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, 2001
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-640
NL INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-5267260
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544
- -------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3300
--------------------
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 9, 2001: 49,399,984
NL INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 3-4
Consolidated Statements of Income - Three months
and nine months ended September 30, 2001 and 2000 5
Consolidated Statements of Comprehensive Income -
Three months and nine months ended September 30, 2001
and 2000 6
Consolidated Statement of Shareholders' Equity
- Nine months ended September 30, 2001 7
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2001 and 2000 8-9
Notes to Consolidated Financial Statements 10-27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28-35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35-36
Item 6. Exhibits and Reports on Form 8-K 36
-2-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS September 30, December 31,
2001 2000
------------- ------------
Current assets:
Cash and cash equivalents .................... $ 97,000 $ 120,378
Restricted cash equivalents .................. 80,198 69,242
Accounts and notes receivable ................ 145,042 131,540
Receivable from affiliates ................... 21,659 214
Refundable income taxes ...................... 337 12,302
Inventories .................................. 186,793 205,973
Prepaid expenses ............................. 6,977 2,458
Deferred income taxes ........................ 11,829 11,673
---------- ----------
Total current assets ..................... 549,835 553,780
---------- ----------
Other assets:
Marketable securities ........................ 44,614 47,186
Receivable from affiliate .................... 11,900 --
Investment in TiO2 manufacturing joint venture 144,228 150,002
Prepaid pension cost ......................... 22,516 22,789
Restricted cash equivalents .................. 12,656 17,942
Other ........................................ 5,977 4,707
---------- ----------
Total other assets ....................... 241,891 242,626
---------- ----------
Property and equipment:
Land ......................................... 24,640 24,978
Buildings .................................... 125,038 129,019
Machinery and equipment ...................... 523,005 530,920
Mining properties ............................ 67,310 67,134
Construction in progress ..................... 27,124 4,586
---------- ----------
767,117 756,637
Less accumulated depreciation and depletion .. 442,274 432,255
---------- ----------
Net property and equipment ............... 324,843 324,382
---------- ----------
$1,116,569 $1,120,788
========== ==========
-3-
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------- ------------
Current liabilities:
Notes payable ............................ $ 47,435 $ 69,970
Current maturities of long-term debt ..... 917 730
Accounts payable and accrued liabilities . 140,275 147,877
Payable to affiliates .................... 9,543 10,634
Accrued environmental costs .............. 64,634 53,307
Income taxes ............................. 13,976 13,616
Deferred income taxes .................... 1,319 1,822
----------- -----------
Total current liabilities ............ 278,099 297,956
----------- -----------
Noncurrent liabilities:
Long-term debt ........................... 195,920 195,363
Deferred income taxes .................... 151,927 145,673
Accrued environmental costs .............. 41,749 57,133
Accrued pension cost ..................... 17,360 21,220
Accrued postretirement benefits cost ..... 29,680 29,404
Other .................................... 16,813 23,272
----------- -----------
Total noncurrent liabilities ......... 453,449 472,065
----------- -----------
Minority interest ............................ 7,211 6,279
----------- -----------
Shareholders' equity:
Common stock ............................. 8,355 8,355
Additional paid-in capital ............... 777,597 777,528
Retained earnings ........................ 191,697 141,073
Accumulated other comprehensive loss ..... (190,009) (181,872)
Treasury stock ........................... (409,830) (400,596)
----------- -----------
Total shareholders' equity ........... 377,810 344,488
----------- -----------
$ 1,116,569 $ 1,120,788
=========== ===========
Commitments and contingencies (Note 14)
See accompanying notes to consolidated financial statements.
- 4 -
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,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues and other income:
Net sales ......................... $206,952 $242,309 $653,117 $724,444
Litigation settlement gains, net .. -- -- 10,582 43,000
Insurance recoveries, net ......... 3,900 -- 5,829 --
Other, net ........................ 2,926 4,906 11,144 20,352
-------- -------- -------- --------
213,778 247,215 680,672 787,796
-------- -------- -------- --------
Costs and expenses:
Cost of sales ..................... 145,945 159,021 447,167 482,319
Selling, general and administrative 30,665 33,972 92,323 104,194
Interest .......................... 6,949 7,717 20,812 23,470
-------- -------- -------- --------
183,559 200,710 560,302 609,983
-------- -------- -------- --------
Income before income taxes and
minority interest ........... 30,219 46,505 120,370 177,813
Income tax expense .................... 9,681 14,882 38,896 58,843
-------- -------- -------- --------
Income before minority interest 20,538 31,623 81,474 118,970
Minority interest ..................... -- 1,454 953 1,655
-------- -------- -------- --------
Net income .................... $ 20,538 $ 30,169 $ 80,521 $117,315
======== ======== ======== ========
Earnings per share:
Basic ............................. $ .41 $ .60 $ 1.61 $ 2.32
======== ======== ======== ========
Diluted ........................... $ .41 $ .60 $ 1.61 $ 2.31
======== ======== ======== ========
Weighted average shares used in the
calculation of earnings per share:
Basic ........................... 49,621 50,203 49,876 50,539
Dilutive impact of stock options 84 403 153 330
-------- -------- -------- --------
Diluted ......................... 49,705 50,606 50,029 50,869
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
- 5 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income ................................ $ 20,538 $ 30,169 $ 80,521 $ 117,315
--------- --------- --------- ---------
Other comprehensive income (loss),
net of tax:
Marketable securities adjustment:
Unrealized holding gain (loss)
arising during the period ... (5,258) 2,021 (1,669) 2,729
Reclassification adjustment for
loss (gain) included in net
income ...................... -- (50) 736 (50)
--------- --------- --------- ---------
(5,258) 1,971 (933) 2,679
Currency translation adjustment ....... 13,161 (18,623) (7,204) (41,219)
--------- --------- --------- ---------
Total other comprehensive income
(loss) ........................ 7,903 (16,652) (8,137) (38,540)
--------- --------- --------- ---------
Comprehensive income .......... $ 28,441 $ 13,517 $ 72,384 $ 78,775
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 6 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine months ended September 30, 2001
(In thousands)
Accumulated other
comprehensive
income (loss)
Additional -------------------------
Common paid-in Retained Currency Marketable Treasury
stock capital earnings translation securities stock Total
--------- --------- --------- ----------- ---------- --------- ---------
Balance at December 31, 2000 ......... $ 8,355 $ 777,528 $ 141,073 $(190,757) $ 8,885 $(400,596) $ 344,488
Net income ........................... -- -- 80,521 -- -- -- 80,521
Other comprehensive income (loss), net -- -- -- (7,204) (933) -- (8,137)
Dividends ............................ -- -- (29,897) -- -- -- (29,897)
Tax benefit of stock options exercised -- 69 -- -- -- -- 69
Treasury stock:
Acquired (677 shares) ............ -- -- -- -- -- (9,853) (9,853)
Reissued (37 shares) ............ -- -- -- -- -- 619 619
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 2001 ........ $ 8,355 $ 777,597 $ 191,697 $(197,961) $ 7,952 $(409,830) $ 377,810
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
- 7 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 and 2000
(In thousands)
2001 2000
--------- ---------
Cash flows from operating activities:
Net income ................................................ $ 80,521 $ 117,315
Depreciation, depletion and amortization .................. 22,335 22,790
Deferred income taxes ..................................... 7,340 33,301
Distributions from TiO2 manufacturing joint venture ....... 5,513 7,550
Litigation settlement gain, net included in restricted cash (10,307) (43,000)
Pension cost, net ......................................... (2,458) (10,488)
Net (gains) losses from securities transactions ........... 1,133 (5,630)
Insurance recoveries, net ................................. (5,829) --
Other, net ................................................ (624) 1,357
--------- ---------
97,624 123,195
Change in assets and liabilities:
Accounts and notes receivable ......................... (15,494) (37,921)
Inventories ........................................... 15,676 27,740
Prepaid expenses ...................................... (3,891) (4,123)
Accounts payable and accrued liabilities .............. (7,872) 7,910
Income taxes .......................................... 12,018 6,708
Other, net ............................................ (5,637) (4,347)
--------- ---------
Net cash provided by operating activities ......... 92,424 119,162
--------- ---------
Cash flows from investing activities:
Capital expenditures ...................................... (32,391) (19,757)
Property damaged by fire:
Insurance proceeds .................................... 10,500 --
Other, net ............................................ (2,100) --
Loans to affiliates:
Loans ................................................. (33,400) --
Collections ........................................... 500 --
Purchase of Tremont Corporation common stock .............. -- (26,040)
Change in restricted cash equivalents, net ................ 700 (102)
Other, net ................................................ 84 249
--------- ---------
Net cash used by investing activities ................. (56,107) (45,650)
--------- ---------
- 8 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 2001 and 2000
(In thousands)
2001 2000
--------- ---------
Cash flows from financing activities:
Dividends paid ................................... $ (29,897) $ (22,721)
Treasury stock:
Purchased .................................... (9,853) (29,180)
Reissued ..................................... 619 1,581
Indebtedness:
Borrowings ................................... 1,437 --
Principal payments ........................... (22,132) (29,034)
Other, net ....................................... (5) (6)
--------- ---------
Net cash used by financing activities ........ (59,831) (79,360)
--------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities (23,514) (5,848)
Currency translation ......................... 136 (3,312)
Balance at beginning of period ................... 120,378 134,224
--------- ---------
Balance at end of period ......................... $ 97,000 $ 125,064
========= =========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 14,239 $ 16,428
Income taxes, net ................................ 19,538 18,838
See accompanying notes to consolidated financial statements.
- 9 -
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. At September 30,
2001, Valhi, Inc. and Tremont Corporation, each affiliates of Contran
Corporation, held approximately 61% and 21%, respectively, of NL's outstanding
common stock. At September 30, 2001, Contran and its subsidiaries held
approximately 94% of Valhi's outstanding common stock, and a company 80% owned
by Valhi and 20% owned by NL held approximately 80% of Tremont's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the
Chairman of the Board of NL and the Chairman of the Board and Chief Executive
Officer of Contran and Valhi and a director of Tremont, may be deemed to control
each of such companies. See Note 6.
The consolidated balance sheet of NL Industries, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2000 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2001 and the consolidated statements
of income, comprehensive income, shareholders' equity and cash flows for the
interim periods ended September 30, 2001 and 2000 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 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, 2000 (the "2000 Annual Report").
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, effective January 1, 2001. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives are recognized as either assets or liabilities and measured at fair
value. The accounting for changes in fair value of derivatives is dependent upon
the intended use of the derivative. As permitted by the transition requirements
of SFAS No. 133, as amended, the Company exempted from the scope of SFAS No. 133
all host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. The Company is not a party to any significant
derivative or hedging instrument covered by SFAS No. 133 at September 30, 2001,
and there was no impact on the Company's financial statements from adopting SFAS
No. 133.
- 10 -
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 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,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands)
Net sales ................................. $ 206,952 $ 242,309 $ 653,117 $ 724,444
Other income (expense), excluding corporate (337) 1,404 1,673 5,518
--------- --------- --------- ---------
206,615 243,713 654,790 729,962
Cost of sales ............................. 145,945 159,021 447,167 482,319
Selling, general and administrative,
excluding corporate ..................... 24,448 27,181 74,315 81,154
--------- --------- --------- ---------
Operating income .................. 36,222 57,511 133,308 166,489
Insurance recoveries, net ................. 3,900 -- 5,829 --
--------- --------- --------- ---------
Income before corporate items,
income taxes and minority
interest ........................ 40,122 57,511 139,137 166,489
General corporate income (expense):
Securities earnings, net .............. 2,145 2,494 5,937 11,602
Litigation settlement gains, net
and other income .................... 1,129 1,008 14,127 46,232
Corporate expenses .................... (6,228) (6,791) (18,019) (23,040)
Interest expense ...................... (6,949) (7,717) (20,812) (23,470)
--------- --------- --------- ---------
Income before income taxes and
minority interest ............... $ 30,219 $ 46,505 $ 120,370 $ 177,813
========= ========= ========= =========
- 11 -
Note 4 - Inventories:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Raw materials ............................ $ 40,160 $ 66,061
Work in process .......................... 7,321 7,117
Finished products ........................ 111,879 107,120
Supplies ................................. 27,433 25,675
-------- --------
$186,793 $205,973
======== ========
Note 5 - Marketable securities:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Available-for-sale marketable equity securities:
Unrealized gains ........................... $ 15,004 $ 14,912
Unrealized losses .......................... (2,770) (1,244)
Cost ....................................... 32,380 33,518
-------- --------
Aggregate fair value ................... $ 44,614 $ 47,186
======== ========
In June 2001, the Company recognized a $1.1 million noncash securities
loss related to an other-than-temporary decline in value of certain
available-for-sale securities held by the Company. See Note 11.
Note 6 - Receivable from affiliates:
A majority-owned subsidiary of the Company, NL Environmental Management
Services, Inc. ("EMS"), loaned $13.4 million to Tremont under a reducing
revolving loan agreement in the first quarter of 2001. See Note 1. The loan was
approved by special committees of the Company's and EMS's Boards of Directors.
The loan bears interest at prime plus 2% (8.75% at September 30, 2001), is due
March 31, 2003 and is collateralized by 10.2 million shares of NL common stock
owned by Tremont. The maximum amount available for borrowing by Tremont reduces
by $250,000 per quarter. In each of the second and third quarters of 2001,
Tremont repaid $250,000 of the loan. At September 30, 2001, the outstanding loan
balance was $12.9 million and no amounts were available for additional
borrowings by Tremont.
In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the
Harold C. Simmons Family Trust #2 (the "Trust"), one of the trusts described in
Note 1, under a $25 million revolving credit agreement. The loan was approved by
special committees of the Company's and EMS's Boards of Directors. The loan
bears interest at prime (6.75% at September 30, 2001), is due on demand with 60
days notice and is collateralized by 13,749 shares, or approximately 35%, of
Contran's outstanding Class A voting common stock and 5,000 shares, or 100%, of
Contran's Series E Cumulative preferred stock, both of which are owned by the
Trust. At September 30, 2001, $5 million was available for additional borrowing
by the Trust.
- 12 -
Note 7 - Accounts payable and accrued liabilities:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Accounts payable ................... $ 54,643 $ 64,553
-------- --------
Accrued liabilities:
Employee benefits .............. 29,367 34,160
Interest ....................... 11,241 5,019
Deferred income ................ 4,000 4,000
Other .......................... 41,024 40,145
-------- --------
85,632 83,324
-------- --------
$140,275 $147,877
======== ========
Note 8 - Other noncurrent liabilities:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Insurance claims and expenses ............ $ 9,592 $10,314
Employee benefits ........................ 3,703 7,721
Deferred income .......................... 1,333 4,333
Other .................................... 2,185 904
------- -------
$16,813 $23,272
======= =======
Note 9 - Notes payable and long-term debt:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Notes payable - Kronos ..................... $ 47,435 $ 69,970
======== ========
Long-term debt:
NL Industries, Inc. - 11.75% Senior
Secured Notes (See Note 13) ........ $194,000 $194,000
Kronos ................................. 2,837 2,093
-------- --------
196,837 196,093
Less current maturities .................... 917 730
-------- --------
$195,920 $195,363
======== ========
Notes payable consists of euro 27.2 million and NOK 200 million at
September 30, 2001 and euro 51 million and NOK 200 million at December 31, 2000.
- 13 -
Note 10 - 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,
--------------------
2001 2000
-------- --------
(In thousands)
Expected tax expense ...................................... $ 42,130 $ 62,235
Non-U.S. tax rates ........................................ (3,451) (3,917)
Incremental tax on income of companies not included in NL's
consolidated U.S. federal income tax return ............. 416 1,015
Valuation allowance ....................................... (1,343) (2,116)
U.S. state income taxes ................................... 444 691
Other, net ................................................ 700 935
-------- --------
Income tax expense ................................ $ 38,896 $ 58,843
======== ========
Note 11 - Litigation settlement gains, net and other income, net:
Litigation settlement gains, net
In the first quarter of 2001 and the second quarter of 2000, the Company
recognized litigation settlement gains with former insurance carrier groups of
$10.6 million and $43 million, respectively, to settle certain insurance
coverage claims related to environmental remediation. A majority of the proceeds
from these settlements were transferred to special-purpose trusts established by
the insurance carrier groups to pay future remediation and other environmental
expenditures of the Company. No further material settlements relating to
litigation concerning environmental remediation coverage are expected.
Other income, net
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In thousands)
Securities earnings:
Interest and dividends ................ $ 2,145 $ 2,417 $ 7,070 $ 5,972
Securities transactions ............... -- 77 (1,133) 5,630
-------- -------- -------- --------
2,145 2,494 5,937 11,602
Currency transactions, net ................ (1,183) 602 98 4,256
Noncompete agreement income ............... 1,000 1,000 3,000 3,000
Disposition of property and equipment ..... 3 (271) (416) (1,219)
Trade interest income ..................... 611 648 1,680 1,475
Other, net ................................ 350 433 845 1,238
-------- -------- -------- --------
$ 2,926 $ 4,906 $ 11,144 $ 20,352
======== ======== ======== ========
- 14 -
In the second quarter of 2000, the Company recognized a $5.6 million
securities gain related to common stock received from the demutualization of an
insurance company from which the Company had purchased certain insurance
policies.
Note 12 - Leverkusen fire and insurance claim:
A fire on March 20, 2001 damaged a section of the Company's Leverkusen,
Germany 35,000 metric ton sulfate-process TiO2 plant ("Sulfate Plant") and, as a
result, production of TiO2 at the Leverkusen facility was halted. The fire did
not enter the Company's adjacent 125,000 metric ton chloride-process TiO2 plant
("Chloride Plant"), but did damage certain support equipment necessary to
operate that plant. The damage to the support equipment resulted in a temporary
shutdown of the Chloride Plant.
On April 8, 2001, repairs to the damaged support equipment were
substantially completed and full production resumed at the Chloride Plant. The
Sulfate Plant became approximately 50% operational in September 2001 and became
fully operational in late October 2001.
During the third quarter of 2001, the Company's insurance carriers
approved payment of $8 million ($6.8 million received as of September 30, 2001)
as a partial payment 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 expenses 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.
In October 2001, the Company reached an agreement in principle with its
insurance carriers to settle the coverage claim involving the Leverkusen fire.
The Company expects to receive an additional $38 million in insurance
recoveries, of which approximately $13 million relates to property damage costs,
and approximately $25 million relates to business interruption losses and extra
expenses resulting from the fire. The Company expects to report a gain, net of
certain expenses, related to this insurance settlement in the fourth quarter of
2001.
Note 13 - Condensed consolidating financial information:
The Company's 11.75% Senior Secured Notes (the "Notes") are
collateralized by a series of intercompany notes to NL (the "Parent Issuer").
The Notes are also collateralized by a first priority lien on the stock of
Kronos. A second priority lien on the stock of NL Capital Corporation ("NLCC")
collateralized the notes until February 2000, at which time it was merged into
KII and became included in the first priority lien on the stock of Kronos.
- 15 -
In the event of foreclosure, the holders of the Notes would have access
to the consolidated assets, earnings and equity of the Company. The Company
believes the collateralization of the Notes, as described above, is the
functional economic equivalent of a joint and several, full and unconditional
guarantee of the Notes by Kronos and, prior to its merger into KII, NLCC.
Management believes that separate financial statements would not provide
additional material information that would be useful in assessing the financial
position of Kronos and NLCC (the "Guarantor Subsidiaries"). In lieu of providing
separate financial statements of the Guarantor Subsidiaries, the Company has
included condensed consolidating financial information of the Parent Issuer,
Guarantor Subsidiaries and non-guarantor subsidiaries in accordance with Rule
3-10(e) of the SEC's Regulation S-X. The Guarantor Subsidiaries and the
non-guarantor subsidiaries comprise all of the direct and indirect subsidiaries
of the Parent Issuer.
Investments in subsidiaries are accounted for by NL under the equity
method, wherein the parent company's share of earnings is included in net
income. Elimination entries eliminate (i) the parent's investments in
subsidiaries and the equity in earnings of subsidiaries, (ii) intercompany
payables and receivables and (iii) other transactions between subsidiaries.
- 16 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
September 30, 2001
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 3,088 $ 65,190 $ 28,722 $ -- $ 97,000
Restricted cash equivalents .................. 80,198 -- -- -- 80,198
Accounts and notes receivable ................ 750 144,220 72 -- 145,042
Receivable from affiliates ................... 17,394 -- 21,714 (17,449) 21,659
Refundable income taxes ...................... -- 337 -- -- 337
Inventories .................................. -- 186,793 -- -- 186,793
Prepaid expenses ............................. 510 6,467 -- -- 6,977
Deferred income taxes ........................ 4,748 7,081 -- -- 11,829
----------- ----------- ----------- ----------- -----------
Total current assets ..................... 106,688 410,088 50,508 (17,449) 549,835
----------- ----------- ----------- ----------- -----------
Other assets:
Investment in subsidiaries ................... 1,044,649 -- 294 (1,044,943) --
Marketable securities ........................ 343 -- 44,271 -- 44,614
Notes receivable from affiliates ............. 194,000 612,183 34,900 (829,183) 11,900
Investment in TiO2 manufacturing joint venture -- 144,228 -- -- 144,228
Prepaid pension cost ......................... 2,228 20,288 -- -- 22,516
Restricted cash equivalents .................. 12,656 -- -- -- 12,656
Other ........................................ 1,368 4,609 -- -- 5,977
----------- ----------- ----------- ----------- -----------
Total other assets ....................... 1,255,244 781,308 79,465 (1,874,126) 241,891
----------- ----------- ----------- ----------- -----------
Property and equipment, net ...................... 3,900 320,943 -- -- 324,843
----------- ----------- ----------- ----------- -----------
$ 1,365,832 $ 1,512,339 $ 129,973 $(1,891,575) $ 1,116,569
=========== =========== =========== =========== ===========
- 17 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet, (Continued)
September 30, 2001
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .......................... $ -- $ 47,435 $ -- $ -- $ 47,435
Current maturities of long-term debt ... -- 917 -- -- 917
Accounts payable and accrued liabilities 29,199 110,884 192 -- 140,275
Payable to affiliates .................. 13,420 12,918 654 (17,449) 9,543
Accrued environmental costs ............ 7,018 -- 57,616 -- 64,634
Income taxes ........................... 459 13,517 -- -- 13,976
Deferred income taxes .................. -- 1,319 -- -- 1,319
----------- ----------- ----------- ----------- -----------
Total current liabilities .......... 50,096 186,990 58,462 (17,449) 278,099
----------- ----------- ----------- ----------- -----------
Noncurrent liabilities:
Long-term debt ......................... 194,000 1,920 -- -- 195,920
Notes payable to affiliate ............. 635,183 194,000 -- (829,183) --
Deferred income taxes .................. 73,227 78,573 127 -- 151,927
Accrued environmental costs ............ 8,005 7,442 26,302 -- 41,749
Accrued pension cost ................... 1,464 15,896 -- -- 17,360
Accrued postretirement benefits cost ... 16,352 13,328 -- -- 29,680
Other .................................. 9,695 7,118 -- -- 16,813
----------- ----------- ----------- ----------- -----------
Total noncurrent liabilities ....... 937,926 318,277 26,429 (829,183) 453,449
----------- ----------- ----------- ----------- -----------
Minority interest .......................... -- 287 6,924 -- 7,211
----------- ----------- ----------- ----------- -----------
Shareholders' equity ....................... 377,810 1,006,785 38,158 (1,044,943) 377,810
----------- ----------- ----------- ----------- -----------
$ 1,365,832 $ 1,512,339 $ 129,973 $(1,891,575) $ 1,116,569
=========== =========== =========== =========== ===========
- 18 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
December 31, 2000
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Current assets:
Cash and cash equivalents .................... $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378
Restricted cash equivalents .................. 69,242 -- -- -- 69,242
Accounts and notes receivable ................ 172 131,295 73 -- 131,540
Receivable from affiliates ................... 6,189 -- 216 (6,191) 214
Refundable income taxes ...................... 10,512 1,790 -- -- 12,302
Inventories .................................. -- 205,973 -- -- 205,973
Prepaid expenses ............................. 347 2,111 -- -- 2,458
Deferred income taxes ........................ 6,394 5,279 -- -- 11,673
----------- ----------- ----------- ----------- -----------
Total current assets ..................... 96,488 399,427 64,056 (6,191) 553,780
----------- ----------- ----------- ----------- -----------
Other assets:
Investment in subsidiaries ................... 687,300 -- 285 (687,585) --
Marketable securities ........................ 452 -- 46,734 -- 47,186
Notes receivable from affiliates ............. 194,000 301,695 23,000 (518,695) --
Investment in TiO2 manufacturing joint venture -- 150,002 -- -- 150,002
Prepaid pension cost ......................... 1,772 21,017 -- -- 22,789
Restricted cash equivalents .................. 17,942 -- -- -- 17,942
Other ........................................ 1,739 2,968 -- -- 4,707
----------- ----------- ----------- ----------- -----------
Total other assets ....................... 903,205 475,682 70,019 (1,206,280) 242,626
----------- ----------- ----------- ----------- -----------
Property and equipment, net ...................... 4,425 319,957 -- -- 324,382
----------- ----------- ----------- ----------- -----------
$ 1,004,118 $ 1,195,066 $ 134,075 $(1,212,471) $ 1,120,788
=========== =========== =========== =========== ===========
- 19 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet, (Continued)
December 31, 2000
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .......................... $ -- $ 69,970 $ -- $ -- $ 69,970
Current maturities of long-term debt ... -- 730 -- -- 730
Accounts payable and accrued liabilities 24,098 123,555 224 -- 147,877
Payable to affiliates .................. 2,140 14,073 612 (6,191) 10,634
Accrued environmental costs ............ 5,046 -- 48,261 -- 53,307
Income taxes ........................... -- 13,604 12 -- 13,616
Deferred income taxes .................. -- 1,822 -- -- 1,822
----------- ----------- ----------- ----------- -----------
Total current liabilities .......... 31,284 223,754 49,109 (6,191) 297,956
----------- ----------- ----------- ----------- -----------
Noncurrent liabilities:
Long-term debt ......................... 194,000 1,363 -- -- 195,363
Notes payable to affiliate ............. 324,695 194,000 -- (518,695) --
Deferred income taxes .................. 70,985 73,699 989 -- 145,673
Accrued environmental costs ............ 6,729 8,699 41,705 -- 57,133
Accrued pension cost ................... 1,438 19,782 -- -- 21,220
Accrued postretirement benefits cost ... 15,039 14,365 -- -- 29,404
Other .................................. 15,460 7,812 -- -- 23,272
----------- ----------- ----------- ----------- -----------
Total noncurrent liabilities ....... 628,346 319,720 42,694 (518,695) 472,065
----------- ----------- ----------- ----------- -----------
Minority interest .......................... -- 299 5,980 -- 6,279
----------- ----------- ----------- ----------- -----------
Shareholders' equity ....................... 344,488 651,293 36,292 (687,585) 344,488
----------- ----------- ----------- ----------- -----------
$ 1,004,118 $ 1,195,066 $ 134,075 $(1,212,471) $ 1,120,788
=========== =========== =========== =========== ===========
- 20 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Three months ended September 30, 2001
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales ................................. $ -- $ 206,952 $ -- $ -- $ 206,952
Interest and dividends .................... 6,754 10,131 1,482 (15,611) 2,756
Equity in income of subsidiaries .......... 25,804 -- -- (25,804) --
Insurance recoveries, net ................. -- 3,900 -- -- 3,900
Other income, net ......................... 1,129 (959) (11) 11 170
--------- --------- --------- --------- ---------
33,687 220,024 1,471 (41,404) 213,778
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales ............................. -- 145,945 -- -- 145,945
Selling, general and administrative ....... (1,800) 31,355 1,110 -- 30,665
Interest .................................. 15,689 6,871 -- (15,611) 6,949
--------- --------- --------- --------- ---------
13,889 184,171 1,110 (15,611) 183,559
--------- --------- --------- --------- ---------
Income before income taxes and minority
interest .......................... 19,798 35,853 361 (25,793) 30,219
Income tax expense (benefit) .................. (740) 10,411 10 -- 9,681
--------- --------- --------- --------- ---------
Net income ............................ $ 20,538 $ 25,442 $ 351 $ (25,793) $ 20,538
========= ========= ========= ========= =========
- 21 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Three months ended September 30, 2000
(In thousands)
NL Combined Combined
Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales .......................................... $ -- $ 242,309 $ -- $ -- $ 242,309
Interest and dividends ............................. 8,326 6,557 1,563 (13,381) 3,065
Equity in income of subsidiaries ................... 39,177 -- -- (39,177) --
Other income, net .................................. 1,085 756 -- -- 1,841
--------- --------- --------- --------- ---------
48,588 249,622 1,563 (52,558) 247,215
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales ...................................... -- 159,021 -- -- 159,021
Selling, general and administrative ................ 5,493 29,530 (1,051) -- 33,972
Interest ........................................... 13,531 7,567 -- (13,381) 7,717
--------- --------- --------- --------- ---------
19,024 196,118 (1,051) (13,381) 200,710
--------- --------- --------- --------- ---------
Income before income taxes and minority interest 29,564 53,504 2,614 (39,177) 46,505
Income tax expense (benefit) ........................... (605) 15,487 -- -- 14,882
--------- --------- --------- --------- ---------
Income before minority interest ................ 30,169 38,017 2,614 (39,177) 31,623
Minority interest ...................................... -- 8 1,446 -- 1,454
--------- --------- --------- --------- ---------
Net income ..................................... $ 30,169 $ 38,009 $ 1,168 $ (39,177) $ 30,169
========= ========= ========= ========= =========
- 22 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Nine months ended September 30, 2001
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
--------- ------------ --------------- ------------ ------------
Revenues and other income:
Net sales ................................. $ -- $ 653,117 $ -- $ -- $ 653,117
Interest and dividends .................... 20,751 25,590 4,603 (42,194) 8,750
Equity in income of subsidiaries .......... 100,325 -- -- (100,325) --
Litigation settlement gains, net .......... 10,582 -- -- -- 10,582
Insurance recoveries, net ................. -- 5,829 -- -- 5,829
Other income, net ......................... 2,412 (18) (11) 11 2,394
--------- --------- --------- --------- ---------
134,070 684,518 4,592 (142,508) 680,672
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales ............................. -- 447,167 -- -- 447,167
Selling, general and administrative ....... 9,257 82,694 372 -- 92,323
Interest .................................. 42,415 20,591 -- (42,194) 20,812
--------- --------- --------- --------- ---------
51,672 550,452 372 (42,194) 560,302
--------- --------- --------- --------- ---------
Income before income taxes and minority
interest ............................ 82,398 134,066 4,220 (100,314) 120,370
Income tax expense ............................ 1,877 37,009 10 -- 38,896
--------- --------- --------- --------- ---------
Income before minority interest ....... 80,521 97,057 4,210 (100,314) 81,474
Minority interest ............................. -- 9 944 -- 953
--------- --------- --------- --------- ---------
Net income ............................ $ 80,521 $ 97,048 $ 3,266 $(100,314) $ 80,521
========= ========= ========= ========= =========
- 23 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Income
Nine months ended September 30, 2000
(In thousands)
NL Combined Combined
Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Revenues and other income:
Net sales .......................................... $ -- $ 724,444 $ -- $ -- $ 724,444
Interest and dividends ............................. 23,500 18,136 4,365 (38,554) 7,447
Equity in income of subsidiaries ................... 153,635 -- -- (153,635) --
Litigation settlement gains, net ................... 43,000 -- -- -- 43,000
Other income, net .................................. 8,862 4,043 -- -- 12,905
--------- --------- --------- --------- ---------
228,997 746,623 4,365 (192,189) 787,796
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales ...................................... -- 482,319 -- -- 482,319
Selling, general and administrative ................ 19,698 85,012 (516) -- 104,194
Interest ........................................... 38,661 23,363 -- (38,554) 23,470
--------- --------- --------- --------- ---------
58,359 590,694 (516) (38,554) 609,983
--------- --------- --------- --------- ---------
Income before income taxes and minority interest 170,638 155,929 4,881 (153,635) 177,813
Income tax expense ..................................... 53,323 5,520 -- -- 58,843
--------- --------- --------- --------- ---------
Income before minority interest ................ 117,315 150,409 4,881 (153,635) 118,970
Minority interest ...................................... -- 33 1,622 -- 1,655
--------- --------- --------- --------- ---------
Net income ..................................... $ 117,315 $ 150,376 $ 3,259 $(153,635) $ 117,315
========= ========= ========= ========= =========
- 24 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2001
(In thousands)
NL Combined
Industries Non-guarantor
Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
Net cash provided (used) by operating activities .... $ 18,618 $ 99,115 $ (2,133) $ (23,176) $ 92,424
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures ............................ -- (32,391) -- -- (32,391)
Loans to affiliates, net ........................ -- (11,938) (32,900) 11,938 (32,900)
Change in restricted cash ....................... 8,024 -- -- (7,324) 700
Other, net ...................................... 7 8,477 (8) 8 8,484
--------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities ................................ 8,031 (35,852) (32,908) 4,622 (56,107)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Dividends, net .................................. (29,897) (30,500) -- 30,500 (29,897)
Treasury stock:
Purchased ................................... (9,853) -- -- -- (9,853)
Reissued .................................... 619 -- -- -- 619
Indebtedness:
Borrowings .................................. -- 1,437 -- -- 1,437
Principal payments .......................... -- (22,132) -- -- (22,132)
Loans from affiliates ........................... 11,938 -- -- (11,938) --
Other, net ...................................... -- 3 -- (8) (5)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities ................................ (27,193) (51,192) -- 18,554 (59,831)
--------- --------- --------- --------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities (544) 12,071 (35,041) -- (23,514)
Currency translation ........................ -- 140 (4) -- 136
--------- --------- --------- --------- ---------
(544) 12,211 (35,045) -- (23,378)
Balance at beginning of period .................. 3,632 52,979 63,767 -- 120,378
--------- --------- --------- --------- ---------
Balance at end of period ........................ $ 3,088 $ 65,190 $ 28,722 $ -- $ 97,000
========= ========= ========= ========= =========
- 25 -
NL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2000
(In thousands)
NL Combined Combined
Industries Guarantor Non-guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
Net cash provided (used) by operating activities .... $ 16,862 $ 145,433 $ (133) $ (43,000) $ 119,162
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures ............................ (21) (19,736) -- -- (19,757)
Purchase of Tremont Corporation common stock .... (9,520) -- (16,520) -- (26,040)
Change in restricted cash ....................... (102) -- -- -- (102)
Loans to affiliates ............................. -- (35,872) 30,000 5,872 --
Investment in subsidiary ........................ (16,600) -- -- 16,600 --
Other, net ...................................... 181 68 -- -- 249
--------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities .................................. (26,062) (55,540) 13,480 22,472 (45,650)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Treasury stock:
Purchased ................................... (29,180) -- -- -- (29,180)
Reissued .................................... 1,581 -- -- -- 1,581
Dividends, net .................................. (22,721) (43,000) -- 43,000 (22,721)
Principal payments on debt ...................... -- (29,034) -- -- (29,034)
Loans from affiliates ........................... 48,872 (43,000) -- (5,872) --
Capital contributions ........................... -- -- 16,600 (16,600) --
Other, net ...................................... -- (6) -- -- (6)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities .............................. (1,448) (115,040) 16,600 20,528 (79,360)
--------- --------- --------- --------- ---------
Cash and cash equivalents:
Net change from:
Operating, investing and financing activities (10,648) (25,147) 29,947 -- (5,848)
Currency translation ........................ -- (3,305) (7) -- (3,312)
--------- --------- --------- --------- ---------
(10,648) (28,452) 29,940 -- (9,160)
Balance at beginning of period .................. 13,415 113,062 7,747 -- 134,224
--------- --------- --------- --------- ---------
Balance at end of period ........................ $ 2,767 $ 84,610 $ 37,687 $ -- $ 125,064
========= ========= ========= ========= =========
- 26 -
Note 14 - 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," (iii) the Company's
Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and June 30,
2001, and (iv) the 2000 Annual Report.
Note 15 - 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 still 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. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, no later than January 1, 2002. SFAS No. 144
retains the fundamental provisions of existing generally accepted accounting
principles 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 be reported at the lower of carrying value or fair value
less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. The Company is still studying
this newly-issued standard, and the effect, if any, to the Company of adopting
SFAS No. 144 has not yet been determined.
- 27 -
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
------------------ ------ ------------------ ------
2001 2000 2001 2000
-------- -------- ------ ------
(In millions, except percentages and metric tons)
Net sales and operating income
Net sales .................... $207.0 $242.3 -15% $653.1 $724.4 -10%
Operating income ............. $ 36.2 $ 57.5 -37% $133.3 $166.5 -20%
Operating income margin
percentage ................. 18% 24% 20% 23%
TiO2 operating statistics
Percent change in average
selling price (in billing
currencies) ................ -6% n/c
Sales volume (metric tons in
thousands) ................. 103 113 -9% 311 343 -10%
Production volume (metric tons
in thousands) .............. 109 113 -4% 315 329 -4%
Kronos' operating income in the third quarter of 2001 decreased $21.3
million or 37% from the third quarter of 2000 due to lower average selling
prices in billing currencies and lower sales and production volumes. Kronos'
operating income in the first nine months of 2001 decreased $33.2 million or 20%
from the first nine months of 2000 due to lower sales and production volumes.
Kronos' average selling price in billing currencies (which excludes the
effects of foreign currency translation) during the third quarter of 2001 was 6%
lower than the third quarter of 2000 and 4% lower than the second quarter of
2001. Compared to the second quarter of 2001, prices in billing currencies were
lower in all major markets. The average selling price in billing currencies in
September was 1% lower than the average selling price during the third quarter
as prices continued to trend downward. Kronos' average selling price in billing
currencies for the first nine months of 2001 was comparable to the first nine
months of 2000. Due to the global economic slowdown, the Company expects its
average selling price in billing currencies will continue to trend downward
through the end of the year and perhaps into the first quarter of 2002. The
Company expects a lower average selling price for full-year 2001 compared to the
full-year average selling price in 2000.
Kronos' third-quarter 2001 sales volume decreased 9% from the near
record third quarter of 2000 and decreased 2% from the second quarter of 2001.
Sales volume in the third quarter of 2001 was 17% and 4% lower in Europe and
North America, respectively, compared to the third quarter of 2000, while export
volume increased moderately. Compared to the second quarter of 2001, sales
volume decreased in Europe and North America while sales volume increased
moderately in the export markets. Sales volume in the first nine months of 2001
was 10% lower than in the first nine months of 2000. Kronos anticipates its
sales volume for full-year 2001 will be lower than that of 2000. Finished goods
inventory levels at the end of September represented about two months of sales.
Third-quarter 2001 production volume was 4% lower than the comparable
2000 period with operating rates at 95% in the third quarter of 2001 compared to
near full capacity in the third quarter of 2000. Kronos'
- 28 -
production volume in the first nine months of 2001 was 4% lower than the first
nine months of 2000 with operating rates at 94% in the first nine months of 2001
compared to near full capacity in the first nine months of 2000. The lower
production volume was primarily related to lost sulfate-process production at
the Company's Leverkusen facility due to the previously reported fire in March
2001. See Note 12 to the Consolidated Financial Statements. The Leverkusen
sulfate-process plant became approximately 50% operational in September 2001 and
became fully operational in late October 2001. Kronos anticipates its production
volume for full-year 2001 will be lower than that of 2000.
During the third quarter of 2001, the Company's insurance carriers
approved payment of $8 million ($6.8 million received as of September 30, 2001)
as a partial payment 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 expenses 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.
In October 2001, the Company reached an agreement in principle with its
insurance carriers to settle the coverage claim involving the Leverkusen fire.
The Company expects to receive an additional $38 million in insurance
recoveries, of which approximately $13 million relates to property damage costs,
and approximately $25 million relates to business interruption losses and extra
expenses resulting from the fire. The Company expects to report a gain, net of
certain expenses, related to this insurance settlement in the fourth quarter of
2001.
Kronos expects its full-year 2001 operating income will be significantly
lower than 2000 primarily because of lower average selling prices in billing
currencies, lower sales and production volumes and higher energy costs.
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 2001
primarily due to lower production volume. Excluding the effects of foreign
currency translation, which decreased the Company's expenses in the third
quarter and first nine months of 2001 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 2001 were slightly lower
compared to the year-earlier 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 U.S.
dollar compared to the euro in the third quarter and first nine months of 2001
versus the year-earlier periods, decreased the dollar value of sales in the
third quarter and first nine months of 2001 by a net $6 million and $24 million,
respectively, when compared to the year-earlier periods. When translated from
billing currencies to U.S. dollars using currency exchange rates prevailing
during the respective periods, Kronos' third-quarter 2001 average selling price
in U.S. dollars was 9% lower than in the third quarter of 2000 and 4% lower than
the second quarter of 2001. Kronos' average selling price in U.S. dollars for
the first nine months of 2001 decreased 4% from the first nine months of 2000.
The effect of the stronger U.S. dollar on Kronos' operating
- 29 -
costs that are not denominated in U.S. dollars reduced operating costs in the
third quarter and first nine months of 2001 compared to the year-earlier
periods. In addition, sales to export markets are typically denominated in U.S.
dollars and a stronger U.S. dollar improves margins on these sales at the
Company's non-U.S. subsidiaries. The favorable margin on export sales tends to
offset the unfavorable effect of translating local currency profits to U.S.
dollars when the dollar is stronger. As a result, the net impact of currency
exchange rate fluctuations on operating income in the third quarter and first
nine months of 2001 was not significant 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
------------------- ---------- ------------------- ----------
2001 2000 2001 2000
------- ------- ------- -------
(In millions)
Securities earnings ...... $ 2.1 $ 2.5 $ (.4) $ 6.0 $ 11.6 $ (5.6)
Corporate income ......... 1.1 1.0 .1 14.1 46.2 (32.1)
Corporate expense ........ (6.2) (6.8) .6 (18.0) (23.0) 5.0
Interest expense ......... (6.9) (7.7) .8 (20.8) (23.5) 2.7
------- ------- ------- ------- ------- -------
$ (9.9) $ (11.0) $ 1.1 $ (18.7) $ 11.3 $ (30.0)
======= ======= ======= ======= ======= =======
Securities earnings in the first nine months of 2001 declined from the
comparable period in 2000 primarily due to a $5.6 million second-quarter 2000
securities gain related to common stock received from the demutualization of an
insurance company from which the Company had purchased certain insurance
policies.
Corporate income in the first quarter of 2001 and the second quarter of
2000 includes litigation settlement gains with former insurance carrier groups
of $10.6 million and $43 million, respectively. See Note 11 to the Consolidated
Financial Statements. No further material settlements relating to litigation
concerning environmental remediation coverage are expected.
Corporate expense in the first nine months of 2001 was lower than the
year-earlier period, primarily due to lower environmental remediation accruals
and lower legal fees.
Interest expense in the third quarter and first nine months of 2001
decreased 10% and 11%, respectively, from the comparable periods in 2000
primarily due to lower average interest rates as a result of the December 2000
refinancing of $50 million of the Company's fixed-rate public debt with lower
variable-rate bank debt, and lower levels of outstanding debt. In the second and
third quarters of 2001, the Company repaid $6.5 million and $14.9 million,
respectively, of its euro-denominated short-term debt with excess cash flow from
operations. The Company expects its full-year 2001 interest expense will be
lower than full-year 2000.
- 30 -
Provision for income taxes
The Company reduced its deferred income tax valuation allowance by $1.3
million in the first nine months of 2001 and $2.1 million in the first nine
months of 2000 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 15 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, 2001 and 2000 are
presented below.
Nine months ended
September 30,
------------------
2001 2000
-------- --------
(In millions)
Net cash provided (used) by:
Operating activities:
Before changes in assets and liabilities .................... $ 97.2 $ 123.2
Changes in assets and liabilities ........................... (4.8) (4.0)
-------- --------
92.4 119.2
Investing activities ............................................ (56.1) (45.6)
Financing activities ............................................ (59.8) (79.4)
-------- --------
Net cash used by operating, investing, and financing activities $ (23.5) $ (5.8)
======== ========
Operating activities
The TiO2 industry is cyclical and changes in economic conditions within
the industry significantly affect the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities, in
the first nine months of 2001 decreased from the comparable period in 2000
primarily due to lower operating income. The net cash used to fund changes in
the Company's inventories, receivables and payables (excluding the effect of
currency translation) in the first nine months of 2001 was comparable to the
first nine months of 2000 with higher inventory balances and decreases in
accounts payable and accrued liabilities offset by decreases in accounts and
notes receivable balances in the first nine months of 2001.
- 31 -
Investing activities
In February 2001, EMS loaned $13.4 million to Tremont under a reducing
revolving loan agreement. See Note 1 to the Consolidated Financial Statements.
The loan was approved by special committees of the Company's and EMS's Boards of
Directors. The loan bears interest at prime plus 2% (8.75% at September 30,
2001), is due March 31, 2003 and is collateralized by 10.2 million shares of NL
common stock owned by Tremont. The maximum amount available for borrowing by
Tremont reduces by $250,000 per quarter. In each of the second and third
quarters of 2001, Tremont repaid $250,000 of the loan. At September 30, 2001,
the outstanding loan balance was $12.9 million and no amounts were available for
additional borrowings by Tremont.
In May 2001, a wholly owned subsidiary of EMS loaned $20 million to the
Harold C. Simmons Family Trust #2 (the "Trust"), one of the trusts described in
Note 1 to the Consolidated Financial Statements, under a $25 million revolving
credit agreement. The loan was approved by special committees of the Company's
and EMS's Boards of Directors. The loan bears interest at prime (6.75% at
September 30, 2001), is due on demand with 60 days notice and is collateralized
by 13,749 shares, or approximately 35%, of Contran's outstanding Class A voting
common stock and 5,000 shares, or 100%, of Contran's Series E Cumulative
preferred stock, both of which are owned by the Trust. At September 30, 2001, $5
million was available for additional borrowing by the Trust.
In the second and third quarters of 2001, the Company's capital
expenditures include an aggregate of $11.7 million for the rebuilding of its
Leverkusen sulfate plant.
In the second and third quarters of 2001, the Company received $5.5
million and $5 million, respectively, of insurance proceeds for property damage
resulting from the Leverkusen fire and paid $1 million and $1.1 million,
respectively, of expenses related to repairs and clean-up costs.
Financing activities
In the second and third quarters of 2001, the Company repaid euro 7.6
million ($6.5 million when paid) and euro 16.4 million ($14.9 million when
paid), respectively, of its euro-denominated short-term debt with excess cash
flow from operations.
In the third quarter of 2001, the Company paid a regular quarterly
dividend to shareholders of $.20 per share, aggregating $9.9 million. Dividends
paid during the first nine months of 2001 totaled $.60 per share or $29.9
million. On October 24, 2001, the Company's Board of Directors declared a
regular quarterly dividend of $.20 per share to shareholders of record as of
December 10, 2001 to be paid on December 24, 2001.
Pursuant to its share repurchase program, the Company purchased 465,000
shares of its common stock at an aggregate cost of $7.1 million in the third
quarter of 2001 and 677,000 shares at an aggregate cost of $9.9 million in the
first nine months of 2001. In October 2001, the Company's Board of Directors
authorized the purchase of up to an additional 1.5 million shares. An additional
13,000 shares at an aggregate cost of $.2 million were purchased in October
2001, with 1,576,000 shares remaining for purchase under the repurchase program.
- 32 -
Cash, cash equivalents, restricted cash equivalents and borrowing availability
At September 30, 2001, the Company had cash and cash equivalents
aggregating $97 million ($59 million held by non-U.S. subsidiaries) and an
additional $93 million of restricted cash equivalents held by U.S. subsidiaries,
of which $13 million was classified as a noncurrent asset. The Company's
subsidiaries had $25 million available for borrowing at September 30, 2001 under
existing non-U.S. credit facilities.
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 interest.
The Company received tax assessments from the Norwegian tax authorities
proposing tax deficiencies, including related interest, of NOK 39.3 million
pertaining to 1994 and 1996. The Company was unsuccessful in appealing the tax
assessments and in June 2001 paid NOK 39.3 million ($4.3 million when paid) to
the Norwegian tax authorities. The Company was adequately reserved for this
contingency. The lien on the Company's Fredrikstad, Norway TiO2 plant in favor
of the Norwegian tax authorities has been released.
The Company has received preliminary tax assessments for the years 1991
to 1998 from the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately euro 13.6 million ($12.5 million at September
30, 2001). The Company has filed protests to the assessments for the years 1991
to 1997 and expects to file a protest for 1998. 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.
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 ($106 million at September 30, 2001) 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 $170 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
- 33 -
under environmental laws or regulations, new developments or changes with
respect to site cleanup costs or allocation of such costs among PRPs, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated by the Company to be required for such matters.
Furthermore, there can be no assurance that additional environmental matters
will not arise in the future.
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 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. There can be no
assurance that additional matters of these types will not arise in the future.
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;
issue additional securities; repurchase shares of its common stock; modify its
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets; or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business, the
Company may review opportunities for the acquisition, divestiture, joint venture
or other business combinations in the chemicals or other industries, as well as
the acquisition of interests in, 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
- 34 -
of words such as "believes," "intends," "may," "will," "should," "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), recoveries from
insurance claims and the timing thereof, the ultimate resolution of pending or
possible future lead pigment litigation and legislative developments related to
the lead paint litigation, the outcome of other litigation, and other risks and
uncertainties included in this Quarterly Report and in the 2000 Annual Report,
and the uncertainties set forth from time to time in the Company's other public
reports and filings. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update publicly
or revise such statements whether as a result of new information, future events
or otherwise.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the 2000 Annual Report and the Company's
Quarterly Report on Form 10-Q for the quarters ended March 31, 2001 and June 30,
2001 for descriptions of certain previously reported legal proceedings.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In
November 2001, the Fourth Department intermediate appellate court unanimously
affirmed the dismissal of plaintiff's complaint by the trial court.
County of Santa Clara v. Atlantic Richfield Company, et al. (No.
CV788657). In September 2001, the trial judge dismissed without leave to amend
plaintiffs' nuisance claim and their product liabilities claims for properties
not owned by plaintiffs.
Sabater, et al. v. Lead Industries Association, et al. (No.
25533/98). In September 2001, the Federal Court dismissed the Federal Home Loan
Mortgage Corporation and remanded the case to state court.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (No.
01CV003066). In October 2001, the trial court denied the Company's motion to
dismiss plaintiff's conspiracy claim for lack of particularity.
Jefferson County School District v. Lead Industries Association, et
al. (No. 2001-69). In July 2001, plaintiff filed a motion to remand the case to
state court.
- 35 -
It is possible that other governmental entities or other plaintiffs
may file claims related to lead pigment and paint similar to those described
above and in the 2000 Annual Report.
Since the filing of the 2000 Annual Report, the Company has been
named as a defendant in asbestos cases in various jurisdictions on behalf of
approximately 2,000 additional personal injury claimants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Revolving Loan Note dated May 4, 2001 with Harold C.
Simmons Family Trust No. 2 and EMS Financial, Inc.
10.2 Security Agreement dated May 4, 2001 by and between Harold
C. Simmons Family Trust No. 2 and EMS Financial, Inc.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended
September 30, 2001 and through the date of this report.
- 36 -
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 9, 2001 By /s/ Susan E. Alderton
- ----------------------- --------------------------------
Susan E. Alderton
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 9, 2001 By /s/ Robert D. Hardy
- ----------------------- --------------------------------
Robert D. Hardy
Vice President and Controller
(Principal Accounting Officer)
- 37 -
EXHIBIT 10.1
REVOLVING LOAN NOTE
$25,000,000 May 4, 2001
FOR VALUE RECEIVED, the undersigned, The Harold C. Simmons Family Trust
No. 2 ("Maker"), promises to pay, on demand, subject to sixty days notice unless
there shall have occurred an "Event of Default" as defined below and as a result
this Note shall have at once become due and payable (the "Maturity Date"), to
the order of EMS Financial, 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 TWENTY-FIVE MILLION DOLLARS ($25,000,000), 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") equal to prime, 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"). The Applicable Rate shall be
determined based upon the published prime rate. Accrued interest on this Note
shall be computed daily on the basis of a 365-day/366 day year, as applicable,
applied to the unpaid principal balance at the close of business each day and
the aggregate of such daily amounts of accrued interest shall be payable
quarterly on the first business day following the end of each calendar quarter.
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 $25,000,000 (the "Maximum Revolving Loan Amount") 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 borrowing 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. Each Revolving Loan
shall bear interest on the outstanding principal balance thereof from the date
such Revolving Loan is made at the Applicable Rate. Proceeds of each Revolving
Loan shall be used for the general purposes of the Maker including to refinance
existing obligations of the Maker.
Payee shall, and is hereby authorized by Maker to, endorse on the
schedule attached hereto an appropriate notation evidencing the date and amount
of each Revolving Loan from Payee and the date and amount of each payment and
prepayment with respect thereto; provided that the failure of the Payee to make
such a notation on this Note or any error in such notation shall not affect the
obligations of Maker under this Note.
Page 1 of 7
Maker shall pay Payee on the last day of each quarter end, 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 Revolving
Loan Amount for each quarter. Such Fee shall be computed on the basis of the
actual number of days elapsed during the calendar quarter on the basis of a 365
or 366 day year, as applicable. Such Fee shall commence on the date of this Note
and cease to accrue on the earlier of the Maturity Date or any 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 permanently reduce or
terminate the Maximum Revolving Loan Amount, provided, however, that each
partial reduction thereof shall be in an integral multiple of $200,000. Any
reduction of the Maximum Revolving Loan Amount shall be accompanied by payment
in full of any principal over the reduced Maximum Revolving Loan Amount plus
accrued interest thereon and accrued Fee computed as provided in the previous
paragraph.
Payee shall have the right at any time, in its sole discretion and upon
not less than 60 days written notice to Maker (unless there shall have occurred
and be continuing an Event of Default), to permanently reduce or terminate the
Maximum Revolving Loan Amount, provided, however, that each partial reduction
thereof shall be in an integral multiple of $200,000. Any reduction of the
Maximum Revolving Loan Amount shall require Maker to remit payment in full of
any principal over the reduced Maximum Revolving Loan Amount plus accrued
interest and accrued Fee computed as provided in the paragraph above upon the
expiration of such 60 day notice period.
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. Any such prepayment may be subsequently reborrowed.
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 the following documents (the "Security
Documents"), to wit:
Page 2 of 7
A Security Agreement dated as of May 4, 2001 executed by the
Maker and Payee covering certain securities owned by Maker.
The term default shall include any or all of the following:
(a) The assignment or voluntary or involuntary conveyance by
Maker of legal or beneficial interest, or Maker's mortgage, pledge or
grant of a security interest in any of the Collateral (as defined in the
Security Agreement); 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 liens not securing indebtedness for
borrowed money 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 United States Bankruptcy Code;
(e) The failure by Maker 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 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
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 relating to a default described in clause (d)
above shall occur, the entire principal balance and accrued interest owing
thereon shall automatically become due and payable, without presentment, demand,
protest or notice of any kind, all of which are expressly waived by Maker, and
the commitment to make Revolving Loans shall automatically be terminated. If any
other Event of Default has occurred and is continuing, the entire principal
Page 3 of 7
balance and accrued interest owing hereof shall at once become due and payable
and the 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 applicable law. Failure to exercise this
option shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default. In the event 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 the Applicable Rate plus four percent.
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 75 days
after the end of each of the first three quarters of each fiscal
year of the Maker, the unaudited balance sheet of the Maker as of
the end of such quarter and the unaudited statements of income
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
statements (subject to year-end adjustments) by the Trustee of
the Maker as being complete and accurate in all material
respects;
(b) as soon as available and in any event not later than 75 days
after the end of each of the first three quarters of each fiscal
year of Contran Corporation, the unaudited consolidated balance
sheet of Contran Corporation as of the end of such quarter and
the unaudited consolidated statements of income and cash flows of
Contran Corporation 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
unaudited consolidated statements (subject to year-end
adjustments) by an officer of Contran Corporation as being
complete and accurate in all material respects;
(c) as soon as available and in any event not later than 120 days
after the end of each fiscal year of the Maker, a copy of the
unaudited balance sheet of the Maker as of the end of such fiscal
year and unaudited statement of income and of cash flows of the
Maker for such fiscal year, all in reasonable detail and duly
certified with respect to such statements by the Trustee of Maker
as being complete and accurate in all material respects;
(d) as soon as available and in any event not later than 120 days
after the end of each fiscal year of Contran Corporation, a copy
of the annual audit report for such year, including therein
consolidated balance sheets of Contran Corporation as of the end
of such fiscal year and consolidated statements of income and
retained earnings and of cash flows of the Contran Corporation
for such fiscal year, in each case with unqualified certification
by PricewaterhouseCoopers LLP or other independent certified
public accountants of national recognized standing reasonably
acceptable to Payee.
Page 4 of 7
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 7
IN WITNESS WHEREOF, the undersigned Maker has executed this Note as of
the day of May 4, 2001.
The Harold C. Simmons Family Trust No. 2
By: /s/H. Simmons
----------------------------------
H. Simmons
Its: Trustee
Acknowledged and agreed to by the undersigned solely with respect to its
obligations in the second and third paragraph of this Note:
EMS Financial, Inc.
By: /s/Robert D. Hardy
-----------------------------------
Robert D. Hardy
Its: Treasurer
Page 6 of 7
SCHEDULE OF REVOLVING LOANS
Type of Transaction
(Loan or Payment) Date Amount
- ------------------- ---------------- -------------------
Page 7 of 7
EXHIBIT 10.2
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement"), dated this 4th day of May,
2001, by and between The Harold C. Simmons Family Trust No. 2 (hereinafter
called "Pledgor"), whose principal office is at 5430 LBJ Freeway, Suite 1700,
Dallas TX 75240 and EMS Financial, 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, Pledgor hereby grants
to Secured Party, upon the terms and conditions of this Agreement, to secure the
"Obligation", as described in Section 2 below, a security interest in and to any
and all present or future rights of Pledgor in and to all of the following
rights, interests and property (all of the following being herein sometimes
called the "Pledged Shares"):
15,768 shares of Pledgor's Class A Common Stock of Contran
Corporation, par value of $.01 per share.
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 Loan Note, dated as of May 4, 2001 ("Revolving Note"), pursuant to
which Secured Party has loaned monies to, and may in the future loan monies to
Pledgor. The security interests herein granted ("Security Interests") shall
secure full payment and performance of: (a) that certain Revolving Loan Note of
even date herewith in the principal amount of $25,000,000, made by Pledgor 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"); and (b)
the due and punctual observance and performance of each and every agreement,
covenant and condition on Pledgor'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. Pledgor represents and warrants that the Security
Interests are first and prior security interests in and to all of the
Collateral, subject to no other liens thereon or security interests therein.
Section 4. Title to Collateral. Pledgor represents and warrants to
Secured Party that: (a) Pledgor is the sole, direct, legal and beneficial 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) Pledgor will defend the Collateral against the claims and demands of all
persons other than any subordinate claims or liens permitted by Secured Party in
its sole discretion.
Section 5. Pledgor's Obligations. So long as the Note is outstanding,
Pledgor covenants and agrees with Secured Party: (a) not to permit any 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 date hereof 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 Pledgor may contest any such tax claim if done diligently
and in good faith.
Pledgor agrees to execute and deliver to Secured Party (i) stock powers
appropriately endorsed in blank, with respect to the Collateral, and (ii) such
other documents of transfer as Secured Party may from time to time request to
enable Secured Party to transfer the Collateral into its name or the name of its
nominee.
Pledgor agrees (i) immediately to deliver to Secured Party or its
nominee all certificates evidencing any of the Collateral which may at any time
come into the possession of Pledgor, (ii) to execute and deliver to Secured
Party such financing statements as Secured Party may request with respect to the
Collateral, and (iii) to take such other steps as Secured Party may from time to
time reasonably request to perfect Secured Party's security interest in the
Collateral under applicable law. Pledgor agrees that this Agreement or a
photocopy of this Agreement shall be sufficient as a financing statement.
Section 6. Event of Default. As used herein, the term default shall
include any or all of the following:
(a) The assignment or voluntary or involuntary conveyance by
Pledgor of legal or beneficial interest, or Pledgor's mortgage, pledge
or grant of a security interest in any of the Collateral (as defined
herein); 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 liens not securing indebtedness for
borrowed money which are being contested in good faith and for which
adequate reserves have been created); or
(c) Pledgor's nonpayment of any installment of principal or
interest or fees under the Note; or
(d) The adjudication of Pledgor as bankrupt, or the taking of any
voluntary action by Pledgor or any involuntary action against Pledgor
seeking an adjudication of Pledgor as bankrupt, or seeking relief by or
against Pledgor under any provision of the United States Bankruptcy
Code; or
(e) The failure by Pledgor to comply with any other covenant
contained in the Note or this Agreement; or
(f) Pledgor's default in any payment (regardless of amount) of
principal of or interest on any other indebtedness for borrowed money;
or
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(g) Pledgor'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
described in clauses (a), (b), or (e) is not cured within 30 days after written
notice from Secured Party to Pledgor.
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 he
may have under the Note and the other documents defining the Obligation.
Pledgor will pay to Secured Party all expenses (including, without
limitation, court costs and attorneys' fees and expenses) of, or incident to,
(i) the administration of this Agreement, (ii) the custody or preservation of,
or the sale or collection of or other realization upon, any of the Collateral,
(iii) the exercise or enforcement of any of the rights of Secured Party
hereunder, or (iv) the failure by Pledgor to perform or observe any provision
hereof. All such reimbursement obligations shall constitute a part of the
Obligation.
In view of the fact that federal and state securities laws may impose
certain restrictions on the method by which a sale of the Collateral may be
effected, Pledgor agrees that upon the occurrence and during the continuance of
an Event of Default, Secured Party may, from time to time, attempt to sell all
or any part of the Collateral by means of a private placement restricting the
bidders and prospective purchasers to those who are qualified and will represent
and agree that they are purchasing for investment only and not for distribution.
In so doing, Secured Party may solicit offers to buy the Collateral, or any part
of it, from a limited number of investors deemed by Secured Party, in its
reasonable judgment, to be financially responsible parties who might be
interested in purchasing the Collateral. If Secured Party solicits such offers,
then the acceptance by Secured Party of the highest offer obtained therefrom
shall be deemed to be a commercially reasonable method of disposing of such
Collateral.
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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 Pledgor;
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 Pledgor.
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 Pledgor 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 paragraph.
Section 10. Right to Vote Collateral; Receipt of Dividends, Etc.
(a) Unless an Event of Default shall have occurred and be continuing,
the Pledgor 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 the Pledgor, which
request shall be deemed to be a representation and warranty by the Pledgor that
no Event of Default has occurred and is continuing, deliver to the Pledgor or,
as specified in such 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 the Pledgor 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 the Pledgor and
thereafter the Secured Party shall have the right to the extent permitted by
law, and the Pledgor 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,
the Pledgor shall be entitled to receive all regular cash dividends. Any other
extraordinary dividends or distributions or proceeds therefrom on account of the
Collateral shall, if received by the Pledgor, be received in trust for the
benefit of the Secured Party, be segregated from the other property or funds of
the Pledgor, and be forthwith delivered to the Secured Party as collateral in
the same form as so received (with any necessary endorsement).
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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:
EMS Financial, Inc.
16825 Northchase Drive
Suite 1200
Houston TX 77060
Attn: Vice President and Secretary
If to Pledgor:
The Harold C. Simmons Family Trust No. 2
5430 LBJ Freeway
Suite 1700
Dallas TX 75240
Attn: Trust 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.
Section 12. Binding Effect. This Agreement shall be binding upon
Pledgor, its successors and assigns, and shall inure to the benefit of Secured
Party, its heirs, successors, assigns, executors, administrators, and personal
or legal representatives.
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.
Section 15. Lender Appointed Attorney-in-Fact. Upon the occurrence and
during the continuance of an Event of Default, Pledgor hereby appoints Secured
Party as Pledgor's attorney-in-fact, with full authority in the place and stead
of Pledgor and in the name of Pledgor or otherwise, from time to time in its
discretion to take any action and to execute any instrument which Secured Party
may deem necessary or advisable to accomplish the purposes of this Agreement,
including, without limitation, to receive, endorse and collect all instruments
made payable to Pledgor representing any distribution, interest payment or other
dividend or distribution in respect of the Collateral or any part thereof and to
give full discharge for the same. This power of attorney created under this
Section 15, being coupled with an interest, shall be irrevocable for the term of
this Agreement and thereafter as long as any of the Obligation shall be
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outstanding, but shall not be deemed to authorize Secured Party to take an
action which Pledgor could not be required to take hereunder.
Section 16. Lender's Duty. Secured Party shall not be liable for any
acts, omissions, errors of judgment or mistakes of fact or law including,
without limitation, acts, omissions, errors or mistakes with respect to the
Collateral, except with respect to Secured Party's custodial duties and for
those arising out of or in connection with the Secured Party's gross negligence
or willful misconduct. Without limiting the generality of the foregoing, Secured
Party shall be under no obligation to take any steps necessary to preserve
rights in the Collateral against any other parties but may do so at its option,
and all expenses incurred in connection therewith shall be for the sole account
of Pledgor, and shall be added to the Obligation secured hereby.
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EXECUTED as of the day and year first herein set forth.
SECURED PARTY:
EMS Financial, Inc.
By: /s/ Robert D. Hardy
------------------------------
Robert D. Hardy
Title: Treasurer
PLEDGOR:
The Harold C. Simmons Family Trust No. 2
By: /s/ H. Simmons
------------------------------
H. Simmons
Title: Trustee