SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the quarter ended September 30, 2002
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
------------------
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) had been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding on November 14, 2002: 47,682,384
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 3-4
Consolidated Statements of Income - Three months and nine
months ended September 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income
- Three months and nine months ended
September 30, 2002 and 2001 6
Consolidated Statement of Shareholders' Equity
- Nine months ended September 30, 2002 7
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2002 and 2001 8-9
Notes to Consolidated Financial Statements 10-22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23-32
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34-35
Item 6. Exhibits and Reports on Form 8-K 35-36
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2002 2001
----------- ----------
Current assets:
Cash and cash equivalents ........................ $ 170,838 $ 116,037
Restricted cash equivalents ...................... 52,832 63,257
Restricted marketable debt securities ............ 9,775 3,583
Accounts and notes receivable .................... 158,569 125,721
Receivable from affiliates ....................... 2,601 3,698
Refundable income taxes .......................... 1,102 1,530
Inventories ...................................... 170,841 231,056
Prepaid expenses ................................. 8,866 3,193
Deferred income taxes ............................ 11,461 11,011
---------- ----------
Total current assets ......................... 586,885 559,086
---------- ----------
Other assets:
Marketable equity securities ..................... 44,998 45,227
Receivable from affiliate ........................ 31,900 31,650
Investment in TiO2 manufacturing joint venture ... 132,078 138,428
Prepaid pension cost ............................. 21,991 18,411
Restricted marketable debt securities ............ 7,204 16,121
Restricted cash equivalents ...................... 2,525 --
Unrecognized net pension obligations ............. 5,901 5,901
Other ............................................ 22,356 6,517
---------- ----------
Total other assets ........................... 268,953 262,255
---------- ----------
Property and equipment:
Land ............................................. 26,861 24,579
Buildings ........................................ 141,948 130,710
Machinery and equipment .......................... 602,388 537,958
Mining properties ................................ 77,910 67,649
Construction in progress ......................... 7,557 5,071
---------- ----------
856,664 765,967
Less accumulated depreciation and depletion ...... 502,094 436,217
---------- ----------
Net property and equipment ................... 354,570 329,750
---------- ----------
$1,210,408 $1,151,091
========== ==========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
2002 2001
----------- ------------
Current liabilities:
Notes payable .............................. $ -- $ 46,201
Current maturities of long-term debt ....... 1,221 1,033
Accounts payable and accrued liabilities ... 144,419 176,223
Payable to affiliates ...................... 8,856 6,919
Accrued environmental costs ................ 52,887 59,891
Income taxes ............................... 8,088 7,277
Deferred income taxes ...................... 1,832 1,530
----------- -----------
Total current liabilities .............. 217,303 299,074
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 306,524 195,465
Deferred income taxes ...................... 154,116 143,256
Accrued environmental costs ................ 47,288 47,589
Accrued pension cost ....................... 26,149 26,985
Accrued postretirement benefits cost ....... 27,573 29,842
Other ...................................... 14,370 14,729
----------- -----------
Total noncurrent liabilities ........... 576,020 457,866
----------- -----------
Minority interest .............................. 8,312 7,208
----------- -----------
Shareholders' equity:
Common stock ............................... 8,355 8,355
Additional paid-in capital ................. 777,638 777,597
Retained earnings .......................... 222,722 222,722
Accumulated other comprehensive loss ....... (174,357) (206,351)
Treasury stock ............................. (425,585) (415,380)
----------- -----------
Total shareholders' equity ............. 408,773 386,943
----------- -----------
$ 1,210,408 $ 1,151,091
=========== ===========
Commitments and contingencies (Note 16)
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues and other income:
Net sales ......................... $234,061 $206,952 $663,327 $653,117
Other income, net ................. 4,329 6,826 17,230 27,555
-------- -------- -------- --------
238,390 213,778 680,557 680,672
-------- -------- -------- --------
Costs and expenses:
Cost of sales ..................... 177,521 145,945 510,021 447,167
Selling, general and administrative 39,143 30,665 106,377 92,323
Interest .......................... 7,554 6,949 22,167 20,812
-------- -------- -------- --------
224,218 183,559 638,565 560,302
-------- -------- -------- --------
Income before income taxes and
minority interest ........... 14,172 30,219 41,992 120,370
Income tax expense .................... 4,677 9,681 11,695 38,896
-------- -------- -------- --------
Income before minority interest 9,495 20,538 30,297 81,474
Minority interest ..................... 713 -- 1,083 953
-------- -------- -------- --------
Net income .................... $ 8,782 $ 20,538 $ 29,214 $ 80,521
======== ======== ======== ========
Earnings per share:
Basic ............................. $ .18 $ .41 $ .60 $ 1.61
======== ======== ======== ========
Diluted ........................... $ .18 $ .41 $ .60 $ 1.61
======== ======== ======== ========
Weighted average shares used
in the calculation of earnings
per share:
Basic ........................... 48,623 49,621 48,772 49,876
Dilutive impact of stock options 58 84 85 153
-------- -------- -------- --------
Diluted ......................... 48,681 49,705 48,857 50,029
======== ======== ======== ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2002 2001 2002 2001
------- -------- -------- --------
Net income ................................... $ 8,782 $ 20,538 $ 29,214 $ 80,521
------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized holding gain (loss) arising
during the period .................. (2,890) (5,258) 239 (1,669)
Add: reclassification adjustment for
loss included in net income ........ -- -- -- 736
------- -------- -------- --------
(2,890) (5,258) 239 (933)
Currency translation adjustment .......... (4,601) 13,161 31,755 (7,204)
------- -------- -------- --------
Total other comprehensive income
(loss) ............................. (7,491) 7,903 31,994 (8,137)
------- -------- -------- --------
Comprehensive income ............. $ 1,291 $ 28,441 $ 61,208 $ 72,384
======= ======== ======== ========
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months ended September 30, 2002
(In thousands)
Accumulated other
comprehensive income (loss)
Additional ---------------------------------
Common paid-in Retained Currency Pension Marketable Treasury
stock capital earnings translation liabilities securities stock Total
-----------------------------------------------------------------------------------
Balance at December 31, 2001 $8,355 $ 777,597 $222,722 $(208,349) $(6,352) $8,350 $(415,380) $386,943
Net income - - 29,214 - - - - 29,214
Other comprehensive income, net of tax - - - 31,755 - 239 - 31,994
Dividends - - (29,214) - - - - (29,214)
Tax benefit of stock options exercised - 41 - - - - - 41
Treasury stock:
Acquired (719 shares) - - - - - - (10,559) (10,559)
Reissued (29 shares) - - - - - - 354 354
---------------------------------------------------------------------------------
Balance at September 30, 2002 $8,355 $ 777,638 $222,722 $(176,594) $(6,352) $8,589 $(425,585) $408,773
=================================================================================
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2001
(In thousands)
2002 2001
-------- --------
Cash flows from operating activities:
Net income .................................................... $ 29,214 $ 80,521
Depreciation, depletion and amortization ...................... 24,590 22,335
Deferred income taxes ......................................... 3,549 7,340
Distributions from TiO2 manufacturing joint venture ........... 6,350 5,513
Litigation settlement gain, net included in restricted cash ... -- (10,307)
Net losses from securities transactions ....................... 59 1,133
Insurance recoveries, net ..................................... -- (5,829)
Other, net .................................................... (4,346) (3,082)
-------- --------
59,416 97,624
Change in assets and liabilities:
Accounts and notes receivable ............................. (33,767) (12,986)
Insurance receivable ...................................... 11,218 (2,508)
Inventories ............................................... 72,532 15,676
Prepaid expenses .......................................... (5,208) (3,891)
Accounts payable and accrued liabilities .................. (49,584) (7,872)
Income taxes .............................................. 377 12,018
Other, net ................................................ 13,125 (5,637)
-------- --------
Net cash provided by operating activities ............. 68,109 92,424
-------- --------
Cash flows from investing activities:
Capital expenditures .......................................... (18,070) (32,391)
Acquisition of business ....................................... (9,149) --
Loans to affiliates:
Loans ..................................................... -- (33,400)
Collections ............................................... 750 500
Property damaged by fire:
Insurance proceeds ........................................ -- 10,500
Other, net ................................................ -- (2,100)
Change in restricted cash equivalents and restricted marketable
debt securities, net ........................................ 821 700
Other, net .................................................... 848 84
-------- --------
Net cash used by investing activities ..................... (24,800) (56,107)
-------- --------
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2002 and 2001
(In thousands)
2002 2001
--------- ----------
Cash flows from financing activities:
Dividends paid ................................... $ (29,214) $ (29,897)
Treasury stock:
Purchased .................................... (10,559) (9,853)
Reissued ..................................... 354 619
Indebtedness:
Borrowings ................................... 330,800 1,437
Principal payments ........................... (271,939) (22,132)
Deferred financing costs ..................... (10,590) --
Other, net ....................................... (11) (5)
--------- ---------
Net cash provided (used) by financing activities . 8,841 (59,831)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities 52,150 (23,514)
Currency translation ......................... 2,455 136
Acquisition of business ...................... 196 --
--------- ---------
54,801 (23,378)
Balance at beginning of period ................... 116,037 120,378
--------- ---------
Balance at end of period ......................... $ 170,838 $ 97,000
========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 19,354 $ 14,239
Income taxes, net ................................ 7,837 19,538
Acquisition of business:
Cash and cash equivalents .................... $ 196 $ --
--------- ---------
Restricted cash .............................. 2,685 --
Goodwill and other intangible assets ......... 9,007 --
Other noncash assets ......................... 1,259 --
Liabilities .................................. (3,998) --
--------- ---------
Cash paid ................................ $ 9,149 $ --
========= =========
NL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2")
operations through its wholly owned subsidiary, Kronos, Inc. ("Kronos"). At
September 30, 2002, Valhi, Inc. ("Valhi") and Tremont Corporation ("Tremont"),
each affiliates of Contran Corporation, held approximately 62% and 21%,
respectively, of NL's outstanding common stock. At September 30, 2002, Contran
and its subsidiaries held approximately 93% of Valhi's outstanding common stock,
and Tremont Group, Inc. ("Tremont Group"), which is 80% owned by Valhi and 20%
owned by NL, held approximately 80% of Tremont's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board of NL, Chairman of the Board and Chief Executive Officer of Contran, the
Chairman of the Board of Valhi and a director of Tremont, may be deemed to
control each of such companies. See Note 8.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2002 and the consolidated statements
of income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended September 30, 2002 and 2001 have been prepared by the
Company without audit. In the opinion of management all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the U.S. ("GAAP") have been condensed or omitted. Certain prior-year amounts
have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (the "2001 Annual
Report").
The Company adopted Statement of Financial Accounting Standards ("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 the Company's equity method
investee. 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 goodwill of $6.4
million at September 30, 2002. See Note 3.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 retains
the fundamental provisions of existing GAAP with respect to the recognition and
measurement of long-lived asset impairment contained in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." However, SFAS No. 144 provides new guidance intended to address
certain significant implementation issues associated with SFAS No. 121,
including expanded guidance with respect to appropriate cash flows to be used to
determine whether recognition of any long-lived asset impairment is required,
and if required how to measure the amount of the impairment. SFAS No. 144 also
requires that any net assets to be disposed of by sale to be reported at the
lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity. The adoption of SFAS No. 144 effective January 1, 2002 did not have a
material effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" effective
April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Board Opinion ("APBO") No. 30. In addition,
upon adoption of SFAS No. 145, all gains and losses from the early
extinguishment of debt that had previously been classified as an extraordinary
item are to be reassessed to determine if they would have met the "unusual and
infrequent" criteria of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria are retroactively reclassified and reported as a
component of income before extraordinary item. The Company has concluded that
all of its previously-recognized gains and losses from the early extinguishment
of debt that occurred on or after January 1, 1998 would not have met the APBO
No. 30 criteria for classification as an extraordinary item, and accordingly
such previously-reported gains and losses from the early extinguishment of debt
have been retroactively reclassified and reported as a component of income
before extraordinary item. The effect of adoption for the nine months ended
September 30, 2002 was a second-quarter 2002 reclassification of a first-quarter
2002 loss of $92,000 ($60,000, net of income tax benefit) from extraordinary
item to income before extraordinary item under interest expense.
Note 2 - 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.
Note 3 - Business combination
In January 2002 the Company acquired all of the stock and limited liability
company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including acquisition
costs of $.2 million. An entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and a wholly owned subsidiary of Contran
owned the remainder of EWI. EWI provides reinsurance brokerage services for
insurance policies of the Company, its joint venture and other affiliates of
Contran as well as external third-party customers. In addition, EWI is
attempting to obtain new third-party customers in the future. The purchase was
approved by a special committee of the Company's Board of Directors consisting
of two of its directors unrelated to Contran, and the purchase price was
negotiated by the special committee based upon its consideration of relevant
factors, including but not limited to due diligence performed by independent
consultants and an appraisal of EWI conducted by an independent third party
selected by the special committee.
EWI's results of operations and cash flows are included in the Company's
consolidated results of operations and cash flows beginning January 2002. The
pro forma effect on the Company's results of operations in the first nine months
of 2001, assuming the acquisition of EWI had occurred as of January 1, 2001, is
not material. The aggregate cash purchase price of $9.2 million (including
acquisition costs of $.2 million) has been allocated to the assets acquired and
liabilities assumed, consisting of a definite-lived, customer list intangible
asset of $2.6 million and goodwill of $6.4 million, based upon preliminary
estimates of fair value. Such identifiable intangible asset and goodwill were
included in other noncurrent assets at September 30, 2002. The actual allocation
may be different from the preliminary allocation due to refinements in the
estimates of fair values of the net assets acquired. The identifiable intangible
asset will be amortized on a straight-line basis over a period of 7 years
(approximately 6.3 years remaining at September 30, 2002) with no assumed
residual value. Goodwill will not be amortized on a periodic basis but instead
will subject to periodic impairment tests in accordance with the requirements of
SFAS No. 142. See Note 1.
Note 4 - Business segment information:
The Company's operations are conducted by Kronos in one operating business
segment - the production and sale of TiO2.
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Net sales .................................... $ 234,061 $ 206,952 $ 663,327 $ 653,117
Other income (expense),
excluding corporate ......................... 1,558 (337) 1,242 1,673
--------- --------- --------- ---------
235,619 206,615 664,569 654,790
Cost of sales ................................ 177,521 145,945 510,021 447,167
Selling, general and
administrative, excluding corporate ......... 28,479 24,448 78,105 74,315
--------- --------- --------- ---------
Operating income ..................... 29,619 36,222 76,443 133,308
Insurance recoveries, net .................... -- 3,900 -- 5,829
--------- --------- --------- ---------
Income before corporate items, income
taxes and minority interest ........ 29,619 40,122 76,443 139,137
General corporate income (expense):
Securities earnings, net ................. 1,752 2,145 4,300 5,937
Litigation settlement gains, net and other
income ................................. 1,019 1,129 5,417 14,127
Currency transaction gains (see Note 14) . -- -- 6,271 --
Corporate expenses ....................... (10,664) (6,228) (28,272) (18,019)
Interest expense ......................... (7,554) (6,949) (22,167) (20,812)
--------- --------- --------- ---------
Income before income taxes and
minority interest .................. $ 14,172 $ 30,219 $ 41,992 $ 120,370
========= ========= ========= =========
Note 5 - Accounts and notes receivable:
September 30, December 31,
2002 2001
------------ ------------
(In thousands)
Trade receivables .............................. $ 149,560 $ 99,989
Insurance claims receivable .................... 287 11,505
Recoverable VAT and other receivables .......... 11,321 16,585
Allowance for doubtful accounts ................ (2,599) (2,358)
--------- ---------
$ 158,569 $ 125,721
========= =========
Note 6 - Inventories:
September 30, December 31,
2002 2001
-------- ---------
(In thousands)
Raw materials ............................ $ 33,835 $ 79,162
Work in process .......................... 11,304 9,675
Finished products ........................ 96,788 117,201
Supplies ................................. 28,914 25,018
-------- --------
$170,841 $231,056
======== ========
Note 7 - Marketable equity securities:
September 30, December 31,
2002 2001
-------- ----------
(In thousands)
Available-for-sale marketable equity securities:
Unrealized gains ........................... $ 13,133 $ 14,917
Unrealized losses .......................... (515) (2,070)
Cost ....................................... 32,380 32,380
-------- --------
Aggregate fair value ................... $ 44,998 $ 45,227
======== ========
Available-for-sale marketable equity securities are comprised substantially
of affiliate equity securities. At September 30, 2002, the Company directly, or
indirectly through its 20% ownership interest in Tremont Group, owned an
aggregate of approximately 1,036,000 shares of Tremont with an aggregate fair
value of approximately $33.2 million. Further, the Company also held 1,186,200
shares of Valhi with an aggregate fair value of approximately $11.6 million at
September 30, 2002. See Note 6 of the Notes to Consolidated Financial Statements
in the 2001 Annual Report.
In November 2002 Valhi and Tremont and Valhi and Tremont Group entered into
definitive merger agreements pursuant to which stockholders of Tremont, other
than Valhi (but including the Company) would receive 3.4 shares of Valhi common
stock for each share of Tremont held (including the shares of Tremont indirectly
owned by the Company through its 20% ownership interest in Tremont Group). The
merger between Tremont and Valhi was approved by the board of directors of
Tremont based upon the recommendation of a special committee of the Tremont
board comprised of directors who are not affiliated with Valhi, is subject to
customary closing conditions and will require the approval by a majority of the
outstanding Tremont shares. Tremont Group, which owns approximately 80% of
Tremont, has indicated that it intends to vote its shares in favor of such
merger. Upon completion of the mergers, the Company would receive an aggregate
of approximately 3.5 million shares of Valhi common stock in return for its
shares of Tremont Group and Tremont and would account for such Valhi shares in
the same manner that it accounts for the 1.2 million Valhi shares currently held
by the Company (available-for-sale marketable securities). The Company would
recognize gain or loss equal to the difference between the market value of the
shares of Valhi common stock received and the cost basis of the shares of
Tremont Group and Tremont exchanged.
Note 8 - Receivable from affiliates:
A majority-owned subsidiary of the Company, NL Environmental Management
Services, Inc. ("EMS"), loaned $13.4 million to Tremont, a related party, under
a reducing revolving loan agreement ($250,000 per quarter) in the first quarter
of 2001 that matured in March 2003. See Note 1. The loan was approved by special
committees of the Company's and EMS' Boards of Directors. At September 30, 2002,
the outstanding loan balance was $11.9 million. In October 2002 a special
committee of the Company's Board of Directors approved new loan terms proposed
by Tremont, whereby Tremont repaid the outstanding principal and interest
balance on the EMS loan with proceeds from a new $15 million revolving loan
agreement with the Company. As such, the EMS loan was extinguished and
cancelled. Similar to the EMS loan, the Company's loan to Tremont bears interest
at prime plus 2% (6.75% at October 23, 2002 with interest payable quarterly),
and is collateralized by 10.2 million shares of NL common stock owned by
Tremont. The loan is due December 31, 2004, with no principal payments required
prior to that date. The maximum amount available to Tremont under the revolving
loan agreement is $15 million. The creditworthiness of Tremont is dependent in
part on the value of the Company as Tremont's interest in the Company is
Tremont's most substantial asset. Because of such refinancing, the $11.9 million
balance due from Tremont at September 30, 2002 has been classified as a
noncurrent receivable from affiliate.
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' Boards of
Directors. The loan bears interest at prime (4.75% at September 30, 2002), 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 September 30, 2002, $5 million was available for additional borrowing
by the Family Trust. The loan was classified as noncurrent at September 30,
2002, as the Company does not expect to demand repayment within one year.
Note 9 - Other noncurrent assets:
September 30, December 31,
2002 2001
------- ------
(In thousands)
Deferred financing costs (see Note 12) .............. $10,054 $ 848
Goodwill (see Note 3) ............................... 6,406 --
Intangible asset, net (see Note 3) .................. 2,323 --
Other ............................................... 3,573 5,669
------- ------
$22,356 $6,517
======= ======
Note 10 - Accounts payable and accrued liabilities:
September 30, December 31,
2002 2001
-------- --------
(In thousands)
Accounts payable ......................... $ 61,572 $ 99,358
-------- --------
Accrued liabilities:
Employee benefits .................... 31,156 29,722
Interest ............................. 6,545 4,980
Deferred income ...................... 1,333 4,000
Other ................................ 43,813 38,163
-------- --------
82,847 76,865
-------- --------
$144,419 $176,223
======== ========
Note 11 - Other noncurrent liabilities:
September 30, December 31,
2002 2001
------- -------
(In thousands)
Insurance claims and expenses .................. $ 8,408 $ 8,789
Employee benefits .............................. 3,762 3,476
Deferred income ................................ -- 333
Other .......................................... 2,200 2,131
------- -------
$14,370 $14,729
======= =======
Note 12 - Notes payable and long-term debt:
September 30, December 31,
2002 2001
------------ ------------
(In thousands)
Notes payable - Kronos International, Inc. and subsidiaries $ -- $ 46,201
======== ========
Long-term debt:
NL Industries, Inc.:
11.75% Senior Secured Notes ....................... $ -- $194,000
Kronos International, Inc. and subsidiaries:
8.875% Senior Secured Notes ....................... 278,673 --
Revolving credit facility ......................... 26,993 --
Other ............................................. 2,079 2,498
-------- --------
307,745 196,498
Less current maturities ................................... 1,221 1,033
-------- --------
$306,524 $195,465
======== ========
Notes payable at December 31, 2001, consisted of (euro)27 million ($24.0
million) and NOK 200 million ($22.2 million). Notes payable totaling $53.2
million were repaid on June 28, 2002 with proceeds from the revolving credit
facility and available cash and the agreements were terminated. See description
of revolving credit facility below.
In June 2002 Kronos International, Inc. ("KII"), issued (euro)285 million
($280 million when issued and $279 million at September 30, 2002) principal
amount of 8.875% Senior Secured Notes (the "Notes") due 2009. The Notes are
collateralized by first priority liens on 65% of the common stock or other
equity interests of certain of KII's first-tier subsidiaries. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to another
entity. In addition, the indenture contains customary cross-default provisions
with respect to other debt and obligations of KII or its subsidiaries. The Notes
are redeemable, at KII's option, on or after December 30, 2005 at redemption
prices ranging from 104.437% of the principal amount, declining to 100% on or
after December 30, 2008. In addition, on or before June 30, 2005, KII may redeem
up to 35% of its Notes with the net proceeds of a qualified public equity
offering at 108.875% of the principal amount. In the event of a change of
control of KII, as defined, KII would be required to make an offer to purchase
its Notes at 101% of the principal amount. KII would also be required to make an
offer to purchase a specified portion of its Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. At September 30, 2002, KII
was in compliance with all the covenants. The Notes require cash interest
payments on June 30 and December 30, commencing on December 30, 2002. KII
commenced an exchange offer on October 18, 2002 to exchange the Notes for
registered publicly traded notes that have substantially identical terms as the
Notes. The exchange offer ends November 18, 2002 unless extended by KII.
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes due October 2003 at par value, using available cash
on hand. In addition, the Company used a portion of the net proceeds from the
issuance of the Notes to redeem in full the remaining $169 million principal
amount of the Company's 11.75% Senior Secured Notes. In accordance with the
terms of the indenture governing the 11.75% Senior Secured Notes, on June 28,
2002, the Company irrevocably placed on deposit with the trustee funds in an
amount sufficient to pay in full the redemption price plus all accrued and
unpaid interest due on the July 28, 2002 redemption date. Immediately
thereafter, the Company was released from its obligations under such indenture,
the indenture was discharged and all collateral was released to the Company.
Because the Company had been released as being the primary obligor under the
indenture as of June 30, 2002, the 11.75% Senior Secured Notes were derecognized
as of that date along with the funds placed on deposit with the trustee to
effect the July 28, 2002 redemption. The Company recognized a loss on the early
extinguishment of debt of approximately $2 million in the second quarter of
2002, consisting primarily of the interest on the 11.75% Senior Secured Notes
for the period from July 1 to July 28, 2002. Such loss was recognized as a
component of interest expense.
In June 2002 KII's operating subsidiaries in Germany, Belgium and Norway
(the "European Borrowers"), entered into a three-year (euro)80 million secured
revolving credit facility ("European Credit Facility"). The European Credit
Facility is available in multiple currencies, including U.S. dollars, euros and
Norwegian kroner. In addition, the European Credit Facility has a (euro)5.0
million sub limit available for issuance of letters of credit. As of September
30, 2002, (euro)16.7 million ($16.3 million) and NOK 80.0 million ($10.7
million) was outstanding under the European Credit Facility and (euro)1.8
million ($1.7 million) of letters of credit were also outstanding under the
European Credit Facility. At September 30, 2002, approximately (euro)51 million
was available for additional borrowings. Borrowings bear interest at the
applicable interbank market rate plus 1.75%. As of September 30, 2002, the
interest rate was 5.07% and 8.86% on the euro and Norwegian kroner borrowings,
respectively, and the weighted average interest rate was 6.57%.
The European Credit Facility is collateralized by accounts receivable and
inventory of the European Borrowers, plus a limited pledge of certain other
assets of the Belgian borrower. The European Credit Facility contains, among
others, various restrictive covenants, including restrictions on incurring
liens, asset sales, additional financial indebtedness, mergers, investments and
acquisitions, transactions with affiliates and dividends. In addition, the
European Credit Facility contains customary cross-default provisions with
respect to other debt and obligations of the European Borrowers, KII and its
other subsidiaries. The European Borrowers were in compliance with all the
covenants as of September 30, 2002.
In September 2002 the Company's U.S. operating subsidiaries (the "U.S.
Borrowers") entered into a three-year $50 million asset-based revolving credit
facility ("U.S. Credit Facility"). Under the terms of the U.S. Credit Facility,
the amount available for borrowing is based on a formula-derived borrowing base
using eligible accounts receivable and eligible inventory and is subject to
maintaining $5 million of minimum excess availability ("Borrowing
Availability"). The maximum amount available under the U.S. Credit Facility is
$45 million. As of September 30, 2002, there were no outstanding borrowings
under the U.S. Credit Facility. Borrowings bear interest at either prime rate or
eurodollar rates plus a margin spread based on average excess availability under
the U.S. Credit Facility or certain levels of EBITDA (as defined) of the
borrowers. Margin spreads range from 0.25% to 1.00% for prime rate borrowings
and 2.00% to 2.75% for eurodollar rate borrowings. The U.S. Credit Facility is
available for future working capital requirements and general corporate purposes
of the U.S. Borrowers, including dividend distributions. The U.S. Borrowers were
in compliance with all the covenants as of September 30, 2002. The U.S. Credit
Facility is collateralized by accounts receivable, inventory and certain fixed
assets of the U.S. Borrowers. The U.S. Credit Facility contains, among other
things, various restrictive and financial covenants including restrictions on
incurring liens, asset sales, mergers, and minimum EBITDA (as defined) of the
U.S. Borrowers and Kronos. As of September 30, 2002, no borrowings were
outstanding under the U.S. Credit Facility and Borrowing Availability was $39
million.
Deferred financing costs of $10.6 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
September 30, 2002.
Unused lines of credit available for borrowing under the Company's non-U.S.
credit facilities approximated $51 million at September 30, 2002 (including
approximately $50 million under the European Credit Facility of which
approximately $3.3 million is available for letters of credit).
Note 13 - Income taxes:
The difference between the provision for income tax expense attributable to
income before income taxes and minority interest and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% is presented
below.
Nine months ended
September 30,
------------------------
2002 2001
--------- ---------
(In thousands)
Expected tax expense ............................. $ 14,697 $ 42,130
Non-U.S. tax rates ............................... (3,918) (3,451)
Incremental tax on income of companies
not included in NL's consolidated U.S. ..........
federal income tax return ....................... 403 416
Valuation allowance .............................. (1,828) (1,343)
U.S. state income taxes .......................... 38 444
Tax contingency reserve adjustments, net ......... 2,214 --
Other, net ....................................... 89 700
-------- --------
Income tax expense ....................... $ 11,695 $ 38,896
======== ========
Note 14 - Other income, net:
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2002 2001 2002 2001
------- -------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends .......... $ 1,799 $ 2,145 $ 4,359 $ 7,070
Securities transactions ......... (47) -- (59) (1,133)
------- -------- -------- --------
1,752 2,145 4,300 5,937
Litigation settlement gains, net .... 5 -- 2,360 10,582
Insurance recoveries, net ........... -- 3,900 -- 5,829
Currency transactions, net .......... 648 (1,183) 5,468 98
Noncompete agreement income ......... 1,000 1,000 3,000 3,000
Disposition of property and equipment (146) 3 451 (416)
Trade interest income ............... 757 611 1,312 1,680
Other, net .......................... 313 350 339 845
------- -------- -------- --------
$ 4,329 $ 6,826 $ 17,230 $ 27,555
======= ======== ======== ========
Litigation settlement gains, net
In the first nine months of 2002 and 2001, the Company recognized
litigation settlement gains with former insurance carrier groups of $2.4 million
and $10.6 million, respectively, to settle certain insurance coverage claims
related to environmental remediation. A majority of the proceeds from the 2001
settlement was transferred to special-purpose trusts established by the
insurance carrier group to pay future remediation and other environmental
expenditures of the Company.
Currency transactions, net
Included in currency transactions, net, as a result of the debt refinancing
described in Note 12, the Company recognized a foreign currency transaction gain
of $6.3 million in the second quarter of 2002 related to the extinguishment of
certain intercompany indebtedness with KII.
Note 15 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant. The Chloride Plant became fully operational in
April 2001 and the Sulfate Plant became approximately 50% operational in
September 2001 and fully operational in late October 2001.
During the third quarter of 2001, the Company's insurance carriers approved
a partial payment of $8 million ($6.8 million received as of September 30, 2001)
for property damage costs and business interruption losses caused by the
Leverkusen fire. Three million dollars of this payment represented partial
compensation for business interruption losses which was recorded as a reduction
of cost of sales to offset unallocated period costs that resulted from lost
production. The remaining $5 million represented property damage recoveries
against which the Company recorded $1.1 million of expense related to clean-up
costs, resulting in a net gain of $3.9 million. In the first nine months of
2001, the Company's insurance carriers approved payment of $18.5 million ($17.3
million received as of September 30, 2001) for losses caused by the Leverkusen
fire, including the $8 million discussed above. Eight million dollars of this
payment was for business interruption losses and the remaining $10.5 million was
for property damage losses against which the Company recorded $4.7 million of
expenses resulting in a net gain of $5.8 million. The Company settled its
insurance claim involving the Leverkusen fire during the fourth quarter of 2001
for an aggregate of $56.4 million (including amounts previously received by the
Company), of which $27.3 million related to business interruption and $29.1
million related to property damages, clean-up costs and other extra expenses.
The Company recognized $19.3 million of business interruption insurance proceeds
in the fourth quarter of 2001, of which $16.6 million was attributable to
unallocated period costs and lost margin related to the first, second and third
quarters of 2001. No additional insurance recoveries related to the Leverkusen
fire are expected to be received in 2002.
Note 16 - Commitments and contingencies:
For descriptions of certain legal proceedings, income tax and other
commitments and contingencies related to the Company, reference is made to (i)
Management's Discussion and Analysis of Financial Condition and Results of
Operations, (ii) Part II, Item 1 - "Legal Proceedings," and (iii) the Company's
Quarterly Report on Form 10-Q for the quarters ended March 31, 2002 and June 30,
2002, and (iv) the 2001 Annual Report.
Note 17 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is studying this newly-issued standard to determine, among other
things, whether it has any asset retirement obligations which are covered under
the scope of SFAS No. 143, and the effect, if any, to the Company of adopting
this standard has not yet been determined.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
Note 18 - Subsequent event:
On October 22, 2002, the Company's Board of Directors declared a regular
quarterly dividend of $.20 per share to shareholders of record as of December 9,
2002 to be paid on December 23, 2002. On November 14, 2002, the Company's Board
of Directors declared an additional dividend of $2.50 per share to shareholders
of record as of November 25, 2002 to be paid on December 5, 2002. The Company
anticipates that $11.9 million of the additional dividend to be paid to Tremont
would be used by Tremont to repay, in its entirety, Tremont's loan with the
Company, although the revolving loan agreement would remain in effect following
the repayment and would not be canceled.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Three months ended % Nine months ended %
September 30, Change September 30, Change
-------------------------- ------------- -------------------------- -------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(In millions, except percentages and metric tons)
Net sales and operating income
Net sales $ 234.1 $207.0 +13% $ 663.3 $653.1 +2%
Operating income $ 29.6 $ 36.2 -18% $ 76.4 $133.3 -43%
Operating income margin
percentage 13% 18% 12% 20%
TiO2 operating statistics
Percent change in average
selling price (in billing
currencies) -7% -12%
Sales volume (metric tons in
thousands) 117 103 +14% 352 311 +13%
Production volume (metric
tons in thousands) 116 109 +7% 335 315 +6%
Kronos' operating income in the third quarter of 2002 decreased $6.6
million or 18% from the third quarter of 2001 due to lower average selling
prices, partially offset by higher sales and production volumes. Operating
income in the third quarter of 2001 included $3.0 million of business
interruption insurance proceeds related to the previously reported fire at the
Company's Leverkusen, Germany plant in 2001. Compared with the second quarter of
2002, operating income in the third quarter of 2002 increased 20% on higher
selling prices and higher production volume, partially offset by lower sales
volume.
Kronos' operating income in the first nine months of 2002 was $76.4 million
and decreased $56.9 million or 43% from the first nine months of 2001 due to 12%
lower average selling prices, partially offset by 13% higher sales volume and 6%
higher production volume. Operating income in the first nine months of 2001
included $8.0 million of business interruption insurance proceeds.
Kronos' average selling price in billing currencies (which excludes the
effects of foreign currency translation) during the third quarter of 2002 was 7%
lower than the third quarter of 2001 and was 3% higher compared with the second
quarter of 2002. Compared with the second quarter of 2002, selling prices in
billing currencies increased in all major markets. The average selling price in
billing currencies for the first nine months of 2002 was 12% lower compared with
the first nine months of 2001. September 2002 selling prices were flat compared
with the average selling price for the quarter; however, the Company expects
fourth-quarter prices to be higher than third quarter prices as previously
announced price increases continue to be implemented, but the extent to which
the Company will realize such price increases will depend on economic and
competitive conditions. The Company expects a lower average selling price for
full-year 2002 compared to full-year 2001.
Kronos' third-quarter 2002 average selling price expressed in U.S. dollars
(computed using actual foreign currency exchange rates prevailing during the
respective periods) was 2% lower than the third quarter of 2001 and 8% higher
than the second quarter of 2002. The September 2002 average selling price
expressed in U.S. dollars was flat compared with the average selling price for
the third quarter. Average selling prices expressed in U.S. dollars decreased
11% in the first nine months of 2002 compared with the first nine months of
2001.
Third-quarter 2002 sales volume increased 14% from the third quarter of
2001 and decreased 4% from the record second quarter of 2002. European and North
American volumes each increased over 16% from the third quarter of 2001, while
export volumes decreased 3% from third quarter 2001. Compared with the second
quarter of 2002, sales volume decreased 5%, 2% and 8% in the European, North
American and export markets, respectively. Sales volume in the first nine months
of 2002 was 41,000 metric tons higher, or 13%, than the first nine months of
2001. Kronos believes that the sales volume increase in the first nine months of
2002 compared with the first nine months of 2001 was attributable to improving
economic conditions and customer restocking inventory levels ahead of previously
announced price increases and, in part, to the effects of the Leverkusen fire in
2001. While Kronos expects sales volume in the fourth quarter to be seasonally
lower than third quarter 2002, fourth quarter 2002 volumes should significantly
exceed fourth quarter 2001 volumes. Kronos' sales volume for full-year 2002
should be significantly higher than full-year 2001, due in part to the
Leverkusen fire.
Third-quarter 2002 production volume was 7% higher than the third quarter
of 2001 and increased 3% from the second quarter of 2002 with operating rates
near full capacity in the third quarter of 2002. The increase from the prior
year period was due in part to lost sulfate-process production in 2001 as a
result of the Leverkusen fire. Production volume in the first nine months of
2002 increased 6% compared with the first nine months of 2001. Finished goods
inventory levels at the end of the third quarter decreased 2% from June 2002
levels and represented approximately two months of sales. Kronos anticipates its
production volume for full-year 2002 will be higher than that of full-year 2001,
due in part to the Leverkusen fire.
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. The Chloride Plant became fully operational in
April 2001 and the Sulfate Plant became approximately 50% operational in
September 2001 and fully operational in late October 2001.
During the third quarter of 2001, the Company's insurance carriers approved
a partial payment of $8 million ($6.8 million received as of September 30, 2001)
for property damage costs and business interruption losses caused by the
Leverkusen fire. Three million dollars of this payment represented partial
compensation for business interruption losses which was recorded as a reduction
of cost of sales to offset unallocated period costs that resulted from lost
production. The remaining $5 million represented property damage recoveries
against which the Company recorded $1.1 million of expense related to clean-up
costs, resulting in a net gain of $3.9 million. In the first nine months of
2001, the Company's insurance carriers approved payment of $18.5 ($17.3 million
received as of September 30, 2001) for losses caused by the Leverkusen fire,
including the $8 million discussed above. Eight million dollars of this payment
was for business interruption losses and the remaining $10.5 million was for
property damage losses against which the Company recorded $4.7 million of
expenses resulting in a net gain of $5.8 million. The Company settled its
insurance claim involving the Leverkusen fire during the fourth quarter of 2001
for an aggregate of $56.4 million (including amounts previously received by the
Company), of which $27.3 million related to business interruption and $29.1
million related to property damages, clean-up costs and other extra expenses.
The Company recognized $19.3 million of business interruption insurance proceeds
in the fourth quarter of 2001, of which $16.6 million was attributable to
unallocated period costs and lost margin related to the first, second and third
quarters of 2001. No additional insurance recoveries related to the Leverkusen
fire are expected to be received in 2002.
The Company believes TiO2 industry demand in the fourth quarter of 2002
should be better than TiO2 industry demand in the fourth quarter of 2001 due to
worldwide economic conditions. Based on stronger than anticipated demand in the
first nine months of 2002, Kronos' TiO2 sales volume in 2002 is expected to
exceed Kronos' 2002 TiO2 production volume. In January 2002 Kronos announced
price increases in all major markets of approximately 5% to 8% above existing
December 2001 prices, a portion of which was realized in the second and third
quarters. In May 2002 Kronos announced a second round of price increases in all
major markets of approximately 7% to 11% above June 2002 prices. Assuming demand
for TiO2 remains at reasonable levels, Kronos expects to realize a portion of
the announced May 2002 price increases during the fourth quarter of 2002, but
the extent to which Kronos will realize price increases will depend on economic
and competitive conditions. Since TiO2 prices were declining in 2001 and the
first quarter of 2002, the Company believes that its average 2002 prices will be
significantly below its average 2001 prices. 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 marketplace, 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.
Compared to the year-earlier periods, cost of sales as a percentage of net
sales increased in both the third quarter and first nine months of 2002
primarily due to lower average selling prices in billing currencies, partially
offset by higher production volume. Excluding the effects of foreign currency
translation, which increased the Company's expenses in the third quarter and
first nine months of 2002 compared to year-earlier periods, the Company's
selling, general and administrative expenses, excluding corporate expenses, in
the third quarter and first nine months of 2002 were slightly higher compared to
the year-earlier periods primarily due to higher distribution expenses
associated with higher sales volume in the 2002 periods.
A significant amount of Kronos' sales and operating costs are denominated
in currencies other than the U.S. dollar. Fluctuations in the value of the U.S.
dollar relative to other currencies, primarily a stronger euro compared to the
U.S. dollar in the third quarter and first nine months of 2002 versus the
year-earlier periods, increased the dollar value of sales in the third quarter
and first nine months of 2002 by a net $14 million and $10 million,
respectively, when compared to the year-earlier periods. Sales to export markets
are typically denominated in U.S. dollars and a weaker U.S. dollar decreases
margins on these sales at the Company's non-U.S. subsidiaries. The effect of the
stronger euro on Kronos' operating costs that are not denominated in U.S.
dollars increased operating costs in the third quarter and first nine months of
2002 compared to the year-earlier periods. In addition, Kronos revalued certain
export trade receivables and certain monetary assets held by its subsidiaries
whose functional currency is not the U.S. dollar and based on the weaker U.S.
dollar reported a revaluation gain in the third quarter of 2002. As a result,
the net impact of currency exchange rate fluctuations increased operating income
by $2.2 million in the third quarter of 2002 and slightly decreased operating
income in the first nine months of 2002 when compared to the year-earlier
periods.
General corporate
The following table sets forth certain information regarding general
corporate income (expense).
Three months ended Nine months ended
September 30, Difference September 30, Difference
--------------------------- ------------- --------------------------- -------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(In millions)
Securities earnings $ 1.8 $ 2.1 $ (.3) $ 4.3 $ 6.0 $ (1.7)
Litigation settlement gains,
net and other income 1.0 1.1 (.1) 5.4 14.1 (8.7)
Currency transaction gains - - - 6.3 - 6.3
Corporate expense (10.6) (6.2) (4.4) (28.2) (18.0) (10.2)
Interest expense (7.6) (6.9) (.7) (22.2) (20.8) (1.4)
------------- ------------- ------------- ------------- ------------- -------------
$ (15.4) $ (9.9) $ (5.5) $ (34.4) $ (18.7) $ (15.7)
============= ============= ============= ============= ============= =============
Securities earnings in the third quarter of 2002 were comparable to the
third quarter of 2001, while securities earnings for the first nine months of
2002 were $1.7 million lower compared with the first nine months of 2001,
primarily due to lower average interest yields on invested funds in the first
nine months of 2002. The Company expects security earnings to be lower in 2002
compared to 2001 due primarily to lower average yields.
In the first nine months of 2002 and 2001, the Company recognized
litigation settlement gains with former insurance carrier groups of $2.4 million
and $10.6 million, respectively, to settle certain insurance coverage claims
related to environmental remediation. A majority of the proceeds from the 2001
settlement was transferred to special-purpose trusts established by the
insurance carrier group to pay future remediation and other environmental
expenditures of the Company. No further material settlements relating to
litigation concerning environmental remediation coverages are expected.
In June 2002 Kronos International, Inc. ("KII") completed a private
placement offering of (euro)285 million 8.875% Senior Secured Notes (the
"Notes") due 2009. KII used the net proceeds of the Notes offering to repay
certain intercompany indebtedness owed to the Company, a portion of which the
Company used to redeem at par all of its outstanding 11.75% Senior Secured Notes
due 2003, plus accrued interest. As a result of the refinancing, the Company
recognized a foreign currency transaction gain of $6.3 million in the second
quarter of 2002 related to the extinguishment of certain intercompany
indebtedness. See Note 12 to the Consolidated Financial Statements.
Corporate expense in the third quarter and first nine months of 2002
increased $4.4 million and $10.2 million, respectively, from comparable 2001
periods, primarily due to higher environmental and legal expenses. Compared to
the second quarter of this year, corporate expense in the third quarter of 2002
increased $3.1 million primarily due to higher legal expenses related to lead
paint defense costs. The Company expects corporate expense in 2002 to be higher
than the full year 2001. Furthermore, four cases regarding lead pigment are
scheduled for trial in 2003 and legal expenses associated with the defense of
such cases are expected to be significantly higher than 2002.
Interest expense in the third quarter of 2002 was $.7 million higher than
the comparable period in 2001 primarily due to higher levels of outstanding
debt, partially offset by lower interest rates. Interest expense in the second
quarter of 2002 included $2.0 million related to the early extinguishment of the
Company's 11.75% Senior Secured Notes, as the amount paid to extinguish the debt
in June 2002 included interest for the month of July 2002. Excluding this
unusual item, interest expense in the first nine months of 2002 was comparable
to the year-earlier period. See Note 12 to the Consolidated Financial
Statements.
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $1.8
million in the first nine months of 2002 and $1.3 million in the first nine
months of 2001 primarily as a result of utilization of certain tax attributes
for which the benefit had not been previously recognized under the
"more-likely-than-not" recognition criteria.
Accounting principles not yet adopted
See Note 17 to the Consolidated Financial Statements.
Other
Minority interest primarily relates to the Company's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS").
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows from operating, investing and
financing activities for the nine months ended September 30, 2002 and 2001 are
presented below.
Nine months ended
September 30,
------------------
2002 2001
------ -------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities ......... $59.4 $97.6
Changes in assets and liabilities ................ 8.7 (5.2)
----- -----
68.1 92.4
Investing activities ................................. (24.8) (56.1)
Financing activities ................................. 8.8 (59.8)
----- -----
Net cash provided (used) by operating,
investing, and financing activities ............... $52.1 $(23.5)
===== ======
Operating activities
The TiO2 industry is cyclical and changes in economic conditions
significantly affect the earnings and operating cash flows of the Company. Cash
flow from operations is considered the primary source of liquidity for the
Company. Changes in TiO2 pricing, production volume and customer demand, among
other things, could significantly affect the liquidity of the Company. Cash flow
from operations, before changes in assets and liabilities, in the first nine
months of 2002 decreased from the comparable period in 2001 primarily due to
$56.9 million of lower operating income and $10.2 million of higher corporate
expenses partially offset by $31 million of lower income taxes. The net cash
provided by changes in the Company's inventories, receivables and payables
(excluding the effect of currency translation) in the first nine months of 2002
was approximately $8 million higher than the net cash used in the first nine
months of 2001 with $41 million lower inventory balances (net of raw material
accruals) and the collection of $11.2 million of insurance proceeds, offset by
decreases in accounts payable and accrued liabilities and increases in accounts
and notes receivable in the first nine months of 2002. Inventories and accounts
payable were affected by certain non-cash accruals for certain titanium ore
contracts of $31.6 million and $15.3 million at December 31, 2001 and 2000,
respectively. These non-cash items were reversed as raw materials were received
under the contracts in the first half of 2002 and 2001, respectively.
Investing activities
Capital expenditures of $18.1 million and $32.4 million in the first nine
months of 2002 and 2001, respectively, included approximately $2.6 million and
$11.7 million, respectively, related to ongoing reconstruction of the
Leverkusen, Germany sulfate plant. The Company expects to complete the
reconstruction by December 31, 2002. In the first nine months of 2001, the
Company received $10.5 million of insurance proceeds for property damage
resulting from the Leverkusen fire and paid $2.1 million of expenses related to
repairs and clean-up costs.
In January 2002 the Company acquired all of the stock and limited liability
company units of EWI RE, Inc. and EWI RE, Ltd. (collectively "EWI"),
respectively, for an aggregate of $9.2 million in cash, including capitalized
acquisition costs of $.2 million. See Note 3 to the Consolidated Financial
Statements.
In the first quarter of 2001, a majority-owned subsidiary of the Company,
EMS, loaned $13.4 million to Tremont Corporation under a reducing revolving loan
agreement. See Notes 1 and 8 to the Consolidated Financial Statements.
In May 2001 a wholly owned subsidiary of EMS loaned $20 million to the
Harold C. Simmons Family Trust #2 ("Family Trust"), one of the trusts described
in Note 1 to the Consolidated Financial Statements, under a new $25 million
revolving credit agreement. See Note 8 to the Consolidated Financial Statements.
Financing activities
In March 2002 the Company redeemed $25 million principal amount of its
11.75% Senior Secured Notes using available cash on hand, and in June 2002 the
Company redeemed the remaining $169 million principal amount of such 11.75%
Senior Secured Notes using a portion of the proceeds from the June 2002 issuance
of the (euro)285 million principal amount of the KII 8.875% Senior Secured Notes
($280 million when issued). Also in June 2002, KII's operating subsidiaries in
Germany, Belgium and Norway entered into a new three-year (euro)80 million
secured revolving credit facility ("European Credit Facility") and borrowed
(euro)13 million ($13 million) and NOK 200 million ($26 million) which, along
with available cash, was used to repay and terminate KII's short term notes
payable ($53.2 million when repaid). In the third quarter of 2002, the Company
repaid a net euro-equivalent 12.7 million ($12.4 million when repaid) of the
European Credit Facility. See Note 12 to the Consolidated Financial Statements.
In September 2002 the Company's U.S. operating subsidiaries entered into a
three-year $50 million asset-based revolving credit facility ("U.S. Credit
Facility"). As of September 30, 2002, no borrowings were outstanding under the
U.S. Credit Facility and Borrowing Availability was $39 million. See Note 12 to
the Consolidated Financial Statements.
Deferred financing costs of $10.6 million for the Notes, the European
Credit Facility and the U.S. Credit Facility are being amortized over the life
of the respective agreements and are included in other noncurrent assets as of
September 30, 2002.
In the third quarter of 2002, the Company paid a regular quarterly dividend
to shareholders of $.20 per share, aggregating $9.7 million. Dividends paid
during the first nine months of 2002 totaled $.60 per share, or $29.2 million.
On October 22, 2002, the Company's Board of Directors declared a regular
quarterly dividend of $.20 per share to shareholders of record as of December 9,
2002 to be paid on December 23, 2002. On November 14, 2002, the Company's Board
of Directors declared an additional dividend of $2.50 per share to shareholders
of record as of November 25, 2002 to be paid on December 5, 2002. The Company
anticipates that $11.9 million of the additional dividend to be paid to Tremont
would be used by Tremont to repay, in its entirety, Tremont's loan with the
Company, although the revolving loan agreement would remain in effect following
the repayment and would not be canceled. See Note 8 to the Consolidated
Financial Statements.
Pursuant to its share repurchase program, the Company purchased
approximately 491,000 shares of its common stock in the open market at an
aggregate cost of $7.3 million in the third quarter of 2002 and 719,000 shares
at an aggregate cost of $10.6 million in the first nine months of 2002.
Approximately 488,000 additional shares are available for purchase under the
Company's repurchase program at September 30, 2002. In October 2002 the
Company's Board of Directors authorized the purchase of up to an additional 1.5
million shares. Through November 13, 2002, the Company purchased 664,300 shares
of its common stock in the open market at an aggregate cost of $10.2 million.
Approximately 1.3 million additional shares are available for purchase under the
Company's repurchase program at November 14, 2002. The available shares may be
purchased over an unspecified period of time and, depending on market
conditions, applicable legal requirements, available cash and other factors, the
share repurchase program may be suspended at any time and could be terminated
prior to completion. The repurchased shares 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 September 30, 2002, the Company had cash and cash equivalents
aggregating $171 million ($22 million held by non-U.S. subsidiaries) and an
additional $72 million of restricted cash equivalents and restricted marketable
debt securities held by the Company, of which $10 million was classified as a
noncurrent asset. Certain of the Company's subsidiaries had approximately $90
million available for borrowing at September 30, 2002 with approximately $51
million under non-U.S. credit facilities (including approximately $50 million
under the European Credit Facility) and approximately $39 million under the U.S.
Credit Facility (based on Borrowing Availability).
Income tax contingencies
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.
The Company's and EMS' 1998 U.S. federal income tax returns are currently
being examined by the U.S. Internal Revenue Service ("IRS"), and the Company and
EMS have each granted extensions of the statute of limitations for assessment of
such returns until September 30, 2003. Based upon the course of the examination
to date, the Company anticipates that the IRS may propose a substantial tax
deficiency.
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 ($10.2 million at
September 30, 2002). The Company has filed protests to the assessments for the
years 1991 to 1997. The Company is in discussions with the Belgian tax
authorities and believes that a significant portion of the assessments is
without merit.
No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
At September 30, 2002, the Company had net deferred tax liabilities of $143
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 $177
million at September 30, 2002, principally related to Germany, partially
offsetting deferred tax assets which the Company believes do not currently meet
the "more-likely-than-not" recognition criteria.
At September 30, 2002, NL had the equivalent of approximately $371 million
of income tax loss carryforwards in Germany with no expiration date. However, NL
has provided a deferred tax valuation allowance against substantially all of
these income tax loss carryforwards because NL currently believes they do not
meet the "more-likely-than-not" recognition criteria. The German federal
government has proposed certain changes to its income tax law, including certain
changes that would impose limitations on utilization of income tax loss
carryforwards, that as proposed would become effective January 1, 2003. Since NL
has provided a deferred income tax asset valuation allowance against
substantially all of these German tax loss carryforwards, any limitation on NL's
ability to utilize such carryforwards resulting from enactment of any of these
proposals would not have a material impact on NL's net deferred income tax
liability. However, if enacted, the proposed changes could have a material
impact on NL's ability to fully utilize its German income tax loss
carryforwards, which would significantly affect the Company's future income tax
expense and future German income tax payments. NL does not currently expect any
enactment of these proposals would occur prior to January 1, 2003.
Environmental matters and litigation
The Company has been named as a defendant, potentially responsible party
("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. Environmental Protection Agency's (the "U.S. EPA") 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 ($100 million at September 30, 2002) 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
allocations of such costs among PRPs. 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 for which it is possible to estimate costs is
approximately $140 million. The Company's estimates of such liabilities have not
been discounted to present value. 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 the 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, in view of the Company's historical operations, the Company expects
that additional environmental matters will arise in the future.
Lead pigment litigation
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. In addition, 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 the precedent set by 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. 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. The Company
expects that additional lead pigment and lead-based paint litigation may be
filed against the Company in the future asserting similar or different legal
theories and seeking similar or different types of damages and relief. See Item
1- "Legal Proceedings."
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; 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, and
loans to, 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.
Special note regarding forward-looking statements
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations" and "Liquidity and Capital Resources"
above, 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," "could," "anticipates," "expects," 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, including, but
not limited to, the cyclicality of the titanium dioxide industry, global
economic and political conditions, global productive capacity, customer
inventory levels, changes in product pricing, changes in product costing,
changes in foreign currency exchange rates, competitive technology positions,
operating interruptions (including, but not limited to, labor disputes, leaks,
fires, explosions, unscheduled downtime, transportation interruptions, war and
terrorist activities), the ultimate 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 this Quarterly Report and in the 2001 Annual Report, and the
uncertainties set forth from time to time 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.
CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. Each of J.
Landis Martin, the Company's Chief Executive Officer, and Robert D. Hardy, the
Company's Chief Financial Officer, have evaluated the Company's disclosure
controls and procedures as of a date within 90 days of the filing date of this
Form 10-Q. Based upon their evaluation, these executive officers have concluded
that the Company's disclosure controls and procedures are effective as of the
date of such evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 2001 Annual Report and the Company's Quarterly
Report on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002 for
descriptions of certain previously reported legal proceedings.
In September 2002 the Company was served with a complaint, City of Chicago
v. American Cyanamid, et al. (Circuit Court of Cook County, Illinois, No.
02CH16212). The City of Chicago seeks damages to abate lead paint in a
single-count complaint alleging public nuisance against the Company and seven
other former manufacturers of lead pigment. The time to respond to the complaint
has not yet occurred.
In October 2002 the Company was served with a complaint, Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002). A
single individual seeks compensatory and punitive damages from the Company and
five other former manufacturers of lead pigment for childhood exposures to lead
paint. The complaint alleges causes of action in negligence and strict product
liability and seeks joint and several liability with claims of civil conspiracy,
concert of action, enterprise liability, and market share or alternative
liability. The time to respond to the complaint has not yet occurred.
In re Lead Paint Litigation (Superior Court of New Jersey, Law Division,
Middlesex County Civil Action Docket No. Mid-L-2754-01, Case Code 247). In
November 2002 the Court entered an order dismissing this previously reported
case with prejudice. The time for the filing of an appeal has not run.
Jefferson County School District v. Lead Industries Association, et al.
(District Court of Jefferson County, Mississippi, Case No. 2001-69). In November
2002 plaintiffs agreed to voluntarily dismiss with prejudice this previously
reported case.
El Paso Independent School District v. Lead Industries Association, et al.
(District Court of El Paso County, Texas, No. 2002-2675). In November 2002 the
plaintiff in this previously reported case dismissed its case without prejudice.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). Trial began in phase I of this previously
reported case before a Rhode Island state court jury on September 4, 2002. On
October 29, 2002 the trial judge declared a mistrial in the case when the jury
was unable to reach a verdict on the question of whether lead pigment in paint
on Rhode Island buildings is a public nuisance. No date has been set for any
further proceedings, including any possible retrial of the public nuisance
issue. Other claims made by the Attorney General, including violation of the
Rhode Island Unfair Trade Practices and Consumer Protection Act, strict
liability, negligence, negligent and fraudulent misrepresentation, civil
conspiracy, indemnity, and unjust enrichment remain pending and were not the
subject of this trial. Post trial motions by plaintiff and defendants for
judgment notwithstanding the mistrial are pending.
Gaines, et al., v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-0604). In October 2002
plaintiffs voluntarily dismissed the Company with prejudice in this previously
reported case.
Borden, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of
Jefferson County, Mississippi, Civil Action No. 2000-587). In October 2002 the
court set a June 2003 trial date in this previously reported case.
Spring Branch Independent School District v. Lead Industries Association,
et al. (District Court of Harris County, Texas, No. 2000-31175) . Plaintiff has
filed an appeal of the grant of summary judgment in favor of the Company in this
previously reported case.
In the previously reported cases of Houston Independent School District,
Harris County, Brownsville Independent School District, and Liberty Independent
School District, pending in various Texas state courts, each court has entered
an order abating, or staying, the case pending the result of the appeal in the
Spring Branch Independent School District case.
The Company expects that additional lead pigment and lead-based paint
litigation may be filed against the Company in the future asserting similar or
different legal theories and seeking similar or different types of damages and
relief.
Since the filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, the Company has been named as a defendant in
asbestos and/or silica cases in various jurisdictions brought on behalf of
approximately 2,700 additional personal injury claimants. Included in the
foregoing total is one case in Mississippi state court involving approximately
2,100 plaintiffs (Jones v. A. O. Smith, et al., Circuit Court, First Judicial
District, Jasper County, Mississippi, Civil Action No. 12-0148). The Company
anticipates that various of these cases will be set for trial from time-to-time
for the foreseeable future. In addition, cases on behalf of approximately 2,500
such personal injury plaintiffs have been dismissed or settled for immaterial
amounts.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement between Sachtleben Chemie GmbH and Kronos
Titan-GmbH effective December 30, 1986, incorporated by
reference to Exhibit 10.1 of KII's Quarterly Report on Form
10-Q (File No. 333-100047) for the quarter ended September
30, 2002.
10.2 Supplementary Agreement to the Agreement of December 30,
1986 between Sachtleben Chemie GmbH and Kronos Titan-GmbH
dated May 3, 1996, incorporated by reference to Exhibit 10.2
of KII's Quarterly Report on Form 10-Q (File No. 333-100047)
for the quarter ended September 30, 2002.
10.3 Second Supplementary Agreement to the Contract dated
December 30, 1986 between Sachtleben Chemie GmbH and Kronos
Titan-GmbH dated January 8, 2002, incorporated by reference
to Exhibit 10.3 of KII's Quarterly Report on Form 10-Q (File
No. 333-100047) for the quarter ended September 30, 2002.
10.4 Revolving Loan Note Agreement dated October 22, 2002 with
Tremont Corporation as Maker and NL Industries, Inc. as
Payee.
10.5 Security Agreement dated October 22, 2002 by and between
Tremont Corporation and NL Industries, Inc.
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2002 through the
date of this report:
September 9, 2002 - reported Item 9.
September 26, 2002 - reported Item 5.
SIGNATURES
Pursuant to the requirements 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)
Date: November 14, 2002 By /s/ Robert D. Hardy
- ------------------------ --------------------------------------
Robert D. Hardy
Principal Financial and Accounting Officer
CERTIFICATIONS
I, J. Landis Martin, the Chief Executive Officer of NL Industries, Inc., certify
that:
1) I have reviewed this quarterly report on Form 10-Q of NL Industries, Inc.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ J. Landis Martin
- ---------------------------
J. Landis Martin
Chief Executive Officer
CERTIFICATIONS
I, Robert D. Hardy, the Chief Financial Officer of NL Industries, Inc., certify
that:
1) I have reviewed this quarterly report on Form 10-Q of NL Industries, Inc.
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Robert D. Hardy
- ---------------------------
Robert D. Hardy
Chief Financial Officer
EXHIBIT 10.4
REVOLVING LOAN NOTE
$15,000,000 October 22, 2002
FOR VALUE RECEIVED, the undersigned, Tremont Corporation, a Delaware
corporation ("Maker"), promises to pay, on or before December 31, 2004 (the
"Maturity Date"), to the order of NL Industries, Inc., a New Jersey corporation
("Payee") or any subsequent holder, at its offices at 16825 Northchase Drive,
Suite 1200, Houston TX 77060, or such other place designated by holder in
writing, the principal sum of FIFTEEN MILLION ($15,000,000), or such lesser
amount as shall equal the aggregate principal amount of all revolving loans made
to Maker by Payee hereunder (the "Revolving Loans"), together with interest from
the date hereof on the unpaid balance of this Note as it may exist from time to
time at the rate (herein called the "Applicable Rate") of prime plus two percent
per annum, determined at the beginning of each calendar quarter, and in no event
shall the Applicable Rate exceed the maximum interest rate permitted to be
charged from time to time under applicable law (herein called the "Maximum
Rate"). Accrued interest on the unpaid principal of this Note shall be computed
on the basis of a 360-day year applied to the actual number of days in each
calendar month and shall be payable on the last business day of each calendar
quarter. The Applicable Rate shall be determined based upon the published prime
rate. Notwithstanding the foregoing, if at any time the Applicable Rate exceeds
the Maximum Rate, the rate of interest payable under this Note shall be limited
to the Maximum Rate as provided above.
Subject to the terms and conditions set forth in this Note, Payee shall
make Revolving Loans to Maker at any time and from time to time from the date of
this Note until the Maturity Date, in an aggregate principal amount not to
exceed at any one time the Maximum Revolving Loan Amount (as defined below) at
such time. Revolving Loans made under this Note shall be in an integral multiple
of $200,000 and shall be wired by Payee to the account of Maker requested by
Maker prior to 3:00 p.m., New York time, on the date proposed by Maker. Maker
shall give Payee irrevocable written notice of all proposed Revolving Loans not
later than three business days prior to the proposed borrowing (a "Borrowing
Notice"). Such Borrowing Notice shall specify the aggregate principal amount of
the Revolving Loan that Maker is requesting Payee to make and the requested
effective date of the proposed Revolving Loan, and shall contain Maker's
certification that no default exists, no default would, solely with the passage
of time, exist and that no default would exist after giving effect to the
requested Revolving Loan. Each Revolving Loan shall bear interest on the
outstanding principal balance thereof from the date such Revolving Loan is made
at the Applicable Rate. The "Maximum Revolving Loan Amount" shall mean Fifteen
Million Dollars ($15,000,000), subject to reduction in accordance with the
provisions of this Note.
Maker shall pay Payee on the last business day of each calendar quarter
beginning on December 31, 2002 and simultaneously with the payment in full of
this Note, in immediately available funds, a revolving loan commitment fee (the
"Fee") equal to 1/2 of 1% per annum on the average unused amount of the Maximum
Page 1 of 1
Revolving Loan Amount during such quarter (or, if the Fee is being
calculated for a period other than a quarter, during such period). Such Fee
shall be computed on the basis of the actual number of days elapsed over a year
of 360 days. Such Fee shall commence on the date of this Note and cease to
accrue on the termination of Payee's commitment to make Revolving Loans.
Maker shall have the right at any time, in its sole discretion and upon
not less than 10 days written notice to Payee, to further permanently reduce or
terminate the Maximum Revolving Loan Amount, provided, however, that each
partial reduction thereof shall be in an integral multiple of $250,000. Any
reduction of the Maximum Revolving Loan Amount shall be accompanied by payment
in full of any principal over the Maximum Revolving Loan Amount plus accrued
interest and accrued Fee computed as provided in the previous paragraph.
The principal balance of this Note may be prepaid and discharged in whole
or in part by Maker at any time and from time to time, without premium, penalty
or fee. Notwithstanding the prior sentence, all interest that is accrued and
unpaid with respect to the prepaid principal amount and the Fee accrued and
unpaid with respect to the unpaid Maximum Revolving Loan Amount shall be paid at
the time of the prepayment.
The Maker, signers, sureties, guarantors and endorsers of this Note,
jointly and severally, except as otherwise expressly set forth herein, waive
demand, presentment, notice of nonpayment or dishonor, diligence in collecting,
grace, notice of any protest, and consent to all extensions for any periods of
time and partial payments, before or after maturity.
If this Note is not paid at maturity, howsoever such maturity may be
brought about, and the same is placed in the hands of an attorney for
collection, or if this Note is collected by suit or through bankruptcy, probate
or other legal proceedings, Maker agrees to pay holder's costs of collection,
when incurred, including reasonable attorney's fees.
No delay in the payments to holder or in the exercise of any power or
right under this Note, or under any instrument securing payment hereof or
executed in connection herewith, shall operate as a waiver thereof, nor shall a
single or partial exercise of any power or right preclude other or further
exercise thereof or exercise of any other power or right.
Payment of the indebtedness evidenced by this Note is secured by the
security interests established by a Security Agreement dated as of the date of
this Note executed by the Maker and Payee covering certain securities owned by
Maker (the "Security Documents").
If at any time the Payee shall notify the Maker that a Collateral
Deficiency (as hereinafter defined) exits, then within 5 days of its receipt of
such notice, the Maker shall, at its option, do one of the following:
(a) prepay principal amounts outstanding under this Note, together with
accrued and unpaid interest on such principal amount to the date of
prepayment, so that immediately following such prepayment no
Collateral Deficiency exists, or
Page 2 of 2
(b) provide the Payee with additional collateral under the Security
Documents reasonably acceptable to the Payee so that immediately
following delivery of such additional collateral no Collateral
Deficiency exists.
In the event a Collateral Deficiency occurs, Payee's commitment to make
further Revolving Loans shall be terminated without notice, at the option of the
Payee, until such time as no Collateral Deficiency shall exist.
For purposes of this Note, (a) a Collateral Deficiency exists at any time
when the outstanding principal amount together with accrued and unpaid interest
on the Note and the Fee exceeds 20% of the Collateral Value, (b) Collateral
Value shall mean the Current Market Value of all securities pledged under the
Security Documents, and (c) Current Market Value shall mean the most recent
closing price of any security pledged under the Security Documents on the New
York Stock Exchange or any other nationally recognized securities exchange, or
if such security is not listed on a national securities exchange, the closing
price of such security as reported on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), or, if applicable, the average of
the closing bid and ask quotation for such security as reported on the NASDAQ.
The term default shall include any or all of the following:
(a) The assignment, voluntary or involuntary conveyance of legal or
beneficial interest, mortgage, pledge or grant of a security interest in
any of the Collateral (as defined in the Security Documents); or
(b) The filing or issuance of a notice of any lien, warrant for
distraint or notice of levy for taxes or assessment against the Collateral
(except for those which are being contested in good faith and for which
adequate reserves have been created); or
(c) Maker's nonpayment of any installment of principal, interest or
the Fee under this Note; or
(d) The adjudication of Maker as bankrupt, or the taking of any
voluntary action by Maker or any involuntary action against Maker seeking
an adjudication of Maker as bankrupt, or seeking relief by or against
Maker under any provision of the Bankruptcy Code, or seeking liquidation
or dissolution of Maker;
(e) Maker failing to comply with any other covenant in this Note or
in the Security Documents;
(f) Maker's default in any payment (regardless of amount) of
principal of or interest on any other indebtedness for borrowed money; or
(g) Maker's default in the observance or performance of any other
agreement or condition relating to any such other indebtedness for
Page 3 of 3
borrowed money or contained in any instrument evidencing, securing or
relating thereto or any other event shall occur or condition exist, the
effect of which default or other event or condition is to cause, or to
permit the holder of the indebtedness to cause, such other indebtedness
for borrowed money to become due prior to its stated maturity.
An "Event of Default" shall be deemed to have occurred immediately upon
any default described in clause (d) or (g) above, if any default described in
clauses (c) or (f) above is not cured within 5 days, and if any default
described in clauses (a), (b), or (e) is not cured within 30 days after written
notice from Payee to Maker.
If an Event of Default has occurred and is continuing, the entire
principal balance and accrued interest owing hereof shall at once become due and
payable and Payee's commitment to make Revolving Loans shall be terminated
without notice, at the option of the Payee, and the property covered by the
Security Documents shall be subject to foreclosure under the Security Documents
and applicable law. Failure to exercise this option shall not constitute a
waiver of the right to exercise the same subsequently or in the event of any
subsequent default. If any payment, including interest or principal, required to
be made under this Note is not made when due, interest on the overdue sum shall
accrue at a rate of prime plus four percent.
The proceeds of this Note shall be used (i) first, to repay all amounts
owed by Maker to NL Environmental Management Services, Inc. pursuant to the
Revolving Loan Note of Maker dated as of February 9, 2001, and (ii) second, for
working capital or other purposes, as determined by Maker.
So long as the Note shall remain unpaid, the Maker shall furnish to the
Payee:
(a) as soon as available and in any event not later than 45 days after
the end of each of the first three quarters of each fiscal year of
the Maker, the consolidated balance sheet of the Maker as of the end
of such quarter and the consolidated statements of income and
retained earnings and cash flows of the Maker for the period
commencing at the end of the previous year and ending with the end
of such quarter, all in reasonable detail and duly certified with
respect to such consolidated statements (subject to year-end
adjustments) by an officer of the Maker as having been prepared in
accordance with generally accepted accounting principles;
(b) as soon as available and in any event not later than 90 days after
the end of each fiscal year of the Maker, a copy of the annual audit
report for such year for the Maker, including therein consolidated
balance sheets of the Maker as of the end of such fiscal year and
consolidated statements of income and retained earnings and of cash
flows of the Maker for such fiscal year, in each case certified by
PricewaterhouseCoopers LLP or other independent certified public
accountants of recognized standing reasonably acceptable to Payee.
Page 4 of 4
This Note shall be construed in accordance with the laws of the State of
New Jersey and the laws of the United States applicable to transactions in New
Jersey.
Page 5 of 5
IN WITNESS WHEREOF, the undersigned Maker has executed this Note as of the
22 day of October, 2002.
Tremont Corporation
By: /s/ Mark A. Wallace
-----------------------------------
Its: Vice President
----------------------------------
Acknowledged and agreed to by the undersigned:
NL Industries, Inc.
By: /s/ Robert D. Hardy
-----------------------------------
Its: Vice President
----------------------------------
58135
Page 6 of 6
SCHEDULE OF REVOLVING LOANS
Type of Transaction
(Loan or Payment) Date Amount
- ------------------- ---- ------
Page 7 of 7
EXHIBIT 10.5
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement"), dated this 22nd day of October,
2002, by and between Tremont Corporation, a Delaware Corporation (hereinafter
called "Tremont"), whose principal office is at 1999 Broadway, Suite 4300,
Denver, Colorado 80202 and NL Industries, Inc., a New Jersey Corporation (the
"Secured Party"), in its capacity as the holder of the Note (as defined below).
Section 1. Security Interest. For value received, Tremont hereby grants to
Secured Party, upon the terms and conditions of this Agreement, a security
interest in and to any and all present or future rights of Tremont in and to
10,215,541 shares of the Secured Party's common stock, par value of $1.25 per
share (the "Pledged Shares"). As used in this Agreement, the "Collateral" shall
include the Pledged Shares together with any and all products and proceeds of
the Pledged Shares, including, without limitation, all dividends, cash,
instruments, subscriptions, warrants and any other rights and options and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Pledged Shares.
Section 2. Loan Agreement. This Agreement is being executed and delivered
pursuant to the terms, conditions and requirements of that certain revolving
note, dated as of the date of this Agreement in the principal amount of
$15,000,000, made by Tremont and payable to the order of Secured Party (such
note and any notes given in modification, renewal, extension or substitution
thereof being herein sometimes collectively referred to as the "Notes" and
individually as the "Note"), pursuant to which Secured Party has loaned monies
to Tremont. The security interests herein granted (the "Security Interests")
shall secure full payment and performance of the Note and the due and punctual
observance and performance of each and every agreement, covenant and condition
on Tremont's part to be observed or performed under this Agreement or the Note
(all of which debts, duties, liabilities and obligations hereinbefore described
and covered by this Agreement and the Note are hereinafter referred to as the
"Obligation").
Section 3. Priority. Tremont represents and warrants that the Security
Interests are first and prior security interests in and to all of the
Collateral, and the Collateral is not subject to any other liens or security
interests. Tremont hereby delivers to the Secured Party the stock certificate
evidencing the Pledged Shares, issued in the name of Tremont, together with an
assignment separate from the certificate, duly executed in blank, with a
medallion signature guarantee (and otherwise in a form sufficient to effect
legal transfer of the Pledged Shares without any further action by Tremont).
Section 4. Title to Collateral. Tremont represents and warrants to Secured
Party that: (a) Tremont is the owner of the Collateral; (b) no dispute, right of
offset, counterclaim, or defense to the Security Interests exists with respect
to all or any part of the Collateral; and (c) Tremont will defend the Collateral
against the claims and demands of all persons other than any subordinate claims
or liens acknowledged by Secured Party.
Section 5. Tremont's Obligations. So long as the Note is outstanding,
Tremont covenants and agrees with Secured Party: (a) not to permit any material
part of the Collateral to be levied upon under any legal process; (b) not to
dispose of any of the Collateral without the prior written consent of Secured
Party; (c) to comply with all applicable federal, state and local statutes,
laws, rules and regulations, the noncompliance with which could have a material
and adverse effect on the value of the Collateral; and (d) to pay all taxes
accruing after the Closing Date which constitute, or may constitute, a lien
against the Collateral, prior to the date when penalties or interest would
attach to such taxes; provided, that Tremont may contest any such tax claim if
done diligently and in good faith. Tremont hereby agrees from time to time to
execute such additional documents as may reasonably be requested by the Secured
Party to maintain the Secured Party's first priority perfected security interest
in the Collateral.
Section 6. Event of Default. As used herein, the term default shall
include any or all of the following:
(a) The assignment of, the voluntary or involuntary conveyance of
legal or beneficial interest in, or the mortgage, pledge or grant of a
security interest in, any of the Collateral; or
(b) The filing or issuance of a notice of any lien, warrant for
distraint or notice of levy for taxes or assessment against the Collateral
(except for those which are being contested in good faith and for which
adequate reserves have been created); or
(c) Nonpayment of any installment of principal or interest under the
Notes; or
(d) The adjudication of Tremont as bankrupt, or the taking of any
voluntary action by Tremont or any involuntary action against Tremont
seeking an adjudication of Tremont as bankrupt, or seeking relief by or
against Tremont under any provision of the Bankruptcy Code, or seeking
liquidation or dissolution of Tremont; or
(e) Tremont failing to comply with any other covenant contained in
the Notes or this Agreement; or
(f) Tremont's default in any payment (regardless of amount) of
principal of or interest on any other indebtedness for borrowed money; or
(g) Tremont's default in the observance or performance of any other
agreement or condition relating to any such other indebtedness for
borrowed money or contained in any instrument evidencing, securing or
relating thereto or any other event shall occur or condition exist, the
effect of which default or other event or condition is to cause, or to
permit the holder of the indebtedness to cause, such other indebtedness
for borrowed money to become due prior to its stated maturity.
An "Event of Default" shall be deemed to have occurred immediately upon any
default described in clause (d) or (g) above, if any default described in
clauses (c) or (f) above is not cured within 5 days, and if any default
-2-
described in clauses (a), (b), or (e) is not cured within 30 days after written
notice from Secured Party to Tremont.
Section 7. Remedies. Upon the occurrence and during the continuation of an
Event of Default as defined herein, in addition to any and all other rights and
remedies which Secured Party may then have hereunder or under the Note, under
the Uniform Commercial Code of the State of New Jersey or of any other pertinent
jurisdiction (the "Code"), or otherwise, Secured Party may, at its option: (a)
reduce its claim to judgment or foreclosure or otherwise enforce the Security
Interests, in whole or in part, by any available judicial procedure; (b) sell,
or otherwise dispose of, at the office of Secured Party, or elsewhere, all or
any part of the Collateral, and any such sale or other disposition may be as a
unit or in parcels, by public or private proceedings, and by way of one or more
contracts (it being agreed that the sale of any part of the Collateral shall not
exhaust the Secured Party's power of sale, but sales may be made from time to
time, and at any time, until all of the Collateral has been sold or until the
Obligation has been paid and performed in full); (c) at its discretion, retain
the Collateral in satisfaction of the Obligation whenever the circumstances are
such that Secured Party is entitled to do so under the Code or otherwise; and
(d) exercise any and all other rights, remedies and privileges it may have under
the Note and the other documents defining the Obligation.
Section 8. Application of Proceeds by Secured Party. Any and all proceeds
ever received by Secured Party from any sale or other disposition of the
Collateral, or any part thereof, or the exercise of any other remedy pursuant
hereto shall be applied by Secured Party to the Obligation in such order and
manner as Secured Party, in its sole discretion, may deem appropriate,
notwithstanding any directions or instructions to the contrary by Tremont;
provided that the proceeds and/or accounts shall be applied toward satisfaction
of the Obligation. Any proceeds received by Secured Party under this Agreement
in excess of those necessary to fully and completely satisfy the Obligation
shall be distributed to Tremont.
Section 9. Notice of Sale. Reasonable notification of the time and place
of any public sale of the Collateral, or reasonable notification of the time
after which any private sale or other intended disposition of the Collateral is
to be made, shall be sent to Tremont and to any other persons entitled under the
Code to notice; provided, that if any of the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Secured Party may sell, pledge, assign or otherwise dispose of the Collateral
without notification, advertisement or other notice of any kind. It is agreed
that notice sent or given not less than ten (10) calendar days prior to the
taking of the action to which the notice relates is reasonable notification and
notice for the purposes of this section.
Section 10. Right to Vote Collateral; Receipt of Dividends, Etc.
(a) Unless an Event of Default shall have occurred and be continuing,
Tremont shall have the right, from time to time, to vote and to give consents,
ratifications and waivers with respect to the Collateral, and the Secured Party
shall, upon receiving a written request from Tremont, which request shall be
deemed to be a representation and warranty by Tremont that no Event of Default
has occurred and is continuing, deliver to Tremont or, as specified in such
-3-
request, such proxies, powers of attorney, consents, ratifications and waivers
in respect of any Collateral which are registered in the name of the Secured
Party or a nominee as shall be specified in such request and be in form and
substance satisfactory to the Secured Party.
(b) If an Event of Default shall have occurred and be continuing, all
rights of Tremont to exercise the voting and other consensual rights which it
would otherwise be entitled to exercise pursuant to Section 10(a) above shall
end upon five days' notice from the Secured Party to Tremont and thereafter the
Secured Party shall have the right to the extent permitted by law, and Tremont
shall take all such action as may be necessary or appropriate to give effect to
such right, to vote and to give consents, ratifications and waivers, and take
any other action with respect to all Collateral with the same force and effect
as if the Secured Party were the absolute and sole owner thereof.
(c) Unless an Event of Default shall have occurred and be continuing,
Tremont shall be entitled to receive all regular quarterly cash dividends. Any
other dividends or distributions or proceeds therefrom on account of the
Collateral shall, if received by Tremont, be received in trust for the benefit
of the Secured Party, be segregated from the other property or funds of Tremont,
and be forthwith delivered to the Secured Party as collateral in the same form
as so received (with any necessary endorsement).
Section 11. Delivery of Notices. Any notice or demand required to be given
hereunder shall be in writing and shall be deemed to have been duly given and
received, if given by hand, when a writing containing such notice is received by
the person to whom addressed or, if given by mail, two (2) business days after a
certified or registered letter containing such notice, with postage prepaid, is
deposited in the United States mails, addressed to:
If to Secured Party:
NL Industries, Inc.
16825 Northchase Drive
Suite 1200
Houston TX 77060
Attn: General Counsel
If to Tremont:
Tremont Corporation
1999 Broadway
Suite 4300
Denver, Colorado 80202
Attn: General Counsel
Any such address may be changed from time to time by serving notice to the other
party as above provided. A business day shall mean a day of the week which is
not a Saturday or Sunday or a holiday recognized by national banking
associations.
-4-
Section 12. Binding Effect. This Agreement shall be binding upon Tremont,
its successors and assigns, and shall inure to the benefit of Secured Party and
its successors and assigns.
Section 13. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the state of New Jersey.
Section 14. Severability. In the event that any one or more of the
provisions contained in this Agreement are held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement.
-5-
EXECUTED as of the day and year first herein set forth.
SECURED PARTY:
NL Industries, Inc.
By: /s/ Robert D. Hardy
----------------------------------------
Title: Vice President
-------------------------------------
TREMONT:
Tremont Corporation
By: /s/ Mark A. Wallace
-----------------------------------------
Title: Vice President
--------------------------------------
58134
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Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NL Industries, Inc. (the Company) on
Form 10-Q for the period ending September 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, J. Landis Martin,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ J. Landis Martin
- ------------------------------------
J. Landis Martin
Chief Executive Officer
November 12, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NL Industries, Inc. (the Company) on
Form 10-Q for the period ending September 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Robert D. Hardy,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Robert D. Hardy
- ----------------------------
Robert D. Hardy
Chief Financial Officer
November 12, 2002
