Filed Pursuant to Rule 424(b)(3)
Registration No. 333-123680
PROSPECTUS
KRONOS INTERNATIONAL, INC.
Offer to Exchange
All Outstanding
8 7/8% Senior Secured Notes due 2009
euro 90,000,000 Aggregate Principal Amount
Issued on November 26, 2004
for
New 8 7/8% Senior Secured Notes due 2009
euro 90,000,000 Aggregate Principal Amount
We are offering to exchange an aggregate principal amount of up to euro
90,000,000 of our new 8 7/8% senior secured notes due 2009 (the "new notes"),
which have been registered under the Securities Act of 1933, for a like amount
of our old 8 7/8% senior secured notes due 2009 issued on November 26, 2004 (the
"old notes").
o The exchange offer expires at 12:00 midnight, New York City time, on
August 15, 2005, unless we extend it.
o We previously issued euro 285,000,000 of our 8 7/8% senior secured notes
due 2009 ("initial notes"). This exchange offer relates solely to the old
notes and does not apply to any of the initial notes.
o The terms of the new notes to be issued are substantially identical to the
terms of the old notes, except for transfer restrictions and registration
rights relating to the old notes.
o No established trading market for the new notes currently exists. We will
apply to list the new notes on the Luxembourg Stock exchange in accordance
with the rules of the Luxembourg Stock Exchange.
o You may withdraw tenders of old notes at any time prior to the expiration
of the exchange offer.
o We will not receive any proceeds from the exchange offer.
See "Risk Factors" beginning on page 9 for a discussion of risk factors
that you should consider before deciding to exchange your old notes for new
notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 15, 2005.
TABLE OF CONTENTS
Page
Notice to Non-U.S. Investors...............................................ii
Prospectus Summary.........................................................1
Risk Factors...............................................................9
The Exchange Offer.........................................................17
Use of Proceeds............................................................27
Capitalization.............................................................27
Selected Financial and Other Data..........................................28
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................29
Business...................................................................47
Management.................................................................53
Certain Relationships and Related Transactions.............................57
Description of the New Notes...............................................59
Registration Rights........................................................77
Book-Entry; Delivery and Form..............................................79
Material Tax Considerations................................................81
Plan of Distribution.......................................................89
Where You Can Find More Information........................................90
General Listing Information................................................90
Legal Matters..............................................................91
Experts....................................................................91
Index of Financial Statements..............................................F-1
This prospectus incorporates important business and financial information
about us that is not included in or delivered with this prospectus. We will
provide you without charge, on your request, a copy of any document that is
incorporated by reference into this prospectus, other than exhibits to those
documents that are not specifically incorporated by reference into those
documents, by writing Kronos International, Inc., 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240-2697, Attention: Robert D. Graham, Vice President. To ensure
timely delivery, please make your request as soon a practicable and, in any
event, no later than five business days prior to the expiration of the exchange
offer.
You should rely only on the information provided in this prospectus. We
have not authorized anyone to provide you with any different information. The
information in this prospectus is current only as of the date on the cover, and
our business or financial condition and other information in this prospectus may
change after that date.
We accept responsibility for the information contained in this prospectus.
To the best of our knowledge, the information we give in this prospectus is in
accordance with the facts and contains no omissions likely to affect the import
of the Luxembourg Stock Exchange listing particulars.
i
NOTICE TO NON-U.S. INVESTORS
This prospectus does not constitute an offer to sell or an invitation to
subscribe for or purchase any of the new notes in any jurisdiction in which such
offer or invitation is not authorized or to any person to whom it is unlawful to
make such an offer or invitation. The distribution of this prospectus and this
exchange offer may be restricted by law in certain jurisdictions. Persons into
whose possession this prospectus comes are required to inform themselves about
and to observe any such restrictions. Each prospective purchaser of the new
notes must comply with all applicable laws and regulations in force in any
jurisdiction in which it purchases, offers or sells the new notes or possesses
or distributes this prospectus. In addition, each prospective purchaser must
obtain any consent, approval or permission required under the regulations in
force in any jurisdiction to which it is subject or in which it purchases,
offers or sells the new notes. We shall have no responsibility for obtaining
such consent, approval or permission.
Austria
The new notes may only be offered in the Republic of Austria in compliance
with the provisions of the Austrian Capital Markets Act and other laws
applicable in the Republic of Austria governing the offer and sale of the new
notes in the Republic of Austria. The new notes are not registered or otherwise
authorized for public offer either under the Capital Markets Act or the
Investment Fund Act. The recipients of this prospectus and other selling
material in respect of the new notes have been individually selected and are
targeted exclusively on the basis of a private placement. Accordingly, the new
notes must not be, and are not being, offered or advertised and no offering or
marketing materials relating to the new notes may be made available or
distributed in any way which could constitute a public offer under either the
Capital Markets Act or the Investment Fund Act (whether presently or in the
future). This exchange offer may not be made to any persons other than the
recipients of this prospectus.
Belgium
The exchange offer is exclusively conducted under applicable private
placement exemptions and is limited to (as amended from time to time): ( i)
investors required to invest a minimum of euro 250,000 (per investor and per
transaction); (ii) institutional investors as defined in Article 3.2 of the
Belgian Royal Decree of July 7, 1999 on the public character of financial
transactions, acting for their own account; and (iii) persons for which the
acquisition of the new notes subject to the exchange offer is necessary to
enable them to exercise their professional activity.
Denmark
The new notes have not been offered or sold and may not be offered, sold or
delivered, directly or indirectly, in the Kingdom of Denmark, unless in
compliance with Chapter 12 of the Danish Executive Order 166 of 13 March 2003 in
the First Public Offer of Certain Securities, issued pursuant to the Danish Act
on Trading in Securities.
Finland
The new notes are not publicly offered or brought into general circulation
in the Republic of Finland other than in compliance with the all applicable
provisions of the laws of the Republic of Finland and especially in compliance
with the Finnish Securities Markets Act (1989/495) and any regulation made
thereunder, as supplemented and amended from time to time.
France
In France, the new notes may not be directly or indirectly offered or sold
to the public, and offers and sales of the new notes will only be made in France
to qualified investors for their own account, in accordance with Articles L411-1
and L411-2 of the Code Monetaire et Financier and Decree no. 98-880, dated
October 1, 1998. Accordingly, this prospectus has not been submitted to the
Commission des Operations de Bourse. Neither this prospectus nor any other
offering material may be distributed to the public or used in connection with
any offer for subscription or sale of the new notes to the public in France or
offered to any investors other than those (if any) to whom offers and sales of
ii
the new notes in France may be made as described above and no prospectus
(document d'information) shall be prepared and submitted for approval (visa) to
the Commission des Operations de Bourse.
Les titres ne peuvent etre offerts ni vendus directement ou indirectement
au public en France et l'offre ou la vente de ces titres ne pourra etre proposee
qu' des investisseurs qualifies, pour leur proper compte conformement aux
Articles L411-1 et L411-2 du Code Montetaire et Financier et au decret no.
98-880 du 1 octobre 1998. Par consequent, ce prospectus n'a pas ete soumis au
visa de la Commission des Operations de Bourse et aucun document d'information
ne sera prepare ou soumis puor visa la Commission des Operations de Bourse. Ni
ce prospectus ni aucun autre document promotionnel ne pourront etre communiques
en France au public ou utilise dans le cadre do l'offre de souscription ou la
vente ou l'offre de titres au public ou toute personne autre que les
investisseurs (le cas echeant) decrits cidessus auxquels les titres peuvent etre
offerts et vendus en France.
Germany
The new notes have not been and will not be publicly offered in Germany
and, accordingly, no securities sales prospectus (Verkaufsprospekt) for a public
offering of the new notes in Germany in accordance with the Securities Sales
Prospectus Act of 13 December 1990, as amended
(Wertpapier-Verkaufsprospektgesetz), has been or will be published or circulated
in the Federal Republic of Germany. New notes have only been offered and sold
and will only be offered and sold in the Federal Republic of Germany in
accordance with the provisions of the Securities Sales Prospectus Act and any
other laws applicable in the Federal Republic of Germany governing the issue,
sale and offering of securities. Any resale of the new notes in the Federal
Republic of Germany may only be made in accordance with the provisions of the
Securities Sales Prospectus Act and any other laws applicable in the Federal
Republic of Germany governing the sale and offering of securities.
Greece
This prospectus and the new notes to which it relates and any other
material related thereto may not be advertised, distributed or otherwise made
available to the public in Greece. The Greek Capital Market Committee has not
authorized any public offering of the subscription of new notes. Accordingly,
new notes may not be advertised, distributed or in any way offered or sold in
Greece or to residents thereof except as permitted by Greek law.
Ireland
The new notes will not and may not be offered, sold, transferred or
delivered, whether directly or indirectly, otherwise and in circumstances which
do not constitute an offer to the public within the meaning of the Irish
Companies Acts 1963 - 2001 and the new notes will not and may not be the subject
of an offer in the Republic of Ireland to which the European Community
(Transferable Securities and Stock Exchange) Regulations, 1992 of Ireland will
apply. No application form has been issued or will be issued in the Republic of
Ireland in respect of the new notes.
Italy
In Italy, this prospectus has not been submitted to the clearance procedure
of the Commissione Nazaionale per le Societ e la Borsa ("CONSOB") and the
offering of the new notes has not been notified to the Bank of Italy pursuant to
Article 129 of the Banking Act; therefore, the new notes may not be offered,
exchanged or delivered, nor may copies of this prospectus or of any other
document relating to the new notes or the exchange offer be distributed in
Italy.
Luxembourg
The new notes may not be directly or indirectly offered or sold to the
public in the Grand-Duchy of Luxembourg and neither this prospectus nor any form
of application, advertisement or other material in connection therewith may be
distributed, published or made otherwise available in the Grand-Duchy of
Luxembourg, unless the requirements of Luxembourg law concerning public
offerings of securities have first been met. A listing on the Luxembourg Stock
Exchange of the new notes does not necessarily imply that a public offering
thereof has been authorized.
iii
Netherlands
The new notes are not and will not be offered in the Netherlands other than
to persons who trade or invest in securities in the conduct of their profession
or trade (which includes banks, securities intermediaries (including dealers and
brokers), insurance companies, pension funds, other institutional investors and
commercial enterprises which as an ancillary activity regularly invest in
securities).
Portugal
The new notes have not been offered, advertised, sold or delivered and will
not be directly or indirectly offered, advertised, sold, re-sold, re-offered or
delivered in circumstances which could qualify as a public offer pursuant to the
Codigo dos Valores Mobiliarios or in circumstances which could qualify the issue
of the new notes as an issue in the Portuguese market to Portuguese residents,
and the new notes have not been directly or indirectly distributed and the
agreement, any other document, circular, advertisement or any offering material
will not be directly or indirectly distributed except in accordance with all
applicable laws and regulations. In particular, the new notes will not be
offered to more than 200 Portuguese (non-institutional) investors; the notes
will not be offered to unidentified addressees, nor will the offer of the new
notes be preceded or performed by prospecting or solicitation of investment
intentions of unidentified addressees, or with promotional material.
Sweden
A prospectus has not and will not be registered with the Swedish Financial
Supervisory Authority. Accordingly, this prospectus may not be made available,
nor may the new notes otherwise be marketed and offered for sale, to the public
in Sweden under the Financial Instruments Trading Act (1991:980).
Switzerland
This prospectus has been prepared for private information purposes of
investors only. It may not be used for and shall not be deemed a public offering
of the new notes. No application has been made under Swiss law to publicly
market the new notes in or out of Switzerland. Therefore, no public offer of the
new notes or public distribution of this prospectus may be made in or out of
Switzerland. This prospectus is strictly for private use by its holder and may
not be passed on to third parties.
United Kingdom
The new notes will only be available for subscription pursuant to this
exchange offer to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances that do not, and will
not, constitute an offer to the public in the United Kingdom within the meaning
of the Public Offers of Securities Regulations 1995, as amended. This prospectus
is being distributed on the basis that each person in the United Kingdom to whom
this prospectus is delivered is a person of the kind described in Article 19(5)
of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001
(the "FPO") or a high net worth company or unincorporated association or high
value trust or other person of a kind described in Article 49(2) of the FPO and,
accordingly, by accepting delivery of this prospectus the recipient warrants and
acknowledges that it is such a person.
iv
PROSPECTUS SUMMARY
In this prospectus, "KII," "we," "us" and "our" refer to Kronos
International, Inc. and its consolidated subsidiaries except where we expressly
state that we are only referring to Kronos International, Inc. As used in this
prospectus, "new notes" means our new 8 7/8% senior secured notes due 2009 that
are being offered in this exchange offer and "old notes" means our outstanding 8
7/8% senior secured notes due 2009 issued on November 26, 2004. In June 2002, we
issued euro 285,000,000 aggregate principal amount of our 8 7/8% senior secured
notes due 2009, which were subject to an earlier exchange offer for notes
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and which we collectively refer to in this prospectus as the "initial notes." In
this prospectus, "notes" means the new notes, the old notes and the initial
notes, collectively. The following summary contains basic information about us,
the new notes and this exchange offer. This prospectus and the exchange offer do
not apply to any of the initial notes. It likely does not contain all the
information that is important to you. For a more complete understanding of us,
the exchange offer and the new notes, we encourage you to read this prospectus
in its entirety and the other documents we have referred you to.
The Company
We are a wholly-owned subsidiary of Kronos Worldwide, Inc. ("Kronos"). We
conduct Kronos' European value-added titanium dioxide pigments ("TiO2")
operations.
Titanium dioxide pigments are inorganic chemical products used for
imparting whiteness, brightness and opacity to a diverse range of customer
applications and end-use markets, including coatings, plastics, paper and other
industrial and consumer "quality-of-life" products. TiO2 is considered a
"quality-of-life" product with demand affected by gross domestic product in
various regions of the world. TiO2, the largest commercially used whitening
pigment by volume, derives its value from its whitening properties and
opacifying ability (commonly referred to as hiding power). As a result of TiO2's
high refractive index rating, it can provide more hiding power than any other
commercially produced white pigment. In addition, TiO2 demonstrates excellent
resistance to chemical attack, good thermal stability and resistance to
ultraviolet degradation. TiO2 is supplied to customers in either a powder or
slurry form.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant regions for TiO2
consumption could emerge in Eastern Europe, the Far East or China as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, experience greater demand.
We currently produce over 40 different TiO2 grades, sold under the Kronos
trademark, which provide a variety of performance properties to meet customers'
specific requirements. Our major customers include domestic and international
paint, plastics and paper manufacturers.
We and our distributors and agents sell and provide technical services for
our products to over 4,000 customers in over 100 countries with the majority of
sales in Europe. TiO2 is distributed by rail, truck and ocean carrier in either
dry or slurry form. Kronos, KII and our predecessors have produced and marketed
TiO2 in North America and Europe for over 80 years, and Kronos is the only
leading TiO2 producer committed to producing TiO2 and related products as its
sole business. We believe that we have developed considerable expertise and
efficiency in the manufacture, sale, shipment and service of our products.
Our total net sales in 2004 were approximately $808 million. Sales of TiO2
represented about 90% of our total sales in 2004. Sales of other products,
complementary to our TiO2 business, comprise the following:
o We operate an ilmenite mine in Norway pursuant to a governmental
concession with an unlimited term. Ilmenite is a raw material used
directly as a feedstock by some sulfate-process TiO2 plants, including
all of our European sulfate-process plants. The mine has estimated
reserves that are expected to last at least 20 years. Ilmenite sales
to third parties represented approximately 6% of our consolidated net
sales in 2004.
o We manufacture and sell iron-based chemicals, which are by-products
and processed by-products of the TiO2 pigment production process.
These co-product chemicals are marketed through our Ecochem division,
and are used primarily as treatment and conditioning agents for
industrial effluents and municipal wastewater as well as in the
1
manufacture of ore pigments, cement and agricultural products. Sales
of iron-based chemical products were about 5% of sales in 2004.
o We manufacture and sell certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from
the production of TiO2. Titanium oxychloride is used in specialty
applications in the formulation of pearlescent pigments, production of
electroceramic capacitors for cell phones and other electronic
devices. Titanyl sulfate products are used primarily in pearlescent
pigments. Sales of these products were about 1% of sales in 2004.
Holding Company Structure
Our assets consist primarily of investments in our operating subsidiaries.
A majority of our cash flows are generated by our operating subsidiaries, and
our ability to service indebtedness, including our ability to pay the interest
on and principal of the notes, depends upon cash dividends and distributions or
other transfers we receive from our subsidiaries. None of our operating
subsidiaries have guaranteed the repayment of the notes. See "Risk Factors - The
notes (including the initial notes) are secured only by the pledge of 65% of the
stock or other equity interests of certain of our first-tier subsidiaries, and
assets of our subsidiaries will first be applied to repay indebtedness and
liabilities of our subsidiaries and may not be sufficient to repay the new
notes" and "Risk Factors - If our subsidiaries do not make sufficient
distributions to us, then we will not be able to make payments on our debt,
including the new notes."
2
The following chart illustrates our corporate structure as of March 31,
2005. Ownership is 100% unless otherwise indicated.
[Chart goes here, which shows Kronos Worldwide's 100% ownership of each of
Kronos Canada, Inc., Kronos Louisiana, Inc. and Kronos International, Inc. The
chart also shows each of the subsidiaries of Kronos International, Inc. which
are listed on Exhibit 21.1 to this Registration Statement. The chart also
discloses (i) the remaining 50% of Louisiana Pigment Company is owned by
Huntsman LLC, (ii) Kronos International, Inc. holds 99.27% of the outstanding
shares of Societe Industrielle Du Titane, S.A. and the public owns the remaining
shares, (iii) Kronos World Services, S.A./N.V. is in liquidation and Kronos
Canada Inc. owns 0.001% of Kronos World Services, S.A./N.V., (iv) Kronos Titan
GmbH owns two shares out of 543,145 shares of Kronos Europe S.A./N.V. as nominee
shareholder for Kronos Denmark ApS and (v) 65% of the stock or other equity
interests of Kronos Limited, Societe Industrielle Du Titane, S.A., Kronos Titan
GmbH and Kronos Denmark ApS have been pledged to secure the new notes.]
3
The Exchange Offer
In the exchange offer, we are offering to exchange your old notes for new
notes, which are identical in all material respects to the old notes, except
that:
o the new notes will be registered under the Securities Act of 1933, as
amended (the "Securities Act");
o the new notes will not contain transfer restrictions and registration
rights that relate to the old notes; and
o the new notes will not contain provisions relating to the payment of
additional interest to be made to the holders of the old notes under
circumstances related to the timing of the exchange offer.
The summary below describes the principal terms of the exchange offer. The
"Exchange Offer" section of this prospectus contains a more detailed description
of the exchange offer.
Old Notes.................................................... On November 26, 2004, we completed a private
offering of euro 90,000,000 aggregate principal
amount of 8 7/8% senior secured notes due 2009,
which we refer to in this prospectus as the old
notes.
Registration Rights Agreement................................ Simultaneously with the sale of the old notes,
we entered into a registration rights agreement,
which provides for the exchange offer. The
exchange offer satisfies your rights under the
registration rights agreement. After the
exchange offer is over, you will not be entitled
to any exchange or registration rights with
respect to your old notes, except under limited
circumstances.
The Exchange Offer........................................... We are offering to exchange the old notes for up
to euro 90,000,000 aggregate principal amount of 8 7/8%
senior secured notes due 2009 that have been
registered under the Securities Act, which we
refer to in this prospectus as the new notes.
You may exchange old notes only in integral
multiples of euro 1,000 principal amount.
Expiration of the Exchange Offer............................. The exchange offer will expire at 12:00,
midnight, New York City time, on
August 15, 2005, or a later date and
time to which we may extend it.
Withdrawal................................................... You may withdraw your tender of old notes
pursuant to the exchange offer at any time
before the expiration of the exchange offer. We
will return any old notes not accepted for
exchange for any reason without expense to you
promptly after the expiration or termination of
the exchange offer.
Conditions to the Exchange Offer............................. The exchange offer is subject to customary
conditions, which we may waive. Please read
"The Exchange Offer-Conditions to the Exchange
Offer" for more information regarding the
conditions to the exchange offer.
4
Acceptance of Old Notes and Delivery of New Notes............ We will accept and exchange any and all old
notes that are validly tendered in the exchange
offer and not withdrawn before the exchange
offer expires. The new notes will be delivered
promptly following the exchange offer.
Resale of New Notes.......................................... We believe that the new notes issued pursuant to
the exchange offer in exchange for old notes may
be offered for resale, resold and otherwise
transferred by you without compliance with the
registration and prospectus delivery provisions
of the Securities Act if:
o you are not our "affiliate" within the
meaning of Rule 405 under the
Securities Act;
o you are acquiring the new notes in the
ordinary course of your business; and
o you have not engaged in, do not intend
to engage in, and have no arrangement
or understanding with any person to
participate in, a distribution of the
new notes.
If you are an affiliate of ours, or are engaging
in or intend to engage in, or have any
arrangement or understanding with any person to
participate in, a distribution of the new notes,
then:
o you will not be permitted to tender old
notes in the exchange offer; and
o you must comply with the registration
and prospectus delivery requirements of
the Securities Act in connection with
any resale of the old notes.
Each participating broker-dealer that receives
new notes for its own account under the exchange
offer in exchange for old notes that were
acquired by the broker-dealer as a result of
market-making or other trading activity must
acknowledge that it will deliver a prospectus in
connection with any resale of the new notes.
See "Plan of Distribution."
Consequences of Failing to Exchange........................... If you are a holder of old notes and you do not
tender your old notes in the exchange offer,
then you will continue to hold your old notes
and will be entitled to all the rights and will
be subject to all the limitations applicable to
the old notes in the indenture. All untendered
old notes will remain subject to the
restrictions on transfer provided for in the old
notes and in the indenture. Generally,
untendered old notes will remain restricted
securities and may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws. Other
5
than in connection with the exchange offer, we
do not currently anticipate that we will
register the old notes under the Securities
Act. The trading market for old notes could be
adversely affected if some but not all of the
old notes are tendered and accepted in the
exchange offer.
Tax Considerations........................................... The exchange of old notes for new notes in the
exchange offer will not be a taxable event for
U.S. federal income tax purposes. See "Material
Tax Considerations" for a more detailed
description of the tax consequences of the
exchange.
Use of Proceeds.............................................. We will not receive any cash proceeds from the
issuance of new notes pursuant to the exchange
offer.
Exchange Agent............................................... The Bank of New York is the exchange agent for
the exchange offer. The address and telephone
number of the exchange agent are set forth under
"The Exchange Offer-Exchange Agent; Paying Agent
in Luxembourg."
6
The New Notes
The new notes will evidence the same debt as the old notes and the initial
notes and will be governed by the same indenture under which the old notes and
the initial notes were issued. The summary below describes the principal terms
of the new notes. The "Description of the New Notes" section of this prospectus
contains a more detailed description of the terms and conditions of the new
notes.
Issuer..................................... Kronos International, Inc.
Securities Offered......................... euro 90,000,000 principal amount of 8 7/8% senior secured notes due 2009. We
previously issued of euro 285,000,000 aggregate principal amount of 8 7/8%
Senior Secured Notes due 2009, which we refer to in this prospectus as
the "initial notes". The new notes and the old notes constitute part
of a single class of securities together with the initial notes.
Maturity................................... June 30, 2009.
Interest Rate.............................. 8 7/8% per year (calculated using a 360-day year).
Interest Payment Dates..................... June 30 and December 30.
Ranking.................................... The new notes will rank equally in right of payment with the old notes,
the initial notes and with all of our senior debt and senior in right
of payment to all of our subordinated debt. The new notes will be
structurally subordinated to the debt and liabilities of our
subsidiaries. As of March 31, 2005, we had outstanding approximately
$169 million of debt and other liabilities that rank equally in right
of payment with the new notes (which includes $124 million related to
the initial notes), $217 million of debt and other liabilities that
rank senior to the new notes and no debt and other liabilities that
rank junior to the new notes. Such debt and other liabilities that
rank senior to the new notes represent debt and other liabilities of
our subsidiaries, while the debt and other liabilities that rank
equally in right of payment with the new notes represent KII's debt and
other liabilities. Also as of March 31, 2005, our subsidiaries could
borrow approximately $91 million under credit facilities, all of which,
if borrowed would rank senior to the notes. See "Capitalization."
Security................................... The new notes will be secured by pledges in favor of the trustee for
the new notes or a collateral agent on behalf of the holders of 65% of
the stock or other equity interests of certain of our first-tier
subsidiaries as indicated on the organizational chart on page 3. This
is the same collateral that secures the old notes and the initial notes.
Sinking Fund............................... None.
Optional Redemption........................ We cannot redeem the new notes until December 30, 2005. On that date
and thereafter we may redeem some or all of the new notes at the
redemption prices listed in the "Description of the New Notes" section
under the heading "Optional Redemption," plus accrued interest.
7
We do not currently intend to redeem any notes prior to June 30, 2005,
although we reserve the right to so redeem the notes until such date.
Change of Control Offer.................... If we undergo a change of control, we must give holders of the notes
the opportunity to sell us their notes at 101% of their face amount,
plus accrued interest. See "Description of the New Notes - Repurchase
at the Option of Holders upon Change of Control. Should any such
change of control occur, it is possible that we would not have
sufficient funds at the time of a change of control to finance the
required repurchase of notes. See "Risk Factors - We may not have the
ability to raise the funds necessary to finance the change of control
offer required by the indenture."
Asset Sale Proceeds........................ If we or our subsidiaries engage in asset sales, we generally must
either invest the net cash proceeds from such sales in our business
within a period of time, prepay senior debt or make an offer to
purchase a principal amount of the notes equal to the excess net cash
proceeds. The purchase price of the new notes will be 100% of their
principal amount, plus accrued interest. See "Description of the New
Notes - Certain Covenants - Limitation on Asset Sales."
Restrictive Covenants...................... The indenture governing the new notes contains covenants limiting our
(and most or all of our subsidiaries') ability to:
o........incur additional debt or enter into sale and leaseback
transactions;
o........pay dividends or distributions on our capital stock or
repurchase our capital stock;
o........issue stock of subsidiaries;
o........make certain investments;
o........create liens on our assets to secure debt;
o........enter into transactions with affiliates;
o........merge or consolidate with another company; and
o........transfer and sell assets.
These covenants are subject to a number of important limitations and
exceptions.
Market for the New Notes................... The initial notes are listed on the Luxembourg Stock Exchange. We will
apply for the new notes to be listed on the Luxembourg Stock Exchange
upon the completion of the exchange offer. The initial notes are
quoted in the over the counter market in the United States. We cannot
provide any assurance as to the liquidity of any market for the new
notes.
Risk Factors............................... Investing in the new notes involves substantial risks. See "Risk
Factors" for a description of certain of the risks you should consider
before investing in the new notes.
8
RISK FACTORS
Before you decide to exchange your old notes for new notes, you should
carefully consider the following factors in addition to the other information
contained in this prospectus. Each of the risks described in this section with
respect to the new notes is equally applicable to the old notes.
Risks Related to the Exchange Offer
You may have difficulty selling the old notes that you do not exchange.
If you do not exchange your old notes for the new notes offered in this
exchange offer, then you will continue to be subject to transfer restrictions of
your old notes. Those transfer restrictions are described in the indenture
governing the new notes and in the legend contained on the old notes, and arose
because we originally issued the old notes under exemptions from, and in
transactions not subject to, the registration requirements of the Securities
Act.
In general, you may offer or sell your old notes only if they are
registered under the Securities Act and applicable state securities laws, or if
they are offered and sold under an exemption from those requirements. We do not
intend to register the old notes under the Securities Act.
If a large number of old notes are exchanged for new notes issued in the
exchange offer, then it may be more difficult for you to sell your unexchanged
old notes. In addition, if you do not exchange your old notes in the exchange
offer, then you will no longer be entitled to have those notes registered under
the Securities Act.
See "The Exchange Offer-Consequences of Failing to Exchange Old Notes" for
a discussion of the possible consequences of failing to exchange your old notes.
Risks Related to the Notes
Our leverage may impair our financial condition.
We currently have a significant amount of debt. As of March 31, 2005, our
total consolidated debt was approximately $506.3 million, substantially all of
which relates to the notes (including the initial notes).
Our level of debt could have important consequences to you, including:
o making it more difficult for us to satisfy our obligations with respect to
the notes;
o increasing our vulnerability to adverse general economic and industry
conditions;
o requiring that a substantial portion of our cash flow from operations be
used for the payment of interest on our debt, therefore reducing our
ability to use our cash flow to fund working capital, capital expenditures,
acquisitions and general corporate requirements;
o limiting our ability to obtain additional financing to fund future working
capital, capital expenditures, acquisitions and general corporate
requirements;
o limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
o placing us at a competitive disadvantage relative to other less leveraged
competitors.
Subject to specified limitations, the indenture permits us and our
subsidiaries to incur additional debt, including secured debt that may be
secured by the collateral on a pari passu basis. In addition, as of March 31,
2005, our subsidiaries have unused borrowing availability of approximately $91
million under our subsidiaries' credit facility, subject to certain tests, all
9
of which borrowings are senior, structurally, to the notes and are secured by
substantially all of the current assets of such subsidiaries. If new debt is
added to our and our subsidiaries' current debt levels, then the related risks
that we and they now face could intensify.
The notes (including the initial notes) are secured only by pledges of 65% of
the stock or other equity interests of certain of our first-tier subsidiaries,
and assets of our subsidiaries will first be applied to repay indebtedness and
liabilities of our subsidiaries and may not be sufficient to repay the notes.
The notes (including the initial notes) are secured only by pledges of 65%
of the stock or other equity interests of certain of our first-tier subsidiaries
as indicated on the organizational chart on page 3. Each of the stock pledges
securing the notes has been made in favor of the trustee or a collateral agent
appointed under the indenture governing the notes and is governed by the local
law of Denmark, France, Germany and the United Kingdom, as applicable, the
jurisdictions where our pledged subsidiaries are formed. As a result, the
validity of those pledges and the ability of the trustee or a collateral agent,
as applicable, or noteholders to realize any benefits associated with the
pledged shares may be limited under applicable local law as any action to
enforce the stock pledges must be taken under the laws of the applicable
jurisdiction and such laws may differ in significant respects from the laws of
the United States. The rights of the trustee or a collateral agent, as
applicable, or the noteholders to foreclose upon and sell the pledged shares
upon the occurrence of a default is subject to limitations under applicable
local bankruptcy laws if a bankruptcy proceeding were commenced by or against us
or our subsidiaries. Any delay or inability to realize any benefit associated
with the security interest in any jurisdiction or the application of local
bankruptcy laws that are contrary to noteholders' interests could have a
material adverse effect on the security interest we have granted in our
subsidiaries and could result in an inability to realize the full value of the
share pledges.
In addition to the foregoing, the old notes are and the new notes will be
effectively subordinated in right of payment to all of the indebtedness and
other liabilities of our subsidiaries, which, as of March 31, 2005, were
approximately $217 million. Furthermore, our debt under our subsidiaries' credit
facility is secured by liens on substantially all of the current assets of our
subsidiaries. The new notes will not, and the old notes do not, have the benefit
of this collateral, nor any other assets of our subsidiaries. Accordingly, if an
event of default occurs under our subsidiaries' credit facility, the lenders
under our subsidiaries' credit facility will have a right to such assets and may
foreclose upon the collateral. In that case, such assets would first be used to
repay in full amounts outstanding under our subsidiaries' credit facility and
may not be available to repay the notes. In the event of a bankruptcy event
affecting any of our subsidiaries, local bankruptcy law would be likely to
apply. In general, such local bankruptcy law affords significant protection for
senior secured creditors, and, in the event of a bankruptcy event, such
creditors may take actions that would materially and adversely affect the value
of our ongoing business and the equity value of such subsidiaries. The remaining
value, if any, of our assets may not be sufficient to repay the notes.
If the priority of the liens securing the new notes and the old notes becomes
subordinated to the liens securing the initial notes, your ability to recover
your investment in the new notes may be adversely impacted.
The priority of the liens securing the new notes and the old notes relative
to the liens securing the Initial Notes are governed by the indenture described
herein. Under the laws of certain jurisdictions governing the share pledges that
secure the notes, the priority of liens on such shares is generally determined
by the date of the filing or recording of the associated security document or,
where applicable, the date of perfection of the security interest. This means
that indebtedness that is intended to benefit from an equal security interest in
an item of collateral may have a junior interest, as a matter of local law, when
compared to a previously filed or perfected security interest notwithstanding
that the original security interest is intended to rank equally with the new
security interest. In such jurisdictions the liens securing the initial notes
may have a priority lien to the lien securing the old notes and the new notes as
a matter of law. Through the indenture, the trustee on behalf of the holders of
the initial notes has agreed that its liens would rank equally with the liens
securing the old notes and the new notes. If, notwithstanding the fact the
indenture is governed by New York law, a court in one or more of such
jurisdictions were to find that these lien ranking terms were invalid or
unenforceable with respect to one or more items of collateral securing the old
notes and the new notes, the holders of the initial notes may be entitled to
recover amounts realized from the liquidation of such collateral before the
holders of the old notes and the new notes. As a result, the holders of the old
notes and the new notes may recover less (or nothing at all) relative to the
holders of the initial notes.
10
Servicing our debt requires a significant amount of cash and our ability to
generate sufficient cash depends on many factors, some of which are beyond our
control.
We are a party to various debt, lease and other agreements pursuant to
which we are committed to pay approximately $84.8 million in 2005. Our ability
to make payments on and refinance our debt and to fund planned capital
expenditures depends on our future ability to generate cash flow. To some
extent, this is subject to general economic, financial, competitive, legislative
and regulatory and other factors that are beyond our control. In addition, our
ability to borrow funds under our subsidiaries' credit facility in the future
will depend on these subsidiaries' ability to maintain specified financial
ratios and satisfy certain financial covenants contained in the credit agreement
for our subsidiaries' credit facility. Our business may not generate cash flow
from operations and future borrowings may not be available to us under our
subsidiaries' credit facility in an amount sufficient to enable us to pay our
debt or to fund other liquidity needs. As a result, we may need to refinance all
or a portion of our debt before maturity, and it is likely that we will need to
refinance all or a portion of our debt on maturity. Our subsidiaries' credit
facility matures in 2005. We may not be able to refinance any of our debt on
favorable terms, if at all. Any inability to generate sufficient cash flow or
refinance our debt on favorable terms could have a material adverse effect on
our financial condition.
Covenant restrictions under our subsidiaries' credit facility and the indenture
may limit our ability to operate our business.
Our subsidiaries' credit facility and the indenture governing the notes
contain, among other things, covenants that may restrict our ability to finance
future operations or capital needs or to engage in other business activities.
Our subsidiaries' credit facility and the indenture restrict, among other
things, our ability and the ability of our restricted subsidiaries to:
o borrow money, pay dividends or make distributions;
o purchase or redeem stock;
o make investments and extend credit;
o engage in transactions with affiliates;
o engage in sale-leaseback transactions;
o freely distribute the proceeds from certain asset sales;
o effect a consolidation or merger or sell, transfer, lease or otherwise
dispose of all or substantially all of our assets; and
o create liens on our assets.
In addition, our subsidiaries' credit facility requires these subsidiaries
to maintain specified financial ratios and satisfy certain financial condition
tests, which may require that action be taken to reduce debt or to act in a
manner contrary to our business objectives. Events beyond our control, including
changes in general business and economic conditions, may affect our ability to
meet those financial ratios and financial condition tests. We cannot assure you
that we will meet those tests or that the lenders will waive any failure to meet
those tests. A breach of any of these covenants would result in a default under
our subsidiaries' credit facility and any resulting acceleration under the
credit facility may result in a default under the indenture. If an event of
default under our subsidiaries' credit facility occurs, the lenders could elect
to declare all amounts outstanding thereunder, together with accrued interest,
to be immediately due and payable. Such action by the lenders could result in an
effort to restructure such indebtedness or engage in asset sales in order to
generate cash proceeds to satisfy such indebtedness. Any such debt restructuring
may not be in our best interests or the best interests of the holders of the new
notes. If we attempt an asset sale, whether on our own initiative or as a result
of pressure from holders of our indebtedness, we may not be able to complete a
sale on terms acceptable to us. Any default under our indebtedness, or the
perception that we may go into default, could also adversely affect the trading
value of the new notes.
11
If our subsidiaries do not make sufficient distributions to us, we will not be
able to make payments on our debt, including the notes.
Our assets consist primarily of investments in our operating subsidiaries.
A majority of our cash flows are generated by our operating subsidiaries, and
our ability to service indebtedness, including our ability to pay the interest
on and principal of the notes, depends upon cash dividends and distributions or
other transfers we receive from our subsidiaries. In addition, any payment of
dividends, distributions, loans or advances by our subsidiaries to us could be
subject to restrictions on or taxation of dividends or repatriation of earnings
under applicable local law, monetary transfer restrictions and foreign currency
exchange regulations in the jurisdictions in which our subsidiaries operate, and
any restrictions imposed by the current and future debt instruments of our
subsidiaries. Such payments to us by our subsidiaries are contingent upon our
subsidiaries' earnings.
Our subsidiaries are separate and distinct legal entities that have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
notes or to make any funds available therefor, whether by dividends, loans,
distributions or other payments, and do not guarantee the payment of interest
on, or principal of, the notes. Any right that we have to receive any assets of
any of our subsidiaries upon the liquidation or reorganization of any such
subsidiary, and the consequent right of holders of notes to realize proceeds
from the sale of such assets, will be effectively subordinated to the claims of
that subsidiary's creditors, including trade creditors and holders of debt
issued by the subsidiary.
No public market exists for the new notes, and any market for the new notes may
be illiquid.
The initial notes are listed on the Luxembourg Stock Exchange and
application will be made to list the new notes on the Luxembourg Stock Exchange.
The initial notes are quoted in the over the counter market in the United
States. The initial purchaser of the old notes has informed us that it intends
to make a market in the notes. However, the initial purchaser is not obligated
to do so, and may cease market-making activities at any time. Accordingly, we
cannot give any assurance as to:
o the likelihood that an active market for the new notes will develop;
o the liquidity of any such market;
o the ability of holders to sell their new notes; or
o the prices that holders may obtain for their new notes upon any sale.
In addition, the liquidity of the trading market for the new notes, if any,
and the market price quoted for the new notes, will depend on many factors,
including our operating results, the market for similar securities, currency
exchange rates and interest rates. Historically, the market for non-investment
grade debt has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the new notes. We cannot
guarantee that the market for the new notes will not be subject to similar
disruptions or that any such disruptions will not have an adverse effect on the
value or marketability of the new notes.
We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture.
Upon a change of control, we are required to offer to repurchase all
outstanding notes at 101% of the face amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. A failure to make such an offer
would constitute an event of default under the indenture. The source of funds
for any such purchase of notes will be our available cash or cash generated from
our subsidiaries' operations or other sources, including borrowing, sales of
assets or sales of equity. We cannot assure you that sufficient funds will be
available at the time of any change of control to make any required repurchases
of notes tendered. If the holders of the notes exercise their right to require
12
us to repurchase all of the notes upon a change of control, the financial effect
of this repurchase could cause a default under our other debt, even if the
change of control itself would not cause a default. Accordingly, it is possible
that we will not have sufficient funds at the time of the change of control to
finance the required repurchase of notes. See "Description of the New Notes -
Change of Control" for additional information.
You may not be able to determine when a change of control has occurred.
Under the indenture, within 60 days following the date on which a change of
control occurs, we are required to send you and the trustee a notice of the
offer to repurchase your notes. In some cases, such as, for example, a sale of
substantially all of our assets, you may not be able to determine when a change
of control giving rise to your right to have us repurchase notes has occurred,
which may adversely affect your ability to enforce this provision of the
indenture.
The terms of the exchange notes may not protect you if we undergo a highly
leveraged transaction.
We may undergo a highly leveraged transaction, such as a recapitalization,
reorganization, restructuring, merger or similar transaction. Such a transaction
may not be included in the definition of change of control in the indenture or
otherwise restricted by the terms of the indenture. In such an event, the
indenture will not afford you protection from any adverse aspects of such
transaction.
Risks Related to Our Business
Demand for, and prices of, our products are cyclical and we may experience
prolonged depressed market conditions for our products, which may result in
reduced earnings or operating losses.
Substantially all of our revenue is attributable to sales of TiO2. Pricing
within the global TiO2 industry over the long term is cyclical, and changes in
industry economic conditions, especially in Western industrialized nations, can
significantly impact our earnings and operating cash flows. This may result in
reduced earnings or operating losses, which may in turn adversely affect our
ability repay the notes.
Historically, the markets for many of our products have experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of capacity additions, resulting in oversupply and
declining prices and profit margins. Our average TiO2 selling prices were
generally (i) decreasing during all of 2001 and the first quarter of 2002, (ii)
flat during the second quarter of 2002, (iii) increasing during the last half of
2002 and the first quarter of 2003, (iv) flat during the second quarter of 2003,
(v) decreasing during the second half of 2003 and the first half of 2004 and
(vi) increasing during the second half of 2004 and the first quarter of 2005.
Our overall average TiO2 selling prices in billing currencies:
o decreased by 10% during 2002 as compared to 2001;
o were generally flat in 2003 as compared to 2002;
o were 3% lower in 2004 as compared to 2003; and
o were 5% higher in the first quarter of 2005 as compared to the first
quarter of 2004.
Future growth in demand for our products may not be sufficient to alleviate
any future conditions of excess industry capacity, and such conditions may not
be sustained or may be further aggravated by anticipated or unanticipated
capacity additions or other events.
The demand for TiO2 during a given year is also subject to annual seasonal
fluctuations. TiO2 sales are generally higher in the first half of the year than
in the second half of the year due in part to the increase in paint production
in the spring to meet the spring and summer painting season demand.
13
As a global business, we are exposed to local business risks in different
countries, which could result in operating losses.
We conduct all of our business in several jurisdictions outside of the
United States and are subject to risks normally associated with international
operations, which include trade barriers, tariffs, exchange controls, national
and regional labor strikes, social and political risks, general economic risks,
seizures, nationalizations, compliance with a variety of foreign laws, including
tax laws, and the difficulty in enforcing agreements and collecting receivables
through foreign legal systems. For example, we have substantial net operating
loss carryforwards in Germany, and any change in German tax law that adversely
impacts our ability to fully utilize such carryforwards could adversely affect
us. We could also be adversely affected by any restriction that limits our
ability to repatriate our foreign profits back to the United States. Any loss
may adversely affect our ability to repay the notes.
We may incur losses from fluctuations in currency exchange rates.
We operate our business in several different countries, and sell our
products worldwide. Therefore, we are exposed to risks related to the prices
that we receive for our products and the need to convert currencies that we may
receive for some of our products into currencies required to pay some of our
debt, or into currencies in which we purchase certain raw materials or pay for
certain services, all of which could result in future gains or losses depending
on fluctuations in exchange rates. These losses may adversely affect our ability
to repay the notes.
We sell our products in a mature and highly competitive industry and face price
pressures in the markets in which we operate, which may result in reduced
earnings or operating losses.
The global markets in which we operate our business are highly competitive.
Competition is based on a number of factors, such as price, product quality and
service. Some of our competitors may be able to drive down prices for our
products because their costs are lower than ours. In addition, some of our
competitors' financial, technological and other resources may be greater than
ours, and such competitors may be better able to withstand changes in market
conditions. Our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Further,
consolidation of our competitors or customers in any of the industries in which
we compete may result in reduced demand for our products. The recurrence of any
of these events could have a material adverse effect on our results of
operations, which may in turn adversely affect our ability to repay the notes.
Higher costs or limited availability of our raw materials may decrease our
liquidity, which may decrease our ability to repay the notes.
The number of sources for, and availability of, certain raw materials is
specific to the particular geographical region in which a facility is located.
We purchase titanium-bearing ores from three suppliers in different countries
under multiple-year agreements. Political and economic instability in the
countries from which we purchase our raw material supplies could adversely
affect the availability of such feedstock. Should our vendors not be able to
meet their contractual obligations or should we be otherwise unable to obtain
necessary raw materials, we may incur higher costs for raw materials or may be
required to reduce production levels, either of which may decrease our
liquidity, which may in turn adversely affect our ability to repay the notes.
If we are unable to maintain our relationship with Kronos and its affiliates, we
may not be able to replace on favorable terms our contracts with them and
facilities that they provide, if at all.
We have entered into and intend to continue to enter into certain
agreements, including service, supply and buy/sell agreements, with Kronos and
its affiliates. If Kronos or any of its affiliates fails to perform its
obligations under any of these agreements, or if any of these agreements
terminate or we are otherwise unable to obtain the benefit thereunder for any
reason, there could be a material adverse effect on our business, financial
condition, results of operations or cash flows, which may in turn adversely
affect our ability to repay the notes, if we are unable to obtain similar
agreements on the same terms from third parties.
14
Kronos and its affiliates may have conflicts of interest with us, and these
conflicts could adversely affect our business and our ability to repay the
notes.
For so long as Kronos and its affiliates retain their direct and indirect
ownership of us, conflicts of interest could arise with respect to transactions
involving business dealings between us and them, potential acquisitions of
businesses or properties, the issuance of additional securities, our payment of
dividends and other matters. In addition, affiliates of Kronos are also engaged
in the business of producing and selling TiO2 and may compete with us. See
"Description of New Notes-Certain Covenants-Limitations on Transactions with
Affiliates."
We are subject to many environmental and safety regulations that may result in
unanticipated costs or liabilities. If these costs or liabilities are
significant, our ability to pay dividends on our securities and the prices of
our securities may decrease.
We are subject to extensive laws, regulations, rules and ordinances
relating to the protection of the environment, including those governing the
discharge of pollutants in the air and water and the generation, management and
disposal of hazardous substances and wastes or other materials. We may incur
substantial costs, including fines, damages and criminal penalties or civil
sanctions, or experience interruptions in our operations for actual or alleged
violations or compliance requirements arising under environmental laws. Our
operations could result in violations under environmental laws, including spills
or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic incident, we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents. Given the
nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities or substantial fines,
penalties, damages or other costs, including as a result of private litigation.
Our production facilities have been used for a number of years to
manufacture products or conduct mining operations. We may incur additional costs
related to compliance with environmental laws applicable to our historic
operations and these facilities. In addition, we may incur significant
expenditures to comply with existing or future environmental laws. Costs
relating to environmental matters will be subject to evolving regulatory
requirements and will depend on the timing of promulgation and enforcement of
specific standards that impose requirements on our operations. Costs beyond
those currently anticipated may be required under existing and future
environmental laws.
If our patents are declared invalid or our trade secrets become known to
competitors, our ability to compete may be adversely affected.
Protection of our proprietary processes and other technology is important
to our competitive position. Consequently, we rely on judicial enforcement for
protection of our patents, and our patents may be challenged, invalidated,
circumvented or rendered unenforceable. Furthermore, if any pending patent
application filed by us does not result in an issued patent, or if patents are
issued to us but such patents do not provide meaningful protection of our
intellectual property, then the use of any such intellectual property by our
competitors could result in decreasing our cash flows, which could adversely
affect our ability to pay dividends on our securities and the prices of our
securities. Additionally, our competitors or other third parties may obtain
patents that restrict or preclude our ability to lawfully produce or sell our
products in a competitive manner, which could have the same effects.
We also rely on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Although it is our practice to enter into confidentiality
agreements to protect our intellectual property, because these confidentiality
agreements may be breached, such agreements may not provide sufficient
protection for our trade secrets or proprietary know-how, or adequate remedies
may not be available in the event of an unauthorized use or disclosure of such
trade secrets and know-how. In addition, others could obtain knowledge of such
trade secrets through independent development or other access by legal means.
15
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our business and inhibit our ability to operate and grow
successfully.
Our success in the highly competitive markets in which we operate will
continue to depend to a significant extent on our leadership team and other key
management personnel. We do not have binding employment agreements with any of
these managers. This increases the risks that we may not be able to retain our
current management personnel and we may not be able to recruit qualified
individuals to join our management team, including recruiting qualified
individuals to replace any of our current personnel that may leave in the
future.
Our relationships with our union employees could deteriorate, which could
adversely impact our operations, which may in turn adversely impact our ability
to pay dividends on our securities and the prices of our securities.
As of March 31, 2005, we employed approximately 1,950 full-time persons. A
significant number of our employees are subject to arrangements similar to
collective bargaining arrangements. We may not be able to negotiate labor
agreements with respect to these employees on satisfactory terms or at all. If
our employees were to engage in a strike, work stoppage or other slowdown, we
could experience a significant disruption of our operations or higher ongoing
labor costs, which could adversely affect our ability to repay the notes.
16
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
When we issued the old notes on November 26, 2004, we entered into a
registration rights agreement with the initial purchaser of the old notes. A
copy of the registration rights agreement is filed as an exhibit to the
registration statement of which this prospectus is a part. Under the
registration rights agreement, we agreed to:
o file and cause to become effective a registration statement with respect to
an offer to exchange the old notes for new notes that have been registered
under the Securities Act; or
o file and cause to become effective a shelf registration statement with
respect to the resale of the old notes.
If we complete the exchange offer within 300 days after the issuance of the
old notes, then we will satisfy those requirements under the registration rights
agreements. If we do not complete the exchange offer within 300 days of the
issuance of the old notes and a shelf registration statement has not been
declared effective, then we will be required to pay additional interest to the
holders of the old notes.
Terms of the Exchange Offer
As of the date of this prospectus, euro 90.0 million aggregate principal
amount of the old notes are outstanding. This prospectus and the accompanying
letter of transmittal together constitute the exchange offer. This prospectus
and the letter of transmittal are being sent to all registered holders of old
notes. There will be no fixed record date for determining registered holders of
old notes entitled to participate in the exchange offer.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn before expiration of the exchange offer. We
will issue euro 1,000 principal amount of new notes in exchange for each euro
1,000 principal amount of old notes surrendered under the exchange offer.
Old notes may be tendered only in integral multiples of euro 1,000. The
exchange offer is not conditioned upon any minimum aggregate principal amount of
old notes being tendered for exchange.
The form and terms of the new notes will be substantially identical to the
form and terms of the old notes, except that the new notes:
o will be registered under the Securities Act;
o will not contain transfer restrictions and registration rights that relate
to the old notes; and
o will not contain provisions relating to the payment of additional interest
to be made to the holders of the old notes under circumstances related to
the timing of the exchange offer.
The new notes will evidence the same debt as the old notes. The new notes
will be issued under and entitled to the benefits of the same indenture that
authorized the issuance of the old notes. For a description of the indenture,
see "Description of the New Notes."
In connection with the exchange offer, holders of the old notes do not have
any appraisal or dissenters' rights under applicable law or the Indenture. We
intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the SEC. The
exchange offer is not being made to, nor will we accept tenders for exchange
from, holders of old notes in any jurisdiction in which the exchange offer or
the acceptance of it would not be in compliance with the securities or blue sky
laws, or other applicable laws, of the jurisdiction.
17
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than applicable taxes described below,
in connection with the exchange offer. It is important that you read "-Fees and
Expenses" for more details regarding fees and expenses incurred in the exchange
offer.
We expressly reserve the right, in our sole discretion:
o to extend the expiration date;
o to delay accepting any old notes due to an extension of the exchange
offer;
o if any of the conditions set forth below under "-Conditions to the
Exchange Offer" have not been satisfied, to terminate the exchange
offer and not accept any notes for exchange; and
o to amend the exchange offer in any manner.
Any delay in acceptance of any old notes due to an extension of the
exchange offer will be consistent with Rule 14e-1(c) promulgated under the
Exchange Act.
In the event of a material change in the exchange offer, including the
waiver of a material condition, we will extend the offer period necessary so
that at least five business days remain in the exchange offer following notice
of the material change.
We will give written notice of any extension, delay, non-acceptance,
termination or amendment as promptly as practicable by public announcement, and,
in the case of an extension, no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
During an extension, all old notes previously tendered will remain subject
to the exchange offer and may be accepted for exchange by us. Any old notes not
accepted for exchange for any reason will be returned without cost to the holder
that tendered them promptly after the expiration or termination of the exchange
offer.
Expiration of the Exchange Offer
The exchange offer will expire at 12:00, midnight, New York City time, on
August 15, 2005. We can extend the exchange offer in our sole discretion, in
which case the term "expiration date" shall mean the latest date and time to
which we extend the exchange offer.
Conditions to the Exchange Offer
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes or to issue new notes in the exchange offer.
We may terminate or amend the exchange offer as provided in this prospectus
before the expiration date if in our reasonable judgment:
o the exchange offer, or the making of any exchange by a holder of old notes,
would violate applicable law or any applicable interpretation of the staff
of the SEC;
o any action or proceeding has been instituted or threatened in any court or
by any governmental agency with respect to the exchange offer that would
reasonably be expected to impair our ability to proceed with the exchange
offer, or a material adverse development has occurred in any existing
action or proceeding that relates to us; and
o the registration statement of which this prospectus is a part has not been
declared, or will not continue to be, effective.
18
We will not be obligated to accept for exchange any old notes that are not
validly tendered in accordance with the exchange offer.
These conditions are solely for our benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any time or at various times in our sole discretion. We may
waive the preceding conditions in whole or in part at any time or from time to
time in our sole discretion. If we do so, the exchange offer will remain open
for at least three business days following the waiver of any of the preceding
conditions. If we fail at any time to exercise any of the foregoing rights, this
failure will not constitute a waiver of that right. Each of these rights will be
deemed an ongoing right that we may assert at any time or at various times.
We will not accept for exchange any old notes tendered, and will not issue
new notes in exchange for any old notes, if at that time a stop order is
threatened or in effect with respect to the registration statement of which this
prospectus constitutes a part or the qualification of the indenture under the
Trust Indenture Act of 1939.
Procedures for Tendering
We have forwarded to you, along with this prospectus, a letter of
transmittal relating to this exchange offer. Because all the old notes are held
in book-entry accounts maintained by the exchange agent at Euroclear Bank
S.A./N.V., as operator of the Euroclear System ("Euroclear"), or Clearstream
Banking, Societe Anonyme, Luxembourg ("Clearstream"), a holder need not submit a
letter of transmittal if the holder tenders old notes in accordance with the
procedures mandated by Euroclear or Clearstream, as the case may be. To tender
old notes without submitting a letter of transmittal, the electronic
instructions sent to Euroclear or Clearstream and transmitted to the exchange
agent must contain your acknowledgment of receipt of and your agreement to be
bound by and to make all of the representations contained in the letter of
transmittal. In all other cases, a letter of transmittal must be manually
executed and delivered as described in this prospectus.
To tender in the exchange offer, a holder must comply with the procedures
of Euroclear or Clearstream, as applicable, and either:
o complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter is transmittal so requires; and deliver the letter
of transmittal or facsimile to the exchange agent or the paying agent in
Luxembourg prior to 12:00, midnight, New York City time, on the expiration
date; or
o in lieu of delivering a letter of transmittal, instruct Euroclear or
Clearstream, as the case may be, to transmit on behalf of the holder an
agent's message to the exchange agent, which agent's message must be
received by the exchange agent prior to 12:00, midnight, New York City
time, on the expiration date.
In addition, either:
o the exchange agent or the paying agent in Luxembourg must receive the
certificates for the old notes along with the letter of transmittal; or
o the exchange agent or the paying agent in Luxembourg must receive, before
the expiration date, timely confirmation of the book-entry transfer of the
old notes being tendered into the exchange agent's account at Euroclear or
Clearstream according to the procedure for book-entry described below,
along with the letter of transmittal or an agent's message.
The term "agent's message" means a message, transmitted by Euroclear or
Clearstream and received by the exchange agent, which states that Euroclear or
Clearstream has received an express acknowledgment from a participant tendering
old notes that the participant has received and agrees to be bound by the terms
of the letter of transmittal, and that we may enforce that agreement against the
participant.
19
To be tendered effectively, the exchange agent or the paying agent in
Luxembourg must receive any physical delivery of the letter of transmittal and
other required documents at the address set forth below under "-Exchange Agent;
Paying Agent in Luxembourg" before the expiration of the exchange offer. To
receive confirmation of valid tender of old notes, a holder should contact the
exchange agent or the paying agent in Luxembourg at the applicable telephone
number listed under "-Exchange Agent; Paying Agent in Luxembourg."
The tender by a holder that is not withdrawn before expiration of the
exchange offer will constitute an agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal. Only a registered holder of old
notes may tender the old notes in the exchange offer. If a holder completing a
letter of transmittal tenders less than all of the old notes held by that
holder, then that tendering holder should fill in the applicable box of the
letter of transmittal. The amount of old notes delivered to the exchange agent
or the paying agent in Luxembourg will be deemed to have been tendered unless
otherwise indicated.
If old notes, the letter of transmittal or any other required documents are
physically delivered to the exchange agent or the paying agent in Luxembourg,
the method of delivery is at the holder's election and risk. Rather than mail
these items, we recommend that holders use an overnight or hand delivery
service. In all cases, holders should allow sufficient time to assure delivery
to the exchange agent or the paying agent in Luxembourg before expiration of the
exchange offer. Holders should not send the letter of transmittal or old notes
to us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If the beneficial owner wishes to tender on its
own behalf, then it must, prior to completing and executing the letter of
transmittal and delivering its old notes, either:
o make appropriate arrangements to register ownership of the old notes in the
owner's name; or
o obtain a properly completed bond power from the registered holder of old
notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
If the applicable letter of transmittal is signed by the record holder(s)
of the old notes tendered, then the signature must correspond with the name(s)
written on the face of the old note without alteration, enlargement or any
change whatsoever. If the applicable letter of transmittal is signed by a
participant in Euroclear or Clearstream, as applicable, then the signature must
correspond with the name as it appears on the security position listing as the
holder of the old notes.
Except as set forth below, a signature on a letter of transmittal or a
notice of withdrawal must be guaranteed by an eligible guarantor institution.
Eligible guarantor institutions include banks, brokers, dealers, municipal
securities dealers, municipal securities brokers, government securities dealers,
government securities brokers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
The signature need not be guaranteed by an eligible guarantor institution if the
old notes are tendered:
o by a registered holder of old notes who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
o for the account of an eligible institution.
20
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, then the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes
and an eligible institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, then
these persons should so indicate when signing. Unless we waive this requirement,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
tendered old notes. Our determination will be final and binding. We reserve the
absolute right to reject any old notes not properly tendered or any old notes
the acceptance of which would, in the opinion of our counsel, be unlawful. We
also reserve the right to waive any defects, irregularities or conditions of
tender as to particular old notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. If we waive a condition
with respect to any particular holder, we will waive it for all holders.
Unless waived, holders of old notes must cure any defects or irregularities
in connection with tenders of old notes within the time that we determine.
Although we intend to notify holders of defects or irregularities with respect
to tenders of old notes, neither we, the exchange agent, the paying agent in
Luxembourg nor any other person will incur any liability for failure to give
notification. Tenders of old notes will not be deemed made until those defects
or irregularities have been cured or waived. Any old notes received by the
exchange agent or the paying agent in Luxembourg that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned by the exchange agent or the paying agent in Luxembourg without cost
to the tendering holder, unless otherwise provided in the letter of transmittal,
as soon as practicable following the expiration date.
By signing the letter of transmittal, or causing Euroclear or Clearstream,
as applicable, to transmit an agent's message to the exchange agent, each
tendering holder of old notes will represent to us that, among other things:
o any new notes that the holder receives will be acquired in the ordinary
course of its business;
o the holder has no arrangement or understanding with any person or entity to
participate in the distribution of the new notes;
o if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the new notes;
o if the holder is a broker-dealer that will receive new notes for its own
account in exchange for old notes that were acquired as a result of
market-making activities or other trading activities, that it will deliver
a prospectus, as required by law, in connection with any resale of those
new notes (see "Plan of Distribution"); and
o the holder is not our "affiliate," as defined in Rule 405 of the Securities
Act.
If any holder or any such other person is our "affiliate," or is engaged in
or intends to engage in or has an arrangement or understanding with any person
to participate in a distribution of the new notes to be acquired in the exchange
offer, then that holder or any such other person:
o may not rely on the applicable interpretations of the staff of the SEC;
o is not entitled and will not be permitted to tender old notes in the
exchange offer; and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
21
Each broker-dealer who acquired its old notes as a result of market-making
activities or other trading activities and thereafter receives new notes issued
for its own account in the exchange offer, must acknowledge that it will deliver
a prospectus in connection with any resale of such new notes issued in the
exchange offer. The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution" for a discussion of the exchange and resale obligations of
broker-dealers in connection with the exchange offer.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes registered under the Securities Act. For
purposes of the exchange offer, we shall be deemed to have accepted properly
tendered old notes for exchange when, as and if we have given oral or written
notice to the exchange agent, with written confirmation of any oral notice to be
given promptly thereafter. See "-Conditions to the Exchange Offer" for a
discussion of the conditions that must be satisfied before we are required to
accept any old notes for exchange.
For each old note accepted for exchange, the holder will receive a new note
registered under the Securities Act having a principal amount equal to, and in
the denomination of, that of the surrendered old note. Accordingly, registered
holders of new notes on the relevant record date for the first interest payment
date following the consummation of the exchange offer will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid on the old notes, from the date of issuance of the old
notes. Old notes that we accept for exchange will cease to accrue interest from
and after the date of consummation of the exchange offer. Under the registration
rights agreement, we may be required to make additional payments of additional
interest to the holders of the old notes under circumstances relating to the
timing of exchange offer.
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent or the
paying agent in Luxembourg has timely received:
o the certificates representing the old notes, or a timely confirmation from
Euroclear or Clearstream of book-entry transfer of the old notes into the
exchange agent's account;
o a properly completed and duly executed letter of transmittal, or in the
case of a book-entry tender, a properly transmitted agent's message; and
o all other required documents.
Book-Entry Transfer
The exchange agent has advised us that it will establish an account with
respect to the old notes at Euroclear and Clearstream as book-entry transfer
facilities, for purposes of the exchange offer within two business days after
the date of this prospectus. Any financial institution that is a participant in
the book-entry transfer facility's system may make book-entry delivery of old
notes by causing the book-entry transfer facility to transfer the old notes into
the exchange agent's account at the facility in accordance with the facility's
procedures for transfer. However, although delivery of old notes may be effected
through book-entry transfer at the facility, a properly completed and duly
executed letter of transmittal or an agent's message, and any other required
documents, must nonetheless be transmitted to, and received by, the exchange
agent or the paying agent in Luxembourg at the address set forth below under
"-Exchange Agent; Paying Agent in Luxembourg" prior to 12:00, midnight, New York
City time, on the expiration date.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders of old notes may
withdraw their tenders at any time before expiration of the exchange offer.
22
For a withdrawal to be effective, the exchange agent must receive a notice
of withdrawal transmitted by Euroclear or Clearstream on behalf of the holder in
accordance with the standard operating procedures of Euroclear or Clearstream,
or a written notice of withdrawal, which may be by telegram, facsimile
transmission or letter, at one of the addresses set forth below under "-Exchange
Agent; Paying Agent in Luxembourg."
Any notice of withdrawal must:
o specify the name of the person who tendered the old notes to be withdrawn;
o identify the old notes to be withdrawn, including the principal amount of
the old notes to be withdrawn; and
o where certificates for old notes have been transmitted, specify the name in
which the old notes were registered, if different from that of the
withdrawing holder.
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of those certificates, the
withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an eligible
institution, unless the withdrawing holder is an eligible institution.
If old notes have been tendered pursuant to the procedures for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at Euroclear or Clearstream, as applicable, to be credited
with the withdrawn old notes and otherwise comply with the procedures of the
facility.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal, and our determination shall
be final and binding on all parties. We will deem any old notes so withdrawn not
to have been validly tendered for exchange for purposes of the exchange offer.
We will return any old notes that have been tendered for exchange but that are
not exchanged for any reason to their holder without cost to the holder. You may
retender properly withdrawn old notes by following one of the procedures
described under "-Procedures for Tendering" above at any time on or before
expiration of the exchange offer.
Exchange Agent; Paying Agent in Luxembourg
The Bank of New York has been appointed as exchange agent for the exchange
offer, and The Bank of New York (Luxembourg) S.A. has been appointed as paying
agent in Luxembourg for the exchange offer. All executed letters of transmittal
should be delivered to either our exchange agent or our paying agent in
Luxembourg at the applicable address set forth below. You should direct
questions and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal to the exchange agent or the paying
agent in Luxembourg addressed as follows:
The Exchange Agent:
By Registered Mail, Hand Delivery or Overnight Courier:
The Bank of New York
Lower Ground Floor
30 Cannon Street
London
EC4M 6XH
Attn: Julie Levy
23
For Information, Call:
011 44 (207) 964-6513 or
011 44 (207) 964-7235
By Facsimile Transmission:
(for Eligible Institutions Only)
011 44 (207) 964-6369 or
011 44 (207) 964-7294
Confirm by Telephone:
011 44 (207) 964-7235
The Paying Agent in Luxembourg:
By Registered Mail, Hand Delivery or Overnight Courier:
The Bank of New York (Luxembourg) S.A.
Aerogolf Center, 1A Hoehenhof
L-1736 Senningerberg
Luxembourg
Attn: _______________
For Information, Call:
011 44 (0) 20 7964 7662
By Facsimile Transmission:
(for Eligible Institutions Only)
011 44 (0) 20 7964 6399
Confirm by Telephone:
011 44 (0) 20 7964 7662
Delivery of the letter of transmittal to an address other than as shown
above or transmission of the letter of transmittal via facsimile other than as
set forth above does not constitute a valid delivery of the letter of
transmittal.
Fees and Expenses
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer, including the following:
o SEC registration fees;
o fees and expenses of the exchange agent and trustee;
o our accounting and legal fees; and
o our printing and mailing costs.
< 24
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. A tendering holder of old notes, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
o certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of old notes tendered;
o new notes are to be delivered to, or issued in the name of, any person
other than the registered holder of the old notes;
o tendered old notes are registered in the name of any person other than the
person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the exchange of old
notes under the exchange offer.
If satisfactory evidence of payment of transfer taxes is not submitted with
the letter of transmittal, then the amount of any transfer taxes will be billed
to the tendering holder.
Accounting Treatment
We will record the new notes in our accounting records at the same carrying
value as the old notes, which is the aggregate principal amount, as reflected in
our accounting records on the date of exchange, plus any unamortized premium
related to the issuance of the old notes. Accordingly, we will not recognize any
gain or loss for accounting purposes in connection with the exchange offer. The
expenses of the exchange offer will be amortized over the term of the new notes.
Resale of New Notes
Based on interpretations of the staff of the SEC, as set forth in no-action
letters to third parties, we believe that new notes issued under the exchange
offer in exchange for old notes may be offered for resale, resold and otherwise
transferred by any old note holder without further registration under the
Securities Act and without delivery of a prospectus that satisfies the
requirements of Section 10 of the Securities Act if:
o the holder is not our "affiliate" within the meaning of Rule 405 under the
Securities Act;
o the new notes are acquired in the ordinary course of the holder's business;
and
o the holder does not intend to participate in a distribution of the new
notes.
Any holder who exchanges old notes in the exchange offer with the intention
of participating in any manner in a distribution of the new notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of new notes. With regard to broker-dealers, only broker-dealers that
acquired the old notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives new notes for its own account in exchange for old notes, where the old
notes were acquired by the broker-dealer as a result of market-making activities
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of the new notes. Please read "Plan of
Distribution" for more details regarding the transfer of new notes.
25
Consequences of Failing to Exchange Old Notes
Holders who desire to tender their old notes in exchange for new notes
registered under the Securities Act should allow sufficient time to ensure
timely delivery. Neither we nor the exchange agent is under any duty to give
notification of defects or irregularities with respect to the tenders of old
notes for exchange.
Old notes that are not tendered or are tendered but not accepted will,
following the consummation of the exchange offer, continue to be subject to the
provisions in the indenture regarding the transfer and exchange of the old notes
and the existing restrictions on transfer set forth in the legend on the old
notes and in the offering memorandum dated November 26, 2004, relating to the
old notes. Except in limited circumstances with respect to specific types of
holders of old notes, we will have no further obligation to provide for the
registration under the Securities Act of such old notes. In general, old notes,
unless registered under the Securities Act, may not be offered or sold except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not anticipate that
we will take any action to register the untendered old notes under the
Securities Act or under any state securities laws.
Upon completion of the exchange offer, holders of the old notes will not be
entitled to any further registration rights under the registration rights
agreement, except under limited circumstances.
Old notes that are not exchanged in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits their holders have under the indenture relating to the old notes
and the new notes. Holders of the new notes and any old notes that remain
outstanding after consummation of the exchange offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage of the class have taken certain actions or exercised certain rights
under the indenture.
26
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes
under the exchange offer. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive the old notes in like principal
amount, the terms of which are identical in all material respects to the new
notes. The old notes surrendered in exchange for the new notes will be retired
and canceled and cannot be reissued. Accordingly, the issuance of the new notes
will not result in any increase or decrease in our indebtedness.
CAPITALIZATION
The following table sets forth our unaudited historical consolidated cash
and cash equivalents and capitalization as of March 31, 2005. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our audited
consolidated financial statements and the related notes included elsewhere in
this prospectus. Euro amounts have been presented in U.S. dollars at an exchange
rate of euro 1.00 to $1.29, based on the closing spot rate on March 31, 2005
reported by Bloomberg.
(In millions)
Cash, cash equivalents and restricted cash equivalents............ $ 17.1
=======
Debt:
Senior secured notes due 2009................................... $ 493.0
Revolving credit facilities of subsidiaries..................... 13.0
Other........................................................... .3
-------
Total debt................................................... 506.3
Stockholder's equity.............................................. 227.1
-------
Total capitalization......................................... $ 733.4
=======
27
SELECTED FINANCIAL AND OTHER DATA
The statement of operations data for the years ended December 31, 2002,
2003 and 2004, and the balance sheet data as of December 31, 2003 and 2004, have
been derived from our audited consolidated financial statements included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 2000 and 2001, and the balance sheet data as of December 31,
2000, 2001 and 2002, have been derived from our audited consolidated financial
statements not separately presented herein. The statement of operations data for
the three months ended March 31, 2004 and 2005, and the balance sheet data as of
March 31, 2005, have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. The balance sheet data as of
March 31, 2004 has been derived from our unaudited consolidated financial
statements not separately presented herein. In our opinion, all adjustments,
consisting only of normal recurring adjustments, necessary to state fairly the
consolidated financial position, results of operations and cash flows for such
interim periods have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations. The selected financial and other data below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.
Three months
Year ended December 31, ended March 31,
--------------------------------------------- ---------------
2000 2001 2002 2003 2004 2004 2005
(in millions, except per share data and ratios)
STATEMENT OF OPERATIONS DATA:
Net sales......................................$ 620.5 $ 554.6 $ 579.7 $ 715.9 $ 808.0 $ 192.2 $ 209.5
Net income..................................... 80.1 113.7 52.3 81.8 326.0 13.2 18.2
BALANCE SHEET DATA (at period end):
Total assets................................... 530.1 532.5 611.3 750.5 985.2 716.4 974.6
Long-term debt including current maturities.... 196.1 482.9 325.9 356.7 533.2 377.8 506.3
Redeemable preferred stock and profit
participation certificates................... 504.9 617.4 - - - - -
Stockholders' equity (deficit)................. (427.7) (777.5) 76.8 111.6 206.5 65.0 227.1
TiO2 OPERATING STATISTICS:
Average selling price index
(1990 = 100)................................. 90 87 79 82 80 80 83
Sales volume*.................................. 294 265 297 310 336 81 77
Production volume*............................. 297 269 293 320 328 79 81
Production rate as a percentage of capacity.... Full 87% 93% Full Full Full Full
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges
(unaudited) (1)...... 4.8 4.2 2.7 3.3 2.7 2.8 3.4
Ratio of earnings to combined fixed charges
and preferred dividends (unaudited) (2)...... 3.5 1.8 1.5 3.3 2.7 2.8 3.4
_______________
* Metric tons in thousands
(1) Fixed charges represents, as applicable, the sum of (i) total interest
expense and (ii) the interest component of rent expense (calculated as
one-third of rent expense). Earnings represents, as applicable, the sum of
(i) fixed charges, (ii) income before income taxes and minority interest
and (iii) amortization of capitalized interest.
(2) Combined fixed charges and preferred dividends represents, as applicable,
the sum of (i) total interest expense, (ii) preferred stock dividends and
accretion and (iii) the interest component of rent expense (calculated as
one-third of rent expense). Earnings represents, as applicable, the sum of
(i) combined fixed charges, (ii) income before income taxes and minority
interest and (iii) amortization of capitalized interest.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reported period. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventory reserves, impairments of investments in marketable securities and
investments accounted for by the equity method, the recoverability of other
long-lived assets (including goodwill and other intangible assets), pension
benefit obligations and the underlying actuarial assumptions related thereto,
the realization of deferred income tax assets and accruals for, litigation,
income tax and other contingencies. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments and other
factors. We take into consideration the current financial condition of our
customers, the age of the outstanding balance and the current economic
environment when assessing the adequacy of the allowance. If the financial
condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
During 2002, 2003 and 2004, the net amount written off against the
allowance for doubtful accounts as a percentage of the balance of the
allowance for doubtful accounts as of the beginning of the year ranged from
15% to 24%.
o We provide reserves for estimated obsolescence or unmarketable inventories
equal to the difference between the cost of inventory and the estimated net
realizable value using assumptions about future demand for our products and
market conditions. If actual market conditions are less favorable than
those projected by management, additional inventory reserves may be
required. We also provide reserves for tools and supplies inventory based
generally on both historical and expected future usage requirements.
o We recognize an impairment charge associated with our long-lived assets,
including property and equipment, whenever we determine that recovery of
such long-lived asset is not probable. Such determination is made in
accordance with the applicable GAAP requirements associated with the
long-lived asset, and is based upon, among other things, estimates of the
amount of future net cash flows to be generated by the long-lived asset and
estimates of the current fair value of the asset. Adverse changes in such
estimates of future net cash flows or estimates of fair value could result
in an inability to recover the carrying value of the long-lived asset,
thereby possibly requiring an impairment charge to be recognized in the
future.
o Under applicable GAAP (SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"), property and equipment is not assessed for
impairment unless certain impairment indicators, as defined, are present.
During 2004, no such impairment indicators, as defined, were present.
o We maintain various defined benefit pension plans. The amounts recognized
as defined benefit pension expenses, and the reported amounts of prepaid
and accrued pension costs, are actuarially determined based on several
assumptions, including discount rates, expected rates of returns on plan
29
assets and expected health care trend rates. Variances from these
actuarially assumed rates will result in increases or decreases, as
applicable, in the recognized pension obligations, pension expenses and
funding requirements. These assumptions are more fully described below
under "-Assumptions on defined benefit pension plans."
o We record a valuation allowance to reduce our deferred income tax assets to
the amount that is believed to be realized under the "more-likely-than-not"
recognition criteria. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need
for a valuation allowance, it is possible that in the future we may change
our estimate of the amount of the deferred income tax assets that would
"more-likely-than-not" be realized in the future, resulting in an
adjustment to the deferred income tax asset valuation allowance that would
either increase or decrease, as applicable, reported net income in the
period such change in estimate was made. For example, during 2004, we
concluded that the "more-likely-than-not" recognition criteria had been met
with respect to the income tax benefit associated with our German net
operating loss carryforwards. We have substantial net operating loss
carryforwards in Germany (the equivalent of $633 million for German
corporate purposes and $205 million for German trade tax purposes at March
31, 2005). Prior to the complete utilization of such carryforwards, it is
possible that we might conclude in the future that the benefit of such
carryforwards would no longer meet the "more-likely-than-not" recognition
criteria, at which point we would be required to recognize a valuation
allowance against the then-remaining tax benefit associated with the
carryforwards.
o We record accruals for legal, income tax and other contingencies when
estimated future expenditures associated with such contingencies become
probable, and the amounts can be reasonably estimated. However, new
information may become available, or circumstances (such as applicable laws
and regulations) may change, thereby resulting in an increase or decrease
in the amount required to be accrued for such matters (and therefore a
decrease or increase in reported net income in the period of such change).
Income from operations are impacted by certain of these significant
judgments and estimates, such as allowance for doubtful accounts, reserves for
obsolete or unmarketable inventories, impairment of equity method investees,
goodwill and other long-lived assets, defined benefit pension plans and loss
accruals. In addition, other income (expense) is impacted by the significant
judgments and estimates for deferred income tax asset valuation allowances and
loss accruals.
Executive Summary
We reported net income of $18.2 million in the first quarter of 2005
compared to net income of $13.2 million in the first quarter of 2004 and
reported net income of $326.0 million in 2004. Net income in 2004 includes a
second quarter income tax benefit related to the reversal of our deferred income
tax asset valuation allowance in Germany of $277.3 million. Net income in 2003
includes an income tax benefit relating to the refund of prior year German
income taxes of $24.6 million. Net income in 2002 includes (i) an income tax
benefit related to the reduction in the Belgian corporate income tax rate of
$2.3 million and (ii) income of $1.8 million related to KII's foreign currency
transaction gain resulting from the extinguishment of certain intercompany
indebtedness. Each of these items is more fully discussed below and/or in the
notes to the consolidated financial statements included elsewhere in this
prospectus.
Due primarily to higher expected average selling prices, we currently
expect income from operations will be higher in 2005 compared to 2004, but this
increase will not offset the decline in income tax benefits in 2005 as compared
to 2004.
Relative changes in our TiO2 sales and operating income during the past
three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates.
30
Selling prices (in billing currencies) for TiO2, our principal product,
were generally: decreasing during the first quarter of 2002, flat during the
second quarter of 2002, increasing during the second half of 2002 and the first
quarter of 2003, flat during the second quarter of 2003, decreasing during the
second half of 2003 and the first half of 2004 and increasing during the second
half of 2004. Changes in our selling prices are largely driven by relative
industry demand and supply conditions and other economic factors.
Results of Operations
Three months ended %
March 31, Change
------------------- -------
2004 2005
---- ----
(In $ millions)
Net sales $ 192.2 $ 209.5 + 9%
Cost of sales 142.6 147.1 + 3%
Gross margin 49.6 62.4 + 26%
Selling, general and administrative expenses (25.4) (28.1) + 11%
Currency transaction gains, net .4 .8
Royalty income 1.3 1.5
Income from operations $ 25.9 $ 36.6 + 41%
TiO2 operating statistics:
Percent changes in average selling prices:
Using actual foreign currency exchange rates + 12%
Impact of changes in foreign currency exchange
rates - 7%
In billing currencies + 5%
Average selling price index
(1990 = 100) 80 83
Sales volumes* 81 77 - 5%
Production volumes* 79 81 + 3%
Production rate as a percent of capacity Full Full
____________________________
-------------------------------------------------------------------------------
* Thousands of metric tons
31
Years ended December 31, % Change
------------------------------- --------------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In $ millions)
Net sales $ 579.7 $ 715.9 $ 808.0 +23% +13%
Cost of sales 454.2 516.9 609.6 +14% +18%
------- ------- -------
Gross margin 125.5 199.0 198.4 +59% **
Selling, general and administrative expense (72.0) (87.0) (104.1) +21% +20%
Currency transaction gains (losses), net 12.4 (3.7) (2.2)
Royalty income 5.8 6.1 6.0
Other operating income (expense), net (.2) - (.5)
------- ------- -------
Income from operations $ 71.5 $ 114.4 $ 97.6 +60% -15%
======= ======= =======
TiO2 operating statistics:
Percent change in average selling prices:
Using actual foreign currency exchange
rates +20% + 4%
Impact of changes in foreign currency
exchange rates -20% - 7%
---- ----
In billing currencies **% - 3%
==== ====
Average selling price index (1990 = 100) 79 82 80
Sales volumes* 297 310 336 + 4% + 8%
Production volumes* 293 320 328 + 9% + 3%
Production rate as percent of capacity 93% Full Full
____________________________
* Thousands of metric tons
** less that 1%
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31,
2004
Our sales increased $17.3 million (9%) in the first quarter of 2005
compared to the first quarter of 2004 due to the net effects of higher average
TiO2 selling prices, lower TiO2 selling volumes and the favorable effect of
fluctuations in foreign currency exchange rates, which increased sales by
approximately $11 million, as further discussed below. Excluding the effect of
fluctuations in the value of the U.S. dollar relative to other currencies, our
average TiO2 selling prices in billing currencies in the first quarter of 2005
were 5% higher as compared to the first quarter of 2004. When translated from
billing currencies to U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods, our average TiO2 selling prices in the
first quarter of 2005 increased 12% compared to the first quarter of 2004. The
higher average selling prices in the first quarter of 2005 is due primarily to
the implementation of prior price increase announcements.
Our TiO2 sales volumes in the first quarter of 2005 decreased 5% compared
to the first quarter of 2004, due primarily to lower volumes in export markets.
Demand for TiO2 has remained strong throughout 2004 and 2005, and while we
believe that the strong demand is largely attributable to the end-use demand of
its customers, it is possible that some portion of the strong demand resulted
from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Our income from
operations comparisons were also favorably impacted by higher production levels,
which increased 3% in the first quarter of 2005 as compared to the same period
in 2004. Our operating rates were near full capacity in both periods, and our
production volume in the first quarter of 2005 was a new record for us for a
first quarter.
32
Our cost of sales increased $4.5 million (3%) in the first quarter of 2005
compared to the first quarter of 2004 largely due to the increase in net sales
and the effects of translating foreign currencies (primarily the euro) into U.S.
dollars. As a result of the higher average TiO2 selling prices in billing
currencies our cost of sales, as a percentage of net sales, decreased from 74%
in the first quarter of 2004 to 70% in the first quarter of 2005.
Our gross margins for the first quarter of 2005 increased $12.8 million
(26%) from the first quarter of 2004 due to the net effects of the
aforementioned increases in sales and cost of sales.
Selling, general and administrative expenses increased $2.7 million (11%)
in the first quarter of 2005 as compared to the corresponding period in 2004.
This increase is largely attributable to the impact of translating foreign
currencies (primarily the euro) into U.S. dollars.
In April 2005, we sold our passive interest in a Norwegian smelting
operation, which had a nominal carrying value for financial reporting purposes,
for approximately $5 million. We expect to recognize a gain of approximately $5
million related to such sale in the second quarter of 2005, and will report such
gain as part of income from operations.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Our sales increased $92.1 million (13%) in 2004 as compared to 2003 as
higher sales volumes and the favorable effect of fluctuations in foreign
currency exchange rates, which increased sales by approximately $56 million as
further discussed below, more than offset the impact of lower average TiO2
selling prices. Excluding the effect of fluctuations in the value of the U.S.
dollar relative to other currencies, our average TiO2 selling prices in billing
currencies were 3% lower in 2004 as compared to 2003. When translated from
billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, our average TiO2 selling prices
in 2004 increased 4% as compared to 2003. See " - Effects of foreign currency
exchange rates" below for a discussion of the impact of relative changes in
currency exchange rates on our operations.
Our TiO2 sales volumes in 2004 increased 8% compared to 2003, due to higher
sales volumes in Europe and export markets. By volume, approximately 77% of our
2004 TiO2 sales were attributable to markets in Europe, with 14% attributable to
export markets and the balance to North America. Demand for TiO2 has remained
strong throughout 2004, and while we believe that the strong demand is largely
attributable to the end-use demand of our customers, it is possible that some
portion of the strong demand resulted from customers increasing their inventory
levels of TiO2 in advance of implementation of announced or anticipated price
increases. Our operating income comparisons were also favorably impacted by
higher production levels, which increased 3%. Our operating rates were near full
capacity in both periods, and our sales and production volumes in 2004 were both
new records for us, setting new volume records for us for the third consecutive
year.
Our cost of sales increased $92.7 million (18%) in 2004 compared to 2003
due to higher raw material and maintenance costs as well as higher sales volumes
and related effects of translating foreign currencies into the U.S. dollar. Our
cost of sales, as a percentage of net sales, increased from 72% in 2003 to 75%
in 2004 due primarily to the effects of lower average selling prices and higher
costs.
Our gross margins decreased $.6 million (less than 1%) from 2003 to 2004
due to the net effects of the aforementioned changes in sales and cost of sales
during such periods.
As a percentage of net sales, selling, general and administrative expenses
were relatively consistent from 2003 to 2004, increasing marginally from 12% to
13%, and increasing proportionately with the increased sales and production
volume.
Our income from operations decreased $16.8 million (15%) in 2004 as
compared to 2003, as the effect of lower average TiO2 selling prices and higher
raw material and maintenance costs more than offset the impact of higher sales
and production volumes. See also " - Effects of foreign currency exchange rates"
below for a discussion of the impact of relative changes in currency exchange
rates on our operations.
33
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Our sales increased $136.2 million (23%) in 2003 compared to 2002 due to
higher average selling prices along with higher sales volumes in 2003 and the
positive effects of currency exchange rates, specifically the weaker U.S. dollar
as compared to the euro. Excluding the effect of fluctuations in the value of
the U.S. dollar relative to other currencies, our average TiO2 selling price in
2003 was consistent with 2002. When translated from billing currencies to U.S.
dollars using actual foreign currency exchange rates prevailing during the
respective periods our average TiO2 selling prices in 2003 increased 20%
compared to 2002. See " - Effects of Foreign Currency Exchange Rates" below for
a discussion of the impact of relative changes in currency exchange rates on our
operations.
Our TiO2 sales volumes in 2003 set a new record, increasing 4% from the
previous record achieved in 2002, with higher volumes in European and North
American markets more than offsetting a decline in volumes to other regions. By
volume, approximately 75% of our 2002 and 2003 TiO2 sales volumes were
attributable to markets in Europe, with approximately 10% attributable to North
America and the balance to other regions. Our operating income comparisons were
also favorably impacted by higher production levels, which increased 9%.
Operating rates were near full capacity during most of 2003, setting a new
company production record.
Our cost of sales increased $62.7 million (14%) in 2003 compared to 2002
due to the higher sales volumes. Our cost of sales, as a percentage of net
sales, decreased from 78% in 2002 to 72% in 2003 due primarily to the effects of
continued cost reduction efforts combined with the impact of higher production
volumes and higher average selling prices.
Our gross margins increased $73.5 million (59%) from 2002 to 2003 due to
the net effects of the aforementioned changes in sales and cost of sales during
such periods.
As a percentage of net sales, selling general and administrative expenses
remained consistent at 12%, increasing proportionately with the increased sales
and production volume.
Our income from operations increased $42.9 million (60%) in 2003 compared
to 2002 due primarily to higher average TiO2 selling prices and higher TiO2
sales and production volumes. See also " - Effects of Foreign Currency Exchange
Rates" below for a discussion of the impact of relative changes in currency
exchange rates on our operations.
Effects of Foreign Currency Exchange Rates
Our sales are denominated in various currencies, including the euro and
other major European currencies. The disclosure of the percentage change in our
average TiO2 selling prices in billing currencies (which excludes the effects of
fluctuations in the value of the U.S. dollar relative to other currencies) is
considered a "non-GAAP" financial measure under regulations of the SEC. The
disclosure of the percentage change in our average TiO2 selling prices using
actual foreign currency exchange rates prevailing during the respective periods
is considered the most directly comparable financial measure presented in
accordance with GAAP ("GAAP measure"). We disclose percentage changes in our
average TiO2 prices in billing currencies because we believe such disclosure
provides useful information to investors to allow them to analyze such changes
without the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in average
selling prices in the actual various billing currencies. Generally, when the
U.S. dollar either strengthens or weakens against other currencies, the
percentage change in average selling prices in billing currencies will be higher
or lower, respectively, than such percentage changes would be using actual
exchange rates prevailing during the respective periods. The difference between
the 20%, 4% and 12% increases in our average TiO2 selling prices during 2003,
2004 and the first quarter of 2005, respectively, as compared to the respective
prior periods using actual foreign currency exchange rates prevailing during the
respective periods (the GAAP measure), and the minimal percentage change, 3%
decrease and 5% increase in our average TiO2 selling prices in billing
currencies (the non-GAAP measure) during such periods was due to the effect of
changes in foreign currency exchange rates. The above table presents (i) the
percentage change in our average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), (ii) the percentage change in our average TiO2 selling prices in
billing currencies (the non-GAAP measure) and (iii) the percentage change due to
changes in foreign currency exchange rates (or the reconciling item between the
non-GAAP measure and the GAAP measure).
34
Our operations and assets are located outside of the United States
(primarily in Germany, Belgium and Norway). A significant amount of our sales
generated from our operations are denominated in currencies other than the U.S.
dollar, principally the euro and other major European currencies. A portion of
our sales generated from our operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
our foreign sales and operating results are subject to currency exchange rate
fluctuations which may favorably or adversely impact reported earnings and may
affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales by a net $11 million in the first
quarter of 2005 compared to the first quarter of 2004, increased TiO2 sales by a
net $56 million in 2004 as compared to 2003, and increased TiO2 sales by a net
$89 million in 2003 as compared to 2002. Fluctuations in the value of the U.S.
dollar relative to other currencies similarly impacted our foreign
currency-denominated operating expenses. Our operating costs that are not
denominated in the U.S. dollar, when translated into U.S. dollars, were higher
in 2004 and 2003 compared to the same periods in prior years. Overall, currency
exchange rate fluctuations resulted in approximately a net $1 million increase
in our income from operations in the first quarter of 2005 as compared to the
first quarter of 2004, an approximate $9 million increase in our income from
operations in 2004 as compared to 2003, and resulted in a net increase in our
income from operations in 2003 of approximately $5 million as compared to 2002.
Outlook
Reflecting the continued implementation of price increase announcements,
our average TiO2 selling prices in billing currencies in the first quarter of
2005 were 3% higher than the fourth quarter of 2004. We expect our TiO2
production volumes in the remainder of 2005 will be slightly higher than its
2004 volumes, with sales volumes comparable to or slightly lower in 2005 as
compared to 2004. Our average TiO2 selling prices, which started to increase
during the second half of 2004 and continued to increase during the first
quarter of 2005, are expected to continue to increase during the remainder of
2005, and consequently, we currently expect our average TiO2 selling prices, in
billing currencies, will be higher in 2005 as compared to 2004. The anticipated
higher selling prices in 2005 reflect the expected continued implementation of
selling price announcements, including our latest price increases announced in
March 2005 which are expected to begin to be implemented beginning April 1,
2005. The extent to which all of such price increases, and any additional price
increases which may be announced subsequently in 2005, will be realized will
depend on, among other things, economic factors. Overall, we expect our income
from operations in 2005 will be higher than 2004, due primarily to higher
expected selling prices. Our expectations as to the future prospects of us and
the TiO2 industry are based upon a number of factors beyond our control,
including worldwide growth of gross domestic product, competition in the
marketplace, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from our expectations, our
results of operations could be unfavorably affected.
Our efforts to debottleneck our production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of back-end finishing capacity to be able to
process a larger quantity of the base TiO2 produced and equipment upgrades and
enhancements to allow for reduced downtime for maintenance activities. Our
production capacity has increased by approximately 30% over the past ten years
due to such debottlenecking programs, with only moderate capital investment. We
believe our annual attainable production capacity for 2005 is approximately
334,000 metric tons, with some slight additional capacity available in 2006
through our continued debottlenecking efforts. To illustrate the additional
production capacity generated primarily by our debottlenecking efforts, the
following table presents, by plant, the 1994 production capacity of our
facilities and the expected production capacity for 2005. The decrease in the
production capacity for the Leverkusen sulfate facility results primarily from
the effects of a 1991 fire at such facility.
35
1994 Production 2005 Expected
Facility Capacity Production Capacity
--------------------------- --------------- -------------------
(in thousands of metric tons)
Leverkusen - Chloride 85 144
Leverkusen - Sulfate 35 26
Nordenham - Sulfate 60 60
Fredrikstad - Sulfate 30 30
Langerbrugge - Chloride 50 74
Other Income (Expense)
The following table sets forth certain information regarding other income
and expense items.
Years ended December 31, Three months ended March 31,
--------------------------------- ----------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(In millions)
Currency transaction gains $ 2.7 $ - $ - $ - $ -
Interest income from affiliates 22.8 - 2.8 - 4.9
Trade interest income 1.6 .7 1.1 (.2) .1
Interest expense to affiliates (18.7) (.1) - - -
Interest expense (16.7) (32.5) (36.7) (9.0) (11.6)
------- ------- ------- ------ -------
$ (8.3) $ (31.9) $ (32.8) $ (8.8) $ (6.6)
======= ======= ======= ====== =======
Interest income fluctuates in part based upon the amount of funds invested
and yields thereon. Interest income from affiliates increased $4.9 million in
the first quarter of 2005 as compared to the first quarter of 2004 as a result
of our notes receivable from Kronos discussed in note 8 to the consolidated
financial statements included elsewhere in this prospectus. As discussed in such
note 8, we expect to receive the quarterly interest payments on such notes
receivable, although the principal amount of such notes receivable are expected
to be settled through a capital transaction in the form of a noncash dividend.
Aggregate interest income increased $3.2 million in 2004 compared to 2003
due primarily to interest on our notes receivable from Kronos entered into
during the fourth quarter of 2004. Aggregate interest income declined $23.7
million in 2003 compared to 2002 primarily due to lower average yields on
invested funds and lower average levels of funds available for investment. We
expect interest income will be higher in 2005 than 2004 due to our notes
receivable from Kronos which are expected to be outstanding during the full
year.
We have a significant amount of indebtedness denominated in the euro,
including our euro-denominated initial notes. Accordingly, the reported amount
of interest expense will vary depending on relative changes in foreign currency
exchange rates. Interest expense in the first quarter of 2005 was $11.6 million,
an increase of $2.6 million from the first quarter of 2004. The increase was due
primarily to higher levels of outstanding indebtedness resulting from the
issuance of an additional euro 90 million principal amount of our Senior Secured
Notes in November 2004. In addition, the increase in interest expense was due to
relative changes in foreign currency exchange rates, which increased the U.S.
dollar equivalent of interest expense on our euro 285 million Senior Secured
Notes outstanding during both periods by approximately $500,000 in the first
quarter of 2005 as compared to the first quarter of 2004.
36
Interest expense in 2004 was higher than 2003 due primarily to relative
changes in foreign currency exchange rates, which increased the U.S. dollar
equivalent of interest expense on the euro 285 million principal amount of our
initial notes outstanding during both years by approximately $3 million as
compared to the respective prior year. In addition, we issued an additional euro
90 million principal amount of senior secured notes in November 2004, and the
interest expense associated with the additional euro 90 million principal amount
of senior secured notes issued in November 2004 was $1 million in 2004.
Interest expense decreased $2.8 million in 2003 as compared to 2002 due
primarily to the net effects of lower average levels of indebtedness, associated
currency effects and lower average interest rates on our indebtedness.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense in 2005 is expected to be
higher than 2004 due primarily to the effect of the issuance of an additional
euro 90 million principal amount of our senior secured notes in November 2004.
At December 31, 2004, approximately $519.2 million of consolidated
indebtedness, principally our senior secured notes, bears interest at fixed
interest rates averaging 8.4% (2003 - $356 million with a weighted average
interest rate of 8.9%; 2002 - $297 million with a weighted average fixed
interest rate of 8.9%). The weighted average interest rate on $14 million of
outstanding variable rate borrowings at December 31, 2004 was 3.9% (2003 - none
outstanding; 2002 - $27 million outstanding at 6.5%). See Note 6 to the
consolidated financial statements included elsewhere in this prospectus.
We had certain loans to affiliates that were outstanding during 2002. We
transferred such notes receivable from affiliates to Kronos in July 2002, and
accordingly no longer reports interest income on such loans to affiliates after
that date.
As noted above, we have a certain amount of indebtedness denominated in
currencies other than the U.S. dollar. See "Quantitative and Qualitative
Disclosures About Market Risk."
Provision for Income Taxes. The principal reasons for the difference
between our effective income tax rates and the U.S. federal statutory income tax
rates are explained in Note 9 to the consolidated financial statements included
elsewhere in this prospectus. Income tax rates vary by jurisdiction (country
and/or state), and relative changes in the geographic mix of our pre-tax
earnings can result in fluctuations in the effective income tax rate.
At March 31, 2005, we had the equivalent of $633 million and $205 million
of income tax loss carryforwards for German corporate and trade tax purposes,
respectively. At December 31, 2004, we had the equivalent of $671 million and
$232 million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in Note 9 to the consolidated financial statements included elsewhere
in this prospectus, we had previously provided a deferred income tax asset
valuation allowance against substantially all of these tax loss carryforwards
and other deductible temporary differences in Germany because we did not believe
they met the "more-likely-than-not" recognition criteria. During the first six
months of 2004, we reduced our deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, we
concluded that these German tax loss carryforwards and other deductible
temporary differences now met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004, we
reversed $268.6 million of the valuation allowance (the portion related to
future years), and we reversed the remaining $3.4 million during the last six
months of 2004. Because the benefit of such net operating loss carryforwards and
other deductible temporary differences in Germany has now been recognized, our
effective income tax rate in 2005 is expected to be higher than what it would
have otherwise been, although our future cash income tax rate will not be
affected by the reversal of the valuation allowance. Prior to the complete
utilization of such carryforwards, it is possible that we might conclude in the
future that the benefit of such carryforwards would no longer meet the
more-likely-than-not recognition criteria, at which point we would be required
to recognize a valuation allowance against the then-remaining tax benefit
associated with the carryforwards.
37
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on our
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable income earned in Germany.
During 2003, we reduced our deferred income tax asset valuation allowance
by an aggregate of approximately $6.7 million, primarily as a result of
utilization of certain income tax attributes for which the benefit had not
previously been recognized. In addition, we recognized a $38.0 million income
tax benefit related to the net refund of certain prior year German income taxes.
During 2002, we reduced our deferred income tax asset valuation allowance
by an aggregate of approximately $2.8 million, primarily as a result of
utilization of certain income tax attributes for which the benefit had not
previously been recognized. The provision for income taxes in 2002 also includes
a $2.3 million deferred income tax benefit related to certain changes in the
Belgian tax law.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact us. These
provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. See Note 9 to the consolidated financial statements
included elsewhere in this prospectus.
Accounting Principles Newly Adopted in 2002, 2003 and 2004. See Note 14 to
the consolidated financial statements included elsewhere in this prospectus.
Accounting Principles Not Yet Adopted. See Note 15 to consolidated
financial statements included elsewhere in this prospectus.
Defined Benefit Pension Plans. We maintain various defined benefit pension
plans in Europe. See Note 10 to the consolidated financial statements included
elsewhere in this prospectus.
We account for our defined benefit pension plans using SFAS No. 87,
"Employer's Accounting for Pensions." Under SFAS No. 87, defined benefit pension
plan expense and prepaid and accrued pension costs are each recognized based on
certain actuarial assumptions, principally the assumed discount rate, the
assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. We recognized consolidated defined benefit pension
plan expense of $5.7 million in 2002, $5.8 million in 2003 and $10.4 million in
2004. The amount of funding requirements for these defined benefit pension plans
is generally based upon applicable regulations (such as ERISA in the U.S.), and
will generally differ from pension expense recognized under SFAS No. 87 for
financial reporting purposes. We made aggregate contributions to all of our
plans of $7.8 million in 2002, $10.2 million in 2003 and $11.7 million in 2004.
The discount rates we utilize for determining defined benefit pension
expense and the related pension obligations are based on current interest rates
earned on long-term bonds that receive one of the two highest ratings given by
recognized rating agencies in the applicable country where the defined benefit
pension benefits are being paid. In addition, we receive advice about
appropriate discount rates from our third-party actuaries, who may in some cases
utilize their own market indices. The discount rates are adjusted as of each
valuation date (September 30th) to reflect then-current interest rates on such
long-term bonds. Such discount rates are used to determine the actuarial present
value of the pension obligations as of December 31st of that year, and such
discount rates are also used to determine the interest component of defined
benefit pension expense for the following year.
At December 31, 2004, approximately 76% and 20% of the projected benefit
obligation related our plans in Germany and Norway, respectively. We use several
different discount rate assumptions in determining our consolidated defined
benefit pension plan obligations and expense because we maintain defined benefit
pension plans in several different countries in Europe and the interest rate
environment differs from country to country.
38
We used the following discount rates for our defined benefit pension plans:
Discount rates used for:
----------------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2002 and expense in December 31, 2003 and expense December 31, 2004 and
2003 in 2004 expense in 2005
----------------------------------- -------------------------------- -----------------------------
Germany 5.5% 5.3% 5.0%
Norway 6.0% 5.5% 5.0%
The assumed long-term rate of return on plan assets represents the
estimated average rate of earnings expected to be earned on the funds invested
or to be invested in the plans' assets provided to fund the benefit payments
inherent in the projected benefit obligations. Unlike the discount rate, which
is adjusted each year based on changes in current long-term interest rates, the
assumed long-term rate of return on plan assets will not necessarily change
based upon the actual, short-term performance of the plan assets in any given
year. Defined benefit pension expense each year is based upon the assumed
long-term rate of return on plan assets for each plan and the actual fair value
of the plan assets as of the beginning of the year. Differences between the
expected return on plan assets for a given year and the actual return are
deferred and amortized over future periods based either upon the expected
average remaining service life of the active plan participants (for plans for
which benefits are still being earned by active employees) or the average
remaining life expectancy of the inactive participants (for plans for which
benefits are not still being earned by active employees).
At December 31, 2004, approximately 70% and 26% of the plan assets related
to our plans in Germany and Norway, respectively. We use several different
long-term rates of return on plan asset assumptions in determining our
consolidated defined benefit pension plan expense because we maintain defined
benefit pension plans in several different countries in Europe, the plan assets
in different countries are invested in a different mix of investments and the
long-term rates of return for different investments differ from country to
country.
In determining the expected long-term rate of return on plan asset
assumptions, we consider the long-term asset mix (e.g., equity vs. fixed income)
for the assets for each of our plans and the expected long-term rates of return
for such asset components. In addition, we receive advice about appropriate
long-term rates of return from our third-party actuaries. Such assumed asset
mixes are summarized below:
o In Germany, the composition of our plan assets is established to satisfy
the requirements of the German insurance commissioner. The current plan
asset allocation at December 31, 2004 was 23% to equity managers, 48% to
fixed income managers and 29% to real estate.
o In Norway, we currently have a plan asset target allocation of 14% to
equity managers, 62% to fixed income managers and the remainder primarily
to cash and liquid investments. The expected long-term rate of return for
such investments is approximately 8%, 4.5% to 6.5% and 2.5%, respectively.
The plan asset allocation at December 31, 2004 was 16% to equity managers,
64% to fixed income managers and the remainder primarily to cash and liquid
investments.
o We regularly review our actual asset allocation for each of our plans and
will periodically rebalance the investments in each plan to more accurately
reflect the targeted allocation when considered appropriate.
Our assumed long-term rates of return on plan assets for 2002, 2003 and
2004 were as follows:
2002 2003 2004
---- ---- ----
Germany 6.8% 6.5% 6.0%
Norway 7.0% 6.0% 6.0%
39
We currently expect to utilize the same long-term rate of return on plan
asset assumptions in 2005 as we used in 2004 for purposes of determining the
2005 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of our plans for
which the benefit formula is so calculated, we generally base the assumed
expected increase in future compensation levels upon average long-term inflation
rates for the applicable country.
In addition to the actuarial assumptions discussed above, because we
maintain our defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and our current
expectation for what actual average foreign currency exchange rates will be
during 2005, we expect our defined benefit pension expense will approximate $11
million in 2005. In comparison, we expect to be required to make approximately
$4 million of contributions to such plans during 2005.
As noted above, defined benefit pension expense and the amounts recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. We believe all of the actuarial assumptions used are reasonable
and appropriate. If we had lowered the assumed discount rate by 25 basis points
for all of our plans as of December 31, 2004, our aggregate projected benefit
obligations would have increased by approximately $11.1 million at that date,
and our defined benefit pension expense would be expected to increase by
approximately $1.4 million during 2005. Similarly, if we lowered the assumed
long-term rate of return on plan assets by 25 basis points for all of our plans,
our defined benefit pension expense would be expected to increase by
approximately $500,000 during 2005.
Foreign Operations
Our operations are located in Europe where the functional currency is not
the U.S. dollar. As a result, the reported amount of our assets and liabilities,
and therefore our consolidated net assets, will fluctuate based upon changes in
currency exchange rates. At December 31, 2004, we had substantial net assets
denominated in the euro, Norwegian kroner and United Kingdom pound sterling.
Liquidity and Capital Resources
Consolidated Cash Flows
Our consolidated cash flows for each of the past three years and for the
three months ended March 31, 2004 and 2005 are presented below:
Three months ended
Years ended December 31, March 31,
----------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(In millions)
Operating activities $ 68.2 $ 104.8 $ 142.2 $ 33.9 $ 3.4
Investing activities (29.7) (31.7) (34.2) (3.4) (4.3)
Financing activities (57.5) (54.9) (129.9) (27.5) -
------- ------- ------- ------- -------
Net cash provided (used) by operating,
investing and financing activities $ (19.0) $ 18.2 $ (21.9) $ 3.0 $ (.9)
======= ======= ======= ======= =======
40
Summary. Our primary source of liquidity on an ongoing basis is our cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay any short-term indebtedness incurred primarily for
working capital purposes and (iii) provide for the payment of dividends. In
addition, from time-to-time we will incur indebtedness, generally to (i) fund
short-term working capital needs, (ii) refinance existing indebtedness or (iii)
fund major capital expenditures or the acquisition of other assets outside the
ordinary course of business. Also, we will from time-to-time sell assets outside
the ordinary course of business, the proceeds of which are generally used to (i)
repay existing indebtedness (including indebtedness which may have been
collateralized by the assets sold), (ii) make investments in marketable and
other securities, (iii) fund major capital expenditures or the acquisition of
other assets outside the ordinary course of business or (iv) pay dividends.
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in our earnings.
However, certain items included in the determination of net income are non-cash,
and therefore such items have no impact on cash flows from operating activities.
Non-cash items included in the determination of net income include depreciation
and amortization expense, non-cash interest expense and asset impairment
charges. Non-cash interest expense relates to amortization of original issue
discount or premium on certain indebtedness and amortization of deferred
financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, the amount of periodic defined benefit pension plan expense
depends upon a number of factors, including certain actuarial assumptions, and
changes in such actuarial assumptions will result in a change in the reported
expense. In addition, the amount of such periodic expense generally differs from
the outflows of cash required to be currently paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal long-lived assets are included in the determination of net
income, although the proceeds from any such disposal are shown as part of cash
flows from investing activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect our liquidity. Relative changes in assets
and liabilities generally result from the timing of production, sales, purchases
and income tax payments. Such relative changes can significantly impact the
comparability of cash flow from operations from period to period, as the income
statement impact of such items may occur in a different period from when the
underlying cash transaction occurs. For example, raw materials may be purchased
in one period, but the payment for such raw materials may occur in a subsequent
period. Similarly, inventory may be sold in one period, but the cash collection
of the receivable may occur in a subsequent period. Relative changes in accounts
receivable are affected by, among other things, the timing of sales and the
collection of the resulting receivable. Relative changes in inventories,
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volumes and sales volumes.
Cash flows from operating activities decreased from $33.9 million provided
by operating activities in the first three months of 2004 to $3.4 million of
cash provided by operating activities in the first three months of 2005. This
$30.5 million decrease was due primarily to the net effects of (i) higher net
income of $5.1 million, (ii) higher deferred income taxes of $5.6 million, (iii)
a higher amount of net cash used from relative changes in our inventories,
receivables, payables and accruals of $14.4 million in the first three months of
2005 as compared to the first three months of 2004 and (iv) higher cash paid for
income taxes of $21.1 million, due in large part to a $20.1 million tax refund
received during the first three months of 2004. Relative changes in accounts
receivable are affected by, among other things, the timing of sales and the
collection of the resulting receivables. Relative changes in inventories and
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volumes and sales volumes.
Cash flows provided from operating activities increased from $104.8 million
in 2003 to $142.2 million in 2004. This $37.4 million increase was due primarily
to the net effect of (i) higher net income of $244.2 million, (ii) a larger
deferred income tax benefit of $312.7 million, (iii) higher depreciation and
41
amortization expense of $4.1 million, (iv) a higher amount of net cash provided
from changes in our inventories, receivables, payables, accruals and accounts
with affiliates of $34.5 million and (v) higher cash received for income taxes
of $12.3 million.
Cash flows from operating activities increased from $68.2 million in 2002
to $104.8 million in 2003. This $36.6 million increase was due primarily to the
effect of (i) higher net income of $29.5 million, (ii) higher depreciation
expense of $6.5 million, (iii) a lower amount of net cash generated from
relative changes in our inventories, receivables, payables and accruals and
accounts with affiliates of $22.6 million in 2003 as compared to 2002 and (iv)
lower cash paid for income taxes of $18.3 million. Relative changes in accounts
receivable are affected by, among other things, the timing of sales and the
collection of the resulting receivable. Relative changes in inventories and
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volume and sales volume.
Investing Cash Flows. Our capital expenditures were $4.0 million and $4.8
million in the first three months of 2004 and 2005, respectively.
Our capital expenditures were $27.6 million, $31.5 million and $33.7
million in 2002, 2003 and 2004, respectively. Capital expenditures in 2002
included an aggregate of $3.1 million for the rebuilding of our Leverkusen,
Germany sulfate plant.
Our capital expenditures during the past three years include an aggregate
of approximately $14 million ($5.1 million in 2004) for our ongoing
environmental protection and compliance programs. Our estimated 2005 capital
expenditures are $37 million and include approximately $4 million in the area of
environmental protection and compliance.
Financing Cash Flows. During 2004, (i) we issued an additional euro 90
million principal amount of our senior secured notes at 107% of par (equivalent
to $130 million when issued) and (ii) our operating subsidiaries in Germany,
Belgium and Norway borrowed an aggregate of euro 90 million ($112 million when
borrowed) of borrowings under our three-year euro 80 million secured revolving
credit facility ("European Credit Facility"), of which euro 80 million ($100
million) were subsequently repaid. See Note 6 to the consolidated financial
statements included elsewhere in this prospectus.
In the fourth quarter of 2004, we transferred an aggregate euro 163.1
million ($209.5 million) to Kronos in return for two promissory notes. Interest
on both notes is payable to us on a quarterly basis at an annual rate of 9.25%.
Due to the long-term investment nature of these notes, settlement of the
intercompany notes receivable is not contemplated within the foreseeable future
and as such have been presented as a separate component of our stockholder's
equity.
In March 2003, our operating subsidiaries in Germany, Belgium and Norway
borrowed euro 15 million ($16.1 million when borrowed), in April 2003, repaid
NOK 80 million ($11.0 million when repaid) and in the third quarter of 2003,
repaid euro 30.0 million ($33.9 million when repaid) under the European Credit
Facility.
In March 2002, we repaid $25 million principal amount of affiliate
indebtedness to Kronos. In June 2002, we repaid $169 million principal amount,
plus accrued interest of affiliate indebtedness, to Kronos with proceeds from
the June 2002 issuance of the euro 285 million principal amount of the initial
notes ($280 million when issued). Further, in June 2002, we repaid euro 113.8
million ($111.8 million), including interest, of a euro-denominated note payable
to Kronos with proceeds from the offering of the initial notes.
Also in June 2002, our operating subsidiaries in Germany, Belgium and
Norway borrowed euro 13 million ($13 million) and NOK 200 million ($26 million)
which, along with available cash, was used to repay and terminate our short term
notes payable ($53.2 million when repaid). In 2002, we repaid a net
euro-equivalent 12.7 million ($12.4 million when repaid) and 1.7 million ($1.6
million when repaid), respectively, of the European Credit Facility.
42
Deferred financing costs paid of $10.0 million in 2002 and $2.0 million in
2004 for the initial notes and the European Credit Facility are being amortized
over the lives of the respective agreements and are included in other noncurrent
assets as of December 31, 2004.
Cash dividends paid during 2003 and 2004 totaled $25.0 million and $60.0
million, respectively. (No dividends were paid in 2002).
Cash flows related to capital contributions and other transactions with
affiliates aggregated a net cash inflow of $2.9 million in 2002. Such amounts
related principally to dividends or loans we received from, or capital
contributions or loans we made to affiliates (such notes receivable from
affiliates being reported as reductions to our stockholder's equity, and
therefore considered financing cash flows). We transferred our Canadian
operations to Kronos in April 2002, and accordingly we no longer report any such
capital transaction cash flows related to such Canadian operations subsequent to
April 2002. Additionally, settlement of the above-mentioned notes receivable
from affiliates was not then currently contemplated in the foreseeable future.
In July 2002, we transferred such notes receivable from affiliates to Kronos in
one or more non-cash transactions, and as a result we no longer report cash
flows related to such notes receivable from affiliates.
Provisions contained in certain of our credit agreements could result in
the acceleration of the applicable indebtedness prior to its stated maturity.
For example, certain credit agreements allow the lender to accelerate the
maturity of the indebtedness upon a change of control (as defined) of the
borrower. In addition, certain credit agreements could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside the ordinary course of business. Other than operating lease commitments
disclosed in Note 12 to the consolidated financial statements included elsewhere
in this prospectus, we are not party to any material off-balance sheet financing
arrangements.
Cash, Cash Equivalents, Restricted Cash and Restricted Marketable Debt
Securities and Borrowing Availability. At March 31, 2005, we had current cash
and cash equivalents aggregating $16.1 million, had current restricted cash
equivalents of $965,000 and noncurrent restricted marketable debt securities of
$2.7 million. At March 31, 2005, certain of our subsidiaries had approximately
$91 million available for borrowing under the European Credit Facility (based on
borrowing availability). The European Credit Facility, as amended, matures in
June 2008. At March 31, 2005, we had approximately $62 million available for
payment of dividends and other restricted payments as defined in the senior
secured notes indenture.
Based upon our expectations for the TiO2 industry and anticipated demands
on our cash resources as discussed herein, we expect to have sufficient
short-term (the twelve-month period ending March 31, 2006) and long-term
(through December 2009, representing the five-year period for which we generally
do forecasts) liquidity to meet our obligations including operations, capital
expenditures, debt service and current dividend policy. To the extent that
actual developments differ from our expectations, our liquidity could be
adversely affected.
Legal Proceedings and Environmental Matters. See Note 12 to the
consolidated financial statements included elsewhere in this prospectus for
certain legal proceedings and environmental matters.
Foreign Operations. As discussed above, our operations are located outside
the United States for which the functional currency is not the U.S. dollar. As a
result, the reported amount of our assets and liabilities related to our
operations, and therefore our consolidated net assets, will fluctuate based upon
changes in currency exchange rates. At March 31, 2005, we had substantial net
assets denominated in the euro, Norwegian kroner and United Kingdom pound
sterling.
Redeemable Preferred Stock, Profit Participation Certificates and Notes
Receivable From Affiliates. We had issued and outstanding Series A and Series B
redeemable preferred stock and profit participation certificates totaling $694.8
million at June 30, 2002, including cumulative and unpaid dividends. The Series
A redeemable preferred stock was issued to Kronos in February 1999 as a result
of a capital contribution to us through the reduction of our affiliate notes
payable to NL and Kronos. The Series B redeemable preferred stock was issued to
Kronos in February 1999 as a result of a contribution of intellectual property
by Kronos to us. The intellectual property was contributed to us at Kronos'
carryover basis of zero due to common control of us and Kronos. The profit
participation certificates were issued to Kronos in December 1999 as part of a
43
recapitalization. We had $753.0 million of outstanding notes receivable from
affiliates at June 30, 2002. Settlement of such notes receivable was not
currently contemplated in the then foreseeable future, and consequently such
notes receivable from affiliates were reported in our consolidated balance sheet
as a reduction of our stockholder's equity in accordance with GAAP. These notes
arose between us, NL and Kronos through a series of transactions with
affiliates, a substantial portion of which were noncash in nature. We
periodically converted accrued interest receivable from affiliates to notes
receivable from affiliates. See Note 8 to the consolidated financial statements
included elsewhere in this prospectus for the effect of the recapitalization in
July 2002 on us.
Other. We periodically evaluate our liquidity requirements, alternative
uses of capital, capital needs and availability of resources in view of, among
other things, our dividend policy, debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, we in the past has sought, and in the future may seek, to reduce,
refinance, repurchase or restructure indebtedness; raise additional capital;
issue additional securities; restructure ownership interests; modify our
dividend policy; sell interests in subsidiaries or other assets; or take a
combination of such steps or other steps to manage our liquidity and capital
resources. In the normal course of our business, we may review opportunities for
the acquisition, divestiture, joint venture or other business combinations in
the chemicals or other industries, as well as the acquisition of interests in
related companies. In the event of any such acquisition or joint venture
transaction, we may consider using available cash, issuing equity securities or
increasing our indebtedness to the extent permitted by the agreements governing
our existing debt. See Note 6 to the consolidated financial statements included
elsewhere in this prospectus.
Summary of Debt and Other Contractual Commitments
As more fully described in the notes to the consolidated financial
statements included elsewhere in this prospectus, we are a party to various
debt, lease and other agreements which contractually and unconditionally commit
us to pay certain amounts in the future. See Notes 6 and 12 to the consolidated
financial statements included elsewhere in this prospectus. The following table
summarizes such contractual commitments of ours and our consolidated
subsidiaries as of December 31, 2004 by the type and date of payment.
Payment due date
2010 and
--------------------------------------- 2005 2006/2007 2008/2009 after Total
Contractual commitment
(In millions)
Third-party indebtedness $ 13.8 $ .2 $ 519.2 $ - $ 533.2
Interest payments on third-party
indebtedness 45.0 89.4 44.7 - 179.1
Operating leases 3.4 4.0 3.0 20.9 31.3
Fixed asset acquisitions 5.5 - - - 5.5
Estimated tax obligations 17.1 - - - 17.1
------- ------- ------- ------ -------
$ 84.8 $ 93.6 $ 566.9 $ 20.9 $ 766.2
======= ======= ======= ====== =======
The timing and amount shown for our commitments related to indebtedness
(principal and interest), operating leases and fixed asset acquisitions are
based upon the contractual payment amount and the contractual payment date for
such commitments. With respect to revolving credit facilities, the amount shown
for indebtedness is based upon the actual amount outstanding at December 31,
2004, and the amount shown for interest for any outstanding variable-rate
indebtedness is based upon the December 31, 2004 interest rate and assumes that
such variable-rate indebtedness remains outstanding until the maturity of the
facility. The amount shown for income taxes is the consolidated amount of income
taxes payable at December 31, 2004, which is assumed to be paid during 2005. A
significant portion of the amount shown for indebtedness relates to our senior
secured notes ($519.2 million at December 31, 2004). Such indebtedness is
denominated in euro. See "Quantitative and Qualitative Disclosures About Market
Risk" and Note 6 to the consolidated financial statements included elsewhere in
this prospectus.
44
The above table does not reflect any amounts that we might pay to fund our
defined benefit pension plans, as the timing and amount of any such future
fundings are unknown and dependent on, among other things, the future
performance of defined benefit pension plan assets, interest rate assumptions
and actual future retiree medical costs. Such defined benefit pension plans are
discussed above in greater detail. The above table also does not reflect any
amounts that we might pay related to our asset retirement obligations, as the
terms and amounts of such future fundings are unknown. See Note 14 to the
consolidated financial statements included elsewhere in this prospectus. The
above table also does not reflect amounts that Kronos US, our affiliate, may pay
to purchase TiO2 feedstock on our behalf. See Note 12 to the consolidated
financial statements included elsewhere in this prospectus.
Quantitative and Qualitative Disclosures About Market Risk
General. We are exposed to market risk from changes in foreign currency
exchange rates, interest rates and equity security prices. In the past, we have
periodically entered into currency forward contracts, interest rate swaps or
other types of contracts in order to manage a portion of our interest rate
market risk. Otherwise, we do not generally enter into forward or option
contracts to manage such market risks, nor do we enter into any such contract or
other type of derivative instrument for trading or speculative purposes. Other
than as described below, we were not a party to any material forward or
derivative option contract related to foreign exchange rates, interest rates or
equity security prices at December 31, 2003 and 2004. See Notes 1 and 13 to the
consolidated financial statements included elsewhere in this prospectus.
Interest Rates. We are exposed to market risk from changes in interest
rates, primarily related to indebtedness. At December 31, 2003 and 2004,
substantially all of our aggregate indebtedness was comprised of fixed-rate
instruments. The large percentage of fixed-rate debt instruments minimizes
earnings volatility that would result from changes in interest rates. The
following table presents principal amounts and weighted average interest rates
for our aggregate outstanding indebtedness at December 31, 2004. At December 31,
2003 and 2004, all outstanding fixed-rate indebtedness was denominated in euros,
and the outstanding variable rate borrowings were denominated in euros.
Information shown below for such foreign currency denominated indebtedness is
presented in our U.S. dollar equivalent at December 31, 2004 using exchange
rates of 1.36 U.S. dollars per euro. Certain Norwegian kroner denominated
capital leases totaling $300,000 in 2004 have been excluded from the table
below.
Amount
-----------------------
Carrying Fair Interest Maturity
Indebtedness value value rate date
----------- -------- ------ -------- ---------
(In millions)
Fixed-rate indebtedness -
Euro-denominated
Senior Secured Notes $ 519.2 $ 549.1 8.9% 2009
======= =======
Variable rate indebtedness -
European Credit Facility $ 13.6 $ 13.6 3.9% 2005
======= =======
At December 31, 2003, euro-denominated fixed rate indebtedness aggregated
$356.1 million (fair value - $356.1 million) with a weighted-average interest
rate of 8.9%.
Foreign Currency Exchange Rates. We are exposed to market risk arising from
changes in foreign currency exchange rates as a result of manufacturing and
selling our products worldwide. Earnings are primarily affected by fluctuations
in the value of the U.S. dollar relative to the euro, the Norwegian kroner and
the United Kingdom pound sterling.
As described above, at December 31, 2004, we had the equivalent of $532.8
million of outstanding euro-denominated indebtedness (2003 - the equivalent of
45
$356.1 million of euro-denominated indebtedness). The potential increase in the
U.S. dollar equivalent of the principal amount outstanding resulting from a
hypothetical 10% adverse change in exchange rates at such date would be
approximately $52.4 million at December 31, 2004 (2003 - $35.6 million).
At December 31, 2003, we had entered into a short-term currency contract
maturing on January 2, 2004 to exchange an aggregate of euro 40 million into
U.S. dollars at an exchange rate of U.S. $1.25 per euro. Such contract was
entered into in conjunction with the January 2004 payment of an intercompany
dividend from one of our European subsidiaries. At December 31, 2003, the actual
exchange rate was U.S. $1.25 per euro. The estimated fair value of such foreign
currency forward contract was not material at December 31, 2003.
Other. We believe there may be a certain amount of incompleteness in the
sensitivity analysis presented above. For example, the hypothetical effect of
changes in exchange rates discussed above ignores the potential effect on other
variables which affect our results of operations and cash flows, such as demand
for our products, sales volumes and selling prices and operating expenses.
Accordingly, the amounts presented above are not necessarily an accurate
reflection of the potential losses we would incur assuming the hypothetical
changes in exchange rates were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
currency exchange rates. Actual future market conditions will likely differ
materially from such assumptions. Accordingly, such forward-looking statements
should not be considered to be projections by us of future events, gains or
losses.
Non-GAAP Financial Measures. In an effort to provide investors with
additional information regarding our results as determined by GAAP, we have
disclosed certain non-GAAP information which we believe provides useful
information to financial statement users. As discussed above, we disclose
percentage changes in our average TiO2 prices in billing currencies, which
excludes the effects of foreign currency translation. Such disclosure of the
percentage change in our average TiO2 selling price in billing currencies is
considered a "non-GAAP" financial measure under regulations of the SEC. The
disclosure of the percentage change in our average TiO2 selling prices using
actual foreign currency exchange rates prevailing during the respective periods
is considered the most directly comparable GAAP measure. We disclose percentage
changes in our average TiO2 prices in billing currencies because we believe such
disclosure provides useful information to financial statement users to allow
them to analyze such changes without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons of the
relative changes in average selling prices in the actual various billing
currencies. Generally, when the U.S. dollar either strengthens or weakens
against other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such percentage
changes using actual exchange rates prevailing during the respective periods.
46
BUSINESS
Kronos International, Inc. was incorporated in the State of Delaware,
U.S.A. on December 22, 1988, and is registered in the Commercial Register of the
Federal Republic of Germany. Our principal place of business is in Leverkusen,
Germany. We are a wholly-owned subsidiary of Kronos. We conduct Kronos' European
value-added TiO2 operations.
At March 31, 2005, (i) Valhi, Inc. and a wholly-owned subsidiary of Valhi
held approximately 57% of Kronos' common stock and NL held approximately an
additional 36% of Kronos' common stock, (ii) Valhi and such wholly-owned
subsidiary of Valhi held approximately 83% of NL's outstanding common stock and
(iii) Contran Corporation and its subsidiaries held approximately 91% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of certain children and
grandchildren of Harold C. Simmons of which Mr. Simmons is sole trustee, or is
held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control each of such companies.
Industry
Titanium dioxide pigments are inorganic chemical products used for
imparting whiteness, brightness and opacity to a diverse range of customer
applications and end-use markets, including coatings, plastics, paper and other
industrial and consumer "quality-of-life" products. TiO2 is considered a
"quality-of-life" product with demand affected by gross domestic product in
various regions of the world. TiO2, the largest commercially used whitening
pigment by volume, derives its value from its whitening properties and
opacifying ability (commonly referred to as hiding power). As a result of TiO2's
high refractive index rating, it can provide more hiding power than any other
commercially produced white pigment. In addition, TiO2 demonstrates excellent
resistance to chemical attack, good thermal stability and resistance to
ultraviolet degradation. TiO2 is supplied to customers in either a powder or
slurry form.
Per capita consumption of TiO2 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant regions for TiO2
consumption could emerge in Eastern Europe, the Far East or China as the
economies in these regions develop to the point that quality-of-life products,
including TiO2, experience greater demand. Geographic information is contained
in Note 2 to the consolidated financial statements included elsewhere in this
prospectus.
Products and Operations
TiO2 is produced in two crystalline forms: rutile and anatase. Both the
chloride and sulfate production processes (discussed below) produce rutile TiO2.
Chloride process rutile is preferred for the majority of customer applications.
From a technical standpoint, chloride process rutile has a bluer undertone and
higher durability than sulfate process rutile TiO2. Although many end-use
applications can use either form of TiO2, chloride process rutile TiO2 is the
preferred form for use in coatings and plastics, the two largest end-use
markets. Anatase TiO2, which is produced only through the sulfate production
process, represents a much smaller percentage of annual global TiO2 production
and is preferred for use in selected paper, ceramics, rubber tires, and man-made
fibers, food and cosmetics.
We believe that there are no effective substitutes for TiO2. Extenders,
such as kaolin clays, calcium carbonate and polymeric opacifiers, are used in a
number of end-used markets as white pigments, however the opacity in these
products is not able to duplicate the performance characteristics of TiO2, and
we believe these products are unlikely to replace TiO2.
We currently produce over 40 different TiO2 grades, sold under the Kronos
trademark, which provide a variety of performance properties to meet customers'
specific requirements. Our major customers include domestic and international
paint, plastics and paper manufacturers.
We and our distributors and agents sell and provide technical services for
our products to over 4,000 customers in over 100 countries with the majority of
sales in Europe. TiO2 is distributed by rail, truck and ocean carrier in either
47
dry or slurry form. Kronos, KII and our predecessors have produced and marketed
TiO2 in North America and Europe for over 80 years, and Kronos is the only
leading TiO2 producer committed to producing TiO2 and related products as its
sole business. We believe that we have developed considerable expertise and
efficiency in the manufacture, sale, shipment and service of our products.
Sales of TiO2 represented about 90% of our total sales in 2004, which
approximated $808 million. Sales of other products, complementary to our TiO2
business, comprise the following:
o We operate an ilmenite mine in Norway pursuant to a governmental concession
with an unlimited term. Ilmenite is a raw material used directly as a
feedstock by some sulfate-process TiO2 plants, including all of our
European sulfate-process plants. The mine has estimated reserves that are
expected to last at least 20 years. Ilmenite sales to third-parties
represented approximately 6% of our consolidated net sales in 2004.
o We manufacture and sell iron-based chemicals, which are by-products and
processed by-products of the TiO2 pigment production process. These
co-product chemicals are marketed through our Ecochem division, and are
used primarily as treatment and conditioning agents for industrial
effluents and municipal wastewater as well as in the manufacture of ore
pigments, cement and agricultural products. Sales of iron-based chemical
products were about 5% of sales in 2004.
o We manufacture and sell certain titanium chemical products (titanium
oxychloride and titanyl sulfate), which are side-stream products from the
production of TiO2. Titanium oxychloride is used in specialty applications
in the formulation of pearlescent pigments, production of electroceramic
capacitors for cell phones and other electronic devices. Titanyl sulfate
products are used primarily in pearlescent pigments. Sales of these
products were about 1% of sales in 2004.
Manufacturing Process and Raw Materials
We manufacture TiO2 using both the chloride process and the sulfate
process. Approximately 65% of our current production capacity is based on the
chloride process. The chloride process is a continuous process in which chlorine
is used to extract rutile TiO2. The chloride process typically has lower
manufacturing costs than the sulfate process due to higher yield and production
of less waste and lower energy requirements and labor costs. Because much of the
chlorine is recycled and feedstock bearing a higher titanium content is used,
the chloride process produces less waste than the sulfate process. The sulfate
process is a batch chemical process that uses sulfuric acid to extract TiO2.
Sulfate technology can produce either anatase or rutile pigment. Once an
intermediate TiO2 pigment has been produced by either the chloride or sulfate
process, it is "finished" into products with specific performance
characteristics for particular end-use applications through proprietary
processes involving various chemical surface treatments and intensive milling
and micronizing. Due to environmental factors and customer considerations, the
proportion of TiO2 industry sales represented by chloride-process pigments has
increased relative to sulfate-process pigments.
We produced a company record 328,000 metric tons of TiO2 in 2004, compared
to 320,000 metric tons produced in 2003 and 293,000 metric tons in 2002. Our
average production capacity utilization rate in 2004 was near capacity, up from
98% in 2003. The production rates in 2003 and 2004 were higher than 2002 due in
part to debottlenecking activities, with only moderate capital expenditures. We
believe our current annual attainable production capacity for 2005 is
approximately 334,000 metric tons, with some slight additional capacity
available in 2006 through Kronos' continuing debottlenecking efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited but increasing number of
suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. We purchased approximately 250,000 metric tons of
chloride feedstock in 2004, of which the vast majority was slag.
48
Through Kronos (US), Inc. ("KUS"), a wholly-owned subsidiary of Kronos, we
purchased chloride process grade slag in 2004 from a subsidiary of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia), a company formed through
the merger of Westralian Sands Limited (Australia) and RGC Mineral Sands, Ltd.,
under a long-term supply contract that expires at the end of 2007. We and KUS do
not expect to encounter difficulties obtaining long-term extensions to existing
supply contracts prior to the expiration of the contracts. Raw materials
purchased under these contracts and extensions thereof are expected to meet our
chloride feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock derived primarily from rock and sand ilmenite and
sulfuric acid. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically integrated producers of
sulfate-process pigments, we operate a rock ilmenite mine in Norway, which
provided all of our feedstock for our sulfate-process pigment plants in 2004. We
produced approximately 856,000 metric tons of ilmenite in 2004 of which
approximately 311,000 metric tons were used internally, with the remainder sold
to third parties.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, through KUS we purchase titanium-bearing ore from two different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain countries from which we purchase our raw
material supplies could adversely affect the availability of such feedstock.
Should our vendors not be able to meet their contractual obligations or should
we be otherwise unable to obtain necessary raw materials, we may incur higher
costs for raw materials or may be required to reduce production levels, which
may have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
The following table summarizes our raw materials procured or mined in 2004:
Quantities of Raw Materials Procured or Mined
Production Process/Raw Material (In thousands of metric tons)
-------------------------------------------------------- ----------------------------------------------
Chloride process plants:
Purchased slag refined from ilmenite beach sand 175
Upgraded purchased slag refined from ilmenite beach
sand 25
Purchased natural rutile ore 50
Sulfate process plants:
Mined raw ilmenite ore consumed internally 311
Mined raw ilmenite ore sold to third parties 545
Competition
The TiO2 industry is highly competitive. We compete primarily on the basis
of price, product quality and technical service, and the availability of high
performance pigment grades. Although certain TiO2 grades are considered
specialty pigments, the majority of our grades and substantially all of our
production are considered commodity pigments with price generally being the most
significant competitive factor. During 2004, we had an estimated 8% share of
worldwide TiO2 sales volume, and believe that we are the leading seller of TiO2
in Germany and are among the leading marketers in the Benelux and Scandinavian
markets.
We (along with KUS and Kronos Canada Inc., a wholly-owned subsidiary of
Kronos), principal competitors are E.I. du Pont de Nemours & Co.; Millennium
Chemicals, Inc.; Huntsman International Holdings LLC; Kerr-McGee Corporation;
and Ishihara Sangyo Kaisha, Ltd. Our five largest competitors have estimated
49
individual shares of TiO2 production capacity ranging from 24% to 4%, and an
estimated aggregate 70% share of worldwide TiO2 production volume.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in our experience). No greenfield
plants are currently under construction in North America or Europe. We expect
that industry capacity will increase as we and our competitors continue to
debottleneck our and their existing facilities. In addition to the potential
capacity additions through debottlenecking, certain competitors have recently
either idled or shut down facilities. In the past year, certain competitors have
announced the idling or shut down of an aggregate of approximately 135,000
metric tons of sulfate production capacity by early 2005. Based on the factors
described above, we expect that the average annual increase in industry capacity
from announced debottlenecking projects will be less than the average annual
demand growth for TiO2 during the next three to five years. However, no
assurance can be given that future increases in the TiO2 industry production
capacity and future average annual demand growth rates for TiO2 will conform to
our expectations. If actual developments differ from our expectations, we and
the TiO2 industry's performances could be unfavorably affected.
Research and Development
Our expenditures for research and development and certain technical support
programs were approximately $6 million in 2002, $7 million in 2003 and $8
million in 2004. Research and development activities are conducted principally
at our Leverkusen, Germany facility. Such activities are directed primarily
toward improving both the chloride and sulfate production processes, improving
product quality and strengthening our competitive position by developing new
pigment applications.
We continually seek to improve the quality of our grades, and have been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Over the last five
years, ten new grades have been added for plastics, coatings, fiber and paper
laminate applications.
Patents and Trademarks
Patents held for products and production processes are believed to be
important to us and to our continuing business activities. We seek patent
protection for our technical developments, principally in the United States,
Canada and Europe, and from time to time enter into licensing arrangements with
third parties. Our existing patents generally have a term of 20 years from the
date of filing, and have remaining terms ranging from one to 19 years. We seek
to protect our intellectual property rights, including our patent rights, and
from time to time we are engaged in disputes relating to the protection and use
of intellectual property relating to our products.
Our major trademarks, including Kronos, are protected by registration in
the United States and elsewhere with respect to those products it manufactures
and sells. We also rely on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Our chloride production process is an important part of
our technology, and our business could be harmed if we should fail to maintain
confidentiality of our trade secrets used in this technology.
Foreign Operations
Our chemical businesses have operated in the European markets since the
1920s. Our current production capacity is located in Europe with our net
property and equipment aggregating approximately $372 million at March 31, 2005.
Our operations include production facilities in Germany, Belgium and Norway and
sales and distribution facilities in England, France, Denmark and the
Netherlands. Approximately $666 million of our 2004 consolidated sales were to
European customers and approximately $142 million were to customers in areas
other than Europe, including approximately $42 million of sales to customers in
the U.S. through affiliates. Foreign operations are subject to, among other
things, currency exchange rate fluctuations and our results of operations have,
in the past, been both favorably and unfavorably affected by fluctuations in
currency exchange rates. Effects of fluctuations in currency exchange rates on
our results of operations are discussed above in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
50
Political and economic uncertainties in certain of the countries in which
we operate may expose us to risk of loss. We do not believe that there is
currently any likelihood of material loss through political or economic
instability, seizure, nationalization or similar event. We cannot predict,
however, whether events of this type in the future could have a material effect
on our operations. Our manufacturing and mining operations are also subject to
extensive and diverse environmental regulation in each of the foreign countries
in which they operate. See "Regulatory and Environmental Matters."
Customer Base and Annual Seasonality
We believe that neither our aggregate sales nor those of any of our
principal product groups are concentrated in or materially dependent upon any
single customer or small group of customers. Our largest ten TiO2 pigment
customers, excluding sales to Kronos and affiliates, accounted for approximately
21% of net sales in 2004. Neither our business as a whole nor that of any of our
principal product groups is seasonal to any significant extent. Due in part to
the increase in paint production in the spring to meet the spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
Employees
As of March 31, 2005, we employed approximately 1,950 persons. Hourly
employees in European production facilities are represented by a variety of
labor unions, with labor agreements having various expiration dates. Our union
employees are covered by master collective bargaining agreements in the
chemicals industry that are renewed annually. We believe that our labor
relations are good.
Regulatory and Environmental Matters
Our operations are governed by various environmental laws and regulations.
Certain of our businesses are, or have been, engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other
damage. We have implemented and continue to implement various policies and
programs in an effort to minimize these risks. Our policy is to maintain
compliance with applicable environmental laws and regulations at all our
facilities and to strive to improve our environmental performance. It is
possible that future developments such as stricter requirements in environmental
laws and enforcement policies thereunder, could adversely affect our production,
handling, use, storage, transportation, sale or disposal of such substances as
well as our consolidated financial position, results of operations or liquidity.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union (the "EU"). Germany and Belgium are members of the EU and follow
its initiatives. Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. We believe that we have obtained
all required permits and are in substantial compliance with applicable EU
requirements.
At our sulfate plant facilities in Germany, we recycle weak sulfuric acid
either through contracts with third parties or using our own facilities. At our
Fredrikstad, Norway plant, we ship our spent acid to a third party location
where it is treated and disposed. We have a contract with a third party to treat
certain sulfate-process effluents at our German sulfate plant. Either party may
terminate the contract after giving four years advance notice with regard to our
Nordenham, Germany plant.
We are also involved in various other environmental, contractual, product
liability and other claims and disputes incidental to our business.
From time to time, our facilities may be subject to environmental
regulatory enforcement under various non-U.S. statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on our
51
consolidated financial position, results of operations or liquidity. We believe
that all of our plants are in substantial compliance with applicable
environmental laws.
Our capital expenditures related to our ongoing environmental protection
and improvement programs in 2004 were approximately $5 million, and are
currently expected to be approximately $4 million in 2005.
Properties
During 2004, we operated four TiO2 plants (one in Leverkusen, Germany; one
in Nordenham, Germany; one in Langerbrugge, Belgium; and one in Fredrikstad,
Norway). We also operate an ilmenite ore mine in Hauge i Dalane, Norway pursuant
to a governmental concession with an unlimited term. TiO2 is produced using the
chloride process at the Leverkusen and Langerbrugge facilities and is
manufactured using the sulfate process in Nordenham, Leverkusen and Fredrikstad.
Our co-products are produced at our Norwegian and Belgian facilities and our
titanium chemicals are produced at our Belgian facility.
We own all of our principal production facilities described above, except
for the land under the Leverkusen and Fredrikstad facilities. The Norwegian
plant is located on public land and is leased until 2013, with an option to
extend the lease for an additional 50 years. Our principal German operating
subsidiary leases the land under its Leverkusen TiO2 production facility
pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility
itself, which we own and which represents about 50% of our current TiO2
production capacity, is located within an extensive manufacturing complex owned
by Bayer AG. Rent for the land lease associated with our Leverkusen facility is
periodically established by agreement with Bayer for periods of at least two
years at a time. The lease agreement provides for no formula, index or other
mechanism to determine changes in the rent for such land lease; rather, any
change in the rent is subject solely to periodic negotiation between Bayer and
us. Any change in the rent based on such negotiations is recognized as part of
lease expense starting from the time such change is agreed upon by us and Bayer.
Under a separate supplies and services agreement expiring in 2011, Bayer
provides some raw materials, including chlorine and certain amounts of sulfuric
acid, auxiliary and operating materials and utilities services necessary to
operate the Leverkusen facility. The lease and the supplies and services
agreement have certain restrictions regarding ownership and use of the
Leverkusen facility.
We have under lease various corporate and administrative offices located in
Leverkusen, Germany and Brussels, Belgium and various sales offices located in
France, the Netherlands, Denmark and the United Kingdom.
We believe the transportation access to our facilities, which are generally
maintained by the applicable local governmental unit, are adequate for our
purposes.
Legal Matters
We are involved in various environmental, contractual, product liability
and other claims and disputes incidental to our business.
52
MANAGEMENT
The table below sets forth information about our directors and executive
officers as of March __, 2005.
Name Age Principal Positions and Directorship
------------------------------------ ------- ----------------------------------------------------
Harold C. Simmons................... 73 Chairman of the Board and Chief Executive Officer
Dr. Ulfert Fiand.................... 56 President, Manufacturing and Technology and Director
Dr. Henry Basson.................... 63 President, Sales and Marketing and a Director
Volker Roth......................... 60 Vice President, Controller, Secretary and Director
Andrew Kasprowiak................... 58 Vice President, Treasurer and Director
James W. Brown...................... 48 Vice President and Assistant Controller
Robert D. Graham.................... 49 Vice President and Assistant Secretary
John A. St. Wrba.................... 48 Vice President and Assistant Treasurer
Gregory M. Swalwell................. 48 Vice President, Finance and Chief Financial Officer
Kelly D. Luttmer.................... 41 Vice President, Tax Director
-------------------------------------------------------------------------------
Harold C. Simmons has served as our chairman of the board since 2004 and
chief executive officer since 2003. He has served as chairman of the board and
chief executive officer of Kronos since 2003. Mr. Simmons has served as chief
executive officer of NL since 2003 and chairman of the board of NL since prior
to 2000. Mr. Simmons has been chairman of the board of Valhi, Inc., a parent
company of NL, and Contran since prior to 2000 and was chief executive officer
of Valhi from prior to 2000 to 2002. Mr. Simmons has been an executive officer
or director of various companies related to Valhi and Contran since 1961.
Dr. Ulfert Fiand has served as our president of manufacturing and
technology and one of our directors since 2001 and has served as president,
manufacturing and technology of Kronos since October 2004. He previously served
as senior vice president, manufacturing and technology of Kronos since 2003. Dr.
Fiand joined us in 1988, and previously served as group leader and director of
chloride process technology, director of process technology and vice president
of production & process technology. Dr. Fiand also serves as company manager of
Kronos Titan GmbH.
Dr. Henry Basson has served as our president of sales and marketing and one
of our directors since 1997. From 1992 to 1997, Dr. Basson was president of
Rheox Europe, a former subsidiary of NL. Prior to 1992, Dr. Basson held
positions in sales, marketing and general management at Rohm and Haas Company.
Volker Roth has served as our vice president, controller and secretary and
one of our directors since 1992. Mr. Roth also serves as company manager of
Unterstutzungskasse Kronos Titan GmbH, Kronos Titan GmbH and Kronos Chemie,
GmbH, subsidiaries of Kronos.
Andrew Kasprowiak joined us and our affiliates in 1986 and has served as
our vice president, treasurer and director since 1998. Prior to this time, he
served in various positions with our affiliates, including general manager and
European treasurer of Kronos World Services NV/SA.
James W. Brown has served as our vice president and assistant controller
since February 2004. He has served as vice president and controller of NL and
Kronos since 2003. From 1998 to 2002, he served as vice president and chief
financial officer of Software Spectrum, Inc. ("SSI"). SSI is a global
business-to-business software services provider that is a wholly owned
subsidiary of Level 3 Communications, Inc. From 1991 to 2002, SSI was a publicly
held corporation. From 1994 to 1998, Mr. Brown served as vice president,
corporate accounting of Affiliated Computer Services, Inc., a provider business
process and information technology outsourcing solutions.
Robert D. Graham has served as our vice president and assistant secretary
since February 2004. He has served as vice president, general counsel and
secretary of Kronos since 2003, vice president, general counsel and secretary of
NL since 2003 and as vice president of Valhi and Contran since 2002. From 1997
to 2002, Mr. Graham served as an executive officer, and most recently as
executive vice president and general counsel, of SSI. From 1985 to 1997, Mr.
Graham was a partner in the law firm of Locke Purnell Rain Harrell (A
Professional Corporation), a predecessor to Locke Liddell and Sapp LLP.
53
John A. St. Wrba has served as our vice president and assistant treasurer
since February 2004. He has served has served as vice president of Kronos since
May 2004 and treasurer since 2003. He has also served as vice president and
treasurer of Valhi since February 2005, Contran since October 2004 and NL since
2003. He was NL's assistant treasurer from 2002 to 2003. He served as NL's
assistant treasurer from prior to 1998 until 2000. From 2000 until 2002, he was
assistant treasurer of Kaiser Aluminum & Chemical Corporation, a leading
producer of fabricated aluminum products.
Gregory M. Swalwell has served as our chief financial officer since
February 2004 and vice president, finance since 2003. He has served as chief
financial officer of Kronos and NL since May 2004, vice president, finance of
Kronos and NL since 2003 and vice president and controller of Valhi and Contran
since prior to 2000. Mr. Swalwell has served in accounting positions with
various companies related to Valhi and Contran since 1988.
Kelly D. Luttmer has served as our vice president, tax director since
October 2004 and tax director since 2003. She has served as vice president of
Kronos, CompX, Contran, Valhi and NL since October 2004, tax director of Kronos
and NL since 2003 and tax director of Valhi and Contran since 1998. Ms. Luttmer
has served in tax accounting positions with various companies related to Valhi
and Contran since 1989.
Compensation of Directors
During 2004, no fees were paid to any director for service as a director.
Directors are reimbursed for reasonable expenses incurred in attending board of
directors and committee meetings.
Summary of Cash and Certain Other Compensation of Executive Officers
The summary compensation table below provides information concerning annual
and long-term compensation paid or accrued by us and our subsidiaries for
services rendered to us and our subsidiaries during 2004, 2003 and 2002 by our
chief executive officer and our two other executive officers with total salary
and bonus, or charge to us or our subsidiaries pursuant to intercorporate
services agreements, in excess of $100,000 in 2004.
SUMMARY COMPENSATION TABLE (1)
Annual Compensation (2)
Name and ------------------------------------------
Principal Position Year Salary Bonus
-----------------------------------------------------------------------------------------------------------------
Harold C. Simmons (3) 2004 $ -0- $ -0-
Chairman of the Board and Chief Executive Officer 2003 -0- -0-
Dr. Ulfert Fiand 2004 209,664 (4) 153,044 (4)(5)
President, Manufacturing and Technology 2003 173,786 (4) 121,650 (4)(5)
2002 128,827 (4) 89,388 (4)(5)
James W. Brown (3) 2004 151,400 (3) -0-
Vice President and Assistant Controller
-------------
(1) For the periods presented for each named executive officer, no stock
options or shares of restricted stock were granted to them nor payouts made
to them pursuant to long-term incentive plans. In addition for the periods
presented, none of the named executive officers received any compensation
from us that would be reportable under the other compensation column.
Therefore, the columns for such compensation have been omitted.
(2) Other than Dr. Fiand, no named executive officer received other annual
compensation from us or our subsidiaries. For each of the three years
presented, Dr. Fiand received an annual car allowance that is less than the
54
amount required to be reported pursuant to SEC rules. Therefore, the column
for other annual compensation has been omitted.
(3) Messrs. Simmons and Brown are employees of Contran. The amount shown in the
summary compensation table as salary for Mr. Brown represents the portion
of the fees we paid pursuant to an intercorporate services agreement with
Contran with respect to the services he rendered to us. Mr. Brown became
one of our executive officers in February 2004.
(4) Dr. Fiand receives his cash compensation in euros. We report these amounts
in the summary compensation table above in U.S. dollars based on an average
exchange rate for each of 2004, 2003 and 2002 of $1.2347, $1.1212 and
$0.9360 per euro 1.00, respectively.
(5) Represents amounts we paid pursuant to our share-in-performance plan.
No Grants of Stock Options or Stock Appreciation Rights
We did not grant any stock options or stock appreciation rights ("SARs") to
the named executive officers during 2004, nor did any of our parent or
subsidiary companies.
Stock Option Exercises and Holdings
The following table provides information with respect to each of the named
executive officers concerning the aggregate amount the named executive officer
realized in 2004 upon the exercise of stock options for NL common stock and the
value of unexercised stock options for NL common stock such officer held as of
December 31, 2004. Other than stock options exercisable for NL common stock, no
named executive officer exercised or held any stock options exercisable for
common stock of any of our parent or subsidiary companies nor have any or our
parent or subsidiary companies granted any SARs.
AGGREGATE STOCK OPTION EXERCISES IN 2004 AND
DECEMBER 31, 2004 OPTION VALUES
Number of Shares
Shares Underlying Value of Unexercised
Acquired Unexercised Options at In-the-Money Options
on December 31, 2004 (#) at December 31, 2004 (1)
Exercise Value --------------------------- ---------------------------
Name (#) Realized Exercisable Unexercisable Exercisable Unexercisable
-------------------------- ---------- -------- ----------- ------------- ----------- -------------
Harold C. Simmons
NL Stock Options....... -0- $ -0- 6,000 -0- $ 86,829 $ -0-
Dr. Ulfert Fiand
NL Stock Options....... 7,000 62,533 (2) 3,600 3,400 38,214 27,475
James W. Brown
NL Stock Options....... -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------
(1) The aggregate amount is based on the difference between the exercise price
of the individual stock options and the closing sales price of $22.10 per
share for NL common stock on December 31, 2004.
(2) The amount realized is based on the difference between the same-day sales
price per share of the underlying NL common stock issued upon exercise and
the exercise price per share.
55
Pension Plan
Dr. Fiand is eligible to receive his pension through the Bayer
Pensionskasse and the Supplemental Pension Promise. All of our employees in
Germany (including wage earners) who have contributed for five years and are
less than 55 years of age are covered by the Bayer Pensionskasse. Each employee
contributes 2% of eligible earnings excluding bonus, up to the social security
contribution ceiling (currently euro 62,400) and the Bayer Pensionskasse
provides a benefit of 44% of such employee's accumulated contributions (with a
minimum benefit of approximately euro 13 per month). The Supplemental Pension
Promise also covers all of our employees in Germany who have completed ten years
of service. In Germany, Kronos accrues 11.25% of participants' eligible annual
earnings excluding bonus in excess of the social security contribution ceiling,
up to a maximum of euro 109,200. The Supplemental Pension Promise provides an
annual retirement benefit of 20% of all accruals made by us. Benefits for both
plans are payable upon retirement and the attainment of ages specified in the
plans. No amounts were paid or distributed under these plans to Dr. Fiand in
2004. As of December 31, 2004, the estimated accrued annual benefit payable upon
normal retirement at normal retirement age for Dr. Fiand is euro 27,588.
Compensation Committee Interlocks and Insider Participation
Compensation for the named executive officers is set by the management
development and compensation committee of the board of directors of Kronos. None
of the named executive officers served on this committee during 2004.
56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We may be deemed to be controlled by Harold C. Simmons. Corporations that
may be deemed to be controlled by or affiliated with Mr. Simmons sometimes
engage in (a) intercorporate transactions such as guarantees, management and
expense sharing arrangements, shared fee arrangements, joint ventures,
partnerships, loans, options, advances of funds on open account, and sales,
leases and exchanges of assets, including securities issued by both related and
unrelated parties and (b) common investment and acquisition strategies, business
combinations, reorganizations, recapitalizations, securities repurchases, and
purchases and sales (and other acquisitions and dispositions) of subsidiaries,
divisions or other business units, which transactions have involved both related
and unrelated parties and have included transactions which resulted in the
acquisition by one related party of a publicly held minority equity interest in
another related party. While no transactions of the type described above are
planned or proposed with respect to us other than as set forth in the
consolidated financial statements included elsewhere in this prospectus, we
continuously consider, review and evaluate, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that we
might be a party to one or more such transactions in the future.
It is our policy to engage in transactions with related parties on terms,
in our opinion, no less favorable to us than could be obtained from unrelated
parties.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between us and various related parties, employees of one company
will provide certain management, tax planning, financial and administrative
services to the other company on a fee basis. Such charges are based upon
estimates of the time devoted by the employees of the provider of the services
to the affairs of the recipient, and the compensation and associated expenses of
such persons. Because of the large number of companies affiliated with Contran,
Kronos and NL, we believe we benefits from cost savings and economies of scale
gained by not having certain management, financial and administrative staffs
duplicated at each entity, thus allowing certain individuals to provide services
to multiple companies but only be compensated by one entity. These ISA
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements. The net ISA fee charged to us
was $1.1 million in 2002, $1.5 million in 2003 and $2.8 million in 2004.
Sales of TiO2 to Kronos (US), Inc. ("KUS"), an affiliate, were $38.5
million in 2002, $57.8 million in 2003 and $41.9 million in 2004 and $8.1
million in the first quarter of 2005. Sales of TiO2 to Kronos Canada, Inc.
("KC") were $7.7 million in 2002, $10.9 million in 2003, $8.9 million in 2004
and $2.2 million in the first quarter of 2005.
KUS purchases the rutile and slag feedstock used as a raw material in all
of our chloride process TiO2 facilities. We purchase such feedstock from KUS for
use in our facilities for an amount equal to the amount paid by KUS to the
third-party supplier plus a 2.5% administrative fee. Such feedstock purchases
were $102.5 million in 2002, $93.3 million in 2003, $106.2 million in 2004 and
$29.6 million in the first quarter of 2005.
Purchases of TiO2 from KUS were $2.6 million in 2002, $100,000 in 2003,
$3.5 million in 2004 and nil in the first quarter of 2005. Purchases of TiO2
from KC were $500,000 in each of 2002 and 2003, $700,000 in 2004 and $1.5
million in the first quarter of 2005.
Royalty income received from KC for use of certain of our intellectual
property was $5.8 million in 2002, $6.1 million in 2003, $6.0 million in 2004
and $1.5 million in the first quarter of 2005.
We are party to master global NL insurance coverage policies with regard to
property, business interruption, excess liability and other coverages. The costs
associated with these policies aggregated $7.0 million, $5.2 million, $5.3
million and $1.3 million in 2002, 2003, 2004 and the first quarter of 2005,
respectively.
Contran and certain of its subsidiaries and affiliates, including us,
purchase certain of their insurance policies as a group, with the costs of the
jointly-owned policies being apportioned among the participating companies. With
respect to certain of such policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of the policy period. As a result, Contran and certain of its
subsidiaries and its affiliates, including us, have entered into a loss sharing
57
agreement under which any uninsured loss is shared by those entities who have
submitted claims under the relevant policy. We believe the benefits in the form
of reduced premiums and broader coverage associated with the group coverage for
such policies justifies the risk associated with the potential for uninsured
loss.
Net amounts between us and KUS were generally related to product sales and
raw material purchases. Net amounts between us and KC were generally related to
product sales and royalties. See Note 8 to the consolidated financial statements
included elsewhere in this prospectus for discussion of notes receivable from
affiliates.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31,
-------------------
2003 2004 March 31, 2005
---- ---- --------------
(In thousands)
Current receivables from affiliates:
KC $ 1,877 $ 2,516 $ 3,133
Other 7 1 34
------- ------- -------
$ 1,884 $ 2,517 $ 3,167
======= ======= =======
Current payables to affiliates:
KUS $ 8,697 $11,033 $13,946
NL - 9 49
------- ------- -------
$ 8,697 $11,042 $13,995
======= ======= =======
Interest income on all loans to related parties was $22.8 million in 2002,
less than $50,000 in 2003, $2.8 million in 2004 and $4.9 million in the first
quarter of 2005. Interest expense on all loans from related parties was $18.7
million in 2002, less than $100,000 in 2003 and nil in 2004 and the first
quarter of 2005.
In July 2002, all outstanding Series A shares and Series B shares (with
aggregate values of $219.0 million and $192.7 million, respectively, at the time
of conversion) were converted into 1,385 shares of our common stock. As a result
of the conversion, the Series A and B shares were canceled. See Note 8 to the
consolidated financial statements included elsewhere in this prospectus.
5,500,000 profit participation certificates ("PPCs") are designated
nonvoting cumulative preferred PPCs and yielded an annual dividend of 4% per
share based our earnings and before any common stock dividends to Kronos. Kronos
waived its right to dividend distributions for all periods presented and through
December 2002. The PPCs were issued to Kronos ($284.3 million) in December 1999
as part of our recapitalization. In July 2002, all outstanding PPCs (with an
aggregate value of $284.3 million at the time of redemption) were redeemed in
exchange for various notes receivable from NL. As a result of the redemption,
the PPCs were canceled.
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DESCRIPTION OF THE NEW NOTES
We issued the initial notes and the old notes, and will issue the new
notes, under an indenture with The Bank of New York, as trustee. The following
is a summary of the material provisions of the indenture. It does not include
all of the provisions of the indenture. We urge you to read the indenture
because it defines your rights. The terms of the new notes include those stated
in the indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, as amended. We have filed the indenture as an exhibit to
the registration statement of which this prospectus is a part and incorporate by
reference that exhibit into this prospectus. You can find definitions of certain
capitalized terms used in this description under "- Certain Definitions."
The new notes will be our senior obligations, ranking equally in right of
payment with the old notes, the initial notes and all our other senior
indebtedness. The new notes will be secured by a senior lien on 65% of the
capital stock of each of Kronos Limited (United Kingdom), Societe Industrielle
Du Titane, S.A., Kronos Titan GmbH and Kronos Denmark ApS, each of which is one
of our first-tier operating subsidiaries, which is the same collateral that
secures the old notes.
We will issue the new notes in fully registered form in denominations of
euro 1,000 and integral multiples thereof. The trustee will initially act as
paying agent and registrar for the new notes. The new notes may be presented for
registration or transfer and exchange at the offices of the registrar. We may
change any paying agent and registrar without notice to holders of the notes. We
will pay principal and any premium on the new notes at the trustee's corporate
office in New York. At our option, interest may be paid at the trustee's
corporate trust office or by check mailed to the registered address of holders.
So long as the new notes are listed on the Luxembourg Stock Exchange, we will
maintain a special agent or, as the case may be, a paying and transfer agent in
Luxembourg. Any old notes that remain outstanding after the completion of the
exchange offer, together with the new notes issued in connection with the
exchange offer, will be treated as a single class of securities under the
indenture.
Principal, Maturity and Interest
An aggregate principal amount of euro 90 million of new notes will be
issued in the exchange offer. The new notes will mature on June 30, 2009.
Additional notes may be issued from time to time, subject to the limitations set
forth under "- Certain Covenants - Limitation on Incurrence of Additional
Indebtedness." Interest on the new notes will accrue at the rate of 8 7/8% per
annum and will be payable semiannually in cash on each June 30 and December 30
to the persons who are registered holders at the close of business on the June
15 and December 15 immediately preceding the applicable interest payment date.
Interest on the new notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from and including the
date of issuance.
The new notes will not be entitled to the benefit of any mandatory sinking
fund.
Redemption
Optional Redemption. Except as described below, the new notes are not
redeemable before December 30, 2005. Thereafter, we may redeem all or some of
the notes at our option upon not less than 30 nor more than 60 days notice, at
the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period (or, in the case of
the period commencing on December 30, 2008, six-month period) commencing on
December 30 of the year set forth below:
Year Percentage
2005................................................... 104.437%
2006................................................... 102.958%
2007................................................... 101.479%
2008 and thereafter.................................... 100.000%
In addition, we must pay accrued and unpaid interest on the notes redeemed.
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Optional Redemption upon a Change of Control. At any time on or prior to
December 30, 2005, we have the option to redeem all, but not less than all, of
the notes upon the occurrence of any of the following events, which we refer to
in this prospectus as a "Change of Control":
o any sale, lease, exchange or other transfer of all or substantially all of
our assets to any person other than the persons specified as permitted
holders in the indenture;
o the approval by our stockholders of any plan or proposal for our
liquidation or dissolution;
o any person, other than the persons specified as permitted holders in the
indenture, becoming the owner of shares representing more than 50% of the
aggregate ordinary voting power represented by our issued and outstanding
capital stock; or
o the replacement of a majority of our board of directors over a two-year
period from the directors who constituted our board of directors at the
beginning of such period, unless such replacement has been approved by a
vote of at least a majority of the board of directors then still in office
who either were members of the board at the beginning of such period or
whose election as a member of the board was previously so approved or
approved by the persons specified as permitted holders in the indenture so
long as these permitted holders then beneficially own a majority of our
capital stock.
The redemption price will be equal to the principal amount of the notes
plus a premium as specified in the indenture plus any accrued but unpaid
interest to the date of redemption. Another person may pay the purchase price
and perform our obligations with respect to a redemption. We will send a notice
of a redemption to each holder not less than 30 nor more than 60 days prior to
the date of redemption and in no event will this notice be sent more than 180
days after the occurrence of a Change of Control. We may give this notice prior
to the occurrence of the related Change of Control, and any redemption, purchase
or notice may, at our discretion, be subject to the satisfaction of one or more
conditions precedent, including but not limited to the occurrence of the related
Change of Control.
Selection and Notice of Redemption
If we choose to redeem less than all of the notes, the trustee will select
the notes for redemption either:
o in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed; or
o on a pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of a principal amount of euro 1,000 or less will be redeemed in
part. If a partial redemption is made with the proceeds of a public equity
offering, the trustee will select the notes only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to the procedures of
Euroclear and Clearstream). Notice of redemption will be mailed at least 30 but
not more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. In the event notes are to be redeemed, we
will also publish a notice of redemption in accordance with the procedures
described under "- Notices." On and after the redemption date, interest will
cease to accrue on notes or portions thereof called for redemption as long as we
have deposited with the paying agent funds in satisfaction of the applicable
redemption price.
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Holding Company Structure
Our assets consist primarily of investments in our operating subsidiaries.
A majority of our cash flows are generated by our operating subsidiaries, and
our ability to service indebtedness, including our ability to pay the interest
on and principal of the notes, depends upon the distribution of the earnings we
receive from our subsidiaries, whether in the form of dividends, partnership
distributions, advances or payments on account of intercompany obligations, to
service its debt obligations. In addition, the claims of noteholders are subject
to the prior payment of all liabilities and to any preferred stock interest of
our subsidiaries. There can be no assurance that, after providing for all prior
claims, there would be sufficient assets available from us and our subsidiaries
to satisfy the claims of the holders of notes. See "Risk Factors - If our
subsidiaries do not make sufficient distributions to us, then we will not be
able to make payments on our debt, including the new notes" and "Risk Factors -
The notes (including the initial notes) are secured only by the pledge of 65% of
the stock or other equity interests of certain of our first-tier subsidiaries,
and assets of our subsidiaries will first be applied to repay indebtedness and
liabilities of our subsidiaries and may not be sufficient to repay the new
notes."
In addition, the new notes will be structurally subordinated in right of
payment to all of the indebtedness and other liabilities of our subsidiaries,
which, as of March 31, 2005, were approximately $217 million. Furthermore, the
indebtedness of certain of our subsidiaries under their credit agreement is
secured by liens on substantially all current assets of such subsidiaries. The
new notes will not have the benefit of this collateral, nor any other assets of
our subsidiaries. Accordingly, if an event of default occurs under our
subsidiaries' credit agreement, the lenders under the credit agreement will have
a right to such assets and may foreclose upon their collateral. In that case,
such assets would first be used to repay in full amounts outstanding under the
credit agreement and may not be available to repay the new notes. In the event
of a bankruptcy event affecting any of our subsidiaries, local bankruptcy law
would be likely to apply. In general, such local bankruptcy law affords
significant protection for senior secured creditors and there can be no
assurances that, in the event of bankruptcy events affecting our subsidiaries,
senior secured creditors could take actions that would materially and adversely
affect the value of our ongoing business and the equity value of our
subsidiaries. The remaining value, if any, of our assets may not be sufficient
to repay the new notes.
Security
The new notes will be secured only by the pledge of 65% of the capital
stock of certain of our first-tier operating subsidiaries identified on the
organizational chart on page 3, which is the same collateral that secures the
old notes and the initial notes. Each of the pledges securing the new notes will
be in favor of either the trustee or a collateral agent appointed under the
indenture and will be governed by the local law of the jurisdiction where each
of our pledged subsidiaries are formed; those jurisdictions are Denmark, France,
Germany and the United Kingdom. As a result, the validity of those pledges, and
the ability of the trustee or a collateral agent, as applicable, or the
noteholders to realize any benefit associated with the pledged shares, may be
limited under applicable local law as any action to enforce the stock pledges
must be taken under the laws of the applicable jurisdiction and such laws may
differ in significant respects from the laws of the United States. Furthermore,
the rights of the trustee or a collateral agent, as applicable, or the
noteholders to foreclose upon and sell the pledged shares upon the occurrence of
a default will be subject to limitations under applicable local bankruptcy laws
if a bankruptcy proceeding were commenced against us or our subsidiaries. Any
delay or inability to realize any benefit associated with the lien in any
jurisdiction or the application of local bankruptcy laws that are contrary to
the noteholders' interests could have a material adverse effect on the lien we
have granted on certain of our first-tier subsidiaries and could result in an
inability to realize the full value of the share pledges entered into in
connection with the issuance of the notes.
Change of Control
Upon the occurrence of a Change of Control, each noteholder will have the
right to require that we purchase all or a portion of such holder's notes
pursuant to the offer described below, at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued interest to the date of purchase.
Within 60 days following the date upon which the Change of Control
occurred, we must send a notice to each noteholder, with a copy to the trustee,
which notice will govern the terms of the offer. Such notice shall state, among
other things, the purchase date, which must be no earlier than 30 days nor later
61
than 45 days from the date such notice is mailed, other than as may be required
by law. In the event of a Change of Control, we will also publish a notice of
the offer to purchase in accordance with the procedures described under "-
Notices." Holders electing to have a note purchased will be required to
surrender the note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the note completed, to the paying agent at the address
specified in the notice prior to the close of business on the third business day
prior to the purchase date specified in the notice.
We will not be required to make an offer upon a Change of Control if a
third party makes an offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the indenture applicable to an
offer we make and purchases all notes validly tendered and not withdrawn under
such offer.
If an offer is made, there can be no assurance that we will have available
funds sufficient to pay the purchase price for all the notes that might be
delivered by holders seeking to accept the offer. In the event we are required
to purchase outstanding notes pursuant to an offer, we expect that we would seek
third party financing to the extent we do not have available funds to meet our
purchase obligations. However, there can be no assurance that we would be able
to obtain such financing.
Neither our board of directors nor the trustee may waive the covenant
relating to a holder's right to redemption upon a Change of Control.
Restrictions in the indenture described in this prospectus on our and our
restricted subsidiaries' ability to incur additional indebtedness, to grant
liens on our or its property, to make restricted payments and to make asset
sales may also make more difficult or discourage a takeover of us, whether
favored or opposed by our management. Consummation of any such transaction in
certain circumstances may require redemption or repurchase of the notes, and
there can be no assurance that we or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with affiliates may, in certain
circumstances, make more difficult or discourage any leveraged buyout of us or
any of our subsidiaries by management. While such restrictions cover a wide
variety of arrangements which have traditionally been used to effect highly
leveraged transactions, the indenture may not afford noteholders protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of notes. To
the extent that the provisions of any securities laws or regulations conflict
with the "Change of Control" provisions of the indenture, we will comply with
the applicable securities laws and regulations and will not be deemed to have
breached our obligations under the "Change of Control" provisions of the
indenture by virtue thereof.
Certain Covenants
The following summarizes the material financial and other restrictive
covenants contained in the indenture:
Limitation on Incurrence of Additional Indebtedness. We agreed to not, and
to not permit any of our subsidiaries that are restricted subsidiaries for
purposes of the indenture (which we refer to in this prospectus as "restricted
subsidiaries"), to incur any indebtedness other than the permitted indebtedness
described below. However, if no default or event of default has occurred and is
continuing at the time of or as a consequence of the incurrence of any such
indebtedness, we or any of our restricted subsidiaries that is, or, upon such
incurrence, becomes, bound by the indenture as a guarantor (which we refer to in
this prospectus as a "guarantor"), may incur indebtedness and any restricted
subsidiary that is not or will not, upon such incurrence, become a guarantor may
incur Acquired Indebtedness, in each case if on the date of the incurrence of
such indebtedness, after giving effect to the incurrence thereof, our
Consolidated Fixed Charge Coverage Ratio is greater than 2.5 to 1.0.
Neither we nor any guarantor may incur any indebtedness that is expressly
subordinated to any senior indebtedness of us or any such guarantor unless such
indebtedness is also expressly subordinated on the same basis to the notes or
any guarantees.
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Under the indenture, in addition to the indebtedness we may incur as
described above, we may incur the following permitted indebtedness (which we
refer to in this prospectus as "permitted indebtedness"):
o indebtedness under the notes in an aggregate principal amount not to exceed
euro 285 million and guarantees in respect thereof;
o indebtedness incurred pursuant to our subsidiaries' credit agreement in an
aggregate principal amount at any time outstanding not to exceed euro 80
million less the amount of any principal payments made under such credit
agreement with certain net cash proceeds of any Asset Sale;
o other of our and our restricted subsidiaries' indebtedness outstanding on
June 28, 2002, the date of issuance of the initial notes;
o certain obligations under interest swap agreements;
o certain indebtedness under any commodity futures contract, commodity option
or other similar agreement designed to protect us against fluctuations in
the price of commodities actually at that time used in the ordinary course
of our business or any foreign exchange contract, currency swap agreement
or other similar agreement designed to protect us against fluctuations in
currency values;
o subject to the proviso set forth in the indenture, indebtedness of a
restricted subsidiary to us or a restricted subsidiary for so long as such
indebtedness is held by us or restricted subsidiary, in each case subject
to no lien held by a person other than us or a restricted subsidiary or
lenders in respect of our subsidiaries' credit agreement or other permitted
indebtedness;
o subject to a proviso set forth in the indenture, indebtedness of us to a
restricted subsidiary for so long as such indebtedness is held by a
restricted subsidiary, in each case subject to no lien other than a lien of
the lenders in respect of our subsidiaries' credit agreement or other
permitted indebtedness of such restricted subsidiary;
o indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business if such indebtedness is extinguished within two
business days of incurrence;
o indebtedness in respect of bid, payment or performance bonds, bankers'
acceptances, workers' compensation claims, surety or appeal bonds, payment
obligations in connection with self-insurance or similar obligations, and
bank overdrafts (and letters of credit in respect thereof) and commercial
letters of credit, in all such cases in the ordinary course of business;
o subject to the limitations contained in the indenture, indebtedness
incurred to refinance, extend, renew, refund, repay, prepay, redeem,
defease or retire any indebtedness existing on June 28, 2002 or
subsequently incurred in accordance with the terms of the indenture;
o additional indebtedness of us in an aggregate principal amount not to
exceed $20 million at any one time outstanding;
o additional indebtedness of one or more restricted subsidiaries in an
aggregate principal amount not to exceed $20 million at any one time
outstanding, which amount may, but need not, be incurred in whole or in
part under the credit agreement;
o indebtedness consisting of guarantees, indemnities or obligations in
respect of customary purchase price adjustments in connection with the
acquisition or disposition of assets; and
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o indebtedness represented by capitalized lease obligations and indebtedness
incurred to finance the purchase price or cost of installation,
construction or improvement of property or equipment, in each case incurred
in the ordinary course of business not to exceed $15 million at any one
time outstanding.
If we incur indebtedness in compliance with the terms of the indenture that
we could incur under more than one category described above, we will, in our
sole discretion, classify (or later reclassify) such item of indebtedness in any
manner that complies with the indenture. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
indebtedness in the form of additional indebtedness with the same terms, the
payment of dividends on Disqualified Capital Stock in the form of additional
shares of the same class of Disqualified Capital Stock, and changes in the
amount outstanding due solely to fluctuations in currency exchange rates, will
not be deemed to be an incurrence of indebtedness or an issuance of Disqualified
Capital Stock for purposes of the terms of the indenture governing incurrence of
indebtedness.
Limitation on Restricted Payments. Subject to the exceptions set forth in
the indenture, we agreed to not, and to not cause or permit any of our
restricted subsidiaries to, make the following restricted payments:
o declare or pay any dividend or make any distribution, other than dividends
or distributions payable in Qualified Capital Stock, on our capital stock;
o acquire or retire for value any capital stock or any warrants, rights or
options to purchase or acquire shares of capital stock;
o make any principal payment on, or acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund
payment, any indebtedness that is subordinate or junior in right of payment
to the notes; or
o make any investment other than specified investments permitted pursuant to
the indenture;
if at the time of such restricted payment or immediately after giving effect to
such restricted payment,
o a default or an event of default will occur and be continuing; or
o we are not able to incur at least $1.00 of additional indebtedness (other
than permitted indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant described above, so long as
the Consolidated Fixed Charge Coverage Ratio, after giving effect to such
restricted payment, is greater than 3.0 to 1.0; or
o the aggregate amount of restricted payments (including the proposed
restricted payment) made subsequent to June 28, 2002 exceeds, without
duplication, the sum of the following:
(a) 75% of our cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income is a loss, minus 100% of such loss) earned
subsequent to June 28, 2002 and on or prior to the date the restricted
payment occurs, treating such period as a single accounting period;
plus
(b) 100% of the aggregate net cash proceeds we receive from any person
other than a restricted subsidiary from the issuance and sale
subsequent to June 28, 2002 and on or prior to the date the restricted
payment occurs of Qualified Capital Stock or warrants, options or
other rights to acquire Qualified Capital Stock (but excluding any
debt security that is convertible into, or exchangeable for, Qualified
Capital Stock); plus
(c) 100% of the aggregate net cash proceeds of any equity contribution we
receive from a holder of our capital stock (excluding, in the case of
the paragraph immediately above and this paragraph, any net cash
proceeds from a public offerings of equity of KII, Kronos or NL to the
extent used to redeem the notes in compliance with the provisions set
forth under "Redemption - Optional Redemption upon Public Equity
Offerings"); plus
64
(d) without duplication, the sum of:
(i) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to
June 28, 2002 whether through interest payments, principal
payments, dividends or other distributions or payments;
(ii) the net cash proceeds we or any of our restricted subsidiaries
receive from the disposition of all or any portion of Investments
(other than Permitted Investments) made subsequent to June 28,
2002 other than to a restricted subsidiary; and
(iii)subject to a proviso set forth in the indenture, upon
redesignation of an unrestricted subsidiary as a restricted
subsidiary, the fair market value of such subsidiary; plus
(iv) $25 million.
The provisions summarized above do not prohibit a number of events,
including the following:
o the payment of any dividend within 60 days after the date of declaration of
such dividend if the dividend would have been permitted on the date of
declaration;
o the acquisition or redemption of any shares of our capital stock, either
(i) solely in exchange for shares of our Qualified Capital Stock or (ii)
through the application of net proceeds of a substantially concurrent sale
for cash (other than to a restricted subsidiary) of shares of our Qualified
Capital Stock;
o the acquisition or redemption of any indebtedness that is subordinate or
junior in right of payment to the notes either (i) solely in exchange for
shares of our Qualified Capital Stock or (ii) through the application of
net proceeds of (a) a substantially concurrent sale for cash (other than to
a restricted subsidiary) of shares of our Qualified Capital or (b) if no
default or event of default shall have occurred and be continuing,
specified indebtedness incurred in connection with a refinancing of
existing indebtedness or incurred in accordance with certain provisions of
the "Limitation on Incurrence of Additional Indebtedness" covenant; and
o so long as no default or event of default has occurred and is continuing,
repurchases by us of our common stock (or options or warrants to purchase
our common stock) from our or our subsidiaries' directors, officers and
employees or their authorized representatives upon the death, disability,
retirement or termination of employment of such directors, officers and
employees, in an aggregate amount not to exceed $3 million in any calendar
year.
Limitation on Asset Sales. The indenture also provides that we will not,
and will not permit any of our restricted subsidiaries to, consummate any Asset
Sales unless:
o we receive consideration at least equal to the fair market value of the
assets sold, as determined in good faith by our board of directors;
o at least 75% of the consideration we received from the Asset Sale is in the
form of cash or cash equivalents and is received at the time of such Asset
Sale; and
o upon the consummation of the Asset Sale, we apply the net cash proceeds
within 365 days of receipt thereof either:
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o to prepay any secured senior indebtedness and, in the case of any such
senior indebtedness under any revolving credit facility, effect a permanent
reduction in the availability under such revolving credit facility; and/or
o to acquire or make an investment in properties and assets that replace the
properties and assets that were the subject of such sale or in properties
and assets that we will use in our business (which assets we refer to in
this prospectus as "replacement assets").
On the 366th day after an Asset Sale or any earlier date as our board of
directors determines not to apply the net cash proceeds of such Asset Sale as
set forth above, the net cash proceeds that have not been applied as set forth
above will be applied to make an offer to purchase from all noteholders on a pro
rata basis, that amount of notes equal to such unapplied amount at a price equal
to 100% of the principal amount of the notes to be purchased, plus accrued and
any unpaid interest thereon to the date of purchase. We may, however, consummate
an Asset Sale without complying with this requirement if at least 80% of the
consideration for such Asset Sale consists of replacement assets and such Asset
Sale is for fair market value. Any consideration that does not constitute
replacement assets will be subject to the provisions set forth in the first
sentence of this paragraph. We may defer such an offer until the total of the
unapplied net cash proceeds is equal to or in excess of $20 million resulting
from one or more Asset Sales.
In the event of the transfer of substantially all (but not all) of our and
our restricted subsidiaries' property and assets as an entirety to a person in a
transaction permitted under "- Merger, Consolidation and Sale of Assets," which
transaction does not constitute a Change of Control, the successor corporation
will be deemed to have sold our properties and assets not so transferred for
purposes of this covenant, and must comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale. In addition, the
fair market value of such properties and assets deemed to be sold will be deemed
to be net cash proceeds for purposes of this covenant.
Each offer will be mailed to the record holders, with a copy to the
trustee, and will comply with the procedures set forth in the indenture. Upon
receiving this notice, noteholders may elect to tender their notes in whole or
in part in integral multiples of euro 1,000 in exchange for cash. To the extent
noteholders properly tender notes in an amount exceeding the offer amount, notes
of tendering holders will be purchased on a pro rata basis (based on amounts
tendered). The offer will remain open for a period of 20 business days or such
longer period as may be required by law.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of notes
pursuant to an offer. To the extent that the provisions of any securities laws
or regulations conflict with the "Asset Sale" provisions of the indenture, we
will comply with the applicable securities laws and regulations and will not be
deemed to have breached our obligations under the "Asset Sale" provisions of the
indenture by virtue thereof.
After the consummation of any offer, we may use any amount not applied to
any such purchase for any purpose permitted by the other provisions of the
indenture.
To the extent that any or all of the net cash proceeds related to an Asset
Sale of a restricted subsidiary are prohibited or delayed by applicable law from
being repatriated (in the form of dividends, loans or otherwise) to us, the
portion of such net cash proceeds so affected will not be required to be applied
at the time provided above, but may be retained by the applicable restricted
subsidiary so long, but only so long, as such applicable law will not permit
repatriation to us, and we have agreed to cause the applicable restricted
subsidiary to promptly take all actions required by the applicable law to permit
such repatriation. After such repatriation of any such affected net cash
proceeds is permitted under such applicable law, such repatriation shall be
immediately effected and such repatriated net cash proceeds will be applied in a
manner as described in this covenant.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. Except as permitted under the indenture, we may not, and may not
cause or permit any of our restricted subsidiaries to create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any restricted subsidiary to:
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o pay dividends or make any other distributions on or in respect of our or
our restricted subsidiaries' capital stock;
o make loans or advances or to pay any indebtedness or other obligation owed
to us or any other restricted subsidiary; or
o transfer any of its property or assets to us or any other restricted
subsidiary,
Limitation on Preferred Stock of Restricted Subsidiaries. We may not permit
any of our restricted subsidiaries to issue any preferred stock other than to us
or to one of our wholly-owned restricted subsidiaries, or permit any person
other than us or one of our wholly-owned subsidiaries to own any preferred stock
of any of our restricted subsidiaries.
Limitation on Liens. Except as permitted under the indenture, we may not,
and may not cause or permit any of our restricted subsidiaries to create, incur,
assume or permit or suffer to exist any liens of any kind against or upon any of
our or our restricted subsidiaries' property or assets, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom, unless:
o in the case of liens securing indebtedness that is expressly subordinate or
junior in right of payment to the notes, the notes are secured by a lien of
such property, assets or proceeds that is senior in priority to such liens;
and
o in all other cases, the notes are equally and ratably secured.
Merger, Consolidation and Sale of Assets. The indenture provides that we
may not consolidate or merge with or into any person, or sell, assign, transfer,
lease, convey or otherwise dispose of (or cause or permit any our restricted
subsidiaries to sell, assign, transfer, lease, convey or otherwise dispose of)
all or substantially all of our assets, determined on a consolidated basis for
us and our restricted subsidiaries, unless:
o either:
o we are the surviving corporation; or
o the person formed by such consolidation or into which we are merged or
the acquiror is a corporation organized and validly existing under the
laws of the United States, any state thereof or the District of
Columbia and expressly assumes, by supplemental indenture in form and
substance satisfactory to the trustee the due and punctual payment of
the principal of, and premium, if any, and interest on all of the
notes and our performance of every covenant of the notes, the
indenture and the registration rights agreement to be performed or
observed;
o immediately after giving effect to such transaction and the assumption
contemplated above, we or such surviving entity, as the case may be, has a
consolidated net worth equal to or greater than our consolidated net worth
immediately prior to such transaction and will in general be able to incur
at least $1.00 of additional indebtedness pursuant to the "- Limitation on
Incurrence of Additional Indebtedness" covenant described above so long as
the Consolidated Fixed Charge Coverage Ratio is greater than 2.5 to 1.0;
o immediately before and immediately after giving effect to such transaction
and the assumption contemplated above, no default or event of default has
occurred or is continuing; and
o we or the surviving entity has delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that such transaction
and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture, comply with the applicable
provisions of the indenture and that all conditions precedent in the
indenture relating to such transaction have been satisfied.
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For purposes of the foregoing, the transfer of all or substantially all of
the properties or assets of one or more restricted subsidiaries the capital
stock of which constitutes all or substantially all of our properties and
assets, will be deemed to be the transfer of all or substantially all of our
properties and assets.
The indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of our assets in accordance with the
foregoing, in which we are not the continuing corporation, the successor person
formed by such consolidation or into which we are merged or to which such
conveyance, lease or transfer is made shall succeed to, and be substituted for,
and may exercise all of our rights and powers, under the indenture and the notes
with the same effect as if such surviving entity had been named as such.
The indenture also provides that each restricted subsidiary that in the
future executes a supplemental indenture in which such guarantor, other than any
guarantor whose guarantee is to be released in accordance with the terms of the
guarantee and the indenture in connection with any transaction complying with
the provisions of "- Limitation on Asset Sales," may not, and we may not cause
or permit any guarantor to, consolidate with or merge with or into any person
other than us or any other guarantor unless, in general, conditions similar to
those described above with respect to a merger or other transaction that
involves us are satisfied.
Limitations on Transactions with Affiliates. Except as permitted under the
indenture, we may not, and may not permit any of our restricted subsidiaries to,
enter into or permit to exist any transaction with, or for the benefit of, any
of our affiliates, other than transactions on terms that are no less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a person that is not our affiliate.
All transactions with an affiliate involving aggregate payments or other
property with a fair market value in excess of $2 million must be approved by
our or such restricted subsidiary's board of directors. If we or any restricted
subsidiary enters into a transaction with an affiliate that involves an
aggregate fair market value of more than $12.5 million, we or such restricted
subsidiary, as the case may be, must, prior to the consummation thereof, obtain
a favorable opinion as to the fairness of such transaction or series of related
transactions to us or the relevant restricted subsidiary, as the case may be,
from a financial point of view, from an independent financial advisor and file
the same with the trustee.
Limitation of Guarantees by Restricted Subsidiaries. Except as set forth in
the indenture, our restricted subsidiaries may not, by way of the pledge of any
intercompany note or otherwise, assume, guarantee or in any other manner become
liable with respect to any of our or another restricted subsidiary's
indebtedness, unless, in any such case:
o such restricted subsidiary executes and delivers a supplemental indenture
to the indenture, providing a guarantee of payment of the notes by such
restricted subsidiary; and
o if such assumption, guarantee or other liability of such restricted
subsidiary is provided in respect of indebtedness that is expressly
subordinated to the notes (or a guarantee of the notes), the guarantee or
other instrument provided by such restricted subsidiary in respect of such
subordinated indebtedness is subordinated to the guarantee pursuant to
subordination provisions no less favorable to the noteholders than those
contained in such other indebtedness.
Any such guarantee by a restricted subsidiary of the notes will be
automatically and unconditionally released and discharged, without any fur ther
action required on the part of the trustee or any noteholder, upon:
o the unconditional release of such restricted subsidiary from its
assumption, guarantee or other liability in respect of the indebtedness in
connection with which such guarantee was executed and delivered pursuant to
the preceding paragraph; or
o subject to the provisions of the indenture, any sale or other disposition
to any person which is not a restricted subsidiary of all of the capital
stock in, or all or substantially all of the assets of, such restricted
subsidiary.
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Provision of Security. Except as set forth in the indenture, we may not
form, acquire or maintain any direct restricted subsidiary, unless, concurrently
with the formation, acquisition or maintenance of such subsidiary, we execute
and deliver, or cause to be executed and delivered, to the trustee for the
benefit of the noteholders, a pledge agreement, in form and substance reasonably
satisfactory to the trustee, pursuant to which not less than 65% of the capital
stock of such subsidiary is pledged to the trustee for the benefit of the
noteholders and we, concurrently therewith, execute and deliver all documents,
instruments and agreements in form and substance reasonably satisfactory to the
trustee reasonably necessary in the opinion of the trustee to grant and maintain
at all times a fully perfected senior lien on the collateral pledged pursuant to
such pledge agreement.
Conduct of Business. Pursuant to the indenture, we and our restricted
subsidiaries may not engage in any businesses which are not the same, similar or
reasonably related to, or ancillary or complementary to, the businesses in which
we and our restricted subsidiaries were engaged on June 28, 2002, the date of
original issuance of the initial notes.
Reports to Holders. The indenture provides that, whether or not required by
the rules and regulations of the SEC, so long as any notes are outstanding, we
will furnish the noteholders (or make publicly available through the SEC's EDGAR
database), all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if we were
required to file such forms and all current reports that would be required to be
filed with the SEC on Form 8-K if we were required to file such reports, in each
case within the time periods specified in the SEC's rules and regulations.
In addition, whether or not required by the rules and regulations of the
SEC, we will file a copy of all such information and reports with the SEC for
public availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. So long as the new notes are listed on the Luxembourg Stock Exchange,
copies of such reports shall be available at the specified office of the paying
agent and transfer agent in Luxembourg. In addition, we have agreed that, for so
long as any notes remain outstanding, we will furnish to the noteholders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Release of Security Upon Satisfaction of Conditions. We have the right to
obtain a release of the liens on items of collateral subject to a sale or
disposition in accordance with the indenture, and the trustee will release such
collateral from these liens and reconvey this collateral to us immediately prior
to such sale or disposition upon delivery to the trustee of an officers'
certificate in the form specified in the indenture and any documentation by the
Trust Indenture Act.
Events of Default
The following events are "events of default" under the indenture, and a
"default" will occur under the indenture upon an event or condition the
occurrence of which is, or with the lapse of time or the giving of notice or
both would be, an event of default:
o the failure to pay interest on any notes when the same becomes due and
payable and the default continues for a period of 30 days;
o the failure to pay the principal on any notes when such principal becomes
due and payable, at maturity, upon redemption or otherwise (including the
failure to make a payment to purchase notes tendered pursuant to the offers
described above under "Change of Control" and "Certain Covenants -
Limitation on Asset Sales");
o a default in the observance or performance of any other covenant or
agreement contained in the indenture which default continues for a period
of 45 days after we receive written notice specifying the default (and
demanding that such default be remedied) from the trustee or the holders of
at least 25% of the outstanding principal amount of the notes, except in
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the case of a default with respect to the "Merger, Consolidation and Sale
of Assets" covenant, which will constitute an Event of Default with such
notice requirement but without such passage of time requirement;
o the failure to pay at final maturity (giving effect to any applicable grace
periods and any extensions thereof) the principal amount of any of our or
our restricted subsidiaries' indebtedness, or the acceleration of the final
stated maturity of any such indebtedness, which acceleration is not
rescinded, annulled or otherwise cured within 20 days of our receipt of
notice of any such acceleration, if the aggregate principal amount of such
indebtedness, together with the principal amount of any other such
indebtedness in default for failure to pay principal at final maturity or
which has been accelerated (in each case with respect to which the 20-day
period described above has elapsed), aggregates $20 million or more at any
time;
o a repudiation by us of any of our obligations under any document (which we
refer to in this prospectus as a "collateral document") creating or
evidencing a security interest in favor of the trustee for the benefit of
the noteholders in any of the property described above under "Security," or
the unenforceability of any such collateral document against us if such
unenforceability reasonably would be expected to result in a material
adverse effect on the liens we granted pursuant to such collateral
documents;
o certain events of bankruptcy affecting us or any of our significant
subsidiaries; or
o any judgment in an aggregate amount in excess of $20 million has been
rendered against us or any of our restricted subsidiaries and such
judgments remain undischarged, unpaid or unstayed for a period of 60 days
after such judgment or judgments become final and non-appealable.
If an event of default (other than an event of default specified in the
last paragraph of the definition of event of default with respect to us) occurs
and is continuing, the trustee or the holders of at least 25% in principal
amount of outstanding notes may declare the principal of and accrued interest on
all the notes to be due and payable by notice in writing to us and the trustee
specifying the respective event of default and that it is a "notice of
acceleration," and the same shall become immediately due and payable.
If an event of default specified in the last paragraph of the definition of
event of default with respect to us occurs and is continuing, then all unpaid
principal of, and premium, if any, and accrued and unpaid interest on all of the
outstanding notes will become and be immediately due and payable without any
declaration or other act on the part of the trustee or any noteholder. The
indenture provides that, at any time after a declaration of acceleration with
respect to the notes as described in the preceding paragraph, the holders of a
majority in principal amount of the notes may rescind and cancel such
declaration and its consequences if the conditions specified in the indenture
are satisfied.
The holders of a majority in principal amount of the notes may waive any
existing default or event of default under the indenture, and its consequences,
except a default in the payment of the principal of or interest on any notes.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture and under the Trust Indenture Act. Subject to the
provisions of the indenture relating to the duties of the trustee, the trustee
is under no obligation to exercise any of its rights or powers under the
indenture at the request, order or direction of any of the noteholders, unless
such noteholders have offered to the trustee reasonable indemnity. Subject to
all provisions of the indenture and applicable law, the holders of a majority in
aggregate principal amount of the then outstanding notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee.
Under the indenture, we are required to provide an officers' certificate to
the trustee promptly upon any such officer obtaining knowledge of any default or
event of default that has occurred and, if applicable, describe such default or
event of default and the status thereof. Such officers must also provide this
certification at least annually whether or not they know of any default or event
of default.
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Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have our obligations and
the obligations of the guarantors discharged with respect to the outstanding
notes, which we refer to in this prospectus as a "legal defeasance." Such legal
defeasance means that we will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding notes, except for:
o the rights of noteholders to receive payments in respect of the principal
of, premium, if any, and interest on the notes when such payments are due;
o our obligations with respect to the notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes
and the maintenance of an office or agency for payments;
o the rights, powers, trust, duties and immunities of the trustee and our
obligations in connection therewith; and
o the legal defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants that are described in the
indenture and thereafter any omission to comply with such obligations will not
constitute an event of default with respect to the notes, which we refer to in
this prospectus as a "covenant defeasance." If a covenant defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an event of default with respect to the notes.
In order to exercise either a legal defeasance or a covenant defeasance, we
must satisfy all of the conditions relating thereto in the indenture.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture) as to all outstanding notes
when:
o either:
o in general, all the notes previously authenticated and delivered have
been delivered to the trustee for cancellation; or
o all notes not previously delivered to the trustee for cancellation
have become due and payable and we have irrevocably deposited or
caused to be deposited with the trustee funds in an amount sufficient
to pay and discharge the entire indebtedness on the notes not
previously delivered to the trustee for cancellation, for principal
of, premium, if any, and interest on the notes to the date of deposit
together with irrevocable instructions from us directing the trustee
to apply such funds to the payment thereof at maturity or redemption,
as the case may be;
o we have paid all other sums payable under the indenture by us; and
o we have delivered to the trustee an officers' certificate and an opinion of
counsel stating that all conditions precedent under the indenture relating
to the satisfaction and discharge of the indenture have been complied with.
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Modification of the Indenture
From time to time, we and the trustee, without the consent of the
noteholders, may amend the indenture or the collateral documents for certain
specified purposes, including curing ambiguities, defects or inconsistencies, so
long as such change does not, in the opinion of the trustee, adversely affect
the rights of any of the noteholders in any material respect. In formulating its
opinion on such matters, the trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion of
counsel. Other modifications and amendments of the indenture or collateral
documents may be made with the consent of the holders of a majority in principal
amount of the then outstanding notes issued under the indenture, except that,
without the consent of each holder affected thereby, no amendment may:
o reduce the amount of notes whose holders must consent to an amendment;
o reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any notes;
o reduce the principal of or change or have the effect of changing the fixed
maturity of any notes, or change the date on which any notes may be subject
to redemption or reduce the redemption price therefor;
o make any notes payable in money other than that stated in the notes;
o make any change in provisions of the indenture protecting the right of each
holder to receive payment of principal of and interest on such note on or
after the due date thereof or to bring suit to enforce such payment, or
permitting holders of a majority in principal amount of notes to waive
defaults or events of default;
o after our obligation to purchase notes arises thereunder, amend, change or
modify in any material respect our obligation to make and consummate the
offers described above under "Change of Control" and "Certain Covenants -
Limitation on Asset Sales" or, after such Change of Control has occurred or
such Asset Sale has been consummated, modify any of the provisions or
definitions with respect thereto; or
o modify or change any provision of the indenture or the related definitions
affecting the ranking of the indebtedness evidenced by the notes.
Governing Law
The indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York.
The Trustee
The indenture provides that, except during the continuance of an event of
default, the trustee will perform only such duties as are specifically set forth
in the indenture. During the existence of an event of default, the trustee will
exercise such rights and powers vested in it by the indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs.
The indenture and the provisions of the Trust Indenture Act contain certain
limitations on the rights of the trustee, should it become a creditor of us, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
Trust Indenture Act, the trustee will be permitted to engage in other
transactions. However, if the trustee acquires any conflicting interest as
described in the Trust Indenture Act, it must eliminate such conflict or resign.
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Notices
All notices required under the indenture will be deemed to have been given by:
o the mailing by first-class mail, postage prepaid, of such notices to
holders of the notes at their registered addresses as recorded in the
register; and
o so long as the new notes are listed on the Luxembourg Stock Exchange and it
is required by the rules of the Luxembourg Stock Exchange, publication of
such notice to the holders of the new notes in English in a leading
newspaper having general circulation in Luxembourg (which is expected to be
the Luxemburger Wort) or, if such publication is not practicable, in one
other leading English language daily newspaper with general circulation in
Europe, such newspaper being published on each business day in morning
editions, whether or not it shall be published on Saturday, Sunday or
holiday editions.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
indenture. Please refer to the indenture for the full definition of all such
terms, as well as any other terms used in this prospectus for which no
definition is provided.
"Acquired Indebtedness" means indebtedness of a person or any of its
subsidiaries existing at the time such person becomes a restricted subsidiary or
at the time it merges or consolidates with or into us or any of our restricted
subsidiaries or assumed in connection with the acquisition of assets from such
person and in each case not incurred by such person in connection with, or in
anticipation or contemplation of, such person becoming a restricted subsidiary
or such acquisition, merger or consolidation, except for indebtedness of a
person or any of its subsidiaries that is repaid at the time such person becomes
a restricted subsidiary or at the time it merges with or into us or any of our
restricted subsidiaries other than from our and our other restricted
subsidiaries' assets.
"Asset Acquisition" means (1) an Investment by us or any restricted
subsidiary in any other person pursuant to which such person shall become a
restricted subsidiary or of any restricted subsidiary, or shall be merged with
or into us or any restricted subsidiary, or (2) the acquisition by us or any
restricted subsidiary of the assets of any person other than a restricted
subsidiary that constitute all or substantially all of the assets of such person
or comprise any division or line of business of such person or any other
properties or assets of such person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by us or any of our
restricted subsidiaries (including any sale and leaseback transaction) to any
person other than us or restricted subsidiary wholly-owned by us of: (1) any
capital stock of any restricted subsidiary; or (2) any other property or assets
of us or any restricted subsidiary other than in the ordinary course of
business; provided, however, that asset sales or other dispositions shall not
include the following:
o a transaction or series of related transactions for which we or our
restricted subsidiaries receive aggregate consideration of less than $2
million;
o the sale, lease, conveyance, disposition or other transfer of all or
substantially all of our assets of as permitted under "Merger,
Consolidation and Sale of Assets";
o sales or grants of licenses to use the patents, trade secrets, know-how and
other intellectual property of us or any of our restricted subsidiaries to
the extent that any such license does not prohibit us or any of our
restricted subsidiaries from using any material technologies licensed or
require us or any of our restricted subsidiaries to pay fees (other than de
minimis fees) for use of any material technologies;
o the sale or discount, in each case without recourse, of accounts receivable
arising in the ordinary course of business, but only in connection with the
compromise or collection thereof;
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o disposals or replacements of obsolete, surplus or unused equipment in the
ordinary course of business;
o any restricted payment not prohibited by the "Limitation on Restricted
Payments" covenant or that constitutes a Permitted Investment;
o the sale, lease, conveyance, disposition or other transfer of assets or
capital stock of Kronos Invest A/S or Capital Stock of Tinfoss Titan & Iron
A/S to the extent the aggregate consideration therefrom is less than $10
million; and
o affiliate transactions permitted under the indenture.
"Consolidated EBITDA" means for any period, the sum (without duplication)
of the following, all as determined on a consolidated basis for us and our
restricted subsidiaries in accordance with GAAP:
o Consolidated Net Income; and
o to the extent Consolidated Net Income has been reduced thereby:
o all of our and our restricted subsidiaries' income taxes paid or
accrued in accordance with GAAP for such period;
o Consolidated Interest Expense; and
o Consolidated Non-cash Charges;
"Consolidated Fixed Charge Coverage Ratio" means the ratio of our
Consolidated EBITDA during the four full fiscal quarters ending prior to the
date of the transaction giving rise to the need to calculate the Consolidated
Fixed Charge Coverage Ratio for which financial statements are available (the
"Transaction Date") to our Consolidated Fixed Charges for such four-quarter
period. In addition to and without limitation of the foregoing, for purposes of
this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to:
o the incurrence or repayment of any indebtedness of us or any of our
restricted subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation and any incurrence or
repayment of other indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of indebtedness in the
ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during such four-quarter period or at
any time subsequent to the last day of such four-quarter period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the
case may be (and the application of the proceeds thereof), occurred on the
first day of such four-quarter period; and
o any asset sales (other than disposals or replacements of obsolete or unused
equipment in the ordinary course of business) or other dispositions or
Asset Acquisitions, including, without limitation, any Asset Acquisition
giving rise to the need to make such calculation as a result of our or one
of our restricted subsidiaries (including any person who becomes a
restricted subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also
including any Consolidated EBITDA (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Exchange Act) attributable to the assets which are the subject of the Asset
Acquisition or asset sale or other disposition during such four-quarter
period) occurring during such four-quarter period or at any time subsequent
to the last day of such four-quarter period and on or prior to the
Transaction Date, as if such asset sale or other disposition or Asset
Acquisition (including the incurrence, assumption or liability for any such
Acquired Indebtedness) occurred on the first day of such four-quarter
period. If we or any of our restricted subsidiaries directly or indirectly
guarantees indebtedness of a third person, the preceding sentence shall
give effect to the incurrence of such guaranteed indebtedness as if we or
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any restricted subsidiary had directly incurred or otherwise assumed such
guaranteed indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of the "Consolidated Fixed
Charge Coverage Ratio":
o interest on outstanding indebtedness determined on a fluctuating basis as
of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such indebtedness in effect on the Transaction
Date; and
o notwithstanding the above paragraph, interest on indebtedness determined on
a fluctuating basis, to the extent such interest is covered by agreements
relating to interest swap arrangements, shall be deemed to accrue at the
rate per annum resulting after giving effect to the operation of such
agreements.
"Consolidated Fixed Charges" means, with respect to any period, the sum,
without duplication, of:
o Consolidated Interest Expense; plus
o the product of (x) the amount of all dividend payments on any series of our
preferred stock of (other than dividends paid in Qualified Capital Stock)
paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which
is one minus our then current effective consolidated federal, state and
local income tax rate, expressed as a decimal.
"Consolidated Interest Expense" means, for any period, the sum of, without
duplication:
o our and our restricted subsidiaries' aggregate of the interest expense for
such period determined on a consolidated basis in accordance with GAAP,
including without limitation:
o any amortization of debt discount and amortization or write-off of
deferred financing costs;
o the net cash costs under agreements relating to interest swap
arrangements; all capitalized interest; and
o the interest portion of any deferred payment obligation; and
o the interest component of capitalized lease obligations paid, accrued
and/or scheduled to be paid or accrued during such period as determined on
a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, our and our restricted
subsidiaries' aggregate net income (or loss) for such period on a consolidated
basis, determined in accordance with GAAP, excluding the following:
o after-tax gains from Asset Sales (without regard to the $2 million
limitation set forth in the definition thereof) or abandonments or reserves
relating thereto;
o after-tax items classified as extraordinary gains in accordance with GAAP;
o net income acquired in a "pooling of interests" transaction accrued prior
to becoming a restricted subsidiary or prior to the date of a merger or
consolidation;
o the net income (but not loss) of any restricted subsidiary to the extent
that the declaration of dividends or similar distributions by that
restricted subsidiary of that income is restricted by a contract, operation
of law or otherwise; provided, however, that if the restricted subsidiary
is able despite any such restriction to distribute income or otherwise
75
transfer cash to us by way of an intercompany loan or otherwise, then such
income or cash, to the extent of such ability, will not be excluded
pursuant to this provision;
o our net income, other than a restricted subsidiary, except to the extent of
cash dividends or distributions paid to us or to one of our wholly-owned
restricted subsidiaries by us;
o income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued); provided, however, that such
income or loss shall be included in Consolidated Net Income for the purpose
of calculating our Consolidated Net Income for certain purposes of the
"Limitation on Restricted Payments" covenant;
o in the case of a successor by consolidation or merger or as a transferee of
our assets, any earnings of the successor corporation prior to such
consolidation, merger or transfer of assets;
o non-cash charges relating to compensation expense in connection with
benefits provided under employee stock option plans, restricted stock
option plans and other employee stock purchase or stock incentive plans;
and
o income or loss attributable solely to fluctuations in currency values and
related tax effects, in either case related to notes and accounts payable
existing prior to or as of June 28, 2002 and payable to our affiliates.
"Consolidated Net Worth" means the consolidated stockholders' equity,
determined on a consolidated basis in accordance with GAAP, less (without
duplication) amounts attributable to Disqualified Capital Stock.
"Consolidated Non-cash Charges" means, for any period, our and our
restricted subsidiaries' aggregate depreciation, amortization and other non-cash
expenses reducing our and our restricted subsidiaries' Consolidated Net Income
for such period, determined on a consolidated basis in accordance with GAAP,
excluding any such charges constituting an extraordinary item or loss or any
such charge which requires an accrual of or a reserve for cash charges for any
future period.
"Disqualified Capital Stock" means that portion of any capital stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable, in either case at the option of the holder
thereof), or upon the happening of any event (other than an event which would
constitute a Change of Control), matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or is redeemable at the sole option
of the holder thereof (except, in each case, upon the occurrence of a Change of
Control) on or prior to the final maturity date of the notes.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by our board of directors acting reasonably and in good
faith.
"Investment" means any direct or indirect loan or other extension of credit
(including, without limitation, a guarantee) or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of any capital stock, bonds, notes, debentures or other securities
or evidences of Indebtedness. "Investment" shall exclude (i) extensions of trade
credit by us and our restricted subsidiaries on commercially reasonable terms in
accordance with our normal trade practices, provided that nothing in this clause
shall prevent us or any restricted subsidiary from providing such concessionary
trade terms as management deems reasonable in the circumstances; and (ii) loans
or extensions of credit to an affiliate that are otherwise permitted under the
indenture. If we or any restricted subsidiary sells or otherwise disposes of any
common stock of any direct or indirect restricted subsidiary such that, after
giving effect to any such sale or disposition, we no longer own, directly or
indirectly, at least 50% of the outstanding common stock of such restricted
76
subsidiary, we will be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the common stock of such
restricted subsidiary not sold or disposed of.
"Permitted Investments" means, without duplication:
o Investments by us or any of restricted subsidiaries in any person that is
or will become immediately after such Investment a restricted subsidiary or
that will merge or consolidate into us or a restricted subsidiary;
o Investments in us by any restricted subsidiary;
o Investments in cash and cash equivalents;
o loans and advances to our and our restricted subsidiaries' employees and
officers in the ordinary course of business for bona fide business
purposes;
o agreements designed to protect us against fluctuations in the price of
commodities, agreements designed to protect us against fluctuations in
currency values and interest swap agreements entered into in the ordinary
course of our business and otherwise in compliance with the indenture;
o additional Investments not to exceed $20 million at any one time
outstanding;
o Investments existing June 28, 2002, the original date of issuance of the
initial notes;
o Investments resulting from settlements or compromises of accounts
receivable or trade payables in the ordinary course of business,
Investments in securities of trade creditors or customers received pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers or in good faith
settlements of delinquent obligations of such trade creditors or customers;
o Investments made as a result of consideration received or investments
deemed made in connection with an Asset Sale made in compliance with the
"Limitation on Asset Sales" covenant;
o Investments represented by guarantees that are otherwise permitted under
the indenture;
o Investments the payment for which is our Qualified Capital Stock; and
o Investments consisting of loans to one or more of our or our subsidiaries'
officers, directors or other employees in connection with such officers',
directors' or employees' acquisition of shares of our or our affiliates'
capital stock, pursuant to the exercise of stock options or in connection
with other equity-based compensation.
"Qualified Capital Stock" means any capital stock that is not Disqualified
Capital Stock.
REGISTRATION RIGHTS
We and the initial purchaser entered into a registration rights agreement
on November 26, 2004 pursuant to which we agreed that we will, at our expense,
for the benefit of the holders of the old notes, (i) within 120 days after
November 26, 2004 (the "Filing Date"), file an exchange offer registration
statement on an appropriate registration form with respect to a registered offer
to exchange the old notes for new notes, which new notes will have terms
substantially identical in all material respects to the old notes (except that
the new notes will not contain terms with respect to transfer restrictions) and
(ii) cause the exchange offer registration statement to be declared effective
under the Securities Act within 270 days after November 26, 2004. Upon the
exchange offer registration statement being declared effective, we will offer
the new notes in exchange for surrender of the old notes. We will keep the
77
exchange offer open for not less than 30 days (or longer if required by
applicable law) after the date notice of the exchange offer is mailed to the
holders of the old notes. For each of the old notes surrendered to us pursuant
to the exchange offer, the holder who surrendered such old note will receive a
new note having a principal amount equal to that of the surrendered old note.
Interest on each new note will accrue (A) from the later of (i) the last
interest payment date on which interest was paid on the old note surrendered in
exchange therefor, or (ii) if the old note is surrendered for exchange on a date
in a period which includes the record date for an interest payment date to occur
on or after the date of such exchange and as to which interest will be paid, the
date of such interest payment date, or (B) if no interest has been paid on such
old note, from November 26, 2004.
If (i) because of any change in law or in currently prevailing
interpretations of the Staff of the SEC, we are not permitted to effect an
exchange offer, (ii) the exchange offer is not consummated within 300 days of
November 26, 2004 or (iii) in certain circumstances, certain holders of
unregistered new notes so request, or (iv) in the case of any holder that
participates in the exchange offer, such holder does not receive new notes on
the date of the exchange that may be sold without restriction under state and
federal securities laws (other than due solely to the status of such holder as
our affiliate within the meaning of the Securities Act), then in each case, we
will (x) promptly deliver to the holders and the Trustee written notice thereof
and (y) at our sole expense, (a) as promptly as practicable, file a shelf
registration statement covering resales of the notes, and (b) use our best
efforts to keep effective the shelf registration statement until the earliest of
two years after November 26, 2004, such time as all of the applicable notes have
been sold thereunder. We will, in the event that a shelf registration statement
is filed, provide to each holder copies of the prospectus that is a part of the
shelf registration statement, notify each such holder when the shelf
registration statement for the notes has become effective and take certain other
actions as are required to permit unrestricted resales of the old notes. A
holder that sells notes pursuant to the shelf registration statement will be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the registration rights agreement that are
applicable to such a holder (including certain indemnification rights and
obligations).
If we fail to meet the targets listed above, then additional interest will
become payable in respect of the old notes as follows:
(i) if (A) neither the exchange offer registration statement nor the shelf
registration statement is filed with the SEC on or prior to 120 days
after November 26, 2004 or (B) notwithstanding that we have
consummated or will consummate an exchange offer, we are required to
file a shelf registration statement and such shelf registration
statement is not filed on or prior to the date required by the
registration rights agreement, then commencing on the day after either
such required filing date, additional interest will accrue on the
principal amount of the notes at a rate of 0.25% per annum for the
first 90 days immediately following each such filing date, such
additional interest rate increasing by an additional 0.25% per annum
at the beginning of each subsequent 90-day period; or
(ii) if (A) neither the exchange offer registration statement nor a shelf
registration statement is declared effective by the SEC on or prior to
270 days after November 26, 2004 or (B) notwithstanding that we have
consummated or will consummate an exchange offer, we are required to
file a shelf registration statement and such shelf registration
statement is not declared effective by the SEC on or prior to the date
required by the registration rights agreement, then, commencing on the
day after either such required effective date, additional interest
will accrue on the principal amount of the notes at a rate of 0.25%
per annum for the first 90 days immediately following such date, such
additional interest rate increasing by an additional 0.25% per annum
at the beginning of each subsequent 90-day period; or
(iii) if (A) we have not exchanged new notes for all old notes validly
tendered in accordance with the terms of the exchange offer on or
prior to the 300th day after November 26, 2004 or (B) if applicable,
the shelf registration statement has been declared effective and such
shelf registration statement ceases to be effective at any time prior
to the second anniversary of November 26, 2004 (other than after such
time as all notes have been disposed of thereunder), then additional
interest will accrue on the principal amount of the notes at a rate of
0.25% per annum for the first 90 days commencing on (x) the 300th day
78
after November 26, 2004, in the case of (A) above, or (y) the day such
shelf registration statement ceases to be effective, in the case of
(B) above, such additional interest rate increasing by an additional
0.25% per annum at the beginning of each subsequent 90-day period;
provided, however, that the additional interest rate on the old notes may
not accrue under more than one of the foregoing clauses (i) - (iii) at any one
time and at no time shall the aggregate amount of additional interest accruing
exceed in the aggregate 0.75% per annum; provided, further, that (1) upon the
filing of the exchange offer registration statement or a shelf registration
statement (in the case of clause (i) above), (2) upon the effectiveness of the
exchange offer registration statement or a shelf registration statement (in the
case of clause (ii) above), or (3) upon the exchange of new notes for all old
notes tendered (in the case of clause (iii) (A) above), or upon the
effectiveness of the shelf registration statement that had ceased to remain
effective (in the case of clause (iii) (B) above), additional interest on the
old notes as a result of such clause (or the relevant subclause thereof), as the
case may be, will cease to accrue.
Any amounts of additional interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on the same original interest payment dates
as the notes.
BOOK-ENTRY; DELIVERY AND FORM
The new notes to be issued in this exchange offer will be issued in
registered, global form in minimum denominations of euro 1,000 and integral
multiples thereof. The new notes will be represented by one or more global notes
in fully registered form without interest coupons and will be deposited with The
Bank of New York, London Branch, as common depositary for Euroclear and
Clearstream (the "Common Depositary"), and registered in the name of a nominee
of the Common Depositary. The notes will not be eligible for clearance through
The Depository Trust Company.
All holders of new notes who exchanged their old notes in this exchange
offer will hold their interests through the global note regardless of whether
they purchased their interests pursuant to Rule 144A or Regulation S. Except in
the limited circumstances described below, owners of beneficial interests in the
global note will not be entitled to receive physical delivery of certificated
notes. Transfers of beneficial interests in the global note will be subject to
the applicable rules and procedures of Euroclear and Clearstream and their
respective direct or indirect participants, which rules and procedures may
change from time to time.
Global Note
The operations and procedures of Euroclear and Clearstream are solely
within the control of the respective settlement systems and are subject to
changes by them from time to time. We urge investors to contact the system or
their participants directly to discuss these matters.
Upon the issuance of the global note, the Common Depositary will credit, on
its internal system, the respective principal amount of the beneficial interests
represented by such global notes to the accounts of Euroclear or Clearstream, as
the case may be. Euroclear or Clearstream, as the case may be, will credit, on
its internal systems, the respective principal amounts of the individual
beneficial interests in such global notes to the accounts of persons who have
accounts with Euroclear or Clearstream, as the case may be. Ownership of
beneficial interests in the global note will be limited to participants or
persons who hold interests through participants in Euroclear or Clearstream, as
the case may be. Ownership of beneficial interests in the global note will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by Euroclear or Clearstream, as the case may be, or their
nominees (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
As long as the Common Depositary, or its nominee, is the registered holder
of a global note, the Common Depositary or such nominee, as the case may be,
will be considered the sole owner and holder of the new notes represented by
such global note for all purposes under the indenture and the notes. Unless (1)
Euroclear or Clearstream notifies us that it is unwilling or unable to continue
as a clearing agency, (2) the Common Depositary notifies us that it is unwilling
or unable to continue as Common Depositary and a successor Common Depositary is
not appointed within 120 days of such notice or (3) in the case of any new note,
an event of default has occurred and is continuing with respect to such note,
79
owners of beneficial interests in a global note will not be entitled to have any
portions of such global note registered in their names, will not receive or be
entitled to receive physical delivery of notes in certificated form and will not
be considered the owners or holders of the global note (or any notes represented
thereby) under the indenture or the new notes. In addition, no beneficial owner
of an interest in a global note will be able to transfer that interest except in
accordance with Euroclear's and Clearstream's applicable procedures (in addition
to those under the indenture referred to herein).
Investors may hold their interests in the global note through Euroclear or
Clearstream, if they are participants in such systems, or indirectly through
organizations that are participants in such systems. Clearstream and Euroclear
will hold interests in the global note on behalf of their participants through
customers' securities accounts in their respective names on the books of the
Common Depositary. All interests in the global note may be subject to the
procedures and requirements of Euroclear and Clearstream.
Payments of the principal of and interest on the global note will be made
to the order of the Common Depositary or its nominee as the registered owner
thereof. Neither KII, the Trustee, the Common Depositary nor any of their
respective agents will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the global note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
We expect that the Common Depositary, in its capacity as paying agent, upon
receipt of any payment or principal or interest in respect of a global note
representing any new notes held by it or its nominee, will immediately credit
the accounts of Euroclear or Clearstream, as the case may be, which in turn will
immediately credit accounts of participants in Euroclear or Clearstream, as the
case may be, with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such global note for such new
notes as shown on the records of Euroclear or Clearstream, as the case may be.
We also expect that payments by participants to owners of beneficial interests
in such global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." Such payments will be
the responsibility of such participants.
Because Euroclear and Clearstream can act only on behalf of their
respective participants, who in turn act on behalf of indirect participants and
certain banks, the ability of a holder of a beneficial interest in a global note
to pledge such interest to persons or entities that do not participate in the
Euroclear or Clearstream systems, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some countries and some U.S. states require that certain
persons take physical delivery of securities in certificated form. Consequently,
the ability to transfer beneficial interests in a global note to such persons
may be limited.
Transfers of interests in a global note between participants in Euroclear
and Clearstream will be effected in the ordinary way in accordance with their
respective rules and operating procedures.
Euroclear and Clearstream have advised us that they will take any action
permitted to be taken by a holder of notes (including the presentation of notes
for exchange as described below) only at the direction of one or more
participants to whose account with Euroclear or Clearstream, as the case may be,
interests in a global note are credited and only in respect of such portion of
the aggregate principal amount of the notes as to which such participant or
participants has or have given such direction. However, if there is an event of
default under the notes, Euroclear and Clearstream reserve the right to exchange
the global note for legended notes in certificated form, and to distribute such
notes to their respective participants.
Euroclear and Clearstream have advised us as follows: Euroclear and
Clearstream each hold securities for their account holders and facilitate the
clearance and settlement of securities transactions by electronic book-entry
transfer between their respective account holders, thereby eliminating the need
for physical movements of certificates and any risk from lack of simultaneous
transfers of securities.
Euroclear and Clearstream each provide various services including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Euroclear and Clearstream each
also deal with domestic securities markets in several countries through
established depository and custodial relationships. The respective systems of
80
Euroclear and Clearstream have established an electronic bridge between their
two systems across which their respective account holders may settle trades with
each other.
Account holders in both Euroclear and Clearstream are world-wide financial
institutions including underwriters, securities brokers and dealers, trust
companies and clearing corporations. Indirect access of both Euroclear and
Clearstream is available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
An account holder's overall contractual relations with either Euroclear or
Clearstream are governed by the respective rules and operation procedures of
Euroclear or Clearstream and any applicable laws. Both Euroclear and Clearstream
act under such rules and operating procedures only on behalf of their respective
account holders, and have no record of or relationship with persons holding
through their respective account holders.
Although Euroclear and Clearstream currently follow the foregoing
procedures to facilitate transfers of interests in global notes among
participants of Euroclear and Clearstream, they are under no obligation to do
so, and such procedures may be discontinued or modified at any time. Neither we
nor the Trustee will have any responsibility for the performance by Euroclear or
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If any depositary is at any time unwilling or unable to continue as a
depositary for the notes for the reasons set forth above, we will issue
certificates for such notes in definitive, fully registered, non-global form
without interest coupons in exchange for the global note. Certificates for notes
delivered in exchange for any global note or beneficial interests therein will
be registered in the names, and issued in any approved denominations, requested
by Euroclear, Clearstream or the Common Depositary (in accordance with their
customary procedures). Upon transfer or partial redemption of any note, new
certificates may be obtained from the Transfer Agent in Luxembourg.
Notwithstanding any statement herein, we and the trustee reserve the right
to impose such transfer, certification, exchange or other requirements, and to
require such restrictive legends on certificates evidencing notes, as they may
determine are necessary to ensure compliance with the securities laws of the
United States and the states therein and any other applicable laws or as
Euroclear or Clearstream may require.
Same-Day Settlement and Payment
The indenture requires that payments in respect of the notes represented by
a global note, including principal, premium, if any, interest and liquidated
damages, if any, be made by wire transfer of immediately available funds to the
accounts specified by the global note holder. With respect to notes in
certificated form, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. Certificated notes may be surrendered for payment at the offices of the
Trustee or, so long as the notes are listed on the Luxembourg Stock Exchange,
the Paying Agent in Luxembourg on the maturity date of the notes. We expect that
secondary trading in any certificated notes will also be settled in immediately
available funds.
MATERIAL TAX CONSIDERATIONS
United States Tax Considerations
The following discussion in this section entitled "United States Tax
Considerations" is the opinion of our counsel, Locke Liddell & Sapp LLP, with
respect to the material United States federal income tax considerations
generally applicable to a U.S. Person who exchanges old notes for new notes in
the exchange offer. This opinion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations, rulings of the Internal
Revenue Service (the "IRS") and judicial decisions in existence on the date
hereof, all of which are subject to change. Any such change could apply
retroactively and could affect adversely the tax consequences described below.
No advance tax 81
ruling has been sought or obtained from the IRS regarding the tax consequences
of the transactions described herein and there can be no assurance that the IRS
will not challenge one or more of the tax consequences described in this
prospectus. This discussion does not purport to be a complete analysis of all
potential tax considerations related to the notes.
For purposes of this discussion, a U.S. Person is:
o an individual who is a citizen of the United States or who is resident in
the United States for United States federal income tax purposes;
o a corporation (including any entity treated as a corporation for United
States federal income tax purposes), that is organized under the laws of
the United States or any state thereof;
o an estate the income of which is subject to United States federal income
taxation regardless of its source; or
o a trust that is subject to the supervision of a court within the United
States and is subject to the control of one or more United States persons
as described in Section 7701(a)(30) of the Code, or that has a valid
election in effect under applicable Treasury regulations to be treated as a
United States person.
For purposes of this discussion, a U.S. Holder is a beneficial owner of the
notes who or which is a U.S. Person and a Non-U.S. Holder is a beneficial owner
of the notes other than a U.S. Holder.
This discussion does not address all United States federal tax
considerations, such as estate and gift tax consequences to U.S. Holders, that
may be relevant to a Holder in light of its particular circumstances. This
discussion does not address the federal income tax consequences that may be
relevant to certain Holders that may be subject to special treatment (including,
without limitation, Holders subject to the alternative minimum tax, banks,
insurance companies, tax-exempt organizations, financial institutions, small
business investment companies, partnerships or other pass-through entities,
dealers in securities or currencies, broker-dealers, persons who hold notes as
part of a straddle, hedging, constructive sale, or conversion transaction, and
U.S. Holders whose functional currency is not the U.S. dollar). Furthermore,
this discussion does not address any aspects of state, local or other taxation.
This discussion is limited to those Holders who purchased notes in the initial
offering at the initial offering price and who hold notes as "capital assets"
within the meaning of Section 1221 of the Code. In the case of any Non-U.S.
Holder who is an individual, the following discussion assumes that this
individual was not a former United States citizen, and was not formerly a
resident of the United States for United States federal income tax purposes.
If a partnership (including for this purpose any entity treated as a
partnership for United States federal income tax purposes) is a beneficial owner
of the notes, the treatment of a partner in the partnership will generally
depend upon the status of the partner and upon the activities of the
partnership. A Holder of notes that is a partnership and partners in such
partnership should consult their tax advisors about the United States federal
income tax consequences of holding and disposing of the notes.
This discussion is not intended to be, and should not be construed to be,
legal, business or tax advice to any particular Holder. Holders are urged to
consult their tax advisors regarding the United States federal income tax
consequences of exchanging, holding and disposing of the notes as well as any
tax consequences that may arise under the laws of any foreign, state, local or
other taxing jurisdictions.
Exchange of Notes
The exchange of old notes for new notes in the exchange offer will not
constitute a taxable event. As a result:
o no Holder will recognize taxable gain or loss as a result of exchanging old
notes for new notes pursuant to the exchange offer;
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o each Holder's holding period of the new notes will include the holding
period of the old notes exchanged;
o each Holder's adjusted tax basis of the new notes will be the same as the
adjusted tax basis of the old notes exchanged immediately before such
exchange;
o each Holder's unamortized bond premium on the new notes will be the same as
the unamortized bond premium on the old notes exchanged immediately before
such exchange; and
o each Holder who elected to amortize bond premium will continue to amortize
the bond premium using the same amortization method.
Consequences to U.S. Holders
Stated Interest. Stated interest on the notes will be taxable to a U.S.
Holder as ordinary income at the time the interest accrues or is received in
accordance with the U.S. Holder's method of accounting for United States federal
income tax purposes.
We intend to take the position for United States federal income tax
purposes that any redemption premium paid upon a change in control should be
taxable to a U.S. Holder as ordinary income when received or accrued in
accordance with the U.S. Holder's method of accounting for federal income tax
purposes. This position is based in part on our determination that, as of the
date of issuance of the new notes, the possibility that any such additional
payment will actually be made is a "remote" or "incidental" contingency within
the meaning of applicable Treasury regulations. Accordingly, we will not treat
the new notes as "contingent payment debt instruments." Our determination that
the possibility is a remote or incidental contingency is binding on each U.S.
Holder, unless the U.S. Holder explicitly discloses to the IRS, on its federal
income tax return for the year during which the note is acquired, that the U.S.
Holder is taking a different position. Regardless of our position, however, this
matter is not free from doubt and the IRS may assert that the possibility that
such an additional payment will actually be made is not a remote or incidental
contingency. If such an assertion by the IRS is successful, you could be subject
to tax consequences that differ materially and adversely from those described
below. The remainder of this discussion assumes that the contingent payment debt
rules will not apply to the new notes.
The interest on the new notes will be paid in euros rather than in United
States dollars. In general, a U.S. Holder that uses the cash method of
accounting will be required to include in income the United States dollar value
of the amount of interest income received, whether or not the payment is
received in United States dollars or converted into United States dollars. The
United States dollar value of the amount of interest received is the amount of
foreign currency interest paid, translated at the spot rate on the date of
receipt. The U.S. Holder will not have exchange gain or loss on the interest
payment, but may have exchange gain or loss when the U.S. Holder disposes of any
foreign currency received.
A U.S. Holder that uses the accrual method of accounting is generally
required to include in income the United States dollar value of interest accrued
during the accrual period. Accrual basis U.S. Holders may determine the amount
of income recognized with respect to such interest in accordance with either of
two methods. Under the first method, the U.S. dollar value of accrued interest
is translated at the average rate for the interest accrual period (or, with
respect to an accrual period that spans two taxable years, the average rate for
the partial period within the taxable year). For this purpose, the average rate
is the simple average of spot rates of exchange for each business day of such
period or other average exchange rate for the period reasonably derived and
consistently applied by the U.S. Holder. Under the second method, a U.S. Holder
can elect to accrue interest at the spot rate on the last day of an interest
accrual period (in the case of a partial accrual period, the last day of the
taxable year) or, if the last day of an interest accrual period is within five
business days of the receipt or payment, the spot rate on the date of receipt or
payment. Any such election will apply to all debt instruments held by the U.S.
Holder at the beginning of the first taxable year to which the election applies
and thereafter acquired, and may not be revoked without the consent of the IRS.
An accrual basis U.S. Holder will recognize exchange gain or loss on the receipt
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of a foreign currency interest payment if the exchange rate on the date payment
is received differs from the rate applicable to the previous accrual of that
interest income. The foreign currency gain or loss of a U.S. Holder will
generally be treated as United States sourced ordinary income or loss.
Bond Premium. The old notes were issued with "bond premium." A U.S. Holder
may elect to amortize bond premium on a note as described below. If a U.S.
Holder elected to amortize bond premium on an old note, such U.S. Holder's
unamortized bond premium on the new note will be the same as the unamortized
bond premium on an old note exchanged immediately before such exchange, and such
U.S. Holder will continue to amortize the bond premium on the new note using the
same amortization method used on the old note. If a U.S. Holder did not elect to
amortize bond premium on an old note but elects to amortize bond premium on a
new note exchanged, such U.S. Holder may not amortize amounts that would have
been amortized on the old note in prior taxable years had an election been in
effect for those prior years.
In general, bond premium is the amount by which the actual purchase price
of a note exceeds the sum of all amounts payable on the note after the
acquisition date (other than payments of qualified stated interest). Qualified
stated interest is generally defined as interest that is unconditionally payable
in cash or in property at least annually at a single fixed rate. If a note
provides for the payment of only qualified stated interest and the principal at
maturity, the bond premium is generally the amount by which the actual purchase
price of the note exceeds the amount payable upon maturity. The bond premium is
generally amortized over the term of the note on a constant yield basis. The
note holder generally amortizes the bond premium by offsetting the interest
allocable to an accrual period with the premium allocable to that accrual
period.
Notwithstanding these general rules, the bond premium calculation may
differ where a note is callable prior to maturity at a price other than the face
amount of the note. This exception to the general rule can apply to the notes
because of the optional redemption feature applicable to the notes. Where a note
is callable prior to maturity at a price other than the face amount of the note,
the bond premium is the amount by which the actual purchase price of a note
exceeds the amount payable upon a redemption of the note if it results in a
smaller amount of bond premium attributable to the period prior to the
redemption date (irrespective of whether the note is in fact redeemed). In such
a case, the period of amortization is the period from issuance of the note to
the redemption date. This calculation must be repeated with respect to each
possible redemption date, and the redemption date that results in the least
amount of bond premium attributable to each period will govern. If the note is
not in fact redeemed on such redemption date, the note will be treated for
purposes of recomputing amortizable bond premium as maturing on that redemption
date for the amount payable upon redemption and then reissued on that redemption
date for the amount so payable. The amount of bond premium attributable to the
taxable year in which the note is actually redeemed includes an amount equal to
the excess of the amount of the adjusted basis (for determining loss on sale or
exchange) of such note as of the beginning of the taxable year over the amount
received on redemption of the note or (if greater) the amount payable on
maturity.
Because of the rules described in the preceding paragraph, the optional
redemption feature of the notes could reduce the bond premium allocable to a
particular period compared to the result under the general rules described
above. A U.S. Holder may be able to vary this result by making an election under
Treasury Regulation Section 1.1272-3 to treat all interest attributable to the
notes as accruing on a constant yield basis. Prospective investors are urged to
consult with their tax advisors concerning such election.
If a U.S. Holder elects to amortize bond premium, the amount of interest
that must be included in the U.S. Holder's income for each period will be
reduced by the portion of bond premium allocable to that period under the rules
discussed above. Bond premium is determined and amortized in euros. The United
States dollars equivalent of the reduced amount of interest is included in the
U.S. Holder's income as determined pursuant to the discussion above. In
addition, a U.S. Holder will recognize exchange gain or loss on the portion of
bond premium amortized with respect to each period based on the difference
between the spot exchange rate on the date the bond premium is paid and the
exchange rate at which the bond premium is applied against interest.
If a U.S. Holder does not elect to amortize bond premium, the U.S. Holder
must include the full amount of each interest payment in income in accordance
with its regular method of accounting (as discussed above). The U.S. Holder will
receive a tax benefit from the bond premium only in computing its gain or loss
upon the sale or other disposition or payment of the principal amount of the
note.
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An election to amortize bond premium will apply to amortizable bond premium
on all notes and other bonds, the interest on which is includible in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first taxable
year to which the election applies or thereafter acquired. The election may be
revoked only with the consent of the IRS.
Disposition of Notes. In the case of a sale or other disposition (including
a retirement, but excluding the exchange) of a note, a U.S. Holder will
recognize gain or loss equal to the difference, if any, between the amount
received (other than any amount representing accrued but unpaid stated interest,
which is taxable as ordinary income) and the U.S. Holder's adjusted tax basis in
the note. A U.S. Holder's adjusted tax basis in a note generally will equal the
U.S. Holder's cost of the note in United States dollars, reduced by any
amortized bond premium (measured in United States dollars using the spot rate in
effect on the date such holder acquired the note). Except as described below
with respect to currency exchange gain or loss, gain or loss recognized by a
U.S. Holder on a sale or other disposition of a note generally will constitute
capital gain or loss. Capital gains of non-corporate taxpayers from the sale or
other disposition of a note held for more than one year are eligible for reduced
rates of United States federal income taxation. The deductibility of a capital
loss realized on the sale or other disposition of a note may be subject to
limitations.
With respect to the sale or other disposition (including a retirement, but
excluding the exchange) of a note denominated in euros, the amount realized in
euros will be considered to be (1) first, the payment of accrued but unpaid
interest (on which exchange gain or loss will be recognized as described in the
section entitled "Stated Interest" above), and (2) second, a payment of
principal. For purposes of determining gain or loss (as discussed above), the
amount realized in euros will be translated on the date of sale or other
disposition. Additionally, exchange gain or loss will be separately computed in
euros on the amount of principal (including unamortized bond premium) to the
extent that the rate of exchange on the date of sale or other disposition
differs from the rate of exchange on the date the note was acquired. Exchange
gain or loss computed on accrued interest and principal will be recognized,
however, only to the extent of total gain or loss realized on the transaction.
In the case of a note denominated in euros, the cost of the note to the
U.S. Holder will be the United States dollar value of the purchase price in
euros translated at the spot rate for the date of purchase. The conversion of
United States dollars into euros and the immediate use of that currency to
purchase a note generally will not result in a taxable gain or loss for a U.S.
Holder.
Disposition of Euros. A U.S. Holder will have a tax basis in any euros
received as interest on a note, or received on the sale or other disposition of
a note, equal to the United States dollar value of such euros on the date of
receipt. Any gain or loss realized by a U.S. Holder on a sale or other
disposition of such euros will be ordinary income or loss.
Backup Withholding and Information Reporting. We, our paying agent or a
broker may be required to provide the IRS with certain information, including
the name, address and taxpayer identification number of U.S. Holders, the
aggregate amount of principal and interest (and premium, if any) and sales
proceeds paid to that Holder during the calendar year, and the amount of tax
withheld, if any. This obligation, however, does not apply with respect to
certain U.S. Holders including corporations, tax-exempt organizations, qualified
pension and profit sharing trusts and individual retirement accounts. In the
event that a U.S. Holder subject to the reporting requirements described above
fails to supply its correct taxpayer identification number in the manner
required by applicable law or is notified by the IRS that it has failed to
properly report payments of interest and dividends, we, our paying agent or a
broker may be required to "backup" withhold tax at a rate equal to 28% on each
payment of interest and principal (and premium, if any) and sales proceeds on or
with respect to the notes.
Backup withholding is not an additional tax; any amounts so withheld may be
credited against the United States federal income tax liability of the Holder or
refunded if the amounts withheld exceed such liability, provided that the
required information is furnished to the IRS.
Consequences to Non-U.S. Holders
Interest Income. Interest earned on a note by a Non-U.S. Holder will be
considered "portfolio interest," and will not be subject to United States
federal income tax or withholding, if:
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o the certification requirements described generally below are satisfied and
the Non-U.S. Holder is not (i) a "controlled foreign corporation" that is
related to us as described in Section 881(c)(3)(C) of the Code, (ii) a bank
receiving the interest on a loan made in the ordinary course of its
business, or (iii) a person who owns, directly or under the attribution
rules of Section 871(h)(3)(C) of the Code, 10% or more of the total
combined voting power of all our stock;
o the interest is not effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder; and
o we do not have actual knowledge or reason to know that the beneficial
Holder is a U.S. Person and we can reliably associate the interest payment
with the certification documents provided to us.
The certification requirements will be satisfied if either (i) the
beneficial owner of the note timely certifies to us or our paying agent, under
penalties of perjury, that such owner is a Non-U.S. Holder and provides its name
and address, or (ii) a custodian, broker, nominee, or other intermediary acting
as an agent for the beneficial owner (such as a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business) that holds the notes
in such capacity timely certifies to us or our paying agent, under penalties of
perjury, that such statement has been received from the beneficial owner of the
notes by such intermediary, or by any other financial institution between such
intermediary and the beneficial owner, and furnishes to us or our paying agent a
copy thereof. The foregoing certification may be provided on a properly
completed IRS Form W-8BEN or W-8IMY, as applicable, or any successor forms, duly
executed under penalties of perjury. With respect to the certification
requirement for notes that are held by an entity that is classified for United
States federal income tax purposes as a foreign partnership, the applicable
Treasury Regulations provide that, unless the foreign partnership has entered
into a withholding agreement with the IRS, the foreign partnership will be
required, in addition to providing an intermediary Form W-8IMY, to attach an
appropriate certification by each partner.
Any payments to a Non-U.S. Holder of interest that do not qualify for the
"portfolio interest" exemption, and that are not effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Holder,
will be subject to United States federal income tax and withholding at a rate of
30% (or at a lower rate under an applicable tax treaty).
Disposition of Notes. Any gain recognized by a Non-U.S. Holder on a sale or
other disposition (including a retirement, but excluding the exchange) of a note
will not be subject to United States federal income tax or withholding if (i)
the gain is not effectively connected with the conduct of a trade or business
within the United States by the Non-U.S. Holder, and (ii) in the case of a
Non-U.S. Holder who is an individual, such individual is not present in the
United States for 183 days or more in the taxable year of the sale or other
disposition, or the individual does not have a "tax home" in the United States
and the gain is not attributable to an office or other fixed place of business
maintained in the United States by the individual.
Effectively Connected Income. Any interest earned on a note, and any gain
realized on a sale or other disposition (including a retirement, but excluding
the exchange) of a note, that is effectively connected with the conduct of a
trade or business within the United States by a Non-U.S. Holder will be subject
to United States federal income tax at regular graduated rates as if the
Non-U.S. Holder were a U.S. Holder. In addition, if the Non-U.S. Holder is a
corporation, the Non-U.S. Holder may also be subject to a 30% branch profits tax
(unless reduced or eliminated by an applicable treaty) imposed on any such
effectively connected earnings and profits. However, such income will not be
subject to United States federal income tax withholding if the Non-U.S. Holder
furnishes a properly completed IRS Form W-8ECI to us or our paying agent.
Estate Tax Consequences. Any note that is owned by an individual who is not
a citizen or resident (as specially defined for United States federal estate tax
purposes) of the United States at the date of death will not be included in such
individual's estate for United States federal estate tax purposes, unless the
individual owns, directly or indirectly, 10% or more of the voting power of all
our stock, or, at the time of such individual's death, payments in respect of
the notes would have been effectively connected with the conduct by such
individual of a trade or business in the United States.
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Backup Withholding and Information Reporting. We must report annually to
the IRS and to each Non-U.S. Holder any interest on the notes that is subject to
withholding or that is exempt from U.S. withholding tax pursuant to a tax treaty
or the "portfolio interest" exemption. Copies of these information returns may
also be made available under the provisions of a specific treaty or agreement to
the tax authorities of the country in which the Non-U.S. Holder resides.
In the case of payments of interest on the notes, backup withholding and
information reporting will not apply if the Non-U.S. Holder has made the
requisite certification, described in the section entitled "Interest Income"
above or otherwise establishes an exemption, provided that neither we nor our
paying agent has actual knowledge that (i) the holder is a U.S. Holder, or (ii)
the conditions of any other exemption are not, in fact, satisfied.
The payment of the proceeds on the disposition (including a redemption) of
a note to or through the U.S. office of a broker generally will be subject to
information reporting and potential backup withholding unless a holder either
certifies its status as a Non-U.S. Holder under penalties of perjury on IRS Form
W-8BEN (or a suitable substitute form) and meets certain other conditions or
otherwise establishes an exemption. If the foreign office of a foreign broker
(as defined in applicable Treasury regulations) pays the proceeds of the
disposition of a note to the seller thereof, backup withholding and information
reporting generally will not apply. Information reporting requirements (but not
backup withholding) will apply, however, to a payment of the proceeds of the
disposition of a note by (1) a foreign office of a custodian, nominee, other
agent or broker that is a U.S. Person, (2) a foreign custodian, nominee, other
agent or broker that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, (3) a foreign
custodian, nominee, other agent or broker that is a controlled foreign
corporation for United States federal income tax purposes or (4) a foreign
partnership if at any time during its tax year one or more of its partners are
U.S. Persons who, in the aggregate, hold more than 50% of the income or capital
interest of the partnership or if, at any time during its taxable year, the
partnership is engaged in the conduct of a trade or business within the United
States, unless the custodian, nominee, other agent, broker or foreign
partnership has documentary evidence in its records that the holder is not a
U.S. Person and certain other conditions are met or the holder otherwise
establishes an exemption.
Backup withholding is not an additional tax; any amounts so withheld may be
credited against the United States federal income tax liability of the holder or
refunded if the amounts withheld exceed such liability, provided that the
required information is furnished to the IRS.
Luxembourg Tax Considerations
The following discussion is a summary of some of the material Luxembourg
income tax consequences relevant to the acquisition, ownership and disposition
of the notes offered by this prospectus for a non-resident Holder of a note.
This summary is based on Luxembourg laws, regulations, rulings and decisions now
in effect, all of which are subject to change.
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal, business or tax advice to any particular
Holder. Prospective investors are urged to consult their tax advisors regarding
the Luxembourg income tax consequences of exchanging, holding and disposing of
the notes as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdictions.
Withholding Tax
Under Luxembourg tax laws currently in effect, there is no withholding tax
on payments of principal, interest, accrued but unpaid interest or accretions of
yield to maturity in respect of the notes, nor is any Luxembourg withholding tax
payable by such Holders on redemption or repurchase of the notes. There is no
income tax due upon redemption or repurchase of, or on capital gains on the sale
of, any notes held by a non-resident, as long as the notes are not held through
a permanent establishment in Luxembourg.
No stamp, value added, registration or similar taxes or duties will, under
present Luxembourg law, be payable in Luxembourg by the Holders of notes in
connection with the issuance of the notes.
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EU Directive on the Taxation of Savings Income
On June 3, 2003, the European Union Council of Economic and Finance
Ministers adopted a directive on the taxation of savings income in the form of
interest payments. The Luxembourg government on February 9, 2004 submitted a
bill to parliament to approve the implementation of this directive. The ultimate
aim of this directive is to enable savings income in the form of interest
payments made in one member state to beneficial owners who are individuals
resident in another EU member state to be made subject to effective taxation in
accordance with the laws of the latter member state. In principle this will be
achieved by the automatic exchange of information concerning interest payments
between member states.
Luxembourg is allowed by way of exception not to apply the automatic
exchange of information at the same time as the other EU member states but is
required to apply a withholding tax to the savings income covered by this
directive during a transitional period, starting as of the effective date of
this directive at a rate of 15% during the first three years, increased to 20%
for the subsequent three years and 35% thereafter. Luxembourg will apply the
above described system of withholding tax from July 1, 2005 provided that
certain non-EU countries and overseas territories of EU countries apply from
that same date the automatic exchange of information in the equivalent manner as
provided for in this directive, (or, during the transitional period, apply a
withholding tax on the same terms as are contained in this directive).
Beneficial owners of interest payments who wish to avoid the Luxembourg
withholding tax that may be due if the interest is paid to them by a Luxembourg
paying agent will have the choice of at least one of the two following
procedures allowing an exemption to the withholding tax system: they either
authorize the Luxembourg paying agent to exchange information with the tax
authorities of their country of residence or they provide the Luxembourg paying
agent with a tax certificate issued by the competent tax authority of their
member state of residence.
German Tax Considerations
The following is a summary of some of the material German income tax
consequences relevant to the acquisition, ownership and disposition of notes for
a resident and non-resident Holder of a note. This summary is based on German
laws, regulations, rulings and decisions now in effect, all of which are subject
to change.
Under German tax law, the new notes should be treated as identical with the
old notes so that the exchange should not be a taxable transaction under German
tax law, and the cost basis of the old notes should carry over to the new notes.
However, prospective investors are urged to consult their tax advisors regarding
the German income tax consequences of exchanging, holding and disposing of the
notes as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdictions.
Tax Residents
Payments of interest on the notes, including interest having accrued up to
the sale of a note and credited separately ("Accrued Interest") to persons who
are tax residents of Germany (i.e., persons whose residence, habitual abode,
statutory seat or place of effective management and control is located in
Germany) are subject to German income tax (plus a solidarity surcharge of 5.5%
thereon (Solidaritaetszurschlag)). Such interest is also subject to trade tax if
the notes form part of the property of a German trade or business.
The notes were issued with a bond premium. In general, bond premium is the
amount by which the actual price of the note exceeds the amount payable upon
maturity. Generally, bond premium should be amortized ratably over the term of
the note in the form of return of capital. Notwithstanding this general rule,
the bond premium may be amortized over the term of the note in the form of
return of capital. Notwithstanding this general rule, the bond premium may be
amortized over a shorter period of time where a note is callable prior to
maturity at a price other than the face amount of the note. This exception could
apply to the notes exchanged pursuant to this offering because of the optional
redemption feature applicable to the notes. German resident holders are urged to
consult their tax advisors regarding the German income, trade and solidarity tax
consequences of amortizing any bond premium in connection with the notes
exchanged pursuant to this offer.
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Capital gains from the disposal of notes by German-resident corporate
Holders of notes will be subject to corporate income tax (plus a solidarity
surcharge at a rate of 5.5% thereon) and trade tax. For purposes of computing
the capital gain amount on the disposal of a note issued with a bond premium, a
holder's basis should include any unamortized bond premium remaining on the note
at the disposition date. German resident holders are urged to consult their tax
advisors regarding the German income, trade and solidarity tax consequences of
disposing of a note issued with any bond premium pursuant to this offer.
If the notes are held in a custodial account that the holder maintains with
a German branch of a German or non-German financial or financial services
institution (the "Disbursing Agent"), a 30% withholding tax on interest payments
(Zinsabschlagsteuer), plus a 5.5% solidarity surcharge on such tax, will be
levied, resulting in a total tax charge of 31.65% of the gross interest payment.
Withholding tax is also imposed on Accrued Interest.
In computing the tax to be withheld, the Disbursing Agent may deduct from
the basis of the withholding tax any Accrued Interest paid by the holder of a
note to the Disbursing Agent during the same calendar year. No withholding tax
will be deducted if the holder of the note has submitted to the Disbursing Agent
a certificate of non-assessment (Nichtveranlagungsbescheinigung) issued by the
relevant local tax office.
Withholding tax and the solidarity surcharge thereon are credited as
prepayments against the German income tax and the solidarity surcharge liability
of the German resident. Amounts overwithheld will entitle the holder to a
refund, based on an assessment to tax.
Nonresidents
Interest, including Accrued Interest, and capital gains with respect to a
note held by a German nonresident are not subject to German taxation, unless:
(1) the note forms part of the business property of a permanent
establishment, including a permanent representative, or a fixed base
maintained in Germany by the Holder; or
(2) the interest income otherwise constitutes German-source income (such
as income from the letting and leasing of certain property located in
Germany).
In situations (1) and (2), a tax regime similar to that explained above
under "Tax Residents" applies. Capital gains from the disposition of the Notes
are, however, only taxable in situation (1).
Nonresidents of Germany are, in general, exempt from German withholding tax
on interest and the solidarity surcharge thereon. However, where the interest is
subject to German taxation as set forth in the preceding paragraph and the notes
are held in a custodial account with a disbursing agent, withholding tax is
levied as explained above under "Tax Residents."
Other Taxes
No stamp, issue, registration or similar taxes or duties will be payable in
Germany in connection with the issuance, delivery or execution of the notes.
Currently, a net assets tax is not levied in Germany.
PLAN OF DISTRIBUTION
If you are a broker-dealer and hold old notes for your own account as a
result of market-making activities or other trading activities and you receive
new notes in exchange for old notes in the exchange offer, then you may be a
statutory underwriter and must acknowledge that you will deliver a prospectus in
connection with any resale of these new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We acknowledge and, unless you are a broker-dealer, you must
acknowledge that you are not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate in a distribution of
new notes. For a period of 120 days after the consummation of the exchange
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offer, we will make this prospectus, as amended and supplements, available to
any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of those methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
these new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of new notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 120 days after the consummation of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests those documents in the letter of transmittal.
We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the notes other than
commissions or concessions of any broker-dealers and will indemnify the holders
of the new notes, including any broker-dealers, against various liabilities,
including liabilities under the Securities Act. We note, however, that, in the
opinion of the SEC, indemnification against liabilities arising under federal
securities laws is against public policy and may be unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act. In
accordance with the Exchange Act, we file periodic reports, registration
statements and other information with the SEC. You may read and copy our
reports, registration statements and other information we file with the SEC at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms. In addition, reports and other
filings are available to the public on the SEC's web site at www.sec.gov.
If for any reason we are not subject to the reporting requirements of the
Exchange Act in the future, we will still be required under the indenture
governing the notes to furnish the holders of the notes with certain financial
and reporting information. See "Description of the New Notes-Certain
Covenants-Reports to Holders" for a description of the information that we are
required to provide.
We do not maintain a website on the Internet. However, Kronos maintains a
website on the Internet with the address of www.kronostio2.com. Copies of our
Annual Report on Form 10-K for the year ended December 31, 2004 and copies of
our Quarterly Reports on Form 10-Q for 2003, 2004 and 2005 and any Current
Reports on Form 8-K for 2003, 2004 and 2005, and any amendments thereto, are or
will be available free of charge at such website as soon as reasonably practical
after they are filed with the SEC. Information contained on Kronos' website is
not part of this prospectus.
GENERAL LISTING INFORMATION
We will apply to list the new notes on the Luxembourg Stock Exchange in
accordance with its rules once the exchange offer has been completed. Prior to
the listing, a legal notice relating to the issuance of the new notes and our
certificate of incorporation will be deposited with the Chief Registrar of the
District Court of Luxembourg (Greffier en Chef du Tribunal d'Arrondissement de
90
et a Luxembourg), where these documents are available for inspection and where
copies of these documents may be obtained free of charge on request.
As long as the notes are listed on the Luxembourg Stock Exchange and the
rules of the Luxembourg Stock Exchange so require, copies of our certificate of
incorporation and the indenture and the registration rights agreement relating
to the new notes may be inspected, and our most recent audited annual
consolidated financial statements and unaudited quarterly consolidated financial
statements may be obtained, on any business day free of charge, at the office of
the paying agent in Luxembourg.
Our board of directors approved the issuance of the new notes on November
17, 2004.
Except as disclosed in this prospectus, we are not involved in, or have any
knowledge of a threat of, any litigation, administrative proceeding or
arbitration which, in our judgment, is or may be material in the context of the
issuance of the notes.
Except as disclosed in this prospectus, there has been no material adverse
change in our consolidated financial position since March 31, 2005.
The new notes have been accepted for clearance through Euroclear and
Clearstream with a Common Code of 015591412 and an International Securities
Identification Number of XS0155914129.
LEGAL MATTERS
Certain legal matters with regard to the validity of the new notes,
including the enforceability of our obligations under the new notes, will be
passed upon for us by Locke Liddell & Sapp LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of Kronos International, Inc. and its
subsidiaries as of December 31, 2003 and 2004 and for each of the three years in
the period ended December 31, 2004 included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of Kronos Titan GmbH and its
subsidiary as of December 31, 2003 and 2004 and for each of the three years in
the period ended December 31, 2004 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of Kronos Denmark ApS and its
subsidiaries as of December 31, 2003 and 2004 and for each of the three years in
the period ended December 31, 2004 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
Additional selling restriction
European Economic Area
In relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive, new notes may not be offered to the public
prior to the publication of a prospectus in relation to the new notes which has
been approved by the competent authority (and, where applicable, notified to the
competent authority in the resident Member State of the offeree), all in
accordance with the Prospectus Directive, except:
(a) to legal entities which are authorised or regulated to operate in the
financial markets or, if not so authorised or regulated, whose corporate
purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more
than euro 43,000,000 and (3) an annual net turnover of more than euro
50,000,000, as shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the publication by the
Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this selling restriction, the expression an "offer of new
notes to the public" in relation to any new notes in any offeree Member State
means the communication in any form and by any means of sufficient information
on the terms of the offer and the new notes to be offered so as to enable an
investor to decide to purchase or subscribe the new notes, as the same may be
varied in that Member State by any measure implementing the Prospectus Directive
in that Member State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant
Member State.
91
KRONOS INTERNATIONAL, INC.
Index of Financial Statements
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2003 and 2004; March
31, 2005 (unaudited) F-3
Consolidated Statements of Income -
Years ended December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) F-6
Consolidated Statements of Stockholder's Equity -
Years ended December 31, 2002, 2003 and 2004; Three months ended
March 31, 2005 (unaudited) F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) F-8
Notes to Consolidated Financial Statements F-10
Other Financial Statements filed pursuant to Rule 3-16 of Regulation S-X
Financial Statements of Kronos Titan GmbH FA-1
Financial Statements of Kronos Denmark ApS FB-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and Board of Directors of Kronos International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kronos International, Inc. and Subsidiaries as of December 31, 2003
and 2004, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
F-2
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 37,121 $ 17,505 $ 16,100
Restricted cash 1,313 1,529 965
Accounts and other receivables 112,797 130,729 144,638
Receivables from affiliates 1,884 2,517 3,167
Refundable income taxes 35,150 2,586 981
Inventories 168,131 170,261 175,251
Prepaid expenses 3,349 3,141 4,812
Deferred income taxes 943 - 15
-------- -------- ---------
Total current assets 360,688 328,268 345,929
-------- -------- ---------
Other assets:
Deferred financing costs, net 9,761 10,404 9,310
Restricted marketable debt securities 2,586 2,877 2,741
Unrecognized net pension obligation 7,812 7,524 7,161
Deferred income taxes - 238,284 235,908
Other 1,266 1,591 1,139
-------- -------- ---------
Total other assets 21,425 260,680 256,259
-------- -------- ---------
Property and equipment:
Land 31,106 34,164 32,523
Buildings 139,665 153,442 145,851
Equipment 644,733 724,904 690,641
Mining properties 63,701 71,980 68,596
Construction in progress 7,565 13,560 15,208
-------- -------- ---------
886,770 998,050 952,819
Less accumulated depreciation
and amortization 518,383 601,815 580,379
-------- -------- ---------
Net property and equipment 368,387 396,235 372,440
-------- -------- ---------
$750,500 $985,183 $ 974,628
======== ======== =========
F-3
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
Current liabilities:
Current maturities of long-term debt $ 288 $ 13,792 $ 13,108
Accounts payable and accrued liabilities 103,804 126,949 126,649
Payable to affiliates 8,697 11,042 13,995
Income taxes 12,007 17,080 17,926
Deferred income taxes 3,436 2,722 2,386
----------- ----------- -----------
Total current liabilities 128,232 171,585 174,064
----------- ----------- -----------
Noncurrent liabilities:
Long-term debt 356,451 519,403 493,145
Deferred income taxes 86,622 22,358 20,879
Accrued pension cost 53,010 48,441 44,942
Other 14,098 16,840 14,426
----------- ----------- -----------
Total noncurrent liabilities 510,181 607,042 573,392
----------- ----------- -----------
Minority interest 525 76 76
----------- ----------- -----------
Stockholder's equity:
Common stock, $100 par value;
100,000 shares authorized;
2,968 shares issued 297 297 297
Additional paid-in capital 1,944,185 1,944,185 1,944,185
Retained deficit (1,665,098) (1,399,118) (1,380,880)
Notes receivable from affiliate - (209,526) (209,526)
Accumulated other comprehensive loss:
Currency translation (133,425) (99,764) (97,386)
Pension liabilities (34,397) (29,594) (29,594)
----------- ----------- -----------
Total stockholder's equity 111,562 206,480 227,096
----------- ----------- -----------
$ 750,500 $ 985,183 $ 974,628
=========== =========== ===========
Commitments and contingencies (Notes 9 and 12)
See accompanying notes to consolidated financial statements.
F-4
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Net sales $579,665 $715,906 $807,970 $192,173 $209,536
Cost of sales 454,154 516,864 609,559 142,623 147,166
-------- -------- -------- -------- --------
Gross margin 125,511 199,042 198,411 49,550 62,370
Selling, general and administrative expense 72,008 86,965 104,110 25,411 28,084
Other operating income (expense):
Currency transaction gains (losses), net 12,439 (3,721) (2,243) 446 770
Disposition of property and equipment (534) (394) (895) (23) (34)
Royalty income 5,779 6,122 6,034 1,364 1,502
Other income 458 489 426 40 59
Other expense (169) (130) (72) (23) (23)
-------- -------- -------- -------- --------
Income from operations 71,476 114,443 97,551 25,943 36,560
Other income (expense):
Currency transaction gain 2,718 - - - -
Interest income from affiliates 22,754 30 2,767 5 4,941
Trade interest income 1,597 700 1,147 198 74
Interest expense to affiliates (18,698) (81) (4) - -
Other interest expense (16,696) (32,529) (36,688) (9,047) (11,611)
-------- -------- -------- -------- --------
Income before income taxes and
minority interest 63,151 82,563 64,773 17,099 29,964
Provision (benefit) for income taxes 10,805 730 (261,260) 3,911 11,722
Minority interest 55 72 53 8 4
-------- -------- -------- -------- --------
Net income 52,291 81,761 325,980 13,180 18,238
Dividends and accretion applicable to
redeemable preferred stock and
profit participation certificates (78,600) - - - -
-------- -------- -------- -------- --------
Net income (loss) available to
common stock $(26,309) $ 81,761 $325,980 $ 13,180 $ 18,238
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Net income $ 52,291 $ 81,761 $325,980 $ 13,180 $ 18,238
-------- -------- -------- -------- --------
Other comprehensive (loss) income,
net of tax:
Minimum pension liabilities adjustment (2,781) (27,647) 4,803 - -
Currency translation adjustment 30,733 5,600 33,661 283 2,378
-------- -------- -------- -------- --------
Total other comprehensive income (loss) 27,952 (22,047) 38,464 283 2,378
-------- -------- -------- -------- --------
Comprehensive income $ 80,243 $ 59,714 $364,444 $ 13,463 $ 20,616
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2002, 2003 and 2004 and
three months ended March 31, 2005 (unaudited)
(In thousands)
Common stockholder's equity (deficit)
--------------------------------------------------------------------------------------
Redeemable Accumulated other
preferred comprehensive Total
stock and Notes income (loss) common
profit Additional Retained receivable ----------------------- stockholder's
participation Common paid-in earnings from Currency Pension equity
certificates stock capital (deficit) affiliates translation liabilities (deficit)
------------- -------- ---------- ----------- ---------- ----------- ----------- ------------
Balance at December 31, 2001 $ 617,409 $ 320 $1,870,935 $(1,774,150) $(700,843) $(169,758) $ (3,969) $ (777,465)
Net income - - - 52,291 - - - 52,291
Other comprehensive income
(loss), net of tax - - - - - 30,733 (2,781) 27,952
Change in notes receivable
from affiliates - - - - 156,661 - - 156,661
Preferred dividends and
accretion 78,600 - (78,600) - - - - (78,600)
Capital contribution - - 217,000 - (217,000) - - -
Recapitalization (696,009) (23) (65,150) - 761,182 - - 696,009
---------- ----- ---------- ----------- --------- --------- -------- ----------
Balance at December 31, 2002 - 297 1,944,185 (1,721,859) - (139,025) (6,750) 76,848
Net income - - - 81,761 - - - 81,761
Other comprehensive income
(loss), net of tax - - - - 5,600 (27,647) (22,047)
Cash dividends - - - (25,000) - - - (25,000)
---------- ----- ---------- ----------- --------- --------- -------- ----------
Balance at December 31, 2003 - 297 1,944,185 (1,665,098) - (133,425) (34,397) 111,562
Net income - - - 325,980 - - - 325,980
Other comprehensive income
(loss), net of tax - - - - - 33,661 4,803 38,464
Change in notes receivable
from affiliates - - - - (209,526) - - (209,526)
Cash dividends - - - (60,000) - - - (60,000)
---------- ----- ---------- ----------- --------- --------- -------- ----------
Balance at December 31, 2004 - 297 1,944,185 (1,399,118) (209,526) (99,764) (29,594) 206,480
Unaudited:
Net income - - - 18,238 - - - 18,238
Other comprehensive income,
net of tax - - - - - 2,378 - 2,378
---------- ----- ---------- ----------- --------- --------- -------- ----------
Balance at March 31, 2005 $ - $ 297 $1,944,185 $(1,380,880) $(209,526) $ (97,386) $(29,594) $ 227,096
========== ===== ========== =========== ========= ========= ======== ==========
See accompanying notes to consolidated financial statements.
F-7
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 52,291 $ 81,761 $ 325,980 $ 13,180 $ 18,238
Depreciation and amortization 27,144 33,634 37,726 9,488 9,488
Noncash currency transaction gain (13,121) - - - -
Noncash interest expense to affiliates 5,521 - - - -
Noncash interest income from affiliates (21,849) - - - -
Noncash interest expense 860 1,944 2,044 536 696
Deferred income taxes 5,514 38,690 (273,985) (210) 5,435
Minority interest 55 72 53 8 4
Net loss from disposition of property
and equipment 534 394 895 23 34
Pension cost, net (2,118) (3,805) (800) 1,528 (997)
Other, net 351 250 987 200 (52)
Change in assets and liabilities:
Accounts and other receivables 10,726 1,104 (6,227) (18,206) (29,733)
Inventories (1,907) 232 11,582 9,317 (13,624)
Prepaid expenses 903 1,345 (233) (162) (1,650)
Accounts payable and accrued
liabilities (6,135) 5,495 27,922 6,210 14,953
Income taxes (2,114) (37,231) 25,557 21,991 3,034
Accounts with affiliates 12,189 (14,424) (6,103) (9,269) 2,031
Other noncurrent assets 162 (3,779) 1,981 (692) 81
Other noncurrent liabilities (788) (894) (5,124) (35) (4,575)
-------- -------- -------- -------- --------
Net cash provided by operating
activities 68,218 104,788 142,255 33,907 3,363
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (27,632) (31,518) (33,679) (3,984) (4,800)
Purchase of interest in subsidiary - - (575) - -
Change in restricted cash equivalents
and restricted marketable debt
securities, net (2,891) (554) (70) 556 529
Proceeds from disposition of
property and equipment 864 383 99 30 21
-------- -------- -------- -------- --------
Net cash used by investing activities (29,659) (31,689) (34,225) (3,398) (4,250)
-------- -------- -------- -------- --------
F-8
KRONOS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Cash flows from financing activities:
Indebtedness:
Borrowings $335,768 $ 16,106 $ 241,648 $ 99,968 $ -
Principal payments (84,814) (46,006) (100,073) (67,468) (41)
Deferred financing fees (9,963) - (1,989) - -
Repayments on loans from
affiliates (301,432) - - - -
Loans to affiliates - - (209,524) - -
Other capital transactions
with affiliates, net 2,925 - - - -
Dividends paid - (25,000) (60,000) (60,000) -
Distributions to minority
interests (11) (14) - - -
-------- -------- --------- -------- --------
Net cash used by
financing activities (57,527) (54,914) (129,938) (27,500) (41)
-------- -------- --------- -------- --------
Cash and cash equivalents -
net change from:
Operating, investing and
financing activities (18,968) 18,185 (21,908) 3,009 (928)
Currency translation 3,648 3,913 2,292 (977) (477)
-------- -------- --------- -------- --------
(15,320) 22,098 (19,616) 2,032 (1,405)
Balance at beginning of year 30,343 15,023 37,121 37,121 17,505
-------- -------- --------- -------- --------
Balance at end of year $ 15,023 $ 37,121 $ 17,505 $ 39,153 $ 16,100
======== ======== ========= ======== ========
Supplemental disclosures -
cash paid (received) for:
Interest $ 34,061 $ 28,147 $ 33,425 $ 960 $ 171
Income taxes 6,748 (11,480) (23,776) (17,823) 3,242
See accompanying notes to consolidated financial statements.
F-9
KORNOS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. Kronos International, Inc. ("KII")
is incorporated in the state of Delaware, U.S.A., with its seat of management in
Leverkusen, Germany. KII or the Company is a wholly-owned subsidiary of Kronos
Worldwide, Inc. ("Kronos") (NYSE:KRO). At, December 31, 2004, (i) Valhi, Inc.
(NYSE: VHI) and a wholly owned subsidiary of Valhi held approximately 57% of
Kronos' outstanding common stock and NL Industries, Inc. (NYSE: NL) held an
additional 37% of Kronos' outstanding common stock, (ii) Valhi and such wholly
owned subsidiary of Valhi owned approximately 83% of NL's outstanding common
stock and (iii) Contran Corporation and its subsidiaries held approximately 91%
of Valhi's outstanding common stock. At March 31, 2005, (i) Valhi held
approximately 57% of Kronos' outstanding common stock and NL held an additional
36% of Kronos' common stock, (ii) Valhi owned approximately 83% of NL's
outstanding common stock and (iii) Contran and its subsidiaries held
approximately 91% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. Consequently, Mr. Simmons may be deemed to control each of such
companies.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of KII and its wholly-owned and majority-owned subsidiaries. All
material intercompany accounts and balances have been eliminated. Minority
interest relates to the Company's majority-owned subsidiary in France, which
conducts the Company's marketing and sales activities in that country. During
2004, the Company increased its ownership interest by approximately 5% to 99% in
such subsidiary by acquiring shares previously held by certain of its other
stockholders for an aggregate of $575,000.
Unaudited interim information. Information included in the consolidated
financial statements and related notes to the consolidated financial statements
as of March 31, 2005 and for the three month interim periods ended March 31,
2004 and 2005 is unaudited. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to state fairly the
consolidated financial position, results of operations and cash flows for such
interim periods have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations. Certain information normally included in financial
statements prepared in accordance with GAAP has been condensed or omitted for
such interim periods.
F-10
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholder's equity as part of accumulated other comprehensive
income (loss), net of related deferred income taxes and minority interest.
Currency transaction gains and losses are recognized in income currently. In
2002, the Company recognized a $2.7 million currency transaction gain related to
the extinguishments of certain intercompany indebtedness.
In 2002, a $2.7 million currency transaction gain is classified as a
component of other income (expense) in the accompanying Consolidated Statement
of Income. Such gain related to the extinguishment of certain intercompany
loans. Prior to June 28, 2002, KII had certain intercompany indebtedness payable
to Kronos, a portion of which was denominated in U.S. dollars, and a portion of
which was denominated in euro. Through June 19, 2002, such intercompany
indebtedness was deemed to be of a long-term nature for which settlement was not
planned or anticipated in the foreseeable future, and in accordance with GAAP,
the foreign currency transaction gains and losses related to such intercompany
indebtedness were not recognized in net income, but instead were reported as
part of accumulated other comprehensive income. On June 19, 2002, when the
purchase agreement was entered into in connection with KII's 2002 issuance of
the KII Senior Secured Notes discussed in Note 6, the expectation that such
intercompany indebtedness was of a long-term nature was no longer applicable, as
KII had stated that it intended to use a portion of the net proceeds of such
offering to repay such intercompany indebtedness owed to Kronos. Accordingly,
from the time period of June 19, 2002 (the date the purchase agreement related
to KII Senior Secured Notes was executed) until June 28, 2002 (the closing date
for the 2002 issuance of the KII Senior Secured Note offering, and the date such
intercompany indebtedness was repaid), the foreign currency transaction gains
and losses related to such intercompany indebtedness during such time period was
recognized in net income in accordance with GAAP.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, the Company has exempted from the scope of SFAS
No. 133 all host contracts containing embedded derivatives that were issued or
acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank deposits with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.6
million and $2.9 million at December 31, 2003 and 2004, respectively). The
restricted marketable debt securities are generally classified as either a
current or noncurrent asset depending upon the maturity date of each such debt
security and are carried at market which approximates cost.
F-11
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company performs
planned major maintenance activities during the year. Repair and maintenance
costs estimated to be incurred in connection with planned major maintenance
activities are accrued in advance and are included in cost of sales. Accrued
repair and maintenance costs, included in other current liabilities and
consisting primarily of materials and supplies, was $4.5 million and $3.9
million at December 31, 2003 and 2004, respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2002, 2003 or 2004.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Effective January 1, 2002, the Company commenced assessing impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which among other things provided certain
implementation guidance in relation to prior GAAP. See Note 14.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness, all included
in interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 10.
F-12
Income taxes. Prior to December 2003, KII, Kronos and its qualifying
subsidiaries were members of NL's consolidated U.S. federal income tax group
(the "NL Tax Group"). As a member of the NL Tax Group, the Company was a party
to a tax sharing agreement (the "NL Tax Agreement"). The NL Tax Group, including
KII, is included in the consolidated U.S. federal tax return of Contran (the
"Contran Tax Group"). As a member of the Contran Tax Group, NL is a party to a
separate tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax
Agreement provides that NL and its qualifying subsidiaries, including KII,
compute provisions for U.S. income taxes on a separate-company basis using the
tax elections made by Contran. Pursuant to the Kronos Tax Sharing Agreement and
using the tax elections made by Contran, KII made payments to or received
payments from Kronos in amounts it would have paid to or received from the U.S.
Internal Revenue Service had it not been a member of NL's consolidated tax group
but instead was a separate taxpayer. Refunds are limited to amounts previously
paid under the NL Tax Sharing Agreement.
Effective December 2003, following NL's distribution of 48.8% of the
outstanding shares of Kronos common stock to NL stockholders, Kronos and its
qualifying subsidiaries, including KII, ceased being members of the NL Tax
Group, but remained as members of the Contran Tax Group. Kronos entered into a
new tax sharing agreement with Valhi and Contran, which contains similar terms
to the NL Tax Agreement. Kronos and its consolidating subsidiaries, including
KII, are also included in Contran's consolidated unitary state income tax
returns in certain qualifying U.S. jurisdictions. The terms of the Contran Tax
Agreement also apply to state provisions in these jurisdictions.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed earnings of foreign subsidiaries which
are not deemed to be permanently reinvested. Earnings of foreign subsidiaries
deemed to be permanently reinvested aggregated $496.8 million at December 31,
2003 and $526.5 million at December 31, 2004. The Company periodically evaluates
its deferred tax assets in the various taxing jurisdictions in which it operates
and adjusts any related valuation allowance based on the estimate of the amount
of such deferred tax assets that the Company believes does not meet the
"more-likely-than-not" recognition criteria.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point,
although in some instances shipping terms are FOB destination point (for which
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Amounts are removed from inventories at average cost. Cost of sales
includes costs for materials, packing and finishing, utilities, salary and
benefits, maintenance and depreciation.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
F-13
sales, distribution, shipping and handling, research and development, legal and
administrative functions such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $33 million in 2002, $43 million in
2003 and $49 million in 2004. Advertising costs are expensed as incurred and
were $1 million in each of 2002, 2003 and 2004. Research, development and
certain sales technical support costs are expensed as incurred and approximated
$6 million in 2002, $7 million in 2003 and $8 million in 2004.
Stock options. The Company has not issued any stock options. However,
certain employees of the Company have been granted options by NL to purchase NL
common stock. The Company has elected the disclosure alternative prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, and to
account for its stock-based employee compensation related to stock options in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations. Under APBO No.
25, no compensation cost is generally recognized for fixed stock options in
which the exercise price is not less than the market price on the grant date.
During 2002, and following NL's cash settlement of options to purchase NL common
stock held by certain individuals, NL and the Company commenced accounting for
its stock options using the variable accounting method because NL could not
overcome the presumption that it would not similarly cash settle its remaining
stock options. Under the variable accounting method, the intrinsic value of all
unexercised stock options (including those with an exercise price at least equal
to the market price on the date of grant) are accrued as an expense over their
vesting period, with subsequent increases (decreases) in NL's market price
resulting in the recognition of additional compensation expense (income). Upon
exercise of such options to purchase NL common stock held by employees of the
Company, the Company pays NL an amount equal to the difference between the
market price of NL's common stock on the date of exercise and the exercise price
of such stock option. Aggregate compensation expense related to NL stock options
held by employees of the Company was approximately $400,000 in 2002, $300,000 in
2003 and $1.0 million in 2004, and aggregate compensation expense was
approximately $200,000 in the first quarter of 2004 and approximately $100,000
in the first quarter of 2005.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been if the Company had applied the
fair value-based recognition provisions of SFAS No. 123, for all awards granted
subsequent to January 1, 1995.
Three months ended
December 31, March 31,
--------------------------------- ------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(In millions)
Net income (loss) as reported $(26.3) $ 81.8 $326.0 $ 13.2 $ 18.2
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation
expense determined under APBO No. 25 .3 .1 .6 .1 -
Stock-based employee compensation
expense determined under SFAS No. 123 (.3) (.1) - - -
------ ------ ------ ------ ------
Pro forma net income (loss) $(26.3) $ 81.8 $326.6 $ 13.3 $ 18.2
====== ====== ====== ====== ======
F-14
Note 2 - Geographic information:
The Company's operations are associated with the production and sale of
TiO2. Titanium dioxide pigments are used to impart whiteness, brightness and
opacity to a wide variety of products, including paints, plastics, paper, fibers
and ceramics. All of the Company's net assets are located in Europe.
For geographic information, net sales are attributed to the place of
manufacture (point of origin) and the location of the customer (point of
destination); property and equipment are attributed to their physical location.
Three months ended
December 31, March 31,
----------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Geographic areas
Net sales - point of origin:
Germany $ 404,299 $ 510,105 $ 576,138 $ 137,134 $ 149,921
Belgium 123,760 150,728 186,445 46,969 46,189
Norway 111,811 131,457 144,492 34,624 40,911
Other 89,560 110,358 124,784 32,675 34,261
Eliminations (149,765) (186,742) (223,889) (59,229) (61,746)
---------- ---------- ---------- ---------- ----------
$ 579,665 $ 715,906 $ 807,970 $ 192,173 $ 209,536
========== ========== ========== ========== ==========
Three months ended
December 31, March 31,
----------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Geographic areas
Net sales - point of destination:
Europe $ 456,299 $ 567,630 $ 666,271 $ 157,770 $ 177,581
United States 39,104 58,293 42,015 10,464 8,061
Latin America 12,808 12,258 20,684 4,644 8,158
Asia 39,832 42,974 43,842 10,306 7,446
Other 31,622 34,751 35,158 8,989 8,290
---------- ---------- ---------- ---------- ----------
$ 579,665 $ 715,906 $ 807,970 $ 192,173 $ 209,536
========== ========== ========== ========== ==========
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Identifiable assets -
net property and equipment:
Germany $ 252,411 $ 269,922 $ 254,339
Belgium 64,895 68,314 63,723
Norway 50,811 57,808 54,168
Other 270 191 210
---------- ---------- ----------
$ 368,387 $ 396,235 $ 372,440
========== ========== ==========
F-15
Note 3 - Accounts and other receivables:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Trade receivables $ 106,246 $ 120,969 $ 134,271
Insurance claims 58 32 113
Recoverable VAT and other receivables 8,715 11,388 11,767
Allowance for doubtful accounts (2,222) (1,660) (1,513)
---------- ---------- ----------
$ 112,797 $ 130,729 $ 144,638
========== ========== ==========
Note 4 - Inventories
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Raw materials $ 30,261 $ 34,303 $ 34,707
Work in process 15,623 13,044 13,978
Finished products 92,009 90,083 94,053
Supplies 30,238 32,831 32,513
---------- ---------- ----------
$ 168,131 $ 170,261 $ 175,251
========== ========== ==========
Note 5 - Accounts payable and accrued liabilities:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Accounts payable $ 50,626 $ 67,463 $ 49,846
Employee benefits 23,592 27,863 30,034
Interest 202 152 11,036
Other 29,384 31,471 35,733
---------- ---------- ----------
$ 103,804 $ 126,949 $ 126,649
========== ========== ==========
Note 6 - Long-term debt:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Long-term debt:
8.875% Senior Secured Notes $ 356,136 $ 519,225 $ 493,015
Bank credit facility - 13,622 12,946
Other 603 348 292
---------- ---------- ----------
356,739 533,195 506,253
Less current maturities 288 13,792 13,108
---------- ---------- ----------
$ 356,451 $519,403 $ 493,145
========== ========== ==========
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009, and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII Senior Secured Notes (collectively,
F-16
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. Such operating subsidiaries are: Kronos Titan GmbH, Kronos
Denmark, ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. The Notes
are issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to, another
entity. The Notes are redeemable, at KII's option, on or after December 30, 2005
at redemption prices ranging from 104.437% of the principal amount, declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of the Notes with the net proceeds of a qualified public
equity offering at 108.875% of the principal amount. In the event of a change of
control of KII, as defined, KII would be required to make an offer to purchase
its Notes at 101% of the principal amount. KII would also be required to make an
offer to purchase a specified portion of its Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. At December 31, 2004, KII was
in compliance with all the covenants, and the quoted market price of the Notes
was approximately euro 1,075 per euro 1,000 principal amount (2003 - euro 1,000
per euro 1,000 principal amount). At December 31, 2004, the carrying amount of
the Notes includes euro 6.2 million ($8.4 million) of unamortized premium
associated with the November 2004 issuance.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway (collectively, the "Borrowers") entered into a euro 80 million secured
revolving bank credit facility that matures in June 2005 ("European Credit
Facility"). Borrowings may be denominated in euros, Norwegian kroners or U.S.
dollars, and bear interest at the applicable interbank market rate plus 1.75%.
The facility also provides for the issuance of letters of credit up to euro 5
million. The European Credit Facility is collateralized by the accounts
receivable and inventories of the borrowers, plus a limited pledge of all of the
other assets of the Belgian borrower. The European Credit Facility contains
certain restrictive covenants which, among other things, restricts the ability
of the borrowers to incur debt, incur liens, pay dividends or merge or
consolidate with, or sell or transfer all or substantially all of their assets
to, another entity. In addition, the European Credit Facility contains customary
cross-default provisions with respect to other debt and obligations of
Borrowers, KII and its other subsidiaries. At December 31, 2004 and March 31,
2005, euro 10 million ($13.6 million and $12.9 million, respectively) was
outstanding under the European Credit Facility at an interest rate of 3.85%, and
at December 31, 2004 and March 31, 2005 the equivalent of $92.6 million and
$88.6 million, respectively, was available for additional borrowing by the
subsidiaries.
In April 2005, the Company repaid euro 5.0 million ($6.5 million) on its
Bank credit facility.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the European Credit
Facility, any outstanding borrowings under the European Credit Facility may be
accelerated prior to their stated maturity if the Borrowers or KII default under
F-17
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness). The
European Credit Facility contains provisions that allow the lender to accelerate
the maturity of the applicable facility in the event of a change of control, as
defined, of the applicable borrower. In the event the cross-default provisions
of either the Notes or the European Credit Facility become applicable, and such
indebtedness is accelerated, the Company would be required to repay such
indebtedness prior to their stated maturity.
Aggregate maturities of long-term debt at December 31, 2004 are shown in
the table below.
Years ending December 31, Amount
------------------------- --------------
(In thousands)
2005 $ 13,792
2006 159
2007 19
2008 -
2009 519,225
2010 and thereafter -
--------
$533,195
========
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2004, the restricted net
assets of consolidated subsidiaries approximated $158 million.
Note 7 - Other noncurrent liabilities:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Insurance claims and expenses $ 1,222 $ 1,505 $ 1,772
Employee benefits 4,849 5,107 4,826
Asset retirement obligations 766 958 962
Other 7,261 9,270 6,866
---------- ---------- ----------
$ 14,098 $ 16,840 $ 14,426
========== ========== ==========
The asset retirement obligations are discussed in Note 14.
Note 8 - Common stock and notes receivable from affiliates:
NL common stock options held by employees of the Company. At December 31,
2004, employees of the Company held options to purchase approximately 85,000
shares of NL common stock, of which 49,000 were granted in 2001 and are
exercisable at various dates through 2011 at an exercise price of $11.49 per
share. The remaining exercisable options are exercisable at various dates
through 2010 at an exercise price ranging from $2.66 to $9.34 per share. Such
options generally vest over five years, and vesting ceases at the date the
employee separates from service from the Company (including retirement).
F-18
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 1. No options were granted in 2002, 2003 or 2004. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting periods.
Common stock dividends. KII paid $25.0 million in cash dividends to Kronos
during 2003 and $60.0 million during 2004.
Preferred stock. In July 2002, KII and Kronos agreed to a recapitalization
of the Company as contemplated in the euro 285 million Notes offering. See Note
6. In connection with the recapitalization agreement, KII converted the Series A
(738 shares) and Series B (647 shares) redeemable preferred stock (including
liquidation and redemption preferences and accrued and unpaid dividends) held by
Kronos totaling $411.7 million into 1,385 shares of KII, $100 par value, common
stock. As a result of the conversion, the Series A and B redeemable preferred
stock certificates were canceled. Further, KII redeemed its profit participation
certificates held by Kronos totaling $284.3 million in exchange for various
notes receivable from NL. As a result of the redemption, the profit
participation certificates were canceled. Finally, KII redeemed 1,613 shares of
KII common stock held by Kronos in exchange for its remaining notes receivable
from NL and Kronos totaling $479.4 million. As a result of the recapitalization
in July 2002, KII's common stockholder's equity increased a net $696.0 million.
Notes receivable from affiliates - contra equity. The Company periodically
converted interest receivable from affiliates to notes receivable from
affiliates. For the year ended 2002 the interest transferred to notes receivable
from affiliates totaled $12.6 million (nil for 2003 and 2004).
In the fourth quarter of 2004, KII loaned an aggregate euro 163.1 million
($209.5 million) to Kronos in return for two promissory notes. Interest on both
notes is payable to KII on a quarterly basis at an annual rate of 9.25%, and
such interest is expected to be paid quarterly to the Company by Kronos. The
notes mature on December 31, 2010, with all principal due at that date. The
notes are unsecured, contain no financial covenants and provide for default only
upon Kronos' failure to pay any amount when due (subject to a short grace
period). Due to the long-term investment nature of these notes, settlement of
the principal balance of the notes is not contemplated within the foreseeable
future. The Company currently expects that settlement of the principal amount of
the notes will occur through a capital transaction (i.e. a non-cash dividend to
Kronos in the form of distributing such notes receivable to Kronos).
Accordingly, these notes receivable have been classified as a separate component
of stockholder's equity in accordance with GAAP. Interest income on such notes,
which is expected to be paid quarterly, is recognized in income when earned.
Rather than make a distribution to Kronos in the form of a cash dividend, the
Company loaned the euro 163.1 million to Kronos pursuant to the two promissory
notes. Until such time as the notes are settled (which, as noted above, is
expected to be through a capital transaction in the form of a non-cash
dividend), the Company benefits from the interest income earned on the
promissory notes.
Cash flows related to principal amounts on such loans made to affiliates
included in contra equity are reflected in financing activities in the
accompanying Consolidated Statements of Cash Flows.
F-19
Note 9 - Income taxes:
Three months ended
December 31, March 31,
----------------------------------------- ------------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In millions)
Pre-tax income (loss):
Germany $ 46.8 $ 45.8 $ 30.2 $ 6.4 $ 16.9
Non-U.S. 16.4 36.8 34.6 10.7 13.1
------ ------ ------- ------- -------
$ 63.2 $ 82.6 $ 64.8 $ 17.1 $ 30.0
====== ====== ======= ======= =======
Expected tax expense (benefit),
at U.S.federal statutory
income tax rate of 35% $ 22.1 $ 28.9 $ 22.7 $ 5.9 $ 10.5
Non-U.S. tax rates (5.2) (.9) .3 (.1) .2
Nondeductible expenses 2.8 2.7 4.2 .8 1.0
Change in deferred income tax
valuation allowance, net
(2.8) (6.7) (280.7) (3.0) -
Currency transaction gains and
losses for which no income
taxes are provided (4.6) - - - -
Change in Belgian income
tax law (2.3) - - - -
NL tax contingency reserve
adjustment, net .1 13.4 (4.6) - -
Refund of prior year income
taxes - (38.0) (2.6) - -
Other, net .7 1.3 (.6) .3 -
------ ------ ------- ------- -------
$ 10.8 $ .7 $(261.3) $ 3.9 $ 11.7
====== ====== ======= ======= =======
Components of income tax
expense (benefit):
Currently payable (refundable):
Germany $ (1.2) $(56.9) $ (.2) $ .3 $ 2.1
Other non - U.S. 6.5 18.9 12.9 3.8 4.2
------ ------ ------- ------- -------
5.3 (38.0) 12.7 4.1 6.3
------ ------ ------- ------- -------
Deferred income taxes (benefit):
Germany 7.9 44.4 (270.5) .4 5.6
Other non - U.S. (2.4) (5.7) (3.5) (.6) (.2)
------ ------ ------- ------- -------
5.5 38.7 (274.0) (.2) 5.4
------ ------ ------- ------- -------
$ 10.8 $ .7 $(261.3) $ 3.9 $ 11.7
====== ====== ======= ======= =======
Comprehensive provision for
income taxes (benefit)
allocable to:
Net income $ 10.8 $ .7 $(261.3) $ 3.9 $ 11.7
Other comprehensive income -
pension liabilities (.7) (9.5) (8.1) - -
------ ------ ------- ------- -------
$ 10.1 $ (8.8) $(269.4) $ 3.9 $ 11.7
====== ====== ======= ======= =======
The components of the net deferred tax liability at December 31, 2003 and
2004, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
F-20
December 31,
---------------------------------------------------
2003 2004
---------------------- -----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Tax effect of temporary differences
related to:
Inventories $ .9 $ (3.4) $ 1.5 $ (4.4)
Property and equipment 46.0 (21.6) 37.8 (22.9)
Accrued (prepaid) pension cost 11.3 (33.5) 19.4 (40.4)
Other accrued liabilities and
deductible differences 3.8 - 46.1 -
Other taxable differences - (67.2) - (43.5)
Investment in subsidiaries/
affiliates not in tax group - - 1.9 -
Tax loss and tax credit carryforwards 137.3 - 217.8 -
Valuation allowance (162.7) - - -
------- ------- ------- -------
Adjusted gross deferred tax assets
(liabilities) 36.6 (125.7) 324.5 (111.2)
Netting of items by tax jurisdiction (35.7) 35.7 (86.2) 86.2
------- ------- ------- -------
.9 (90.0) 238.3 (25.0)
Less net current deferred tax (2.7)
asset (liability) .9 (3.4) -
------- ------- ------- -------
Net noncurrent deferred tax asset
(liability) $ - $ (86.6) $ 238.3 $ (22.3)
======= ======= ======= =======
Years ended December 31,
---------------------------------
2002 2003 2004
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria $(2.8) $ (6.7) $(280.7)
Foreign currency translation 21.6 28.2 (3.0)
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies 13.2 (12.5) 121.0
------ ------ -------
$ 32.0 $ 9.0 $(162.7)
====== ====== =======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. KII and the Company's
German operating subsidiary were required to file amended tax returns with the
German tax authorities in order to receive its refunds for such years, and all
of such amended returns were filed during 2003. Such amended returns reflected
an aggregate refund of taxes and related interest to KII and its German
operating subsidiary of euro 26.9 million ($32.1 million), and the Company
F-21
recognized the benefit for these net funds in its 2003 results of operations.
For the year ended December 31, 2004, the Company recognized a net refund of
euro 2.5 million ($3.1 million) related to additional net interest which has
accrued on the outstanding refund amount. Through December 2004, KII and its
German operating subsidiary had received net refunds of euro 35.6 million ($44.7
million when received). All refunds relating to the periods 1990 to 1997 were
received by December 31, 2004. In addition to the refunds for the 1990 to 1997
periods, the court ruling also resulted in a refund of 1999 income taxes and
interest, and the Company received euro 21.5 million ($24.6 million) in 2003.
Certain of the Company's non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. For example:
o The Company has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including interest,
of approximately euro 6 million ($8 million at December 31, 2004). The
Company has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of the Company's Belgian
TiO2 operations in connection with this assessment. In April 2003, the
Company received a notification from the Belgian tax authorities of their
intent to assess a tax deficiency related to 1999 that, including interest,
is expected to be approximately euro 9 million ($13 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response.
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2004) relating to the years 1998 to 2000. The Company has
objected to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII, a
wholly-owned subsidiary of Kronos, principally during the 1990s when KII had a
significantly higher level of outstanding indebtedness than is currently
outstanding. For financial reporting purposes, however, the benefit of such net
operating loss carryforwards had not previously been recognized because Kronos
did not believe they met the "more-likely-than-not" recognition criteria, and
accordingly Kronos had a deferred income tax asset valuation allowance
offsetting the benefit of such net operating loss carryforwards and Kronos'
other tax attributes in Germany. KII had generated positive taxable income in
Germany for both German corporate and trade tax purposes since 2000, and
starting with the quarter ended December 31, 2002 and for each quarter
thereafter, KII had cumulative taxable income in Germany for the most recent
twelve quarters. However, offsetting this positive evidence was the fact that
prior to the end of 2003, Kronos believed there was significant uncertainty
F-22
regarding its ability to utilize such net operating loss carryforwards under
German tax law and, principally because of the uncertainty caused by this
negative evidence, Kronos had concluded the benefit of the net operating loss
carryforwards did not meet the "more-likely-than-not" criteria. By the end of
2003, and primarily as a result of a favorable German court ruling in 2003 and
the procedures Kronos had completed during 2003 with respect to the filing of
certain amended German tax returns (as discussed below), Kronos had concluded
that the significant uncertainty regarding its ability to utilize such net
operating loss carryforwards under German tax law had been eliminated. However,
at the end of 2003, Kronos believed at that time that it would generate a
taxable loss in Germany during 2004. Such expectation was based primarily upon
then-current levels of prices for TiO2, and the fact that Kronos was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience), Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased, or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. Accordingly, Kronos continued to conclude at the end of
2003 that the benefit of the German net operating loss carryforwards did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase, and Kronos believed its selling prices
would continue to increase during the second half of 2004 after Kronos and its
major competitors announced an additional round of price increases. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflected
taxable income for Germany in 2004 as well as 2005. Accordingly, based on all
available evidence, including the fact that (i) KII had generated positive
taxable income in Germany since 2000, and starting with the quarter ended
December 31, 2002 and for each quarter thereafter, KII had cumulative taxable
income in Germany for the most recent twelve quarters, (ii) Kronos was now
projecting positive taxable income in Germany for 2004 and 2005 and (iii) the
German net operating loss carryforwards have no expiration date, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, Kronos believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given the number of years for which Kronos has now generated positive taxable
income in Germany, combined with the fact that the net operating loss
carryforwards were generated during a time when KII had a significantly higher
level of outstanding indebtedness than it currently has outstanding, and the
fact that the net operating loss carryforwards have no expiration date, Kronos
concluded it was now appropriate to reverse all of the valuation allowance
F-23
related to the net operating loss carryforwards because the benefit of such
operating loss carryforwards now meet the "more-likely-than-not" recognition
criteria. Under applicable GAAP related to accounting for income taxes at
interim periods, a change in estimate at an interim period resulting in a
decrease in the valuation allowance is segregated into two components, the
portion related to the remaining interim periods of the current year and the
portion related to all future years. The portion of the valuation allowance
reversal related to the former is recognized over the remaining interim periods
of the current year, and the portion of the valuation allowance related to the
latter is recognized at the time the change in estimate is made. Accordingly,
Kronos has recognized a $280.7 million income tax benefit in 2004 related to the
complete reversal of such deferred income tax asset valuation allowance
attributable to Kronos' income tax attributes in Germany (principally the net
operating loss carryforwards). Of such $280.7 million, (i) $8.7 million relates
primarily to the utilization of the German net operating loss carryforwards
during the first six months of 2004, the benefit of which had previously not met
the "more-likely-than-not" recognition criteria, (ii) $268.6 million relates to
the valuation allowance reversal recognized as of June 30, 2004 and (iii) $3.4
million relates to the valuation allowance reversal recognized during the last
six months of 2004. At December 31, 2004, the net operating loss carryforwards
for German corporate and trade tax purposes aggregated the equivalent of $671
million and $232 million, respectively, all of which have no expiration date.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. The Company is still studying the new law, including the
technical provisions related to the two complex provisions noted above. The
effect on the Company of the new law, if any, has not yet been determined, in
part because the Company has not definitively determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction. If the Company determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned. With respect to the special dividends received deduction
for certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its evaluation of whether it would benefit
from the special dividends received deduction until sometime after the U.S.
government has issued clarifying regulations regarding this provision of the
Act, the timing for the issuance of which is not known. The aggregate amount of
unremitted earnings that is potentially subject to the special dividends
received deduction is approximately $527 million at December 31, 2004. The
Company is unable to reasonably estimate a range of income tax effects if such
unremitted earnings would be repatriated and become eligible for the special
dividends received deduction, as the calculation would be extremely complex.
Note 10 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Employees are covered by plans in their respective countries.
Variances from actuarially assumed rates will result in increases or decreases
in accumulated pension obligations, pension expense and funding requirements in
F-24
future periods. At December 31, 2004, the Company currently expects to
contribute the equivalent of approximately $4 million to all of its defined
benefit pension plans during 2005.
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost related to the Company's
consolidated business segments and charged to continuing operations and the
rates used in determining the actuarial present value of benefit obligations are
presented in the tables below. The Company uses a September 30th measurement
date for their defined benefit pension plans.
Years ended December 31,
------------------------
2003 2004
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 213,183 $ 272,204
Service cost 4,060 5,398
Interest cost 12,378 14,132
Participant contributions 1,295 1,362
Plan amendments 3,200 -
Actuarial (gains) losses 17,337 3,134
Change in foreign exchange rates 36,547 26,588
Benefits paid (15,796) (15,236)
--------- ---------
Benefit obligations at end of the year $ 272,204 $ 307,582
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 160,860 $ 167,302
Actual return on plan assets (12,559) 14,175
Employer contributions 10,240 11,726
Participant contributions 1,295 1,362
Change in foreign exchange rates 23,262 17,244
Benefits paid (15,796) (15,236)
--------- ---------
Fair value of plan assets at end of year $ 167,302 $ 196,573
========= =========
Funded status at end of the year:
Plan assets less than PBO $(104,902) $ (111,009)
Unrecognized actuarial losses 98,368 107,581
Unrecognized prior service cost 6,678 6,829
Unrecognized net transition obligations 1,228 952
--------- ---------
$ 1,372 $ 4,353
========= =========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 7,812 $ 7,524
Accrued pension costs:
Current (7,877) (8,587)
Noncurrent (53,010) (48,441)
Accumulated other comprehensive income 54,447 53,857
--------- ---------
$ 1,372 $ 4,353
========= =========
F-25
Three months ended
December 31, March 31,
-------------------------------- -------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Net periodic pension cost:
Service cost benefits $ 3,395 $ 4,060 $ 5,398 $ 1,288 $ 1,616
Interest cost on PBO 10,965 12,378 14,132 3,539 3,692
Expected return on plan assets (10,294) (12,264) (12,318) (3,122) (3,204)
Amortization of prior service cost 223 255 463 116 126
Amortization of net transition obligations 332 527 368 91 81
Recognized actuarial losses 1,029 827 2,335 578 794
-------- -------- -------- -------- --------
$ 5,650 $ 5,783 $ 10,378 $ 2,490 $ 3,105
======== ======== ======== ======== ========
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o In Germany, the composition of the Company's plan assets is established to
satisfy the requirements of the German insurance commissioner. The current
plan asset allocation at December 31, 2004 was 23% to equity managers, 48%
to fixed income managers and 29% to real estate.
o In Norway, the Company currently has a plan asset target allocation of 14%
to equity managers, 62% to fixed income managers and the remainder
primarily to liquid investments and cash. The expected long-term rate of
return for such investments is approximately 8% and 4.5% to 6.5% and 2.5%,
respectively. The current plan asset allocation at December 31, 2004 was
16% to equity managers, 64% to fixed income managers and the remainder
primarily to cash and liquid investments.
The Company regularly reviews its actual asset allocation for each of its
plans, and will periodically rebalance the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
------------------------
2003 2004
---- ----
Discount rate 5.4% 5.0%
Increase in future compensation levels 2.8% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
F-26
December 31,
----------------------------------------
2002 2003 2004
---- ---- ----
Discount rate 6.0% 5.8% 5.3%
Increase in future compensation levels 2.8% 2.6% 2.8%
Long-term return on plan assets 7.3% 6.9% 6.4%
Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
is presented below. At December 31, 2002 and 2003, 100% of the projected benefit
obligations of such plans relate to non-U.S. plans.
December 31,
----------------------
2003 2004
---- ----
(In thousands)
Projected benefit obligation $272,204 $307,582
Accumulated benefit obligation 230,893 257,308
Fair value of plan assets 167,302 196,573
The Company expects future benefits paid from all defined benefit pension
plans to be as follows:
Amount
Years ending December 31, (In thousands)
2005 $ 15,592
2006 16,974
2007 15,978
2008 17,729
2009 16,497
2010 to 2014 89,950
Note 11 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect to
the Company other than as set forth in these financial statements, the Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
F-27
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, employees of one
company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient, and the compensation and associated
expenses of such persons. Because of the large number of companies affiliated
with Contran, Kronos and NL, the Company believes it benefits from cost savings
and economies of scale gained by not having certain management, financial and
administrative staffs duplicated at each entity, thus allowing certain
individuals to provide services to multiple companies but only be compensated by
one entity. These ISA agreements are reviewed and approved by the applicable
independent directors of the companies that are parties to the agreements. The
net ISA fee charged to the Company was $1.1 million in 2002, $1.5 million in
2003 and $2.8 million in 2004.
Sales of TiO2 to Kronos (US), Inc. ("KUS"), an affiliate, were $38.5
million in 2002, $57.8 million in 2003 and $41.9 million in 2004. Sales of TiO2
to Kronos Canada, Inc. ("KC") were $7.7 million in 2002, $10.9 million in 2003
and $8.9 million in 2004.
KUS purchases the rutile and slag feedstock used as a raw material in all
of the Company's chloride process TiO2 facilities. The Company purchases such
feedstock from KUS for use in its facilities for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $102.5 million in 2002, $93.3 million in 2003 and
$106.2 million in 2004.
Purchases of TiO2 from KUS were $2.6 million in 2002, $100,000 in 2003 and
$3.5 million in 2004. Purchases of TiO2 from KC were $500,000 in each of 2002
and 2003 and $700,000 in 2004.
Royalty income received from KC for use of certain of the Company's
intellectual property was $5.8 million in 2002, $6.1 million in 2003 and $6.0
million in 2004.
The Company is party to master global NL insurance coverage policies with
regard to property, business interruption, excess liability and other coverages.
The costs associated with these policies aggregated $7.0 million, $5.2 million
and $5.3 million in 2002, 2003 and 2004, respectively.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and its affiliates, including the Company, have
entered into a loss sharing agreement under which any uninsured loss is shared
by those entities who have submitted claims under the relevant policy. The
Company believes the benefits in the form of reduced premiums and broader
coverage associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
F-28
Net amounts between the Company and KUS were generally related to product
sales and raw material purchases. Net amounts between the Company and KC were
generally related to product sales and royalties. See Note 8 for discussion of
notes receivable from affiliates.
Current receivables from and payables to affiliates are summarized in the
table below.
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Current receivables from affiliates:
KC $ 1,877 $ 2,516 $ 3,133
Other 7 1 34
-------- -------- --------
$ 1,884 $ 2,517 $ 3,167
======== ======== ========
Current payables to affiliates:
KUS $ 8,697 $ 11,033 $ 13,946
NL - 9 49
-------- -------- --------
$ 8,697 $ 11,042 $ 13,995
======== ======== ========
Interest income on all loans to related parties was $22.8 million in 2002,
less than $50,000 in 2003 and $2.8 million in 2004. Interest expense on all
loans from related parties was $18.7 million in 2002, less than $100,000 in 2003
and nil in 2004.
In July 2002, all outstanding Series A shares and Series B shares (with
aggregate values of $219.0 million and $192.7 million, respectively, at the time
of conversion) were converted into 1,385 shares of KII, $100 par value, common
stock. As a result of the conversion, the Series A and B shares were canceled.
See Note 8.
Profit Participation Certificates ("PPCs") - PPCs with DM100 par value:
5,500,000 shares authorized, issued and outstanding are designated nonvoting
cumulative preferred PPCs and yielded an annual dividend of 4% per share based
on earnings of the Company and before any common stock dividends to Kronos.
Kronos waived its right to dividend distributions for all periods presented and
through December 2002. The PPCs were issued to Kronos ($284.3 million) in
December 1999 as part of a recapitalization of the Company. In July 2002 all
outstanding PPCs (with an aggregate value of $284.3 million at the time of
redemption) were redeemed in exchange for various notes receivable from NL. As a
result of the redemption, the PPCs were canceled.
Note 12 - Commitments and contingencies:
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's businesses are, or
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. From time to time, the Company
F-29
may be subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all its plants are in
substantial compliance with applicable environmental laws.
Litigation matters. The Company's Belgian subsidiary and certain of its
employees are the subject of civil and criminal proceedings relating to an
accident that resulted in two fatalities at the Company's Belgian facility in
2000. In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against the Company and fines aggregating less than euro 40,000
against various Company employees. The Company and the individual employees have
appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
its consolidated financial condition, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for more than 90% of
net sales from continuing operations during each of the past three years. The
remaining sales result from the mining and sale of ilmenite ore (a raw material
used in the sulfate pigment production process), and the manufacture and sale of
iron-based water treatment chemicals (derived from co-products of the TiO2
production processes). TiO2 is generally sold to the paint, plastics and paper
industries. Such markets are generally considered "quality-of-life" markets
whose demand for TiO2 is influenced by the relative economic well-being of the
various geographic regions. TiO2 is sold to over 4,000 customers, with the top
ten customers approximating 21%, 20% and 21%, respectively of net sales in 2002,
2003 and 2004. Approximately 73% of the Company's TiO2 sales by volume were to
Europe in each of 2002 and 2003 and approximately 77% of the Company's TiO2
sales were to Europe in 2004. Approximately 13% of sales by volume were
attributable to North America in 2002 and 2003 and 9% attributable to North
America in 2004.
Capital expenditures. At December 31, 2004 the estimated cost to complete
capital projects in process approximated $5.5 million.
Long-term contracts. KUS has long-term supply contracts that provide for
certain of its affiliates', including the Company's, TiO2 feedstock requirements
through 2009. The agreements require KUS to purchase certain minimum quantities
of feedstock with minimum annual purchase commitments aggregating approximately
$525 million at December 31, 2004. The agreements require that the Company and
certain of its affiliates purchase chloride feedstock underlying these long-term
supply contracts from KUS.
Operating leases. The Company's principal German operating subsidiary
leases the land under its Leverkusen TiO2 production facility pursuant to a
lease with Bayer AG that expires in 2050. The Leverkusen facility itself, which
is owned by the Company and which represents approximately one-half of the
F-30
Company's current TiO2 production capacity, is located within Bayer's extensive
manufacturing complex. Rent for such land lease associated with the Leverkusen
facility is periodically established by agreement with the lessor for periods of
at least two years at a time. The lease agreement provides for no formula, index
or other mechanism to determine changes in the rent for such land lease; rather,
any change in the rent is subject solely to periodic negotiation between Bayer
and the Company. Any change in the rent based on such negotiations is recognized
as part of lease expense starting from the time such change is agreed upon by
both parties, as any such change in the rent is deemed "contingent rentals"
under GAAP. Under a separate supplies and services agreement expiring in 2011,
Bayer provides some raw materials, auxiliary and operating materials and
utilities services necessary to operate the Leverkusen facility. Both the lease
and the supplies and services agreements restrict ownership and use of the
Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Net rent expense approximated $7 million in
2002, $9 million in 2003 and $8 million in 2004. At December 31, 2004, future
minimum payments under noncancellable operating leases having an initial or
remaining term of more than one year were as follows:
Years ending December 31, Amount
(In thousands)
2005 $ 3,357
2006 2,130
2007 1,896
2008 1,698
2009 1,290
2010 and thereafter 20,895
-------
$31,266
=======
Approximately $25.3 million of the $31.3 million aggregate future minimum
rental commitments at December 31, 2004 relates to the Company's land lease
associated with its Leverkusen facility discussed above. The minimum commitment
amounts for such lease included in the table above for each year through the
2050 expiration of the lease are based upon the current annual rental rate as of
December 31, 2004. As discussed above, any change in the rent is based solely on
negotiations between Bayer and the Company, and any such change in the rent is
deemed "contingent rentals" under GAAP which is excluded from the future minimum
lease payments disclosed above.
Note 13 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
F-31
December 31, December 31,
2003 2004
--------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
------------- ------------- -------------------------
(In millions)
Cash, cash equivalents, restricted cash and current and
noncurrent restricted marketable debt securities $ 41.0 $ 41.0 $ 21.9 $ 21.9
Long-term debt:
Fixed rate with market quotes -
8.875% Senior Secured Notes $ 356.1 $ 356.1 $519.2 $549.1
Variable rate debt - - 13.6 13.6
Other fixed rate debt .6 .6 .4 .4
Fair value of the Company's noncurrent restricted marketable debt
securities and 8.875% Senior Secured Notes are based upon quoted market prices
at each balance sheet date.
At December 31, 2003, the Company had entered into a short-term currency
forward contract maturing January 2, 2004 to exchange an aggregate of euro 40
million for an equivalent amount of U.S. dollars at an exchange rate of U.S.
$1.25 per euro. Such contract was entered into in conjunction with the January
2004 payment of an intercompany dividend from one of the Company's European
subsidiaries. At December 31, 2003, the actual exchange rate was U.S. $1.25 per
euro. The estimated fair value of such foreign currency contract was not
material at December 31, 2003. The Company held no other significant derivative
financial instruments at December 31, 2003 or 2004. See Note 1.
Note 14 - Accounting principles newly adopted in 2002, 2003 and 2004:
Impairment of long-lived assets. The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of prior GAAP
with respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Lived-Lived Assets to be Disposed Of." However, SFAS No. 144 provides
new guidance intended to address certain implementation issues associated with
SFAS No. 121, including expanded guidance with respect to appropriate cash flows
to be used to determine whether recognition of any long-lived asset impairment
is required, and if required how to measure the amount of the impairment. SFAS
No. 144 also requires that net assets to be disposed of by sale are to be
reported at the lower of carrying value or fair value less cost to sell, and
expands the reporting of discontinued operations to include any component of an
entity with operations and cash flows that can be clearly distinguished from the
rest of the entity. Adoption of SFAS No. 144 did not have a significant effect
on the Company.
Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," on January 1, 2003. Under SFAS No. 143, the
fair value of a liability for an asset retirement obligation covered under the
scope of SFAS No. 143 is recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
F-32
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, is recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was not material, as
summarized in the table below, and is not separately recognized in the
accompanying Statement of Income.
Amount
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities .3
Asset retirement obligation recognized (.6)
----
Net impact $ -
====
The increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) and to December 31, 2004 ($1 million)
is primarily due to accretion expense and the effects of currency translation.
Accretion expense, which is reported as a component of cost of goods sold in the
accompanying Consolidated Statement of Operations, approximated $100,000 for
each of the years ended December 31, 2003 and 2004.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
F-33
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51," as amended, as of March 31,
2004. The Company does not have any involvement with any variable interest
entity (as that term is defined in FIN No. 46R) covered by the scope of FIN No.
46R that would require the Company to consolidate such entity under FIN No. 46R
which had not already been consolidated under prior applicable GAAP, and
therefore the impact to the Company of adopting the consolidation requirements
of FIN No. 46R was not material.
Note 15 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, if the vesting period of the award). No compensation cost will
be recognized in the aggregate for equity instruments for which the employee
does not render the requisite service (generally, the instrument is forfeited
before it has vested). The grant-date fair value will be estimated using
option-pricing models (e.g. Black-Scholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
F-34
award existing as of December 31, 2005 over the remaining vesting period.
Because the Company has not granted any options to purchase its common stock and
is not expected to grant any options prior to January 1, 2006 and because the
number of non-vested awards as of December 31, 2005 with respect to options
granted by NL to employees of the Company is not expected to be material, the
effect of adopting SFAS No. 123R is not expected to be significant in so far as
it relates to existing stock options. Should the Company, however, grant a
significant number of options in the future, the effect on the Company's
consolidated financial statements could be material.
Note 16 - Quarterly results of operations (unaudited):
Quarter ended
--------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions, except per share data)
Year ended December 31, 2003
Net sales $ 178.2 $ 182.9 $ 173.4 $ 181.4
Cost of sales 130.8 134.2 124.2 127.7
Net income $ 14.8 $ 36.7 $ 14.2 $ 16.1
Year ended December 31, 2004
Net sales $ 192.2 $ 208.1 $ 203.4 $ 204.3
Cost of sales 142.6 156.3 156.1 154.6
Net income $ 13.2 $ 290.5 $ 9.1 $ 13.2
Year ended December 31, 2005
Net sales $ 209.5
Cost of sales 147.2
Net income $ 18.2
During the fourth quarter of 2004, the Company determined that it should
have recognized an additional $26.8 million net deferred income tax benefit
during the second quarter of 2004, related to the amount of the valuation
allowance related to the Company's German operations which should have been
reversed. While the additional tax benefit is not material to the Company's
second quarter 2004 results, the quarterly results of operations for 2004, as
presented above, reflects this additional tax benefit. Accordingly, income from
continuing operations for the second quarter of 2004 of $290.5 million, as
reflected above, differs from the $263.7 million previously reported by the
Company due to such $26.8 million deferred income tax benefit.
F-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Kronos International, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 30, 2005, appearing on page F-2 in this 2004 Annual Report on
Form 10-K of Kronos International, Inc., also included an audit of the financial
statement schedules listed in the index on page F-1 of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
KRONOS TITAN GMBH AND SUBSIDIARY
Index of Consolidated Financial Statements
Financial Statements Pages
Report of Independent Registered Public Accounting Firm FA-2
Consolidated Balance Sheets - December 31, 2003 and 2004;
March 31, 2005 (unaudited) FA-3
Consolidated Statements of Income - Years ended
December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) FA-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) FA-6
Consolidated Statements of Partners' Capital/Owners'
Equity - Years ended December 31, 2002, 2003 and 2004 and
three months ended March 31, 2005 (unaudited) FA-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) FA-8
Notes to Consolidated Financial Statements FA-10
FA-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Owner of Kronos Titan GmbH:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, owners' equity
and cash flows present fairly, in all material respects, the financial position
of Kronos Titan GmbH and Subsidiary at December 31, 2003 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
FA-2
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 30,859 $ 6,444 $ 6,445
Accounts and notes receivable 66,565 76,732 92,353
Receivable from affiliates 82,166 32,355 30,579
Refundable income taxes 128,956 59 56
Inventories 100,133 101,850 107,693
Prepaid expenses 2,389 2,078 3,848
-------- -------- --------
Total current assets 411,068 219,518 240,974
-------- -------- --------
Other assets:
Note receivable from Kronos Titan A/S - 5,449 5,178
Unrecognized net pension obligations 3,636 3,672 3,490
Deferred income taxes 19,832 18,077 21,925
Other 1,211 1,201 798
-------- -------- --------
Total other assets 24,679 28,399 31,391
-------- -------- --------
Property and equipment:
Land 13,539 14,929 14,215
Buildings 101,819 111,349 105,805
Machinery and equipment 442,838 496,428 473,281
Construction in progress 6,624 10,022 10,790
-------- -------- --------
564,820 632,728 604,091
Less accumulated depreciation and amortization 323,313 373,938 360,183
-------- -------- --------
Net property and equipment 241,507 258,790 243,908
-------- -------- --------
$677,254 $506,707 $516,273
======== ======== ========
FA-3
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND OWNERS' EQUITY December 31, March 31,
------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 61,252 $ 76,952 $ 70,650
Payable to affiliates 21,685 35,260 55,609
Deferred income taxes 1,407 1,912 1,927
--------- --------- ---------
Total current liabilities 84,344 114,124 128,186
--------- --------- ---------
Noncurrent liabilities:
Note payable to affiliate 89,710 12,941 12,299
Accrued pension cost 50,826 45,015 40,982
Other 11,530 12,193 11,806
--------- --------- ---------
Total noncurrent liabilities 152,066 70,149 65,087
--------- --------- ---------
Owners' equity:
Subscribed capital 12,496 12,496 12,496
Paid in capital 376,634 227,037 227,037
Retained deficit - (9,685) 4,628
Accumulated other comprehensive
income (loss):
Currency translation 75,524 111,996 98,249
Pension liabilities (23,810) (19,410) (19,410)
--------- --------- ---------
Total owners' equity 440,844 322,434 323,000
--------- --------- ---------
$ 677,254 $ 506,707 $ 516,273
========= ========= =========
Commitments and contingencies (Notes 6, 10 and 13)
See accompanying notes to consolidated financial statements.
FA-4
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ----------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Net sales $ 384,361 $487,337 $552,216 $131,736 $142,774
Cost of sales 323,306 379,187 451,888 107,774 110,460
--------- -------- -------- -------- --------
Gross margin 61,055 108,150 100,328 23,962 32,314
Selling, general and administrative
expense 34,633 42,925 47,824 12,490 12,751
Other operating income (expense):
Currency transaction gains 430
(losses), net 93 (3,519) (2,533) 854
Disposition of property
and equipment (300) (390) (293) (39) (40)
--------- -------- -------- -------- --------
Income from operations 26,215 61,316 49,678 11,863 20,377
Other income (expense):
Trade interest income 518 447 949 159 49
Interest and other expense
to affiliates (4,493) (442) (304) (75) (150)
Interest and other income
from affiliates 3,694 3,918 8,813 1,668 3,380
Interest expense (198) (368) (651) (250) (60)
--------- -------- -------- -------- --------
Income before income taxes 25,736 64,871 58,485 13,365 23,596
Income tax provision (benefit) 3,306 (205,670) 17,507 3,123 9,283
--------- -------- -------- -------- --------
Net income $ 22,430 $270,541 $ 40,978 $ 10,242 $ 14,313
========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
FA-5
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ----------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Net income $ 22,430 $270,541 $ 40,978 $ 10,242 $ 14,313
--------- -------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Minimum pension liabilities adjustment (2,915) (17,946) 4,400 - -
Currency translation adjustment 22,892 37,674 36,472 (9,895) (13,747)
--------- -------- -------- -------- --------
Total other comprehensive income 19,977 19,728 40,872 (9,895) (13,747)
--------- -------- -------- -------- --------
Comprehensive income $ 42,407 $290,269 $ 81,850 $ 347 $ 566
========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
FA-6
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL / OWNERS' EQUITY
Years ended December 31, 2002, 2003 and 2004 and
three months ended March 31, 2005 (unaudited)
(In thousands)
Accumulated other
comprehensive
Partners' Owners' Equity Retained income (loss)
capital Subscribed Paid-in earnings Currency Pension
(deficit) capital capital (deficit) translation liabilities Total
-------- ---------- ------- --------- ----------- ----------- ------
Balance at December 31, 2001 $108,865 $ - $ - $ - $14,958 $ (2,949) $120,874
Net income 22,430 - - - - - 22,430
Other comprehensive income
(loss), net of tax - - - - 22,892 (2,915) 19,977
Cash contribution (12,706) - - - - - (12,706)
------- -------- --------- -------- ------- -------- --------
Balance at December 31, 2002 118,589 - - - 37,850 (5,864) 150,575
Net income 270,541 - - - - - 270,541
Other comprehensive income
(loss), net of tax - - - - 37,674 (17,946) 19,728
Partnership conversion (389,130) 12,496 376,634 - - - -
------- -------- --------- -------- ------- -------- --------
Balance at December 31, 2003 - 12,496 376,634 - 75,524 (23,810) 440,844
Net income - - - 40,978 - - 40,978
Dividends declared - - - (50,663) - - (50,663)
Other comprehensive income,
net of tax - - - - 36,472 4,400 40,872
Noncash capital transaction - - (149,597) - - - (149,597)
------- -------- --------- -------- ------- -------- --------
Balance at December 31, 2004 - 12,496 227,037 (9,685) 111,996 (19,410) 322,434
Unaudited:
Net income - - - 14,313 - - 14,313
Other comprehensive loss,
net of tax - - - - (13,747) - (13,747)
------- -------- --------- -------- ------- -------- --------
Balance at March 31, 2005 $ - $ 12,496 $ 227,037 $ 4,628 $ 98,249 $(19,410) $323,000
======= ======== ========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
FA-7
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ----------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 22,430 $270,541 $ 40,978 $10,242 $14,313
Depreciation, depletion and amortization 16,387 20,452 23,583 5,937 5,535
Noncash interest expense 57 140 200 39 46
Deferred income taxes 2,875 (39,770) 6,178 2,607 631
Net loss from disposition of property and
equipment 300 390 293 39 40
Pension, net (2,745) (5,021) (4,540) (1,083) (833)
Other, net 25 12 167 53 44
Change in assets and liabilities:
Accounts and notes receivable (27,322) 1,827 (3,205) (11,784) (27,793)
Inventories (2,678) 1,830 5,837 4,822 (11,163)
Prepaid expenses 25 1,107 559 (101) (1,727)
Accounts payable and accrued liabilities (4,677) 3,542 13,683 1,117 5,057
Income taxes (1,164) (130,136) 126,599 21,811 (16)
Accounts with affiliates 25,616 (85,431) (82,855) (27,359) 21,895
Accrued environmental costs 259 (905) - - -
Other noncurrent assets (222) 481 (146) 78 112
Other noncurrent liabilities (1,018) (555) (5,334) 50 (2,724)
--------- -------- -------- -------- --------
Net cash provided by operating activities 28,148 38,504 121,997 6,468 3,417
--------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (15,818) (18,715) (20,396) (2,557) (3,260)
Loans to affiliates - collections 18,097 - - - -
Proceeds from disposition of property and -
equipment 3 4 - (1) -
--------- -------- -------- -------- --------
Net cash provided (used) by investing
activities 2,282 (18,711) (20,396) (2,558) (3,260)
--------- -------- -------- -------- --------
FA-8
KRONOS TITAN GMBH AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Three months ended
December 31, March 31,
-------------------------------------- ----------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Cash flows from financing activities:
Indebtedness:
Borrowings $ - $ - $ 49,984 $ 49,984 $ -
Principal payments - - (49,984) (49,984) -
Loans from affiliates:
Loans - - 11,597 - -
Repayments (12,090) - (88,656) - -
Cash distributions (12,706) - (50,663) - -
Deferred financing fees (410) - - - -
--------- -------- --------- -------- --------
Net cash used by financing activities (25,206) - (127,722) - -
--------- -------- --------- -------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing
activities 5,224 19,793 (26,121) 3,910 157
Currency translation 924 3,241 1,706 (1,959) (156)
Balance at beginning of year 1,677 ____7,825 30,859 30,859 6,444
--------- -------- --------- -------- --------
Balance at end of year $ 7,825 $ 30,859 $ 6,444 $ 32,810 $ 6,445
========= ======== ========= ======== ========
Supplemental disclosures:
Cash paid (received) for:
Interest $ 4,463 $ 674 $ 626 $ 349 $ 14
Income taxes 938 (166) (132,629) (21,074) -
See accompanying notes to consolidated financial statements.
FA-9
KRONOS TITAN GMBH AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Titan GmbH ("TG") is a wholly-owned subsidiary of Kronos
International, Inc. ("KII"). KII is a wholly-owned subsidiary of Kronos
Worldwide, Inc. (NYSE:KRO) ("Kronos"). At December 31, 2004, (i) Valhi, Inc.
(NYSE: VHI) and a wholly owned subsidiary of Valhi held approximately 57% of
Kronos' outstanding common stock and NL Industries, Inc. (NYSE: NL) held an
additional 37% of Kronos' outstanding common stock, (ii) Valhi and such wholly
owned subsidiary of Valhi owned approximately 83% of NL's outstanding common
stock and (iii) Contran Corporation and its subsidiaries held approximately 91%
of Valhi's outstanding common stock. At March 31, 2005, (i) Valhi held
approximately 57% of Kronos' common stock and NL held an additional 36% of the
outstanding common stock of Kronos, (ii) Valhi owned 83% of NL's outstanding
common stock and (iii) Contran and its subsidiaries held approximately 91% of
Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or
is held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control each of such companies.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"), with the U.S. dollar as the reporting currency. TG also
prepares financial statements on other bases, as required in Germany.
Effective December 31, 2003, Kronos Titan GmbH & Co. OHG was converted from
a partnership into a limited liability company under German law, and was renamed
TG. The conversion resulted in a reclassification of partner's capital
aggregating $389 million at the date of conversion into other capital accounts
(subscribed capital and paid-in capital) and had no material effect on TG's
consolidated financial statements, other than with respect to deferred income
taxes. See Note 10. In 2004, the Company forgave a $150 million receivable from
KII which is reflected as a noncash capital transaction in the accompanying
Consolidated Statement of Partners' Capital/Owners' Equity.
TG is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and therefore is not subject to the SEC's periodic reporting
requirements, except as may be required by Rule 3-16 of Regulation S-X.
Note 2 - Summary of significant accounting policies:
Principles of consolidation and management's estimates The accompanying
consolidated financial statements include the accounts of TG and its
wholly-owned subsidiary (collectively, the "Company"). All material intercompany
accounts and balances have been eliminated. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results may differ from previously estimated amounts
under different assumptions or conditions. The Company has no involvement with
any variable interest entity covered by the scope of FASB Interpretation ("FIN")
No. 46R, "Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51," as amended as of March 31, 2004.
FA-10
Unaudited interim information. Information included in the consolidated
financial statements and related notes to the consolidated financial statements
as of March 31, 2005 and for the three month interim periods ended March 31,
2004 and 2005 is unaudited. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to state fairly the
consolidated financial position, results of operations and cash flows for such
interim periods have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations. Certain information normally included in financial
statements prepared in accordance with GAAP has been condensed or omitted for
such interim periods.
Translation of foreign currencies. The functional currency of the Company
is the euro. Assets and liabilities of the Company are translated to U.S.
dollars at year-end rates of exchange and revenues and expenses are translated
at weighted average exchange rates prevailing during the year. Resulting
translation adjustments are included in other comprehensive income (loss), net
of related income taxes, if applicable. Currency transaction gains and losses
are recognized in income currently.
Derivatives and hedging activities. Derivative instruments are recognized
as either assets or liabilities and measured at fair value in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. The accounting for changes in fair value of derivatives is dependent
upon the intended use of the derivative, and such changes are recognized either
in net income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, as amended, the Company exempted from the scope of
SFAS No. 133 all host contracts containing embedded derivatives which were
issued or acquired prior to January 1, 1999. See Note 14.
Cash equivalents. Cash equivalents include bank deposits with original
maturities of three months or less.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of the accounts.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for obsolete or
slow-moving inventories. Amounts are removed from inventories at average cost.
Cost of sales includes costs for materials, packaging and finishing, utilities,
salary and benefits, maintenance and depreciation.
Property, equipment, depreciation and depletion. Property and equipment are
stated at cost. Interest costs related to major, long-term capital projects are
capitalized as a component of construction costs. Expenditures for maintenance,
repairs and minor renewals are expensed; expenditures for major improvements are
capitalized. The Company performs planned major maintenance activities
throughout the year. Repair and maintenance costs estimated to be incurred in
connection with planned major maintenance activities, consisting primarily of
materials and supplies, are accrued in advance and are included in cost of goods
sold. At December 31, 2004, accrued repair and maintenance costs, included in
other current liabilities, was $3.2 million (2003 - $3.3 million).
FA-11
Depreciation is computed principally by the straight-line method over the
estimated useful lives of ten to forty years for buildings and three to twenty
years for machinery and equipment.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company accounts for the impairment of its property and equipment
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144.
Deferred financing costs. Deferred financing costs are amortized over the
term of the applicable issue by the interest method.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 8.
The Company has not issued any stock options. However, certain employees of
the Company have been granted options by NL to purchase NL common stock. The
Company has elected the disclosure alternative prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended, and to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to Employees," and its various interpretations. Under APBO No. 25, no
compensation cost is generally recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. During 2002,
and following NL's cash settlement of options to purchase NL common stock held
by certain individuals, NL and the Company, commenced accounting for its stock
options using the variable accounting method because NL could not overcome the
presumption that it would not similarly cash settle its remaining stock options.
Under the variable accounting method, the intrinsic value of all unexercised
stock options (including those with an exercise price at least equal to the
market price on the date of grant) are accrued as an expense over their vesting
period, with subsequent increases (decreases) in NL's market price resulting in
additional compensation expense (income). Upon exercise of such options to
purchase NL common stock held by employees of the Company, the Company pays NL
an amount equal to the difference between the market price of NL's common stock
on the date of exercise and the exercise price of such stock option. Aggregate
compensation expense related to NL stock options held by employees of the
Company was $25,000 in 2002, $12,000 in 2003 and $167,000 in 2004, and aggregate
compensation expense was $53,000 and $6,000 in the three month periods ended
March 31, 2004 and 2005, respectively.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
FA-12
Three months ended
December 31, March 31,
----------------------------------- -------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Net income - as reported $22,430 $270,541 $ 40,978 $10,242 $14,313
Adjustments, net of applicable
income tax effects:
Stock-based employee
compensation expense
determined under APBO No.25 21 10 102 44 4
Stock-based employee
compensation expense
determined under SFAS No. 123 (21) (9) (4) (2) (1)
------- -------- -------- ------- -------
Pro forma net income $22,430 $270,542 $ 41,076 $10,284 $14,316
======= ======== ======== ======= =======
Environmental remediation costs. Environmental remediation costs are
accrued when estimated future expenditures are probable and reasonably
estimable. The estimated future expenditures are generally not discounted to
present value. Recoveries of remediation costs from other parties, if any, are
reported as receivables when their receipt is deemed probable. At December 31,
2003 and 2004, no receivables for recoveries have been recognized.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point.
Amounts charged to customers for shipping and handling are included in net
sales. Sales are stated net of price, early payment and distributor discounts
and volume rebates.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal and
administrative functions, such as accounting, treasury and finance, and includes
costs for salary and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $15.1 million in 2002, $19.8 million
in 2003 and $22.3 million in 2004.
Income taxes. As a partnership under German law during 2002 and 2003, TG
was not subject to corporate income taxes, but was subject to trade income
taxes. Deferred trade income tax assets and liabilities were recognized for the
expected future tax consequences of temporary differences between the trade
income tax and financial reporting carrying amounts of assets and liabilities.
Effective December 31, 2003, the Company was converted from a partnership to a
limited liability company. See Note 10. Subsequent to that date, the Company is
subject to the German corporation tax, with a statutory rate of 25%, in addition
to solidarity-surcharge of 5.5% of corporate income tax and trade income taxes.
The Company periodically evaluates its deferred trade income tax assets and
adjusts any related valuation allowance.
FA-13
Note 3 - Accounts and notes receivable:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Trade receivables $ 62,225 $ 71,914 $ 83,274
Insurance claims receivable 9 12 97
Recoverable VAT and other receivables 5,800 6,046 10,216
Allowance for doubtful accounts (1,469) (1,240) (1,234)
-------- -------- --------
$ 66,565 $ 76,732 $ 92,353
======== ======== ========
Note 4 - Inventories:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Raw materials $ 13,424 $ 20,379 $ 21,087
Work in process 14,169 10,173 11,982
Finished products 57,267 55,349 59,024
Supplies 15,273 15,949 15,600
-------- -------- --------
$100,133 $101,850 $107,693
======== ======== ========
Note 5 - Accounts payable and accrued liabilities:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Accounts payable $ 29,886 $ 39,732 $ 27,307
Accrued liabilities:
Employee benefits 13,180 15,957 19,696
Waste acid recovery 8,187 9,598 9,022
Other 9,999 11,665 14,625
-------- -------- --------
$ 61,252 $ 76,952 $ 70,650
======== ======== ========
Note 6 - Long-term debt:
In June 2002 the Company and KII's operating subsidiaries in Belgium and
Norway (Kronos Europe S.A./N.V.-"KEU", Kronos Titan A/S - "TAS" and Titania A/S
- "TIA"), referred to as the "Borrowers", entered into a three-year euro 80
million secured revolving credit facility ("Credit Facility"). During 2004,
Kronos Norge A/S, the parent company of TAS and TIA, and Kronos Denmark ApS, the
parent company of both Kronos Norge and KEU, were added as Borrowers under the
Credit Facility. Borrowings may be denominated in multiple currencies, including
U.S. dollars, euros and Norwegian kroner, and bear interest at the applicable
interbank market rate plus 1.75%. As of December 31, 2004 and March 31, 2005,
the Company had no amounts outstanding under the Credit Facility. However at
December 31, 2004 and March 31, 2005, KEU had borrowed a net euro 10 million
($13.6 million and $12.9 million, respectively) under the Credit Facility. At
March 31, 2005, euro 68 million ($88.6 million) was available for borrowing by
the Borrowers.
The Credit Facility is collateralized by accounts receivable and inventory
of certain of the Borrowers, plus a limited pledge of certain other assets of
FA-14
the Belgian operating subsidiary. The Credit Facility contains, among others,
various restrictive covenants, including restrictions on incurring liens, asset
sales, additional financial indebtedness, mergers, investments and acquisitions,
transactions with affiliates and dividends. The Company, KEU and Kronos Denmark
are unconditionally jointly and severally liable for any and all outstanding
borrowings under the Credit Facility. TAS, TIA and Kronos Norge A/S are jointly
and severally liable for any and all outstanding borrowings under the Credit
Facility to the extent permitted by Norwegian law. The Borrowers have a euro 5
million sub-limit for issuing letters of credit with euro 2 million ($3 million)
letters of credit issued at December 31, 2004 and March 31, 2005. The Borrowers
were in compliance with all the covenants as of December 31, 2004 and March 31,
2005.
Deferred financing costs of $1.4 million for the Credit Facility ($.4
million paid by the Company, with the remaining $1.0 million paid by KII's
Belgian and Norwegian operating subsidiaries) are being amortized over the life
of the Credit Facility and are included in other noncurrent assets as of March
31, 2005.
In January 2004, the Company borrowed euro 40 million ($50 million, when
borrowed) under the Credit Facility at an interest rate of 3.86% and used the
proceeds to fund a $60 million dividend to KII. In February 2004, the Company
repaid the euro 40 million borrowing from proceeds collected from KEU and TAS in
settlement of outstanding intercompany balances. KEU and TAS utilized funds
borrowed under the Credit Facility, euro 26 million ($32 million when borrowed)
borrowed by KEU and euro 14 million ($18 million when borrowed) borrowed by TAS,
to settle the outstanding intercompany balances. Such amounts were repaid in the
second quarter of 2004.
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009 and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
amount ($130 million when issued) of the KII senior secured notes (collectively
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. Such operating subisidiaries are Kronos Titan GmbH, Kronos Denmark
ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries, to incur debt, incur liens, or merge or consolidate with, or sell
or transfer all or substantially all of their assets to, another entity. The
Notes are redeemable, at KII's option, on or after December 30, 2005 at
redemption prices ranging from 104.437% of the principal amount, declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of the Notes with the net proceeds of a qualified public
equity offering at 108.875% of the principal amount. In the event of a change of
control of KII, as defined, KII would be required to make an offer to purchase
its Notes at 101% of the principal amount. KII would also be required to make an
offer to purchase a specified portion of its Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period.
FA-15
Note 7 - Other noncurrent liabilities:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Employee benefits $ 3,962 $ 4,111 $ 3,895
Insurance claims expense 1,112 1,362 1,601
Other 6,456 6,720 6,310
-------- -------- --------
$ 11,530 $ 12,193 $ 11,806
======== ======== ========
Note 8 - Employee benefit plans:
Company-sponsored pension plans. The Company maintains a defined benefit
pension plan and certain other benefits covering substantially all employees.
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below. The Company uses a
September 30th measurement date for their defined benefit pension plans.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
------------------
Rate 2003 2004
---- ---- ----
Discount rate 5.3% 5.0%
Increase in future compensation levels 2.8% 2.8%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Years ended December 31,
-----------------------------
2002 2003 2004
---- ---- ----
Rate
----
Discount rate 5.5% 5.3% 5.3%
Increase in future compensation levels 2.5% 2.8% 2.8%
Long-term return on plan assets 6.8% 6.5% 6.5%
Plan assets are comprised primarily of investments in corporate equity and
debt securities, short-term investments, mutual funds and group annuity
contracts.
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. The
accumulated benefit obligation of the Company's defined benefit pension plan was
$193.6 million at December 31, 2004 (2003 - $177.3 million). Variances from
FA-16
actuarially assumed rates will change the actuarial valuation of accrued pension
liabilities, pension expense and funding requirements in future periods.
The components of the net periodic defined benefit pension cost are set
forth below.
Three months ended
December 31, March 31,
------------------------------- -----------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Net periodic pension cost:
Service cost benefits $ 2,120 $ 2,621 $ 3,289 $ 901 $ 998
Interest cost on projected
benefit obligation ("PBO") 8,353 9,354 10,558 2,662 2,787
Expected return on plan assets (8,210) (8,831) (9,448) (2,384) (2,338)
Amortization of prior service cost - - 196 50 53
Amortization of net transition
obligation 210 251 69 17 -
Recognized actuarial losses 329 20 782 197 435
------- ------- ------- ------- -------
$ 2,802 $ 3,415 $ 5,446 $ 1,443 $ 1,935
======= ======= ======= ======= =======
FA-17
The funded status of the Company's defined benefit pension plan is set
forth below.
December 31,
--------------------
2003 2004
---- ----
(In thousands)
Change in PBO:
Beginning of year $ 160,871 $ 205,440
Service cost 2,621 3,289
Interest 9,354 10,558
Participant contributions 1,156 1,206
Plan amendments 3,200 -
Actuarial losses 6,398 4,968
Benefits paid (10,947) (12,442)
Change in currency exchange rates 32,787 19,289
--------- ---------
End of year $ 205,440 $ 232,308
--------- ---------
Change in fair value of plan assets:
Beginning of year $ 112,674 $ 116,275
Actual return on plan assets (15,643) 10,026
Employer contributions 8,919 10,432
Participant contributions 1,156 1,206
Benefits paid (10,947) (12,442)
Change in currency exchange rates 20,116 11,422
--------- ---------
End of year $ 116,275 $ 136,919
--------- ---------
Funded status at year end:
Plan assets less than PBO $ (89,165) $ (95,389)
Unrecognized actuarial loss 68,627 79,381
Unrecognized prior service cost 3,566 3,672
Unrecognized net transition obligation 70 -
--------- ---------
$ (16,902) $ (12,336)
========= =========
Amounts recognized in the balance sheet:
Accrued pension cost:
Current $ (7,878) $ (8,587)
Noncurrent (50,826) (45,015)
Unrecognized net pension obligations 3,636 3,672
Accumulated other comprehensive loss 38,166 37,594
--------- ---------
$ (16,902) $ (12,336)
========= =========
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. The composition of the Company's plan assets is
established to satisfy the requirements of the German insurance commissioner.
The current plan asset allocation at December 31, 2004 was 23% to equity
managers, 48% to fixed income managers and 29% to real estate. The Company
regularly reviews its actual asset allocation for each of its plans, and will
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
At December 31, 2004, the Company expects to contribute the equivalent of
approximately $3 million to its defined benefit pension plan during 2005.
FA-18
The Company expects total defined benefit pension plan expense to be
approximately $7 million in 2005. The Company expects future benefits paid from
all defined benefit pension plans to be as follows:
Amount
Years ending December 31, (In thousands)
------------------------- --------------
2005 $12,700
2006 12,838
2007 12,963
2008 13,088
2009 13,213
2010 to 2014 67,938
Note 9 - Other items:
Advertising costs are expensed as incurred and were $.3 million in each of
2002, 2003 and 2004.
Interest capitalized in connection with long-term capital projects was nil
in each of 2002, 2003 and 2004.
Note 10 - Income taxes:
The components of (i) the difference between the provision for income taxes
attributable to pretax income and the amounts that would be expected using the
German statutory corporation tax rate of 25% in 2002 and 2003 and 26.4% in 2004,
(ii) the provision for income taxes and (iii) the comprehensive tax provision
are presented below.
Three months ended
December 31, March 31,
------------------------------- ------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
(In thousands)
Pretax income $ 25,736 $ 64,871 $ 58,485 $ 13,365 $ 23,596
========= ========= ========= ========= =========
Expected tax expense $ 6,434 $ 16,218 $ 15,440 $ 3,528 $ 6,229
Trade income tax 2,561 11,365 7,773 1,972 3,044
German tax refund - (123,033) (2,508) - -
Change in deferred income
tax valuation allowance, net - - (3,146) (2,617) -
Organschaft adjustment - (94,079) - - -
No corporation tax provision due to (16,218)
partnership structure (6,434) - - -
Other, net 745 77 (52) 240 10
--------- --------- --------- --------- ---------
Income tax expense (benefit) $ 3,306 $(205,670) $ 17,507 $ 3,123 $ 9,283
========= ========= ========= ========= =========
Provision for income taxes:
Current income tax expense
(benefit) $ 431 $(165,900) $ 11,329 $ 516 $ 8,652
Deferred income tax expense
(benefit) 2,875 (39,770) 6,178 2,607 631
--------- --------- --------- --------- ---------
$ 3,306 $(205,670) $ 17,507 $ 3,123 $ 9,283
========= ========= ========= ========= =========
Comprehensive provision (benefit)
for income taxes allocable to:
Pretax income $ 3,306 $(205,670) $ 17,507 $ 3,123 $ 9,283
Other comprehensive loss - pension
liabilities (732) (5,331) (8,081) - -
--------- --------- --------- --------- ---------
$ 2,574 $(211,001) $ 9,426 $ 3,123 $ 9,283
========= ========= ========= ========= =========
FA-19
The components of the net deferred tax liability are summarized below.
December 31,
--------------------------------------------------
2003 2004
----------------------- ----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Tax effect of temporary differences
relating to:
Inventories $ - $ (1,407) $ - $ (1,816)
Property and equipment 38,400 - 38,327 -
Accrued (prepaid) pension cost 6,690 (22,716) 14,770 (27,598)
Other taxable differences - (2,880) - (7,518)
Tax loss and tax credit carryforwards 338 - - -
------- -------- ------- --------
Gross deferred tax assets (liabilities) 45,428 (27,003) 53,097 (36,932)
Reclassification, principally netting by
tax jurisdiction (25,596) 25,596 (35,020) 35,020
------- -------- ------- --------
Net total deferred tax liabilities 19,832 (1,407) 18,077 (1,912)
Net current deferred tax liabilities - (1,407) - (1,912)
------- -------- ------- --------
Net noncurrent deferred tax liabilities $19,832 $ - $18,077 $ -
======= ======== ======= ========
The Company's has no deferred income tax valuation allowance as of December
31, 2003 and 2004.
Certain of the Company's tax returns are being examined and the German tax
authorities may propose tax deficiencies, including penalties and interest.
No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent uncertainties involved in settlement initiatives,
court and tax proceedings. The Company believes that it has provided adequate
accruals for additional taxes and related interest expense which may ultimately
result from all such examinations and believes that the ultimate disposition of
such examinations should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
During 2002 and 2003, the Company's legal form was as a partnership. As a
partnership, the Company was not subject to corporation tax, although the
Company was subject to trade income tax. Effective December 31, 2003, the
Company was converted to a limited liability company and will also be subject to
the German corporation tax in years following 2003. As a result of the
conversion of the Company from a partnership, the Company recognized net
deferred income tax assets of approximately $52 million related to the expected
future tax consequences of temporary differences between the corporate income
tax and financial reporting carrying amounts of its assets and liabilities.
In the first quarter of 2003, the Company was notified by the German
Federal Fiscal Court (the "Court") that the Court had ruled in the Company's
favor concerning a claim for refund suit in which the Company sought refunds of
prior taxes paid during the periods 1990 through 1997. The Company was required
to file amended tax returns with the German tax authorities in order to receive
its refunds for such years, and all of such amended returns were filed during
2003. Such amended returns reflected an aggregate refund of taxes and related
interest to the Company of euro 103.2 million ($123.0 million) and the Company
recognized the benefit for these net funds in its 2003 results of operations.
For the year ended December 31, 2004, the Company recognized a refund of euro
FA-20
4.0 million ($5.3 million) related to additional net interest which has accrued
on the outstanding refund amount. Through December 2004, TG had received net
refunds of euro 107.2 million ($135.4 million when received). All refunds
relating from the periods 1990 to 1997 were received by December 31, 2004. In
addition to the refunds for the 1990 to 1997 periods, the court ruling also
resulted in a refund of 1999 income taxes and interest, and the Company received
euro 21.5 million ($24.6 million) in 2003.
Pursuant to the Company's conversion to a limited liability company
effective December 31, 2003, the Company is included in KII's Organschaft
effective January 1, 2004.
Note 11 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate, such transactions. Depending upon the business,
tax and other objectives then relevant, and restrictions under the KII
indenture, the Credit Facility and other agreements, it is possible that the
Company might be a party to one or more such transactions in the future.
The Company is a party to services and cost sharing agreements among
several affiliates of the Company whereby Kronos, KII, KEU and other affiliates
provide certain management, financial, insurance and administrative services to
the Company on a fee basis. The Company's expense was approximately $5.7 million
in 2002, $7.1 million in 2003 and $7.8 million in 2004 related to these services
and costs.
The Company charges affiliates for certain management, financial and
administrative services costs, which totaled approximately $3.4 million, $4.3
million, and $4.4 million in 2002, 2003 and 2004, respectively. These charges to
affiliates were reflected primarily as a reduction of selling, general and
administrative expense.
The Company is also party to master global insurance coverage policies with
NL with regard to property, business interruption, excess liability, and other
coverages. Tall Pines, Valmont Insurance Company (which merged into Tall Pines
in December 2004, with Tall Pines surviving the merger) and EWI RE, Inc. ("EWI")
provide for or broker certain insurance policies for Contran and certain of its
subsidiaries and affiliates, including KII, Kronos and the Company. Tall Pines
is wholly owned by a subsidiary of Valhi, and EWI is a wholly-owned subsidiary
of NL. Consistent with insurance industry practices, Tall Pines, Valmont and EWI
receive commissions from the insurance and reinsurance underwriters for the
FA-21
policies that they provide or broker. The costs associated with these policies
aggregated $5.6 million, $4.1 million and $4.0 million in 2002, 2003 and 2004,
respectively.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and its affiliates, including Kronos, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
The Company purchases from and sells to its affiliates a significant amount
of titanium dioxide pigments ("TiO2"). Intercompany sales to (purchases from)
affiliates of TiO2 are summarized in the following table.
Years ended December 31,
-----------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Sales to:
Kronos (US), Inc. ("KUS") $ 24,511 $ 37,550 $21,448
Societe Industrielle du Titane, S.A. ("SIT") 23,681 32,969 39,091
KEU 19,141 22,417 23,872
Kronos Limited ("KUK") 16,864 22,151 18,677
Kronos Canada, Inc. ("KC") 4,494 5,026 5,414
Other affiliates 10,564 29,200 41,052
-------- -------- --------
$ 99,255 $149,313 $149,554
======== ======== ========
Purchases from:
KEU $ 26,868 $ 33,061 $ 42,836
TAS 3,209 5,722 10,796
KC - - 271
-------- -------- --------
$ 30,077 $ 38,783 $ 53,903
======== ======== ========
KUS purchases the rutile and slag feedstock used as a raw material in the
Company's chloride process TiO2 facility. The Company purchases such feedstock
from KUS for use in its facility for an amount equal to the amount paid by KUS
to the third-party supplier plus a 2.5% administrative fee. Such feedstock
purchases were $64.3 million in 2002, $56.2 million in 2003 and $66.7 million in
2004.
The Company sells water treatment chemicals (derived from co-products of
the TiO2 production processes) to KII. Such water treatment chemical sales were
$8.4 million in 2002, $12.8 million in 2003 and $15.9 million in 2004.
The Company purchases ilmenite (sulfate feedstock) from TIA on a
year-to-year basis. Such feedstock purchases were $13.4 million in 2002, $15.5
million in 2003 and $17.4 million in 2004.
At January 1, 2002, the Company was party to an accounts receivable
factoring agreement with KII pursuant to which the Company factored its export
accounts receivable without recourse to KII for a fee of 0.85%. KII, upon
non-recourse transfer from the Company, assumed all risk pertaining to the
FA-22
factored receivables, including, but not limited to, exchange control risks,
risks pertaining to the bankruptcy of a customer and risks related to late
payments. Effective June 2002, this factoring agreement was terminated, and
certain European affiliates of the Company commenced factoring their export
accounts receivables to the Company on similar terms. Export receivables sold to
KII during 2002 aggregated $59 million, and export receivables purchased by the
Company during 2003 and 2004 aggregated $108 million and $129 million,
respectively.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
December 31, March 31,
------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Receivable from:
KUK $ 886 $ 862 $ 689
TAS 15,533 - 306
SIT - 1,632 3,519
KEU 32,342 - -
Kronos B.V. - 2,055 4,711
KII 31,974 25,032 18,504
KC 92 1,496 1,639
Other affiliates 1,339 1,278 1,211
-------- -------- ---------
$ 82,166 $ 32,355 $ 30,579
======== ======== =========
Current payable to:
KII - income taxes $ - $ 14,386 $ 21,733
KUS 5,856 5,390 6,407
TIA 6,631 8,817 13,464
Kronos B.V. 8,609 - -
KEU - 4,456 13,971
TAS - 2,139 -
Other affiliates 589 72 34
-------- -------- ---------
$ 21,685 $ 35,260 $ 55,609
======== ======== =========
Noncurrent receivable from TAS $ - $ 5,449 $ 5,178
======== ======== =========
Noncurrent payables to:
KII $ 89,710 $ - $ -
KDK - 12,941 12,299
-------- -------- ---------
$ 89,710 $ 12,941 $ 12,299
======== ======== =========
Such amounts receivable from affiliates were generally related to product
sales (including water treatment chemical sales to KII) and services rendered.
Amounts payable to affiliates, net were related primarily to raw material
purchases, accounts receivable factoring and services received.
The noncurrent euro-denominated note payable to KII was established prior
to 2002 during a recapitalization of the Company. The note payable (euro 71.8
million, or $89.7 million and nil, at December 31, 2003 and 2004, respectively)
bore interest through 2002 at EURIBOR plus 1% (4.30% at December 31, 2002). This
note was fully repaid in October 2004.
The Company borrowed euro 9.5 million from KDK in October 2004 ($12.9
million at December 31, 2004). This note bears an interest rate of 2.675% and is
due on June 30, 2005, with an option to renew.
FA-23
The Company loaned TAS euro 4 million ($5.4 million) all of which was
outstanding at December 31, 2004. This note receivable bears interest at 3.1%
and is due on March 31, 2005.
Interest expense to affiliates related to the note payable to KII was $3.7
million in 2002, and nil in 2003 and 2004. Interest income from affiliates
related to a note receivable from KEU, repaid in June 2002, $.6 million in 2002.
Included in other affiliate income and other affiliate expense was other
affiliate interest income/expense, factoring fees and service fees.
Note 12 - NL common stock options held by employees of the Company:
At December 31, 2004, employees of the Company held options to purchase
approximately 14,000 shares of NL common stock, of which 5,000 were granted in
2000 and are exercisable at various dates through 2010 at an exercise price of
$5.63 per share, and 9,000 were granted in 2001 and are exercisable at various
dates through 2011 at an exercise price of $11.49 per share. Such options
generally vest over five years, and vesting ceases at the date the employee
separates from service from the Company (including retirement).
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Notes 2 and 15. No options were granted during 2002, 2003 or 2004. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
Note 13 - Commitments and contingencies:
Operating leases. The Company leases, pursuant to operating leases, various
manufacturing facilities and equipment. Most of the leases contain purchase
and/or various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases.
The Company leases the land under its Leverkusen TiO2 production facility
pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility
itself, which is owned by the Company and which represents approximately
two-thirds of the Company's current TiO2 production capacity, is located within
Bayer's extensive manufacturing complex. Rent for the land lease associated with
the Leverkusen facility is periodically established by agreement with the lessor
for periods of at least two years at a time. The lease agreement provides for no
formula, index or other mechanism to determine changes in the rent for such land
lease; rather, any change in the rent is subject solely to periodic negotiation
between Bayer and the Company. Any change in the rent based on such negotiations
is recognized as part of lease expense starting from the time such change is
agreed upon by both parties, as any such change in the rent is deemed
"contingent rentals" under GAAP. Under a separate supplies and services
agreement expiring in 2011, Bayer provides some raw materials, auxiliary and
operating materials and utilities services necessary to operate the Leverkusen
facility. Both the lease and the supplies and services agreements restrict
ownership and use of the Leverkusen facility.
Net rent expense aggregated $4 million in 2002, $5 million in 2003 and $4
million in 2004. At December 31, 2004, minimum rental commitments under the
terms of noncancellable operating leases were as follows:
FA-24
Amount
--------------
(in thousands)
Years ending December 31,
2005 $ 2,173
2006 1,357
2007 1,259
2008 1,150
2009 1,093
2010 and thereafter 20,736
-------
$27,768
=======
Approximately $25.3 million of the $27.8 million aggregate future minimum
rental commitments at December 31, 2004 relates to the land lease associated
with the Company's Leverkusen facility lease discussed above. The minimum
commitment amounts for such lease included in the table above for each year
through the 2050 expiration of the lease are based upon the current annual
rental rate as of December 31, 2004. As discussed above, any change in the rent
is based solely on negotiations between Bayer and the Company, and any such
change in the rent is deemed "contingent rentals" under GAAP which is excluded
from the future minimum lease payments disclosed above.
Capital expenditures. At December 31, 2004 the estimated cost to complete
capital projects in process approximated $3.9 million.
Purchase commitments. KUS has long-term supply contracts that provide for
certain affiliates' chloride feedstock requirements through 2009. The Company
purchases chloride feedstock underlying these long-term supply contracts from
KUS. The agreements require KUS to purchase certain minimum quantities of
feedstock with minimum purchase commitments aggregating approximately $525
million at December 31, 2004.
Environmental, product liability and litigation matters. The Company's
operations are governed by various environmental laws and regulations. Certain
of the Company's operations are and have been engaged in the handling,
manufacture or use of substances or compounds that may be considered toxic or
hazardous within the meaning of applicable environmental laws. As with other
companies engaged in similar businesses, certain past and current operations and
products of the Company have the potential to cause environmental or other
damage. The Company has implemented and continues to implement various policies
and programs in an effort to minimize these risks. The Company's policy is to
maintain compliance with applicable environmental laws and regulations at all of
its facilities and to strive to improve its environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Concentrations of credit risk. Sales of TiO2 accounted for more than 97% of
net sales during each of 2002, 2003 and 2004. The remaining sales result from
the manufacture and sale of iron-based water treatment chemicals (derived from
co-products of the TiO2 production processes). TiO2 is generally sold to the
paint, plastics and paper, as well as fibers, rubber, ceramics, inks and
cosmetics markets. Such markets are generally considered "quality-of-life"
markets whose demand for TiO2 is influenced by the relative economic well-being
of the various geographic regions. TiO2 is sold to over 1,000 customers, with
the top ten external customers approximating 20% of net sales in each of 2002
and 2003 and 22% of net sales in 2004. Approximately 75% of the Company's TiO2
FA-25
sales by volume were to Europe in 2002, 68% in 2003 and 78% in 2004.
Approximately 8% in 2002, 12% in 2003 and 7% in 2004 of sales by volume were to
North America.
Note 14 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31,
----------------------------------------------------------
2003 2004
----------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- -------
(In millions)
Cash and cash equivalents $30.9 $30.9 $ 6.4 $ 6.4
Note payable to affiliate 89.7 89.7 12.9 12.9
The Company periodically uses currency forward contracts to manage foreign
exchange rate risk associated with anticipated transactions denominated in a
currency other than the euro. The Company has not entered into these contracts
for trading or speculative purposes in the past, nor does the Company currently
anticipate entering into such contracts for trading or speculative purposes in
the future. To manage such exchange rate risk, at December 31, 2003 the Company
held a contract maturing on January 2, 2004 to exchange an aggregate of euro 40
million for an equivalent amount of U.S. dollars at an exchange rate of $1.2496
U.S. dollars per euro. At December 31, 2003, the actual exchange rate was equal
to the contract rate. The contract was closed on January 2, 2004 at an
immaterial loss.
The Company periodically uses interest rate swaps, currency swaps and other
types of contracts to manage interest rate and foreign exchange risk with
respect to financial assets or liabilities. The Company has not entered into
these contracts for trading or speculative purposes in the past, nor does it
currently anticipate doing so in the future. The Company was not a party to any
such contracts during 2002, 2003 and 2004.
Other than as described above, the Company was not a party to any material
derivative financial instruments during 2002, 2003 or 2004. There was no impact
on the Company's financial statements from adopting SFAS No. 133.
Note 15- Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
FA-26
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment",
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, if the vesting period of the award). No compensation cost will
be recognized in the aggregate for equity instruments for which the employee
does not render the requisite service (generally, the instrument is forfeited
before it has vested). The grant-date fair value will be estimated using
option-pricing models (e.g. Black-Scholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because the Company has not granted any options to purchase its common stock and
is not expected to grant any options prior to January 1, 2006, and because the
number of non-vested awards as of December 31, 2005 with respect to options
granted by NL to employees of the Company is not expected to be material, the
effect of adopting SFAS No. 123R is not expected to be significant in so far as
it relates to existing stock options. Should the Company or one of its
affiliates, however, grant a significant number of options in the future to
employees of the Company, the effect on the Company's consolidated financial
statements could be material.
FA-27
KRONOS DENMARK APS AND SUBSIDIARIES
Index of Consolidated Financial Statements
Financial Statements Pages
Report of Independent Registered Public Accounting Firm FB-2
Consolidated Balance Sheets - December 31, 2003 and 2004;
March 31, 2005 (unaudited) FB-3
Consolidated Statements of Income - Years ended
December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) FB-5
Consolidated Statements of Comprehensive Income - Years ended
December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) FB-6
Consolidated Statements of Partners' Capital/Owners'
Equity - Years ended December 31, 2002, 2003 and 2004 and
three months ended March 31, 2005 (unaudited) FB-7
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2003 and 2004; Three months ended
March 31, 2004 (unaudited) and 2005 (unaudited) FB-8
Notes to Consolidated Financial Statements FB-10
FB-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Kronos Denmark ApS:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholder's
equity and cash flows present fairly, in all material respects, the financial
position of Kronos Denmark ApS and Subsidiaries at December 31, 2003 and 2004,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
FB-2
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 4,681 $ 3,566 $ 1,644
Restricted cash 1,313 1,529 965
Accounts and notes receivable 15,605 18,422 20,251
Receivable from affiliates 1,987 16,029 24,824
Refundable income taxes 587 1,542 3
Inventories 66,156 65,282 64,205
Prepaid expenses 834 908 681
Deferred income taxes 26 - 15
-------- -------- --------
Total current assets 91,189 107,278 112,588
-------- -------- --------
Other assets:
Note receivable from affiliate - 12,941 12,299
Other 7,387 7,013 6,583
-------- -------- --------
Total other assets 7,387 19,954 18,882
-------- -------- --------
Property and equipment:
Land 17,568 19,236 18,309
Buildings 37,025 41,196 39,195
Machinery and equipment 168,549 190,748 180,507
Mining properties 63,700 72,384 69,001
Construction in progress 237 3,443 4,403
-------- -------- --------
287,079 327,007 311,415
Less accumulated depreciation
and amortization 171,338 200,873 193,513
-------- -------- --------
Net property and equipment 115,741 126,134 117,902
-------- -------- --------
$214,317 $253,366 $249,372
======== ======== ========
FB-3
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
Current liabilities:
Current maturities of long-term debt $ 288 $ 13,792 $ 13,108
Accounts payable and accrued liabilities 31,536 38,776 36,707
Payable to affiliates 39,661 10,142 10,640
Income taxes 5,411 6,427 7,281
Deferred income taxes 2,030 2,363 2,372
--------- --------- ----------
Total current liabilities 78,926 71,500 70,108
--------- --------- ----------
Noncurrent liabilities:
Long-term debt 315 178 130
Note payable to affiliate - 5,449 5,178
Deferred income taxes 23,320 22,358 20,867
Accrued pension costs 1,191 2,493 3,002
Other 1,555 3,484 1,518
--------- --------- ----------
Total noncurrent liabilities 26,381 33,962 30,695
--------- --------- ----------
Stockholder's equity:
Common stock - 100 Danish kroner
par value; 10,000 shares authorized;
10,000 shares issued and outstanding 136 136 136
Additional paid-in capital 216,996 216,996 216,996
Accumulated deficit (93,459) (69,643) (60,965)
Accumulated other comprehensive
income (loss):
Currency translation adjustment (4,204) 9,686 1,673
Minimum pension liability (10,459) (9,271) (9,271)
--------- --------- ----------
Total stockholder's equity 109,010 147,904 148,569
--------- --------- ----------
$ 214,317 $ 253,366 $ 249,372
========= ========= ==========
Commitments and contingencies (Notes 7, 9 and 12)
See accompanying notes to consolidated financial statements.
FB-4
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three months ended
December 31, March 31,
---------------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Net sales $ 243,412 $ 292,611 $ 345,962 $ 85,502 $ 91,440
Cost of sales 206,690 234,881 284,902 67,336 71,263
--------- --------- --------- --------- ---------
Gross margin 36,722 57,730 61,060 18,166 20,177
Selling, general and administrative expense 17,406 19,596 23,874 6,006 6,383
Other operating income (expense):
Currency transaction gains (losses), net 399 355 980 497 (123)
Disposition of property and equipment (239) 37 (596) 18 1
Other, net 176 350 286 16 37
Income from operations 19,652 38,876 37,856 12,691 13,709
--------- --------- --------- --------- ---------
Other income (expense):
Trade interest income 231 163 73 24 16
Interest and other expense to affiliates (2,938) (2,608) (2,943) (690) (646)
Interest and other income from affiliates 325 198 202 - 80
Interest expense (2,548) (2,309) (1,529) (500) (397)
--------- --------- --------- --------- ---------
Income before income taxes 14,722 34,320 33,659 11,525 12,762
Provision for income taxes 3,378 7,428 9,843 3,513 4,084
--------- --------- --------- --------- ---------
Net income $ 11,344 $ 26,892 $ 23,816 $ 8,012 $ 8,678
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
FB-5
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended
December 31, March 31,
---------------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Net income $ 11,344 $ 26,892 $ 23,816 $ 8,012 $ 8,678
--------- --------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Currency translation adjustment 17,081 10,998 13,890 (3,934) (8,013)
Minimum pension liability - (10,459) 1,188 - -
--------- --------- --------- --------- ---------
Total other comprehensive income 17,081 539 15,078 (3,934) (8,013)
--------- --------- --------- --------- ---------
Comprehensive income $ 28,425 $ 27,431 $ 38,894 $ 4,078 $ 665
--------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
FB-6
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 2002, 2003 and 2004 and
Three months ended March 31, 2005 (unaudited)
(In thousands)
Accumulated other
comprehensive income (loss)
--------------------------
Additional Currency Minimum
Common paid-in Accumulated translation pension
stock capital deficit adjustment liability Total
------ ----------- ----------- ----------- --------- ------
Balance at December 31, 2001 $ 136 $ 216,996 $(118,335) $ (32,283) $ - $ 66,514
Net income - - 11,344 - - 11,344
Other comprehensive income,
net of tax - - - 17,081 - 17,081
Common dividends declared - - (13,360) - - (13,360)
------ --------- --------- --------- --------- --------
Balance at December 31, 2002 136 216,996 (120,351) (15,202) - 81,579
Net income - - 26,892 - - 26,892
Other comprehensive income
(loss), net of tax - - - 10,998 (10,459) 539
------ --------- --------- --------- --------- --------
Balance at December 31, 2003 136 216,996 (93,459) (4,204) (10,459) 109,010
Net income - - 23,816 - - 23,816
Other comprehensive income,
net of tax - - - 13,890 1,188 15,078
------ --------- --------- --------- --------- --------
Balance at December 31, 2004 136 216,996 (69,643) 9,686 (9,271) 147,904
Unaudited:
Net income - - 8,678 - - 8,678
Other comprehensive loss,
net of tax - - - (8,013) - (8,013)
------ --------- --------- --------- --------- --------
Balance at March 31, 2005 $ 136 $ 216,996 $ (60,965) $ 1,673 $ (9,271) $148,569
====== ========= ========= ========= ========= ========
See accompanying notes to consolidated financial statements.
FB-7
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
December 31, March 31,
---------------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 11,344 $ 26,892 $ 23,816 $ 8,012 $ 8,678
Depreciation and amortization 9,408 11,446 12,041 3,023 3,394
Noncash interest expense 150 332 358 89 97
Deferred income taxes (2,011) (5,405) (2,983) (241) (235)
Net loss (gain) from disposition of
property and equipment 239 (37) 596 (17) (1)
Pension, net 1,132 2,278 4,372 2,611 (52)
Change in assets and liabilities:
Accounts and notes receivable (1,307) 437 (967) (4,845) (2,844)
Inventories 1,377 (2,250) 6,500 5,175 (2,188)
Prepaid expenses 909 143 17 25 186
Accounts payable and accrued liabilities 5,098 4,107 3,130 (185) (193)
Income taxes (1,542) (2,902) (453) 1,802 2,654
Accounts with affiliates 19,152 10,403 (37,220) (47,925) (8,756)
Other noncurrent assets 263 (4,181) 2,257 (710) 5
Other noncurrent liabilities (73) 547 (1,420) (115) (1,888)
-------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities 44,139 41,810 10,044 (33,301) (1,143)
-------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (10,329) (10,274) (11,725) (1,175) (1,224)
Loans to affiliates - - (11,597) - (23)
Change in restricted cash equivalents
and restricted marketable debt
securities, net (2,891) (554) (70) 556 529
Proceeds from disposition of property
and equipment 823 350 100 29 14
-------- --------- --------- --------- ---------
Net cash used by investing activities (12,397) (10,478) (23,292) (590) (704)
-------- --------- --------- --------- ---------
FB-8
KRONOS DENMARK APS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Three months ended
December 31, March 31,
---------------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(unaudited)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 55,727 $ 16,106 $ 62,140 $ 49,984 $ -
Principal payments (58,117) (46,006) (50,089) (17,484) (41)
Deferred financing fees (953) - - - -
Loans from affiliates - repayments (18,097) - - - (14)
Dividends paid (13,360) - - - -
--------- --------- --------- --------- ---------
Net cash provided (used) by
financing activities (34,800) (29,900) 12,051 32,500 (55)
--------- --------- --------- --------- ---------
Cash and cash equivalents:
Net change during the year from:
Operating, investing and
financing activities (3,058) 1,432 (1,197) (1,391) (1,902)
Currency translation 541 336 82 (13) (20)
Balance at beginning of period 5,430 2,913 4,681 4,681 3,566
--------- --------- --------- --------- ---------
Balance at end of period $ 2,913 $ 4,681 $ 3,566 $ 3,277 $ 1,644
========= ========= ========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest $ 5,461 $ 4,638 $ 4,198 $ 1,008 $ 157
Income taxes 6,931 11,525 13,331 1,970 1,640
See accompanying notes to consolidated financial statements.
FB-9
KRONOS DENMARK APS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Kronos Denmark ApS ("KDK") was incorporated in Denmark in October 1999 and
is a wholly-owned subsidiary of Kronos International, Inc. ("KII"). KII is a
wholly-owned subsidiary of Kronos Worldwide, Inc. (NYSE:KRO). At December 31,
2004, (i) Valhi, Inc. (NYSE: VHI) and a wholly owned subsidiary of Valhi held
approximately 57% of Kronos' outstanding common stock and NL Industries, Inc.
(NYSE: NL) held an additional 37% of Kronos' outstanding common stock, (ii)
Valhi and such wholly owned subsidiary of Valhi owned approximately 83% of NL's
outstanding common stock and (iii) Contran Corporation and its subsidiaries held
approximately 91% of Valhi's outstanding common stock. At March 31, 2005, (i)
Valhi and a wholly-owned subsidiary owned approximately 57% of Kronos' common
stock and NL held an additional 36% of the outstanding common stock of Kronos,
(ii) Valhi owned 83% of NL's outstanding common stock and (iii) Contran and its
subsidiaries held approximately 91% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control each of such companies.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") with the U.S. dollar as the reporting currency. KDK and its
subsidiaries also prepare financial statements on other bases, as required in
countries in which such entities are resident.
KDK's current operations are conducted primarily through its Belgian and
Norwegian subsidiaries with a titanium dioxide pigments ("TiO2") plant in
Belgium and a TiO2 plant and ilmenite ore mining operation in Norway. KDK also
operates TiO2 sales and distribution facilities in Denmark and the Netherlands.
KDK is not a registrant with the U.S. Securities and Exchange Commission
("SEC") and is not subject to the SEC's periodic reporting requirements, except
as may be required by Rule 3-16 of Regulation S-X.
Note 2 - Summary of significant accounting policies:
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of KDK and its wholly-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated. The Company has no involvement with any variable interest entity
covered by the scope of FASB Interpretation ("FIN") No. 46R, "Consolidation of
FB-10
Variable Interest Entities, an interpretation of ARB No. 51.," as amended as of
March 31, 2004.
Unaudited interim information. Information included in the consolidated
financial statements and related notes to the consolidated financial statements
as of March 31, 2005 and for the three month interim periods ended March 31,
2004 and 2005 is unaudited. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary to state fairly the
consolidated financial position, results of operations and cash flows for such
interim periods have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for a full year
or of future operations. Certain information normally included in financial
statements prepared in accordance with GAAP has been condensed or omitted for
such interim periods.
Translation of foreign currencies. The functional currencies of the Company
include the Danish kroner, the euro and the Norwegian kroner. Assets and
liabilities of subsidiaries whose functional currency is other than the U.S.
dollar are translated at year-end rates of exchange and revenues and expenses
are translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholder's equity as part of
accumulated other comprehensive income, net of related deferred income taxes.
Currency transaction gains and losses are recognized in income currently.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, as amended, the Company has exempted from the
scope of SFAS No. 133 all host contracts containing embedded derivatives that
were issued or acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank deposits with
original maturities of three months or less.
Restricted marketable debt securities. Restricted marketable debt
securities are primarily invested in corporate debt securities and include
amounts restricted in accordance with applicable Norwegian law regarding certain
requirements of the Company's Norwegian defined benefit pension plans ($2.6
million and $2.9 million at December 31, 2003 and 2004, respectively). The
restricted marketable debt securities are generally classified as either a
current or noncurrent asset depending upon the maturity date of each such debt
security and are carried at market, which approximates cost.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Property and equipment and depreciation. Property and equipment are stated
at cost. The Company has a governmental concession with an unlimited term to
operate an ilmenite mine in Norway. Mining properties consist of buildings and
equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) is computed principally by the straight-line
method over the estimated useful lives of ten to 40 years for buildings and
FB-11
three to 20 years for equipment. Accelerated depreciation methods are used for
income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company performs
planned major maintenance activities during the year. Repair and maintenance
costs estimated to be incurred in connection with planned major maintenance
activities are accrued in advance and are included in cost of sales. Accrued
repair and maintenance costs, included in other current liabilities and
consisting primarily of materials and supplies, was $1.1 million and $600,000 at
December 31, 2003 and 2004, respectively.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
were not significant in 2002, 2003 or 2004.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company assesses impairment of other long-lived assets (such as
property and equipment and mining properties) in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which among
other things provided certain implementation guidance in relation to prior GAAP.
See Note 14.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs, included in
interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 8.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities,
including investments in the Company's subsidiaries and affiliates who are not
members of the Contran Tax Group and undistributed earnings of foreign
subsidiaries which are not deemed to be permanently reinvested. The Company
periodically evaluates its deferred tax assets in the various taxing
jurisdictions in which it operates and adjusts any related valuation allowance
based on the estimate of the amount of such deferred tax assets that the Company
believes does not meet the "more-likely-than-not" recognition criteria.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped are generally FOB shipping point;
although in some instances shipping terms are FOB destination point (for which
FB-12
sales are not recognized until the product is received by the customer). Amounts
charged to customers for shipping and handling are included in net sales. Sales
are stated net of price, early payment and distributor discounts and volume
rebates.
Inventories and cost of sales. Inventories are stated at the lower of cost
(principally average cost) or market, net of allowance for slow-moving
inventories. Amounts are removed from inventories at average cost. Cost of sales
includes costs for materials, packaging and finishing, utilities, salary and
benefits, maintenance and depreciation.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal and
administrative functions, such as accounting, treasury and finance, and includes
costs for salaries and benefits, travel and entertainment, promotional materials
and professional fees. Shipping and handling costs are included in selling,
general and administrative expense and were $9.2 million in 2002, $11.2 million
in 2003 and $13.1 million in 2004. Advertising costs are expensed as incurred
and were approximately $100,000 in each of 2002, 2003 and 2004. Research,
development and certain sales technical support costs are expensed as incurred
and approximated $300,000 in each of 2002 and 2003 and $200,000 in 2004.
Stock options. The Company has not issued any stock options. However,
certain employees of the Company have been granted options by NL to purchase NL
common stock. The Company has elected the disclosure alternative prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, and to
account for its stock-based employee compensation related to stock options in
accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting
for Stock Issued to Employees," and its various interpretations. Under APBO No.
25, no compensation cost is generally recognized for fixed stock options in
which the exercise price is not less than the market price on the grant date.
During the fourth quarter of 2002, and following NL's cash settlement of options
to purchase NL common stock held by certain individuals, NL and the Company,
commenced accounting for its stock options using the variable accounting method
because NL could not overcome the presumption that it would not similarly cash
settle its remaining stock options. Under the variable accounting method, the
intrinsic value of all unexercised stock options (including those with an
exercise price at least equal to the market price on the date of grant) are
accrued as an expense over their vesting period, with subsequent increases
(decreases) in NL's market price resulting in additional compensation expense
(income). Upon exercise of such options to purchase NL common stock held by
employees of the Company, the Company pays NL an amount equal to the difference
between the market price of NL's common stock on the date of exercise and the
exercise price of such stock option. Compensation cost recognized by the Company
in accordance with APBO No. 25 and the amount charged to the Company by NL for
stock option exercises was $126,000 in 2002, $117,000 in 2003 and $319,000 in
2004, and aggregate compensation expense was $41,000 and $23,000 in the three
month periods ended March 31, 2004 and 2005, respectively.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
FB-13
Three months ended
December 31, March 31,
---------------------------------- --------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(In thousands) (Unaudited)
Net income - as reported $11,344 $26,892 $23,816 $ 8,012 $ 8,678
Adjustments, net of applicable income tax
effects:
Stock-based employee compensation expense
determined under APBO No. 25 75 77 223 27 16
Stock-based employee compensation expense
determined under SFAS No. 123 (79) (38) (8) (2) (1)
------- ------- ------- ------- -------
Pro forma net income $11,340 $26,931 $24,031 $ 8,037 $ 8,693
======= ======= ======= ======= =======
Note 3 - Accounts and notes receivable:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Trade receivables $13,117 $15,487 $ 17,224
Recoverable VAT and other receivables 2,510 2,960 3,051
Allowance for doubtful accounts (22) (25) (24)
------- ------- --------
$15,605 $18,422 $ 20,251
======= ======= ========
Note 4 - Inventories:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Raw materials $ 16,793 $ 13,804 $ 13,568
Work in process 1,454 2,871 1,996
Finished products 32,943 31,725 31,728
Supplies 14,966 16,882 16,913
-------- -------- --------
$ 66,156 $ 65,282 $ 64,205
======== ======== ========
Note 5 - Other noncurrent assets:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Unrecognized net pension obligations $ 4,176 $ 3,852 $ 3,671
Restricted marketable debt securities 2,586 2,877 2,741
Deferred financing costs, net 542 198 94
Other 83 86 77
-------- -------- --------
$ 7,387 $ 7,013 $ 6,583
======== ======== ========
FB-14
Note 6 - Accounts payable and accrued liabilities:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Accounts payable $ 16,609 $ 21,695 $ 17,179
-------- -------- --------
Accrued liabilities:
Employee benefits 8,786 10,462 9,377
Other 6,141 6,619 10,151
-------- -------- --------
14,927 17,081 19,528
-------- -------- --------
$ 31,536 $ 38,776 $ 36,707
======== ======== ========
Note 7 - Notes payable and long-term debt:
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Long-term debt:
Bank credit facility $ - $ 13,622 $ 12,946
Other 603 348 292
-------- -------- --------
603 13,970 13,238
Less current maturities 288 13,792 13,108
-------- -------- --------
$ 315 $ 178 $ 130
======== ======== ========
In June 2002 the Company's operating subsidiaries in Belgium ("KEU") Norway
("TAS" and "TIA") and KII's operating subsidiary in Germany ("TG"), referred to
as the "Borrowers" entered into a three-year euro 80 million secured revolving
bank credit facility ("Credit Facility"). Borrowings may be denominated in
euros, Norwegian kroners or U.S. dollars, and bear interest at the applicable
interbank market rate plus 1.75%. The facility also provides for the issuance of
letters of credit up to euro 5 million (euro 2 million, or $3 million, issued at
December 31, 2004). The Credit Facility is collateralized by the accounts
receivable and inventories of the borrowers, plus a limited pledge of all of the
other assets of KEU. The Credit Facility contains certain restrictive covenants
which, among other things, restricts the ability of the Borrowers to incur debt,
incur liens, pay dividends or merge or consolidate with, or sell or transfer all
or substantially all of their assets to, another entity. In addition, the Credit
Facility contains customary cross-default provisions with respect to other debt
and obligations of the Borrowers, KII and its other subsidiaries. At December
31, 2004 and March 31, 2005, euro 10 million ($13.6 million and $12.9 million,
respectively) were outstanding under the Credit Facility. At December 31, 2004
and March 31, 2005, euro 68 million ($92.6 million and $88.6 million,
respectively,) was available for borrowing by the Borrowers.
Deferred financing costs of $1.4 million for the Credit Facility ($1.0
million paid by the Company, with the remaining $.4 million paid by the German
operating subsidiary) are being amortized over the life of the Credit Facility
and are included in other noncurrent assets as of March 31, 2005.
In June 2002, KII issued at par value euro 285 million principal amount
($280 million when issued) of its 8.875% Senior Secured Notes due 2009, and in
November 2004 KII issued at 107% of par an additional euro 90 million principal
FB-15
amount ($130 million when issued) of the KII Senior Secured Notes (collectively
the "Notes"). The Notes are collateralized by a pledge of 65% of the common
stock or other ownership interests of certain of KII's first-tier operating
subsidiaries. Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark
ApS, Kronos Limited and Societe Industrielle Du Titane, S.A. The Notes are
issued pursuant to an indenture which contains a number of covenants and
restrictions which, among other things, restricts the ability of KII and its
subsidiaries to incur debt, incur liens, pay dividends or merge or consolidate
with, or sell or transfer all or substantially all of their assets to, another
entity. The Notes are redeemable, at KII's option, on or after December 30, 2005
at redemption prices ranging from 104.437% of the principal amount, declining to
100% on or after December 30, 2008. In addition, on or before June 30, 2005, KII
may redeem up to 35% of the Notes with the net proceeds of a qualified public
equity offering at 108.875% of the principal amount. In the event of a change of
control of KII, as defined, KII would be required to make an offer to purchase
its Notes at 101% of the principal amount. KII would also be required to make an
offer to purchase a specified portion of its Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period.
Under the cross-default provisions of the Notes, the Notes may be
accelerated prior to their stated maturity if KII or any of KII's subsidiaries
default under any other indebtedness in excess of $20 million due to a failure
to pay such other indebtedness at its due date (including any due date that
arises prior to the stated maturity as a result of a default under such other
indebtedness). Under the cross-default provisions of the Credit Facility, any
outstanding borrowings under the Credit Facility may be accelerated prior to
their stated maturity if the Borrowers or KII default under any other
indebtedness in excess of euro 5 million due to a failure to pay such other
indebtedness at its due date (including any due date that arises prior to the
stated maturity as a result of a default under such other indebtedness). The
Credit Facility contains provisions that allow the lender to accelerate the
maturity of the Credit Facility in the event of a change of control, as defined,
of the applicable borrower. In the event any of these cross-default or
change-of-control provisions become applicable, and such indebtedness is
accelerated, KII would be required to repay such indebtedness prior to their
stated maturity.
The aggregate maturities of long-term debt at December 31, 2004 are shown
in the table below.
Amount
(In thousands)
Years ending December 31,
-------------------------
2005 $13,792
2006 159
2007 19
-------
$13,970
=======
In April 2005, the Company repaid euro 5.0 million ($6.5 million) on its
Bank credit facility.
Note 8 - Employee benefit plans:
The Company maintains various defined benefit pension plans. Personnel are
covered by plans in their respective countries. Variances from actuarially
FB-16
assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods. In 2002
the Company amended its defined benefit pension plans for KEU, TAS and TIA to
exclude the admission of new employees to the plans. New employees at these
locations are eligible to participate in Company-sponsored defined contribution
plans. The Company's expense related to the Company-sponsored defined
contribution plans was not material in 2003 or 2004. At December 31, 2004, the
Company expects to contribute the equivalent of approximately $1.4 million to
its defined benefit pension plans during 2005.
Certain actuarial assumptions used in measuring the defined benefit pension
assets, liabilities and expenses are presented below. The Company uses a
September 30th measurement date for their defined benefit pension plans.
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
--------------------
2003 2004
---- ----
Discount rate 5.5% 5.0%
Increase in future compensation levels 3.0% 3.0%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations as
of the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets as of the beginning of
each year.
Years ended December 31,
------------------------------
2002 2003 2004
---- ---- ----
Discount rate 6.0% 5.9% 5.5%
Increase in future compensation levels 3.0% 3.0% 3.0%
Long-term return on plan assets 6.9% 7.0% 6.0%
Plan assets are comprised primarily of investments in corporate equity and
debt securities, short-term investments, mutual funds and group annuity
contracts.
The components of the net periodic defined benefit pension cost are set
forth below.
FB-17
Three months ended
December 31, March 31,
---------------------------------- ------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(In thousands) (Unaudited)
Net periodic pension cost:
Service cost benefits $ 1,264 $ 1,430 $ 2,096 $ 384 $ 615
Interest cost on projected benefit 3,436
obligation ("PBO") 2,508 2,907 843 865
Expected return on plan assets (2,660) (3,335) (2,815) (710) (835)
Amortization of prior service cost 223 255 267 66 73
Amortization of net transition obligation 140 296 321 80 87
Recognized actuarial losses 668 732 1,428 350 329
------- -------- -------- -------- -------
$ 2,143 $ 2,285 $ 4,733 $ 1,013 $ 1,134
======= ======== ======== ======== ========
The funded status of the Company's defined benefit pension plans is set
forth below.
December 31,
-------------------
2003 2004
---- ----
(In thousands)
Change in PBO:
Beginning of year $ 50,061 $ 64,161
Service cost 1,430 2,096
Interest 2,907 3,436
Participant contributions 135 152
Actuarial gains (losses) 10,745 (1,891)
Benefits paid (4,736) (2,674)
Change in currency exchange rates 3,619 7,081
-------- --------
End of year $ 64,161 $ 72,361
-------- --------
Change in fair value of plan assets:
Beginning of year $ 47,324 $ 49,540
Actual return on plan assets 2,943 3,881
Employer contributions 1,223 1,170
Participant contributions 135 152
Benefits paid (4,736) (2,674)
Change in currency exchange rates 2,651 5,685
-------- --------
End of year $ 49,540 $ 57,754
-------- --------
Funded status at year end:
Plan assets less than PBO $(14,621) $(14,607)
Unrecognized actuarial loss 27,815 26,344
Unrecognized prior service cost 3,112 3,157
Unrecognized net transition obligation 1,223 999
-------- --------
$ 17,529 $ 15,893
======== ========
Amounts recognized in the balance sheet:
Accrued pension cost, noncurrent $ (1,174) $ (2,469)
Unrecognized net pension obligations 4,176 3,852
Accumulated other comprehensive loss 14,527 14,510
-------- --------
$ 17,529 $ 15,893
======== ========
SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit obligation exceeds the unfunded accrued pension liability. Variances
FB-18
from actuarially assumed rates will change the actuarial valuation of accrued
pension liabilities, pension expense and funding requirements in future periods.
The accumulated benefit obligation of the Company's defined benefit pension
plans was $60.8 million at December 31, 2004 (2003 - $51.1 million).
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. The Company currently has a plan asset target allocation
of 14% to equity managers, 62% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate of return
for such investments is approximately 8%, 4.5% to 6.5% and 2.5%, respectively.
The current plan asset allocation at December 31, 2004 was 16% to equity
managers, 64% to fixed income managers and the remainder primarily cash and
liquid investments. The Company regularly reviews its actual asset allocation
for each of its plans, and will periodically rebalance the investments in each
plan to more accurately reflect the targeted allocation when considered
appropriate.
The Company expects future benefits paid from its defined benefit plans to
be as follows:
Amount
Years ending December 31, (In thousands)
------------------------- --------------
2005 $2,804
2006 4,046
2007 2,923
2008 4,545
2009 3,185
2010 to 2014 21,472
Note 9 - Income taxes:
The components of (i) income from continuing operations before income taxes
("pretax income"), (ii) the difference between the provision for income taxes
attributable to pretax income and the amounts that would be expected using the
Danish statutory income tax rate of 30% in 2002, 2003 and 2004, (iii) the
provision for income taxes and (iv) the comprehensive tax provision are
presented below.
FB-19
Three months ended
December 31, March 31,
---------------------------------- ------------------
2002 2003 2004 2004 2005
---- ---- ---- ---- ----
(In thousands) (Unaudited)
Pretax income (loss):
Denmark $ 207 $ 170 $ (101) $ (185) $ 280
Non-Denmark 14,515 34,150 33,760 11,710 12,482
------- -------- -------- -------- --------
$14,722 $ 34,320 $ 33,659 $ 11,525 $ 12,762
======= ======== ======== ======== ========
Expected tax expense $ 4,417 $ 10,296 $ 10,099 $ 3,458 $ 3,829
Non-Denmark tax rates 650 428 527 69 173
Valuation allowance 658 - - - -
Tax contingency reserve adjustment - (5,100) (125) - -
Refund of prior year taxes - - (595) (183) -
Tax on partnership income - 1,245 (358) 29 -
Rate change adjustment of deferred taxes (2,332) - - - -
Other, net (15) 559 295 140 82
------- -------- -------- -------- --------
Income tax expense $ 3,378 $ 7,428 $ 9,843 $ 3,513 $ 4,084
======= ======== ======== ======== ========
Provision for income taxes:
Current income tax expense:
Denmark $ 48 $ 63 $ 2 $ - $ 86
Non-Denmark 5,341 12,770 12,824 3,754 4,233
------- -------- -------- -------- --------
5,389 12,833 12,826 3,754 4,319
------- -------- -------- -------- --------
Deferred income tax expense (benefit):
Denmark (1) (5,104) (139) - (1)
Non-Denmark (2,010) (301) (2,844) (241) (234)
------- -------- -------- -------- --------
(2,011) (5,405) (2,983) (241) (235)
------- -------- -------- -------- --------
$ 3,378 $ 7,428 $ 9,843 $ 3,513 $ 4,084
======= ======== ======== ======== ========
Comprehensive provision for income taxes
allocable to:
Pretax income $ 3,378 $ 7,428 $ 9,843 $ 3,513 $ 4,084
Other comprehensive loss - pension liabilities - (4,068) 5 - -
------- -------- -------- -------- --------
$ 3,378 $ 3,360 $ 9,848 $ 3,513 $ 4,084
======= ======== ======== ======== ========
FB-20
The components of the net deferred tax liability are summarized below.
December 31,
--------------------------------------------------
2003 2004
----------------------- ----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Tax effect of temporary differences
relating to:
Inventories $ 26 $ (2,035) $ 61 $ (2,546)
Property and equipment 143 (18,856) 181 (20,214)
Accrued (prepaid) pension cost 4,068 (4,970) 4,063 (4,624)
Accrued liabilities and other
deductible differences 834 - 199 -
Other taxable differences - (3,851) - (3,746)
Incremental tax and rate
differences on equity in earnings
of non-tax group companies - - 1,905 -
Valuation allowance (683) - - -
------ -------- ------ --------
Gross deferred tax assets (liabilities) 4,388 (29,712) 6,409 (31,130)
Reclassification, principally netting by tax 4,362
jurisdiction (4,362) (6,409) 6,409
------ -------- ------ --------
Net total deferred tax assets
(liabilities) 26 (25,350) - (24,721)
Net current deferred tax assets
(liabilities) 26 (2,030) - (2,363)
------ -------- ------ --------
Net noncurrent deferred tax liabilities $ - $(23,320) $ - $(22,358)
====== ======== ====== ========
Changes in the Company's deferred income tax valuation allowance are
summarized below:
December 31,
------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Balance at beginning of year $ - $ 658 $ 683
Increase in certain deductible temporary
differences which the Company believes
do not meet the "more-likely-than-not"
recognition criteria 658 - -
Foreign currency translation - 25
Offset to the change in gross deferred
income tax assets due principally
to redeterminations of certain tax
attributes and implementation of
certain planning strategies - - (683)
----- ----- -----
Balance at end of year $ 658 $ 683 $ -
===== ===== =====
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.3 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgian temporary differences.
FB-21
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o The Company has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including interest,
of approximately euro 6 million ($8 million at December 31, 2004). The
Company has filed a protest to this assessment and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of the Company's Belgian
TiO2 operations in connection with this assessment. In April 2003, the
Company received a notification from the Belgian tax authorities of their
intent to assess a tax deficiency related to 1999 that, including interest,
is expected to be approximately euro 9 million ($13 million). The Company
believes the proposed assessment is substantially without merit, and the
Company has filed a written response.
o The Norwegian tax authorities have notified the Company of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million at
December 31, 2004) relating to the years 1998 to 2000. The Company has
objected to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives, court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 10 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, tax
sharing agreements, joint ventures, partnerships, loans, options, advances of
funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (b) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly held minority equity interest in another related party.
While no transactions of the type described above are planned or proposed with
respect to the Company other than as set forth in these financial statements,
the Company from time to time considers, reviews and evaluates such transactions
and understands that Contran, Valhi, NL, Kronos, KII and related entities
consider, review and evaluate such transactions. Depending upon the business,
tax and other objectives then relevant, it is possible that the Company might be
a party to one or more such transactions in the future.
FB-22
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
The Company is a party to services and cost sharing agreements among
several affiliates of the Company whereby Kronos, KII and other affiliates
provide certain management, financial, insurance and administrative services to
the Company on a fee basis. The Company's expense was approximately $1.9 million
in each of 2002 and 2003 and $2.1 million in 2004 related to these services and
costs.
Tall Pines Insurance Company, Valmont Insurance Company (which merged into
Tall Pines in December 2004, with Tall Pines surviving the merger) and EWI RE,
Inc. provide for or broker certain insurance policies for Contran and certain of
its subsidiaries and affiliates, including the Company. Tall Pines is
wholly-owned by a subsidiary of Valhi, and EWI is a wholly-owned subsidiary of
NL. Consistent with insurance industry practices, Tall Pines, Valmont and EWI
receive commissions from the insurance and reinsurance underwriters for the
policies that they provide or broker. The aggregate premiums paid to Tall Pines,
Valmont and EWI by the Company and its joint venture were $1.3 million in 2002,
$900,000 in 2003 and $1.1 million in 2004. These amounts principally included
payments for insurance and reinsurance premiums paid to third parties, but also
included commissions paid to Tall Pines, Valmont and EWI. The Company expects
that these relationships with Tall Pines and EWI will continue in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and its affiliates, including NL, have entered into
a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for uninsured loss.
Intercompany sales to (purchases from) affiliates of TiO2 are summarized in
the following table.
FB-23
Years ended December 31,
------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Sales to:
TG $ 30,077 $ 38,783 $ 53,631
Kronos Limited ("KUK") 17,148 18,856 25,285
Kronos (US), Inc. ("KUS") 13,189 18,792 19,180
Societe Industrielle du Titane, S.A. ("SIT") 8,924 8,138 8,868
Kronos Canada, Inc. ("KC") 3,231 4,308 2,596
-------- -------- --------
$ 72,569 $ 88,877 $109,560
======== ======== ========
Purchases from:
TG $ 29,706 $ 38,785 $ 48,808
KUS 2,553 101 3,489
KC 170 223 22
-------- -------- --------
$ 32,429 $ 39,109 $ 52,319
======== ======== ========
Sales of ilmenite to TG were $13.4 million in 2002, $15.5 million in 2003
and $17.4 million in 2004.
KUS purchases the rutile and slag feedstock used as a raw material in all
of the Company's chloride process TiO2 facilities. The Company purchases such
feedstock from KUS for use in its facilities for an amount equal to the amount
paid by KUS to the third-party supplier plus a 2.5% administrative fee. Such
feedstock purchases were $32.9 million in 2002, $39.5 million in 2003 and $40.5
million in 2004.
Interest expense to affiliates related to a note payable to TG was $300,000
in 2002. Such note was repaid in full in 2002 and the underlying agreement was
cancelled. Included in other affiliate income and other affiliate expense was
other affiliate interest income/expense, factoring fees and service fees.
Royalties paid to KII for use of certain of KII's intellectual property
totaled $8.6 million in 2002, $10.4 million in 2003 and $12.5 million in 2004,
and was included as a component of cost of sales.
During 2002, 2003 and 2004, the Company was party to an accounts receivable
factoring agreement (the "Factoring Agreement") with one or more of its
affiliates whereby the Company factored its export accounts receivable without
recourse for a fee of 0.85% for the Company's export receivables related to
Kronos Europe S.A./N.V. ("KEU") and 1.2% for export receivables related to its
Norwegian operating subsidiaries, Kronos Titan A/S ("TAS") and Titania A/S
("TIA"). Upon non-recourse transfer from the Company, the affiliate assumed all
risk pertaining to the factored receivables, including, but not limited to,
exchange control risks, risks pertaining to the bankruptcy of a customer and
risks related to late payments. Export receivables sold by the Company pursuant
to the Factoring Agreement during 2002, 2003 and 2004 aggregated $92.0 million,
$101.4 million, and $119.9 million, respectively.
Net amounts currently receivable from (payable to) affiliates are
summarized in the following table.
FB-24
December 31, March 31,
--------------------- ---------
2003 2004 2005
---- ---- ----
(unaudited)
(In thousands)
Receivable from:
SIT $ 501 $ 814 $ 961
KUK 1,085 1,766 2,224
TG - 13,342 21,625
KC 401 - -
Other - 107 14
-------- -------- --------
$ 1,987 $ 16,029 $ 24,824
======== ======== ========
Noncurrent receivable from TG $ - $ 12,941 $ 12,299
======== ======== ========
Payable to:
KII $ 4,203 $ 4,266 $ 3,058
KUS 2,770 5,486 7,512
TG 32,635 - -
KC - 390 39
Other affiliates 53 - 31
-------- -------- --------
$ 39,661 $ 10,142 $ 10,640
======== ======== ========
Noncurrent payable to TG $ - $ 5,449 $ 5,178
======== ======== ========
Net amounts between the Company, KUS, TG, SIT, KUK and KC were generally
related to product purchases and sales. Net amounts with TG also include
accounts receivable factoring fees.
Note 11 - NL common stock options held by employees of the Company:
At December 31, 2004, employees of the Company held options to purchase
approximately 26,000 shares of NL common stock, of which 14,000 are exercisable
at various dates through 2010 at an exercise price ranging from $2.66 to $5.63
per share and 12,000 are exercisable at various dates through 2011 at an
exercise price of $11.49 per share. Such options generally vest over five years,
and vesting ceases at the date the employee separates from service from the
Company (including retirement).
The pro forma information required by SFAS No. 123 is based on an
estimation of the fair value of options issued subsequent to January 1, 1995.
See Note 2. No options were granted during 2002, 2003, or 2004. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period.
Note 12 - Commitments and contingencies:
Operating leases. The Company leases, pursuant to operating leases, various
manufacturing and office space and transportation equipment. Most of the leases
contain purchase and/or various term renewal options at fair market and fair
rental values, respectively. In most cases management expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
FB-25
Net rent expense aggregated $2 million in 2002, $3 million in each of 2003
and 2004. At December 31, 2004, minimum rental commitments under the terms of
noncancellable operating leases were as follows:
Equipment
--------------
(in thousands)
Years ending December 31,
-------------------------
2005 $ 678
2006 579
2007 486
2008 489
2009 197
2010 and thereafter 159
------
$2,588
======
Long-term contracts. KUS has long-term supply contracts that provide for
certain of its affiliates', including KDK's, chloride feedstock requirements
through 2009. The Company and certain of its affiliates purchase chloride
feedstock underlying these long-term supply contracts from KUS. The agreements
require KUS to purchase certain minimum quantities of feedstock with minimum
purchase commitments aggregating approximately $525 million at December 31,
2004.
Environmental matters. The Company's operations are governed by various
environmental laws and regulations. Certain of the Company's businesses are, or
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws and regulations. As with other companies engaged in similar
businesses, certain past and current operations and products of the Company have
the potential to cause environmental or other damage. The Company has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. The Company's policy is to maintain compliance
with applicable environmental laws and regulations at all its facilities and to
strive to improve its environmental performance. From time to time, the Company
may be subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Litigation matters. The Company's Belgian subsidiary and certain of its
employees are the subject of civil and criminal proceedings relating to an
accident that resulted in two fatalities at the Company's Belgian facility in
2000. In May 2004, the court ruled and, among other things, imposed a fine of
euro 200,000 against the Company and fines aggregating less than euro 40,000
against various Company employees. The Company and the individual employees have
appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
FB-26
its consolidated financial condition, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for approximately
77%, 78% and 81% of net sales during 2002, 2003 and 2004, respectively. The
remaining sales result from the mining and sale of ilmenite ore (a raw material
used in the sulfate pigment production process) and the manufacture and sale of
certain titanium chemical products (derived from co-products of the TiO2
production process). TiO2 is generally sold to the paint, plastics and paper
industries. Such markets are generally considered "quality-of-life" markets
whose demand for TiO2 is influenced by the relative economic well-being of the
various geographic regions. TiO2 is sold to over 1,000 customers, with the top
ten external customers approximating 28% of net sales in 2002, 26% of net sales
in 2003 and 24% of net sales in 2004. Approximately 80% of the Company's TiO2
sales by volume were to Europe in each of 2002, 2003 and 2004. Approximately 10%
of sales by volume were to North America in each of 2002, 2003 and 2004.
Capital expenditures. At December 31, 2004, the estimated cost to complete
capital projects in process approximated $1.4 million.
Note 13 - Financial instruments:
Summarized below is the estimated fair value and related net carrying value
of the Company's financial instruments.
December 31,
----------------------------------------------------------
2003 2004
----------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- -------
(In millions)
Cash, cash equivalents,
restricted cash equivalents
and noncurrent restricted
marketable debt securities $ 8.6 $ 8.6 $ 8.0 $ 8.0
Notes payable and long-term
debt - variable rate debt $ .6 $ .6 $ 14.0 $ 14.0
The Company held no derivative financial instruments during 2002, 2003 or
2004.
Note 14 - Accounting principles recently adopted in 2002, 2003 and 2004:
Asset retirement obligations. The Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003. Under SFAS No.
143, the fair value of a liability for an asset retirement obligation covered
under the scope of SFAS No. 143 would be recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would be accreted to its
present value, and the capitalized cost would be depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity would
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003, the Company will recognize (i) an asset retirement cost
capitalized as an increase to the carrying value of its property, plant and
equipment, (ii) accumulated depreciation on such capitalized cost and (iii) a
FB-27
liability for the asset retirement obligation. Amounts resulting from the
initial application of SFAS No. 143 are measured using information, assumptions
and interest rates all as of January 1, 2003. The amount recognized as the asset
retirement cost is measured as of the date the asset retirement obligation was
incurred. Cumulative accretion on the asset retirement obligation, and
accumulated depreciation on the asset retirement cost, is recognized for the
time period from the date the asset retirement cost and liability would have
been recognized had the provisions of SFAS No. 143 been in effect at the date
the liability was incurred, through January 1, 2003. The difference, if any,
between the amounts to be recognized as described above and any associated
amounts recognized in the Company's balance sheet as of December 31, 2002 is
recognized as a cumulative effect of a change in accounting principle as of the
date of adoption. The effect of adopting SFAS No. 143 as of January 1, 2003 was
not material, as summarized in the table below and is not separately recognized
in the accompanying Statement of Income.
Amount
--------------
(in millions)
Increase in carrying value of net property, plant and equipment:
Cost $ .4
Accumulated depreciation (.1)
Decrease in liabilities previously accrued
for closure and post closure activities .3
Asset retirement obligation recognized (.6)
----
Net impact $ -
====
The increase in the asset retirement obligations from January 1, 2003
($600,000) to December 31, 2003 ($800,000) and to December 31, 2004 ($1 million)
is primarily due to accretion expense and the effects of currency translation.
Accretion expense, which is reported as a component of cost of sales in the
accompanying Consolidated Statements of Income, approximated $100,000 for each
of the years ended December 31, 2003 and 2004.
Estimates of the ultimate cost to be incurred to settle the Company's asset
retirement obligations require a number of assumptions, are inherently difficult
to develop and the ultimate outcome may differ from current estimates. As
additional information becomes available, cost estimates will be adjusted as
necessary. It is possible that technological, regulatory or enforcement
developments, the results of studies or other factors could necessitate the
recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
FB-28
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51," as amended as of March 31,
2004. The Company does not have any involvement with any variable interest
entity (as that term is defined in FIN No. 46R) covered by the scope of FIN No.
46R that would require the Company to consolidate such entity under FIN No. 46R,
which had not already been consolidated under prior applicable GAAP, and
therefore the impact to the Company of adopting the consolidation requirements
of FIN No. 46R was not material.
Note 15 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that he allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, "Share-Based Payment,"
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, if the vesting period of the award). No compensation cost will
be recognized in the aggregate for equity instruments for which the employee
does not render the requisite service (generally, the instrument is forfeited
before it has vested). The grant-date fair value will be estimated using
option-pricing models (e.g. Black-Sholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled. Additionally, as of January 1, 2006, the Company will
be required to recognize compensation cost for the portion of any non-vested
award existing as of December 31, 2005 over the remaining vesting period.
Because the Company has not granted any options to purchase its common stock and
is not expected to grant any options prior to January 1, 2006 and because the
number of non-vested awards as of December 31, 2005 with respect to options
granted by NL to employees of the Company is not expected to be material, the
effect of adopting SFAS No. 123R is not expected to be significant in so far as
it relates to existing stock options. Should the Company, however, grant a
significant number of options in the future, the effect on the Company's
consolidated financial statements could be material.
FB-29