following:
(i) Any breach of any representation or warranty either
Seller has made in this Agreement as if such representation or
warranty were made on and as of the Closing Date.
(ii) Any breach by either Seller of any obligation of
either Seller in this Agreement.
(iii) Any and all taxes that may be imposed on or
assessed on either of the Companies or the assets thereof with
respect to all taxable periods ending on or prior to the closing
date.
15
(c) Indemnification Provisions for the Sellers' Benefit. The
Purchaser will indemnify and hold the Sellers and their officers,
directors, managers, employees, agents, representatives, controlling
Persons, stockholders, members and Affiliates (other than Purchaser and
its subsidiaries), as applicable (collectively, the "Purchaser
Indemnified Parties"), harmless from and pay any and all Damages,
directly or indirectly, resulting from, relating to, arising out of, or
attributable to any of the following:
(i) Any breach of any representation or warranty the
Purchaser has made in this Agreement as if such representation
or warranty were made on and as of the Closing Date without
giving effect to any supplement to the Schedules.
(ii) Any breach by the Purchaser of any covenant or
obligation of the Purchaser in this Agreement.
(d) Indemnification Claim Procedures.
(i) If any third party notifies any Indemnified Party
with respect to the commencement of any Action that may give
rise to a claim for indemnification against any Indemnitor under
this Section 8 (an "Indemnification Claim"), then the
Indemnified Party will promptly give notice to the Indemnitor
pursuant to Section 8(e).
(ii) An Indemnitor will have the right at any time to
assume and thereafter conduct the defense of the Indemnification
Claim with counsel of the Indemnitor's choice reasonably
satisfactory to the Indemnified Party; provided, however, the
Indemnified Party will not consent to the entry of any judgment
or enter into any settlement with respect to the Indemnification
Claim without the prior written consent of the Indemnitor (not
to be withheld unreasonably).
(iii) Unless and until an Indemnitor assumes the defense
of the Indemnification Claim as provided in Section 8(d)(ii),
the Indemnitor may defend against the Indemnification Claim in
any manner the Indemnitor reasonably may deem appropriate.
(iv) In no event will the Indemnified Party consent to
the entry of any judgment or enter into any settlement with
respect to the Indemnification Claim without the prior written
consent of the Indemnitor (not to be withheld unreasonably).
(e) Notice of Claim. A party having Knowledge of an event or
condition that may cause such party to be Damaged, which event or
condition gives or could give rise to a claim for indemnification under
this Section 8, shall promptly notify each other party thereof in
writing (a "Claim Notice"). The Claim Notice shall contain a brief
description of the nature of the Damages suffered and, if practicable,
an aggregate dollar value estimate of the Damages suffered. Failure to
provide a Claim Notice with respect to such an event or condition within
the applicable survival period in Section 8(a) will constitute a waiver
of any such claim.
16
(f) Limitations on Indemnification Liability. Any claims made by
any Indemnified Party under this Section 8 will be limited as follows:
(i) Sellers' aggregate liability for Damages under this
Agreement related to breaches of the representations,
warranties, and covenants herein will not exceed an amount equal
to $1,000,000, except with respect to breaches of
representations and warranties contained in Section 7(j) and
except with respect to Section 8(b)(iii) herein where Seller's
aggregate liability for Damages under this Agreement shall be
without limit.
(ii) No party will have any liability for Damages
related to breaches of the representations, warranties, and
covenants in this Agreement unless and until the aggregate
Damages claimed under Section 8(e) exceeds $50,000 (the
"Threshold Amount"); provided, however, once such amount exceeds
the Threshold Amount, the Indemnified Party will be entitled to
recover all amounts to which it is entitled relating back to the
first dollar of Damages, without regard to the Threshold Amount.
(iii) The amount required to be paid for Damages will be
reduced to the extent of (A) any amounts an Indemnified Party
actually receives pursuant to the terms of the insurance
policies (if any) covering such Indemnification Claim (and the
Indemnified Party shall use all reasonable efforts to effect any
such recovery) and (B) any income tax benefit actually realized
by the Indemnified Party related to such Indemnification Claim.
(iv) All indemnification obligations under this Section
8 will be limited to actual Damages and will exclude incidental,
consequential, lost profits, indirect, punitive, or exemplary
Damages.
(g) Other Indemnification Provisions.
(i) This Section 8 contains the sole and exclusive
remedy for any claim against the Purchaser or either Seller with
respect to claims under this Agreement after the Closing.
(ii) A claim for any matter not involving a third party
may be asserted by notice to the party from whom indemnification
is sought.
Section 9. Miscellaneous.
(a) Transfer Taxes. Each Seller and Purchaser agrees to each pay
one-third of any transfer tax applicable to the transfer of its
respective shares of Common Stock and Membership Interests hereunder.
(b) Binding Effect, Benefits. This Agreement shall inure to the
benefit of the parties and shall be binding upon the parties and their
respective heirs, successors and permitted assigns.
17
(c) Notices. All notices and other communications that are
required to be or may be given under this Agreement shall be in writing
and shall be deemed to have been duly given when delivered in person or
transmitted by confirmed telecopy or upon receipt after dispatch by
overnight courier or by certified or registered mail, postage prepaid,
to the party to whom the notice is given. Notices shall be given to the
addresses appearing below such party's signature to this Agreement or to
such other address as such party may designate by giving notice to the
other parties to this Agreement.
(d) Entire Agreement; Amendment. This Agreement constitutes the
entire agreement and supersedes all prior agreements and understandings,
oral and written, among the parties with respect to its subject matter
and may not be amended, modified or terminated unless done so in a
written instrument executed by the party or parties sought to be bound.
(e) Headings. The captions used in this Agreement are for the
convenience of the parties and shall not affect the interpretation of
this Agreement.
(f) Attorneys' Fees. If any suit or action is instituted
relating to this Agreement, the prevailing party (the finality of which
is not reasonably contested) shall be awarded all reasonable attorney
fees incurred at trial and on any appeal.
(g) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of Texas without
giving effect to any choice of law or conflict of law provision or rule
(whether of the state of Texas or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the
state of Texas.
(h) Severability. The invalidity of all or any part of any
section if this Agreement shall not render invalid the remainder of this
Agreement or the remainder of such section. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
(i) Further Assurances. In addition to the acts and deeds
recited herein and contemplated to be performed, executed and delivered
by the parties hereto, the parties hereto shall perform, execute and
deliver or cause to be performed, executed and delivered at the Closing
or thereafter any and all further acts, deeds and assurances as may
reasonably be required to consummate or evidence the consummation of the
transactions contemplated herein.
(j) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(k) Assignments. No party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of each other party; provided, however, that the
Purchaser may (i) assign any or all of its rights and interests
hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or
all of which cases the Purchaser nonetheless will remain responsible for
the performance of all of its obligations hereunder).
18
(l) Expenses. Except as otherwise expressly provided in this
Agreement, each party will bear its own costs and expenses incurred in
connection with the preparation, execution and performance of this
Agreement and the transactions contemplated hereby, including all fees
and expenses of agents, representatives, financial advisors, legal
counsel and accountants. The Sellers agree that neither Company has
borne or will bear any costs and expenses (including any legal fees and
expenses of either Seller) in connection with this Agreement or any of
the transactions contemplated hereby.
(m) Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question
of intent or interpretation arises, this Agreement will be construed as
if drafted jointly by the parties and no presumption or burden of proof
will arise favoring or disfavoring any party because of the authorship
of any provision of this Agreement. Any reference to any federal, state,
local, or foreign law will be deemed also to refer to law as amended and
all rules and regulations promulgated thereunder, unless the context
requires otherwise, words "include," "includes," and "including" will be
deemed to be followed by "without limitation." Pronouns in masculine,
feminine, and neuter genders will be construed to include any other
gender, and words in the singular form will be construed to include the
plural and vice versa, unless the context otherwise requires. The words
"this Agreement," "herein," "hereof," "hereby," "hereunder," and words
of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The parties intend
that each representation, warranty, and covenant contained herein will
have independent significance. If any party has breached any
representation, warranty, or covenant contained herein in any respect,
the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels
of specificity) which the party has not breached will not detract from
or mitigate the fact that the party is in breach of the first
representation, warranty, or covenant.
(n) Remedies. Except as expressly provided herein, the rights,
obligations and remedies created by this Agreement are cumulative and in
addition to any other rights, obligations, or remedies otherwise
available at law or in equity. Except as expressly provided herein,
nothing herein will be considered an election of remedies.
[Remainder of page intentionally left blank]
19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PURCHASER: KRONOS, INC.
By:/s/ Robert D. Hardy
Name: Robert D. Hardy
Title: Vice President & Assistant Treasurer
By: THE SPECIAL COMMITTEE OF THE BOARD OF
DIRECTORS OF NL INDUSTRIES, INC.
ESTABLISHED BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS AS OF AUGUST 2,
2001 TO APPROVE, IF APPROPRIATE, THE
ACQUISITION OF THE EQUITY INTERESTS OF EWI
RE, INC. AND EWI RE, LTD.
By:/s/ Kenneth R. Peak
-------------------
Kenneth R. Peak, Chairman
Address: Two Greenspoint Plaza
Suite 1200
16825 Northchase Drive
Houston, Texas 77060
FAX: 281.423.3216
BIG BEND HOLDINGS LLC
By:/s/ Lisa A. Epstein
Lisa Simmons Epstein, Sole Member
Address: Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240
FAX: 972.448.1445
CONTRAN INSURANCE HOLDINGS, INC.
By:/s/ Bobby D. O'Brien
--------------------
Bobby D. O'Brien, Vice President
Address: Three Lincoln Centre
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240
FAX: 972.448.1445
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
incorporation % of Voting
NAME OF CORPORATION or organization Securities Held
------------------- --------------- ---------------
Kronos, Inc. Delaware 100
Kronos (US) Inc. Delaware 100
Kronos International, Inc. Delaware 100
Kronos Titan GmbH & Co. OHG Germany 100(b)
Unterstutzungskasse Kronos Titan-GmbH Germany 100
Kronos Chemie-GmbH Germany 100
Kronos World Services S.A./N.V. Belgium 100
Kronos Canada, Inc. Canada 100
Societe Industrielle du Titane, S.A. France 94
Kronos Limited United Kingdom 100
Kronos Denmark ApS Denmark 100
Kronos Europe S.A./N.V. Belgium 100
Kronos B.V. Holland 100
Kronos Norge A/S Norway 100
Kronos Titan A/S Norway 100
The Jossingfjord Manufacturing Company A/S Norway 100
Titania A/S Norway 100
Kronos Invest A/S Norway 100
Titania Invest A/S Norway 100
Kronos Louisiana, Inc. Delaware 100
Louisiana Pigment Company, L.P. Delaware 50(a)
Other:
NL Industries (USA), Inc. Texas 100
NLO, Inc. Ohio 100
Salem Lead Company Massachusetts 100
Sayre & Fisher Land Company New Jersey 100
153506 Canada Inc. Canada 100
NL Industries Chemie, GmbH Germany 100
Tremont Holdings, LLC Delaware 100
NL Environmental Management Services, Inc. New Jersey 78(c)
EMS Financial, Inc. Delaware 78(c)
The 1230 Corporation California 100
United Lead Company New Jersey 100
(a) Unconsolidated joint venture accounted for by the equity method.
(b) On October 1, 2001, Kronos Titan GmbH & Co. OHG merged into NL Industries
GmbH & Co. OHG. NL Industries GmbH & Co. OHG changed its name to Kronos
Titan GmbH & Co. OHG.
(c) Registrant directly owns 56% and indirectly owns 22% via 153506 Canada,
Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the:
(i) Registration Statement No. 33-29287 on Form S-8 and related
Prospectus with respect to the 1989 Long Term Performance
Incentive Plan of NL Industries, Inc.; and
(ii) Registration Statement No. 33-25913 on Form S-8 and related
Prospectus with respect to the NL Industries, Inc. Retirement
Savings Plan; and
(iii) Registration Statement No. 333-65817 on Form S-8 and related
Prospectus with respect to the NL Industries, Inc. 1998 Long-Term
Incentive Plan; and
(iv) Registration Statement No. 33-48145 on Form S-8 and related
Prospectus with respect to the NL Industries, Inc. 1992
Non-Employee Directors Stock Option Plan.
of our report dated March 1, 2002 on our audits of the consolidated financial
statements and financial statement schedules of NL Industries, Inc. as of
December 31, 2001 and 2000, and for each of the three years in the period ended
December 31, 2001, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Houston, Texas
March 14, 2002