10-K405 1 0001.txt NL INDUSTRIES, INC. 12/31/00 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-640 NL INDUSTRIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 13-5267260 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 16825 Northchase Drive, Suite 1200, Houston, Texas 77060-2544 -------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (281) 423-3300 --------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------------------ ------------------------ Common stock ($.125 par value) New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the registrant at March 9, 2001 approximated $191 million. There were 50,086,684 shares of common stock outstanding at March 9, 2001. Documents incorporated by reference: The information required by Part III is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. Forward-Looking Information. The statements contained in this Annual Report on Form 10-K ("Annual Report") which are not historical facts, including, but not limited to, statements found (i) under the captions "Industry," "Products and operations," "Manufacturing process and raw materials," "Competition," "Patents and Trademarks," "Foreign Operations," and "Regulatory and Environmental Matters," all contained in Item 1. Business; (ii) under the captions "Lead pigment litigation," "Environmental matters and litigation," and "Other Litigation," all contained in Item 3. Legal Proceedings; (iii) under the captions "Results of Operations" and "Liquidity and Capital Resources," both contained in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and (iv) under the captions "Currency exchange rates," "Marketable equity security prices," and "Other," all contained in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes," "intends," "may," "will," "should," "anticipates," "expects," or comparable terminology or by discussions of strategy or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Annual Report and those described from time to time in the Company's other filings with the Securities and Exchange Commission. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties including, but not limited to, the cyclicality of the titanium dioxide industry, global economic and political conditions, global productive capacity, customer inventory levels, changes in product pricing, competitive technology positions, operating interruptions (including, but not limited to, labor disputes, leaks, fires, explosions, unscheduled downtime and transportation interruptions), the ultimate resolution of pending or possible future lead pigment litigation and legislative developments related to the lead paint litigation, the outcome of other litigation, and other risks and uncertainties included in the Company's filings with the Securities and Exchange Commission. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. The Company assumes no duty to update any forward-looking statements whether as a result of new information, future events or otherwise. PART I ITEM 1. BUSINESS General NL Industries, Inc., organized as a New Jersey corporation in 1891, conducts its continuing operations through its principal wholly owned subsidiary, Kronos, Inc. Kronos is the world's fifth largest producer of titanium dioxide pigments ("TiO2") with an estimated 12% share of worldwide TiO2 sales volume in 2000. Approximately one-half of Kronos' 2000 sales volume was in Europe, where Kronos is the second largest producer of TiO2. NL and its consolidated subsidiaries are sometimes referred to herein collectively as the "Company." The Company's primary objective is to maximize total shareholder return. The Company has taken a number of steps towards achieving its objective, including (i) increasing its regular quarterly dividend to $.20 per share, (ii) controlling costs, (iii) investing in certain cost effective debottlenecking projects to increase TiO2 production capacity and efficiency, and (iv) improving its capital structure. The Company periodically considers mergers or acquisitions within the chemical industry and acquisitions of additional TiO2 production capacity to meet its objective. Industry Titanium dioxide pigments are chemical products used for imparting whiteness, brightness and opacity to a wide range of products, including paints, plastics, paper, fibers and ceramics. TiO2 is considered a "quality-of-life" product with demand affected by gross domestic product in various regions of the world. Pricing within the global TiO2 industry is cyclical, and changes in industry economic conditions can significantly impact the Company's earnings and operating cash flows. The Company's average TiO2 selling price on a billing currency basis increased from the preceding quarter during each quarter of 2000, continuing the upward trend in prices that began in the fourth quarter of 1999. Industry-wide demand for TiO2 was strong throughout most of 2000, but weakened in the fourth quarter of 2000. The Company believes that the weaker demand in the fourth quarter was due to a softening worldwide economy and customers reducing inventory levels. Kronos has an estimated 18% share of European TiO2 sales volume and an estimated 12% share of North American TiO2 sales volume. Per capita consumption of TiO2 in the United States and Western Europe far exceeds that in other areas of the world and these regions are expected to continue to be the largest consumers of TiO2. Significant regions for TiO2 consumption could emerge in Eastern Europe, the Far East or China if the economies in these regions develop to the point that quality-of-life products, including TiO2, are in greater demand. Kronos believes that, due to its strong presence in Western Europe, it is well positioned to participate in growth in consumption of TiO2 in Eastern Europe. Geographic segment information is contained in Note 3 to the Consolidated Financial Statements. Products and operations TiO2 is produced in two crystalline forms: rutile and anatase. Rutile TiO2 is a more tightly bound crystal that has a higher refractive index than anatase TiO2 and, therefore, better opacification and tinting -1- strength in many applications. Although many end-use applications can use either form of TiO2, rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it is often preferred for use in paper, ceramics, rubber and man-made fibers. The Company believes that there are no effective substitutes for TiO2. However, extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are used in a number of Kronos' markets. Generally, extenders are used to reduce to some extent the utilization of higher-cost TiO2. The use of extenders has not significantly changed TiO2 consumption over the past decade because, to date, extenders generally have failed to match the performance characteristics of TiO2. As a result, the Company believes that the use of extenders will not materially alter the growth of the TiO2 business in the foreseeable future. Kronos currently produces over 40 different TiO2 grades, sold under the Kronos trademark, which provide a variety of performance properties to meet customers' specific requirements. Kronos' major customers include domestic and international paint, plastics and paper manufacturers. Kronos is one of the world's leading producers and marketers of TiO2. Kronos and its distributors and agents sell and provide technical services for its products to over 4,000 customers with the majority of sales in Europe and North America. TiO2 is distributed by rail, truck and ocean carrier in either dry or slurry form. Kronos' manufacturing facilities are located in Germany, Canada, Belgium and Norway and Kronos owns a one-half interest in a TiO2 manufacturing joint venture located in Louisiana, U.S.A. Kronos has sales and marketing activities in over 100 countries worldwide. Kronos and its predecessors have produced and marketed TiO2 in North America and Europe for over 80 years. As a result, Kronos believes that it has developed considerable expertise and efficiency in the manufacture, sale, shipment and service of its products in domestic and international markets. By volume, approximately one-half of Kronos' 2000 TiO2 sales were to Europe, with 37% to North America and the balance to export markets. Kronos is also engaged in the mining and sale of ilmenite ore (a raw material used as a feedstock by sulfate-process TiO2 plants) and has estimated ilmenite reserves that are expected to last at least 20 years. Kronos is also engaged in the manufacture and sale of iron-based water treatment chemicals (derived from co-products of the pigment production processes). Water treatment chemicals are used as treatment and conditioning agents for industrial effluents and municipal wastewater, and in the manufacture of iron pigments. Manufacturing process and raw materials TiO2 is manufactured by Kronos using both the chloride process and the sulfate process. Approximately two-thirds of Kronos' current production capacity is based on its chloride process which generates less waste than the sulfate process. The sulfate process is a batch chemical process that uses sulfuric acid to extract TiO2. Sulfate technology normally produces either anatase or rutile pigment. The chloride process is a continuous process in which chlorine is used to extract rutile TiO2. In general, the chloride process is also less intensive than the sulfate process in terms of capital investment, labor and energy. Because much of the chlorine is recycled and higher titanium-containing feedstock is used, the chloride process produces less waste. Once an intermediate TiO2 pigment has been produced by either the chloride or sulfate process, it is `finished' into products with specific performance characteristics for particular end-use applications through proprietary processes involving various chemical surface treatments and intensive milling and micronizing. -2- Due to environmental factors and customer considerations, the proportion of TiO2 industry sales represented by chloride-process pigments has increased relative to sulfate-process pigments and, in 2000, chloride-process production facilities represented almost 60% of industry capacity. Kronos produced a record 441,000 metric tons of TiO2 in 2000, compared to 411,000 metric tons produced in 1999 and its previous record 434,000 metric tons in 1998. Kronos' average production capacity utilization rate in 2000 was near full capacity, up from 93% in 1999, primarily due to the Company's decision to return to higher production levels to meet strengthening demand after curtailing production volume at the beginning of the first quarter of 1999 to manage inventory levels. Kronos believes its current annual attainable production capacity is approximately 450,000 metric tons, including its one-half interest in the joint venture-owned Louisiana plant (see "TiO2 manufacturing joint venture"). The Company expects its production capacity will be increased by approximately 15,000 metric tons primarily at its chloride facilities, with moderate capital expenditures, bringing Kronos' capacity to approximately 465,000 metric tons during 2002. The primary raw materials used in the TiO2 chloride production process are titanium-containing feedstock derived from beach sand ilmenite, natural rutile ore, chlorine and coke. Chlorine and coke are available from a number of suppliers. Titanium-containing feedstock suitable for use in the chloride process is available from a limited number of suppliers around the world, principally in Australia, South Africa, Canada, India and the United States. Kronos purchases slag refined from beach sand ilmenite from Richards Bay Iron and Titanium (Proprietary) Limited (South Africa), a 51%-owned subsidiary of Rio Tinto plc (U.K.), under a long-term supply contract that expires at the end of 2003. Natural rutile ore is purchased primarily from Iluka Resources, Inc. (Australia), a wholly owned subsidiary of Westralian Sands Limited (Australia), under a long-term supply contract that expires at the end of 2005. The Company does not expect to encounter difficulties obtaining long-term extensions to existing supply contracts prior to the expiration of the contracts. Raw materials purchased under these contracts and extensions thereof are expected to meet Kronos' chloride feedstock requirements over the next several years. The primary raw materials used in the TiO2 sulfate production process are titanium-containing feedstock derived primarily from rock and beach sand ilmenite and sulfuric acid. Sulfuric acid is available from a number of suppliers. Titanium-containing feedstock suitable for use in the sulfate process is available from a limited number of suppliers around the world. Currently, the principal active sources are located in Norway, Canada, Australia, India and South Africa. As one of the few vertically integrated producers of sulfate-process pigments, Kronos operates a rock ilmenite mine in Norway, which provided all of Kronos' feedstock for its European sulfate-process pigment plants in 2000. For its Canadian sulfate-process plant, Kronos also purchases sulfate grade slag from Q.I.T. Fer et Titane Inc. (Canada), a wholly owned subsidiary of Rio Tinto, under a long-term supply contract which expires in 2003. Kronos believes the availability of titanium-containing feedstock for both the chloride and sulfate processes is adequate for the next several years. Kronos does not expect to experience any interruptions of its raw material supplies because of its long-term supply contracts. However, political and economic instability in certain countries from which the Company purchases its raw material supplies could adversely affect the availability of such feedstock. Should Kronos' vendors not be able to meet their contractual obligations or should Kronos be otherwise unable to obtain necessary raw materials, the Company may incur higher costs for raw materials or may be required to reduce production levels, which may have a material adverse effect on the Company's financial position, results of operations or liquidity. -3- TiO2 manufacturing joint venture Subsidiaries of Kronos and Huntsman ICI Holdings ("Huntsman") each own a 50%-interest in a manufacturing joint venture, Louisiana Pigment Company ("LPC"). LPC owns and operates a chloride-process TiO2 plant located in Lake Charles, Louisiana. Production from the plant is shared equally by Kronos and Huntsman (the "Partners") pursuant to separate offtake agreements. A supervisory committee, composed of four members, two of whom are appointed by each Partner, directs the business and affairs of LPC including production and output decisions. Two general managers, one appointed and compensated by each Partner, manage the operations of the joint venture acting under the direction of the supervisory committee. The manufacturing joint venture operates on a break-even basis and, accordingly, the Company reports no equity in earnings of the joint venture. Kronos' cost for its share of the TiO2 produced is equal to its share of the joint venture's costs. Kronos' share of the joint venture's interest expense in 1998 was reported as a component of interest expense. Kronos' share of all other net costs is reported as cost of sales as the related TiO2 acquired from the joint venture is sold. Competition The TiO2 industry is highly competitive. Kronos competes primarily on the basis of price, product quality and technical service, and the availability of high performance pigment grades. Although certain TiO2 grades are considered specialty pigments, the majority of Kronos' grades and substantially all of Kronos' production are considered commodity pigments with price generally being the most significant competitive factor. During 2000 Kronos had an estimated 12% share of worldwide TiO2 sales volume, and Kronos believes that it is the leading seller of TiO2 in a number of countries, including Germany and Canada. Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"); Millennium Chemicals, Inc.; Huntsman; Kerr-McGee Corporation; and Ishihara Sangyo Kaisha, Ltd. Kronos' five largest competitors have estimated individual shares of TiO2 production capacity ranging from 23% to 5%, and an estimated aggregate 70% share of worldwide TiO2 production volume. DuPont has about one-half of total U.S. TiO2 production capacity and is Kronos' principal North American competitor. In 2000 Kerr-McGee acquired Kemira Pigments Oy's TiO2 businesses in the Netherlands and the U.S. Capacity additions that are the result of construction of greenfield plants in the worldwide TiO2 market require significant capital and substantial lead time, typically three to five years in the Company's experience. No greenfield plants have been announced, but industry capacity can be expected to increase as Kronos and its competitors debottleneck existing plants. Based on the factors described under the caption "Industry" above, the Company expects that the average annual increase in industry capacity from announced debottlenecking projects will be less than the average annual demand growth for TiO2 over the next three to five years. No assurance can be given that future increases in the TiO2 industry production capacity and future average annual demand growth rates for TiO2 will conform to the Company's expectations. If actual developments differ from the Company's expectations, the Company and the TiO2 industry's performance could be unfavorably affected. -4- Discontinued operations On January 30, 1998, the Company sold its specialty chemicals business for $465 million. The Company has reported its specialty chemicals business as discontinued operations. Research and Development The Company's expenditures for research and development and certain technical support programs, excluding discontinued operations, have averaged approximately $6 million annually during the past three years. Research and development activities are conducted principally at the Leverkusen, Germany facility. Such activities are directed primarily toward improving both the chloride and sulfate production processes, improving product quality and strengthening Kronos' competitive position by developing new pigment applications. Patents and Trademarks Patents held for products and production processes are believed to be important to the Company and to the continuing business activities of Kronos. The Company continually seeks patent protection for its technical developments, principally in the United States, Canada and Europe, and from time to time enters into licensing arrangements with third parties. The Company's major trademarks, including Kronos, are protected by registration in the United States and elsewhere with respect to those products it manufactures and sells. Foreign Operations The Company's chemical businesses have operated in non-U.S. markets since the 1920s. Most of Kronos' current production capacity is located in Europe and Canada with non-U.S. net property and equipment aggregating $316 million at December 31, 2000. Net property and equipment in the U.S., including 50% of the property and equipment of the TiO2 manufacturing joint venture, was $140 million at December 31, 2000. Kronos' European operations include production facilities in Germany, Belgium and Norway. Approximately $639 million of the Company's 2000 consolidated sales were to non-U.S. customers, including $106 million to customers in areas other than Europe and Canada. Sales to customers in the U.S. aggregated $283 million in 2000. Foreign operations are subject to, among other things, currency exchange rate fluctuations and the Company's 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 the Company's results of operations are discussed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative Disclosures about Market Risk." Political and economic uncertainties in certain of the countries in which the Company operates may expose it to risk of loss. The Company does not believe that there is currently any likelihood of material loss through political or economic instability, seizure, nationalization or similar event. The Company cannot predict, however, whether events of this type in the future could have a material effect on its operations. The Company's manufacturing and mining operations are also subject to extensive and diverse environmental regulation in each of the foreign countries in which they operate. See "Regulatory and Environmental Matters." -5- Customer Base and Seasonality The Company believes that neither its aggregate sales nor those of any of its principal product groups are concentrated in or materially dependent upon any single customer or small group of customers. Kronos' largest ten customers accounted for 24% of net sales in 2000. Neither the Company's business as a whole nor that of any of its principal product groups is seasonal to any significant extent. Due in part to the increase in paint production in the spring to meet the spring and summer painting season demand, TiO2 sales are generally higher in the second and third calendar quarters than in the first and fourth calendar quarters. Employees As of December 31, 2000, the Company employed approximately 2,500 persons, excluding the joint venture employees, with approximately 100 employees in the United States and approximately 2,400 at sites outside the United States. Hourly employees in production facilities worldwide, including the TiO2 manufacturing joint venture, are represented by a variety of labor unions, with labor agreements having various expiration dates. The Company believes its labor relations are good. Regulatory and Environmental Matters Certain of the Company's businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws. As with other companies engaged in similar businesses, certain past and current operations and products of the Company have the potential to cause environmental or other damage. The Company has implemented and continues to implement various policies and programs in an effort to minimize these risks. The policy of the Company is to maintain compliance with applicable environmental laws and regulations at all its facilities and to strive to improve its environmental performance. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies thereunder, could adversely affect the Company's production, handling, use, storage, transportation, sale or disposal of such substances as well as the Company's consolidated financial position, results of operations or liquidity. The Company's U.S. manufacturing operations are governed by federal environmental and worker health and safety laws and regulations, principally the Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substances Control Act and the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), as well as the state counterparts of these statutes. The Company believes the Louisiana plant owned and operated by the joint venture and a slurry facility owned by the Company are in substantial compliance with applicable requirements of these laws or compliance orders issued thereunder. The Company has no other U.S. plants. From time to time, the Company's facilities may be subject to environmental regulatory enforcement under such statutes. Resolution of such matters typically involves the establishment of compliance programs. Occasionally, resolution may result in the payment of penalties, but to date such penalties have not involved amounts having a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. -6- The Company's European and Canadian production facilities operate in an environmental regulatory framework in which governmental authorities typically are granted broad discretionary powers which allow them to issue operating permits required for the plants to operate. The Company believes that all its plants are in substantial compliance with applicable environmental laws. While the laws regulating operations of industrial facilities in Europe vary from country to country, a common regulatory denominator is provided by the European Union (the "EU"). Germany and Belgium are members of the EU and follow its initiatives. Norway, although not a member, generally patterns its environmental regulatory actions after the EU. The Company believes that Kronos is in substantial compliance with agreements reached with European regulatory authorities and with an EU directive to control the effluents produced by TiO2 production facilities. The Company has a contract with a third party to treat certain effluents of its German sulfate-process plants. Either party may terminate the contract after giving four years advance notice with regard to its Nordenham, Germany plant. Under certain circumstances, Kronos may terminate the contract after giving six months notice with respect to treatment of effluents from the Leverkusen, Germany plant. The Company completed in 2000 an $8 million landfill expansion for its Belgian plant which is expected to provide the plant with twenty years of storage space for neutralized chloride-process solids. The Company's capital expenditures related to its ongoing environmental protection and improvement programs are currently expected to be approximately $6 million in 2001 and $5 million in 2002. The Company has been named as a defendant, potentially responsible party ("PRP"), or both, pursuant to CERCLA and similar state laws in approximately 75 governmental and private actions associated with waste disposal sites, mining locations and facilities currently or previously owned, operated or used by the Company, or its subsidiaries, or their predecessors, certain of which are on the U.S. Environmental Protection Agency's ("U.S. EPA") Superfund National Priorities List or similar state lists. See Item 3. "Legal Proceedings." Principal Shareholders At December 31, 2000, Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation, held approximately 60% and 20%, respectively, of NL's outstanding common stock. At December 31, 2000, Contran and its subsidiaries held approximately 93% of Valhi's outstanding common stock, and a subsidiary of Valhi and NL held approximately 80% of Tremont's outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons, the Chairman of the Board of NL and the Chairman of the Board and Chief Executive Officer of Contran and Valhi and a director of Tremont, may be deemed to control each of such companies. ITEM 2. PROPERTIES Kronos currently operates four TiO2 facilities in Europe (Leverkusen and Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North America, Kronos has a facility in Varennes, Quebec, Canada and, through the manufacturing joint venture described above, a one-half interest in a plant in Lake Charles, Louisiana. The Company also owns a slurry plant in Lake Charles, Louisiana. The -7- Company's Fredrikstad TiO2 plant has a lien on it that secures a claim by Norwegian tax authorities, pending resolution of certain tax litigation. See Notes 9 and 12 to the Consolidated Financial Statements. Kronos' principal German operating subsidiary leases the land under its Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The Leverkusen facility, with about one-third of Kronos' current TiO2 production capacity, is located within an extensive manufacturing complex owned by Bayer AG. Kronos is the only unrelated party so situated. Under a separate supplies and services agreement expiring in 2011, Bayer provides some raw materials, auxiliary and operating materials and utilities services necessary to operate the Leverkusen facility. Both the lease and the supplies and services agreement have certain restrictions regarding Kronos' ability to transfer ownership or use of the Leverkusen facility. All of Kronos' principal production facilities described above are owned, except for the land under the Leverkusen facility. Kronos has a governmental concession with an unlimited term to operate its ilmenite mine in Norway. The Company has under lease various corporate and administrative offices located in the U.S. and various sales offices located in the U.S., France, the Netherlands, Denmark and the U.K. ITEM 3. LEGAL PROCEEDINGS Lead pigment litigation The Company was formerly involved in the manufacture of lead pigments for use in paint and lead-based paint. The Company has been named as a defendant or third party defendant in various legal proceedings alleging that the Company and other manufacturers are responsible for personal injury, property damage and governmental expenditures allegedly associated with the use of lead pigments. The Company is vigorously defending such litigation. Considering the Company's previous involvement in the lead pigment and lead-based paint businesses, there can be no assurance that additional litigation, similar to that described below, will not be filed. In this regard, the Company is aware that the City Council of the City of Milwaukee, Wisconsin has authorized the filing of litigation against former lead pigment manufacturers. While the suit has not yet been filed, the Company believes that the suit may seek to recover costs associated with diagnosing and treating children who have been exposed to lead-based paint and the cost of abating lead-based paint in the City's public housing. In addition, it is possible that other governmental entities may take similar action in the future. In addition, various legislation and administrative regulations have, from time to time, been enacted or proposed that seek to (a) impose various obligations on present and former manufacturers of lead pigment and lead-based paint with respect to asserted health concerns associated with the use of such products and (b) effectively overturn court decisions in which the Company and other pigment manufacturers have been successful. Examples of such proposed legislation include bills which would permit civil liability for damages on the basis of market share, rather than requiring plaintiffs to prove that the defendant's product caused the alleged damage, and bills which would revive actions barred by the statute of limitations. While no legislation or regulations have been enacted to date which are expected to have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity, the imposition of market share liability or other legislation could have such an effect. -8- The Company has not accrued any amounts for the pending lead pigment and lead-based paint litigation. There is no assurance that the Company will not incur future liability in respect of this pending litigation in view of the inherent uncertainties involved in court and jury rulings in pending and possible future cases. However, based on, among other things, the results of such litigation to date, the Company believes that the pending lead pigment and lead-based paint litigation is without merit. Liability that may result, if any, cannot reasonably be estimated. In 1989 and 1990 the Housing Authority of New Orleans ("HANO") filed third-party complaints for indemnity and/or contribution against the Company, other alleged manufacturers of lead pigment (together with the Company, the "pigment manufacturers") and the Lead Industries Association (the "LIA") in 14 actions commenced by residents of HANO units seeking compensatory and punitive damages for injuries allegedly caused by lead pigment. The actions, which were pending in the Civil District Court for the Parish of Orleans, State of Louisiana, were dismissed by the district court in 1990. Subsequently, HANO agreed to consolidate all the cases and appealed. In March 1992 the Louisiana Court of Appeals, Fourth Circuit, dismissed HANO's appeal as untimely with respect to three of these cases. With respect to the other cases included in the appeal, the court of appeals reversed the lower court decision dismissing the cases. These cases were remanded to the District Court for further proceedings. In November 1994 the District Court granted defendants' motion for summary judgment in one of the remaining cases and in June 1995 the District Court granted defendants' motion for summary judgment in several of the remaining cases. After such grant, only two cases remain pending and have been inactive since 1992, Hall v. HANO, et al. (No. 89-3552) and Allen v. HANO, et al. (No. 89-427) Civil District Court for the Parish of Orleans, State of Louisiana. In June 1989 a complaint was filed in the Supreme Court of the State of New York, County of New York, against the pigment manufacturers and the LIA. Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of $50 million for monitoring and abating alleged lead paint hazards in public and private residential buildings, diagnosing and treating children allegedly exposed to lead paint in city buildings, the costs of educating city residents to the hazards of lead paint, and liability in personal injury actions against the City and the Housing Authority based on alleged lead poisoning of city residents (The City of New York, the New York City Housing Authority and the New York City Health and Hospitals Corp. v. Lead Industries Association, Inc., et al., No. 89-4617). In December 1991 the court granted the defendants' motion to dismiss claims alleging negligence and strict liability and denied the remainder of the motion. In January 1992 defendants appealed the denial. In May 1993 the Appellate Division of the Supreme Court affirmed the denial of the motion to dismiss plaintiffs' fraud, restitution and indemnification claims. In May 1994 the trial court granted the defendants' motion to dismiss the plaintiffs' restitution and indemnification claims, and plaintiffs appealed. In June 1996 the Appellate Division reversed the trial court's dismissal of plaintiffs' restitution and indemnification claims, reinstating those claims. In December 1998 plaintiffs moved for partial summary judgment on their claims of market share, alternative liability, enterprise liability, and concert of action. In February 1999 plaintiffs New York City and New York City Health and Hospital Corporation dismissed with prejudice all their claims and were no longer parties to the case. Also in February 1999 the New York City Housing Authority dismissed with prejudice all of its claims except for claims for damages relating to two housing projects. In September 1999 the trial court denied the plaintiffs' motions for summary judgment on market share and conspiracy issues and denied defendants' April 1999 motion for summary judgment on statute of limitations grounds. In September 2000 the First Department denied plaintiffs' appeal of the trial court's denial of plaintiffs' motion for summary judgment on the market share issue. Discovery is proceeding. -9- In August 1992 the Company was served with an amended complaint in Jackson, et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland, Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for personal injury caused by the ingestion of lead, and an order directing defendants to abate lead-based paint in buildings. Plaintiffs purport to represent a class of similarly situated persons throughout the State of Ohio. The amended complaint asserts causes of action under theories of strict liability, negligence per se, negligence, breach of express and implied warranty, fraud, nuisance, restitution, and negligent infliction of emotional distress. The complaint asserts several theories of liability including joint and several, market share, enterprise and alternative liability. Plaintiffs moved for class certification in October 1998, and all briefing on the issue was completed in April 1999. No decision regarding class certification has been issued by the trial court. In November 1993 the Company was served with a complaint in Brenner, et al. v. American Cyanamid, et al., (No. 12596-93) Supreme Court, State of New York, Erie County alleging injuries to two children purportedly caused by lead pigment. The complaint seeks $24 million in compensatory and $10 million in punitive damages for alleged negligent failure to warn, strict liability, fraud and misrepresentation, concert of action, civil conspiracy, enterprise liability, market share liability, and alternative liability. In June 1998 defendants moved for partial summary judgment dismissing plaintiffs' market share and alternative liability claims. In January 1999 the trial court granted defendants' summary judgment motion to dismiss the alternative liability and enterprise liability claims, but denied defendants' motion to dismiss the market share liability claim. In May 1999 defendants appealed the denial of their motion to dismiss the market share liability claim. The Fourth Department intermediate appellate court in December 1999 reversed the trial court and dismissed the market share claim. The case was remanded to the trial court for further proceedings on the remaining claims and in June 2000 the trial court dismissed all remaining claims. Plaintiffs have filed a notice of appeal. In April 1997 the Company was served with a complaint in Parker v. NL Industries, et al. (Circuit Court, Baltimore City, Maryland, No. 97085060 CC915). Plaintiff, now an adult, and his wife, seek compensatory and punitive damages from the Company, another former manufacturer of lead paint and a local paint retailer, based on claims of negligence, strict liability and fraud, for plaintiff's alleged ingestion of lead paint as a child. In February 1998 the Court dismissed the fraud claim. In June 2000, following a two-week trial, the jury returned a verdict for the Company. Plaintiffs have abandoned their appeal. In December 1998 the Company was served with a complaint on behalf of four children and their guardians in Sabater, et al. v. Lead Industries Association, et al. (Supreme Court of the State of New York, County of Bronx, Index No. 25533/98). Plaintiffs purport to represent a class of all children and mothers similarly situated in New York City. The complaint alleges against the Company, the LIA, and other former manufacturers of lead pigment various causes of action including negligence, strict products liability, fraud and misrepresentation, concert of action, civil conspiracy, enterprise liability, market share liability, breach of warranties, nuisance, and violation of New York State's consumer protection act. The complaint seeks damages for establishment of property abatement and medical monitoring funds and compensatory damages for alleged injuries to plaintiffs. In February 2000 the trial court granted defendants' motions to dismiss the product defect, express warranty, nuisance and consumer fraud statute claims. In October 2000 defendants filed a third-party complaint against the Federal Home Loan Mortgage Corporation (FHLMC), and FHLMC removed the case to federal court in the Southern District of New York and moved to dismiss the claims. Plaintiffs have moved to remand the case to state court. -10- In September 1999 an amended complaint was filed in Thomas v. Lead Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No. 99-CV-6411) adding as defendants the Company and seven other companies alleged to have manufactured lead products in paint to a suit originally filed against plaintiff's landlords. Plaintiff, a minor, alleges injuries purportedly caused by lead on the surfaces of premises in homes in which he resided. Plaintiff seeks compensatory and punitive damages. Plaintiff alleges strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentations and omissions, concert of action, civil conspiracy, and enterprise liability causes of action against the Company, seven other alleged former manufacturers of lead products contained in paint, and the LIA. In January 2000 the Company filed an answer denying all wrongdoing and liability. In June 2000 the trial court granted defendants' January 2000 motion to dismiss the product defect and Wisconsin consumer protection statute claims. Discovery is proceeding. In October 1999 the Company was served with a complaint in State of Rhode Island v. Lead Industries Association, et al. (Superior Court of Rhode Island, No. 99-5226). Rhode Island, by and through its Attorney General, seeks compensatory and punitive damages for medical, school, and public and private building abatement expenses that the State alleges were caused by lead paint, and for funding of a public education campaign and screening programs. Plaintiff seeks judgments of joint and several liability against the Company, seven other companies alleged to have manufactured lead products in paint, and the LIA. Plaintiffs allege public nuisance, violation of the Rhode Island Unfair Trade Practices and Consumer Protection Act, strict liability, negligence, negligent misrepresentation and omissions, fraudulent misrepresentation and omissions, civil conspiracy, unjust enrichment, indemnity, and equitable relief to protect children. In January 2000 defendants moved to dismiss all claims. The court has not ruled. In October 1999 the Company was served with a complaint in Cofield, et al. v. Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to represent a class of all owners of nonrental residential properties in Maryland. Plaintiffs seek compensatory and punitive damages for the existence of lead-based paint in their homes, including funds for monitoring, detecting and abating lead-based paint in those residences. Plaintiffs allege that the Company, fourteen other companies alleged to have manufactured lead pigment, paint and/or gasoline additives, the LIA, and the National Paint and Coatings Association are jointly and severally liable for alleged negligent product design, negligent failure to warn, supplier negligence, strict liability/defective design, strict liability/failure to warn, nuisance, indemnification, fraud and deceit, conspiracy, concert of action, aiding and abetting, and enterprise liability. Plaintiffs seek damages in excess of $20,000 per household. In October 1999 defendants removed the case to Maryland federal court. In February 2000 defendants moved to dismiss the design defect, fraud and deceit, indemnification and nuisance claims. In March 2000 the Federal trial court (No. MJG-99-3277) denied plaintiffs' motion to remand to State Court. In April 2000 defendants filed an additional motion to dismiss all claims for lack of product identification. In August 2000 the federal court dismissed the fraud and deceit, indemnification, and nuisance claims, and remanded the case to Maryland state court. In August 2000 plaintiffs also filed a third amended complaint, with the case renamed Young, et al. v. Lead Industries, Association, et al.. In November 2000 defendants filed motions to dismiss all remaining claims except conspiracy and aiding and abetting. The court has not ruled. Class discovery is proceeding. In October 1999 the Company was served with a complaint in Smith, et al. v. Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case No. 24-C-99-004490). Plaintiffs, six minors, each seek compensatory damages of $5 million and punitive damages of $10 million. Plaintiffs allege that the Company, fourteen other companies alleged to have manufactured lead pigment, paint and/or -11- gasoline additives, the LIA, and the National Paint and Coatings Association are jointly and severally liable for alleged negligent product design, negligent failure to warn, supplier negligence, fraud and deceit, conspiracy, concert of action, aiding and abetting, strict liability/ failure to warn, and strict liability/defective design. In October 1999 defendants removed the case to Maryland federal court and in November 1999 the case was remanded to state court. In February 2000 the Company answered the complaint and denied all wrongdoing and liability, and all defendants filed motions to dismiss the product defect and fraud and deceit claims. In June 2000 defendants moved to dismiss all claims for lack of product identification. The court has not ruled. In February 2000 the Company was served with a complaint in City of St. Louis v. Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial Circuit, St. Louis City, Cause No. 002-245, Division 1). The City of St. Louis seeks compensatory and punitive damages for its expenses discovering and abating lead, detecting lead poisoning and providing medical care, educational programs for City residents, and the costs of educating children suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and several liability against the Company, eight other companies alleged to have manufactured lead products for paint, and the LIA. Plaintiff alleges claims of public nuisance, product liability, negligence, negligent misrepresentation, fraudulent misrepresentation, civil conspiracy, unjust enrichment, and indemnity. In March 2000 defendants removed the case to Missouri federal court. In April 2000 plaintiff filed a motion to remand to State Court and an amended complaint seeking to add additional Missouri defendant residents. In May 2000 defendants moved to dismiss all claims. The court has not ruled. In April 2000 the Company was served with a complaint in County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of California, County of Santa Clara, Case No. CV788657). The County of Santa Clara seeks to represent a class of California governmental entities (other than the state and its agencies). The County seeks from defendants, eight present or former pigment or paint manufacturing companies and the LIA, compensatory damages for funds the plaintiffs have expended for medical treatment, educational expenses, abatement or other costs due to exposure to, or potential exposure to, lead paint, disgorgement of profit, and punitive damages. Plaintiff alleges causes of action for violations of the California Business and Professions Code, strict product liability, negligence, fraud and concealment, unjust enrichment, and indemnity, and includes market share liability allegations. Defendants filed demurrers to the original complaint in August 2000 and to the first amended complaint in October 2000. In December 2000 the Court dismissed all claims except the claim for fraud, but granted plaintiffs leave to amend. The plaintiffs filed a second amended complaint in January 2001 that included as plaintiffs: Santa Cruz, Solano, Alameda, San Francisco, and Kern counties; the cities of San Francisco and Oakland; the Oakland and San Francisco unified school districts and housing authorities; and the Oakland Redevelopment Agency. The second amended complaint omits indemnification and unjust enrichment claims, but adds public and private nuisance claims. In June 2000 two complaints were filed in Texas state court, Spring Branch Independent School District v. Lead Industries Association, et al. (District Court of Harris County, Texas, No. 2000-31175), and Houston Independent School District v. Lead Industries Association, et al. (District Court of Harris County, Texas, No. 2000-33725). The School Districts seek past and future damages and exemplary damages for costs they have allegedly incurred due to the presence of lead-based paint in their buildings from the Company, the LIA and seven other companies sued as former manufacturers of lead-based paint. Plaintiffs allege claims for design defect and marketing defect, negligent product design and failure to warn, fraudulent misrepresentation, negligent misrepresentation, concert of action, conspiracy, and indemnity. In October -12- 2000 the Company filed answers in both cases denying all allegations of wrongdoing and liability. Discovery is proceeding. In June 2000 a complaint was filed in Illinois state court, Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois, County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to represent two classes, one of all minors between ages six months and six years who resided in housing in Illinois built before 1978, and one of all individuals between ages six and twenty years who lived between ages six months and six years in Illinois housing built before 1978 and had blood lead levels of 10 micrograms/deciliter or more. The complaint seeks a medical screening fund for the first class to determine blood lead levels, a medical monitoring fund for the second class to detect the onset of latent diseases, and a fund for a public education campaign. The complaint seeks to hold jointly and severally liable the Company, the LIA, and seven other companies sued as former manufacturers of lead pigment and/or lead paint. Plaintiffs allege claims for negligent product design, negligent failure to warn, strict products liability, violation of the Illinois Consumer Fraud Act, fraud by omission, market share liability, civil conspiracy, concert of action, enterprise liability and alternative liability. In October 2000 defendants moved to dismiss all claims. In November 2000 plaintiffs moved to amend the complaint. Plaintiffs filed an amended complaint in January 2001. In October 2000 the Company was served with a complaint filed in California state court. Justice, et al. v. Sherwin-Williams Company, et al. (Superior Court of California, County of San Francisco, No. 314686). Plaintiffs are two minors who seek general, special and punitive damages for injuries alleged to be due to ingestion of paint containing lead in their residence. Defendants are the Company, the LIA, and nine other companies sued as former manufacturers of lead paint. Plaintiffs allege claims for negligence, strict products liability, concert of action, market share liability, and intentional tort. The Company answered the complaint in December 2000 denying all allegations of wrongdoing and liability. In January 2001 the Company was served with a complaint in Gaines, et al., v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County, Mississippi, Civil Action No. 2000-0604). The complaint seeks joint and several liability for compensatory and punitive damages from the Company, Sherwin- Williams, and four local retailers on behalf of a minor and his mother alleging injuries due to lead pigment and/or paint. The complaint alleges strict liability, negligence, and fraudulent concealment and misrepresentation claims. In February 2001 the Company removed the case to federal court. In March 2001 the Company moved to dismiss the negligence and fraudulent concealment and misrepresentation claims. In February 2001 the Company was served with a complaint in Borden, et al. v. The Sherwin-Williams Company, et al. (Circuit Court of Jefferson County, Mississippi, Civil Action No. 2000-587). The complaint seeks joint and several liability for compensatory and punitive damages from more than 40 manufacturers and retailers of lead pigment and/or paint, including the Company, on behalf of 18 adult residents of Mississippi who were allegedly exposed to lead during their employment in construction and repair activities. The complaint asserts strict liability, negligence, fraudulent concealment and misrepresentation, and medical monitoring claims. The Company intends to deny all allegations of wrongdoing and liability. The Company believes that the foregoing lead pigment actions are without merit and intends to continue to deny all allegations of wrongdoing and liability and to defend such actions vigorously. -13- The Company has filed actions seeking declaratory judgment and other relief against various insurance carriers with respect to costs of defense and indemnity coverage for certain of its environmental and lead pigment litigation. NL Industries, Inc. v. Commercial Union Insurance Cos., et al., Nos. 90-2124, -2125 (HLS) (District Court of New Jersey). The action relating to lead pigment litigation defense costs filed in May 1990 against Commercial Union Insurance Company ("Commercial Union") sought to recover defense costs incurred in the City of New York lead pigment case and two other lead pigment cases which have since been resolved in the Company's favor. The action relating to lead paint litigation defense costs has been settled. The Company has also settled insurance coverage claims concerning environmental claims with certain of the defendants in the New Jersey environmental coverage litigation, including the Company's principal former carriers, as more fully described below. The settled claims are to be dismissed from the New Jersey litigation in accordance with the terms of the settlement agreements. The Company also continues to negotiate with several other insurance carriers with respect to possible settlement of claims that are being asserted in the New Jersey environmental litigation, although there can be no assurance that settlement agreements can be reached with these other carriers. No further material settlements relating to litigation concerning environmental remediation coverage are expected. Other than granting motions for summary judgment brought by two excess liability insurance carriers, which contended that their policies contained absolute pollution exclusion language, and certain summary judgment motions regarding policy periods and ruling regarding choice of law issues, the Court has not made any final rulings on defense costs or indemnity coverage with respect to the Company's pending environmental litigation. Nor has the Court made any final ruling on indemnity coverage in the lead pigment litigation. No trial dates have been set. Other than rulings to date, the issue of whether insurance coverage for defense costs or indemnity or both will be found to exist depends upon a variety of factors, and there can be no assurance that such insurance coverage will exist in other cases. The Company has not considered any potential insurance recoveries for lead pigment or environmental litigation in determining related accruals. Environmental matters and litigation The Company has been named as a defendant, PRP, or both, pursuant to CERCLA and similar state laws in approximately 75 governmental and private actions associated with waste disposal sites, mining locations and facilities currently or previously owned, operated or used by the Company, or its subsidiaries, or their predecessors, certain of which are on the U.S. EPA's Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage, and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although the Company may be jointly and severally liable for such costs, in most cases it is only one of a number of PRPs who may also be jointly and severally liable. The extent of CERCLA liability cannot accurately be determined until the Remedial Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA issues a record of decision and costs are allocated among PRPs. The extent of liability under analogous state cleanup statutes and for common law equivalents are subject to similar uncertainties. The Company believes it has provided adequate accruals for reasonably estimable costs for CERCLA matters and other environmental liabilities. At December 31, 2000, the Company had accrued $110 million for those environmental matters which are reasonably estimable. The Company determines the amount of accrual on a quarterly basis by analyzing and estimating the range of possible costs to the Company. Such costs include, among other things, expenditures for remedial investigations, monitoring, managing, studies, certain legal fees, cleanup, removal and remediation. It is -14- not possible to estimate the range of costs for certain sites. The Company has estimated that the upper end of the range of reasonably possible costs to the Company for sites for which it is possible to estimate costs is approximately $170 million. The Company's estimate of such liability has not been discounted to present value and the Company has not reduced its accruals for any potential insurance recoveries. No assurance can be given that actual costs will not exceed either accrued amounts or the upper end of the range for sites for which estimates have been made, and no assurance can be given that costs will not be incurred with respect to sites as to which no estimate presently can be made. The imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes with respect to site cleanup costs or allocation of such costs among PRPs, or a determination that the Company is potentially responsible for the release of hazardous substances at other sites could result in expenditures in excess of amounts currently estimated by the Company to be required for such matters. Furthermore, there can be no assurance that additional environmental matters will not arise in the future. More detailed descriptions of certain legal proceedings relating to environmental matters are set forth below. In June 2000 the Company recognized a $43 million net gain from a settlement with one of the two principal former insurance carriers, and in December 2000 the Company recognized a $26.5 million net gain from a settlement with certain members of the other principal former insurance carrier. The settlement gains are stated net of $3.1 million in commissions, and the gross settlement proceeds of $72.6 million were transferred by the carriers to special purpose trusts established to pay future remediation and other environmental expenditures of the Company. A settlement with remaining members of the second carrier group was reached in January 2001, and the Company expects to recognize a $10 million gain in the first quarter of 2001. The settlements resolved court proceedings that the Company initiated to seek reimbursement for legal defense expenditures and indemnity coverage for certain of its environmental remediation expenditures. In July 1991 the United States filed an action in the U.S. District Court for the Southern District of Illinois against the Company and others (United States of America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to the Granite City, Illinois lead smelter formerly owned by the Company. The complaint seeks injunctive relief to compel the defendants to comply with an administrative order issued pursuant to CERCLA, and fines and treble damages for the alleged failure to comply with the order. The Company and the other parties did not implement the order, believing that the remedy selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected in accordance with law. The complaint also seeks recovery of past costs and a declaration that the defendants are liable for future costs. Although the action was filed against the Company and ten other defendants, there are 330 other PRPs who have been notified by the U.S. EPA. Some of those notified were also respondents to the administrative order. In September 1995 the U.S. EPA released its amended decision selecting cleanup remedies for the Granite City site. In September 1997 the U.S. EPA informed the Company that past and future cleanup costs are estimated to total approximately $63.5 million. In 1999 the U.S. EPA and certain other PRPs entered into a consent decree settling their liability at the site for approximately 50% of the site costs. The Company and the U.S. EPA reached an agreement in principle in 1999 to settle the Company's liability at the site for $31.5 million. The Company and the U.S. EPA are negotiating a consent decree embodying the terms of this agreement in principle. The Company reached an agreement in 1999 with the other PRPs at a formerly owned lead smelter site in Pedricktown, New Jersey to settle the Company's liability for $6 million, of which $3.2 million has been paid as of December 31, 2000. The settlement does not resolve issues regarding the Company's potential liability in the event site costs exceed $21 million. The Company does not presently expect site costs to exceed such amount and has not provided accruals for such contingency. -15- In 1998 the Company reached an agreement to settle litigation with the other PRPs at a lead smelter site in Portland, Oregon that was formerly owned by the Company. Under the agreement, the Company agreed to pay a portion of future cleanup costs. In 2000 the construction of the remediation was completed and is now in the operation and maintenance phase. In 2000 the Company reached an agreement with the other PRPs at the Baxter Springs subsite in Cherokee County, Kansas, to resolve the Company's liability. The Company and others formerly mined lead and zinc in the Baxter Springs subsite. Under the agreement, the Company agreed to pay a portion of the cleanup costs associated with the Baxter Springs subsite. The U.S. EPA has estimated the total cleanup costs in the Baxter Springs subsite to be $5.4 million. The remedial design phase of the cleanup is underway. In 1996 the U.S. EPA ordered the Company to perform a removal action at a formerly owned facility in Chicago, Illinois. The Company has complied with the order and has completed the on-site work at the facility. The Company is conducting an investigation regarding potential offsite contamination. Residents in the vicinity of the Company's former Philadelphia lead chemicals plant commenced a class action allegedly comprised of over 7,500 individuals seeking medical monitoring and damages allegedly caused by emissions from the plant. Wagner, et al. v. Anzon, Inc. and NL Industries, Inc., No. 87- 4420, Court of Common Pleas, Philadelphia County. The complaint sought compensatory and punitive damages from the Company and the current owner of the plant, and alleged causes of action for, among other things, negligence, strict liability, and nuisance. A class was certified to include persons who resided, owned or rented property, or who work or have worked within up to approximately three-quarters of a mile from the plant from 1960 through the present. The Company answered the complaint, denying liability. In December 1994 the jury returned a verdict in favor of the Company. Plaintiffs appealed to the Pennsylvania Superior Court and in September 1996 the Superior Court affirmed the judgment in favor of the Company. In December 1996 plaintiffs filed a petition for allowance of appeal to the Pennsylvania Supreme Court, which was declined. Residents also filed consolidated actions in the United States District Court for the Eastern District of Pennsylvania, Shinozaki v. Anzon, Inc. and Wagner and Antczak v. Anzon and NL Industries, Inc. Nos. 87-3441, 87-3502, 87-4137 and 87-5150. The consolidated action is a putative class action seeking CERCLA response costs, including cleanup and medical monitoring, declaratory and injunctive relief and civil penalties for alleged violations of the RCRA, and also asserting pendent common law claims for strict liability, trespass, nuisance and punitive damages. The court dismissed the common law claims without prejudice, dismissed two of the three RCRA claims as against the Company with prejudice, and stayed the case pending the outcome of the state court litigation. In 2000 the Company reached an agreement with the other PRPs at the Batavia Landfill Superfund Site in Batavia, New York to resolve the Company's liability. The Batavia Landfill is a former industrial waste disposal site. Under the agreement, the Company agreed to pay 40% of the future remedial construction costs, which the U.S. EPA has estimated to be approximately $11 million. Under the settlement, the Company is not responsible for costs associated with the operation and maintenance of the remedy. In connection with the settlement, the U.S. EPA waived approximately $4 million in past response costs. In addition, the Company received approximately $2 million from settling PRPs. The remedial design phase of the remedy is underway. In October 2000 the Company was served with a complaint in Pulliam, et al. v. NL Industries, Inc., et al., No. 49DO20010CT001423, filed in superior court in Marion County, Indiana, on behalf of an alleged -16- class of all persons and entities who own or have owned property or have resided within a one-mile radius of an industrial facility formerly owned by the Company in Indianapolis, Indiana. Plaintiffs allege that they and their property have been injured by lead dust and particulates from the facility and seek unspecified actual and punitive damages and a removal of all alleged lead contamination. In December 2000 the Company filed an answer denying all allegations of wrongdoing and liability. Discovery is proceeding. See Item 1. "Business - Regulatory and Environmental Matters." Other litigation The Company has been named as a defendant in various lawsuits in a variety of jurisdictions alleging personal injuries as a result of occupational exposure to asbestos, silica and/or mixed dust in connection with formerly owned operations. Various of these actions remain pending, including the following matters. In March 1997 the Company was served with a complaint in Ernest Hughes, et al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the Fifth Judicial District Court of Cass County, Texas, on behalf of approximately 4,000 plaintiffs and their spouses alleging injury due to exposure to asbestos and seeking compensatory and punitive damages. The Company has filed an answer denying the material allegations. The case has been inactive since 1998. In February 1999 and October 2000 the Company was served with complaints in Cosey, et al. v. Bullard, et al., No. 95-0069, and Pierce, et al. v. GAF, et al., No. 2006-150, filed in the Circuit Court of Jefferson County, Mississippi, on behalf of approximately 1,600 plaintiffs and 275 plaintiffs, respectively, alleging injury due to exposure to asbestos and/or silica and seeking compensatory and punitive damages. The Cosey case was removed to federal court and has been transferred to the eastern district of Pennsylvania for consolidated proceedings. The Company has filed answers in both cases denying the material allegations of the complaint. In addition, the Company is a defendant in various asbestos cases pending in Ohio, Indiana and West Virginia on behalf of approximately 4,600 personal injury claimants. In August and September 2000 the Company and one of its subsidiaries, NLO, Inc. ("NLO"), were named as defendants in four lawsuits filed in federal court in the western district of Kentucky against the Department of Energy ("DOE") and a number of other defendants alleging that nuclear material supplied by, among others, the Feed Material Production Center ("FMPC") in Fernald, Ohio, owned by the DOE and formerly managed under contract by NLO, harmed employees and others at the DOE's Paducah, Kentucky Gaseous Diffusion Plant ("PGDP"). With respect to each of the cases listed below, the Company believes that the DOE is obligated to provide defense and indemnification pursuant to its contract with NLO, and pursuant to its statutory obligation to do so, as the DOE has in several previous cases relating to management of the FMPC, and the Company has so advised the DOE. Answers in the four cases have not been filed. The Company and NLO have moved to dismiss Rainer I. The Company and NLO intend to deny all allegations of wrongdoing and liability and to defend the cases vigorously. * In Rainer, et al. v. E.I. du Pont de Nemours, et al., ("Rainer I") No. 5:00CV-223-J, plaintiffs purport to represent a class of former employees at the PGDP and members of their households and seek -17- actual and punitive damages of $5 billion each for alleged negligence, infliction of emotional distress, ultra-hazardous activity/strict liability and strict products liability. * In Rainer, et al. v. Bill Richardson, et al., No. 5:00CV-220-J, plaintiffs purport to represent the same classes regarding the same matters alleged in Rainer I, and allege a violation of constitutional rights and seek the same recovery sought in Rainer I. * In Dew, et al. v. Bill Richardson, et al., No. 5:00CV00221R, plaintiffs purport to represent classes of all PGDP employees who sustained pituitary tumors or cancer as a result of exposure to radiation and seek actual and punitive damages of $2 billion each for alleged violation of constitutional rights, assault and battery, fraud and misrepresentation, infliction of emotional distress, negligence, ultra-hazardous activity/strict liability, strict products liability, conspiracy, concert of action, joint venture and enterprise liability, and equitable estoppel. * In Shaffer, et al. v. Atomic Energy Commission, et al., No. 5:00CV00307M, plaintiffs purport to represent classes of PGDP employees and household members, subcontractors at PGDP, and landowners near the PGDP and seek actual and punitive damages of $1 billion each and medical monitoring for the same counts alleged in Dew. The Company is also involved in various other environmental, contractual, product liability and other claims and disputes incidental to its present and former businesses, and the disposition of past properties and former businesses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 2000. -18- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS NL's common stock is listed and traded on the New York Stock Exchange and the Pacific Exchange under the symbol "NL." As of March 9, 2001, there were approximately 6,000 holders of record of NL common stock. The following table sets forth the high and low sales prices for NL common stock on the New York Stock Exchange ("NYSE") Composite Tape. On March 9, 2001, the closing price of NL common stock according to the NYSE Composite Tape was $19.63.
Dividends High Low Declared --------- ---------- ---------- Year ended December 31, 1999: First quarter $14-15/16 $ 8-3/4 $ .035 Second quarter 13-9/16 9-1/16 .035 Third quarter 13-5/16 11-1/8 .035 Fourth quarter 15-7/16 9-3/4 .035 Year ended December 31, 2000: First quarter $ 16-3/8 $ 13 $ .15 Second quarter 19 13-1/8 .15 Third quarter 24-3/8 15-1/2 .15 Fourth quarter 25 18-15/16 .20
The Company's indenture to its Senior Notes limits the ability of the Company to pay dividends, acquire treasury shares and make other restricted payments, as defined. The aggregate amount of dividends and other restricted payments since October 1993 may not exceed 50% of the aggregate consolidated net income, as defined in the indenture, since October 1993. At December 31, 2000, $20 million was available for restricted payments including dividends, acquisition of treasury shares and affiliate stock purchases. In October 2000 the Company increased the regular quarterly dividend to $.20 per share and subsequently paid a $.20 per share cash dividend in the fourth quarter of 2000. On February 7, 2001, the Company's Board of Directors declared a regular quarterly dividend of $.20 per share to shareholders of record as of March 14, 2001 to be paid on March 28, 2001. The declaration and payment of future dividends is discretionary, and the amount, if any, will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Company's Board of Directors. Pursuant to its share repurchase program, the Company purchased 1,682,000 shares of its common stock at an aggregate cost of $30.9 million in 2000 and 552,000 shares of its common stock in the open market at an aggregate cost of $7.2 million in 1999. Approximately 766,000 additional shares are available for purchase under the Company's share repurchase program. The available shares may be purchased over an unspecified period of time, and are to be held as treasury shares available for general corporate purposes. -19- ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Certain amounts have been reclassified to conform with the current year's consolidated financial statement presentation.
Years ended December 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (In millions, except per share amounts) INCOME STATEMENT DATA: Net sales .................................... $ 922.3 $ 908.4 $ 894.7 $ 837.2 $ 851.2 Operating income ............................. 212.5 145.7 171.2 82.5 71.6 Income (loss) from continuing operations ..... 155.3 159.8 89.9 (29.9) (11.7) Net income (loss) ............................ 154.6 159.8 366.7 (9.5) 10.8 Earnings per share: Basic: Income (loss) from continuing operations . $ 3.08 $ 3.09 $ 1.75 $ (.58) $ (.23) Net income (loss) ........................ 3.07 3.09 7.13 (.19) .21 Diluted: Income (loss) from continuing operations . $ 3.06 $ 3.08 $ 1.73 $ (.58) $ (.23) Net income (loss) ........................ 3.05 3.08 7.05 (.19) .21 Cash dividends ............................... $ .65 $ .14 $ .09 $ -- $ .30 BALANCE SHEET DATA at year end: Cash, cash equivalents, current marketable securities, current and noncurrent restricted cash equivalents ............................ $ 207.6 $ 151.8 $ 163.1 $ 106.1 $ 114.1 Current assets ............................... 553.8 506.4 546.8 454.9 500.2 Total assets ................................. 1,120.8 1,056.2 1,155.6 1,098.5 1,221.4 Current liabilities .......................... 298.0 264.8 310.7 276.7 290.3 Long-term debt including current maturities .. 196.1 244.5 357.6 744.2 829.0 Shareholders' equity (deficit) ............... 344.5 271.1 152.3 (222.3) (203.5) CASH FLOW DATA: Operating activities ......................... $ 139.7 $ 108.3 $ 45.1 $ 89.2 $ 16.5 Investing activities ......................... (56.2) (38.4) 417.3 (11.1) (68.4) Financing activities ......................... (95.7) (88.0) (396.2) (82.6) 26.6 Operating, investing and financing activities (12.2) (18.1) 66.2 (4.5) (25.3) OTHER NON-GAAP FINANCIAL DATA: EBITDA (1) ................................... $ 286.3 $ 162.5 $ 187.4 $ 67.6 $ 90.7 OTHER DATA: Net debt at year end (2) ..................... $ 58.5 $ 149.8 $ 226.7 $ 652.0 $ 740.7 Interest expense, net (3) .................... 22.9 30.3 43.1 63.0 64.6 Cash interest expense, net (4) ............... 23.8 28.6 24.8 39.9 44.2 Capital expenditures ......................... 31.1 35.6 22.4 28.2 64.2
-20-
Years ended December 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (In millions, except per share amounts) TiO2 OPERATING STATISTICS: Average selling price in billing currencies index (1983=100) ............................. 162 153 154 133 139 Sales volumes (metric tons in thousands) ....... 436 427 408 427 388 Production volume (metric tons in thousands) ... 441 411 434 408 373 Production capacity at beginning of year (metric tons in thousands) ................... 440 440 420 400 390 Production rate as a percentage of capacity .... Full 93% Full Full 95%
(1) EBITDA, as presented, represents operating income less corporate expense, plus (i) litigation settlement gains, net, (ii) other corporate income and (iii) depreciation, depletion and amortization. EBITDA is presented as a supplement to the Company's operating income and cash flow from operations because the Company believes that EBITDA is a widely accepted financial indicator of cash flows and the ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, operating income or net income determined under generally accepted accounting principles ("GAAP") as an indicator of the Company's operating performance, or cash flows from operating, investing and financing activities determined under GAAP as a measure of liquidity. EBITDA is not intended to depict funds available for reinvestment or other discretionary uses, as the Company has significant debt requirements and other commitments. Investors should consider certain factors in evaluating the Company's EBITDA, including interest expense, income taxes, noncash income and expense items, changes in assets and liabilities, capital expenditures, investments in joint ventures and other items included in GAAP cash flows as well as future debt repayment requirements and other commitments, including those described in Notes 9, 12 and 17 to the Consolidated Financial Statements. The Company believes that the trend of its EBITDA is consistent with the trend of its GAAP operating income, except in (i) 1997 when EBITDA decreased and operating income increased from 1996 amounts due to a $30 million noncash charge related to the Company's adoption of SOP 96-1, "Environmental Remediation Liabilities" and (ii) 2000 when $70 million of net litigation settlement gains are included in EBITDA and excluded from operating income, which treatment results in a higher percentage increase over 1999 for EBITDA as compared to the percentage increase over 1999 for operating income. See "Management's Discussion and Analysis" for a discussion of operating income and cash flows during the last three years and the Company's outlook. EBITDA as a measure of a company's performance may not be comparable to other companies, unless substantially all companies and analysts determine EBITDA as computed and presented herein. (2) Net debt represents notes payable and long-term debt less cash, cash equivalents, current marketable securities and current and noncurrent restricted cash equivalents. (3) Interest expense, net represents interest expense less general corporate interest and dividend income. (4) Cash interest expense, net represents interest expense, net as defined in (3) above less noncash interest expense plus noncash interest income. Noncash interest expense includes deferred interest expense on the Senior Secured Discount Notes in 1996 through 1998 and amortization of deferred financing costs. Noncash interest income includes interest income on restricted cash in 2000. -21- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS General The Company's continuing operations are conducted by Kronos in the TiO2 business segment. As discussed below, average TiO2 selling prices in billing currencies increased in 2000 and slightly decreased in 1999 compared to the prior year. Kronos' operating income increased $66.8 million in 2000 and declined $25.5 million in 1999. Gross profit margins were 34% in 2000, 27% in 1999 and 31% in 1998. Many factors influence TiO2 pricing levels, including (i) industry capacity, (ii) worldwide demand growth, (iii) customer inventory levels and purchasing decisions and (iv) relative changes in foreign currency exchange rates. Kronos believes that the TiO2 industry has long-term growth potential, as discussed in "Item 1. Business - Industry" and "- Competition."
Years ended December 31, % Change ------------------------- ----------------- 2000 1999 1998 2000-99 1999-98 ----- ---- ---- ------- ------- (In millions) Net sales and operating income Net sales ................................... $922.3 $908.4 $894.7 +2% +2% Operating income ............................ $212.5 $145.7 $171.2 +46% -15% Operating income margin percentage .......... 23% 16% 19% TiO2 operating statistics Percent change in average selling prices (in billing currencies) ................... +6% -1% Sales volume (metric tons in thousands) ..... 436 427 408 +2% +5% Production volume (metric tons in thousands). 441 411 434 +7% -5% Production rate as a percent of capacity .... Full 93% Full
Kronos' operating income for 2000 was higher than 1999 due to higher average TiO2 selling prices in billing currencies and higher production and sales volumes. Kronos' operating income in 1999 was lower than 1998, primarily due to lower average TiO2 selling prices and lower production volume, partially offset by higher sales volume. Average TiO2 selling prices in billing currencies (which excludes the effects of foreign currency translation) during 2000 were 6% higher than in 1999 with higher prices in all major regions with the greatest improvement being realized in the European and export markets. Pigment prices increased from the preceding quarter during each quarter of 2000, continuing the upward trend that began in the fourth quarter of 1999. The rate of price increases slowed in the fourth quarter to 1% over the third quarter of 2000, and prices at the end of the fourth quarter of 2000 were slightly lower than the average for the quarter. Since prices began to increase in the fourth quarter of 1999, prices have increased an aggregate of 16% in Europe and 3% in North America over the five-quarter period. Average TiO2 selling prices in 1999 were 1% lower than 1998 with higher prices in North America offset by lower prices in Europe and export markets. -22- Record sales volume of 436,000 metric tons of TiO2 in 2000 was 2% higher than 1999, primarily due to higher sales in Europe and North America. Kronos' sales volume in the fourth quarter of 2000 decreased 16% from the record fourth quarter of 1999. Approximately one-half of Kronos' 2000 TiO2 sales volume was attributable to markets in Europe with approximately 37% attributable to North America, and the balance to other regions. Sales volume in 1999 was 5% higher than 1998 with growth in all major regions. Industry-wide demand was strong for the first half of 1998, before moderating in the second half of 1998 and early 1999. Demand in the second half of 1999 and the first three quarters of 2000 was stronger than comparable year-earlier periods as a result of, among other things, customers buying in advance of anticipated price increases. Demand softened in the fourth quarter of 2000. The Company's record production volume of 441,000 metric tons in 2000 was 7% higher than the 411,000 metric tons produced in 1999. Operating rates were near full capacity in 2000 compared to 93% in 1999. Kronos' production volume in 1999 was 5% lower than the 434,000 metric tons produced in 1998 with operating rates near full capacity in 1998. Production volume was curtailed in the beginning of the first quarter of 1999 in order to manage inventory levels. Finished goods inventory levels increased in the fourth quarter of 2000 and at the end of 2000 represent about two months of sales. The Company's efforts to debottleneck Kronos' production facilities to meet long-term demand continue to prove successful. The Company expects Kronos' production capacity of 450,000 metric tons at the end of 2000 will be increased to approximately 465,000 metric tons during 2002, primarily at its chloride facilities, with moderate capital expenditures. Industry demand in 2001 is expected to heavily depend upon worldwide economic conditions. The Company believes 2001 sales and production volumes should approximate 2000 levels. The price increase that was originally scheduled for October 2000 in North America has not been implemented due to market conditions. The Company recently announced a European price increase of euro 140 per metric ton scheduled to be implemented late in the first quarter and early in the second quarter of 2001. The Company believes that its average 2001 prices will approximate its average 2000 prices. The extent to which Kronos can realize these or other price increases in 2001 will depend on market conditions. Kronos expects its operating income in the first quarter of 2001 will be comparable to the first quarter of 2000. Operating income for the balance of 2001 will depend on worldwide economic conditions. If the economy continues to soften, selling prices and sales volume could be lower than expected and full year 2001 operating income would likely be below 2000 levels factoring in higher anticipated costs, particularly energy. However, if demand strengthens later in the year the Company should be able to realize price increases. Kronos believes this would put its operating income closer to or above the 2000 level. The Company's expectations as to the future prospects of the Company and the TiO2 industry are based upon a number of factors beyond the Company's control, including continued worldwide growth of gross domestic product, competition in the market place, unexpected or earlier-than-expected capacity additions and technological advances. If actual developments differ from the Company's expectations, the Company's performance could be unfavorably affected. Excluding the effects of foreign currency translation, which reduced the Company's expenses in both 2000 and 1999 compared to the year-earlier periods, Kronos' cost of sales in 2000 was lower than 1999 primarily due to lower unit costs, which resulted primarily from higher production levels. Kronos' cost of sales in 1999 was higher than 1998 due to higher sales volume and higher unit costs, which resulted primarily from lower production levels. Cost of sales, as a percentage of net sales, decreased in 2000 primarily due to the -23- impact on net sales of higher average selling prices and lower unit costs, and increased in 1999 primarily due to the impact on net sales of lower average selling prices and higher unit costs. Excluding the effects of foreign currency translation, which reduced the Company's expense in both 2000 and 1999 compared to the year-earlier periods, selling, general and administrative expenses ("SG&A"), excluding corporate expenses, increased in 2000 from the year-earlier period primarily due to higher variable compensation expense and higher selling and distribution expenses associated with higher 2000 sales volumes. SG&A, excluding corporate expenses, increased in 1999 from the year-earlier period due to higher selling and distribution expenses associated with higher 1999 sales volume. SG&A, excluding corporate expenses, as a percentage of net sales, was 12% in each of 2000, 1999 and 1998. See discussion of corporate expenses below. The Company has substantial operations and assets located outside the United States (principally Germany, Norway, Belgium and Canada). The Company's non-U.S. sales and operating costs are subject to currency exchange rate fluctuations which may impact reported earnings and may affect the comparability of period-to-period revenues and expenses expressed in U.S. dollars. A significant amount of the Company's sales (59% in 2000) are denominated in currencies other than the U.S. dollar, principally the euro, other major European currencies and the Canadian dollar. Certain purchases of raw materials, primarily titanium-containing feedstocks, are denominated in U.S. dollars, while labor and other production costs are primarily denominated in local currencies. Fluctuations in the value of the U.S. dollar relative to other currencies, primarily a stronger U.S. dollar compared to the euro, decreased sales by $68 million and $15 million during 2000 and 1999, respectively, compared to the year-earlier period. When translated to U.S. dollars using currency exchange rates prevailing during the respective periods, Kronos' average selling prices for 2000 decreased 1% from 1999. Kronos' average selling prices in U.S. dollars for 1999 decreased 3% from 1998. The effect of the stronger U.S. dollar on Kronos' operating costs that are not denominated in U.S. dollars reduced operating costs in 2000 and 1999 compared to the respective prior year. In addition, sales to export markets are typically denominated in U.S. dollars and a stronger U.S. dollar improves margins on these sales at the Company's non-U.S. subsidiaries. The favorable margin on export sales tends to offset the unfavorable effect of translating local currency profits to U.S. dollars when the dollar is stronger. As a result, the net impact of currency exchange rate fluctuations on operating income in 2000 and 1999, excluding the 1999 $5.3 million foreign currency transaction gain, was not significant when compared to the year-earlier periods. -24- General corporate The following table sets forth certain information regarding general corporate income (expense).
Years ended December 31, Change ----------------------------- ------------------ 2000 1999 1998 2000-99 1999-98 ------- ------- ------- ------- ------- (In millions) Securities earnings: Interest and dividends $ 8.3 $ 6.6 $ 14.9 $ 1.7 $ (8.3) Securities gains, net 2.5 -- -- 2.5 -- Corporate income ......... 73.7 4.6 4.4 69.1 .2 Corporate expense ........ (29.6) (21.5) (22.7) (8.1) 1.2 Interest expense ......... (31.2) (36.9) (58.1) 5.7 21.2 ------- ------- ------- ------- ------- $ 23.7 $ (47.2) $ (61.5) $ 70.9 $ 14.3 ======= ======= ======= ======= =======
Corporate interest and dividend income, including noncash interest income on restricted cash balances, fluctuate in part based upon the amount of funds invested and yields thereon. Average funds invested in 2000 were higher than 1999 primarily due to the increase in restricted cash related to the $43.0 million litigation settlement in July 2000. Average funds invested in 1999 were lower than 1998 primarily due to the repayment of certain of the Company's debt in the last half of 1998. Securities gains, net in 2000 includes a second-quarter $5.6 million securities gain related to common stock received from the demutualization of an insurance company from which the Company had purchased certain insurance policies and a fourth-quarter $3.1 million noncash securities loss related to an other-than-temporary decline in value of certain available-for-sale securities held by the Company. See Note 4 to the Consolidated Financial Statements. Corporate income in 2000 includes a $69.5 million net gain from settlements with former insurance carriers. In January 2001 the Company reached a $10 million settlement with the remaining group of its principal former insurance carriers and expects to report the gain in the first quarter of 2001. No further material settlements relating to litigation concerning environmental remediation coverage are expected. See Note 14 to the Consolidated Financial Statements. The Company recognized $4.0 million in both 2000 and 1999 and $3.7 million in 1998 of income related to the straight-line, five-year amortization of $20 million of proceeds received in conjunction with the sale of its specialty chemicals business attributable to a five-year agreement by the Company not to compete in the rheological products business. Corporate expense in 2000 was higher than 1999, primarily as a result of higher legal and environmental expenses. The Company expects corporate expense in 2001 will be slightly lower than 2000 primarily due to lower legal and environmental expenses. Interest expense in 2000 declined compared to 1999 primarily due to reduced levels of outstanding euro-denominated debt. Interest expense in 1999 declined compared to 1998 due to the prepayment of the Company's former Deutsche mark bank credit facility in 1999 and prepayments of outstanding indebtedness in 1998, principally the Senior Secured Discount Notes, a joint venture term loan and a portion of the Company's former DM bank credit facility. Assuming no significant change in interest rates, interest expense in 2001 is expected to be lower compared to 2000 due to (i) lower levels of outstanding indebtedness and -25- (ii) lower average interest rates as a result of the December 2000 refinancing of $50 million of the Company's high fixed-rate public debt with lower variable-rate bank debt. Provision for income taxes The principal reasons for the difference between the U.S. federal statutory income tax rates and the Company's effective income tax rates are explained in Note 12 to the Consolidated Financial Statements. The Company's operations are conducted on a worldwide basis and the geographic mix of income can significantly impact the Company's effective income tax rate. In 2000 the Company's effective income tax rate varied from the normally expected rate primarily due to the geographic mix of income, changes in the German income tax "base" rate and the recognition of certain deductible tax assets which previously did not meet the "more-likely-than-not" recognition criteria. In 1999 and 1998 the Company's effective tax rate varied from the normally expected rate due predominantly to the recognition of certain deductible tax attributes which previously did not meet the "more-likely-than-not" recognition criteria. Also in 2000, 1999 and 1998, the Company recognized certain one-time benefits related to German tax settlements. Effective January 1, 2001, the Company and its qualifying subsidiaries will be included in the consolidated United States federal tax return of Contran (the "Contran Tax Group"). As a member of the Contran Tax Group, the Company is a party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax Agreement provides that the Company compute its provision for U.S. income taxes on a separate company basis using the tax elections made by Contran. Pursuant to the Contran Tax Agreement, and using the tax elections made by Contran, the Company will make payments to or receive payments from Valhi in amounts it would have paid to or received from the Internal Revenue Service had it not been a member of the Contran Tax Group. Refunds are limited to amounts previously paid under the Contran Tax Agreement. Other Minority interest primarily relates to the Company's majority-owned environmental management subsidiary, NL Environmental Management Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS contractually assumed certain of the Company's environmental liabilities. EMS' earnings are based, in part, upon its ability to favorably resolve these liabilities on an aggregate basis. The minority interest shareholders of EMS actively manage the environmental liabilities and share in 39% of EMS' cumulative earnings, as defined in the formation documents. The Company includes liabilities contractually assumed by EMS in its consolidated balance sheet. Discontinued operations in 1998 represent the Company's former specialty chemicals operation which was sold in January 1998. The extraordinary items in 2000 and 1998 resulted from early extinguishment of debt. -26- LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash flows, including certain discontinued operations in 1998, for each of the past three years are presented below.
Years ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (In millions) Net cash provided (used) by: Operating activities: Before changes in assets and liabilities ..... $ 153.1 $ 115.7 $ 137.0 Changes in assets and liabilities ............ (13.4) (7.4) (91.9) -------- -------- -------- 139.7 108.3 45.1 Investing activities ........................... (56.2) (38.4) 417.3 Financing activities ........................... (95.7) (88.0) (396.2) -------- -------- -------- Net cash provided (used) by operating, investing and financing activities ........................ $ (12.2) $ (18.1) $ 66.2 ======== ======== ========
Operating cash flows Certain items included in the determination of net income do not represent current inflows or outflows of cash. For example, the $3.1 million security transaction loss recognized in 2000 for an other-than-temporary decline in value of certain marketable securities held by the Company, did not result in a current outflow of cash. Depreciation, depletion and amortization is another noncash expense item. Noncash interest expense consists of amortization of original issue discount on certain indebtedness and amortization of deferred financing costs. Certain other items included in the determination of net income have an impact on cash flows from operating activities, but the impact of such items on cash will differ from their impact on net income. For example, the amount of income or expense recorded for pension and OPEB assets and obligations (which depend upon a number of factors, including actuarial assumptions used to value obligations) will generally differ from the outflows of cash for such benefits. See Note 10 to the Consolidated Financial Statements. The TiO2 industry is cyclical and changes in economic conditions within the industry significantly impact the earnings and operating cash flows of the Company. Cash flow from operations, before changes in assets and liabilities increased $37.4 million in 2000 and decreased $21.3 million in 1999 from the preceding year. Operating cash flows in 2000 compared to 1999 were favorably affected by $66.8 million higher operating income and $4.8 million of lower cash interest expense, net, partially offset by $5.3 million of higher payments to fund the Company's pension plans, $8.2 million of higher corporate expenses, $16.1 million of higher current tax expense, and $6.1 million of lower distributions from the TiO2 manufacturing joint venture. Operating cash flows in 1999 compared to 1998 were unfavorably affected by $25.5 million of lower operating income, $7.4 million of higher current tax expense and $3.8 million of higher cash interest expense, net, partially offset by $13.7 million of distribution from the joint venture. -27- Changes in the Company's assets and liabilities (excluding the effect of currency translation) used cash in 2000, 1999 and 1998 primarily due to increases in inventory levels in 2000 and 1998 and increases in receivable levels in 1999 due to high year-end demand. Investing cash flows The Company's capital expenditures were $31 million, $36 million and $22 million in 2000, 1999 and 1998, respectively. Capital expenditures in 1999 were higher due to $6 million of expenditures for a landfill expansion for the Company's Belgian facility. Capital expenditures of the 50%-owned manufacturing joint venture were $4 million in each of 2000, 1999 and 1998 and are not included in the Company's capital expenditures. The Company's capital expenditures during the past three years include an aggregate of $24 million ($8 million in 2000) for the Company's ongoing environmental protection and compliance programs. The Company's estimated 2001 and 2002 capital expenditures are $37 million for each year, and include $6 million and $5 million, respectively, in the area of environmental protection and compliance. During 2000 the Company purchased 1,000,000 shares of Tremont's common stock in market transactions for an aggregate of $26 million. See Notes 1 and 4 to the Consolidated Financial Statements. Tremont owns 10.2 million shares, or 20%, of NL's outstanding common stock. In February 2001 NL Environmental Management Services, Inc., a majority-owned subsidiary of the Company, loaned $13.4 million to Tremont. The loan bears interest at prime plus 2%, is due March 31, 2003 and is collateralized by 10.2 million shares of NL common stock owned by Tremont. The Company sold the net assets of its specialty chemicals business in January 1998 for $465 million and recognized an after-tax gain of approximately $286 million on the sale of this business segment. Financing cash flows In the second and third quarters of 2000 the Company repaid euro 17.9 million ($16.7 million when paid) and euro 13.0 million ($12.2 million when paid), respectively, of its euro-denominated short-term debt with cash flow from operations. In December 2000 the Company borrowed $43 million of short-term non- U.S. dollar-denominated bank debt and used the proceeds along with cash on hand to redeem $50 million (par value) of the Company's 11.75% Senior Secured Notes. In the first quarter of 1999 the Company prepaid the remaining balance of DM 107 million ($60 million when paid) of a term loan that was part of the Company's previous DM bank credit facility, principally by drawing DM 100 million ($56 million when drawn) on the revolving portion of the DM credit facility. In the second and third quarters of 1999, the Company repaid DM 60 million ($33 million when paid) of the DM revolving credit facility with cash provided from operations. The revolver's outstanding balance of DM 120 million was further reduced in October 1999 by DM 20 million ($11 million when paid). In December 1999 the Company borrowed $26 million of short-term unsecured euro-denominated bank debt and used the proceeds along with cash on hand to prepay the remaining balance of DM 100 million ($52 million when paid) of the revolving portion of the DM credit facility. The DM credit facility was then terminated, which released collateral and eliminated certain restrictive loan covenants. -28- Borrowings in 1998 included DM 35 million ($19 million when borrowed) under the Company's short-term non-U.S. credit facilities and DM 20 million ($11 million when borrowed) under the Company's DM revolving credit facility. Repayments in 1998 included DM 40 million ($23 million when paid) of the DM revolving credit facility and DM 81 million ($44 million when paid) of its DM term loan. The Company's borrowings and principal repayments excludes activity related to the Company's discontinued operations. With a majority of the $380 million after-tax net proceeds from the sale of its specialty chemicals business, the Company (i) prepaid $118 million of the Rheox term loan (included as Discontinued operations, net, on the Company's Consolidated Statements of Cash Flows), (ii) prepaid $42 million of Kronos' tranche of the LPC joint venture term loan, (iii) made $65 million of open-market purchases of the Company's 13% Senior Secured Discount Notes at prices ranging from $101.25 to $105.19 per $100 of their principal amounts, (iv) purchased $6 million of the Senior Secured Notes and $61,000 of the Senior Secured Discount Notes at a price of $100 and $96.03 per $100 of their principal amounts, respectively, pursuant to a June 1998 pro rata tender offer to Note holders as required under the terms of the indenture, and (v) redeemed $121 million of 13% Senior Secured Discount Notes outstanding on October 15, 1998 at the redemption price of 106% of the principal amount, in accordance with the terms of the Senior Secured Discount Notes indenture. Dividends paid during 2000, 1999 and 1998 totaled $32.7 million, $7.2 million and $4.6 million, respectively. At December 31, 2000, the Company had $20 million available for payment of dividends, acquisition of treasury shares, acquisition of affiliate stock and other restricted payments as defined in the Senior Secured Notes indenture. On February 7, 2001, the Company's Board of Directors declared a regular quarterly dividend of $.20 per share to shareholders of record as of March 14, 2001 to be paid on March 28, 2001. Pursuant to its share repurchase program, the Company purchased 1,682,000 shares of its common stock at an aggregate cost of $30.9 million in 2000 and 552,000 shares of its common stock in the open market at an aggregate cost of $7.2 million in 1999. Approximately 766,000 additional shares are available for purchase under the Company's share repurchase program. The available shares may be purchased over an unspecified period of time, and are to be held as treasury shares available for general corporate purposes. In 1998, as a result of the settlement of a shareholder derivative lawsuit on behalf of the Company, Valhi transferred $14.4 million in cash to the Company, and the Company paid plaintiffs' attorneys' fees and expenses of $3.2 million. Cash, cash equivalents, restricted cash and borrowing availability At December 31, 2000, the Company had cash and cash equivalents aggregating $120 million (38% held by non-U.S. subsidiaries) and $87 million of restricted cash equivalents held by U.S. subsidiaries, of which $18 million was classified as a noncurrent asset. At December 31, 2000, the Company's subsidiaries had $16 million available for borrowing under non-U.S. credit facilities. At December 31, 2000, the Company had complied with all financial covenants governing its debt agreements. Based upon the Company's expectations for the TiO2 industry and anticipated demands on the Company's cash resources as discussed herein, the Company expects to have sufficient liquidity to meet its near-term obligations including operations, capital expenditures, debt service and current dividend policy. To the extent that actual developments differ from Company's expectations, the Company's liquidity could be adversely affected. -29- Income taxes A reduction in the German "base" income tax rate from 30% to 25%, enacted in October 2000, became effective January 1, 2001. The reduction in the German income tax rate resulted in $5.7 million of additional deferred income tax expense in the fourth quarter of 2000 due to a reduction of the Company's deferred income tax asset related to certain German tax attributes. The Company does not expect its future current income tax expense to be affected by the rate change in Germany. Certain of the Company's tax returns in various U.S. and non-U.S. jurisdictions are being examined and tax authorities have proposed or may propose tax deficiencies, including interest. The Company has received tax assessments from the Norwegian tax authorities proposing tax deficiencies including related interest of approximately NOK 38 million ($4.3 million at December 31, 2000) relating to 1994 and 1996. The Company is currently litigating the primary issue related to the 1994 assessment and in February 2001 the Norwegian Appeals Court ruled in favor of the Norwegian tax authorities. The Company has appealed the case to the Norwegian Supreme Court and believes that the outcome of the 1996 case is dependent on the eventual outcome of the 1994 case. The Company has granted a lien for the 1994 and 1996 tax assessments on its Fredrikstad, Norway TiO2 plant in favor of the Norwegian tax authorities. The Company has received preliminary tax assessments for the years 1991 to 1997 from the Belgian tax authorities proposing tax deficiencies, including related interest, of approximately euro 12.7 million ($11.8 million at December 31, 2000). The Company has filed protests to the assessments for the years 1991 to 1996 and expects to file a protest for 1997. The Company is in discussions with the Belgian tax authorities and believes that a significant portion of the assessments are without merit. No assurance can be given that the Company's tax matters will be favorably resolved due to the inherent uncertainties involved in court and tax proceedings. The Company believes that it has provided adequate accruals for additional taxes and related interest expense which may ultimately result from all such examinations and believes that the ultimate disposition of such examinations should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. At December 31, 2000, the Company had net deferred tax liabilities of $136 million. The Company operates in numerous tax jurisdictions, in certain of which it has temporary differences that net to deferred tax assets (before valuation allowance). The Company has provided a deferred tax valuation allowance of $190 million at December 31, 2000, principally related to Germany, partially offsetting deferred tax assets which the Company believes do not currently meet the "more-likely-than-not" recognition criteria. Environmental matters and litigation The Company has been named as a defendant, PRP, or both, in a number of legal proceedings associated with environmental matters, including waste disposal sites, mining locations and facilities currently or previously owned, operated or used by the Company, certain of which are on the U.S. EPA's Superfund National Priorities List or similar state lists. On a quarterly basis, the Company evaluates the potential range of its liability at sites where it has been named as a PRP or defendant, including sites for which EMS has contractually assumed the Company's obligation. The Company believes it has adequate accruals for reasonably estimable costs of such matters, but the Company's ultimate liability may be affected -30- by a number of factors, including changes in remedial alternatives and costs and the allocation of such costs among PRPs. The Company is also a defendant in a number of legal proceedings seeking damages for personal injury and property damage arising out of the sale of lead pigments and lead-based paints. There is no assurance that the Company will not incur future liability in respect of this pending litigation in view of the inherent uncertainties involved in court and jury rulings in pending and possible future cases. However, based on, among other things, the results of such litigation to date, the Company believes that the pending lead pigment and paint litigation is without merit. The Company has not accrued any amounts for such pending litigation. Liability that may result, if any, cannot reasonably be estimated. The Company currently believes the disposition of all claims and disputes, individually and in the aggregate, should not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance that additional matters of these types will not arise in the future. See Item 3. "Legal Proceedings" and Note 17 to the Consolidated Financial Statements. Foreign operations As discussed above, the Company has substantial operations located outside the United States for which the functional currency is not the U.S. dollar. As a result, the reported amount of the Company's assets and liabilities related to its non-U.S. operations, and therefore the Company's consolidated net assets, will fluctuate based upon changes in currency exchange rates. At December 31, 2000, the Company had substantial net assets denominated in the euro, Canadian dollar, Norwegian kroner and United Kingdom pound sterling. Euro currency Beginning January 1, 1999, certain members of the European Union ("EU"), including Germany, Belgium, the Netherlands and France, adopted a new European currency unit (the "euro") as their common legal currency. Following the introduction of the euro, the participating countries' national currencies remain legal tender as denominations of the euro from January 1, 1999 through January 1, 2002, and the exchange rates between the euro and such national currency units are fixed. The Company conducts substantial operations in Europe. As of January 1, 2001, the functional currency of the Company's German, Belgian, Dutch and French operations have been converted to the euro from their respective national currencies. The Company has assessed and evaluated the impact of the euro conversion on its business and made the necessary system conversions. The euro conversion may impact the Company's operations including, among other things, changes in product pricing decisions necessitated by cross-border price transparencies. Such changes in product pricing decisions could impact both selling prices and purchasing costs and, consequently, favorably or unfavorably impact results of operations, financial condition or liquidity. Other The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital needs and availability of resources in view of, among other things, its debt service and capital expenditure requirements and estimated future operating cash flows. As a result of this process, the Company in the past has sought, and in the future may seek, to reduce, refinance, repurchase or restructure indebtedness; raise -31- additional capital; issue additional securities; repurchase shares of its common stock; modify its dividend policy; restructure ownership interests; sell interests in subsidiaries or other assets; or take a combination of such steps or other steps to manage its liquidity and capital resources. In the normal course of its business, the Company may review opportunities for the acquisition, divestiture, joint venture or other business combinations in the chemicals or other industries, as well as the acquisition of interests in related companies. In the event of any acquisition or joint venture transaction, the Company may consider using available cash, issuing equity securities or increasing its indebtedness to the extent permitted by the agreements governing the Company's existing debt. See Note 9 to the Consolidated Financial Statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK General The Company is exposed to market risk from changes in currency exchange rates, interest rates and equity security prices. In the past, the Company has periodically entered into interest rate swaps or other types of contracts in order to manage a portion of its interest rate market risk. Otherwise, the Company has not generally entered into forward or option contracts to manage such market risks, nor has the Company entered into any such contract or other type of derivative instrument for trading purposes. The Company was not a party to any forward or derivative option contracts related to currency exchange rates, interest rates or equity security prices at December 31, 2000 or 1999. See Notes 2 and 18 to the Consolidated Financial Statements. Interest rates The Company is exposed to market risk from changes in interest rates, primarily related to indebtedness. At December 31, 2000, the Company's aggregate indebtedness was split between 73% of fixed-rate instruments and 27% of variable-rate borrowings (1999 -81% fixed-rate and 19% variable-rate). The large percentage of fixed-rate debt instruments minimizes earnings volatility which would result from changes in interest rates. The following table presents principal amounts and weighted-average interest rates, by contractual maturity dates, for the Company's aggregate indebtedness at December 31, 2000 and 1999. At December 31, 2000 and 1999, all outstanding fixed-rate indebtedness was denominated in U.S. dollars, and all outstanding variable-rate indebtedness was denominated in either euros or Norwegian kroner. Information shown below for such euro- and kronor-denominated indebtedness is presented in its U.S. dollar equivalent at December 31, 2000 using that date's exchange rate of 1.08 euro per U.S. dollar (1999 - .99 euro per U.S. dollar) and 8.90 kroner per U.S. dollar (1999-n/a). Certain kroner-denominated capital leases totaling $2.1 million in 2000 and $.5 million in 1999 have been excluded from the table below. -32-
Fair Value at Contractual Maturity Date December 31, --------------------------------------------- ------------- December 31, 1999: 2000 2001 2002 2003 Total 1999 ------ ------ ------ -------- -------- ------------- (In millions) Fixed-rate debt (U.S. dollar- denominated): Principal amount ........................ $ -- $ -- $ -- $ 244.0 $ 244.0 $ 253.2 Weighted-average interest rate .......... -- -- -- 11.75% 11.75% Variable-rate debt (euro- denominated): Principal amount ........................ $57.1 $ -- $ -- $ -- $ 57.1 $ 57.1 Weighted-average interest rate .......... 3.6% -- -- -- 3.6% December 31, 2000: N/A 2001 2002 2003 Total 2000 ------ ------ ------ -------- -------- ------------- (In millions) Fixed-rate debt (U.S. dollar-denominated): Principal amount ....................... $ -- $ -- $ 194.0 $ 194.0 $ 195.9 Weighted-average interest rate ......... -- -- 11.75% 11.75% Variable-rate debt (Non-U.S .............. dollar-denominated): Principal amount ..................... $70.0 $ -- $ -- $ 70.0 $ 70.0 Weighted-average interest rate ....... 6.3% -- -- 6.3%
Currency exchange rates The Company is exposed to market risk arising from changes in currency exchange rates as a result of manufacturing and selling its products worldwide. Earnings are primarily affected by fluctuations in the value of the U.S. dollar relative to the euro, Canadian dollar, Norwegian kroner and the United Kingdom pound sterling. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of risks and uncertainties related to the conversion of certain of these currencies to the euro. At December 31, 2000, the Company had $48 million of indebtedness denominated in euros (1999 - $58 million) and $24 million of indebtedness denominated in Norwegian kroner (1999-$.5 million) The potential increase in the U.S. dollar equivalent of the principal amount outstanding resulting from a hypothetical 10% adverse change in exchange rates would be approximately $7 million (1999 - $6 million). Marketable equity security prices The Company is exposed to market risk due to changes in prices of the marketable securities which are held. The fair value of such equity securities at December 31, 2000 and 1999 was $47 million and $15 million, respectively. The potential change in the aggregate fair value of these investments, assuming a 10% change in prices, would be $4.7 million and $1.5 million, respectively. Other The Company believes there are certain shortcomings in the sensitivity analyses presented above, which analyses are required under the Securities and Exchange Commission's regulations. For example, the hypothetical affect of changes in interest rates discussed above ignores the potential effect on other variables which affect the Company's results of operations and cash flows, such as demand for the Company's products, sales volumes and selling prices and operating expenses. Contrary to the above assumptions, changes in interest rates rarely result in simultaneous parallel shifts along the yield curve. Accordingly, the amounts presented above are not necessarily an accurate reflection of the potential losses the Company would incur assuming the hypothetical changes in market prices were actually to occur. -33- The above discussion and estimated sensitivity analysis amounts include forward-looking statements of market risk which assume hypothetical changes in market prices. Actual future market conditions will likely differ materially from such assumptions. Accordingly, such forward-looking statements should not be considered to be projections by the Company of future events, gains or losses. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is contained in a separate section of this Annual Report. See "Index of Financial Statements and Schedules" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report (the "NL Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the NL Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the NL Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the NL Proxy Statement. See also Note 16 to the Consolidated Financial Statements. -34- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) and (d)Financial Statements and Schedules The consolidated financial statements and schedules listed by the Registrant on the accompanying Index of Financial Statements and Schedules (see page F-1) are filed as part of this Annual Report. (b) Reports on Form 8-K Reports on Form 8-K for the quarter ended December 31, 2000 and thereafter through the date of this report. October 18, 2000 - reported Items 5 and 7. (c) Exhibits Included as exhibits are the items listed in the Exhibit Index. NL will furnish a copy of any of the exhibits listed below upon payment of $4.00 per exhibit to cover the costs to NL of furnishing the exhibits. Instruments defining the rights of holders of debt issues which do not exceed 10% of consolidated total assets will be furnished to the Securities and Exchange Commission upon request. -35- Item No. Exhibit Index 3.1 By-Laws, as amended on June 28, 1990 - incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. 3.2 Certificate of Amended and Restated Certificate of Incorporation dated June 28, 1990 - incorporated by reference to Exhibit 1 to the Registrant's Proxy Statement on Schedule 14A for the annual meeting held on June 28, 1990. 4.1 Registration Rights Agreement dated October 30, 1991, by and between the Registrant and Tremont Corporation - incorporated by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. 4.2 Indenture dated October 20, 1993 governing the Registrant's 11.75% Senior Secured Notes due 2003, including form of Senior Note - incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 4.3 Senior Mirror Notes dated October 20, 1993 - incorporated by reference to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 4.4 Senior Note Subsidiary Pledge Agreement dated October 20, 1993 between Registrant and Kronos, Inc. - incorporated by reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 4.5 Third Party Pledge and Intercreditor Agreement dated October 20, 1993 between Registrant, Chase Manhattan Bank (National Association) and Chemical Bank - incorporated by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.1 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung (German language version and English translation thereof) - incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. 10.2 Contract on Supplies and Services among Bayer AG, Kronos Titan-GmbH and Kronos International, Inc. dated June 30, 1995 (English translation from German language document) - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. 10.3** Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. - incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.4** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999 between Richards Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. - incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. -36- 10.5 Formation Agreement dated as of October 18, 1993 among Tioxide Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.6 Joint Venture Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.7 Kronos Offtake Agreement dated as of October 18, 1993 between Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.8 Amendment No. 1 to Kronos Offtake Agreement dated as of December 20, 1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.9 Tioxide Americas Offtake Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.10 Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of December 20, 1995 between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. - incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.11 TCI/KCI Output Purchase Agreement dated as of October 18, 1993 between Tioxide Canada Inc. and Kronos Canada, Inc. - incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.12 TAI/KLA Output Purchase Agreement dated as of October 18, 1993 between Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.13 Master Technology Exchange Agreement dated as of October 18, 1993 among Kronos, Inc., Kronos Louisiana, Inc., Kronos International, Inc., Tioxide Group Limited and Tioxide Group Services Limited - incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.14 Parents' Undertaking dated as of October 18, 1993 between ICI American Holdings Inc. and Kronos, Inc. - incorporated by reference to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. -37- 10.15 Allocation Agreement dated as of October 18, 1993 between Tioxide Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and Kronos Louisiana, Inc. - incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 10.16 Form of Director's Indemnity Agreement between NL and the independent members of the Board of Directors of NL - incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. 10.17* 1989 Long Term Performance Incentive Plan of NL Industries, Inc. - incorporated by reference to Exhibit B to the Registrant's Proxy Statement on Schedule 14A for the annual meeting of shareholders held on May 8, 1996. 10.18* NL Industries, Inc. Variable Compensation Plan - incorporated by reference to Exhibit A to the Registrant's Proxy Statement on Schedule 14A for the annual meeting of shareholders held on May 8, 1996. 10.19* NL Industries, Inc. Retirement Savings Plan, as amended and restated effective April 1, 1996 - incorporated by reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 10.20* Amendment to NL Industries, Inc. Retirement Savings Plan effective as of January 1, 2000 - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 10.21* NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as adopted by the Board of Directors on February 13, 1992 - incorporated by reference to Appendix A to the Registrant's Proxy Statement on Schedule 14A for the annual meeting of shareholders held April 30, 1992. 10.22* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by reference to Appendix A to the Registrant's Proxy Statement on Schedule 14A for the annual meeting of shareholders held on May 6, 1998. 10.23 Intercorporate Services Agreement by and between Valhi, Inc. and the Registrant effective as of January 1, 2000 - incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 10.24 Intercorporate Services Agreement by and between Contran Corporation and the Registrant effective as of January 1, 2000 - incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 10.25 Intercorporate Service Agreement by and between Titanium Metals Corporation and the Registrant effective as of January 1, 2000 - incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. -38- 10.26 Intercorporate Services Agreement by and between Tremont Corporation and the Registrant effective as of January 1, 2000 - incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 10.27 Intercorporate Services Agreement by and between CompX International, Inc. and the Registrant effective as of January 1, 2000 - incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report of Form 10-Q for the quarter ended June 30, 2000. 10.28 Insurance Sharing Agreement, effective January 1, 1990, by and between the Registrant, NL Insurance, Ltd. (an indirect subsidiary of Tremont Corporation) and Baroid Corporation - incorporated by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. 10.29* Executive severance agreement effective as of March 9, 1995 by and between the Registrant and Lawrence A. Wigdor - incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 10.30* Executive severance agreement effective as of July 24, 1996 by and between the Registrant and J. Landis Martin - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 10.31* Supplemental Executive Retirement Plan for Executives and Officers of NL Industries, Inc. effective as of January 1, 1991 - incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. 10.32* Agreement to Defer Bonus Payment dated February 20, 1998 between the Registrant and Lawrence A. Wigdor and related trust agreement - incorporated by reference to Exhibit 10.48 to the Registrant's Annual Report of Form 10-K for the year ended December 31, 1997. 10.33* Agreement to Defer Bonus Payment dated February 20, 1998 between the Registrant and J. Landis Martin and related trust agreement - incorporated by reference to Exhibit 10.49 to the Registrant's Annual Report of Form 10-K for the year ended December 31, 1997. 10.34 Revolving Loan Note dated February 9, 2001 with Tremont Corporation as Maker and NL Environmental Management Services, Inc. as Payee. 10.35 Security Agreement dated February 9, 2001 by and between Tremont Corporation and NL Environmental Management Services, Inc. 10.36 Tax Agreement between Valhi, Inc. and NL Industries, Inc. effective as of January 1, 2001. 10.37 Subscription Agreement by and among Valhi, Inc., Tremont Holdings, LLC and Tremont Group, Inc. effective as of December 31, 2000. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants. -39- 99.1 Annual Report of NL Industries, Inc. Retirement Savings Plan (Form 11-K) to be filed under Form 10-K/A to the Registrant's Annual Report on Form 10-K within 180 days after December 31, 2000. All documents in the Exhibit Index above that have been incorporated by reference were previously filed by the Registrant under SEC File Number 1-640. * Management contract, compensatory plan or arrangement. ** Portions of the exhibit have been omitted pursuant to a request for confidential treatment. -40- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NL Industries, Inc. (Registrant) By /s/ J. Landis Martin ------------------------------------- J. Landis Martin, March 9, 2001 President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: /s/ J. Landis Martin /s/ Harold C. Simmons ------------------------------- --------------------------------- J. Landis Martin, March 9, 2001 Harold C. Simmons, March 9, 2001 Director, President and Chairman of the Board Chief Executive Officer (Principal Executive Officer) /s/ Glenn R. Simmons /s/ Steven L. Watson ------------------------------- --------------------------------- Glenn R. Simmons, March 9, 2001 Steven L. Watson, March 9, 2001 Director Director /s/ Kenneth R. Peak /s/ Dr. Lawrence A. Wigdor ------------------------------ --------------------------------- Kenneth R. Peak, March 9, 2001 Dr. Lawrence A. Wigdor, March 9, 2001 Director Director, President and Chief Executive Officer of Kronos /s/ General Thomas P. Stafford /s/ Susan E. Alderton ----------------------------------------- --------------------------------- General Thomas P. Stafford, March 9, 2001 Susan E. Alderton, March 9, 2001 Director Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Robert D. Hardy --------------------------------- Robert D. Hardy, March 9, 2001 Vice President and Controller (Principal Accounting Officer) -41- NL INDUSTRIES, INC. ANNUAL REPORT ON FORM 10-K Items 8, 14(a) and 14(d) Index of Financial Statements and Schedules ------------------------------------------- Financial Statements Pages -------------------- ----- Report of Independent Accountants F-2 Consolidated Balance Sheets - December 31, 2000 and 1999 F-3 / F-4 Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998 F-5 / F-6 Consolidated Statements of Comprehensive Income - Years ended December 31, 2000, 1999 and 1998 F-7 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2000, 1999 and 1998 F-8 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 F-9 / F-11 Notes to Consolidated Financial Statements F-12 / F-53 Financial Statement Schedules Report of Independent Accountants S-1 Schedule I - Condensed Financial Information of Registrant S-2 / S-7 Schedule II - Valuation and qualifying accounts S-8 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of NL Industries, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of NL Industries, Inc. at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Houston, Texas February 28, 2001 F-2 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (In thousands, except per share data)
ASSETS 2000 1999 ---------- ---------- Current assets: Cash and cash equivalents ........................ $ 120,378 $ 134,224 Restricted cash equivalents ...................... 69,242 17,565 Accounts and notes receivable, less allowance of $2,222 and $2,075 ............ 131,540 143,768 Receivable from affiliates ....................... 214 747 Refundable income taxes .......................... 12,302 4,473 Inventories ...................................... 205,973 191,184 Prepaid expenses ................................. 2,458 2,492 Deferred income taxes ............................ 11,673 11,974 ---------- ---------- Total current assets ......................... 553,780 506,427 ---------- ---------- Other assets: Marketable securities ............................ 47,186 15,055 Investment in TiO2 manufacturing joint venture ... 150,002 157,552 Prepaid pension cost ............................. 22,789 23,271 Restricted cash equivalents ...................... 17,942 -- Other ............................................ 4,707 5,410 ---------- ---------- Total other assets ........................... 242,626 201,288 ---------- ---------- Property and equipment: Land ............................................. 24,978 23,678 Buildings ........................................ 129,019 133,682 Machinery and equipment .......................... 530,920 550,842 Mining properties ................................ 67,134 71,952 Construction in progress ......................... 4,586 6,805 ---------- ---------- 756,637 786,959 Less accumulated depreciation and depletion ...... 432,255 438,501 ---------- ---------- Net property and equipment ................... 324,382 348,458 ---------- ---------- $1,120,788 $1,056,173 ========== ==========
F-3 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 2000 and 1999 (In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 ----------- ----------- Current liabilities: Notes payable .................................... $ 69,970 $ 57,076 Current maturities of long-term debt ............. 730 212 Accounts payable and accrued liabilities ......... 147,877 143,132 Payable to affiliates ............................ 10,634 11,240 Accrued environmental costs ...................... 53,307 47,228 Income taxes ..................................... 13,616 5,605 Deferred income taxes ............................ 1,822 326 ----------- ----------- Total current liabilities .................... 297,956 264,819 ----------- ----------- Noncurrent liabilities: Long-term debt ................................... 195,363 244,266 Deferred income taxes ............................ 145,673 108,226 Accrued environmental costs ...................... 57,133 64,491 Accrued pension cost ............................. 21,220 32,946 Accrued postretirement benefits cost ............. 29,404 37,105 Other ............................................ 23,272 29,330 ----------- ----------- Total noncurrent liabilities ................. 472,065 516,364 ----------- ----------- Minority interest .................................... 6,279 3,903 ----------- ----------- Shareholders' equity: Preferred stock - 5,000 shares authorized, no shares issued or outstanding ................ -- -- Common stock - $.125 par value; 150,000 shares authorized; 66,839 shares issued ........ 8,355 8,355 Additional paid-in capital ....................... 777,528 774,304 Retained earnings ................................ 141,073 19,150 Accumulated other comprehensive income (loss): Currency translation ........................... (190,757) (160,022) Marketable securities .......................... 8,885 2,857 Pension liabilities ............................ -- (1,756) Treasury stock, at cost (16,787 and 15,555 shares) (400,596) (371,801) ----------- ----------- Total shareholders' equity ................... 344,488 271,087 ----------- ----------- $ 1,120,788 $ 1,056,173 =========== ===========
Commitments and contingencies (Notes 12 and 17) See accompanying notes to consolidated financial statements. F-4 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2000, 1999 and 1998 (In thousands, except per share data)
2000 1999 1998 ----------- ----------- ----------- Revenues and other income: Net sales ................................ $ 922,319 $ 908,387 $ 894,724 Litigation settlement gains, net ......... 69,465 -- -- Other, net ............................... 23,283 23,646 25,453 ----------- ----------- ----------- 1,015,067 932,033 920,177 ----------- ----------- ----------- Costs and expenses: Cost of sales ............................ 610,449 662,315 618,447 Selling, general and administrative ...... 137,178 134,342 133,970 Interest ................................. 31,243 36,884 58,070 ----------- ----------- ----------- 778,870 833,541 810,487 ----------- ----------- ----------- Income from continuing operations before income taxes and minority interest ... 236,197 98,492 109,690 Income tax expense (benefit) ................. 78,420 (64,601) 19,788 ----------- ----------- ----------- Income from continuing operations before minority interest .................... 157,777 163,093 89,902 Minority interest ............................ 2,436 3,322 40 ----------- ----------- ----------- Income from continuing operations ...... 155,341 159,771 89,862 Discontinued operations ...................... -- -- 287,396 Extraordinary items - early extinguishment of debt, net of tax benefit of $394 and $5,698 (732) -- (10,580) ----------- ----------- ----------- Net income ............................. $ 154,609 $ 159,771 $ 366,678 =========== =========== ===========
F-5 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) Years ended December 31, 2000, 1999 and 1998 (In thousands, except per share data)
2000 1999 1998 ---------- ---------- ---------- Basic earnings per share: Continuing operations ............. $ 3.08 $ 3.09 $ 1.75 Discontinued operations ........... -- -- 5.59 Extraordinary items ............... (.01) -- (.21) ---------- ---------- ---------- Net income ...................... $ 3.07 $ 3.09 $ 7.13 ========== ========== ========== Diluted earnings per share: Continuing operations ............. $ 3.06 $ 3.08 $ 1.73 Discontinued operations ........... -- -- 5.52 Extraordinary items ............... (.01) -- (.20) ---------- ---------- ---------- Net income ...................... $ 3.05 $ 3.08 $ 7.05 ========== ========== ========== Weighted average shares used in the calculation of earnings per share: Basic ............................. 50,415 51,774 51,460 Dilutive impact of stock options .. 334 93 540 ---------- ---------- ---------- Diluted ........................... 50,749 51,867 52,000 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-6 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Net income ................................... $ 154,609 $ 159,771 $ 366,678 --------- --------- --------- Other comprehensive income (loss), net of tax: Marketable securities adjustment: Unrealized holding gains (losses) arising during the period ....................... 4,064 (1,641) 201 Add: reclassification adjustment for loss included in net income ......... 1,964 -- -- --------- --------- --------- 6,028 (1,641) 201 Minimum pension liabilities adjustment ... 1,756 1,431 (3,187) Currency translation adjustment .......... (30,735) (26,582) 370 --------- --------- --------- Total other comprehensive loss ......... (22,951) (26,792) (2,616) --------- --------- --------- Comprehensive income ..................... $ 131,658 $ 132,979 $ 364,062 ========= ========= =========
See accompanying notes to consolidated financial statements. F-7 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 (In thousands)
Accumulated other comprehensive income (loss) Additional Retained ------------------------------------- Common paid-in earnings Currency Pension Marketable Stock capital (deficit) translation liabilities securities --------- ---------- ---------- ----------- ------------ ----------- Balance at December 31, 1997 .......................... $ 8,355 $ 759,281 $(495,421) $(133,810) $ -- $ 4,297 Net income ............................................ -- -- 366,678 -- -- -- Other comprehensive income (loss), net of tax ......... -- -- -- 370 (3,187) 201 Common dividends declared - $.09 per share ........... -- -- (4,636) -- -- -- Cash received upon settlement of shareholder derivative -- 11,211 -- -- -- -- lawsuit, net of $3,198 in legal fees and expenses Tax benefit of stock options exercised ................ -- 3,796 -- -- -- -- Treasury stock reissued (544 shares) .................. -- -- -- -- -- -- -------- --------- -------- --------- --------- --------- Balance at December 31, 1998 .......................... 8,355 774,288 (133,379) (133,440) (3,187) 4,498 Net income ............................................ -- -- 159,771 -- -- -- Other comprehensive income (loss), net of tax ......... -- -- -- (26,582) 1,431 (1,641) Common dividends declared - $.14 per share ........... -- -- (7,242) -- -- -- Tax benefit of stock options exercised ................ -- 16 -- -- -- -- Treasury stock: Acquired (552 shares) ............................. -- -- -- -- -- -- Reissued (25 shares) .............................. -- -- -- -- -- -- -------- --------- -------- --------- --------- --------- Balance at December 31, 1999 .......................... 8,355 774,304 19,150 (160,022) (1,756) 2,857 Net income ............................................ -- -- 154,609 -- -- -- Other comprehensive income (loss), net of tax ......... -- -- -- (30,735) 1,756 6,028 Common dividends declared - $.65 per share ............ -- -- (32,686) -- -- -- Tax benefit of stock options exercised ................ -- 3,224 -- -- -- -- Treasury stock: Acquired (1,682 shares) ........................... -- -- -- -- -- -- Reissued (450 shares) ............................. -- -- -- -- -- -- -------- --------- -------- --------- --------- --------- Balance at December 31, 2000 .......................... $ 8,355 $ 777,528 $ 141,073 $(190,757) $ -- $ 8,885 Treasury stock Total ---------- --------- Balance at December 31, 1997 .......................... $(364,971) $(222,269) Net income ............................................ -- 366,678 Other comprehensive income (loss), net of tax ......... -- (2,616) Common dividends declared - $.09 per share ........... -- (4,636) Cash received upon settlement of shareholder derivative -- 11,211 lawsuit, net of $3,198 in legal fees and expenses Tax benefit of stock options exercised ................ -- 3,796 Treasury stock reissued (544 shares) .................. 170 170 --------- --------- Balance at December 31, 1998 .......................... (364,801) 152,334 Net income ............................................ -- 159,771 Other comprehensive income (loss), net of tax ......... -- (26,792) Common dividends declared - $.14 per share ........... -- (7,242) Tax benefit of stock options exercised ................ -- 16 Treasury stock: Acquired (552 shares) ............................. (7,210) (7,210) Reissued (25 shares) .............................. 210 210 --------- --------- Balance at December 31, 1999 .......................... (371,801) 271,087 Net income ............................................ -- 154,609 Other comprehensive income (loss), net of tax ......... -- (22,951) Common dividends declared - $.65 per share ............ -- (32,686) Tax benefit of stock options exercised ................ -- 3,224 Treasury stock: Acquired (1,682 shares) ........................... (30,886) (30,886) Reissued (450 shares) ............................. 2,091 2,091 --------- --------- Balance at December 31, 2000 .......................... $(400,596) $ 344,488
See accompanying notes to consolidated financial statements. F-8 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income ........................................ $ 154,609 $ 159,771 $ 366,678 Depreciation, depletion and amortization .......... 29,733 33,730 34,545 Noncash interest income on restricted cash ........ (1,531) -- -- Noncash interest expense .......................... 599 1,682 18,393 Deferred income taxes ............................. 40,186 (86,772) 4,988 Minority interest ................................. 2,436 3,322 40 Net (gains) losses from: Securities transactions ......................... (2,531) -- -- Disposition of property and equipment ........... 1,562 429 768 Pension cost, net ................................. (11,816) (4,702) (5,566) Other postretirement benefits, net ................ 1,062 (5,459) (6,299) Distributions from TiO2 manufacturing joint venture 7,550 13,650 -- Litigation settlement gains, net .................. (69,465) -- -- Discontinued operations, net ...................... -- -- (287,396) Extraordinary items ............................... 732 -- 10,580 Other, net ........................................ -- -- 317 --------- --------- --------- 153,126 115,651 137,048 Discontinued operations, net ...................... -- -- (30,587) Change in assets and liabilities: Accounts and notes receivable ................... 1,417 (22,289) (2,012) Inventories ..................................... (23,395) 20,663 (49,839) Prepaid expenses ................................ (244) (463) 436 Accounts payable and accrued liabilities ........ 9,301 7,315 (2,741) Income taxes .................................... 4,843 6,729 (12,976) Accounts with affiliates ........................ (123) (3,572) 2,286 Other noncurrent assets ......................... (168) 1,090 (178) Other noncurrent liabilities .................... (5,002) (16,816) 3,650 --------- --------- --------- Net cash provided by operating activities ... 139,755 108,308 45,087 --------- --------- ---------
F-9 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Cash flows from investing activities: Capital expenditures ............................... $ (31,089) $ (35,559) $ (22,392) Purchase of Tremont Corporation common stock ....... (26,040) -- -- Change in restricted cash equivalents, net ......... 630 (5,176) (2,638) Proceeds from disposition of property and equipment. 139 2,344 769 Proceeds from disposition of marketable securities . 158 -- 6,875 Other, net ......................................... (33) -- (372) Proceeds from sale of specialty chemicals business . -- -- 435,080 Discontinued operations, net ....................... -- -- (26) --------- --------- --------- Net cash provided (used) by investing activities (56,235) (38,391) 417,296 --------- --------- --------- Cash flows from financing activities: Indebtedness: Borrowings ....................................... 44,923 82,038 30,491 Principal payments ............................... (79,162) (155,787) (315,892) Dividends paid ..................................... (32,686) (7,242) (4,636) Treasury stock: Purchased ........................................ (30,886) (7,210) -- Reissued ......................................... 2,091 210 170 Settlement of shareholder derivative lawsuit, net .. -- -- 11,211 Distributions to minority interests ................ (6) (6) (2) Discontinued operations, net ....................... -- -- (117,500) --------- --------- --------- Net cash used by financing activities .......... (95,726) (87,997) (396,158) --------- --------- --------- Net change during the year from operating investing and financing activities ........... $ (12,206) $ (18,080) $ 66,225 ========= ========= =========
F-10 NL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Cash and cash equivalents: Net change during the year from: Operating, investing and financing activities ........................ $(12,206) $ (18,080) $ 66,225 Currency translation ................ (1,640) (2,649) (36) Sale of discontinued operation ...... -- -- (7,630) --------- --------- --------- (13,846) (20,729) 58,559 Balance at beginning of year .... 134,224 154,953 96,394 --------- --------- --------- Balance at end of year .......... $ 120,378 $ 134,224 $ 154,953 ========= ========= ========= Supplemental disclosures - cash paid for: Interest, net of amounts capitalized .. $ 32,354 $ 35,540 $ 37,965 Income taxes .......................... 33,398 14,963 54,230
See accompanying notes to consolidated financial statements. F-11 NL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: NL Industries, Inc. conducts its titanium dioxide pigments ("TiO2") operations through its wholly owned subsidiary, Kronos, Inc. At December 31, 2000, Valhi, Inc. and Tremont Corporation, each affiliates of Contran Corporation, held approximately 60% and 20%, respectively, of NL's outstanding common stock. At December 31, 2000, Contran and its subsidiaries held approximately 93% of Valhi's outstanding common stock, and a subsidiary of Valhi and NL held approximately 80% of Tremont's outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the Board of NL and the Chairman of the Board and Chief Executive Officer of Contran and Valhi and a director of Tremont, may be deemed to control each of such companies. Note 2 - Summary of significant accounting policies: Principles of consolidation and management's estimates The accompanying consolidated financial statements include the accounts of NL and its majority-owned subsidiaries (collectively, the "Company"). All material intercompany accounts and balances have been eliminated. Certain prior-year amounts have been reclassified to conform to the current year presentation. The preparation of financial statements in conformity with generally accepted accounting principles 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. Ultimate actual results may in some instances differ from previously estimated amounts. Translation of foreign currencies Assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end rates of exchange and revenues and expenses are translated at weighted average exchange rates prevailing during the year. Resulting translation adjustments are included in other comprehensive income (loss), net of related income taxes. Currency transaction gains and losses are recognized in income currently. Cash equivalents Cash equivalents include U.S. Treasury securities purchased under short-term agreements to resell and bank deposits with original maturities of three months or less. F-12 Restricted cash equivalents At December 31, 2000, restricted cash equivalents of approximately $17 million collateralized undrawn letters of credit, and restricted cash equivalents of approximately $70 million was held by special purpose trusts established to pay future environmental remediation obligations and other environmental expenditures of the Company. Restricted cash equivalents are primarily invested in U.S. government securities and money market funds that invest primarily in U.S. government securities. At December 31, 1999, restricted cash equivalents of approximately $18 million collateralized undrawn letters of credit. Restricted cash is classified as either a current or noncurrent asset depending upon the classification of the liability to which the restricted cash relates. Marketable securities and securities transactions Marketable securities are carried at market based on quoted market prices. Unrealized gains and losses on available-for-sale securities are included in other comprehensive income (loss), net of related deferred income taxes. See Note 4. Gains and losses on available-for-sale securities are recognized in income upon realization and are computed based on specific identification of the securities sold. Inventories Inventories are stated at the lower of cost (principally average cost) or market. Amounts are removed from inventories at average cost. Investment in TiO2 manufacturing joint venture Investment in a 50%-owned manufacturing joint venture is accounted for by the equity method. Intangible assets Intangible assets, included in other noncurrent assets, are amortized by the straight-line method over the periods expected to be benefitted, not exceeding ten years. At December 31, 2000 and 1999, accumulated amortization of intangible assets was $20.4 million and $22.1 million, respectively. Property, equipment, depreciation and depletion Property and equipment are stated at cost. Interest costs related to major, long-term capital projects are capitalized as a component of construction costs. Expenditures for maintenance, repairs and minor renewals are expensed; expenditures for major improvements are capitalized. Depreciation is computed principally by the straight-line method over the estimated useful lives of ten to forty years for buildings and three to twenty years for machinery and equipment. Depletion of mining properties is computed by the unit-of-production and straight-line methods. F-13 Long-term debt Long-term debt is stated net of unamortized original issue discount ("OID"). OID is amortized over the period during which cash interest payments are not required and deferred financing costs are amortized over the term of the applicable issue, both by the interest method. Employee benefit plans Accounting and funding policies for retirement plans and postretirement benefits other than pensions ("OPEB") are described in Note 10. The Company accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees," and its various interpretations. Under APBO No. 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is not less than the market price on the grant date. Compensation cost recognized by the Company in accordance with APBO No. 25 was $1.7 million in 2000 and nil in each of 1999 and 1998. Environmental remediation costs Environmental remediation costs are accrued when estimated future expenditures are probable and reasonably estimable. The estimated future expenditures generally are not discounted to present value. Recoveries of remediation costs from other parties, if any, are reported as receivables when their receipt is deemed probable. At December 31, 2000 and 1999, no receivables for recoveries have been recognized. Net sales The Company adopted the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," as amended, in 2000. Revenue generally is realized or realizable and earned when all of the requirements of SAB 101 are met, including when title and the risks and rewards of ownership passes to the customer. The impact of adopting SAB 101 was not material. Amounts charged to customers for shipping and handling are included in net sales. Repair and maintenance costs The Company performs planned major maintenance activities during the year. Repair and maintenance costs estimated to be incurred in connection with planned major maintenance activities are accrued in advance and are included in cost of goods sold. Shipping and handling costs Shipping and handling costs are included in selling, general and administrative expense and were $50 million in 2000 and $54 million in each of 1999 and 1998. F-14 Income taxes Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amounts of assets and liabilities, including investments in subsidiaries and unconsolidated affiliates not included in the Company's U.S. tax group (the "NL Tax Group"). The Company periodically evaluates its deferred tax assets and adjusts any related valuation allowance. The Company's valuation allowance is equal to the amount of deferred tax assets which the Company believes do not meet the "more-likely-than-not" recognition criteria. Effective January 1, 2001, the Company and its qualifying subsidiaries will be included in the consolidated United States federal tax return of Contran (the "Contran Tax Group"). As a member of the Contran Tax Group, the Company is a party to a tax sharing agreement (the "Contran Tax Agreement"). The Contran Tax Agreement provides that the Company compute its provision for U.S. income taxes on a separate-company basis using the tax elections made by Contran. Pursuant to the Contran Tax Agreement and using the tax elections made by Contran, the Company will make payments to or receive payments from Valhi in amounts it would have paid to or received from the Internal Revenue Service had it not been a member of the Contran Tax Group. Refunds are limited to amounts previously paid under the Contran Tax Agreement. Interest rate swaps and contracts The Company periodically uses interest rate swaps and contracts (such as caps and floors) to manage interest rate risk with respect to financial assets or liabilities. The Company has not entered into these contracts for speculative purposes in the past, nor does it currently anticipate doing so in the future. Any cost associated with the swap or contract designated as a hedge of assets or liabilities is deferred and amortized over the life of the agreement as an adjustment to interest income or expense. If the swap or contract is terminated, the resulting gain or loss is deferred and amortized over the remaining life of the underlying asset or liability. If the hedged instrument is disposed of, the swap or contract agreement is marked to market with any resulting gain or loss included with the gain or loss from the disposition. The Company was not a party to any such contracts at December 31, 2000 or 1999. Earnings per share Basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares outstanding and the dilutive impact of outstanding stock options. The weighted average number of outstanding stock options which were excluded from the calculation of diluted earnings per share because their impact would have been antidilutive aggregated 222,000, 1,511,000 and 483,000 in 2000, 1999 and 1998, respectively. There were no adjustments to income from continuing operations or net income in the computation of the diluted earnings per share amounts. New accounting principles not yet adopted The Company will adopt Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, effective January 1, 2001. SFAS No. 133 establishes accounting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, all derivatives will be F-15 recognized as either assets or liabilities and measured at fair value. The accounting for changes in fair value of derivatives will depend upon the intended use of the derivative, and such charges will be recognized either in net income or other comprehensive income. As permitted by the transition requirements of SFAS No. 133, as amended, the Company will exempt from the scope of SFAS No. 133 all host contracts containing embedded derivatives which were issued, acquired or not substantially modified prior to January 1, 1999. The Company is not a party to any significant derivative or hedging instrument covered by SFAS No. 133 at December 31, 2000. The adoption of SFAS No. 133 will not have a material effect on the Company's consolidated financial position, liquidity or results of operations. Note 3 - Business and geographic segments: The Company's operations are conducted by Kronos in one operating business segment - the production and sale of TiO2. Titanium dioxide pigments are used to impart whiteness, brightness and opacity to a wide variety of products, including paints, plastics, paper, fibers and ceramics. Discontinued operations consists of the Company's former specialty chemicals business which was sold in January 1998. See Note 20. At December 31, 2000 and 1999, the net assets of non-U.S. subsidiaries included in consolidated net assets approximated $352 million and $375 million, respectively. The Company evaluates its TiO2 segment performance based on operating income. Operating income is defined as income from continuing operations before minority interest, income taxes, interest expense, certain nonrecurring items and certain general corporate items. Corporate items excluded from operating income include interest and dividend income not attributable to TiO2 operations, litigation settlement gains and securities transaction gains and losses. The accounting policies of the TiO2 segment are the same as those described in Note 2. Interest income included in the calculation of TiO2 operating income is disclosed in Note 13 as "Trade interest income." Segment assets are comprised of all assets attributable to the reportable operating segment. The Company's investment in the TiO2 manufacturing joint venture (see Note 6) is included in TiO2 business segment assets. Corporate assets are not attributable to the TiO2 operating segment and consist principally of cash, cash equivalents, restricted cash equivalents and marketable securities. For geographic information, net sales are attributed to the place of manufacture (point of origin) and the location of the customer (point of destination); property and equipment are attributed to their physical location. F-16
Years ended December 31, 2000 1999 1998 --------- --------- --------- (In thousands) Business segment - TiO2 Net sales ............................... $ 922,319 $ 908,387 $ 894,724 Other income, excluding corporate ....... 8,167 12,484 6,110 --------- --------- --------- 930,486 920,871 900,834 Cost of sales ........................... 610,449 662,315 618,447 Selling, general and administrative, excluding corporate .................... 107,554 112,888 111,206 --------- --------- --------- Operating income .................... 212,483 145,668 171,181 General corporate income (expense): Securities earnings: Interest and dividends .......... 8,346 6,597 14,921 Securities gains, net ........... 2,531 -- -- Litigation settlement gains, net and other income ............... 73,704 4,565 4,421 Corporate expense ................... (29,624) (21,454) (22,763) Interest expense .................... (31,243) (36,884) (58,070) --------- --------- --------- $ 236,197 $ 98,492 $ 109,690 ========= ========= ========= Capital expenditures: Kronos .............................. $ 31,066 $ 32,703 $ 22,310 General corporate ................... 23 2,856 82 --------- --------- --------- $ 31,089 $ 35,559 $ 22,392 ========= ========= ========= Depreciation, depletion and amortization: Kronos .............................. $ 28,989 $ 33,047 $ 34,341 General corporate ................... 744 683 204 --------- --------- --------- $ 29,733 $ 33,730 $ 34,545 ========= ========= =========
F-17
Years ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (In thousands) Geographic areas Net sales - point of origin: Germany ......................... $ 444,050 $ 459,467 $ 451,061 United States ................... 313,426 299,520 289,701 Canada .......................... 154,579 162,746 158,967 Belgium ......................... 137,829 138,671 159,558 Norway .......................... 98,300 88,277 91,112 Other ........................... 92,691 90,442 96,912 Eliminations .................... (318,556) (330,736) (352,587) --------- --------- --------- $ 922,319 $ 908,387 $ 894,724 ========= ========= ========= Net sales - point of destination: Europe .......................... $ 480,388 $ 478,652 $ 493,942 United States ................... 283,327 268,037 246,209 Canada .......................... 53,060 60,834 66,843 Latin America ................... 27,104 35,308 35,281 Asia ............................ 45,922 41,612 21,042 Other ........................... 32,518 23,944 31,407 --------- --------- --------- $ 922,319 $ 908,387 $ 894,724 ========= ========= =========
December 31, ---------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In thousands) Identifiable assets Net property and equipment: Germany ....................... $ 173,385 $ 190,292 $ 223,605 Canada ........................ 57,929 62,334 60,574 Belgium ....................... 46,778 49,146 51,683 Norway ........................ 38,361 39,845 42,336 Other ......................... 7,929 6,841 3,961 ---------- ---------- ---------- $ 324,382 $ 348,458 $ 382,159 ========== ========== ========== Total assets: Kronos ........................ $ 893,340 $ 972,549 $ 997,893 General corporate ............. 227,448 83,624 157,752 ---------- ---------- ---------- $1,120,788 $1,056,173 $1,155,645 ========== ========== ==========
F-18 Note 4 - Marketable securities and securities transactions:
December 31, --------------------- 2000 1999 -------- -------- (In thousands) Available-for-sale marketable equity securities: Unrealized gains ................................. $ 14,912 $ 6,700 Unrealized losses ................................ (1,244) (2,304) Cost ............................................. 33,518 10,659 -------- -------- Aggregate fair value ......................... $ 47,186 $ 15,055 ======== ========
During 2000 the Company purchased 1,000,000 shares of Tremont's common stock in market transactions for an aggregate of $26 million. Before the close of business on December 31, 2000, the Company held 16% of Tremont's outstanding common stock, including approximately 36,000 shares previously held by the Company, and Valhi held an additional 64% of Tremont's outstanding common stock. Effective with the close of business on December 31, 2000, the Company contributed substantially all of its Tremont shares, and Valhi contributed all of its Tremont shares, to a newly formed company, Tremont Group, Inc., in return for a 20% and 80% respective ownership interest in Tremont Group. After the contributions, Tremont Group held the 80% of Tremont previously owned by the Company and Valhi. The Company's stock of Tremont Group is redeemable at the option of the Company for fair value based upon the value of the underlying Tremont shares, and the Company accounts for its investment in Tremont Group as an available-for-sale marketable security. The Company also held approximately 1% of Valhi's outstanding common stock at December 31, 2000 and 1999. The Company accounts for investments in its parent companies as "available-for-sale" marketable securities carried at fair value. See Note 1. In 2000 the Company received approximately 390,000 shares of common stock pursuant to the demutualization of an insurance company from which the Company had purchased certain insurance policies. The Company recognized a $5.6 million securities gain based on the insurance company's initial public offering price of $14-1/4 per share. The shares were placed in a Voluntary Employees' Beneficiary Association ("VEBA") trust, the assets of which may only be used to pay for certain retiree benefits. The Company accounted for the $5.6 million contribution of the insurance company's common stock to the trust as a reduction of its accrued postretirement benefits cost liability. The shares were sold by the trust in 2000 for $7.8 million or $20 per share. See Notes 10 and 13. In 2000 the Company recognized a $3.1 million noncash securities loss related to an other-than-temporary decline in value of certain available-for-sale securities held by the Company. See Note 13. F-19 Note 5 - Inventories:
December 31, ------------------- 2000 1999 -------- -------- (In thousands) Raw materials ............................................ $ 66,061 $ 54,861 Work in process .......................................... 7,117 8,065 Finished products ........................................ 107,120 100,824 Supplies ................................................. 25,675 27,434 -------- -------- $205,973 $191,184 ======== ========
Note 6 - Investment in TiO2 manufacturing joint venture: Kronos Louisiana, Inc. ("KLA"), a wholly owned subsidiary of Kronos, owns a 50% interest in Louisiana Pigment Company, L.P. ("LPC"). LPC is a manufacturing joint venture that is also 50%-owned by Tioxide Americas Inc. ("Tioxide"), a subsidiary of Huntsman ICI Holdings, a 70%-owned subsidiary of Huntsman Corporation. LPC owns and operates a chloride-process TiO2 plant in Lake Charles, Louisiana. KLA is required to purchase one-half of the TiO2 produced by LPC. LPC operates on a break-even basis and, accordingly, the Company reports no equity in earnings of LPC. Kronos' cost for its share of the TiO2 produced is equal to its share of LPC's costs. Kronos' share of LPC's interest expense in 1998 was reported as a component of interest expense. Kronos' share of all other net costs is reported as cost of sales as the related TiO2 acquired from LPC is sold. LPC made cash distributions of $15.1 million in 2000 and $27.3 million in 1999, equally split between the partners. Summary balance sheets of LPC are shown below.
December 31, ----------------------- 2000 1999 -------- -------- (In thousands) ASSETS Current assets ................................... $ 56,063 $ 55,999 Property and equipment, net ...................... 264,918 279,567 -------- -------- $320,981 $335,566 ======== ======== LIABILITIES AND PARTNERS' EQUITY Other liabilities, primarily current ............. $ 18,749 $ 18,234 Partners' equity ................................. 302,232 317,332 -------- -------- $320,981 $335,566 ======== ========
F-20 Summary income statements of LPC are shown below.
Years ended December 31, ------------------------------------ 2000 1999 1998 -------- -------- -------- (In thousands) Revenues and other income: Kronos ........................... $ 92,530 $ 85,304 $ 90,392 Tioxide .......................... 93,366 86,309 89,879 Interest ......................... 578 569 753 -------- -------- -------- 186,474 172,182 181,024 -------- -------- -------- Cost and expenses: Cost of sales .................... 186,045 171,829 178,803 General and administrative ....... 429 353 348 Interest ......................... -- -- 1,873 -------- -------- -------- 186,474 172,182 181,024 -------- -------- -------- Net income ................... $ -- $ -- $ -- ======== ======== ========
Note 7 - Accounts payable and accrued liabilities:
December 31, --------------------------- 2000 1999 -------- -------- (In thousands) Accounts payable ......................... $ 64,553 $ 56,597 -------- -------- Accrued liabilities: Employee benefits .................... 34,160 35,243 Interest ............................. 5,019 6,761 Deferred income ...................... 4,000 4,000 Other ................................ 40,145 40,531 -------- -------- 83,324 86,535 -------- -------- $147,877 $143,132 ======== ========
F-21 Note 8 - Other noncurrent liabilities:
December 31, ------------------------- 2000 1999 ------- ------- (In thousands) Insurance claims expense ................... $10,314 $11,688 Employee benefits .......................... 7,721 7,816 Deferred income ............................ 4,333 8,333 Other ...................................... 904 1,493 ------- ------- $23,272 $29,330 ======= =======
Note 9 - Notes payable and long-term debt:
December 31, --------------------- 2000 1999 -------- -------- (In thousands) Notes payable ........................................ $ 69,970 $ 57,076 ======== ======== Long-term debt: NL Industries - 11.75% Senior Secured Notes ...... $194,000 $244,000 Kronos ........................................... 2,093 478 -------- -------- 196,093 244,478 Less current maturities .......................... 730 212 -------- -------- $195,363 $244,266 ======== ========
The Company's $194 million of 11.75% Senior Secured Notes due 2003 (the "Notes") are collateralized by a series of intercompany notes from Kronos International, Inc. ("KII"), a wholly owned subsidiary of Kronos, to NL, the interest rate and payment terms of which mirror those of the respective Notes (the "Mirror Notes"). The Notes are also collateralized by a first priority lien on the stock of Kronos. In the event of foreclosure, the holders of the Notes would have access to the consolidated assets, earnings and equity of the Company. The Company believes the collateralization of the Notes, as described above, is the functional economic equivalent of a full and unconditional guarantee of the Notes by Kronos. In lieu of providing separate audited financial statements of Kronos, the Company has included condensed consolidating financial information in accordance with Rule 3-10 (e) of the SEC's Regulation S-X. See Note 21. The Company redeemed $50 million (par value) of the Notes on December 29, 2000 at 101.5%. The remaining Notes are redeemable, at the Company's option, at a redemption price of 101.5% of the principal amount, declining to 100% in October 2001. In the event of a Change of Control, as defined in the indenture, the Company would be required to make an offer to purchase the Notes at 101% of the principal amount of the Notes. The Notes are issued pursuant to an indenture which contains a number of covenants and restrictions which, among others, restrict the ability of the Company and its subsidiaries to incur debt, incur liens, pay dividends, merge or consolidate with, or sell or transfer all or substantially all of their assets to another entity. At December 31, 2000, $20 million was available for payment of dividends pursuant to F-22 the terms of the indenture. The quoted market price of the Notes per $100 principal amount was $101 and $103.75 at December 31, 2000 and 1999, respectively. Notes payable consist of short-term borrowings denominated in non-U.S. currencies due within one year from non-U.S. banks. Borrowings total $70 million (euro 51 million and NOK 200 million) at December 31, 2000 and $57million (euro 57 million) at December 31, 1999. Interest rates on notes payable ranged from 5.33% to 7.92% at December 31, 2000 and from 3.03% to 4.30% at December 31, 1999. Unused lines of credit available for borrowing under the Company's non-U.S. credit facilities approximated $16 million at December 31, 2000. During 1998 the Company redeemed (i) $6 million principal amount of its Senior Secured Notes at par value pursuant to a tender offer; and (ii) the entire issue of its 13% Senior Secured Discount Notes ($187.5 million principal amount at maturity) with premiums ranging between 1.25% and 6% in market transactions or pursuant to a tender offer. The aggregate maturities of long-term debt at December 31, 2000 are shown in the table below.
Years ending December 31, Amount -------------- (In thousands) 2001 $ 730 2002 627 2003 194,549 2004 61 2005 66 2006 60 -------- $196,093 ========
Note 10 - Employee benefit plans: Company-sponsored pension plans The Company maintains various defined benefit and defined contribution pension plans covering substantially all employees. Non-U.S. employees are covered by plans in their respective countries and a majority of U.S. employees are eligible to participate in a contributory savings plan. The Company contributes to eligible U.S. employees' accounts an amount equal to approximately 4% (3% in 1999 and 1998) of the employee's annual eligible earnings and partially matches employee contributions to the U.S. contributory savings plan. The Company also has an unfunded, nonqualified defined contribution plan covering certain executives, and participants' account balances are credited based on a formula involving eligible earnings. The Company's expense related to these plans included in continuing operations was $1.6 million in 2000, $1.1 million in 1999 and $1.3 million in 1998. Expense related to these plans included in discontinued operations was nil in 1998. F-23 Certain actuarial assumptions used in measuring the defined benefit pension assets, liabilities and expenses are presented below.
December 31, ----------------------------------- 2000 1999 1998 ---- ---- ---- (Percentages) Discount rate ................................. 6.0 to 7.8 5.8 to 7.5 5.5 to 8.5 Rate of increase in future compensation levels. 3.0 to 4.5 2.5 to 4.5 2.5 to 6.0 Long-term rate of return on plan assets ....... 7.0 to 9.0 6.0 to 9.0 6.0 to 9.0
During 1998 the Company curtailed certain U.S. employee pension benefits and recognized a gain of $1.5 million, which is included in discontinued operations. Plan assets are comprised primarily of investments in U.S. and non-U.S. corporate equity and debt securities, short-term investments, mutual funds and group annuity contracts. SFAS No. 87, "Employers' Accounting for Pension Costs" requires that an additional pension liability be recognized when the unfunded accumulated pension benefit obligation exceeds the unfunded accrued pension liability. Variances from actuarially assumed rates will change the actuarial valuation of accrued pension liabilities, pension expense and funding requirements in future periods. The components of the net periodic defined benefit pension cost, excluding curtailment (gain) loss and discontinued operations, are set forth below.
Years ended December 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Net periodic pension cost: Service cost benefits ............................... $ 4,063 $ 3,942 $ 3,835 Interest cost on projected benefit obligation ("PBO") 15,088 16,170 15,669 Expected return on plan assets ...................... (15,403) (15,567) (15,172) Amortization of prior service cost .................. 238 267 332 Amortization of net transition obligation ........... 530 578 173 Recognized actuarial losses ......................... 226 1,144 385 -------- -------- -------- $ 4,742 $ 6,534 $ 5,222 ======== ======== ========
F-24 The funded status of the Company's defined benefit pension plans is set forth below.
December 31, ---------------------- 2000 1999 --------- --------- (In thousands) Change in PBO: Beginning of year ................................ $ 260,186 $ 296,013 Service cost ..................................... 4,063 3,942 Interest ......................................... 15,088 16,170 Participant contributions ........................ 1,027 939 Actuarial (gain) loss ............................ 1,022 (14,303) Benefits paid .................................... (16,993) (16,345) Change in currency exchange rates ................ (16,038) (26,230) --------- --------- End of year .................................. 248,355 260,186 --------- --------- Change in fair value of plan assets: Beginning of year ................................ 218,942 221,035 Actual return on plan assets ..................... 11,762 21,444 Employer contributions ........................... 16,558 11,236 Participant contributions ........................ 1,027 939 Benefits paid .................................... (16,993) (16,345) Change in currency exchange rates ................ (14,312) (19,367) --------- --------- End of year .................................. 216,984 218,942 --------- --------- Funded status at year end: Plan assets less than PBO ........................ (31,371) (41,244) Unrecognized actuarial loss ...................... 24,191 21,603 Unrecognized prior service cost .................. 1,693 2,137 Unrecognized net transition obligation ........... 786 514 --------- --------- $ (4,701) $ (16,990) ========= ========= Amounts recognized in the balance sheet: Prepaid pension cost ............................. $ 22,789 $ 23,271 Accrued pension cost: Current ...................................... (6,270) (9,071) Noncurrent ................................... (21,220) (32,946) Accumulated other comprehensive income (loss) .... -- 1,756 --------- --------- $ (4,701) $ (16,990) ========= =========
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, 2000, 76% of the projected benefit obligations of such plans relate to non-U.S. plans (1999 - 75%). F-25
December 31, ------------------------- 2000 1999 -------- -------- (In thousands) Projected benefit obligation ................. $190,141 $194,204 Accumulated benefit obligation ............... 169,077 164,262 Fair value of plan assets .................... 149,767 146,435
Incentive bonus programs Certain employees are eligible to participate in the Company's various incentive bonus programs. The programs provide for annual payments, which may be in the form of cash or NL common stock. The amount of the annual payment paid to an employee, if any, is based on formulas involving the profitability of Kronos in relation to the annual operating plan and, for most of these employees, individual performance. Postretirement benefits other than pensions In addition to providing pension benefits, the Company currently provides certain health care and life insurance benefits for eligible retired employees. Certain of the Company's Canadian employees may become eligible for such postretirement health care and life insurance benefits if they reach retirement age while working for the Company. In 1989 the Company began phasing out such benefits for currently active U.S. employees over a ten-year period and U.S. employees retiring after 1998 are not entitled to any such benefits. The majority of all retirees are required to contribute a portion of the cost of their benefits and certain current and future retirees are eligible for reduced health care benefits at age 65. With the exception of the $5.6 million contributed to the VEBA trust discussed in Note 4, the Company's policy is to fund medical claims as they are incurred, net of any contributions by the retirees. For measuring the OPEB liability at December 31, 2000, the expected rate of increase in health care costs is 8.5% in 2001 decreasing to 5.5% in 2007. Other weighted-average assumptions used to measure the liability and expense are presented below.
December 31, ----------------------- 2000 1999 1998 ---- ---- ---- (Percentages) Discount rate ....................................... 7.3 7.5 6.5 Long-term rate for compensation increases ........... 6.0 6.0 6.0 Long-term rate of return on plan assets ............. 7.7 9.0 9.0
Variances from actuarially assumed rates will change accrued OPEB liabilities, net periodic OPEB expense and funding requirements in future periods. If the health care cost trend rate was increased (decreased) by one percentage point for each year, postretirement benefit expense would have increased approximately $.1 million (decreased by $.1 million) in 2000, and the projected benefit obligation at December 31, 2000 would have increased by approximately $1.7 million (decreased by $1.5 million). During 1998, as a result of the sale of Rheox, the Company settled certain U.S. employee OPEB benefits and recognized a $3.2 million gain, all of which is included in discontinued operations. F-26 The components of the Company's net periodic postretirement benefit cost, excluding curtailment and settlement gains and discontinued operations, are set forth below. The net periodic postretirement benefit costs included in discontinued operations excluding the settlement gain was nil in 1998.
Years ended December 31, ------------------------------- 2000 1999 1998 ------- ------- ------- (In thousands) Net periodic OPEB cost (benefit): Service cost benefits .................. $ 84 $ 40 $ 43 Interest cost on PBO ................... 2,646 2,069 2,393 Expected return on plan assets ......... (521) (526) (583) Amortization of prior service cost ..... (2,075) (2,075) (2,075) Recognized actuarial losses (gains) .... 24 (573) (811) ------- ------- ------- $ 158 $(1,065) $(1,033) ======= ======= =======
December 31, ----------------------- 2000 1999 -------- -------- (In thousands) Change in PBO: Beginning of year ............................ $ 37,354 $ 33,812 Service cost ................................. 84 40 Interest cost ................................ 2,646 2,069 Actuarial losses ............................. 1,672 5,714 Benefits paid from: Company funds ............................ (1,790) (3,316) Plan assets .............................. (2,859) (1,078) Change in currency exchange rates ............ (67) 113 -------- -------- End of year .............................. 37,040 37,354 -------- -------- Change in fair value of plan assets: Beginning of year ............................ 5,968 6,365 Actual return on plan assets ................. 2,705 206 Employer contributions ....................... 6,028 475 Benefits paid ................................ (2,859) (1,078) -------- -------- End of year .............................. 11,842 5,968 -------- -------- Funded status at year end: Plan assets less than PBO .................... (25,198) (31,386) Unrecognized actuarial gain .................. (1,135) (575) Unrecognized prior service cost .............. (7,858) (9,933) -------- -------- $(34,191) $(41,894) ======== ======== Amounts recognized in the balance sheet: Current ...................................... $ (4,787) $ (4,789) Noncurrent ................................... (29,404) (37,105) -------- -------- $(34,191) $(41,894) ======== ========
F-27 Note 11 - Shareholders' equity: Common stock
Shares of common stock ---------------------------------- Treasury Issued stock Outstanding ------ -------- ----------- (In thousands) Balance at December 31, 1997 .......... 66,839 15,572 51,267 Treasury shares reissued .......... -- (544) 544 ------ ------ ------ Balance at December 31, 1998 .......... 66,839 15,028 51,811 Treasury shares acquired .......... -- 552 (552) Treasury shares reissued .......... -- (25) 25 ------ ------ ------ Balance at December 31, 1999 .......... 66,839 15,555 51,284 Treasury shares acquired .......... -- 1,682 (1,682) Treasury shares reissued .......... -- (450) 450 ------ ------ ------ Balance at December 31, 2000 .......... 66,839 16,787 50,052 ====== ====== ======
Pursuant to its share repurchase program, the Company purchased 1,682,000 shares of its common stock at an aggregate cost of $30.9 million in 2000 and 552,000 shares of its common stock in the open market at an aggregate cost of $7.2 million in 1999. Approximately 766,000 additional shares are available for purchase under the Company's share repurchase program. The available shares may be purchased over an unspecified period of time, and are to be held as treasury shares available for general corporate purposes. The Company reinstated a regular quarterly dividend in June 1998 and subsequently paid three quarterly $.03 per share cash dividends in 1998. In February 1999 the Company increased the regular quarterly dividend to $.035 per share and subsequently paid four quarterly $.035 per share cash dividends in 1999. In February 2000 the Company increased the regular quarterly dividend to $.15 per share and subsequently paid three quarterly $.15 per share cash dividends in the first nine months of 2000. In October 2000 the Company increased the regular quarterly dividend to $.20 per share and subsequently paid a quarterly $.20 per share cash dividend in the fourth quarter of 2000. On February 7, 2001, the Company's Board of Directors declared a regular quarterly dividend of $.20 per share to shareholders of record as of March 14, 2001 to be paid on March 28, 2001. Common stock options The NL Industries, Inc. 1998 Long-Term Incentive Plan (the "NL Option Plan") provides for the discretionary grant of restricted common stock, stock options, stock appreciation rights ("SARs") and other incentive compensation to officers and other key employees of the Company. Although certain stock options granted pursuant to a similar plan which preceded the NL Option Plan ("the Predecessor Option Plan") remain outstanding at December 31, 2000, no additional options may be granted under the Predecessor Option Plan. Up to five million shares of NL common stock may be issued pursuant to the NL Option Plan and, at December 31, 2000, 4,147,000 shares were available for future grants. The NL Option Plan provides for the grant of options that qualify as incentive options and for options which are not so qualified. Generally, stock options and SARs (collectively, "options") are granted at a price equal to or greater than 100% of the F-28 market price at the date of grant, vest over a five year period and expire ten years from the date of grant. Restricted stock, forfeitable unless certain periods of employment are completed, is held in escrow in the name of the grantee until the restriction period expires. No SARs have been granted under the NL Option Plan. In addition to the NL Option Plan, the Company had a stock option plan for its nonemployee directors that expired in 1998. At December 31, 2000, there were options to acquire 2,000 shares of common stock outstanding under this plan, all of which were fully vested. Future grants to directors are expected to be granted from the NL Option Plan. Changes in outstanding options granted pursuant to the NL Option Plan, the Predecessor Option Plan and the nonemployee director plan are summarized in the table below.
Exercise price Amount per share payable -------------------- upon Shares Low High exercise ------ --------- --------- -------- (In thousands, except per share amounts) Outstanding at December 31, 1997 2,845 $ 4.81 $ 24.19 $ 34,761 Granted .................... 474 17.97 21.97 9,334 Exercised .................. (960) 4.81 17.25 (8,740) Forfeited .................. (240) 5.00 19.97 (4,336) ----- --------- --------- -------- Outstanding at December 31, 1998 2,119 5.00 24.19 31,019 Granted .................... 410 11.28 15.19 5,377 Exercised .................. (25) 5.00 11.81 (209) Forfeited .................. (67) 8.69 22.63 (1,244) ----- --------- --------- -------- Outstanding at December 31, 1999 2,437 5.00 24.19 34,943 Granted .................... 432 14.25 14.44 6,165 Exercised .................. (918) 5.00 17.97 (9,508) Forfeited .................. (349) 8.69 24.19 (7,237) ----- --------- --------- -------- Outstanding at December 31, 2000 1,602 $ 5.00 $ 21.97 $ 24,363 ===== ========= ========= ========
At December 31, 2000, 1999 and 1998 options to purchase 363,480, 1,255,901 and 957,861 shares, respectively, were exercisable and options to purchase 340,800 shares become exercisable in 2001. All of the exercisable options at December 31, 2000 had exercise prices less than the Company's December 31, 2000 quoted market price of $24.25 per share. Outstanding options at December 31, 2000 expire at various dates through 2010, with a weighted-average remaining life of eight years. The pro forma information required by SFAS No. 123, "Accounting for Stock-Based Compensation," is based on an estimation of the fair value of options issued subsequent to January 1, 1995. The weighted-average fair values of options granted during 2000, 1999 and 1998 were $4.83, $6.94 and $9.78 per share, respectively. The fair values of employee stock options were calculated using the Black-Scholes stock option valuation model with the following weighted average assumptions for grants in 2000, 1999 and 1998: stock price volatility of 48%, 50% and 51% in 2000, 1999 and 1998, respectively; risk-free rate of return of F-29 5% in 2000, 6% in 1999 and 4% in 1998; dividend yield of 4.9% in 2000, 1.2% in 1999 and .9% in 1998; and an expected term of 9 years in 2000 and 1999 and 8 years in 1998. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and basic net income per common share were as follows. The pro forma impact on earnings per common share for 2000, 1999 and 1998 is not necessarily indicative of future effects on earnings per share.
Years ended December 31, ------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (In thousands except per share amounts) Net income - as reported ...................... $ 154,609 $ 159,771 $ 366,678 Net income - pro forma ........................ $ 152,201 $ 156,868 $ 363,843 Net income per basic common share - as reported $ 3.07 $ 3.09 $ 7.13 Net income per basic common share - pro forma . $ 3.02 $ 3.03 $ 7.07
Preferred stock The Company is authorized to issue a total of five million shares of preferred stock. The rights of preferred stock as to dividends, redemption, liquidation and conversion are determined upon issuance. Note 12 - Income taxes: The components of (i) income from continuing operations before income taxes and minority interest ("pretax income"), (ii) the difference between the provision for income taxes attributable to pretax income and the amounts that would be expected using the U.S. federal statutory income tax rate of 35%, (iii) the provision for income taxes and (iv) the comprehensive tax provision are presented below.
Years ended December 31, ------------------------------------------ 2000 1999 1998 -------- -------- -------- (In thousands) Pretax income: U.S ..................... $ 73,646 $ 23,642 $ 57,638 Non-U.S ................. 162,551 74,850 52,052 -------- -------- -------- $236,197 $ 98,492 $109,690 ======== ======== ========
F-30
Years ended December 31, ------------------------------------ 2000 1999 1998 -------- -------- -------- (In thousands) Expected tax expense ..................................... $ 82,669 $ 34,472 $ 38,391 Non-U.S. tax rates ....................................... (6,445) 6,119 2,507 Resolution of German income tax audits ................... (5,500) (36,490) -- Change in valuation allowance: Corporate restructuring in Germany and other ......... -- (77,580) -- Change in German income tax law ...................... -- 24,070 -- Recognition of certain deductible tax attributes which previously did not meet the "more-likely-than-not" . (2,600) (15,807) (19,143) recognition criteria Incremental tax on income of companies not included in the NL Tax Group ........................................... 1,943 2,747 4,277 German rate change adjustment of deferred taxes .......... 5,695 -- -- Refund of prior-year German dividend withholding taxes ... -- -- (8,219) U.S. state income taxes .................................. 1,348 (680) 307 Other, net ............................................... 1,310 (1,452) 1,668 -------- -------- -------- Income tax expense (benefit) ......................... $ 78,420 $(64,601) $ 19,788 ======== ======== ======== Provision for income taxes: Current income tax expense (benefit): U.S. federal ..................................... $ (8,255) $ 193 $ 850 U.S. state ....................................... 622 (2,489) 307 Non-U.S .......................................... 45,867 24,467 13,643 -------- -------- -------- 38,234 22,171 14,800 -------- -------- -------- Deferred income tax expense (benefit): U.S. federal ..................................... 32,128 (47,426) 2,112 U.S. state ....................................... 726 1,809 -- Non-U.S .......................................... 7,332 (41,155) 2,876 -------- -------- -------- 40,186 (86,772) 4,988 -------- -------- -------- $ 78,420 $(64,601) $ 19,788 ======== ======== ======== Comprehensive provision (benefit) for income taxes allocable to: Pretax income ...................................... $ 78,420 $(64,601) $ 19,788 Discontinued operations ............................ -- -- 87,000 Extraordinary item ................................. (394) -- (5,698) Additional paid-in capital ......................... (3,224) (16) (3,796) Other comprehensive income - marketable securities . 3,244 (883) 108 -------- -------- -------- $ 78,046 $(65,500) $ 97,402 ======== ======== ========
F-31 The components of the net deferred tax liability are summarized below:
December 31, -------------------------------------------------------- 2000 1999 ---- ---- Deferred tax Deferred tax -------------------------- -------------------------- Assets Liabilities Assets Liabilities --------- ----------- --------- ----------- (In thousands) Tax effect of temporary differences relating to: Inventories ................................. $ 4,027 $ (2,966) $ 4,025 $ (2,086) Property and equipment ...................... 61,738 (53,753) 96,548 (53,313) Accrued postretirement benefits cost ........ 13,145 -- 14,575 -- Accrued (prepaid) pension cost .............. 4,348 (22,928) 6,288 (24,830) Accrued environmental costs ................. 37,761 -- 37,439 -- Noncompete agreement ........................ 2,917 -- 4,317 -- Other accrued liabilities and deductible differences ............................... 18,327 -- 16,878 -- Other taxable differences ................... -- (122,561) -- (87,041) Tax on unremitted earnings of non-U.S subsidiaries .................................. -- (4,396) -- (20,727) Tax loss and tax credit carryforwards ........... 119,064 -- 144,985 -- Valuation allowance ............................. (190,312) -- (233,595) -- --------- --------- --------- --------- Gross deferred tax assets (liabilities) ..... 71,015 (206,604) 91,460 (187,997) Reclassification, principally netting by tax jurisdiction .............................. (59,109) 59,109 (79,445) 79,445 --------- --------- --------- --------- Net total deferred tax assets (liabilities) . 11,906 (147,495) 12,015 (108,552) Net current deferred tax assets (liabilities) 11,673 (1,822) 11,974 (326) --------- --------- --------- --------- Net noncurrent deferred tax assets (liabilities).............................. $ 233 $(145,673) $ 41 $(108,226) ========= ========= ========= =========
Changes in the Company's deferred income tax valuation allowance are summarized below. The deductible temporary differences in 1998 include items that have been reported as discontinued operations.
Years ended December 31, --------------------------------------- 2000 1999 1998 --------- --------- --------- (In thousands) Balance at the beginning of year .................................. $ 233,595 $ 134,477 $ 188,585 Recognition of certain deductible tax attributes which previously did not meet the "more-likely-than-not" recognition criteria ........................................ (2,600) (70,946) (64,274) Increase in certain deductible temporary differences which the Company believes do not meet the "more-likely-than- not" recognition criteria ................................... -- 1,629 6,964 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 ....... (24,955) 183,150 (3,734) Foreign currency translation .................................. (15,728) (14,715) 6,936 --------- --------- --------- Balance at the end of year ........................................ $ 190,312 $ 233,595 $ 134,477 ========= ========= =========
F-32 A reduction in the German "base" income tax rate from 30% to 25%, enacted in October 2000, became effective January 1, 2001. The reduction in the German income tax rate resulted in $5.7 million of additional deferred income tax expense in the fourth quarter of 2000 due to a reduction of the Company's deferred income tax asset related to certain German tax attributes. The Company does not expect its future current income tax expense to be affected by the rate change in Germany. Certain of the Company's tax returns in various U.S. and non-U.S. jurisdictions are being examined and tax authorities have proposed or may propose tax deficiencies, including interest. The Company has received tax assessments from the Norwegian tax authorities proposing tax deficiencies including related interest of approximately NOK 38 million ($4.3 million at December 31, 2000) relating to 1994 and 1996. The Company is currently litigating the primary issue related to the 1994 assessment and in February 2001 the Norwegian Appeals Court ruled in favor of the Norwegian tax authorities. The Company has appealed the case to the Norwegian Supreme Court and believes that the outcome of the 1996 case is dependent on the eventual outcome of the 1994 case. The Company has granted a lien for the 1994 and 1996 tax assessments on its Fredrikstad, Norway TiO2 plant in favor of the Norwegian tax authorities. The Company has received preliminary tax assessments for the years 1991 to 1997 from the Belgian tax authorities proposing tax deficiencies, including related interest, of approximately euro 12.7 million ($11.8 million at December 31, 2000). The Company has filed protests to the assessments for the years 1991 to 1996 and expects to file a protest for 1997. The Company is in discussions with the Belgian tax authorities and believes that a significant portion of the assessments are without merit. No assurance can be given that the Company's tax matters will be favorably resolved due to the inherent uncertainties involved in 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. The Company recognized a $90 million noncash income tax benefit in 1999 related to (i) a favorable resolution of the Company's previously reported tax contingency in Germany ($36 million) and (ii) a net reduction in the Company's deferred income tax valuation allowance due to a change in estimate of the Company's ability to utilize certain income tax attributes under the "more-likely-than-not" recognition criteria ($54 million). The $54 million net reduction in the Company's deferred income tax valuation allowance is comprised of (i) a $78 million decrease in the valuation allowance to recognize the benefit of certain deductible income tax attributes which the Company now believes meets the recognition criteria as a result of, among other things, a corporate restructuring of the Company's German subsidiaries offset by (ii) a $24 million increase in the valuation allowance to reduce the previously recognized benefit of certain other deductible income tax attributes which the Company now believes do not meet the recognition criteria due to a change in German tax law. At December 31, 2000, the Company had, for U.S. federal income tax purposes, a net operating loss carryforward of approximately $3 million which expires in 2019. The Company also has approximately $315 million of income tax loss carryforwards in Germany with no expiration date. In 1998 the Company utilized $13 million of alternative minimum tax credit carryforwards (the benefit of which was recognized in F-33 discontinued operations) to reduce U.S. federal income tax expense. Unutilized foreign tax credit carryovers of $2 million and $6 million expired in 1999 and 1998, respectively. Note 13 - Other income, net:
Years ended December 31, ------------------------------------ 2000 1999 1998 -------- -------- -------- (In thousands) Securities earnings: Interest and dividends ........... $ 8,346 $ 6,597 $ 14,921 Securities gains, net ............ 2,531 -- -- -------- -------- -------- 10,877 6,597 14,921 Currency transaction gains, net ...... 6,499 10,161 4,157 Noncompete agreement income .......... 4,000 4,000 3,667 Trade interest income ................ 2,333 2,365 2,115 Disposition of property and equipment (1,562) (429) (768) Other, net ........................... 1,136 952 1,361 -------- -------- -------- $ 23,283 $ 23,646 $ 25,453 ======== ======== ========
The Company received a $20 million fee as part of the sale of Rheox in January 1998 in payment for entering into a five-year covenant not to compete in the rheological products business. The Company is amortizing the fee to income using the straight-line method over the five-year noncompete period beginning January 30, 1998. Note 14 - Litigation settlement gains, net: In June 2000 the Company recognized a $43 million net gain from a settlement with one of its two principal former insurance carriers, and in December 2000 the Company recognized a $26.5 million net gain from a settlement with certain members of the other principal former insurance carrier. The settlement gains are stated net of $3.1 million in commissions, and the gross settlement proceeds of $72.6 million were transferred by the carriers to special purpose trusts established to pay future remediation and other environmental expenditures of the Company. A settlement with remaining members of the second carrier group was reached in January 2001, and the Company expects to recognize a $10 million gain in the first quarter of 2001. The settlements resolved court proceedings that the Company initiated to seek reimbursement for legal defense expenditures and indemnity coverage for certain of its environmental remediation expenditures. Note 15 - Other items: Advertising expense included in continuing operations is expensed as incurred and was $1 million in each of 2000, 1999 and 1998. Research, development and certain sales technical support costs included in continuing operations is expensed as incurred and approximated $6 million in 2000 and $7 million in each of 1999 and 1998. Interest capitalized related to continuing operations in connection with long-term capital projects was nil in each of 2000 and 1999 and $1 million in 1998. F-34 Note 16 - Related party transactions: The Company may be deemed to be controlled by Harold C. Simmons. Corporations that may be deemed to be controlled by or affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions such as guarantees, management and expense sharing arrangements, shared fee arrangements, tax sharing agreements, joint ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties and (b) common investment and acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases, and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have involved both related and unrelated parties and have included transactions which resulted in the acquisition by one related party of a publicly held minority equity interest in another related party. While no transactions of the type described above are planned or proposed with respect to the Company other than as set forth in this Annual Report on Form 10-K, the Company from time to time considers, reviews and evaluates and understands that Contran, Valhi and related entities consider, review and evaluate, such transactions. Depending upon the business, tax and other objectives then relevant, and restrictions under the indentures and other agreements, it is possible that the Company might be a party to one or more such transactions in the future. It is the policy of the Company to engage in transactions with related parties on terms, in the opinion of the Company, no less favorable to the Company than could be obtained from unrelated parties. The Company is a party to an intercorporate services agreement with Contran (the "Contran ISA") whereby Contran provides certain management services to the Company on a fee basis. Intercorporate services fee expense related to the Contran ISA was and $1.0 million in each of 2000, 1999 and 1998. The Company is a party to an intercorporate services agreement with Valhi (the "Valhi ISA") whereby Valhi and the Company provide certain management, financial and administrative services to each other on a fee basis. Net intercorporate services fee expense related to the Valhi ISA was $.2 million in 2000, $.1 million in 1999 and nil in 1998. The Company is party to an intercorporate services agreement with Tremont (the "Tremont ISA"). Under the terms of the contract, the Company provides certain management and financial services to Tremont on a fee basis. Intercorporate services fee income related to the Tremont ISA was $.1 million in each of 2000, 1999 and 1998. The Company is party to an intercorporate services agreement (the "Timet ISA") with Titanium Metals Corporation ("Timet"), approximately 47% of the outstanding common stock of which is currently held by Tremont and another entity related to Harold C. Simmons. Under the terms of the contract, the Company provides certain management and financial services to Timet on a fee basis. Intercorporate services fee income related to the Timet ISA was $.3 million in each of 2000, 1999 and 1998. The Company is party to an intercorporate services agreement (the "CompX ISA") with CompX International, Inc. ("CompX"), a subsidiary of Valhi. Under the terms of the contract, the Company provides certain management and administrative services to CompX on a fee basis. Intercorporate services fee income related to the CompX ISA was $.2 million in 2000 and $.1 million in each of 1999 and 1998. Purchases of TiO2 from LPC were $92.5 in 2000, $85.3 million in 1999 and $89.0 million in 1998. F-35 The Company and Tall Pines Insurance Company ("Tall Pines") (formerly NL Insurance, Ltd. of Vermont), a wholly owned subsidiary of Tremont, are parties to an Insurance Sharing Agreement with respect to certain loss payments and reserves established by Tall Pines that (i) arise out of claims against other entities for which the Company is contractually responsible and (ii) are subject to payment by Tall Pines under certain reinsurance contracts. Also, Tall Pines will credit the Company with respect to certain underwriting profits or credit recoveries that Tall Pines receives from independent reinsurers that relate to retained liabilities. At December 31, 2000, the Company has $9.7 million of restricted cash that collateralizes certain of Tall Pines' outstanding letters of credit. Tall Pines, Valmont and EWI RE, Inc. ("EWI") provide for or broker certain of the Company's, its joint venture's and its affiliates' insurance policies. Valmont is a wholly owned insurance company of Valhi. Parties related to Contran own all of the outstanding common stock of EWI. Through December 31, 2000, a son-in-law of Harold C. Simmons managed the operations of EWI. Subsequent to December 31, 2000, such son-in-law provides advisory services to EWI as requested by EWI. 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 Company and its joint venture paid approximately $5.7 million, $3.7 million and $3.0 million in 2000, 1999 and 1998, respectively, for policies provided or brokered by Tall Pines, Valmont and EWI. These amounts principally included payments for reinsurance and insurance premiums paid to unrelated third parties, but also included commissions paid to Tall Pines, Valmont and EWI. In the Company's opinion, the amounts that the Company paid for these insurance policies and the allocation among the Company and its affiliates of relative insurance premiums are reasonable and similar to those they could have obtained through unrelated insurance companies and/or brokers. The Company expects that these relationships with Tall Pines, Valmont and EWI will continue in 2001. In February 2001 NL Environmental Management Services, Inc., a majority-owned subsidiary of the Company, loaned $13.4 million to Tremont. The loan bears interest at prime plus 2%, is due March 31, 2003 and is collateralized by 10.2 million shares of NL common stock owned by Tremont. During 2000 the Company purchased 414,000 shares of its common stock from officers and directors of the Company for an aggregate of $9.4 million. Such purchases were at market prices on the respective dates of purchase. F-36 Amounts receivable from and payable to affiliates are summarized in the following table.
December 31, ------------------------ 2000 1999 ------- ------- (In thousands) Receivable from affiliates: Timet .................................... $ 1 $ 310 CompX .................................... 82 176 Other .................................... 131 261 ------- ------- $ 214 $ 747 ======= ======= Payable to affiliates: Tremont Corporation ...................... $ 1,923 $ 2,859 LPC ...................................... 8,711 8,381 ------- ------- $10,634 $11,240 ======= =======
Amounts payable to LPC are generally for the purchase of TiO2 (see Note 6), and amounts payable to Tremont principally relate to the Company's Insurance Sharing Agreement described above. Note 17 - Commitments and contingencies: Leases The Company leases, pursuant to operating leases, various manufacturing and office space and transportation equipment. Most of the leases contain purchase and/or various term renewal options at fair market and fair rental values, respectively. In most cases management expects that, in the normal course of business, leases will be renewed or replaced by other leases. Kronos' principal German operating subsidiary leases the land under its Leverkusen TiO2 production facility pursuant to a lease expiring in 2050. The Leverkusen facility, with approximately one-third of Kronos' current TiO2 production capacity, is located within the lessor's extensive manufacturing complex, and Kronos is the only unrelated party so situated. Under a separate supplies and services agreement expiring in 2011, the lessor provides some raw materials, auxiliary and operating materials and utilities services necessary to operate the Leverkusen facility. Both the lease and the supplies and services agreements restrict the Company's ability to transfer ownership or use of the Leverkusen facility. F-36 Net rent expense included in continuing operations aggregated $9 million in each of 2000 and 1999 and $7 million in 1998. At December 31, 2000, minimum rental commitments under the terms of noncancellable operating leases, excluding discontinued operations, were as follows:
Years ending December 31, Real Estate Equipment ----------- --------- (In thousands) 2001 $ 1,985 $ 1,496 2002 1,780 808 2003 1,630 464 2004 1,243 295 2005 1,094 77 2006 and thereafter 18,886 20 ------- ------- $26,618 $ 3,160 ======= =======
Capital expenditures At December 31, 2000, the estimated cost to complete capital projects in process approximated $16 million, including $4 million to complete an expansion project increasing finishing capacity at the Company's Belgian facility. Purchase commitments The Company has long-term supply contracts that provide for the Company's chloride feedstock requirements through 2003. The agreements require the Company purchase certain minimum quantities of feedstock with average minimum annual purchase commitments aggregating approximately $155 million. Legal proceedings Lead pigment litigation. Since 1987 the Company, other former manufacturers of lead pigments for use in paint and lead-based paint, and the Lead Industries Association have been named as defendants in various legal proceedings seeking damages for personal injury and property damage allegedly caused by the use of lead-based paints. Certain of these actions have been filed by or on behalf of states, large United States cities or their public housing authorities and certain others have been asserted as class actions. These legal proceedings seek recovery under a variety of theories, including negligent product design, failure to warn, strict liability, breach of warranty, conspiracy/concert of action, enterprise liability, market share liability, intentional tort, and fraud and misrepresentation. The plaintiffs in these actions generally seek to impose on the defendants responsibility for lead paint abatement and asserted health concerns associated with the use of lead-based paints, including damages for personal injury, contribution and/or indemnification for medical expenses, medical monitoring expenses and costs for educational programs. Most of these legal proceedings are in various pre-trial stages; some are on appeal. F-38 The Company believes that these actions are without merit, intends to continue to deny all allegations of wrongdoing and liability and to defend all actions vigorously. The Company has not accrued any amounts for the pending lead pigment litigation. Considering the Company's previous involvement in the lead and lead pigment businesses, there can be no assurance that additional litigation similar to that currently pending will not be filed. Environmental matters and litigation. Some of the Company's current and former facilities, including several divested secondary lead smelters and former mining locations, are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws. Additionally, in connection with past disposal practices, the Company has been named a potential responsible party ("PRP") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act ("CERCLA") in approximately 75 governmental and private actions associated with hazardous waste sites and former mining locations, certain of which are on the U.S. Environmental Protection Agency's Superfund National Priorities List. These actions seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. While the Company may be jointly and severally liable for such costs, in most cases it is only one of a number of PRPs who are also jointly and severally liable. In addition, the Company is a party to a number of lawsuits filed in various jurisdictions alleging CERCLA or other environmental claims. At December 31, 2000, the Company had accrued $110 million for those environmental matters which are reasonably estimable. It is not possible to estimate the range of costs for certain sites. The upper end of the range of reasonably possible costs to the Company for sites which it is possible to estimate costs is approximately $170 million. The Company's estimates of such liabilities have not been discounted to present value, and the Company has not recognized any potential insurance recoveries other than the settlements in 2000 discussed in Note 14. The imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes respecting site cleanup costs or allocation of such costs among PRPs, or a determination that the Company is potentially responsible for the release of hazardous substances at other sites could result in expenditures in excess of amounts currently estimated by the Company to be required for such matters. No assurance can be given that actual costs will not exceed accrued amounts or the upper end of the range for sites for which estimates have been made and no assurance can be given that costs will not be incurred with respect to sites as to which no estimate presently can be made. Further, there can be no assurance that additional environmental matters will not arise in the future. Certain of the Company's businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws. As with other companies engaged in similar businesses, certain past and current operations and products of the Company have the potential to cause environmental or other damage. The Company has implemented and continues to implement various policies and programs in an effort to minimize these risks. The policy of the Company is to maintain compliance with applicable environmental laws and regulations at all of its facilities and to strive to improve its environmental performance. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies thereunder, could adversely affect the Company's production, handling, use, storage, transportation, sale or disposal of such substances as well as the Company's consolidated financial position, results of operations or liquidity. F-39 Other litigation. The Company is also involved in various other environmental, contractual, product liability and other claims and disputes incidental to its present and former businesses. The Company currently believes the disposition of all claims and disputes individually or in the aggregate, should not have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. Concentrations of credit risk Sales of TiO2 accounted for more than 90% of net sales from continuing operations during each of the past three years. The remaining sales result from the mining and sale of ilmenite ore (a raw material used in the sulfate pigment production process), and the manufacture and sale of iron-based water treatment chemicals (derived from co-products of the TiO2 production processes). TiO2 is generally sold to the paint, plastics and paper industries. Such markets are generally considered "quality-of-life" markets whose demand for TiO2 is influenced by the relative economic well-being of the various geographic regions. TiO2 is sold to over 4,000 customers, with the top ten customers approximating 25% of net sales in each of the last three years. Approximately one-half of the Company's TiO2 sales by volume were to Europe in each of the past three years and approximately 37% in each of 1998, 1999 and 2000 of sales were attributable to North America. Consolidated cash, cash equivalents, current and noncurrent restricted cash equivalents includes $159 million and $78 million invested in U.S. Treasury securities purchased under short-term agreements to resell at December 31, 2000 and 1999, respectively, of which $67 million and $58 million, respectively, of such securities are held in trust for the Company by a single U.S. bank. Note 18 - Financial instruments: Summarized below is the estimated fair value and related net carrying value of the Company's financial instruments.
December 31, December 31, 2000 1999 -------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- (In millions) Cash, cash equivalents, current and noncurrent restricted cash equivalents .......................... $ 207.6 $ 207.6 $ 151.8 $ 151.8 Marketable securities - classified as available-for-sale 47.2 47.2 15.1 15.1 Notes payable and long-term debt: Fixed rate with market quotes - Senior Secured Notes $ 194.0 $ 195.9 $ 244.0 $ 253.2 Variable rate debt ................................. 72.1 72.1 57.6 57.6 Common shareholders' equity ............................ $ 344.5 $ 1,213.8 $ 271.1 $ 774.1
Fair value of the Company's marketable securities and Notes are based upon quoted market prices and the fair value of the Company's common shareholder's equity is based upon quoted market prices for NL's common stock at the end of the year. The Company held no derivative financial instruments at December 31, 2000 or 1999. F-40 Note 19 - Quarterly financial data (unaudited):
Quarter ended ----------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- (In thousands, except per share amounts) Year ended December 31, 2000: Net sales .................................. $231,009 $251,126 $242,309 $197,875 Cost of sales .............................. 159,265 164,033 159,021 128,130 Operating income ........................... 46,235 62,743 57,511 45,994 Income from continuing operations .......... 23,708 63,438 30,169 38,026(a) Net income ................................. 23,708 63,438 30,169 37,294(a) Earnings per share: Basic: Income from continuing operations .. $ .47 $ 1.26 $ .60 $ .76(a) ======== ======== ======== ======== Net income ......................... $ .47 $ 1.26 $ .60 $ .75(a) ======== ======== ======== ======== Diluted: Income from continuing operations .. $ .46 $ 1.25 $ .60 $ .75(a) ======== ======== ======== ======== Net income ......................... $ .46 $ 1.25 $ .60 $ .74(a) ======== ======== ======== ======== Weighted average common shares and potential common shares outstanding: Basic .................................. 50,920 50,499 50,203 50,045 Diluted ................................ 51,154 50,850 50,606 50,385 Year ended December 31, 1999: Net sales .................................. $201,569 $232,568 $242,621 $231,629 Cost of sales .............................. 147,040 167,779 181,745 165,751 Operating income ........................... 30,961 44,136 34,759 35,812 Net income ................................. 13,940 111,823 17,146 16,862 Earnings per share - net income: Basic .................................. $ .27 $ 2.16 $ .33 $ .33 ======== ======== ======== ======== Diluted ................................ $ .27 $ 2.16 $ .33 $ .33 ======== ======== ======== ======== Weighted average common shares and potential common shares outstanding: Basic .................................. 51,819 51,826 51,835 51,614 Diluted ................................ 51,870 51,883 51,943 51,758
(a) Income from continuing operations in the fourth quarter of 2000 includes a $26.5 million pretax net litigation settlement gain (see Note 14) and a $3.1 million noncash securities loss (see Note 4). Net income in the fourth quarter of 2000 also includes a $.7 million extraordinary item for early extinguishment of debt, net of tax. F-41 Note 20 - Discontinued operations: The Company sold the net assets of its Rheox specialty chemical business to Elementis plc for $465 million cash (before fees and expenses) in January 1998, including $20 million attributable to a five-year agreement by the Company not to compete in the rheological products business. The Company recognized an after-tax gain of approximately $286 million on the sale of this business segment. As a result of the sale, the Company has presented the results of this business segment as discontinued operations. Condensed income statement related to discontinued operations for the month ended January 31, 1998 is as follows. Interest expense has been allocated to discontinued operations based on the amount of debt specifically attributed to Rheox's operations.
Month ended January 31, 1998 -------------- (In thousands) Net sales ...................................................... $ 12,630 Other expense, net ............................................. (50) --------- 12,580 --------- Cost of sales .................................................. 6,969 Selling, general and administrative ............................ 2,737 Interest expense ............................................... 771 --------- 10,477 --------- Income before income taxes ................................. 2,103 Income tax expense ............................................. 778 --------- 1,325 Gain from sale of Rheox, net of tax expense of $86,222 ......... 286,071 --------- $ 287,396 =========
Condensed cash flow data for Rheox (excluding dividends paid to, contributions received from and intercompany loans with NL) is presented below.
Month ended January 31, 1998 -------------- (In thousands) Cash flows from: Operating activities ...................................... $ (30,587) Investing activities - capital expenditures ............... (26) Financing activities - indebtedness, net .................. (117,500) --------- Net change from operating, investing and financing activities ................................ $(148,113) =========
F-42 Note 21 - Condensed consolidating financial information: The Company's 11.75% Senior Secured Notes are collateralized by a series of intercompany notes to NL (the "Parent Issuer"). The Notes are also collateralized by a first priority lien on the stock of Kronos. A second priority lien on the stock of NL Capital Corporation ("NLCC") collateralized the notes until February 2000, at such time it was merged into KII and became included in the first priority lien on the stock of Kronos. In the event of foreclosure, the holders of the Notes would have access to the consolidated assets, earnings and equity of the Company. The Company believes the collateralization of the Notes, as described above, is the functional economic equivalent of a joint and several, full and unconditional guarantee of the Notes by Kronos and, prior to its merger into KII, NLCC. Management believes that separate audited financial statements would not provide additional material information that would be useful in assessing the financial position of Kronos and NLCC (the "Guarantor Subsidiaries"). In lieu of providing separate audited financial statements of the Guarantor Subsidiaries, the Company has included condensed consolidating financial information of the Parent Issuer, Guarantor Subsidiaries and non-guarantor subsidiaries in accordance with Rule 3-10 (e) of the SEC's Regulation S-X. The Guarantor Subsidiaries and the non-guarantor subsidiaries comprise all of the direct and indirect subsidiaries of the Parent Issuer. Investments in subsidiaries are accounted for by NL under the equity method, wherein the parent company's share of earnings is included in net income. The elimination entries eliminate the parent's investment in subsidiaries and the equity in earnings of subsidiaries, intercompany payables and receivables and other transactions between subsidiaries. F-43 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet December 31, 2000 (In thousands)
Combined NL Industries, Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated -------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ...... $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378 Restricted cash equivalents .... 69,242 -- -- -- 69,242 Accounts and notes receivable .. 172 131,295 73 -- 131,540 Receivable from affiliates ..... 6,189 -- 216 (6,191) 214 Refundable income taxes ........ 10,512 1,790 -- -- 12,302 Inventories .................... -- 205,973 -- -- 205,973 Prepaid expenses ............... 347 2,111 -- -- 2,458 Deferred income taxes .......... 6,394 5,279 -- -- 11,673 ----------- ----------- ----------- ----------- ----------- Total current assets ....... 96,488 399,427 64,056 (6,191) 553,780 ----------- ----------- ----------- ----------- ----------- Other assets: Investment in subsidiaries ..... 687,300 -- 285 (687,585) -- Marketable securities .......... 452 -- 46,734 -- 47,186 Notes receivable from affiliates 194,000 301,695 23,000 (518,695) -- Investment in joint venture .... -- 150,002 -- -- 150,002 Prepaid pension cost ........... 1,772 21,017 -- -- 22,789 Restricted cash equivalents .... 17,942 -- -- -- 17,942 Other .......................... 1,739 2,968 -- -- 4,707 ----------- ----------- ----------- ----------- ----------- Total other assets ......... 903,205 475,682 70,019 (1,206,280) 242,626 ----------- ----------- ----------- ----------- ----------- Property and equipment, net ........ 4,425 319,957 -- -- 324,382 ----------- ----------- ----------- ----------- ----------- $ 1,004,118 $ 1,195,066 $ 134,075 $(1,212,471) $ 1,120,788 =========== =========== =========== =========== ===========
F - 44 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet, (Continued) December 31, 2000 (In thousands)
Combined NL Industries, Non-guarantor Inc. Kronos, Inc. Subsidiaries Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable .......................... $ -- $ 69,970 $ -- $ -- $ 69,970 Current maturities of long-term debt ... -- 730 -- -- 730 Accounts payable and accrued liabilities 29,144 123,555 48,485 -- 201,184 Payable to affiliates .................. 2,140 14,073 612 (6,191) 10,634 Income taxes ........................... -- 13,604 12 -- 13,616 Deferred income taxes .................. -- 1,822 -- -- 1,822 ----------- ----------- ----------- ----------- ----------- Total current liabilities .......... 31,284 223,754 49,109 (6,191) 297,956 ----------- ----------- ----------- ----------- ----------- Noncurrent liabilities: Long-term debt ......................... 194,000 1,363 -- -- 195,363 Notes payable to affiliate ............. 324,695 194,000 -- (518,695) -- Deferred income taxes .................. 70,985 73,699 989 -- 145,673 Accrued pension cost ................... 1,438 19,782 -- -- 21,220 Accrued postretirement benefits cost ... 15,039 14,365 -- -- 29,404 Other .................................. 22,189 16,511 41,705 -- 80,405 ----------- ----------- ----------- ----------- ----------- Total noncurrent liabilities ....... 628,346 319,720 42,694 (518,695) 472,065 ----------- ----------- ----------- ----------- ----------- Minority interest .......................... -- 299 5,980 -- 6,279 ----------- ----------- ----------- ----------- ----------- Shareholders' equity ....................... 344,488 651,293 36,292 (687,585) 344,488 ----------- ----------- ----------- ----------- ----------- $ 1,004,118 $ 1,195,066 $ 134,075 $(1,212,471) $ 1,120,788 =========== =========== =========== =========== ===========
F - 45 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet December 31, 1999 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents ...... $ 13,415 $ 113,062 $ 7,747 $ -- $ 134,224 Restricted cash equivalents .... 17,565 -- -- -- 17,565 Accounts and notes receivable .. 61 143,647 60 -- 143,768 Receivable from affiliates ..... 11,668 -- 562 (11,483) 747 Refundable income taxes ........ 317 4,155 1 -- 4,473 Inventories .................... -- 191,184 -- -- 191,184 Prepaid expenses ............... 227 2,265 -- -- 2,492 Deferred income taxes .......... 5,774 6,200 -- -- 11,974 ----------- ----------- ----------- ----------- ----------- Total current assets ....... 49,027 460,513 8,370 (11,483) 506,427 ----------- ----------- ----------- ----------- ----------- Other assets: Investment in subsidiaries ..... 558,898 -- 285 (559,183) -- Marketable securities .......... 2,600 -- 12,455 -- 15,055 Notes receivable from affiliates 244,000 185,839 78,000 (507,839) -- Investment in joint venture .... -- 157,552 -- -- 157,552 Prepaid pension cost ........... -- 24,127 -- (856) 23,271 Deferred income taxes .......... 3,992 41 -- (3,992) 41 Other .......................... 2,620 2,749 -- -- 5,369 ----------- ----------- ----------- ----------- ----------- Total other assets ......... 812,110 370,308 90,740 (1,071,870) 201,288 ----------- ----------- ----------- ----------- ----------- Property and equipment, net ........ 5,174 343,284 -- -- 348,458 ----------- ----------- ----------- ----------- ----------- $ 866,311 $ 1,174,105 $ 99,110 $(1,083,353) $ 1,056,173 =========== =========== =========== =========== ===========
F - 46 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Balance Sheet, (Continued) December 31, 1999 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------- ------------- ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable .......................... $ -- $ 57,076 $ -- $ -- $ 57,076 Current maturities of long-term debt ... -- 212 -- -- 212 Accounts payable and accrued liabilities 30,397 114,512 45,451 -- 190,360 Payable to affiliates .................. 3,444 20,368 614 (13,186) 11,240 Income taxes ........................... 1,470 4,135 -- -- 5,605 Deferred income taxes .................. -- 326 -- -- 326 ----------- ----------- ----------- ----------- ----------- Total current liabilities .......... 35,311 196,629 46,065 (13,186) 264,819 ----------- ----------- ----------- ----------- ----------- Noncurrent liabilities: Long-term debt ......................... 244,000 266 -- -- 244,266 Notes payable to affiliate ............. 263,839 244,000 -- (507,839) -- Deferred income taxes .................. -- 111,932 286 (3,992) 108,226 Accrued pension cost ................... 8,410 25,392 -- (856) 32,946 Accrued postretirement benefits cost ... 21,625 15,480 -- -- 37,105 Other .................................. 22,039 21,076 50,706 -- 93,821 ----------- ----------- ----------- ----------- ----------- Total noncurrent liabilities ....... 559,913 418,146 50,992 (512,687) 516,364 ----------- ----------- ----------- ----------- ----------- Minority interest .......................... -- 312 3,591 -- 3,903 ----------- ----------- ----------- ----------- ----------- Shareholders' equity (deficit) ............. 271,087 559,018 (1,538) (557,480) 271,087 ----------- ----------- ----------- ----------- ----------- $ 866,311 $ 1,174,105 $ 99,110 $(1,083,353) $ 1,056,173 =========== =========== =========== =========== ===========
F - 47 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Year ended December 31, 2000 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ ------------- ------------ ------------ Revenues and other income: Net sales .................................. $ -- $ 922,319 $ -- $ -- $ 922,319 Interest and dividends ..................... 31,598 25,587 5,937 (52,443) 10,679 Equity in income of subsidiaries ........... 173,620 -- -- (173,620) -- Litigation settlement gains, net ........... 69,465 -- -- -- 69,465 Other income, net .......................... 12,595 5,834 -- (5,825) 12,604 ----------- ----------- ----------- ----------- ----------- 287,278 953,740 5,937 (231,888) 1,015,067 ----------- ----------- ----------- ----------- ----------- Costs and expenses: Cost of sales .............................. -- 610,449 -- -- 610,449 Selling, general and administrative ........ 25,381 112,429 (632) -- 137,178 Interest ................................... 52,701 30,985 -- (52,443) 31,243 ----------- ----------- ----------- ----------- ----------- 78,082 753,863 (632) (52,443) 778,870 ----------- ----------- ----------- ----------- ----------- Income before income taxes, minority interest and extraordinary item ...... 209,196 199,877 6,569 (179,445) 236,197 Income tax expense ............................. 53,855 22,850 12 1,703 78,420 ----------- ----------- ----------- ----------- ----------- Income before minority interest and extraordinary item ................... 155,341 177,027 6,557 (181,148) 157,777 Minority interest .............................. -- 47 2,389 -- 2,436 ----------- ----------- ----------- ----------- ----------- Income before extraordinary item ....... 155,341 176,980 4,168 (181,148) 155,341 Extraordinary item-early extinguishment of debt, net of tax benefit of $394 ................... (732) -- -- -- (732) ----------- ----------- ----------- ----------- ----------- Net income ............................. $ 154,609 $ 176,980 $ 4,168 $ (181,148) $ 154,609 =========== =========== =========== =========== ===========
F - 48 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Year ended December 31, 1999 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ ------------- ------------ ------------ Revenues and other income: Net sales ......................... $ -- $ 908,387 $ -- $ -- $ 908,387 Interest and dividends ............ 30,843 24,425 6,823 (53,129) 8,962 Equity in income of subsidiaries .. 154,625 -- -- (154,625) -- Other income, net ................. 4,565 10,119 -- -- 14,684 --------- --------- --------- --------- --------- 190,033 942,931 6,823 (207,754) 932,033 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ..................... -- 662,315 -- -- 662,315 Selling, general and administrative 16,037 116,138 2,167 -- 134,342 Interest .......................... 49,872 40,141 -- (53,129) 36,884 --------- --------- --------- --------- --------- 65,909 818,594 2,167 (53,129) 833,541 --------- --------- --------- --------- --------- Income before income taxes and minority interest ....... 124,124 124,337 4,656 (154,625) 98,492 Income tax benefit .................... 35,647 26,955 1,999 -- 64,601 --------- --------- --------- --------- --------- Income before minority interest 159,771 151,292 6,655 (154,625) 163,093 Minority interest ..................... -- 48 3,274 -- 3,322 --------- --------- --------- --------- --------- Net income .................... $ 159,771 $ 151,244 $ 3,381 $(154,625) $ 159,771 ========= ========= ========= ========= =========
F - 49 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Income Year ended December 31, 1998 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ ------------ ------------ ------------ Revenues and other income: Net sales .................................... $ -- $ 894,724 $ -- $ -- $ 894,724 Interest and dividends ....................... 57,901 18,481 3,559 (62,905) 17,036 Equity in income of subsidiaries ............. 73,839 -- -- (73,839) -- Other income, net ............................ 10,056 4,069 (1,997) (3,711) 8,417 --------- --------- --------- --------- --------- 141,796 917,274 1,562 (140,455) 920,177 --------- --------- --------- --------- --------- Costs and expenses: Cost of sales ................................ -- 618,754 -- (307) 618,447 Selling, general and administrative .......... 10,756 122,523 691 -- 133,970 Interest ..................................... 55,078 70,762 -- (67,770) 58,070 --------- --------- --------- --------- --------- 65,834 812,039 691 (68,077) 810,487 --------- --------- --------- --------- --------- Income from continuing operations before income taxes and minority interest ..... 75,962 105,235 871 (72,378) 109,690 Income tax expense (benefit) ..................... (13,900) 33,601 -- 87 19,788 --------- --------- --------- --------- --------- Income from continuing operations before minority interest ...................... 89,862 71,634 871 (72,465) 89,902 Minority interest ................................ -- 40 -- -- 40 --------- --------- --------- --------- --------- Income from continuing operations ........ 89,862 71,594 871 (72,465) 89,862 Discontinued operations .......................... 287,396 285,385 -- (285,385) 287,396 Extraordinary item - early extinguishment of debt, net of tax benefit of $5,698 ................... (10,580) 999 -- (999) (10,580) --------- --------- --------- --------- --------- Net income ............................... $ 366,678 $ 357,978 $ 871 $(358,849) $ 366,678 ========= ========= ========= ========= =========
F - 50 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Year ended December 31, 2000 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ -------------- ------------ ------------ Net cash provided (used) by operating activities ....... $ 12,318 $ 177,642 $ 4,795 $ (55,000) $ 139,755 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures ............................... (23) (31,066) -- -- (31,089) Purchase of Tremont Corporation common stock ....... (26,040) -- -- -- (26,040) Change in restricted cash .......................... 4,480 -- (3,850) -- 630 Loans to affiliates ................................ 50,000 (115,856) 55,000 10,856 -- Other, net ......................................... 107 77 -- 80 264 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities 28,524 (146,845) 51,150 10,936 (56,235) --------- --------- --------- --------- --------- Cash flows from financing activities: Indebtedness: Borrowings ..................................... -- 44,923 -- -- 44,923 Principal payments ............................. (50,000) (29,162) -- -- (79,162) Treasury stock: Purchased ...................................... (30,886) -- -- -- (30,886) Reissued ....................................... 2,091 -- -- -- 2,091 Dividends, net ..................................... (32,686) (55,000) -- 55,000 (32,686) Loans from affiliates .............................. 60,856 (50,000) -- (10,856) -- Other, net ......................................... -- (6) 80 (80) (6) --------- --------- --------- --------- --------- Net cash provided (used) by financing activities (50,625) (89,245) 80 44,064 (95,726) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities .. (9,783) (58,448) 56,025 -- (12,206) Currency translation ........................... -- (1,635) (5) -- (1,640) --------- --------- --------- --------- --------- (9,783) (60,083) 56,020 -- (13,846) Balance at beginning of year ....................... 13,415 113,062 7,747 -- 134,224 --------- --------- --------- --------- --------- Balance at end of year ............................. $ 3,632 $ 52,979 $ 63,767 $ -- $ 120,378 ========= ========= ========= ========= =========
F - 51 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Year ended December 31, 1999 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ ------------- ------------ ------------ Net cash provided (used) by operating activities ....... $ 28,742 $ 134,937 $ (5,371) $ (50,000) $ 108,308 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures ............................... (2,856) (32,703) -- -- (35,559) Change in restricted cash .......................... (12,065) -- 6,889 -- (5,176) Other, net ......................................... (17) 2,334 -- 27 2,344 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities (14,938) (30,369) 6,889 27 (38,391) --------- --------- --------- --------- --------- Cash flows from financing activities: Indebtedness: Borrowings ..................................... -- 82,038 -- -- 82,038 Principal payments ............................. -- (155,787) -- -- (155,787) Treasury stock purchased ........................... (7,000) -- -- -- (7,000) Dividends, net ..................................... (7,242) (50,030) 30 50,000 (7,242) Other, net ......................................... -- (6) 27 (27) (6) --------- --------- --------- --------- --------- Net cash provided (used) by financing activities (14,242) (123,785) 57 49,973 (87,997) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities .. (438) (19,217) 1,575 -- (18,080) Currency translation ........................... -- (2,649) -- -- (2,649) (438) (21,866) 1,575 -- (20,729) Balance at beginning of year ....................... 13,853 134,928 6,172 -- 154,953 --------- --------- --------- --------- --------- Balance at end of year ............................. $ 13,415 $ 113,062 $ 7,747 $ -- $ 134,224 ========= ========= ========= ========= =========
F - 52 NL INDUSTRIES, INC. AND SUBSIDIARIES Condensed Consolidating Statement of Cash Flows Year ended December 31, 1998 (In thousands)
Combined Combined NL Industries, Guarantor Non-guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated -------------- ------------ ------------- ------------ ------------ Net cash provided (used) by operating activities .............. $ 92,846 $ 35,899 $ (68,658) $ (15,000) $ 45,087 --------- --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures ...................................... (82) (22,310) -- -- (22,392) Proceeds from disposition of securities ................... 6,875 -- -- -- 6,875 Change in restricted cash ................................. (566) 4,817 (6,889) -- (2,638) Loans to affiliates ....................................... -- (224,660) -- 224,660 -- Proceeds from sale of specialty chemicals business ........ -- 435,080 -- -- 435,080 Other, net ................................................ 87 284 -- -- 371 --------- --------- --------- --------- --------- Net cash provided (used) by investing activities ...... 6,314 193,211 (6,889) 224,660 417,296 --------- --------- --------- --------- --------- Cash flows from financing activities: Indebtedness: Borrowings ............................................ -- 30,491 -- -- 30,491 Principal payments .................................... (193,498) (108,113) (14,281) -- (315,892) Settlement of shareholder derivative lawsuit, net ......... 11,211 -- -- -- 11,211 Dividends, net ............................................ (4,636) (15,000) -- 15,000 (4,636) Loans from affiliates ..................................... 89,839 38,821 96,000 (224,660) -- Discontinued operations, net .............................. -- (117,500) -- -- (117,500) Other, net ................................................ 170 (2) -- -- 168 --------- --------- --------- --------- --------- Net cash provided (used) by financing activities ...... (96,914) (171,303) 81,719 (209,660) (396,158) --------- --------- --------- --------- --------- Cash and cash equivalents: Net change from: Operating, investing and financing activities ......... 2,246 57,807 6,172 -- 66,225 Currency translation .................................. -- (36) -- -- (36) Sale of discontinued operation ........................ -- (7,630) -- -- (7,630) --------- --------- --------- --------- --------- 2,246 50,141 6,172 -- 58,559 Balance at beginning of year .............................. 11,607 84,787 -- -- 96,394 --------- --------- --------- --------- --------- Balance at end of year .................................... $ 13,853 $ 134,928 $ 6,172 $ -- $ 154,953 ========= ========= ========= ========= =========
F - 53 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of NL Industries, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 28, 2001 appearing on page F-2 in the 2000 Annual Report to Shareholders on Form 10-K of NL Industries, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a) and (d) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Houston, Texas February 28, 2001 S-1 NL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets December 31, 2000 and 1999 (In thousands)
2000 1999 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ...................... $ 3,632 $ 13,415 Restricted cash equivalents .................... 69,242 17,565 Accounts and notes receivable .................. 172 61 Receivable from subsidiaries ................... 6,189 11,668 Refundable income taxes ........................ 10,512 317 Prepaid expenses ............................... 347 227 Deferred income taxes .......................... 6,394 5,774 ---------- ---------- Total current assets ....................... 96,488 49,027 ---------- ---------- Other assets: Marketable securities .......................... 452 2,600 Notes receivable from subsidiary ............... 194,000 244,000 Investment in subsidiaries ..................... 687,300 558,898 Deferred income taxes .......................... -- 3,992 Restricted cash equivalents .................... 17,942 -- Prepaid pension cost ........................... 1,772 -- Other .......................................... 1,739 2,620 ---------- ---------- Total other assets ......................... 903,205 812,110 ---------- ---------- Property and equipment, net ........................ 4,425 5,174 ---------- ---------- $1,004,118 $ 866,311 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ....... $ 29,144 $ 30,397 Payable to affiliates .......................... 2,140 3,444 Income taxes ................................... -- 1,470 ---------- ---------- Total current liabilities .................. 31,284 35,311 ---------- ---------- Noncurrent liabilities: Long-term debt ................................. 194,000 244,000 Notes payable to affiliates .................... 324,695 263,839 Deferred income taxes .......................... 70,985 -- Accrued pension cost ........................... 1,438 8,410 Accrued postretirement benefits cost ........... 15,039 21,625 Other .......................................... 22,189 22,039 ---------- ---------- Total noncurrent liabilities ............... 628,346 559,913 ---------- ---------- Shareholders' equity ............................... 344,488 271,087 ---------- ---------- $1,004,118 $ 866,311 ========== ==========
Contingencies (Note 4) S-2 NL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) Condensed Statements of Income Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Revenues and other income: Equity in income from continuing operations of subsidiaries ........ $ 173,620 $ 154,625 $ 73,839 Interest and dividends .............. 2,961 1,184 1,812 Interest income from subsidiaries ... 28,637 29,659 56,089 Securities gains, net ............... 8,356 -- 5,635 Litigation settlement gains, net .... 69,465 -- -- Other income, net ................... 4,239 4,565 4,421 --------- --------- --------- 287,278 190,033 141,796 --------- --------- --------- Costs and expenses: General and administrative .......... 25,381 16,037 10,756 Interest ............................ 52,701 49,872 55,078 --------- --------- --------- 78,082 65,909 65,834 --------- --------- --------- Income from continuing operations before income taxes ........... 209,196 124,124 75,962 Income tax expense (benefit) ............ 53,855 (35,647) (13,900) --------- --------- --------- Income from continuing operations 155,341 159,771 89,862 Discontinued operations ................. -- -- 287,396 Extraordinary items ..................... (732) -- (10,580) --------- --------- --------- Net income ...................... $ 154,609 $ 159,771 $ 366,678 ========= ========= =========
S-3 NL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) Condensed Statements of Cash Flows Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income ......................................... $ 154,609 $ 159,771 $ 366,678 Equity in income of subsidiaries: Continuing ..................................... (173,620) (154,625) (73,839) Discontinued ................................... -- -- (287,396) Distributions from subsidiaries .................... 55,000 50,000 15,000 Noncash interest income, net ....................... (932) (390) (8,660) Deferred income taxes .............................. 71,837 (18,071) (3,862) Securities gains, net .............................. (8,356) -- (3,711) Litigation settlement gains, net ................... (69,465) -- -- Other, net ......................................... (4,399) (3,164) (3,382) --------- --------- --------- 24,674 33,521 828 Change in assets and liabilities, net .............. (12,356) (4,779) 92,018 --------- --------- --------- Net cash provided by operating activities ...... 12,318 28,742 92,846 --------- --------- --------- Cash flows from investing activities: Change in restricted cash equivalents, net ......... 4,480 (12,065) (566) Capital expenditures ............................... (23) (2,856) (82) Purchase of Tremont Corporation common stock ....... (26,040) -- -- Loans to affiliates ................................ 50,000 -- -- Investments in subsidiaries ........................ (80) (27) -- Proceeds from disposition of marketable securities . 158 -- 6,875 Other, net ......................................... 29 10 87 --------- --------- --------- Net cash provided (used) by investing activities 28,524 (14,938) 6,314 --------- --------- ---------
S-4 NL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) Condensed Statements of Cash Flows (Continued) Years ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- --------- --------- Cash flows from financing activities: Dividends ....................................... $ (32,686) $ (7,242) $ (4,636) Treasury stock: Purchased ................................... (30,886) (7,210) -- Reissued .................................... 2,091 210 170 Indebtedness - principal payments ............... (50,000) -- (193,498) Loans from affiliates ........................... 60,856 -- 89,839 Settlement of shareholder derivative lawsuit, net -- -- 11,211 --------- --------- --------- Net cash used by financing activities ....... (50,625) (14,242) (96,914) --------- --------- --------- Net change from operating, investing and financing activities .......................... (9,783) (438) 2,246 Balance at beginning of year .................... 13,415 13,853 11,607 --------- --------- --------- Balance at end of year .......................... $ 3,632 $ 13,415 $ 13,853 ========= ========= =========
S-5 NL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) Notes to Condensed Financial Information Note 1 - Basis of presentation: The Consolidated Financial Statements of NL Industries, Inc. (the "Company") and the related Notes to Consolidated Financial Statements are incorporated herein by reference. Note 2 - Net receivable from (payable to) subsidiaries and affiliates:
December 31, --------------------------- 2000 1999 --------- --------- (In thousands) Current: Receivable from: Kronos: Income taxes ................... $ 1,260 $ 3,790 Other, net ..................... 4,103 6,507 Timet .............................. 1 310 CompX .............................. 82 176 Other .............................. 743 885 --------- --------- $ 6,189 $ 11,668 ========= ========= Payable to: Tremont ............................ $ (1,925) $ (2,859) NLEMS .............................. (146) (562) Other .............................. (69) (23) --------- --------- $ (2,140) $ (3,444) ========= ========= Noncurrent: Notes receivable from Kronos ........... $ 194,000 $ 244,000 ========= ========= Notes payable to: Kronos ............................. $(301,695) $(185,839) NLEMS .............................. (23,000) (78,000) --------- --------- $(324,695) $(263,839) ========= =========
S-6 Note 3 - Long-term debt: See Note 9 of the Consolidated Financial Statements for a description of the Notes. The Company's $194 million of Senior Secured Notes at December 31, 2000 are due October 2003. The Company has guaranteed Kronos' non-U.S. dollar-denominated notes payable of $70 million. Note 4 - Contingencies: See Legal proceedings in Note 17 to the Consolidated Financial Statements. S-7 NL INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Charges (credits) Balance at to costs Currency beginning and translation Balance at Description of year expenses Deductions adjustments end of year ----------- ---------- --------- ----------- ----------- ----------- Year ended December 31, 2000: Allowance for doubtful accounts and notes receivable $ 2,075 $ 342 $ (67) (a) $ (128) $ 2,222 ======== ======== ========= ======== ======== Amortization of intangibles ........................ $ 22,095 $ 113 $ -- $ (1,779) $ 20,429 ======== ======== ========= ======== ======== Year ended December 31, 1999: Allowance for doubtful accounts and notes receivable $ 2,377 $ 140 $ (180) (a) $ (262) $ 2,075 ======== ======== ========= ======== ======== Amortization of intangibles ........................ $ 23,704 $ 1,851 $ -- $ (3,460) $ 22,095 ======== ======== ========= ======== ======== Year ended December 31, 1998: Allowance for doubtful accounts and notes receivable $ 2,828 $ (208) $ (363) (a)(b) $ 120 $ 2,377 ======== ======== ========= ======== ======== Amortization of intangibles ........................ $ 22,366 $ 2,438 $ (2,757) (b) $ 1,657 $ 23,704 ======== ======== ========= ======== ========
--------------------------------------------- (a) Amounts written off, less recoveries. (b) Sale of Rheox's assets. S-8