Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number
- -----------------------------------------------------------------------------
NOVEON, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4143915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9911 Brecksville Road, Cleveland, Ohio 44141
(Address of principal executive offices) (Zip Code)
(216) 447-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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 (or for such shorter period that the
Registrant was required to file such reports), 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 Company's voting stock is not publicly traded and does not have a
quantifiable market value.
As of March 28, 2002, there is 1 share of Registrant's Common Stock
outstanding,
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement on Form S-4 filed on
May 29, 2001 (Commission File No. 333-61812) are incorporated by reference
in Part IV hereof.
NOVEON, INC.
FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business.........................................................................................3
Item 2. Properties.......................................................................................12
Item 3. Legal Proceedings................................................................................12
Item 4. Submission of Matters to a Vote of Security Holders..............................................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................13
Item 6. Selected Financial Data..........................................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............15
Item 7A. Quantitative and Qualitative Disclosures of Market Risk..........................................32
Item 8. Financial Statements and Supplementary Data......................................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............34
PART III
Item 10. Directors and Executive Officers ................................................................35
Item 11. Executive Compensation ..........................................................................38
Item 12. Security Ownership by Certain Beneficial Owners and Management...................................45
Item 13. Certain Relationships and Related Transactions...................................................46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................49
-----------------------
We will provide, upon written request, without charge a copy of this Form
10-K. If you would like a copy of this Form 10-K, please write to: Noveon,
Inc., 9911 Brecksville Road, Cleveland, OH 44141, Attention: Secretary.
PART I
ITEM 1. Business
References to "Noveon, Inc.," the "Company," "we," "us" or "our" refer to
Noveon, Inc. and its subsidiaries, except where the context makes clear
that the reference is only to Noveon, Inc. itself and not to its
subsidiaries.
Overview
Noveon, Inc. is a leading global producer and marketer of technologically
advanced specialty chemicals for a broad range of consumer and industrial
applications. We serve in excess of 7,000 customers through our worldwide
network of 27 strategically located manufacturing facilities. For the
twelve months ended December 31, 2001, we derived approximately 65% of our
net sales from the United States, approximately 18% from Europe and
approximately 17% from the rest of the world.
Our business consists of three operating segments: Consumer Specialties,
Polymer Solutions, and Performance Coatings.
Our principal executive offices are located at 9911 Brecksville Road,
Cleveland, Ohio 44141.
Development of Business
We commenced operations on March 1, 2001 through the acquisition on
February 28, 2001 of certain assets and common stock of certain
subsidiaries of BFGoodrich Performance Materials (the "Predecessor Company"
or "Performance Materials"), an operating segment of The BFGoodrich Company
("Goodrich" or "BFGoodrich"), for $1.372 billion, before adjustments, fees
and expenses (the "Acquisition"). The electronic materials division and
textile dyes business that had been operated as part of the Predecessor
Company were not part of the Acquisition.
To finance the Acquisition, we utilized funds from the following sources:
o The equity sponsors, led by AEA Investors, Inc. and consisting of AEA
Investors, Inc. and its affiliates ("AEA"), DLJ Merchant Banking
Partners III, L.P. and affiliates ("DLJ Merchant Banking") and DB
Capital Partners, Inc. and an affiliate of DB Capital Partners, Inc.
("DB Capital") contributed $355.0 million of cash as equity to Noveon
Holdings, Inc., our corporate parent, which in turn contributed this
cash to us;
o Noveon Holdings, Inc., issued a $172.0 million seller note to Goodrich;
and
o We issued $275 million of 11% Senior Subordinated Notes due 2011 and
borrowed $635.0 million under our credit facilities.
Noveon Holdings, Inc. was organized for the purpose of owning all of our
common stock and has no independent operations or investments other than
its investment in us.
Business Segments
Our business consists of the Consumer Specialties Segment, Polymer
Solutions Segment, and Performance Coatings Segment. For financial
information and further discussion about our business segments, see Items 7
and 8 of this Annual Report on Form 10-K.
Consumer Specialties Segment. The Consumer Specialties Segment is a global
producer of synthetic thickeners, film formers, pharmaceutical actives and
intermediates, benzoate preservatives, synthetic food dyes and natural
colorants. We market products from our Consumer Specialties Segment to two
primary end-use industries: Personal Care and Pharmaceuticals and Food and
Beverage.
Personal Care and Pharmaceuticals. Our products serving the personal care
and pharmaceutical end-use industries impart physical properties, such as
texture, stability and thickness to products, including lotions, hair gel,
cosmetics and several pharmaceutical products. These products are a
component of the functionality and aesthetics of the end product, but
typically represent a small portion of the customer's total product costs.
Primary end-uses in the personal care industry for Carbopol(R), our core
product, include skin and hair care, cosmetics and oral hygiene. Primary
end-uses in pharmaceuticals for Carbopol(R) include topical applications.
Our other pharmaceutical products include excipients, advanced
intermediates and active ingredients such as mesalizine, which is used in
the treatment of Crohn's disease, an inflammatory disease of the
gastrointestinal tract.
Food and Beverage. We are a global producer and manufacturer of benzoate
preservatives for the food and beverage industry. We are also a supplier of
synthetic colorants and an integrated producer of flavors, fragrances and
other food additives. Benzoates improve the shelf life of consumable goods
and are a preservative used by manufacturers of soft drinks, bottled
beverages, fruit-based products and prepared salads due to their
anti-microbial properties. We also sell a full line of FDA-approved food,
drug and cosmetic primary dyes (including blends of primary dyes), as well
as lakes and natural colors. Primary end-uses for our product line within
food and beverage applications include carbonated soft drinks and processed
foods, such as canned soup and pre-made meals. In addition, we market a
range of intermediates which are created during the production of
benzoates. Ultimate intermediate end-uses include adhesives, sealants,
safety glass and compact discs.
The following is a list of representative uses for Consumer Specialties
Segment products:
Category Product Product Description
- ---------------------------------------- ------------------------------------- --------------------------------------
Personal Care and Pharmaceuticals Carbopol(R) Acrylic thickener which imparts
stability
Used as a controlled release agent
Pemulen(R) Polymeric emulsifier improving water
resistance
Avalure(R) Polymers for color cosmetics
Specialty silicones Polymers affecting "slip-and-feel"
Colorants Imparts color in personal care
products
Polycarbophil Active agent for bulk laxatives
Amino acid-based actives Active ingredients for
pharmaceuticals
Advanced intermediates Used in the production of active
ingredients
Food and Beverage Benzoates
Sodium benzoate Improves shelf life for certain
consumable goods
Potassium benzoate Preservative for manufacturers of
soft drinks, bottled beverages,
fruit-based products and prepared
salads
Colors
Food, drug and cosmetic dyes, lakes Colorants for beverages,
and natural colors confectionary goods, dry
mixes/snacks, processed foods and
pet food
Flavors and Fragrances
Benzaldehyde-based chemicals Food, personal care and soap products
Intermediates
Phenol, benzaldehyde, benzyl Pharmaceuticals, coatings,
alcohol and benzoic acid agrochemical products, plasticizers,
adhesives and sealant products
Hydrocolloids
Cassia gum Pet food (Europe) and human food
(Japan)
Our Consumer Specialties Segment products are sold to customers worldwide.
These customers include manufacturers of cosmetics, personal care products,
household products, soft drinks and food products.
Polymer Solutions Segment. The Polymer Solutions Segment is a global
supplier of chlorinated polyvinyl chloride ("CPVC"), thermoplastic
polyurethane ("TPU") and reactive liquid polymers ("RLP") and is a producer
of rubber and lubricant antioxidants and rubber accelerators. We market our
Polymer Solutions Segment products through two primary product categories:
Specialty Plastics and Polymer Additives.
Specialty Plastics. Our core specialty plastics products are CPVC and TPU.
CPVC is a heat, fire and chemical resistant polymer. Primary end-uses
include residential and commercial plumbing and fire sprinkler systems.
CPVC has inherent advantages over copper, other metals and commodity
plastics due to its heat and corrosion resistance, increased insulation
properties and lower installed cost. We also produce a number of modified
resin blends for specific downstream applications such as FlowGuard(R) and
FlowGuard Gold(R) for residential and commercial plumbing, Corzan(R) for
industrial piping and Blazemaster(R) for fire sprinklers. We use direct
sales and pull-through marketing for our specialty plastics.
TPU, an engineered thermoplastic, is an alternative to rigid plastics and
flexible rubber. Performance attributes of TPU include abrasion, heat and
chemical stress resistance, minimal fatigue from bending, ease of
processing and paintability. Some of the end-uses of TPU products include
film and sheet, wire and cable insulation, athletic equipment (e.g.,
in-line skate wheels), medical applications, automotive molded parts and
adhesives. We also produce a fiber-reinforced TPU under the Estaloc(R)
brand which offers the functional properties of traditional TPU, yet is
reinforced for higher stiffness, to provide the strength, dimensional
stability and impact resistance required to withstand a variety of
applications and environments. Applications include automotive trim,
sporting goods, agricultural equipment and other mechanical components. The
polyurethane industry is characterized by a small number of worldwide
competitors including Dow, Bayer, Huntsman and BASF. These competitors
produce various types and quantities of TPU.
Polymer Additives. We are a global supplier of RLP and a producer of
polymer additives including rubber and lubricant antioxidants and rubber
accelerators. Our products in this category extend the life and improve the
performance characteristics of rubber, lubricating oil, plastics and
epoxy-based adhesives. RLP is used for technologically challenging
applications, including structural and engineering adhesives used in
aerospace, transportation and electronics.
Our antioxidant products are used in rubber, plastic and lubricants.
Antioxidants prevent oxidative degradation and are primarily utilized by
rubber manufacturers and to a lesser extent plastic manufacturers, to
impart durability and prevent the loss of functional attributes such as
flexibility. In motor oil and other lubricants, antioxidants prevent
thermal breakdown and extend product life. We also manufacture a complete
line of accelerators, marketed under our brand, Cure-Rite(R), which are
utilized by rubber manufacturers to reduce the vulcanization/curing time,
and improve manufacturing productivity.
We are also a provider of RLP additives, which are need-specific, low
molecular weight polybutadienes (and copolymers) used as strengtheners and
modifiers in epoxy resins for construction composites, coatings and
structural adhesives. The product improves impact resistance and crack
resistance in composites and coatings and improves the tensile and shear
values of epoxy-based structural adhesives when exposed to temperature
extremes and accelerated weathering. Overall growth for high-end adhesives
is driven by increased usage in the manufacturing of electronics and the
automotive industry.
Category Product Product Description
- ---------------------------------------- ------------------------------------- --------------------------------------
Specialty Plastics CPVC
TempRite(R) Residential plumbing
FlowGuard(R) Residential and commercial plumbing
Corzan(R) Industrial piping
Blazemaster(R) Fire sprinklers
TPU
Estane(R) Film and sheet, wire and cable
insulation, athletic equipment,
medical applications, automotive
molded parts and adhesives
Estaloc(R) Automotive trim, sporting goods,
agricultural equipment and other
mechanical components
StatRite(R) Packaging of semiconductors,
sensitive electronic components,
disk drive heads and cell phones
Polymer Additives Antioxidants
Good-Rite(R) Primarily used by rubber
manufacturers to prevent oxidative
degradations, impart durability and
loss of flexibility
Accelerators
Cure-Rite(R) Helps reduce vulcanization/curing
time
Reactive Liquid Polymers
Hycar(R) Used as strengtheners and modifiers
in epoxy resins (construction
composites, coatings and structural
adhesives)
Our Polymer Solutions Segment products are sold to a diverse customer base
comprised of major manufacturers in the construction, automotive,
telecommunications, electronics, recreation and aerospace industries.
Performance Coatings Segment. Our Performance Coatings Segment is a global
producer of high-performance polymers for specialty paper, graphic arts,
architectural and industrial coatings and textile applications. We market
through two primary product categories: Performance Polymers and Coatings
and Textile Performance Chemicals.
Performance Polymers and Coatings. Our product offerings include a range of
water-based emulsions and resins used in the production of high-end paints
and coatings for wood, paper, metal, concrete, plastic and other surfaces.
Our products are used as ink vehicles in overprint varnishes for graphic
arts, primarily used in specialty packaging applications. We are also a
global producer of water-borne coatings for consumer products packaging
applications.
We offer over 1,100 formulations, including water-borne systems, and are
able to compound these chemistries to create customized solutions to meet
the specific needs of our customers. We expect water-borne formulations to
grow faster than the standard industry growth rate for paints and coatings.
This growth is primarily attributable to the performance characteristics of
water-borne formulations to meet niche end-use applications, including
graphic arts and specialty paper.
Textile Performance Chemicals. We are a supplier of components used by the
North American textiles industry, including coatings, thickeners, softeners
and resins. These products are used in the coating, printing and finishing
phases of textile processing. The most significant of these products,
acrylic emulsions, is used in coatings for high-end specialty applications
sold to the home furnishings, automotive technical fabrics and apparel
industries. Our textile products can be classified according to the
respective end-uses that each serves: coatings, auxiliaries and printing.
Category Product Product Description
- ---------------------------------------- ------------------------------------- --------------------------------------
Performance Polymers and Coatings Architectural and Industrial Paints
and Coatings
Hycar(R) Water-borne acrylic emulsion for
high gloss enamels and stain
blocking paint primers. Also used on
wood flooring to promote toughness
and durability
Specialty Paper
Coatings and saturants Modifies physical attributes of
specialty paper including stiffness,
porosity, and water. Used in ink jet
printer paper and tea bag sheathing
Stelomer(R) Emulsion polymer for paper gasoline
filters
Graphic Arts
Polymers and water-borne coatings Used in ink vehicles, overprint
varnishes and coatings emulsions for
consumer goods packaging
Textile Performance Chemicals Textile Coatings
Hycar(R) Acrylic-based coatings applied to
textiles to offer a pleasing
texture, low-temperature
flexibility, and wash resistance
Auxiliary Chemicals
Glyoxal Preparation agents to improve resins
Glyoxal resins manufacturing process and add
Fluorocarbon extenders attributes such as softness, durable
Polymer-based softeners press and anticrease agents, stain
repellents, and flame retardants
Printing Chemicals
Dye thickener and binders Thickeners are used to impart
Carbopol(R) viscosity to the printing paste
applied to fabrics. Pigment binders
are used to add a pigment to a
printing paste and prevent
deterioration by abrasion or
laundering
Our Performance Coatings Segment services companies in the specialty paper,
graphic arts, paints and coatings, and textiles industries.
Competition
We encounter a variety of competitors in each of our product lines, but no
single company competes with us across all of our existing product lines.
The specialty chemicals industry is highly fragmented and its participants
offer a broad array of product lines and categories, representing many
different products designed to meet specific customer requirements.
Individual products or service offerings compete on a global, regional and
local level due to the nature of the businesses and products, as well as
the end-use applications and customers served.
Sales and Marketing
Our principal sales and marketing strategies include focusing on end-users
and process intermediaries, a strong cooperative development among
salespersons, technical staff and customers and a decentralized worldwide
organization which facilitates the effective sale of our products.
We sell and support our products in over 90 countries throughout the world.
Our sales network is primarily end-use focused, with regional coverage
provided as appropriate. Our three sales regions consist of the United
States, Europe and the rest of the world. For the year ended December 31,
2001, we derived approximately 65% of our sales from the United States,
approximately 18% from Europe and approximately 17% from the rest of the
world.
Foreign Operations
We are engaged in business in foreign markets. Our foreign manufacturing
facilities are located in Belgium, China, England, Germany, India,
Malaysia, The Netherlands, South Korea, and Spain. We also market products
and services through sales subsidiaries and distributors in a number of
foreign countries. We also have technical fee, patent royalty agreements
and joint venture agreements with various foreign companies.
Currently, North America is our largest geographic market, although we
continue to expand our operations in the rest of the world. Currency
fluctuations, tariffs and similar import limitations, price controls and
labor regulations can affect our foreign operations, including foreign
affiliates. Other potential limitations on foreign operations include
expropriation, nationalization, restrictions on foreign investments or
their transfers, and additional political and economic risks. In addition,
the transfer of funds from foreign operations could be impaired by the
unavailability of dollar exchange or other restrictive regulations that
foreign governments could enact. We do not believe that such restrictions
or regulations would have a materially adverse effect on our business, in
the aggregate.
Backlog
Most orders for our products are received and shipped in the same month.
Manufacturing turnaround time is generally sufficiently short so as to
permit us to manufacture and fill orders for most of our products, which
helps to limit inventory costs. Backlog is therefore generally a function
of requested customer delivery dates and is typically not significant.
Research, Development, Technology and Intellectual Property
The Company and the Predecessor Company have a long history as an industry
innovator, creating proprietary, high-performance materials for our
customers. These products are derived from a broad range of technology
platforms developed either internally or externally through licensing,
acquisition or joint technological alliances with global suppliers and
customers. Our successful record of technological innovation is evidenced
by the more than 700 patents that have been secured during the past 20
years. Currently, we possess approximately 1,000 issued and pending foreign
and domestic patents and patent applications worldwide and over 500 foreign
and domestic product trademarks and applications and other significant
trade secrets. While such patents in the aggregate are important to us,
neither our primary business nor any segment is dependent on any single
patent or group of related patents.
Raw Materials
We use a variety of specialty and commodity chemicals in our manufacturing
processes. Materials are generally available from multiple independent
suppliers. The majority of our raw materials used in manufacturing our
products are available from more than one source and are readily available
on the open market. Those materials that are single sourced generally have
long-term supply contracts as a basis to guarantee supply reliability. The
majority of our raw materials are derived from petrochemical-based
feedstocks.
Manufacturing and Properties
We possess global manufacturing, sales and technical service facilities
enabling us to provide customers with worldwide services and supplies of
products. There are 27 manufacturing sites, with two facilities, located at
Kalama, Washington and Pohang, South Korea, certified to ISO 14000 and all
but two U.S. plants, two European plants and one Asian plant certified to
ISO 9002 standards. The plants not currently ISO certified are more recent
acquisitions or startups. In addition, the plants located at Calvert City,
Kentucky, Chennai, India, and Raubling, Germany operate to "current good
manufacturing process" standards (CGMP) and manufacture certain products
suitable for human consumption. Each plant has productivity and quality
assessment programs in place, with performance metrics summarized and
reviewed on a monthly basis by management.
Since 1997, we have made investments in a Carbopol(R) and latex facility in
Antwerp, Belgium, a TempRite(R) compounding facility in Oevel, Belgium, an
Estane(R) plant expansion in Avon Lake, Ohio, an acrylic plant expansion in
Gastonia, North Carolina, a benzoic acid plant expansion in Kalama,
Washington, and a static control polymers plant in Malaysia.
Human Resources
As of December 31, 2001, we have approximately 2,790 employees worldwide,
with approximately 1,870 in North America, 600 in Europe and 320 in the
Asia/Pacific region. Six of the United States sites are organized by labor
unions with collective bargaining agreements varying from three to five
years. Approximately 500 employees are covered by these contracts, with two
agreements expiring in 2002. The other four contracts expire at various
times through 2004. Production employees in Europe generally fall under
national master agreements for all chemical companies that are reviewed and
modified as of March 1 of each year. We observe local customs and
legislation in labor relations (including staff councils, where required)
and, where applicable, in negotiating collective bargaining agreements.
Environmental Matters
Our operations are subject to extensive environmental laws and regulations
by foreign, federal, state, and local authorities, including those
pertaining to air emissions, wastewater discharges, the handling and
disposal of solid and hazardous wastes and the remediation of contamination
associated with the use and disposal of hazardous substances. We have
incurred, and will continue to incur, costs and capital expenditures in
complying with these laws and regulations. In an effort to comply with
these environmental laws and regulations, we maintain a disciplined
environmental and occupational safety and health compliance program. We
conduct internal and external regulatory audits at our plants to identify
and categorize potential environmental exposures as well as to ensure
compliance with applicable environmental, health and safety laws and
regulations. We also conduct a compliance and management systems audit
program. We believe that compliance with current governmental regulations
will not have a material adverse effect on our capital expenditures,
results of operations or competitive position. Under the purchase agreement
for our acquisition of Performance Materials, Goodrich has agreed to
indemnify us against various environmental liabilities through February 28,
2011 in most cases and through February 28, 2015 for some items. At
December 31, 2001, Goodrich has indemnified us for environmental
liabilities estimated at $12.5 million.
Under certain environmental laws, including the United States Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and similar
state laws, we may be jointly and severally liable for the costs of
environmental contamination at current or former facilities and at off-site
locations at which we have disposed of hazardous waste. Although we believe
past operations were in substantial compliance with the then-applicable
regulations, the Company or the Predecessor Company has been designated as
a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency ("EPA"), or similar state agencies, in connection with
several sites.
Our environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as
off-site disposal sites at which we have been identified as a PRP. This
process includes investigation and remedial selection and implementation,
as well as negotiations with other PRPs and governmental agencies.
We believe that our reserves are adequate based on currently available
information. Management believes that it is reasonably possible that
additional costs may be incurred beyond the amounts accrued as a result of
new information. However, the amounts, if any, cannot be estimated and
management believes that they would not have a material adverse effect on
our results of operations, financial position or cash flows in a given
period.
Product Liability
Goodrich has agreed to indemnify us for all liabilities (including product
liability claims and product recalls) arising in connection with product
lines not currently manufactured or sold by us at the date of the
Acquisition. In addition, Goodrich has agreed to indemnify us against all
product liability, product warranty and product defect claims made prior to
the tenth anniversary of the closing of the Acquisition, relating to
products manufactured, sold or delivered by Goodrich prior to that closing
and involving damages of at least $2.0 million.
ITEM 2. Properties
Our headquarters and primary research facility are located in Brecksville,
Ohio. Our chemical manufacturing facilities are listed below.
Location Owned/Leased Size (Approx.)
- -------- ------------ --------------
Henry, Illinois Owned 100,000 sq. ft.
Calvert City, Kentucky Owned 75,000 sq. ft.
Louisville, Kentucky Owned 232,000 sq. ft.
Lawrence, Massachusetts Owned 160,000 sq. ft.
Leominster, Massachusetts Owned 59,000 sq. ft.
Pedricktown, New Jersey Owned 40,000 sq. ft.
Charlotte, North Carolina Owned 270,000 sq. ft.
Gastonia, North Carolina Owned 116,000 sq. ft.
Akron, Ohio Owned 236,000 sq. ft.
Avon Lake, Ohio Owned 240,000 sq. ft.
Brecksville, Ohio Owned 380,000 sq. ft.
Chagrin Falls, Ohio Owned 49,000 sq. ft.
Cincinnati, Ohio Leased 450,000 sq. ft.
Twinsburg, Ohio Leased 18,800 sq. ft.
Kalama, Washington Owned 550,000 sq. ft.
Antwerp, Belgium Owned 81,000 sq. ft.
Oevel, Belgium Owned 215,000 sq. ft.
Raubling, Germany Leased/Owned 134,500 sq. ft.
Chennai, India Leased 114,000 sq. ft.
Vadadora, India Jointly Owned 294,000 sq. ft.
Senawang, Malaysia Owned 38,000 sq. ft.
Delfzijl, The Netherlands Leased 50,000 sq. ft.
Wenzhou, PRC Leased 53,000 sq. ft.
Pohang, South Korea Leased/Owned 49,000 sq. ft.
Barcelona, Spain Owned 76,000 sq. ft.
Barnsley, United Kingdom Owned 50,000 sq. ft.
Shepton Mallet, United Kingdom Leased 13,000 sq. ft.
The lease of the Shepton Mallet facility will expire in 2003. Production
from this facility will be transferred to other locations and no material
impact on our business is expected.
ITEM 3. Legal Proceedings
We are engaged in legal proceedings arising in the ordinary course of
business. We believe that the ultimate outcome of these proceedings will
not have a material adverse impact on our results of operations, financial
position or cash flows. See "Environmental Matters" in Item 1, "Business,"
for information concerning legal proceedings relating to certain
environmental claims.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 2001. On July 24,
2001, we adopted amended and restated by-laws by the written consent of the
sole stockholder. A copy of the amended and restated by-laws has been filed
as an exhibit to this Form 10-K.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our voting stock is not publicly traded and does not have a quantifiable
market value. As of March 15, 2002, we have one holder of record of our
voting common stock. We have not declared any dividends in the year ended
December 31, 2001 and do not anticipate paying cash dividends on common
stock in the foreseeable future. Any future determination as to the payment
of dividends will be made at the discretion of the Board of Directors and
will depend upon our operating results, financial condition, capital
requirements, general business conditions and such other factors as the
Board of Directors deems relevant. Our debt instruments include
restrictions on the payment of cash dividends on our common stock.
ITEM 6. Selected Financial Data
The following table presents selected financial data at the dates and for
the periods indicated. The data for the years ended 1997, 1998, 1999 and
2000 are derived from the audited consolidated historical financial
statements of the Performance Materials Segment of Goodrich. The data for
the two months ended February 28, 2001 are derived from the unaudited
consolidated financial statements of the Performance Materials Segment of
Goodrich. The data for the ten months ended December 31, 2001 are derived
from the audited consolidated financial statements of Noveon, Inc. The
information set forth below should be read in conjunction with the
consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and other financial information included elsewhere in this Annual Report on
Form 10-K.
Performance Materials Segment of Goodrich Noveon, Inc.
---------------------------------------------------------------------
Year Ended December 31 Two Months Ten Months
Ended Ended
-----------------------------------------------February 28 December 31
1997 1998 1999 2000 2001 2001
-----------------------------------------------------------------------
(unaudited)
(dollars in millions, except ratios)
Statement of Operations Data:
Sales $ 904.7 $ 1,195.2 $ 1,217.7 $ 1,167.7 $ 187.0 $ 876.4
Cost of sales 602.5 817.8 832.2 819.5 137.3 628.1
----------------------------------------------------------------------------
Gross profit 302.2 377.4 385.5 348.2 49.7 248.3
Selling and administrative expenses 179.7 223.4 218.2 201.1 35.2 160.5
Amortization expense 5.5 18.2 24.6 24.4 4.0 26.5
Consolidation costs -- -- 37.3 40.5 -- 3.1
----------------------------------------------------------------------------
Operating income 117.0 135.8 105.4 82.2 10.5 58.2
Interest income (expense), net 0.7 (0.7) 0.5 4.4 0.6 (73.5)
Other income (expense), net (2.1) (0.2) (1.5) (0.4) (1.5) (0.7)
----------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 115.6 134.9 104.4 86.2 9.6 (16.0)
Income tax expense (44.1) (55.4) (42.3) (35.9) (4.0) (4.6)
----------------------------------------------------------------------------
Income (loss) from continuing
operations 71.5 79.5 62.1 50.3 5.6 (20.6)
Income (loss) from discontinued
operations-net
of taxes 59.5 (1.6) -- -- -- --
----------------------------------------------------------------------------
Net income (loss) ................. $ 131.0 $ 77.9 $ 62.1 $ 50.3 $ 5.6 $ (20.6)
============================================================================
Other Data:
Cash flow provided (used) by $48.3 $ 168.7 $156.1 $ 180.9 $(31.6) $ 153.9
operating activities
Cash flow provided (used) by 78.2 (449.3) (97.3) (75.3) (7.6) (1,218.7)
investing activities
Cash flow provided (used) by (141.8) 273.7 (54.4) (100.2) 37.5 1,184.4
financing activities
EBITDA(A) 166.5 211.9 229.6 209.4 24.9 150.6
Depreciation and amortization 49.5 76.1 86.9 86.7 14.4 83.0
Capital expenditures 72.8 70.7 79.6 64.0 7.6 28.5
Balance Sheet Data:
Cash and cash equivalents $13.0 $ 6.6 $ 10.6 $ 15.7 N/A $ 120.0
Working capital 84.0 129.7 143.5 119.9 N/A 201.7
Property, plant and equipment, net 479.7 610.8 600.8 563.2 N/A 672.5
Total assets 930.4 1,439.0 1,430.6 1,359.2 N/A 1,661.8
Total debt 64.4 69.3 42.7 30.0 N/A 900.7
Goodrich's investment 572.3 938.1 950.9 910.4 N/A -
Stockholder's equity - - - - N/A 496.2
(A) EBITDA is defined as income from continuing operations before
interest, taxes, depreciation and amortization, non-cash cost of
sales impact of inventory write-up from purchase accounting,
other income and expense, management fees (if applicable) and
consolidation costs. EBITDA has not been reduced by management
fees (if applicable) which, pursuant to management services
agreements, are subordinated to the obligations under our senior
subordinated notes due 2011. EBITDA is not a measure of operating
income, operating performance or liquidity under GAAP. We include
EBITDA data because we understand such data are used by investors
to determine our historical ability to service our indebtedness.
Nevertheless, this measure should not be considered in isolation
or as a substitute for operating income (as determined in
accordance with GAAP) as an indicator of our operating
performance, or to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity. In
addition, it should be noted that companies calculate EBITDA
differently and therefore EBITDA as presented for us may not be
comparable to EBITDA reported by other companies. Differences
exist between the various agreements governing our indebtedness
with respect to the definition of EBITDA or comparable terms.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion in conjunction with the audited
consolidated financial statements of Noveon, Inc. and the Predecessor
Company included elsewhere in this document.
This management's discussion and analysis of financial condition and
results of operations contains forward-looking statements. See
"Forward-looking Information" for a discussion of the uncertainties, risks
and assumptions associated with these statements.
Overview
We are a global producer and marketer of specialty chemicals for a range of
consumer and industrial applications. We consist of three reportable
segments: Consumer Specialties Segment, Polymer Solutions Segment, and
Performance Coatings Segment.
For the year ended December 31, 2001, we derived approximately 65% of our
sales from the United States, approximately 18% from Europe and
approximately 17% from the rest of the world. For the year ended December
31, 2001, sales, operating income (before consolidation costs of $3.1
million), cash flow from operations and EBITDA were $ 1,063.4 million,
$71.8 million, $122.3 million, and $175.5 million, respectively. The
results for the year ended December 31, 2001 have been derived by combining
the results of operations for the two months ended February 28, 2001 of the
Performance Materials Segment of Goodrich, prior to the acquisition, with
the results of operations of Noveon, Inc. for the ten months ended December
31, 2001.
We commenced operations on March 1, 2001 through the acquisition on
February 28, 2001 of certain assets and common stock of certain
subsidiaries of BFGoodrich Performance Materials (the "Acquisition"), an
operating segment of Goodrich. The Acquisition was financed through
borrowings under our credit facilities, proceeds from our 11% senior
subordinated note offering, and an equity contribution from Noveon
Holdings, Inc. ("Holdings"). We are a wholly-owned subsidiary of Holdings.
Holdings was organized for the purpose of owning all of our common stock
and was capitalized through an equity contribution of $355.0 million from
affiliates of its equity sponsors, AEA, DLJ Merchant Banking and DB
Capital. Holdings has no independent operations or investments other than
its investment in us. Holdings has made an equity contribution of $527.0
million to us comprised of $355.0 million in cash and $172.0 million from
the seller note that Holdings issued to a subsidiary of Goodrich in
connection with the Acquisition. The seller note bears interest at an
initial rate of 13% payable semiannually in cash or additional notes at the
option of Holdings and increases to a rate of 15% after five years.
However, if the interest is paid in cash after five years, the interest
rate remains at 13%. Holdings may be dependent on our cash flows to repay
the seller note upon maturity in 2011.
Our consolidated balance sheet as of December 31, 2001 reflects the
Acquisition under the purchase method of accounting. The purchase price
before fees and expenses, totaling $20.4 million, was $1,372.0 million and
consisted of cash of $1,167.1 million, assumption of debt and liabilities
of $32.9 million, net of cash acquired, and a $172.0 million equity
contribution resulting from the seller note of Holdings issued to Goodrich.
Under the terms of the Agreement for Sale and Purchase of Assets between
Goodrich and Noveon, Inc. (the "Agreement"), the final working capital
adjustment will be determined subsequent to December 31, 2001, which may
require a change to the purchase price. Goodrich has computed a $25.0
million working capital adjustment that is equal to the upward adjustment
limit. Under the terms of the Agreement, we are disputing Goodrich's
working capital adjustment. The parties have not been able to settle their
differences, and the disputed matters will be forwarded to an independent
third party for resolution. The decision by that third party will be final
and binding on all parties. Amounts finally determined to be due to
Goodrich, if any, as a working capital adjustment in the Agreement will be
paid through borrowings under the revolving credit facility or with cash.
Any amounts received by us as a result of a downward adjustment to the
purchase price may be used to reduce debt under the credit facilities
unless these amounts are invested in cash or net working capital. The final
adjustment to purchase price for working capital will be reflected in our
financial statements upon the resolution of the working capital dispute. We
expect the working capital dispute to be resolved in 2002.
The Acquisition was financed through term loan borrowings under our credit
facilities, proceeds from the offering of senior subordinated notes, and
the $527.0 million equity contribution from Holdings. The proceeds from the
credit facilities included $125.0 million on a six-year Term Loan A
facility and $510.0 million on a seven and one-half year Term Loan B
facility. The proceeds from the 11% Senior Subordinated Notes due 2011 were
$275.0 million.
The assets acquired and liabilities assumed of the Predecessor Company have
been recorded at estimated fair values. Appraisals of long-lived assets and
identifiable intangible assets were completed in the fourth quarter of
2001. In addition, the valuations of our projected pension and other
postretirement benefit obligations are reflected in the allocation of
purchase price. The deferred income taxes provided in the purchase price
allocation are attributed to the tax effects of differences between the
assigned values and the tax basis of assets acquired (except for certain
goodwill which is non-deductible for tax purposes) and liabilities assumed.
As of December 31, 2001, goodwill and identifiable intangible assets
arising principally from the Acquisition, represented 20.9% and 11.6%,
respectively, of total assets and they represented 69.9% and 38.7%,
respectively, of total stockholder's equity.
Restructuring
As of the Acquisition date, management began to assess a plan to
consolidate and/or exit activities of the business and reduce the number of
our personnel. Management has completed this assessment and finalized the
components of the plan, including exiting certain non-core product lines
and investments and undertaking efficiency and productivity initiatives at
selected locations. The assets have been adjusted to the estimated fair
values through purchase accounting. The plan included the reduction of
approximately 480 employees. Included in the purchase price allocation is a
$12.9 million accrual for termination benefits and exit costs related to
the plan. Approximately 68% of the affected employees have left their
positions as of December 31, 2001. At December 31, 2001, approximately $6.7
million remains accrued with substantially all of the remaining costs
anticipated to be paid in 2002 and 2003.
As a result of these restructuring efforts, we estimate annualized savings
of approximately $17.0 million attributable to reduced employee expenses
that were partially recognized beginning in the third quarter of 2001.
Factors Affecting Our Business
Some factors that affect our results are described below:
Economic and Industry Conditions. Economic growth rates varied by
geographic regions in which we operate from 1998 to 2001 and may do so in
the future. Our results in the past have been negatively impacted by
reduced demand in the automotive, paper and packaging, textile,
construction and electronics industries during cyclical periods. We have
experienced pricing pressure in parts of the Performance Coatings Segment
and Polymer Solutions Segment as a result of consolidation among some of
our competitors and customers and as some of the industries we serve
mature. Our results in the past have been negatively affected by increases
in feedstock and energy costs. Raw material cost increases that have
affected our results include toluene, natural gas, ethyl and butyl
acrylate, chlorine, methyl diphenyl diisocyanate (MDI), polytetramethylene
ether glycol (PTMEG), aniline, acetone, PVC and styrene. For the ten months
ended December 31, 2001, raw material costs represented 41.9% of sales.
Effects of Currency Fluctuations. Our worldwide results of operations are
subject to both currency transaction and translation risk. We incur
currency transaction risk whenever we enter into either a purchase or sales
transaction using a currency other than the local currency of the entity.
We incur currency translation risk because we measure and record our
financial condition and results of operations in local currencies before
translating these results into U.S. dollars and including them in our
consolidated financial statements. Exchange rates between these currencies
and U.S. dollars in recent years have fluctuated significantly and may do
so in the future. For the year ended December 31, 2001, we generated
approximately 27% of our sales in foreign currency, and we incurred
approximately 24% of our total costs in foreign currency. The net
depreciation of the Euro and/or constituent currencies against the U.S.
dollar and other world currencies since 1998 has had a negative impact on
our sales and operating income as reported in U.S. dollars in our
historical consolidated financial statements. Additionally, due to the
relative values of the Euro and the U.S. dollar, we are disadvantaged with
respect to our competitors that manufacture products with effectively lower
costs in Europe. Under our credit facilities we borrowed a portion of Term
Loan A and Term Loan B in Euros, and under our revolving credit facility we
have the ability to borrow in multiple currencies, which may reduce risks
relating to currency fluctuations.
Stand-Alone Company. Some of the historical consolidated financial
information included in this Annual Report on Form 10-K is derived from the
historical consolidated financial statements of the Performance Materials
Segment of Goodrich. The preparation of this information is based on
various assumptions and estimates including allocations of costs from
Goodrich. This information may not necessarily reflect what the results of
operations, financial position and cash flow would have been if the
Performance Materials Segment of Goodrich had been a separate, stand-alone
entity during the periods presented or what the results of operations,
financial position and cash flows will be in the future. During the periods
prior to February 28, 2001, we received general and administrative services
from Goodrich. Management estimates that the aggregate costs allocated to
us for these services are less than the costs that we would have incurred
had we operated as a stand-alone entity.
Leverage Position of the Company. Our indebtedness could restrict our
operations, make us more vulnerable to adverse economic conditions and make
it more difficult for us to make payments on the notes and our other
indebtedness. We now have and will continue to have a significant amount of
indebtedness. As of December 31, 2001, our total debt was $900.7 million.
In addition, under our credit facilities, we have an available borrowing
capacity of an additional $120.9 million at December 31, 2001.
Our current and future indebtedness could significantly impact the
business. For example, it could: impair our ability to obtain additional
financing for working capital, capital expenditures, acquisitions or
general corporate or other purposes; limit our ability to use operating
cash in other areas of our business because we must dedicate a substantial
portion of these funds to make principal and interest payments on
indebtedness; put us at a competitive disadvantage to competitors that have
less debt; hinder our ability to adjust rapidly to changing industry
conditions; increase our vulnerability in the event of diverse business
developments or a general economic downturn; make it more difficult for us
to satisfy our obligations with respect to the notes and our other
indebtedness; increase our vulnerability to interest rate increases to the
extent our variable-rate debt is not effectively hedged; and limit our
ability to make investments or take other actions or borrow additional
funds.
Our ability to repay or refinance our indebtedness will depend on our
financial and operating performance, which, in turn, is subject to
prevailing economic and competitive conditions and to financial, business
and other factors, many of which are beyond our control. These factors
could include operating difficulties, increased operating costs or raw
material or product prices, the response of competitors, regulatory
developments and delays in implementing strategic projects.
Acquisitions and Divestitures
The acquisitions by us and the Predecessor Company as discussed in the
following paragraphs were recorded using the purchase method of accounting.
The results of operations of the acquired companies have been included in
our results since their respective dates of acquisition.
During 2001, we acquired certain intellectual property and tangible assets
as an addition to our TempRite(R) product family within the Polymer
Solutions Segment for $3.6 million.
During 2000, the Predecessor Company acquired the intellectual property
related to two businesses in our Consumer Specialties Segment. Total
consideration aggregated $11.6 million, of which $10.2 million represented
goodwill and other intangible assets.
At the end of March 2000, the Predecessor Company contributed $17.9 million
of net assets related to the Telene(R) product line for a 50% interest in a
joint venture consisting of Telene(R) and various assets, primarily patents
and licenses from Advanced Polymer Technologies, Inc. Also, as part of the
purchase agreement with Goodrich, the textile dyes business was not part of
the Acquisition. For 2000, the textile dyes business had sales and an
operating loss of $15.7 million and $3.0 million, respectively.
During 1999, the Predecessor Company acquired a textile coatings business
for $19.6 million, of which $14.4 million represented goodwill.
Results of Operations
The following table presents the major components of the statement of
operations on a historical basis. Our business consists of three reportable
business segments: Consumer Specialties Segment, Polymer Solutions Segment
and Performance Coatings Segment. We show segment sales as a percentage of
total sales. We show segment gross profit and operating income as a
percentage of segment sales.
Performance Materials Segment of BFGoodrich Noveon, Inc.
--------------------------------------------------------------------------------
Two Months Ten Months
Ended Ended
Fiscal Year Ended December 31 February 28 December 31
----------------------------------------- -------------------------------------
1999 % 2000 % 2001 % 2001 %
---- - ---- - ---- - ---- -
(dollars in millions)
Sales (unaudited)
Consumer Specialties $ 287.3 23.6% $ 283.3 24.3% $ 45.2 24.2% $238.8 27.2%
Polymer Solutions 438.5 36.0% 426.7 36.5% 73.1 39.1% 324.4 37.0%
Performance Coatings 491.9 40.4% 457.7 39.2% 68.7 36.7% 313.2 35.8%
---------------------------------------------------------------------------------
Total Sales $1,217.7 100.0% $1,167.7 100.0% $187.0 100.0% $876.4 100.0%
=================================================================================
Gross Profit
Consumer Specialties $ 88.5 30.8% $ 84.8 29.9% $ 10.5 23.2% $ 64.5 27.0%
Polymer Solutions 161.5 36.8% 149.4 35.0% 25.6 35.0% 106.5 32.8%
Performance Coatings 135.5 27.5% 114.0 24.9% 13.6 19.8% 77.3 24.7%
----------- ---------- -------- --------
Total Gross Profit $ 385.5 31.7% $ 348.2 29.8% $ 49.7 $26.6% $248.3 28.3%
=========== ========== ======== ========
Operating Income
Consumer Specialties $ 39.6 13.8% $ 40.2 14.2% 2.1 4.6% $ 29.0 12.1%
Polymer Solutions 105.4 24.0% 98.3 23.0% 16.9 23.1% 59.1 18.2%
Performance Coatings 70.5 14.3% 52.5 11.5% 3.2 4.7% 29.5 9.4%
Corporate Costs (72.8) (6.0%) (68.3) (5.8%) (11.7) (6.3%) (56.3) (6.4%)
----------- ---------- -------- --------
142.7 11.7% 122.7 10.5% 10.5 5.6% 61.3 7.0%
Consolidation Costs (37.3) (3.0%) (40.5) (3.5%) - (3.1) (0.4%)
----------- ---------- -------- --------
Total Operating Income $ 105.4 8.7% $ 82.2 7.0% $ 10.5 5.6% $ 58.2 6.6%
=========== ========== ======== ========
2001 Compared With 2000
The comparison of the year ended December 31, 2001 to the year ended
December 31, 2000 has been completed by combining the results of operations
for the two months ended February 28, 2001 of the Predecessor Company,
prior to the Acquisition, with the results of operations of Noveon, Inc.
for the ten months ended December 31, 2001. The results for the
pre-acquisition period are not necessarily comparative to the
post-acquisition period because of the changes in our organizational
structure, recorded asset values, cost structure and capitalization
resulting from the Acquisition.
Total Company Analysis
Sales. Sales decreased $104.3 million, or 8.9%, from $1,167.7 million in
2000 to $1,063.4 million in 2001. The decrease was primarily the result of
volume declines related to products sold to the paper and packaging,
graphic arts, textiles and automotive related industries, the disposition
of the textile dyes product line prior to the Acquisition, and our decision
to discontinue our flush pigments and colorformers product lines in
Cincinnati in June 2001. Pricing pressure, unfavorable foreign currency
exchange rates, and the exclusion of Telene(R) sales, as these sales are
included in a joint venture formed on March 31, 2000 which is being
accounted for under the equity method, also negatively impacted sales.
These decreases were partially offset by increased volumes in the our
products sold by the Consumer Specialties Segment.
Cost of Sales. Cost of sales as a percentage of sales increased from 70.2%
in 2000 to 72.0% in 2001. The increase in cost of sales as a percentage of
sales in 2001 was attributable to increases in raw material and utility
costs, reduced utilization of facilities due to lower production volume,
the incremental depreciation expense of approximately $3.8 million
associated with the write-up of property, plant and equipment in purchase
accounting and the incremental cost of sales in 2001 associated with the
non-cash write-up of inventory in purchase accounting resulting in
approximately $3.0 million of expense. These unfavorable impacts were
partially offset by lower manufacturing costs.
Gross Profit. Gross profit decreased $50.2 million, or 14.4%, from $348.2
million in 2000 to $298.0 million in 2001. The decrease is primarily
associated with the sales volume reductions, the increase in raw material
and utility costs, pricing pressure, unfavorable foreign currency exchange
rates, reduced utilization of facilities due to lower production volume,
and the incremental depreciation and non-cash expense associated with the
write-up of assets in purchase accounting. These unfavorable impacts were
partially offset by lower manufacturing costs.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $5.4 million, or 2.7%, from $201.1 million in 2000 to $195.7
million in 2001. Selling and administrative costs as a percent of sales
increased from 17.2% in 2000 to 18.4% in 2001. The increase in selling and
administrative costs as a percent of sales in 2001 was a result of lower
sales volumes, investor management fees of $3.3 million, incremental
depreciation expense associated with the write-up of property, plant, and
equipment, and incremental administrative costs reflective of a stand-alone
company, offset by the reduction in costs attributable to our restructuring
efforts and the reduced retiree medical costs resulting from the terms of
the Acquisition.
Amortization Expense. Amortization expense increased $6.1 million, or
25.0%, from $24.4 million in 2000 to $30.5 million in 2001. The increase is
primarily associated with the incremental amortization of the excess of
purchase price over fair value of tangible net assets acquired allocated to
identifiable intangible assets and goodwill.
Consolidation Costs. Consolidation costs decreased from $40.5 million in
2000 to $3.1 million in 2001. The Predecessor Company recorded net
consolidation costs of $40.5 million consisting of $4.2 million in
personnel-related costs (offset by a $0.7 million credit representing a
revision of prior estimates) and $37.0 million in asset write-down and
facility closure costs. Personnel-related costs include $3.7 million of
severance related to the textile restructuring associated with Goodrich's
divestiture of the Predecessor Company and $0.5 million for other workforce
reductions.
The 2001 costs of $3.1 million include $1.9 million of restructuring
expenses associated with the Predecessor Company's textile restructuring
and $1.2 million associated with our restructuring and consolidation plan.
Operating Income. Operating income decreased by $13.5 million, or 16.4%,
from $82.2 million in 2000 to $68.7 million in 2001. The decrease in
operating income was primarily attributable to sales volume declines,
higher raw material and energy costs, pricing pressure, unfavorable foreign
currency exchange rates, reduced utilization of facilities due to lower
production volume, and the incremental depreciation and non-cash expense
associated with the write-up of assets in purchase accounting. These
unfavorable impacts were partially offset by increased sales volume of
products serving the consumer products industry, lower manufacturing costs,
selling and administrative cost controls, and reduced consolidation costs
in 2001.
Interest Income (Expense)-Net. Interest income, net was $4.4 million in
2000 and interest expense, net was $72.9 million in 2001. The increase in
expense was primarily attributable to the change in the debt structure
associated with the Acquisition.
Other Income (Expense)-Net. Other expense was $0.4 million in 2000 and $2.2
million in 2001. The increase in expense was primarily due to the
unfavorable operating performance of our investments accounted for under
the equity method.
Income Tax Expense. The income tax expense for 2001 is primarily associated
with our international operations. Management has determined, based on our
new capital structure and lack of prior earnings history based on this new
structure, that it is uncertain that our future taxable income will be
sufficient enough to recognize certain of these deferred tax assets. As a
result, a valuation allowance at December 31, 2001 has been established.
Accordingly, the negative effective tax rate is principally due to the
establishment of this valuation allowance against certain deferred tax
assets. The effective tax rate was 41.6% in 2000.
Net Income (Loss). Net income decreased by $65.3 million from net income of
$50.3 million in 2000 to a net loss of $15.0 million in 2001. The decrease
in net income was primarily attributable to the incremental interest
expense of $77.3 million associated with our new equity and debt structure,
sales volume declines, higher raw material and energy costs, pricing
pressure, unfavorable foreign currency exchange rates, reduced utilization
of facilities due to lower production volume, and the incremental
depreciation and amortization expense associated with the write-up of
assets in purchase accounting. These unfavorable impacts were partially
offset by increased sales volume of products serving the consumer products
industry, lower manufacturing costs, selling and administrative cost
controls, and reduced consolidation costs in 2001.
Because of our highly leveraged capital structure, EBITDA is an important
performance measure used by us and our stakeholders. EBITDA is defined as
income from continuing operations before interest, taxes, depreciation and
amortization, other income and expense, management fees and consolidation
costs. We believe that EBITDA provides additional information for
determining its ability to meet future obligations and debt service
requirements. However, EBITDA is not indicative of operating income, cash
flow from operations, liquidity or operating performance as determined
under generally accepted accounting principles. Our EBITDA for the years
ended December 31, 2001 and 2000 is calculated as follows (dollars in
millions):
2000 2001
-------------------------------------
Operating income $ 82.2 $ 68.7
Depreciation and amortization 86.7 97.4
Investor management fees - 3.3
Consolidation (benefits) costs 40.5 3.1
Non-cash cost of sales impact of
inventory write-up from purchase
accounting - 3.0
-------------------------------------
EBITDA $ 209.4 $ 175.5
=====================================
Segment Analysis
Consumer Specialties Segment. Sales increased $0.7 million, or 0.2%, from
$283.3 million in 2000 to $284.0 million in 2001. The increase was driven
by volume growth for the segment's products sold to the food and beverage
and other consumer products industries. These increases were partially
offset by pricing pressure, the volume declines related to our decision to
discontinue our flush pigments and colorformers product lines in Cincinnati
in June 2001, and the unfavorable exchange impact of the weakened Euro.
Gross profit decreased $9.8 million, or 11.6%, from $84.8 million in 2000
to $75.0 million in 2001. As a percentage of sales, gross profit decreased
from 29.9% in 2000 to 26.4% in 2001. The decrease is primarily associated
with pricing pressure, lower margins associated with the discontinuance of
the flush pigments and colorformers product lines, the incremental expenses
associated with the write-up of assets in purchase accounting, higher raw
material and utility costs, and the unfavorable exchange impact of the
weakened Euro.
Operating income decreased $9.1 million, or 22.6%, from $40.2 million in
2000 to $31.1 million in 2001. The decrease was primarily due to pricing
pressure, the lower margins associated with the discontinuance of the flush
pigments and colorformers product lines, the incremental expenses
associated with the write-up of assets in purchase accounting, higher raw
material and utility costs, and the unfavorable exchange impact of the
weakened Euro. These effects were partially offset by increased sales
volumes in food and beverage and reduced selling and administrative
expenses in the segment.
Polymer Solutions Segment. Sales decreased by $29.2 million, or 6.8%, from
$426.7 million in 2000 to $397.5 million in 2001. The decrease is primarily
attributable to North America volume reductions in the polymer additives,
Estane(R) and TempRite(R) product lines, the exclusion of the Telene(R)
business that was contributed to a joint venture on March 31, 2000, and the
unfavorable exchange impact of the weakened Euro.
Gross profit decreased $17.3 million, or 11.6%, from $149.4 million in 2000
to $132.1 million in 2001. As a percentage of sales, gross profit decreased
from 35.0% in 2000 to 33.2% in 2001. The decrease was primarily
attributable to North America volume reductions in the polymer additives,
Estane(R) and TempRite(R) product lines, reduced utilization of facilities
due to lower production volume, the unfavorable exchange impact of the
weakened Euro, and the incremental expenses associated with the write-up of
assets in purchase accounting. These effects were partially offset by lower
manufacturing costs.
Operating income for the segment decreased $22.3 million, or 22.7%, from
$98.3 million in 2000 to $76.0 million in 2001. The decrease was primarily
attributable to North America volume reductions for the polymer additives,
Estane(R) and TempRite(R) product lines, reduced utilization of facilities
due to lower production volume, the unfavorable exchange impact of the
weakened Euro, and the incremental expenses associated with the write-up of
assets in purchase accounting. These effects were partially offset by lower
manufacturing costs.
Performance Coatings Segment. Sales decreased $75.8 million, or 16.6%, from
$457.7 million in 2000 to $381.9 million in 2001. The decrease is primarily
attributable to the lower demand for products sold in the paper and
packaging and textile industries, the disposition of the textile dyes
product line prior to the Acquisition and to a lesser extent, the
unfavorable exchange impact of the Euro.
Gross profit decreased $23.1 million, or 20.3%, from $114.0 million in 2000
to $90.9 million in 2001. As a percentage of sales, gross profit decreased
from 24.9% in 2000 to 23.8% in 2001. The decrease is primarily associated
with the sales volume reductions due to lower demand for products sold in
the paper and packaging and textile industries, reduced utilization of
facilities due to lower production volume, the increase in raw material and
energy costs, and the incremental expenses associated with the write-up of
assets in purchase accounting. These unfavorable impacts were partially
offset by lower manufacturing costs.
Operating income for the segment decreased $19.8 million, or 37.7%, from
$52.5 million in 2000 to $32.7 million in 2001. The decrease is primarily
associated with the sales volume reductions due to the lower demand for
products sold in the paper and packaging and textile industries, reduced
utilization of facilities due to lower production volume, the increase in
raw materials and energy costs, and the incremental expenses associated
with the write-up of assets in purchase accounting. These unfavorable
impacts were partially offset by lower manufacturing costs and selling and
administrative cost controls.
Corporate. Corporate costs decreased $0.3 million from $68.3 million in
2000 to $68.0 million in 2001. This decrease was primarily the result of
our restructuring efforts and the reduced retiree medical costs resulting
from the Acquisition, that were partially offset by investor management
fees of $3.3 million and the incremental administrative costs reflective of
a stand-alone company.
2000 Compared With 1999
Total Company Analysis
Sales. Sales decreased $50.0 million, or 4.1%, from $1,217.7 million in
1999 to $1,167.7 million in 2000. The decrease was primarily the result of
unfavorable foreign currency exchange rates, volume declines related to
products sold to the textiles industry, exclusion of Telene(R) sales and
reduced selling prices primarily in food and beverage, intermediates and
rubber additives product lines. These decreases were partially offset by
strong volumes in our Consumer Specialties Segment's Carbopol(R) product
line and most of the Polymer Solutions Segment's product lines, favorable
sales mix, and incremental sales from acquisitions made earlier in the
year.
Cost of Sales. Cost of sales as a percentage of sales increased from 68.3%
in 1999 to 70.2% in 2000. The increase in cost of sales as a percentage of
sales in 2000 as compared to 1999 was attributable to increases in raw
material and energy costs across all segments as well as the reduction in
prices noted above. These unfavorable impacts were partially offset by
manufacturing productivity, overhead cost controls and volume increases in
the Carbopol(R) product line and the Polymer Solutions Segment's TPU,
reactive liquid polymers (RLP) and antioxidant product lines.
Gross Profit. Gross profit decreased $37.3 million, or 9.7%, from $385.5
million in 1999 to $348.2 million in 2000. The decrease was primarily
associated with the increase in raw material costs and the above-mentioned
decline in sales offset partially by favorable volume, mix, manufacturing
productivity and overhead cost controls.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $17.1 million, or 7.8%, from $218.2 million in 1999 to $201.1
million in 2000. Selling and administrative expenses as a percentage of
sales decreased from 17.9% in 1999 to 17.2% in 2000. The decrease in
selling and administrative expenses as a percent of sales in 2000 was a
result of efficiencies realized in the 1999 consolidation and the continued
integration of acquisitions partially offset by the above-mentioned lower
2000 sales.
Amortization Expense. Amortization expense of $24.6 million in 1999
approximated the expense of $24.4 million in 2000.
Consolidation Costs. The Predecessor Company reported $40.5 million of
consolidation costs in 2000, including $4.2 million in personnel-related
costs (offset by a $0.7 million credit representing a revision of prior
estimates) and $37.0 million in asset write-down and facility closure
costs. Personnel-related costs include $3.7 million of severance related to
the textile restructuring and $0.5 million for other workforce reductions.
Asset write-down and facility closure costs of $37.0 million are for
restructuring activities related to the closure or sale of facilities
serving the textile market.
Operating Income. Operating income decreased by $23.2 million, or 22.0%,
from $105.4 million in 1999 to $82.2 million in 2000. Operating income in
2000 and 1999 included consolidation costs of $40.5 million and $37.3
million, respectively. Excluding consolidation costs, operating income
decreased by $20.0 million, or 14.0%, from $142.7 million in 1999 to $122.7
million in 2000. The decrease in operating income was primarily
attributable to higher raw material costs, textile volume declines, reduced
selling prices and a weaker Euro. These decreases were partially offset by
volume increases in the Carbopol(R), TPU, RLP and antioxidant product
lines, reductions in manufacturing and overhead costs and a favorable sales
mix.
Other Income (Expense)-Net. Other income (expense)-net was $0.4 and $1.5
million of expense in 2000 and 1999, respectively. The decrease in expense
was primarily due to the dissolution of the Telenor joint venture in 1999.
Income Tax Expense. The Predecessor Company's effective tax rate was 41.6%
and 40.5% in 2000 and 1999, respectively. The effective tax rate was higher
in 2000 than in 1999 primarily a result of other non-deductible items
incurred in 2000.
Net Income. Net income decreased by $11.8 million from net income of $62.1
million in 1999 to $50.3 million in 2000. The decrease in net income was
primarily attributable to higher raw material costs, textile volume
declines, reduced selling prices and a weaker Euro. These decreases were
partially offset by volume increases in the Carbopol(R), TPU, RLP and
antioxidant product lines, reductions in manufacturing and overhead costs
and a favorable sales mix.
Segment Analysis
Consumer Specialties Segment. Sales decreased $4.0 million, or 1.4%, from
$287.3 million in 1999 to $283.3 million in 2000. The decrease was driven
by lower pricing in the food and beverage product line, lower sales of
intermediates for non-food applications and the unfavorable exchange impact
of the weakened Euro, partially offset by acquisitions and strong sales for
the segment's personal care Carbopol(R) product line in all regions of the
world.
Gross profit decreased $3.7 million, or 4.2%, from $88.5 million in 1999 to
$84.8 million in 2000. The decrease was the result of increased raw
material and energy costs (particularly toluene and natural gas) and the
weak Euro, partially offset by increased volume, acquisitions and
manufacturing productivity improvements.
Operating income increased $0.6 million, or 1.5% from $39.6 million in 1999
to $40.2 million in 2000. The increase was primarily the result of the
strength in personal care sales noted above, incremental acquisition
income, and ongoing productivity initiatives to reduce overhead costs,
partially offset by a one-time favorable settlement from a patent
infringement lawsuit recorded in 1999, the weak Euro, and higher raw
material (primarily toluene, driven by higher oil prices) and energy costs.
Polymer Solutions Segment. Sales decreased by $11.8 million, or 2.7% from
$438.5 million in 1999 to $426.7 million in 2000. The decrease was
primarily attributable to the unfavorable exchange impact of the weakened
Euro, reduced prices in the segment's polymer additives products, and the
exclusion of the Telene(R) business that was contributed to a joint venture
at the end of March 2000. These decreases were partially offset by
increased volume and favorable mix in the TPU, RLP and antioxidant product
lines.
Gross profit decreased $12.1 million, or 7.5%, from $161.5 million in 1999
to $149.4 million in 2000. The decrease was primarily attributable to
higher raw material costs and reduced prices in the group's polymer
additives products, partially offset by increased volume and improvements
in manufacturing productivity.
Operating income for the segment decreased $7.1 million, or 6.7%, from
$105.4 million in 1999 to $98.3 million in 2000. The decrease was primarily
the result of sharply higher raw material costs, the impact of the
above-mentioned sales price decreases and unfavorable foreign exchange.
These decreases were partially offset by volume gains in most product
lines, plus reductions in manufacturing and overhead costs.
Performance Coatings Segment. Sales decreased $34.2 million, or 7.0% from
$491.9 million in 1999 to $457.7 million in 2000. The decrease was
primarily attributable to a decline in demand in the textile industry and
the unfavorable exchange impact of the weakened Euro. This decrease was
partially offset by favorable sales mix, volume increases in certain
coatings product lines, and incremental sales from acquisitions.
Gross profit decreased $21.5 million, or 15.9%, from $135.5 million in 1999
to $114.0 million in 2000. The decrease was attributable to the decline in
demand for textile products and unfavorable raw material costs partially
offset by improvements in manufacturing productivity, a favorable sales mix
and increased volume in some coatings product lines.
Operating income for the segment decreased $18.0 million, or 25.5%, from
$70.5 million in 1999 to $52.5 million in 2000. The decrease was primarily
due to the volume declines noted above and higher raw material costs. These
decreases were partially offset by volume strength in some coatings product
lines, productivity initiatives, overhead cost reductions and plant
consolidations, and a favorable sales mix.
Corporate. Corporate costs decreased $4.5 million from $72.8 million in
1999 to $68.3 million in 2000. This decrease was primarily the result of
the efficiencies realized in the 1999 consolidation and the continued
integration of acquisitions.
Liquidity and Capital Resources
Debt and Commitments
In connection with the Acquisition, we entered into new credit facilities
and issued senior subordinated notes.
The credit facilities include (1) a six-year Term Loan A facility in the
amount of $125.0 million, (2) a seven and one-half year Term Loan B
facility in the amount of $510.0 million and (3) a six-year revolving
credit facility in the amount of $125.0 million. A portion of the revolving
credit is available in various foreign currencies. A portion of Term Loan A
and Term Loan B are denominated in Euros. The domestic revolving credit
facility provides for a letter of credit subfacility, drawings under which
will reduce the amount available under the domestic revolving facility.
Borrowings under the Term Loans were used to finance the Acquisition.
Borrowings under the revolving credit facility may be used for working
capital and for general corporate purposes.
Our $275.0 million senior subordinated notes mature on February 28, 2011
and interest will accrue at 11% per year. Interest payments on the notes
will occur on March 15 and September 15 of each year. The first payment was
made on September 15, 2001.
Principal and interest payments under the credit facilities and the notes
represent significant liquidity requirements for us. Borrowings under the
credit facilities bear interest at floating rates and require periodic
interest payments. Interest on the notes is payable semiannually and
interest and principal on the new credit facilities are payable
periodically but not less frequently than quarterly. The credit facilities
will be repaid in periodic installments until the maturity of each of the
term loans. The credit facilities contain customary representations,
covenants related to net worth requirements, capital expenditures, interest
coverage, leverage and EBITDA levels and events of default. The notes
contain a covenant related to interest coverage and provide for events of
default.
Our credit facilities contain a specific covenant requirement for minimum
EBITDA levels. The definition of EBITDA in the credit facilities
approximates our financial statement definition, as noted in Item 6. We
have satisfied the minimum EBITDA covenant for the year ended December 31,
2001. For the twelve month period ended June 30, 2002 the credit agreement
requires a minimum EBITDA level of $185.0 million. We expect to attain the
minimum EBITDA level at June 30, 2002. However, it is possible, given the
volatility in the current economic environment, that the minimum EBITDA
covenant may not be met for the twelve month period ended June 30, 2002.
At December 31, 2001, we had a cash balance of $120.0 million and no
outstanding borrowings under our revolving credit facility. At December 31,
2001 we had $120.9 million available under our revolving credit facility of
$125.0 million, net of $4.1 million of outstanding letters of credit.
Management believes that our cash on hand, anticipated funds from
operations, and the amounts available to us under our revolving credit
facilities will be sufficient to cover our working capital needs, capital
expenditures, debt service requirements, working capital adjustments which
may occur as a result of the Goodrich dispute discussed earlier and tax
obligations. However, our ability to fund working capital, capital
expenditures, debt service requirements and tax obligations will be
dependent upon our future financial performance and ability to repay or
refinance our debt obligations which in turn will be subject to economic
conditions and to financial, business and other factors.
The table below summarizes our contractual obligations (in millions):
Payments Due by Period
-------------------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
---------- --------------- ------------- -------------- -----------
Term Loan A $117.9 $17.8 $40.1 $52.9 $ 7.1
Term Loan B 506.5 5.4 10.8 10.8 479.5
11% Senior Subordinated Notes 275.0 - - - 275.0
Short-term bank debt 1.3 1.3 - - -
Operating leases 10.3 4.3 4.9 0.9 0.2
---------- --------------- ------------- -------------- -----------
Total contractual cash obligations $911.0 $28.8 $55.8 $64.6 $761.8
========== =============== ============= ============== ===========
In conjunction with the Acquisition, Holdings made an equity contribution
of $527.0 million to us comprised of $355.0 million in cash and $172.0
million from the seller note that Holdings issued to a subsidiary of
Goodrich in connection with the Acquisition. The seller note bears interest
at an initial rate of 13% payable semiannually in cash or additional notes
at the option of Holdings and increases to a rate of 15% after 5 years. If
the interest is paid in cash, the interest rate remains at 13%. Holdings
will be dependent on our cash flows to repay the seller note upon maturity
in 2011.
Cash Flows
Cash flows from operating activities decreased $58.6 million from $180.9
million in 2000 to $122.3 million in 2001. The decrease was primarily
related to a reduction in earnings levels, partially offset by decreases in
working capital. Cash flows used by operating activities of the Predecessor
Company for the two months ended February 28, 2001 were $31.6 million and
cash flows provided by operating activities of Noveon, Inc. for the ten
months ended December 31, 2001 were $153.9 million. Cash flows from
operating activities increased $24.8 million from $156.1 million in 1999 to
$180.9 million in 2000. The increase was primarily due to consolidation
activities.
In addition to the $58.2 million of operating income we achieved for the
ten months ended December 31, 2001, we generated operating cash flows
through the non-cash effects of depreciation and amortization and
improvements in working capital, consisting primarily of improvements in
accounts receivable and inventories.
Investing activities included the Acquisition, the acquisition of assets by
the Polymer Solutions Segment, and purchases of property, plant and
equipment in 2001, totaling $1,226.3 million. Investing activities used
$75.3 million of cash in 2000 for the purchases of property, plant and
equipment and acquisitions related to two businesses in our Consumer
Specialties Segment. We used $97.3 million of cash in 1999 related to
investing activities, primarily in the acquisition of various businesses
and purchases of property.
Financing activities provided $1,221.9 million of cash in 2001, primarily
related to the funding of the Acquisition. This compares to the $100.2
million used in financing activities for 2000 which were primarily
transfers to Goodrich. Financing activities used $54.4 million in cash in
1999. Excess operating cash flows in 1999 were used to reduce short-term
debt and transfer funds to Goodrich.
Capital Expenditures
Management believes that our manufacturing facilities are generally in good
condition and we do not anticipate that major capital expenditures will be
needed to replace existing facilities in the near future. Accordingly, we
expect our capital expenditures to run at or below levels approximating
depreciation. Our capital expenditures for 2001 were $36.1 million. These
expenditures were used to maintain our production sites, implement our
business strategy regarding operations and health and safety and for
strategic capacity expansion in our key product lines. These capital
expenditures were paid for through internally generated cash flow.
Our primary sources of liquidity are cash flows from operations and
borrowings under our new credit facilities. Based on current and
anticipated financial performance, we expect that cash from operations and
borrowings under these credit facilities will be adequate to meet
anticipated requirements for capital expenditures, working capital and
scheduled interest and principal payments. However, our capital
requirements will be dependent upon our future financial performance and
ability to repay or refinance our debt obligations which in turn will be
subject to economic conditions and to financial, business and other
factors, many of which are beyond our control.
Contingencies
We have numerous purchase commitments for materials, supplies and energy
incident to the ordinary course of business.
General
There are pending or threatened against us or our subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the
ordinary course of business with respect to commercial, product liability,
and environmental matters, which seek remedies or damages. We believe that
any liability that may finally be determined with respect to commercial and
product liability claims should not have a material effect on our
consolidated financial position, results of operations or cash flows. From
time to time, we are also involved in legal proceedings as a plaintiff
involving contract, patent protection, environmental and other matters.
Gain contingencies, if any, are recognized when they are realized.
Environmental
We are generators of both hazardous and non-hazardous wastes, the
treatment, storage, transportation and disposal of which are subject to
various laws and governmental regulations. Although we believe past
operations were in substantial compliance with the then-applicable
regulations, the Company or the Predecessor Company has been designated as
a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency ("EPA"), or similar state agencies, in connection with
several sites.
We initiate corrective and/or preventive environmental projects of our own
to ensure safe and lawful activities at our current operations. We also
conduct a compliance and management systems audit program. We believe that
compliance with current laws and regulations will not have a material
adverse effect on our capital expenditures, results of operations or
competitive position.
Our environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as
off-site disposal sites at which we have been identified as a PRP. This
process includes investigation and remedial selection and implementation,
as well as negotiations with other PRPs and governmental agencies.
Goodrich has indemnified us for various environmental liabilities estimated
at $12.5 million. Our December 31, 2001 balance sheet includes liabilities
of $23.7 million to cover future environmental expenditures. Accordingly,
the current portion of the environmental obligation of $3.0 million is
recorded in accrued expenses and $3.2 million is recorded in accounts
receivable. Approximately $20.7 million is included in non-current
liabilities and $9.3 million is included in other non-current assets,
reflecting the recovery due from Goodrich.
We believe that our reserves are adequate based on currently available
information. Management believes that it is reasonably possible that
additional costs may be incurred beyond the amounts accrued as a result of
new information. However, the amounts, if any, cannot be estimated and
management believes that they would not have a material adverse effect on
our results of operations, financial position or cash flows in a given
period.
Conversion to the Euro
We successfully addressed the many areas involved with the introduction of
the Euro on January 1, 2002, including information technology, business and
finance systems, as well as the impact on the pricing and distribution of
our products. The effect of the introduction of the Euro, as well as any
related costs of conversion, did not have a material impact on our results
of operations, financial condition or cash flows.
New Accounting Standards
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS
No. 140 revises the standards for accounting for securitization and other
transfers of financial assets and collateral and requires certain
disclosures. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. The adoption of SFAS No. 140 did not have a material impact on
our results of operations or financial position.
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires
companies to recognize all of its derivative instruments as either assets
or liabilities in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are designated
and qualify as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign
operation.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as
the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in current earnings during the period of the change in
fair values. For derivative instruments that are designated and qualify as
a cash flow hedge (i.e., hedging the exposure to variability in expected
future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess
of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. For derivative instruments that are designated and qualify as a
hedge of a net investment in a foreign currency, the gain or loss is
reported in other comprehensive income as part of the cumulative
transaction adjustment to the extent it is effective. For derivative
instruments not designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 addresses the topic of financial accounting and reporting for
business combinations and supersedes Accounting Principles Board ("APB")
Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." Based on the
provisions of SFAS No. 141, all business combinations are to be accounted
for using only one method, the purchase method. SFAS No. 141 is effective
for all business combinations initiated after June 30, 2001.
The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets,"
in July 2001. The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." SFAS No. 142 applies to all goodwill
and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were
initially recognized. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue
to be amortized over their useful lives. We will adopt SFAS No. 142 in our
first quarter of 2002 reporting, as required. For the ten months ended
December 31, 2001, we incurred goodwill amortization expense of $15.3
million. Application of the non-amortization provisions of the statement is
expected to result in an increase in income from continuing operations
before income taxes. During 2002, we will perform the first of the required
impairment tests of goodwill and intangible assets deemed to have
indefinite lives as of January 1, 2002. We have not yet determined what the
effect of these tests will be on our financial position and results of
operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," that requires the recognition of the fair value of
the liability for closure and removal costs associated with the resulting
legal obligations upon retirement or removal of any tangible long-lived
assets be recognized in the period in which it is incurred. The initial
recognition of the liability will be capitalized as part of the asset cost
and depreciated over its estimated useful life. We are required to adopt
this Statement January 1, 2003, the effect of which has not yet been
determined.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that supersedes SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." The Statement retains the fundamental
provisions of SFAS No. 121 related to the recognition and measurement of
the impairment of long-lived assets to be "held and used," provides more
guidance on estimating cash flows when performing a recoverability test,
requires that a long-lived asset (group) to be disposed of other than by
sales (i.e. abandoned) be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset
(group) as "held for sale." We adopted this Statement effective January 1,
2002. The effect of adoption is not material to our consolidated financial
condition or results of operations.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to product returns, bad
debts, inventories, investments, intangible assets, income taxes,
restructuring, pensions and other postretirement benefits, and
contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our
significant judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue and Income Recognition
Revenue from the sale of products is recognized at the point of passage of
title, which is generally at the time of shipment.
Inventories
Inventories are stated at the lower of cost or market. Most domestic
inventories are valued by the last-in, first-out (LIFO) cost method.
Inventories not valued by the LIFO method are valued principally by the
average cost method.
Derivative and Hedging Activities
We have entered into interest rate swap agreements to limit our exposure to
interest rate fluctuations on $180.0 million of the outstanding principal
of our Term Loans through 2005. These agreements require us to pay a fixed
rate of interest while receiving a variable rate. At December 31, 2001, the
fair value of these swap arrangements included in other non-current
liabilities totaled approximately $5.7 million. The offsetting impact of
this hedge transaction is included in accumulated other comprehensive loss.
We enter into currency forward exchange contracts, totaling $10.5 million
at December 31, 2001, to hedge certain firm commitments denominated in
foreign currencies. The purpose of our foreign currency hedging activities
is to protect us from risk that the eventual dollar cash flows from the
sale of products to international customers will be adversely affected by
changes in the exchange rates. The fair value of these contracts at
December 31, 2001 was not material to our results of operations, financial
position, or cash flows.
We have foreign denominated floating rate debt to protect the value of our
investments in our foreign subsidiaries in Europe. Realized and unrealized
gains and losses from these hedges are not included in the income
statement, but are shown in the cumulative translation adjustment account
included in other comprehensive loss. During the ten months ended December
31, 2001, we recognized $2.1 million of net gains included in the
cumulative translation adjustment, related to the foreign denominated
floating rate debt.
Deferred Income Taxes
The provision for income taxes is calculated in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred income taxes using the liability method. Deferred income taxes
reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Management provides valuation
allowances against the deferred tax assets for amounts for which it is
uncertain that future taxable income will be sufficient enough to recognize
certain of these deferred tax assets.
Forward-Looking Information
Certain statements in this section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect
our future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The terms "expect," "anticipate," "intend,"
"project," "may," "will," "believes," "plans," "estimates," and similar
words or expressions are intended to identify forward-looking statements.
These statements speak only as of the date of this report. The statements
are based on current expectations, are inherently uncertain, are subject to
risks, and should be viewed with caution. Actual results and experience may
differ materially from the forward-looking statements as a result of many
factors, including changes in economic conditions in the markets served by
us, increasing competition, fluctuations in raw materials and energy
prices, and other unanticipated events and conditions. It is not possible
to foresee or identify all such factors. We make no commitment to update
any forward-looking statement or to disclose any facts, events, or
circumstances after the date hereof that may affect the accuracy of any
forward-looking statement. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a
prediction of actual results. See Exhibit 99.1 to this Annual Report on
Form 10-K.
ITEM 7A. Quantitative and Qualitative Disclosures of Market Risk
Market Risk
We are exposed to various market risk factors such as fluctuating interest
rates and changes in foreign currency rates. These risk factors can impact
results of operations, cash flows and financial position. We manage these
risks through regular operating and financing activities and periodically
use derivative financial instruments such as foreign exchange forward
contracts. These derivative instruments are placed with major financial
institutions and are not for speculative or trading purposes.
Foreign Currency Risk
We limit our foreign currency risk by operational means, mostly by locating
our manufacturing operations in those locations where we have significant
exposures to major currencies. We have entered into forward contracts to
partially offset the risk of foreign currency fluctuations. The value of
these contracts at December 31, 2001 was not material to our results of
operations, financial position, or cash flows.
We sell to customers in foreign markets through foreign operations and
through export sales from plants in the U.S. These transactions are often
denominated in currencies other than the U.S. dollar. The primary currency
exposure is the Euro.
We have foreign denominated floating rate debt to protect the value of our
investments in our foreign subsidiaries in Europe. Realized and unrealized
gains and losses from these hedges are not included in the income
statement, but are shown in the cumulative translation adjustment account
included in other comprehensive loss.
Interest Rate Risk
In order to hedge a portion of our interest rate risk, we are a party to
interest rate swap agreements, with notional amounts of $180.0 million and
for which we pay a fixed rate of interest and receive a LIBOR-based
floating rate. Our interest rate swap agreements at December 31, 2001 did
qualify for hedge accounting under SFAS No. 133 and as such the changes in
the fair value of the interest rate swap agreements are recognized as a
component of equity. The amount of the changes in fair value of the
interest rate swap agreements was $5.7 million for 2001.
At December 31, 2001, we carried $900.7 million of outstanding debt on our
balance sheet, with $445.7 million of that total, net of $180.0 million of
debt that is hedged, held at variable interest rates. Holding all other
variables constant, if interest rates hypothetically increased or decreased
by 10%, for the ten months ended December 31, 2001, interest expense would
increase or decrease by $2.8 million. In addition, if interest rates
hypothetically increased or decreased by 10% on December 31, 2001, with all
other variables held constant, the fair market value of our $275.0 million
aggregate principal amount, 11% senior subordinated notes would decrease or
increase by approximately $17.5 million.
ITEM 8. Financial Statements and Supplementary Data
The financial statements required by this item are included as a separate
section of this report and begin on page F-2. See Index to Consolidated
Financial Statements on page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers
The following table sets forth information with respect to each member of
our Board of Directors and each of our executive officers.
Name Age Position
H. William Lichtenberger 66 Chairman of the Board and Director
Steven J. Demetriou 43 Director, Chief Executive Officer and President
T. J. Dermot Dunphy 69 Director
John L. Garcia 45 Director
Brian R. Hoesterey 34 Director
William J. Lovejoy 34 Director
Vincent A. Sarni 73 Director
Susan C. Schnabel 40 Director
Christopher R. Clegg 44 Senior Vice President, General Counsel and Secretary
Sarah R. Coffin 49 Senior Vice President and General Manager, Performance
Coatings Global Business Unit
Michael D. Friday 50 Senior Vice President and Chief Financial Officer
William B. Sedlacek 47 Senior Vice President and General Manager, Personal Care
and Pharmaceuticals Global Business Unit
Kumar Shah 53 Senior Vice President, Corporate Development
Sean M. Stack 35 Vice President and Treasurer
H. William Lichtenberger is our Chairman of the Board of Directors. In
November 2000, Mr. Lichtenberger retired from Praxair, Inc., which was spun
off from Union Carbide Corporation in 1992. He served as Chairman of the
Board of Praxair from 1992 until his retirement in 2000 and as Chief
Executive Officer of Praxair from 1992 until March 2000. Mr. Lichtenberger
is currently a director of Arch Chemicals, Inc. and Ingersoll-Rand Company.
Mr. Lichtenberger is a former President, Chief Operating Officer and
director of Union Carbide. He holds a bachelor of arts and a bachelor of
science in chemical engineering from the University of Iowa. Mr.
Lichtenberger holds a master's degree in business administration from the
State University of New York, Buffalo.
Steven J. Demetriou is our Chief Executive Officer and President and serves
on our Board of Directors. Prior to joining us in March 2001, Mr. Demetriou
served as an Executive Vice President of IMC Global Inc. and President of
IMC Crop Nutrients. Mr. Demetriou joined IMC Global Inc. in June 1999 as a
Senior Vice President and President of the IMC Phosphates business unit.
From December 1997 to June 1999, Mr. Demetriou served as Vice President,
Global Specialty Resins and President, Cytec Asia-Pacific of Cytec
Industries, Inc., a manufacturer of specialty materials. From July 1996 to
December 1997, Mr. Demetriou served as Vice President, Global Adhesives
Polymers Business Unit, for Exxon Chemical Company, a manufacturer of
olefins, aromatics and numerous polymer and chemical derivatives. Mr.
Demetriou holds a bachelor of science in chemical engineering from Tufts
University.
T.J. Dermot Dunphy serves on our Board of Directors. Mr. Dunphy is
currently the Chairman of Kildare Enterprises, LLC, a private equity
management and investment firm. Prior to joining Kildare, Mr. Dunphy worked
for Sealed Air Corporation, a manufacturer and marketer of proprietary
protective products and systems. In 1971, Mr. Dunphy was elected President
and Chief Executive Officer of Sealed Air, and in 1996, he was elected
Chairman and Chief Executive Officer of the corporation. From 1971 until he
retired in 2000, Sealed Air grew from a corporation with annual sales of
approximately $5 million to sales of approximately $3.0 billion in 2000.
Mr. Dunphy was also President of Custom-Made Packaging, Inc. and worked for
Westinghouse Electric Corporation as Manager of Services for the
corporation's air-conditioning division. Mr. Dunphy is currently a director
of Public Service Enterprise Group and FleetBoston Financial and was
formerly a director of Formica Corporation, Rockaway Corporation and
Loctite Corporation. Mr. Dunphy graduated from Oxford University and holds
a master's degree in business administration from Harvard Business School.
John L. Garcia serves on our Board of Directors. Mr. Garcia is currently a
Managing Director of AEA Investors Inc. and head of the firm's chemical
practice. From 1994 to 1999, Mr. Garcia was a Managing Director with Credit
Suisse First Boston, where he served as Global Head of the Chemical Banking
Group and Head of the European Acquisition and Leveraged Finance and
Financial Sponsors Group. His previous experience was at ARCO Chemicals, in
research, strategic planning and corporate development roles. Mr. Garcia is
currently a director of Acetex Corporation and Sovereign Specialty
Chemicals Inc. Mr. Garcia is a graduate of the University of Kent in
England and holds a master's degree and Ph.D. in organic chemistry from
Princeton University. He also holds a master's degree in business
administration from The Wharton School of the University of Pennsylvania.
Brian R. Hoesterey serves on our Board of Directors. Mr. Hoesterey is
currently a Director of AEA Investors Inc. Prior to joining AEA, he was
with BT Capital Partners, the private equity investment vehicle of Bankers
Trust. Mr. Hoesterey has also previously worked for McKinsey & Co. and the
investment banking division of Morgan Stanley. He is currently an officer
of Sovereign Specialty Chemicals Inc. Mr. Hoesterey holds a bachelor of
business administration from Texas Christian University and a master's
degree in business administration from Harvard Business School.
William J. Lovejoy serves on our Board of Directors. Mr. Lovejoy is a
Managing Director of DB Capital Partners, Inc., the private equity arm of
Deutsche Bank AG. Prior to joining DB Capital, he was a Principal of Lazard
Capital Partners, the private equity investing affiliate of Lazard Freres &
Co. LLC and before joining Lazard, Mr. Lovejoy was a Director of Castle
Harlan, Inc., a private equity investment firm. Prior to entering the
merchant banking industry, Mr. Lovejoy was a management consultant with The
Boston Consulting Group, Inc. Mr. Lovejoy obtained his master's degree in
business administration from Harvard Business School and a bachelor of
science degree in engineering from the University of Michigan.
Vincent A. Sarni serves on our Board of Directors. Mr. Sarni retired from
PPG Industries, Inc. in August 1993, concluding a 25-year career with the
company. He served as Chairman of the Board and Chief Executive Officer of
PPG from 1984 until his retirement in 1993. Mr. Sarni is currently a
director of Mueller Group, Inc. He is a former director of Amtrol, Inc.,
Brockway, Inc., Hershey Foods Corp., Honeywell, Inc., LTV Corporation,
Mellon Bank, and PNC Financial Corp. Mr. Sarni is also a former Chairman of
the Pittsburgh Pirates. Mr. Sarni holds a bachelor of science from the
University of Rhode Island. He completed graduate studies in marketing at
New York University Graduate School of Business and the advanced management
program of Harvard Business School.
Susan C. Schnabel serves on our Board of Directors. Ms. Schnabel is
currently a Managing Director of Credit Suisse First Boston. In 1990, she
joined Donaldson, Lufkin & Jenrette, Inc. and became a Managing Director in
1996. In 1997, Ms. Schnabel left DLJ to serve as Chief Financial Officer of
PETsMART, a high-growth specialty retailer of pet products and supplies.
She rejoined DLJ in her present capacity in 1998. Ms. Schnabel serves on
the board of directors of DeCrane Aircraft Holdings, Inc., Environmental
Systems Products, Inc., Shoppers Drug Mart, and Target Media Partners. Ms.
Schnabel received a bachelor of science in chemical engineering from
Cornell University and a master's degree in business administration from
Harvard Business School.
Christopher R. Clegg is our Senior Vice President, General Counsel and
Secretary. Mr. Clegg had served as Vice President-Legal for the Performance
Materials Segment of Goodrich since 1999. Before assuming that position,
Mr. Clegg served as Senior Counsel for Goodrich Aerospace. Prior to joining
Goodrich, Mr. Clegg was a corporate lawyer in private practice with the law
firms of Squire, Sanders & Dempsey in Cleveland, Ohio and Perkins Coie in
Seattle, Washington. Mr. Clegg holds a bachelor's degree in political
science from the University of California at Berkeley, a master's degree in
International Studies from the Johns Hopkins University School of Advanced
International Studies and a law degree from the Georgetown University Law
Center.
Sarah R. Coffin is our Senior Vice President and General Manager,
Performance Coatings Global Business Unit. Ms. Coffin had served as Group
President of the Performance Coatings Group for the Performance Materials
Segment of Goodrich since July 1999. Ms. Coffin joined Goodrich in 1998
with responsibility for the Polymer Solutions Group. Prior to joining
Goodrich, Ms. Coffin was Vice President-Specialty Group for H.B. Fuller in
St. Paul, Minnesota. Ms. Coffin spent 17 years with Borg Warner Chemicals
and G.E. Plastics before joining H.B. Fuller. Ms. Coffin serves on the
board of directors of SPX Corporation. Ms. Coffin earned a bachelor's
degree in zoology from DePauw University and a master's degree in business
administration in marketing from Indiana University.
Michael D. Friday is our Senior Vice President and Chief Financial Officer
and has served as Vice President-Finance, Business Development and
Information Technology of the Performance Materials Segment of Goodrich
since March 1997. Prior to joining Goodrich, Mr. Friday spent three years
at Rubbermaid Incorporated as Vice President of Finance for the Little
Tikes Company, where he had responsibility for information technology,
customer service and finance. Prior to joining Rubbermaid, Mr. Friday spent
20 years in the General Electric Company's financial organization. Mr.
Friday holds a bachelor of science in business administration from the
Rochester Institute of Technology.
William B. Sedlacek is our Senior Vice President and General Manager,
Personal Care and Pharmaceuticals Global Business Unit. Mr. Sedlacek had
served as Group President of the Consumer Specialties Group for the
Performance Materials Segment of Goodrich since 1999. Mr. Sedlacek joined
Goodrich in 1977 as a product engineer in that company's international
business unit. In 1988, Mr. Sedlacek moved to Brussels, Belgium, as
business manager for the hydrophilics business in Europe. In 1992, Mr.
Sedlacek returned to the United States as General Manager of the Hycar
Reactive Liquid Polymers business units. Mr. Sedlacek was named Vice
President of the consumer specialties business unit in 1995 and promoted to
Group President in 1999. Mr. Sedlacek earned a bachelor's degree in
chemistry and zoology from Miami University and a master's degree in
business administration from Miami University.
Kumar Shah is our Senior Vice President-Corporate Development. Prior to
joining us in May, 2001, Mr. Shah served as Senior Vice President-Corporate
Development of International Specialty Products Inc., a specialty chemicals
firm, from 1999 to 2000. From 1994 to 1999, Mr. Shah served as Vice
President-Corporate Development and Planning, Investor Relations of Cytec
Industries, Inc., a manufacturer of specialty materials. Mr. Shah holds a
bachelor's degree in chemical engineering from the Indian Institute of
Technology, a master's degree in polymer science from the Polytechnic
Institute of Brooklyn and a master's degree in business administration from
New York University.
Sean M. Stack is our Vice President and Treasurer. Prior to joining us in
March, 2001, Mr. Stack served as Vice President and Treasurer for Specialty
Foods Corporation. Mr. Stack joined Specialty Foods as Assistant Treasurer
in 1996. Prior to that he was a Vice President at ABN AMRO Bank in
commercial and investment banking. Mr. Stack holds a bachelor's degree in
business administration from the University of Notre Dame and a master's
degree in management from Northwestern University J.L. Kellogg Graduate
School of Management.
Board Committee Membership
Our board of directors has two standing committees: a compensation
committee and an audit committee. The compensation committee is comprised
of Messrs. Lichtenberger, Dunphy and Garcia. The audit committee is
comprised of Messrs. Sarni, Hoesterey and Lovejoy and Ms. Schnabel.
ITEM 11. Executive Compensation
The table below summarizes compensation information for our Chief Executive
Officer and our four other most highly compensated executive officers
during 2001. The table includes compensation paid by us for the period of
March 1, 2001 (the date we began operations) through December 31, 2001. The
compensation received by certain of these officers during the first two
months of 2001 while they were employees of Goodrich is excluded from this
table.
Summary Compensation Table
Annual Compensation (1)
-----------------------------------------------------
Securities
Fiscal Other Annual Underlying All Other
Name Year Salary($) Bonus($) Compensation ($) Options(#)(2) Compensation ($)
---- ------ --------- -------- ---------------- ------------- ----------------
Steven J. Demetriou 2001 $475,000 $500,000(3) $ 157,115(4) 98,611 $ 214,400 (5)
Chief Executive Officer and
President
Michael D. Friday 2001 $203,400 $71,250(6) $ 25,620(7) 30,000 $ 3,476 (8)
Senior Vice President and
Chief Financial Officer
Sarah R. Coffin 2001 $242,916 $59,055(6) $ 38,455(7) 10,000 $ 6,330 (9)
Senior Vice President and
General Manager, Performance
Coatings Global Business Unit
William B. Sedlacek 2001 $198,920 $78,224(6) $ 51,732(7) 10,000 $ 5,555 (10)
Senior Vice President and
General Manager, Personal
Care and Pharmaceuticals
Global Business Unit
Christopher R. Clegg 2001 $179,167 $62,700(6) $ 22,157(7) 10,000 $ 52,118 (11)
Senior Vice President,
General Counsel and Secretary
(1) We began operations on March 1, 2001. Salary amounts reflect
compensation paid for fiscal year 2001. Messrs. Friday, Clegg and
Sedlacek and Ms. Coffin were employed by us as of March 1, 2001.
Mr. Demetriou began employment with us on March 15, 2001.
(2) In connection with its approval of the Noveon Holdings, Inc.
Amended and Restated Stock Option Plan ("Stock Option Plan"), the
board of directors of Noveon Holdings, Inc. approved the grant of
options as follows: Mr. Demetriou, 98,611; Mr. Friday, 30,000;
Mr. Clegg, 10,000; Ms. Coffin, 10,000; and Mr. Sedlacek, 10,000.
(3) Pursuant to his Employment Agreement, Mr. Demetriou received an
annual bonus of $500,000 for the achievement of working capital
targets and other personal management objectives.
(4) Includes reimbursements of $73,000 for expenses relating to Mr.
Demetriou's temporary housing and living expenses associated with
relocation.
(5) Includes a one-time signing bonus of $200,000 to compensate for
amounts forfeited in connection with termination from prior
employer and reflects premiums paid for excess liability and life
insurance policies for Mr. Demetriou.
(6) Messrs. Friday, Clegg and Sedlacek and Ms. Coffin received a
bonus for fiscal year 2001 under our Management Incentive Plan.
(7) Includes automobile allowance reimbursements of $18,000 for Ms.
Coffin and Mr. Sedlacek, $16,950 for Mr. Clegg and $16,500 for
Mr. Friday.
(8) Reflects our matching contributions under our 401(k) plan for the
2001 plan year.
(9) Reflects premiums paid for a life insurance policy for Ms.
Coffin.
(10) Reflects premium paid in the amount of $4,903 for a life
insurance policy for Mr. Sedlacek and our matching contributions
in the amount of $652 under our 401(k) plan for the 2001 plan
year.
(11) Reflects a one-time special recognition payment of $50,000 and
our matching contribution under our 401(k) plan for the 2001 plan
year.
Stock Options
The table below sets forth the most recent information with respect to
options to purchase shares of common stock of Noveon Holdings, Inc. to the
executives listed in the Summary Compensation Table.
OPTION GRANTS IN FISCAL YEAR 2001
Individual Grants (1)
Potential Realizable Value
Number of % of Total at Assumed Annual Rates of
Securities Options Stock Price Appreciation for
Underlying Granted to Exercise Option Term (2)
Options Employees in Price Expiration ----------------------------
Name Granted(#) Fiscal Year(3) ($/Share)(4) Date 5%($) 10% ($)
---- ---------- -------------- ------------ ---------- ---- -------
Steven J. Demetriou 98,611 33.65% 128.57 2011 3,395,177 12,861,833
Michael D. Friday 30,000 10.24% 128.57 2011 1,032,900 3,912,900
Sarah R. Coffin 10,000 3.41% 128.57 2011 344,300 1,304,300
William B. Sedlacek 10,000 3.41% 128.57 2011 344,300 1,304,300
Christopher R. Clegg 10,000 3.41% 128.57 2011 344,300 1,304,300
___________
(1) In connection with its approval of the Stock Option Plan, the
board of directors of Noveon Holdings, Inc. approved the grant of
options as follows: Mr. Demetriou, 98,611; Mr. Friday, 30,000;
Ms. Coffin, 10,000; Mr. Sedlacek, 10,000; and Mr. Clegg, 10,000.
Noveon Holdings, Inc. has entered into stock option agreements
with the named executive officers.
(2) Values are based on assumed rates of annual compounded
appreciation of 5% and 10% from the date the option was granted
over the full option term. These assumed rates of appreciation
are established by the Securities and Exchange Commission and do
not represent our estimate or projection of future stock price.
(3) Pursuant to the Stock Option Plan, an aggregate of 394,444 shares
of common stock of Noveon Holdings, Inc. were reserved for
options to be granted to our key employees, consultants and
directors. As of December 31, 2001, Noveon Holdings, Inc. had
granted options to purchase 313,011 shares of its common stock,
which includes 20,000 shares of common stock for options granted
to certain directors of Noveon Holdings, Inc.
(4) Pursuant to the terms of the Stock Option Plan, unless the
applicable stock option agreement provides otherwise, 20% of the
shares subject to an option vest on each of the first five
anniversaries of the grant date, subject to continued employment
with us. In the event of certain change of control transactions
involving us, 50% of the unvested options become fully
exercisable. Any remaining unvested options become fully
exercisable upon the earlier of the first anniversary of the
change of control, if the optionee is employed by us, or the date
the optionee is involuntarily terminated. It is expected that
options will generally expire on the tenth anniversary of the
date of grant.
The following table sets forth the most recent information concerning the
value of options for shares of common stock of Noveon Holdings, Inc. held
by each of the executives listed in the Summary Compensation Table.
AGGREGATE OPTION EXERCISES
AND OPTION VALUES
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options In-the-Money Options ($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ---- ----------- ----------- ------------------------- ----------------------------
Steven J. Demetriou 0 0 0/98,611 0/0
Michael D. Friday 0 0 0/30,000 0/0
Sarah R. Coffin 0 0 0/10,000 0/0
William B. Sedlacek 0 0 0/10,000 0/0
Christopher R. Clegg 0 0 0/10,000 0/0
___________
(1) There is no public trading market for shares of common stock of
Noveon Holdings, Inc. Accordingly, these values of exercisable
and unexercisable in-the-money options are based on the fair
market value of Noveon Holding, Inc.'s common stock at May 3,
2001 of $100 per share, as determined by its Board of Directors,
and the $128.57 exercise price per share. There has been no
subsequent fair market value determination by the Board of
Directors of Noveon Holdings, Inc. As of December 31, 2001, none
of the options issued pursuant to the Stock Option Plan would be
in-the-money.
Employment Agreement and Equity Plans
Employment Agreements
The following is a summary of the principal features of the employment
agreement with Steven J. Demetriou and is qualified in its entirety by the
employment agreement. A copy of the employment agreement has been filed as
an exhibit to our Form S-4 on May 29, 2001, and is incorporated herein by
reference.
We entered into an agreement with Steven J. Demetriou providing for his
employment as Chief Executive Officer for a three-year term beginning on
March 15, 2001. Mr. Demetriou's annual salary is $600,000. He received a
signing bonus of $200,000. Mr. Demetriou is eligible for an annual
performance-based bonus based upon the attainment of earnings targets. Upon
attainment of 100% of our target earnings plan, Mr. Demetriou's bonus will
equal 80% of his base salary. For the year ended December 31, 2001, he
received a guaranteed bonus of $300,000. Mr. Demetriou was also eligible
for a bonus of $200,000 for the 2001 fiscal year based upon the terms of
his employment agreement concerning the attainment of working capital
targets and the achievement of personal management objectives agreed upon
by Mr. Demetriou and our compensation committee. Mr. Demetriou is
guaranteed a minimum bonus of $100,000 for the fiscal year ending December
31, 2002, if he is employed at the end of such fiscal year.
Mr. Demetriou has purchased from Noveon Holdings, Inc. 10,000 shares of its
common stock at a per share purchase price of $100 in exchange for a full
recourse note with a term of ten years and an interest rate of 7% per
annum. The principal amount of the note, together with accumulated
interest, will be payable upon the earliest of (1) the date Mr. Demetriou's
employment is terminated for any reason other than a termination without
"cause" (as defined in the employment agreement) or a termination by Mr.
Demetriou with "good reason" (as defined in the employment agreement), (2)
a "change in control" of our company (as defined in the employment
agreement) or underwritten public offering of our common stock following a
termination of Mr. Demetriou's employment by us without cause or by Mr.
Demetriou with good reason, or (3) the expiration of the ten-year term of
the note.
If Mr. Demetriou's employment is terminated without cause (which includes
any failure by us to extend the term of employment for successive one-year
periods) or if Mr. Demetriou terminates his employment with good reason, we
are required to pay or provide Mr. Demetriou (1) any unpaid portion of his
annual salary and paid vacation earned through the date of termination, (2)
an amount equal to Mr. Demetriou's annual salary at the time of termination
for the remainder of the term of employment, provided that the amount is at
least equal to three years of Mr. Demetriou's annual salary at the time of
termination, and (3) employee benefits for the remainder of the term, but
in no event for less than two years.
If we terminate Mr. Demetriou's employment as a result of a change in
control, we are required to pay or provide Mr. Demetriou (1) any unpaid
portion of his annual salary and paid vacation earned through the date of
termination, (2) an amount equal to Mr. Demetriou's annual salary for a
period of three years, provided that Mr. Demetriou will not receive that
amount if the value of his vested stock options on the date of the change
in control exceeds the total value of three years of his annual salary, and
(3) employee benefits for a period of two years.
Mr. Demetriou is entitled to a gross-up payment in the event he is subject
to a federal excise tax resulting from payments or benefits received in
connection with a change in control of our company. Mr. Demetriou has the
right to terminate his employment at any time on thirty days' notice. Mr.
Demetriou is subject to non-competition, non-solicitation and
non-disclosure covenants. The non-competition covenant does not apply if
Mr. Demetriou's employment is terminated by us without cause, by him with
good reason, as a result of a change in control, or if we fail to extend
his term of employment.
Amended and Restated Stock Option Plan
The following paragraphs summarize the principal features of the Stock
Option Plan. A copy of the Stock Option Plan has been filed as an exhibit
to this Form 10-K.
In 2001, Noveon Holdings, Inc. ("Holdings") adopted the Stock Option Plan
to provide for the grant of nonqualified stock options to key employees,
consultants and directors of Holdings and its subsidiaries (including us)
and affiliates. The maximum number of shares of Holdings common stock
underlying the options available for award under the stock option plan is
394,444. If any options terminate or expire unexercised, the shares subject
to such unexercised options are again available for grant.
The Stock Option Plan is administered by a committee of the board of
directors of Holdings. Generally, the committee interprets and implements
the Stock Option Plan, grants options, exercises all powers, authority, and
discretion of the board under the Stock Option Plan, and determines the
terms and conditions of option agreements, including vesting provisions,
exercise price, and termination date of options.
Each option is evidenced by an agreement between an optionee and Holdings
containing such terms as the committee determines. Unless determined
otherwise by the committee, 20% of the shares subject to the option vest on
each of the first five anniversaries of the grant date subject to continued
employment. The committee may accelerate the vesting of options at any
time. Unless determined otherwise by the committee, the option price is not
less than the fair market value of the underlying shares on the grant date.
Generally, unless otherwise set forth in an agreement or as determined by
the committee, vested options terminate forty-five days after termination
of employment (180 days in the event of termination by reason of death or
disability).
In the event of a transaction that constitutes a change in control of
Holdings, as described in the Stock Option Plan, unless otherwise set forth
in an agreement or as determined by the committee, 50% of the unvested
options held by each optionee become fully exercisable. Any remaining
unvested options held by an optionee become fully exercisable upon the
earlier of the first anniversary of the change in control transaction, if
such optionee is then employed by us, or the date the optionee's employment
is involuntarily terminated, as described in the Stock Option Plan. In the
event of specified transactions that result in holders of Holdings common
stock receiving payments or securities in respect of, or in exchange for,
their Holdings common stock that do not result in a change in control of
Holdings, as described in the Stock Option Plan, unless otherwise set forth
in an option agreement or as determined by the committee, options remain
subject to the terms of the Stock Option Plan and the applicable option
agreement, and thereafter, upon exercise, optionees will be entitled to
receive in respect of any option the same per share consideration received
by holders of Holdings common stock in connection with the transaction.
In the event of either of the above-described transactions, Holdings may
cancel any options unexercised as of the transaction date upon substitution
of equivalent options or a payment from Holdings to the holders of options
of the difference between the fair market value of the underlying stock and
the option exercise price. Options will in no event entitle the holder of
the option to ordinary cash dividends payable upon the Holdings common
stock issuable upon exercise of the options.
The Stock Option Plan provides that the aggregate number of shares subject
to the Stock Option Plan and any option, the purchase price to be paid upon
exercise of an option and the amount to be received in connection with the
exercise of any option, will be automatically adjusted to reflect any stock
splits, reverse stock splits or dividends paid in the form of Holdings
common stock, and equitably adjusted as determined by the committee for any
other increase or decrease in the number of issued shares of Holdings
common stock resulting from the subdivision or combination of shares or
other capital adjustments, or the payment of any other stock dividend or
other extraordinary dividend, or other increase or decrease in the number
of such shares of Holdings common stock or any substantial sale of the
assets of Holdings.
The Holdings board of directors may amend, alter, or terminate the Stock
Option Plan. Any board action may not adversely alter outstanding options
without the consent of the optionee. The Stock Option Plan will terminate
ten years from its effective date, but all outstanding options will remain
effective until satisfied or terminated under the terms of the Stock Option
Plan.
Pension Plan
We adopted a tax qualified defined benefit retirement plan (the "Noveon
Retirement Plan") that will provide pension benefits to our U.S. salaried
employees. The amount of an employee's pension will depend on a number of
factors including final average earnings ("FAE") for the highest 48
consecutive months of an employee's earnings and years of credited service.
The table below sets forth the estimated normal annual retirement benefits
payable to eligible employees under the Noveon Retirement Plan in the
specified compensation levels and with the specified years of benefit
service.
The benefit formula under the Noveon Retirement Plan will generally provide
an annual pension of 1.15% of FAE (subject to certain limitations imposed
by the Internal Revenue Code) times all years of pension credit, plus 0.45%
of FAE in excess of "covered compensation" times years of pension credit up
to 35 years. Certain eligible employees will be given pension credit for
past service with Goodrich and the benefits provided to certain employees
under the Noveon Retirement Plan will be offset by benefits payable from
Goodrich's defined benefit pension plan for salaried employees. The numbers
listed below do not reflect this offset. Benefits will not be subject to
any deduction for Social Security.
- --------------------------------------------------------------------------------------------------------------------
Final Average
Earnings 10 15 20 25 30 35 40
- --------------------------------------------------------------------------------------------------------------------
$100,000 $ 14,225 $ 21,338 $ 28,450 $ 35,563 $ 42,675 $ 49,788 $ 55,538
$125,000 $ 18,225 $ 27,338 $ 36,450 $ 45,563 $ 54,675 $ 63,788 $ 70,975
$150,000 $ 22,225 $ 33,338 $ 44,450 $ 55,563 $ 66,675 $ 77,788 $ 86,413
$200,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$250,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$300,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$350,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$400,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$450,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$500,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$600,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$700,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$800,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$900,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
$1,000,000 $ 30,225 $ 45,338 $ 60,450 $ 75,563 $ 90,675 $105,788 $117,288
Earnings include salary and certain incentive payments, including annual
cash bonuses, but exclude any awards under any long term incentive plans
and our matching contributions under our 401(k) plan.
The pension amounts shown above reflect an assumed Internal Revenue Code
limitation on FAE taken into account under the benefit formula of $200,000
and covered compensation of $37,212. The table also assumes retirement at
age 65 and the benefit being paid in the form of a five year certain and
continuous annuity with no survivor benefits.
As of January 1, 2002, Mr. Demetriou had 0.8 years of credited service; Mr.
Clegg had 10.6 years of credited service and his pension benefit will be
subject to an estimated offset under the Goodrich Pension Plan of $22,900;
Ms. Coffin had 3.5 years of credited service and her pension benefit will
be subject to such offset, estimated to be $6,400; Mr. Sedlacek had 25
years of credited service and his pension benefit will be subject to such
offset, estimated to be $56,700; and Mr. Friday had 4.8 years of credited
service and his pension benefit will be subject to such an offset,
estimated to be $9,400.
Director Compensation
Members of our board of directors are reimbursed for traveling costs and
other out-of-pocket expenses incurred in attending board of directors and
committee meetings. Messrs. Lichtenberger, Sarni and Dunphy each receive an
annual fee of $25,000 for their services as directors. Mr. Lichtenberger
also received 10,000 options to purchase common shares of Holdings. Messrs.
Sarni and Dunphy each also received 5,000 options to purchase common shares
of Holdings. The other members of the board of directors do not receive
additional compensation for their services on the board of directors or its
committees.
Compensation Committee Interlocks and Insider Participation
As of December 2001, the compensation committee of our board of directors
is comprised of Messrs. Lichtenberger, Dunphy and Garcia. Mr. Garcia is
currently a Managing Director of AEA Investors Inc. AEA owns approximately
43% of the common stock of Holdings, our corporate parent. For a more
detailed discussion of relationships between AEA and us see "Certain
Relationships and Related Transactions."
ITEM 12. Security Ownership by Certain Beneficial Owners and Management
All of our common stock is held by Noveon Holdings, Inc. The following
table sets forth information with respect to the beneficial ownership of
the common stock of Noveon Holdings, Inc. by (a) any person or group who
will beneficially own more than five percent of the common stock of Noveon
Holdings, Inc., (b) each of our directors and executive officers and (c)
all of our directors and executive officers as a group. In the table below,
unless otherwise noted, the address of the person is in care of our
company.
Percentage of
Number of Outstanding
Name of Beneficial Owner: Shares Common Stock(1)
- ------------------------ --------- ---------------
AEA Investors Inc. and related owners (2)(3) 1,550,000 43%
DLJ Merchant Banking Partners III, L.P. and related owners (4)(5) 1,500,000 42%
DB Capital Partners, Inc. and related owners (6)(7) 500,000 14%
Steven J. Demetriou (8) 10,000 *
H. William Lichtenberger (9)(10) 5,000 *
T. J. Dermot Dunphy 7,000 *
Vincent A. Sarni (11) 500 *
John L. Garcia (9) - *
Brian R. Hoesterey (9) - *
Susan C. Schnabel (12) - *
William J. Lovejoy (13) - *
William B. Sedlacek 2,500 *
Sarah R. Coffin 2,000 *
Kumar Shah 1,500 *
Michael D. Friday 1,250 *
Christopher R. Clegg 1,000 *
Sean M. Stack 1,000 *
All directors and executive officers as a group (14 persons) 31,750 *
___________
* Represents beneficial ownership of less than one percent.
(1) As used in this table, each person or entity with the power to
vote or direct the disposition of shares is deemed to be a
beneficial owner.
(2) Consists of shares held indirectly through PMD Investors I LLC
and PMD Investors II LLC.
(3) The address for AEA Investors Inc., PMD Investors I LLC and PMD
Investors II LLC is c/o AEA Investors Inc., 65 East 55th Street,
New York, New York 10022.
(4) Consists of shares held by DLJ Merchant Banking Partners III,
L.P.; DLJMB Funding III, Inc.; DLJ ESC II, L.P., DLJ Offshore
Partners III, C.V.; DLJ Offshore Partners III-1, C.V.; DLJ
Offshore Partners III-2, C.V. and DLJ MB PartnersIII GmbH & Co.KG
(5) The address for DLJ Merchant Banking Partners III, L.P. and
related owners is c/o DLJ Merchant Banking, Eleven Madison
Avenue, 16th Floor, New York, New York 10010.
(6) Consists of shares held by DB Capital/PMD Investors, LLC, an
indirect wholly owned subsidiary of DB Capital Partners, Inc.
(7) The address for DB Capital/PMD Investors, LLC and DB Capital
Partners, Inc. is c/o DB Capital Partners, Inc., 31 West 52nd
Street, 26th Floor, New York, New York 10019.
(8) Pursuant to an employment agreement, Mr. Demetriou purchased
10,000 shares of common stock of Noveon Holdings, Inc.
(9) Does not include shares beneficially owned by AEA Investors Inc.,
PMD Investors I LLC and PMD Investors II LLC. Mr. Lichtenberger
is a limited partner in PMD Investors I LP, the partnership that
owns PMD Investors I LLC. Messrs. Garcia and Hoesterey are
limited partners in PMD Investors II LP, the partnership that
owns PMD Investors II LLC and are officers and directors of AEA
PMD Investors Inc., the general partner of PMD Investors I LP and
PMD Investors II LP. Mr. Garcia and Mr. Hoesterey are also
officers AEA Investors Inc.
(10) Includes 5,000 shares held by H. William Lichtenberger Flint TM
Trust, dated July 20, 2001, which may be deemed to be
beneficially owned by Mr. Lichtenberger.
(11) Includes 500 shares held by Ms. Sandra P. Sarni, Vincent Sarni's
wife, which may be deemed to be beneficially owned by Mr. Sarni.
(12) Does not include shares beneficially owned by DLJ Merchant
Banking Partners III, L.P. and related owners. Ms. Schnabel is a
managing director of Credit Suisse First Boston, the indirect
parent of DLJ Merchant Banking Partners III, L.P. and related
owners.
(13) Does not include shares beneficially owned by DB Capital
Partners, Inc. Mr. Lovejoy is an officer of DB Capital Partners,
Inc.
ITEM 13. Certain Relationships and Related Transactions
The Stockholders Agreement
The following is a summary of the material terms of the stockholders
agreement among Noveon Holdings, Inc. ("Holdings"), AEA, DLJ Merchant
Banking and DB Capital dated as of November 28, 2000, as amended, and
entered into with respect to the shares of Holdings. AEA owns 43% of the
shares of the common stock of Holdings, DLJ Merchant Banking owns 42% and
DB Capital owns 14%.
The stockholders agreement provides AEA, DLJ Merchant Banking and DB
Capital with various corporate governance rights so long as specific stock
ownership levels are maintained. AEA and DLJ Merchant Banking each have the
right to designate three members to the board of directors of Holdings, and
to jointly designate one additional director. DB Capital has the right to
designate one director, and an additional director will serve as the chief
executive officer of Holdings. Pursuant to the terms of the stockholders
agreement, prior to an initial public offering, or IPO, of Holdings all
actions approved by the board of directors require the vote of at least one
director designated solely by each of AEA and DLJ Merchant Banking. After
an IPO, a significant number of board actions require the approval of those
directors designated to the board of Holdings by AEA and DLJ Merchant
Banking and DB Capital. In addition, the prior approval of each of AEA, DLJ
Merchant Banking and DB Capital, or the prior approval of at least one
director designated solely by each of AEA, DLJ Merchant Banking and DB
Capital, will be necessary to engage in the following transactions or to
take the following actions prior to an IPO:
o amend the charter documents of Holdings;
o enter into transactions between Holdings and any of AEA, DLJ
Merchant Banking and DB Capital, excluding the payment of
management fees involving less than $100,000 and entered into on
arm's-length terms in the ordinary course of business; and
o cause the liquidation, dissolution or voluntary bankruptcy of
Holdings.
The stockholders agreement provides that (1) prior to the third anniversary
of the closing of the Acquisition, AEA and DLJ Merchant Banking acting
together, (2) after the third anniversary, either AEA or DLJ Merchant
Banking and (3) after the eighth anniversary, DB Capital, may require
Holdings to enter into a sale, recapitalization or a qualified public
offering. Other than DB Capital, any stockholder making such a request must
own at least 20% of the issued and outstanding shares of the common stock
of Holdings. If DB Capital is making this request, Holdings will have the
right to purchase all of the shares owned by it at 85% of their fair market
value.
The Management Agreements
Pursuant to the stockholders agreement, we entered into management
agreements, with each of AEA, DLJ Merchant Banking and DB Capital. Under
the management agreements, we will pay AEA, DLJ Merchant Banking and DB
Capital an annual fee of $1.9 million, $1.1 million and $0.5 million,
respectively, plus reasonable out-of-pocket expenses as compensation for
the appointed directors, various advisory and consulting services and for
monitoring and management costs, as applicable. In addition, we agreed to
indemnify AEA, DLJ Merchant Banking and DB Capital and their respective
affiliates for liabilities arising from their actions under the management
agreements. The management agreements will remain in effect for as long as
the stockholders agreement is in effect. A copy of each of the management
agreements has been filed as an exhibit to our Form S-4 on May 29, 2001,
and is incorporated herein by reference. A copy of the Amended and Restated
Management Agreement, dated as of June 26, 2001 between DLJ Merchant
Banking and us has been filed as an exhibit to this Form 10-K.
Pursuant to the stockholders agreement, we entered into an advisory
services agreement, dated as of February 5, 2001, with Credit Suisse First
Boston ("CSFB"). Under the advisory services agreement, we will pay CSFB an
annual fee of $0.5 million plus reasonable out-of-pocket expenses as
compensation for strategic and financial planning advisory services. In
addition, we agreed to indemnify CSFB and its respective affiliates for
liabilities arising from their actions under the advisory services
agreement. A copy of the advisory services agreement has been filed as an
exhibit to our Form S-4 on May 29, 2001, and is incorporated herein by
reference.
Note Receivable
Our Chief Executive Officer and President purchased stock in Holdings which
he paid for with the issuance of a $1.0 million note. The note carries
interest at 7% per year and has a term of ten years. We purchased that note
from Holdings at face value and have reflected the note receivable in other
assets on the balance sheet and the intercompany payable of $1.0 million on
our balance sheet in current liabilities. The intercompany payable was paid
subsequent to December 31, 2001.
The Tax Sharing Agreement
We entered into a tax sharing agreement with Holdings. The tax sharing
agreement provides, among other things, that Holdings will file U.S.
federal income tax returns on a consolidated basis as a member of an
affiliated group, to the extent required by the Internal Revenue Service.
Where the affiliated group filing on a consolidated basis includes us, the
tax sharing agreement provides a formula, which is generally on a separate
return basis, for determining that portion of the consolidated U.S. federal
income tax liability attributable to us and which portion shall be paid by
us. A copy of the tax sharing agreement has been filed as an exhibit to our
Form S-4 filed on May 29, 2001, and is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements:
See Index to Consolidated Financial Statements included on page F-1.
(2) Exhibits:
See Exhibits Index included on page E-1.
(b) Reports on Form 8-K filed in the fourth quarter of 2001:
We filed a Current Report on Form 8-K dated November 14, 2001, which was
reported under Item 5, Other Events and Item 7, Financial Statements and
Exhibits with respect to our financial results for the third quarter of
2001.
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.
NOVEON, INC.
Dated: March 28, 2002 By: /s/ Christopher R. Clegg
-------------------------------
Christopher R. Clegg
Senior Vice President, General
Counsel and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below, constitute and appoint Christopher R. Clegg , as their true
and lawful attorney-in-fact and agent, with the full power of substitution
and resubstitution, for them in their names, places and steads, in any and
all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as they might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitute,
may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which when taken together shall
constitute one Instrument.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ H. William Lichtenberger Chairman and Director March 28, 2002
- ----------------------------
H. William Lichtenberger
/s/ Steven J. Demetriou Director, Chief Executive March 28, 2002
- ---------------------------- Officer and President
Steven J. Demetriou
/s/ T. J. Dermot Dunphy Director March 28, 2002
- ----------------------------
T.J. Dermot Dunphy
/s/ Vincent A. Sarni Director March 28, 2002
- ----------------------------
Vincent A. Sarni
/s/ John L. Garcia Director March 28, 2002
- ----------------------------
John L. Garcia
/s/ Brian R. Hoesterey Director March 28, 2002
- ----------------------------
Brian R. Hoesterey
/s/ Susan C. Schnabel Director March 28, 2002
- ----------------------------
Susan C. Schnabel
/s/ William J. Lovejoy Director March 28, 2002
- ----------------------------
William J. Lovejoy
/s/ Michael D. Friday Senior Vice President and March 28, 2002
- ---------------------------- Chief Financial Officer
Michael D. Friday
/s/ Sean M. Stack Vice President and Treasurer March 28, 2002
- ----------------------------
Sean M. Stack
/s/ Scott A. McKinley
- ----------------------------
Scott A. McKinley Vice President and Controller March 28, 2002
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not
Registered Securities Pursuant to Section 12 of the Act
We have not sent any annual reports to security holders covering the year
ended December 31, 2001. We have not sent proxies, form of proxy or other
proxy soliciting material to our security holders with respect to any
meeting of security holders and will not be doing so subsequent to the
filing of this Annual Report on Form 10-K.
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
2.1 Agreement for Sale and Purchase of Assets, dated as of November 28, 2001, by and between The B.F.Goodrich Company
and PMD Group Inc.+**
3.1 Restated Certificate of Incorporation of Noveon, Inc.**
3.2 Amended and Restated By-Laws of Noveon, Inc.*
4.1 Indenture, dated February 28, 2001, by and between PMD Group Inc., the Guarantors party thereto and Wells Fargo Bank
Minnesota, National Association, as trustee.**
4.2 Forms of 11% Senior Subordinated Notes due 2011, Series A Notes (contained in Exhibit 4.1 as Exhibit A and B
thereto, respectively).**
4.3 Form of Guarantee (contained in Exhibit 4.1 as Exhibit A and B thereto).**
4.4 Registration Rights Agreement, dated February 28, 2001, by and between PMD Group Inc., the Guarantors party thereto,
Credit Suisse First Boston and Deutsche Banc Alex. Brown.**
10.1 Amended and Restated Management Agreement, dated June 26, 2001, between Noveon, Inc. and DLJ Merchant Banking III,
Inc.*
10.2 Management Agreement, dated February 5, 2001, between PMD Group Inc. and DB Capital/PMD Investors, LLC.**
10.3 Management Agreement, dated February 5, 2001, between PMD Group Inc. and AEA Investors Inc.**
10.4 Advisory Services Agreement, dated as of February 5, 2001, by and between PMD Group Inc. and Credit Suisse First
Boston Corporation.+**
10.5 Credit Agreement by and among PMD Group Inc., Bankers Trust Company and Credit Suisse First Boston, dated as of
February 28, 2001.+**
10.6 Tax Sharing Agreement by and between PMD Group Holdings Inc. and PMD Group Inc., dated as of February 28, 2001.**
10.7 Employment Agreement, dated March 9, 2001, between PMD Group Holdings Inc., PMD Group Inc., and Steven J.
Demetriou.+**
10.8 Noveon Holdings, Inc. Amended and Restated Stock Option Plan.*
10.9 Noveon, Inc. 2001 Management Incentive Plan. *
10.10 PMD Group Inc. 2001 Special Deferred Compensation Plan.+*
21.1 Subsidiaries of the Company. *
24.1 Powers of Attorney (included in the signature pages to this Form 10-K).*
99.1 Cautionary Statements Regarding Forward-Looking Statements.*
+ We agree to furnish supplementary to the Commission a copy of any
omitted schedule to such agreement upon the request of the
Commission in accordance with Item 601(b)(2) of Regulation S-K.
* Filed herewith.
** Previously filed with our Registration Statement on Form S-4 as
filed on May 29, 2001 (Commission File No. 333-61812).
E-1
NOVEON, INC.
PERIOD OF TEN MONTHS ENDED DECEMBER 31, 2001
AND
BFGOODRICH PERFORMANCE MATERIALS
(THE PREDECESSOR COMPANY AND A SEGMENT OF THE BFGOODRICH COMPANY)
Period of Two Months Ended February 28, 2001 (unaudited)
and Years Ended December 31, 2000 and 1999
Consolidated Financial Statements
INDEX
Reports of Independent Auditors.............................................F-2
Consolidated Financial Statements
Consolidated Statement of Operations for the ten months
ended December 31, 2001, the two months ended
February 28, 2001 (unaudited) and for the years
ended December 31, 2000 and 1999.........................................F-4
Consolidated Balance Sheet as of December 31, 2001 and 2000.................F-5
Consolidated Statement of Cash Flows for the ten months
ended December 31, 2001, the two months ended
February 28, 2001 (unaudited) and for the years
ended December 31, 2000 and 1999.........................................F-6
Consolidated Statement of Stockholder's Equity for the ten
months ended December 31, 2001 and the Consolidated
Statement of BFGoodrich Investment for the two months
ended February 28, 2001 (unaudited) and for the years
ended December 31, 2000 and 1999.........................................F-7
Notes to Consolidated Financial Statements..................................F-8
Report of Independent Auditors
Board of Directors of
Noveon, Inc.
We have audited the accompanying consolidated balance sheet of Noveon, Inc.
as of December 31, 2001, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the ten months ended
December 31, 2001. 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 audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Noveon,
Inc. at December 31, 2001, and the consolidated results of their operations
and their cash flows for the ten months ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 26, 2002
Report of Independent Auditors
Board of Directors of
The BFGoodrich Company
We have audited the accompanying consolidated balance sheet of BFGoodrich
Performance Materials (as defined in Note A) (a segment of The BFGoodrich
Company) as of December 31, 2000, and the related consolidated statements
of operations, BFGoodrich investment, and cash flows for the years ended
December 31, 2000 and 1999. These financial statements are the
responsibility of the management of The BFGoodrich Company. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BFGoodrich Performance
Materials (as defined in Note A) at December 31, 2000, and the consolidated
results of their operations and their cash flows for the years ended
December 31, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Charlotte, North Carolina
February 12, 2001, except for the information
related to the years ended December 31, 2000
and 1999 included in Note V, as to which the
date is May 23, 2001
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Consolidated Statement of Operations
(dollars in millions)
BFGOODRICH PERFORMANCE MATERIALS NOVEON, INC.
----------------------------------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31 FEBRUARY 28 DECEMBER 31
1999 2000 2001 2001
----------------------------------------------------------------------
(Unaudited)
SALES $ 1,217.7 $ 1,167.7 $ 187.0 $ 876.4
Cost of sales 832.2 819.5 137.3 628.1
----------------------------------------------------------------------
GROSS PROFIT 385.5 348.2 49.7 248.3
Selling and administrative expenses 218.2 201.1 35.2 160.5
Amortization expense 24.6 24.4 4.0 26.5
Consolidation costs 37.3 40.5 - 3.1
----------------------------------------------------------------------
OPERATING INCOME 105.4 82.2 10.5 58.2
Interest income (expense)--net 0.5 4.4 0.6 (73.5)
Other income (expense)--net (1.5) (0.4) (1.5) (0.7)
----------------------------------------------------------------------
Income (loss) before income taxes 104.4 86.2 9.6 (16.0)
Income tax expense (42.3) (35.9) (4.0) (4.6)
----------------------------------------------------------------------
NET INCOME (LOSS) $ 62.1 $ 50.3 $ 5.6 $ (20.6)
======================================================================
See notes to consolidated financial statements.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Consolidated Balance Sheet
(dollars in millions, except share amounts)
BFGOODRICH
PERFORMANCE
MATERIALS NOVEON, INC.
DECEMBER 31, 2000 DECEMBER 31, 2001
------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 15.7 $ 120.0
Accounts and notes receivable, less allowances for doubtful
receivables ($6.9 and $8.7 at December 31, 2000
and 2001, respectively) 181.6 133.8
Inventories 167.4 140.2
Deferred income taxes 16.0 -
Prepaid expenses and other current assets 4.8 4.5
------------------------------------------
TOTAL CURRENT ASSETS 385.5 398.5
Property, plant and equipment--net 563.2 672.5
Prepaid pension 25.7 -
Goodwill--net 307.0 346.9
Identifiable intangible assets--net 58.9 192.0
Other assets 18.9 51.9
------------------------------------------
TOTAL ASSETS $ 1,359.2 $ 1,661.8
==========================================
CURRENT LIABILITIES
Short-term bank debt $ 29.1 $ 1.3
Accounts payable 120.6 97.1
Accrued expenses 77.9 74.2
Income taxes payable 37.1 1.0
Current maturities of long-term debt 0.9 23.2
------------------------------------------
TOTAL CURRENT LIABILITIES 265.6 196.8
Long-term debt - 876.2
Postretirement benefits other than pensions 68.5 5.3
Accrued pensions 5.7 32.8
Deferred income taxes 65.2 24.6
Accrued environmental 38.3 20.7
Other non-current liabilities 5.5 9.2
BFGOODRICH INVESTMENT OR STOCKHOLDER'S EQUITY
BFGoodrich investment 910.4 -
Common stock ($.01 par value, 1,000 shares authorized,
1 share issued and outstanding at December 31, 2001) - -
Paid in capital - 527.0
Retained deficit - (20.6)
Accumulated other comprehensive loss - (10.2)
------------------------------------------
Total BFGoodrich investment or stockholder's equity 910.4 496.2
------------------------------------------
TOTAL LIABILITIES AND BFGOODRICH INVESTMENT OR STOCKHOLDER'S EQUITY $ 1,359.2 $ 1,661.8
==========================================
See notes to consolidated financial statements.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Consolidated Statement of Cash Flows
(dollars in millions)
BFGOODRICH PERFORMANCE MATERIALS NOVEON, INC.
---------------------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31 FEBRUARY 28 DECEMBER 31
1999 2000 2001 2001
---------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ 62.1 $ 50.3 $ 5.6 $ (20.6)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Consolidation costs:
Expenses 37.3 40.5 - 3.1
Payments (28.8) (4.9) (2.0) (11.8)
Depreciation and amortization 86.9 86.7 14.4 83.0
Deferred income taxes 10.2 (1.2) (5.2) 0.4
Debt issuance cost amortization in interest expense - - - 6.8
Change in assets and liabilities, net of effects of
acquisitions and dispositions of businesses:
Receivables (12.1) (1.5) (7.2) 45.9
Inventories (3.9) (2.8) (3.1) 35.8
Other current assets 0.7 1.9 (0.1) 0.9
Accounts payable 18.5 (1.0) (16.8) (4.0)
Accrued expenses (2.9) 1.5 5.7 13.4
Income taxes payable (18.0) 5.2 (27.9) -
Other non-current assets and liabilities 6.1 6.2 5.0 1.0
---------------------------------------------------------
Net cash provided (used) by operating activities 156.1 180.9 (31.6) 153.9
INVESTING ACTIVITIES
Purchases of property, plant and equipment (79.6) (64.0) (7.6) (28.5)
Proceeds from sale of property and business 1.9 0.3 - 0.9
Payments made in connection with acquisitions,
net of cash acquired (19.6) (11.6) - (1,191.1)
---------------------------------------------------------
Net cash (used) by investing activities (97.3) (75.3) (7.6) (1,218.7)
FINANCING ACTIVITIES
Decrease in short-term debt (21.4) (11.3) (3.7) (25.8)
Proceeds from issuance of long-term debt - - - 910.0
Repayment of long-term debt (4.7) (0.3) - (8.5)
Proceeds from sale of receivables, net 0.2 (1.9) 0.5 (1.9)
Debt issuance costs - - - (44.4)
Equity contribution from stockholder - - - 355.0
Transfers (to) /from BFGoodrich (28.5) (86.7) 40.7 -
---------------------------------------------------------
Net cash (used) provided by financing activities (54.4) (100.2) 37.5 1,184.4
Effect of exchange rate changes on cash and cash
equivalents (0.4) (0.3) - 0.4
---------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4.0 5.1 (1.7) 120.0
Cash and cash equivalents at beginning of period 6.6 10.6 15.7 -
---------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10.6 $ 15.7 $ 14.0 $ 120.0
=========================================================
Non-Cash transactions
Equity Contribution $ - $ - $ - $ 172.0
Assets contributed to joint venture - 17.9 - -
See notes to consolidated financial statements.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Consolidated Statement of Stockholder's Equity and BFGoodrich Investment
(dollars in millions)
BFGOODRICH PERFORMANCE MATERIALS
-------------------------------------------------
TWO MONTHS
ENDED
YEAR ENDED DECEMBER 31 FEBRUARY 28
1999 2000 2001
-------------------------------------------------
(UNAUDITED)
BFGOODRICH INVESTMENT
BEGINNING OF PERIOD $ 938.1 $ 950.9 $ 910.4
Net income 62.1 50.3 5.6
Cumulative translation adjustment (20.8) (4.1) 2.6
-------------------------------------------------
Comprehensive income 41.3 46.2 8.2
Net transfers (to)/from BFGoodrich (28.5) (86.7) 40.7
-------------------------------------------------
END OF PERIOD $ 950.9 $ 910.4 $ 959.3
=================================================
ACCUMULATED
OTHER
COMMON PAID IN RETAINED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
------------------------------------------------------------------------
STOCKHOLDER'S EQUITY--NOVEON, INC.
OPENING BALANCE AT MARCH 1, 2001 $ - $ - $ - $ - $ -
Equity contribution from stockholder - 527.0 - - 527.0
Comprehensive loss:
Net loss - - (20.6) - (20.6)
Net change in fair value of cash
flow hedges - - - (5.7) (5.7)
Cumulative translation
adjustment - - - (4.5) (4.5)
------------------------------------------------------------------------
Total comprehensive loss - - - - (30.8)
------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ - $ 527.0 $ (20.6) $ (10.2) $ 496.2
========================================================================
See notes to consolidated financial statements.
Noveon, Inc.
Period of Ten Months ended December 31, 2001
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Period of Two Months Ended February 28, 2001 (unaudited)
and Years Ended December 31, 2000 and 1999
Notes to Consolidated Financial Statements
A. ORGANIZATION AND ACQUISITION
Noveon, Inc. (the "Company") commenced operations on March 1, 2001 through
the acquisition on February 28, 2001 of certain assets and common stock of
certain subsidiaries of BFGoodrich Performance Materials (the "Predecessor
Company" or "Performance Materials"), an operating segment of The
BFGoodrich Company ("Goodrich" or "BFGoodrich"), now known as Goodrich
Corporation. The Company is a wholly-owned subsidiary of Noveon Holdings,
Inc. ("Holdings").
Holdings was organized for the purpose of owning all of the common stock of
the Company and was capitalized through an equity contribution of $355.0
million from affiliates of its equity sponsors, AEA Investors Inc. (AEA),
DLJ Merchant Banking Partners III, L.P. and affiliates (DLJMB) and DB
Capital Partners, Inc. (DB). Holdings has no independent operations or
investments other than its investment in the Company. Holdings has made an
equity contribution of $527.0 million to the Company comprised of $355.0
million in cash and $172.0 million from the seller note that Holdings
issued to a subsidiary of Goodrich in connection with the Company's
acquisition of the Predecessor Company. The seller note bears interest at
an initial rate of 13% payable semiannually in cash or additional notes at
the option of Holdings and increases to a rate of 15% after 5 years. If the
interest is paid in cash, the interest rate remains at 13%. Holdings will
be dependent on the cash flows of the Company to repay the seller note upon
maturity in 2011.
The consolidated balance sheet of the Company as of December 31, 2001
reflects the acquisition of the Predecessor Company under the purchase
method of accounting. The purchase price before fees and expenses, totaling
$20.4 million, was $1,372.0 million and consisted of cash of $1,167.1
million, assumption of debt and liabilities of $32.9 million, net of cash
acquired, and a $172.0 million equity contribution resulting from the
seller note of Holdings issued to Goodrich.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
A. ORGANIZATION AND ACQUISITION (CONTINUED)
Under the terms of the Agreement for Sale and Purchase of Assets between
BFGoodrich and the Company (the "Agreement"), the final working capital
adjustment will be determined subsequent to December 31, 2001, which may
require a change to the purchase price. Goodrich has computed a $25.0
million working capital adjustment that is equal to the upward adjustment
limit. Under the terms of the Agreement, the Company is disputing
Goodrich's working capital adjustment. The parties have not been able to
settle their differences, and the disputed matters will be forwarded to an
independent third party for resolution. The decision by the third party
will be final and binding on all parties. Any amounts finally determined to
be due to Goodrich as a working capital adjustment in the Agreement will be
paid through borrowings under the revolving credit facility or with cash.
Any amounts received by the Company as a result of a downward adjustment to
the purchase price may be used to reduce debt under the credit facilities
unless these amounts are invested in cash or net working capital. The
adjustment to purchase price for the working capital adjustment will be
reflected in the financial statements upon the resolution of the working
capital dispute.
The purchase of the Predecessor Company from Goodrich (the "Acquisition")
was financed through term loan borrowings under the Company's new credit
facilities, proceeds from the offering of senior subordinated notes, and
the $527.0 million equity contribution from Holdings. The proceeds from the
new credit facilities included $125.0 million on the six-year Term Loan A
facility and $510.0 million on the seven and one-half year Term Loan B
facility. The proceeds from the 11% Senior Subordinated Notes due 2011 were
$275.0 million.
The assets acquired and liabilities assumed of the Predecessor Company have
been recorded at estimated fair values. Appraisals of long-lived assets and
identifiable intangible assets were completed in the fourth quarter of
2001. In addition, the valuations of the Company's projected pension and
other post-employment benefit obligations have been completed and are
reflected in the allocation of purchase price. The deferred income taxes
provided in the purchase price allocation are attributed to the tax effects
of differences between the assigned values and the tax basis of assets
acquired (except for certain goodwill which is non-deductible for tax
purposes) and liabilities assumed.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
A. ORGANIZATION AND ACQUISITION (CONTINUED)
As of the Acquisition date, management began to assess a plan to
consolidate and/or exit activities of the business and reduce the number of
personnel at the Company. Management has completed this assessment and
finalized the components of the plan, including exiting certain non-core
product lines and investments and undertaking efficiency and productivity
initiatives at selected locations. The assets have been adjusted to the
estimated fair values through purchase accounting. Included in the purchase
price allocation is a $12.9 million accrual for termination benefits and
exit costs related to the components of the plan.
The following unaudited pro forma data summarize the results of operations
for the years ended December 31, 2000 and 2001 as if the Company had been
acquired as of the beginning of the periods presented. The pro forma data
give effect to actual operating results prior to the Acquisition.
Adjustments to interest expense, goodwill amortization and income taxes
related to the Acquisition are reflected in the pro forma data. In
addition, the results of textile dyes, which were not part of the
Acquisition, are excluded from the pro forma results. These pro forma
amounts do not purport to be indicative of the results that would have
actually been attained if the Acquisition had occurred as of the beginning
of the periods presented or that may be attained in the future.
(IN MILLIONS) 2000 2001
-----------------------------------------------------------------------
Net sales $1,152.0 $1,062.3
Operating income 92.1 66.2
Net income (loss) 3.9 (30.5)
B. BASIS OF PRESENTATION
The consolidated financial statements of the Predecessor Company present
the consolidated results of operations and financial condition as it
operated as the Performance Materials segment of Goodrich, including
certain adjustments and allocations, prior to the Acquisition.
Goodrich's investment represents Goodrich's equity investment in
Performance Materials. Interest expense associated with Goodrich's general
corporate debt was not charged to Performance Materials and has not been
allocated to Performance Materials. Performance Materials received funding
for its operations from Goodrich as deemed necessary. All transfers to and
from Goodrich have been reported in the Goodrich investment account.
B. BASIS OF PRESENTATION (CONTINUED)
During the two months ended February 28, 2001 and the years ended December
31, 2000 and 1999 Performance Materials was allocated $0.8 million, $6.1
million and $9.8 million in costs from Goodrich, respectively. Certain
costs, such as employee benefits, legal and executive compensation, are
specifically attributed to Performance Materials. These costs amounted to
$0.5 million, $3.2 million and $6.6 million for the two months ended
February 28, 2001 and the years ended December 31, 2000 and 1999,
respectively. Certain costs, such as the corporate aircraft, tax,
accounting, and other corporate shared services, are allocated to
Performance Materials primarily based on estimates of the time spent on
Performance Materials matters. These costs amounted to $0.3 million, $2.9
million and $3.2 million for the two months ended February 28, 2001 and the
years ended December 31, 2000 and 1999, respectively. Performance Materials
also participated in certain benefit plans of Goodrich, the cost of which
is allocated to Performance Materials and is included in the accompanying
financial statements but is not reflected in the amounts above. Management
of the Predecessor Company believes these allocations are reasonable.
The results for the Predecessor Company are not necessarily comparable to
those of the Company because of the exclusion of certain businesses from
the Acquisition and changes in organizational structure, recorded asset
values, cost structure and capitalization of the Company resulting from the
Acquisition.
Certain disclosure information related to the two month period ended
February 28, 2001 has been omitted as data for this period is not readily
available.
Earnings per share data are not presented because the Company's common
stock is not publicly traded and the Company is a wholly-owned subsidiary
of Noveon Holdings, Inc.
C. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the accounts of the Company
and its majority-owned subsidiaries. Investments in 20%-owned to 50%-owned
affiliates are accounted for using the equity method. Equity in earnings
(losses) from these businesses is included in other income (expense)--net.
Intercompany accounts and transactions are eliminated.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
three months or less at the time of purchase.
INVENTORIES
Inventories are stated at the lower of cost or market. Certain domestic
inventories are valued by the last-in, first-out (LIFO) cost method.
Inventories not valued by the LIFO method are valued principally by the
average cost method.
LONG-LIVED ASSETS
Property, plant and equipment of the Predecessor Company and that purchased
subsequent to the Acquisition, including amounts recorded under capital
leases, are recorded at cost. Appraisals of fair value were obtained for
property, plant and equipment acquired in the Acquisition. Depreciation and
amortization is computed principally using the straight-line method over
the following estimated useful lives: buildings and improvements, 15 to 40
years; machinery and equipment, 5 to 15 years. Repairs and maintenance
costs are expensed as incurred.
Identifiable intangible assets are recorded at cost, or when acquired as a
part of a business combination, at estimated fair value. These assets
include principally patents and other technology agreements and trademarks.
Appraisals of fair value were obtained for identifiable intangibles
acquired in the Acquisition. The appraised value of identifiable
intangibles acquired totaled $201.8 million, and included approximately
$156.9 million of identifiable intangibles for technology. They are
amortized using the straight-line method over estimated useful lives of
primarily 15 years.
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired businesses and was amortized by the
straight-line method over 20 years through December 31, 2001.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of long-lived assets and related goodwill is recognized when
events or changes in circumstances indicate that the carrying amount of the
asset, or related groups of assets, may not be recoverable and the estimate
of undiscounted cash flows over the assets remaining estimated useful life
are less than the assets carrying value. Measurement of the amount of
impairment may be based on appraisal, market values of similar assets or
estimated discounted future cash flows resulting from the use and ultimate
disposition of the asset.
DEBT ISSUANCE COSTS
Costs incurred with the issuance of the Company's new credit facilities and
senior subordinated notes, totaling $44.4 million, have been capitalized in
other assets in the consolidated balance sheet and are being amortized
using the interest method over the life of the related agreements ranging
in periods of six through ten years.
REVENUE AND INCOME RECOGNITION
Revenue from the sale of products is recognized at the point of passage of
title, which is generally at the time of shipment.
FREIGHT-OUT COSTS
The Company includes costs of shipping and handling in cost of goods sold
in the statement of operations.
FINANCIAL INSTRUMENTS
Financial instruments recorded on the balance sheet include cash and cash
equivalents, accounts and notes receivable, accounts payable and debt.
Because of their short maturity, the carrying value of cash and cash
equivalents, accounts and notes receivable, accounts payable and short-term
bank debt approximates fair value. Fair value of long-term debt is based on
quoted market prices.
The fair value of foreign currency forward contracts and interest rate swap
agreements is based on quoted market prices.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 requires
companies to recognize their derivative instruments as either assets or
liabilities in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are designated
and qualify as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign
operation.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as
the offsetting loss or gain on the hedged item attributable to the hedged
risk are recognized in current earnings during the period of the change in
fair values. For derivative instruments that are designated and qualify as
a cash flow hedge (i.e., hedging the exposure to variability in expected
future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in
the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess
of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. For derivative instruments that are designated and qualify as a
hedge of a net investment in a foreign currency, the gain or loss is
reported in other comprehensive income as part of the cumulative
transaction adjustment to the extent it is effective. For derivative
instruments not designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has entered into interest rate swap agreements (cash flow
hedges) to limit its exposure to interest rate fluctuations on $180.0
million of the outstanding principal of the Company's Term Loans for the
next four years. These agreements require the Company to pay a fixed rate
of interest while receiving a variable rate and expire in 2005. At December
31, 2001, the fair value of these swap arrangements, included in other
non-current liabilities, totaled approximately $5.7 million. The offsetting
impact of this hedge transaction is included in accumulated other
comprehensive loss, net of the related tax benefit.
The Company enters into currency forward exchange contracts, totaling $10.5
million at December 31, 2001, to hedge certain firm commitments denominated
in foreign currencies. The purpose of the Company's foreign currency
hedging activities is to protect the Company from risk that the eventual
dollar cash flows from the sale of products to international customers will
be adversely affected by changes in the exchange rates. The fair value of
these contracts at December 31, 2001 was not material to the Company's
results of operations, cash flow or financial position.
The Company has foreign denominated floating rate debt to protect the value
of its investments in its foreign subsidiaries in Europe. Realized and
unrealized gains and losses from these hedges are not included in the
income statement, but are shown in the cumulative translation adjustment
account included in other comprehensive loss. During the ten months ended
December 31, 2001, the Company recognized $2.1 million of net gains
included in the cumulative translation adjustment related to the foreign
denominated floating rate debt.
STOCK-BASED COMPENSATION
The Company and the Predecessor Company account for stock-based employee
compensation in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations.
INCOME TAXES
The Company's operations will be included in the consolidated income tax
returns filed by Holdings. Income tax expense in the Company's consolidated
statement of operations is calculated on a separate tax return basis as if
the Company had operated as a stand-alone entity.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Historically, the Predecessor Company's operations have been included in
the consolidated income tax returns filed by Goodrich. Income tax expense
in the Predecessor Company's consolidated statement of operations is
calculated on a separate tax return basis as if the Company had operated as
a stand-alone entity.
The provision for income taxes is calculated in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires the recognition of
deferred income taxes using the liability method.
RESEARCH AND DEVELOPMENT EXPENSE
The Company performs research and development under Company-funded programs
for commercial products. Total research and development expenditures for
the ten months ended December 31, 2001, the two months ended February 28,
2001 and the years ended December 31, 2000 and 1999 were $18.2 million,
$4.3 million, $32.9 million and $43.2 million, respectively.
RECLASSIFICATIONS
Certain amounts in prior financial statements have been reclassified to
conform to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 addresses the topic of financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." Based on the provisions of SFAS
No. 141, all business combinations are to be accounted for using only one
method, the purchase method. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets,"
in July 2001. The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." SFAS No. 142 applies to all goodwill
and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were
initially recognized. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue
to be amortized over their useful lives. The Company will adopt SFAS No.
142 in the Company's first quarter of 2002 reporting, as required. For the
ten months ended December 31, 2001, the Company incurred goodwill
amortization expense of $15.3 million. The annualized impact of this
expense will not be incurred upon the application of the non-amortization
provisions of SFAS No. 142. During 2002, the Company will perform the first
of the required impairment tests of goodwill and intangible assets deemed
to have indefinite lives as of January 1, 2002. The Company has not yet
determined what the effect of these tests will be on the financial position
and results of operations of the Company.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," that requires the recognition of the fair value of
the liability for closure and removal costs associated with the resulting
legal obligations upon retirement or removal of any tangible long-lived
assets be recognized in the period in which it is incurred. The initial
recognition of the liability will be capitalized as part of the asset cost
and depreciated over its estimated useful life. The Company is required to
adopt this Statement January 1, 2003, the effect of which has not yet been
determined.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that supersedes SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." The Statement retains the fundamental
provisions of SFAS No. 121 related to the recognition and measurement of
the impairment of long-lived assets to be "held and used," provides more
guidance on estimating cash flows when performing a recoverability test,
requires that a long-lived asset (group) to be disposed of other than by
sale (i.e., abandoned) be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset
(group) as "held for sale." The Company adopted this Statement effective
January 1, 2002. The effect of adoption is not material to the Company's
consolidated financial condition or results of operations.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
D. ACQUISITIONS
The following acquisitions of the Company and Predecessor Company were
recorded using the purchase method of accounting. Their results of
operations have been included in the Company's results since their
respective dates of acquisition.
During 2001, the Company acquired certain intellectual property and
tangible assets as an addition to the Company's TempRite(R) product family
within the Polymer Solutions Segment for $3.6 million.
During 2000, Performance Materials acquired intellectual property related
to certain dyes and a personal care business, for consideration of $11.6
million, of which $10.2 million represented goodwill and other intangible
assets.
During 1999, Performance Materials acquired a textile coatings business,
for consideration of $19.6 million, of which $14.4 million represented
goodwill.
E. RESTRUCTURING AND CONSOLIDATION COSTS
In conjunction with the Company's plan to restructure and streamline its
operations in order to increase efficiency and productivity, reduce costs
and support the Company's global growth strategy, the Company restructured
its colorants business in Cincinnati, Ohio and discontinued its flush
pigments and colorformers product lines in June 2001 and reduced headcount
at other facilities. Through the Cincinnati restructuring and other
restructuring efforts, the Company is eliminating approximately 480
positions. Approximately 68% of the affected employees have left their
positions as of December 31, 2001. The restructuring accrual included in
the purchase price allocation is summarized below:
ACQUISITION DATE BALANCE
BALANCE SHEET DECEMBER 31,
(IN MILLIONS) LIABILITY PROVISION ACTIVITY 2001
----------------------------------------------------------------------------------------------------------
Personnel related costs $ 11.6 $ - $ (5.6) $ 6.0
Facility closure costs 1.3 - (0.6) 0.7
Relocation and restructuring
expense - 1.2 (1.2) -
----------------------------------------------------------------------------
$ 12.9 $ 1.2 $ (7.4) $ 6.7
============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
E. RESTRUCTURING AND CONSOLIDATION COSTS (CONTINUED)
During the year ended December 31, 1999, Performance Materials incurred
$32.4 million of personnel related costs associated with employee
termination payments resulting from realignment of the headquarters and the
Advanced Technology Group of Performance Materials, as well as from
reductions at certain Performance Materials operating locations
(approximately 280 positions). Performance Materials also incurred $4.9
million of asset write-down and facility closure costs, which include a
$2.9 million non-cash charge related to the write-down of the Company's
investment in a research and development joint venture and $2.0 million
related to realignment activities. Consolidation accruals at December 31,
1999, as well as activity during the year, consisted of:
BALANCE BALANCE
JANUARY 1, DECEMBER 31,
(IN MILLIONS) 1999 PROVISION ACTIVITY 1999
-----------------------------------------------------------------------------------------------------------
Personnel related costs $ - $ 32.4 $ (26.8) $ 5.6
Asset write-down and
facility closure costs - 4.9 (4.2) 0.7
-----------------------------------------------------------------------------
$ - $ 37.3 $ (31.0) $ 6.3
=============================================================================
Performance Materials recorded net consolidation costs of $40.5 million in
2000 consisting of $4.2 million in personnel-related costs (offset by a
$0.7 million credit representing a revision of prior estimates) and $37.0
million in asset write-downs and facility closure costs. Personnel-related
costs include $3.7 million of severance related to the textile
restructuring associated with Goodrich's divestiture of Performance
Materials and $0.5 million for other workforce reductions.
Asset write-down and facility closure costs of $37.0 million are for
restructuring activities associated with Goodrich's divestiture of
Performance Materials and relate to the closure or sale of facilities
serving the textile market. The $41.0 million in activity during 2000
includes reserve reductions of $4.9 million related to cash payments and
$36.1 million in asset write-downs associated with restructuring activities
performed in connection with Goodrich's divestiture of Performance
Materials ($4.6 million of inventory, $18.3 million of goodwill and $13.2
million of property, plant and equipment).
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
E. RESTRUCTURING AND CONSOLIDATION COSTS (CONTINUED)
Consolidation accruals relating to pre-Acquisition restructuring plans at
December 31, 2000 and February 28, 2001 for the Predecessor Company and
December 31, 2001 for the Company, as well as activity during the periods
consisted of:
BALANCE BALANCE
JANUARY 1, DECEMBER 31,
(IN MILLIONS) 2000 PROVISION ACTIVITY 2000
-----------------------------------------------------------------------------------------------------------
Personnel related costs $ 5.6 $ 3.5 $ (4.4) $ 4.7
Asset write-down and
facility closure costs 0.7 37.0 (36.6) 1.1
-----------------------------------------------------------------------------
$ 6.3 $ 40.5 $ (41.0) $ 5.8
=============================================================================
BALANCE BALANCE
JANUARY 1, FEBRUARY 28,
(IN MILLIONS) 2001 PROVISION ACTIVITY 2001
-----------------------------------------------------------------------------------------------------------
Personnel related costs $ 4.7 $ - $ (2.0) $ 2.7
Asset write-down and
facility closure costs 1.1 - (1.1) -
-----------------------------------------------------------------------------
$ 5.8 $ - $ (3.1) $ 2.7
=============================================================================
BALANCE BALANCE
MARCH 1, DECEMBER 31,
(IN MILLIONS) 2001 PROVISION ACTIVITY 2001
-----------------------------------------------------------------------------------------------------------
Personnel related costs $ 2.7 $ - $ (2.5) $ 0.2
Asset write-down and
facility closure costs - 0.8 (0.8) -
Relocation and restructuring
expense - 1.1 (1.1) -
-----------------------------------------------------------------------------
$ 2.7 $ 1.9 $ (4.4) $ 0.2
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
F. ACCOUNTS RECEIVABLE
The Company has an agreement to sell certain Spanish Peseta denominated
trade accounts receivable, up to a maximum of approximately $5.5 million.
At December 31, 2001 and 2000, $2.1 million and $3.5 million of receivables
were sold under this agreement and reflected as a reduction of accounts
receivable. The receivables were sold at a discount, which was included in
interest expense.
The following table summaries the activity in allowances for accounts
receivable:
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
(IN MILLIONS) OF PERIOD EXPENSE DEDUCTIONS(1) OF PERIOD
--------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 $ 3.7 $ 4.5 $ 0.9 $ 7.3
Year ended December 31, 2000 7.3 1.8 2.2 6.9
Two Months Ended February 28, 2001 6.9 - 0.4 6.5
Ten Months Ended December 31, 2001 6.5 3.4 1.2 8.7
(1) Write-offs of doubtful accounts, net of recoveries.
G. INVENTORIES
Inventories consisted of the following:
(IN MILLIONS) 2000 2001
----------------------------------------------------------------
Finished products $ 138.7 $ 107.5
In process 2.2 2.5
Raw materials 48.3 30.2
LIFO reserve (21.8) -
----------------------------------
Total $ 167.4 $ 140.2
==================================
Approximately 57% and 60% of inventory was valued by the LIFO method in
2001 and 2000, respectively. At December 31, 2001, LIFO inventory
approximated replacement cost.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
H. PROPERTY, PLANT AND EQUIPMENT--NET
Property, plant and equipment - net consisted of the following:
(IN MILLIONS) 2000 2001
----------------------------------------------------------------------
Land $ 12.7 $ 36.4
Buildings and improvements 227.6 129.8
Machinery and equipment 744.1 536.1
Construction in progress 54.9 25.7
-------------------------------
1,039.3 728.0
Less allowances for depreciation (476.1) (55.5)
-------------------------------
Total $ 563.2 $ 672.5
===============================
Amounts charged to expense for depreciation were $56.5 million, $10.4
million, $62.3 million and $62.3 million for the ten months ended December
31, 2001, the two months ended February 28, 2001, and the years ended
December 31, 2000 and 1999, respectively.
I. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Accumulated amortization of goodwill was $15.3 million and $59.1 million at
December 31, 2001 and 2000, respectively.
Accumulated amortization of identifiable intangible assets was $11.2
million and $16.0 million at December 31, 2001 and 2000, respectively.
Amounts charged to expense for amortization of goodwill and identifiable
intangible assets was $26.5 million, $4.0 million, $24.4 million and $24.6
million for the ten months ended December 31, 2001, the two months ended
February 28, 2001, and the years ended December 31, 2000 and 1999,
respectively.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
J. ACCRUED EXPENSES
Accrued expenses consisted of the following:
(IN MILLIONS) 2000 2001
-----------------------------------------------------------------------------------------------------------
Wages, vacations, pensions and other employment costs $ 31.5 $ 24.4
Taxes, other than federal and foreign taxes on income 6.4 7.0
Accrued interest 0.2 10.9
Accrued environmental liabilities 9.3 3.0
Consolidation costs 5.8 6.9
Other 24.7 22.0
----------------------------------
Total $ 77.9 $ 74.2
==================================
K. FINANCING ARRANGEMENTS
Short-term Bank Debt
At December 31, 2001 and 2000, the Company had $1.3 million and $29.1
million of short-term bank debt outstanding under various foreign
facilities. Weighted-average interest rates on short-term borrowings were
10.0%, 5.4%, 5.1%, and 3.1% for the ten months ended December 31, 2001, the
two months ended February 28, 2001, and the years ended December 31, 2000
and 1999, respectively.
Long-term Debt
In connection with the Acquisition, the Company entered into new credit
facilities and issued subordinated notes.
The credit facilities include (1) a six-year Term Loan A facility in the
amount of $125.0 million, (2) a seven and one-half year Term Loan B
facility in the amount of $510.0 million and (3) a six-year revolving
credit facility in the amount of $125.0 million. A portion of the revolving
credit facility is made available in various foreign currencies. Portions
of Term Loan A and Term Loan B were made available in Euros. While
borrowings under Term Loans A and B were used to finance the Acquisition,
borrowings under the revolving credit facility may be used for working
capital and for general corporate purposes.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
K. FINANCING ARRANGEMENTS (CONTINUED)
Borrowings under the new credit facilities bear interest in an amount
equal, at the Company's option, to either (1) the reserve adjusted
Eurocurrency rate plus an applicable borrowing margin or (2) the base rate
plus an applicable borrowing margin. The reserve adjusted Eurocurrency rate
is the average of the offered quotation in the interbank Eurodollar market
for U.S. dollar deposits, approximately equal to the outstanding principal
amount of the Company's Eurocurrency rate loans. The base rate is the
greater of (1) the prime rate or (2) the federal funds rate plus 50 basis
points. The applicable borrowing margins for Eurocurrency and base rate
loans are based upon the most recent leverage ratio submitted by the
Company to the Administrative Agent. The applicable borrowing margins for
Eurocurrency rate loans at December 31, 2001 are 3.25% for the revolving
loan facility and Term Loan A and 3.75% for Term Loan B. The applicable
borrowing margins for the base rate loans at December 31, 2001 are 2.25%
for the revolving loan facility and Term Loan A and 2.75% for Term Loan B.
Interest periods for Eurocurrency rate loans are one, two, three or six
months, subject to availability. Interest on Eurocurrency rate loans is
payable at the end of the applicable interest period, except for six month
interest periods in which case interest is payable every three months.
Interest on base rate loans is payable quarterly in arrears. Upon an event
of default, all loans will bear an additional 2.0% of interest for as long
as the event of default is continuing. At December 31, 2001, the average
interest rates for Term Loans A and B were 5.81% and 5.89%, respectively.
The new credit facilities are secured by a first priority security interest
in substantially all of the Company's assets and the assets of the domestic
subsidiaries. The credit facilities do require prepayments of portions of
principal for certain asset dispositions, other equity or debt issuances
and excess cash positions. The new credit facilities require the Company to
pay commitment fees of 0.5% on the unused portion of the revolving line of
credit.
At December 31, 2001, the Company has no amounts outstanding on the
revolving credit facility and $120.9 million is available for borrowing,
net of $4.1 million on outstanding letters of credit.
The new credit facilities contain covenants related to net worth
requirements, capital expenditures, interest coverage, leverage and EBITDA
levels and provide for events of default. The Company was in compliance
with all covenants at December 31, 2001.
K. FINANCING ARRANGEMENTS (CONTINUED)
The $275.0 million senior subordinated notes mature on February 28, 2011
and interest accrues at 11% per year. Interest payments on the notes occur
on March 15 and September 15 of each year. The notes contain a covenant
related to interest coverage and provide for events of default. The Company
was in compliance with its covenant at December 31, 2001.
Maturities of these long-term financing arrangements are as follows:
TERM TERM SUBORDINATED
(IN MILLIONS) LOAN A LOAN B NOTES TOTAL
-----------------------------------------------------------------------------------------------------------
2002 $ 17.8 $ 5.4 $ - $ 23.2
2003 17.8 5.4 - 23.2
2004 22.3 5.4 - 27.7
2005 25.2 5.4 - 30.6
2006 27.7 5.4 - 33.1
Thereafter 7.1 479.5 275.0 761.6
-----------------------------------------------------------------------------
$ 117.9 $ 506.5 $ 275.0 $ 899.4
=============================================================================
L. LEASE COMMITMENTS
Future minimum lease payments, by year and in the aggregate, under
noncancelable operating leases with initial or remaining noncancelable
lease terms in excess of one year, consisted of the following at December
31, 2001:
(IN MILLIONS)
- ----------------------------------------------------------------
2002 $ 4.3
2003 3.4
2004 1.5
2005 0.6
2006 0.3
Thereafter 0.2
--------------
Total minimum payments $ 10.3
==============
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
L. LEASE COMMITMENTS (CONTINUED)
Net rent expense was $8.2 million, $2.0 million, $12.1 million, and $11.6
million for the ten months ended December 31, 2001, the two months ended
February 28, 2001, and the years ended December 31, 2000 and 1999,
respectively.
M. PENSIONS AND POSTRETIREMENT BENEFITS
As an operating segment of Goodrich, Performance Materials did not have its
own pension and postretirement benefit plans. Employees of Performance
Materials were eligible to participate in Goodrich's salary and wage
pension plans, non-qualified plans and postretirement benefit plans.
As part of the terms of the Acquisition, Goodrich retained the pension
benefit obligations for all retirees and the vested portion of the pension
obligations for active employees for service prior to the Acquisition, as
well as the plan assets of the domestic pension plans. Furthermore,
Goodrich retained the post-retirement benefit obligations of retirees and
those eligible to retire through December 31, 2002. The Company has
recorded the pension and postretirement benefit obligations for active
employees covered by collective bargaining agreements that remained with
the Company after the Acquisition.
Salaried employees' benefit payments are generally determined using a
formula that is based on an employees' compensation and length of service.
Hourly employees' benefit payments are generally determined using stated
amounts for each year of service.
Employees also participate in unfunded defined benefit postretirement plans
that provide certain health-care and life insurance benefits to eligible
employees. The health-care plans are contributory, with retiree
contributions adjusted periodically, and contain other cost-sharing
features, such as deductibles and coinsurance. The life insurance plans are
generally noncontributory.
Goodrich's qualified pension plans were fully funded on an accumulated
benefit obligation basis at December 31, 2000. Assets for these plans
consist principally of corporate and government obligations and commingled
funds invested in equities, debt and real estate.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
M. PENSIONS AND POSTRETIREMENT BENEFITS (CONTINUED)
Amortization of unrecognized transition assets and liabilities, prior
service cost and gains and losses (if applicable) of the Predecessor
Company were recorded using the straight-line method over the average
remaining service period of active employees, or approximately 12 years.
The following table summarizes information regarding the Company's defined
benefit pension plans and defined benefit postretirement plans as of
December 31, 2001 and Performance Material's allocation of Goodrich's
defined benefit pension plans and defined benefit postretirement plans as
of December 31, 2000, and the amounts recorded in the consolidated balance
sheet at these dates. In describing the period changes in the table, the
period of January 1, 2000 through December 31, 2000 was used to describe
the effect of activity for 2000 and the period of March 1, 2001 through
December 31, 2001 was used to describe the effect of activity for 2001. As
of December 31, 2000, certain amounts could be specifically identified with
Performance Materials, while other amounts could not be specifically
identified with Performance Materials and are allocated, generally based on
fair value of assets or the projected benefit obligation.
PENSION BENEFITS OTHER BENEFITS
--------------------------------------------
(IN MILLIONS) 2000 2001 2000 2001
-----------------------------------------------------------------------------------------------------------
Change in projected benefit obligations:
Projected benefit obligation at beginning of period $ 204.5 $ 35.5 $ 71.9 $ 4.8
Service cost 5.2 3.0 0.5 0.2
Interest cost 15.8 2.3 5.6 0.3
Amendments (0.5) 0.2 - -
Actuarial losses 1.8 1.7 3.4 0.1
Acquisitions and other 10.9 (1.5) - -
Benefits paid (12.7) (0.2) (7.4) -
--------------------------------------------
Projected benefit obligation at end of period $ 225.0 $ 41.0 $ 74.0 $ 5.4
============================================
Change in plan assets:
Fair value of plan assets at beginning of period $ 222.1 $ 5.3 $ - $ -
Actual return on plan assets 8.5 0.4 - -
Acquisitions and other 6.7 - - -
Company contributions 1.0 0.8 7.4 -
Benefits paid (12.7) (0.2) (7.4) -
--------------------------------------------
Fair value of plan assets at end of period $ 225.6 $ 6.3 $ - $ -
============================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
M. PENSIONS AND POSTRETIREMENT BENEFITS (CONTINUED)
PENSION BENEFITS OTHER BENEFITS
---------------------------------------------
(IN MILLIONS) 2000 2001 2000 2001
------------------------------------------------------------------------------------------------------------
Funded status (underfunded):
Funded status $ 0.6 $ (34.7) $ (74.0) $ (5.4)
Unrecognized net actuarial loss (gain) 1.3 1.7 (1.0) 0.1
Unrecognized prior service cost 14.0 0.2 (0.9) -
Unrecognized net transition obligation 3.6 - - -
---------------------------------------------
Prepaid (accrued) benefit cost $ 19.5 $ (32.8) $ (75.9) $ (5.3)
=============================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 25.7 $ - $ - $ -
Accrued benefit liability (6.2) (32.8) (75.9) (5.3)
---------------------------------------------
Net amount recognized $ 19.5 $ (32.8) $ (75.9) $ (5.3)
=============================================
Weighted-Average Assumptions as of December 31:
Discount rate 7.75% 7.50% 7.75% 7.50%
Expected return on plan assets 9.25% 8.50% - -
Rate of compensation increase 4.00% 4.00% - -
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2002. The rate was
assumed to decrease gradually to 6.0% for 2006 and remain at that level
thereafter. The components of net periodic benefit cost are reflected below
for the ten months ended December 31, 2001 and the years ended December 31,
2000 and 1999.
PENSION BENEFITS OTHER BENEFITS
------------------------------- -------------------------------
(IN MILLIONS) 1999 2000 2001 1999 2000 2001
------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 5.2 $ 5.2 $ 3.0 $ 0.8 $ 0.5 $ 0.2
Interest cost 15.7 15.8 2.3 4.7 5.6 0.3
Expected return on plan assets (20.4) (21.4) (0.3) - - -
Amortization of prior service cost 1.2 1.1 - (0.1) (0.1) -
Amortization of transition obligation 0.6 1.0 - - - -
Recognized net actuarial (gain) loss 0.1 0.2 - 0.9 0.7 -
---------------------------------------------------------------
Total net periodic benefit cost $ 2.4 $ 1.9 $ 5.0 $ 6.3 $ 6.7 $ 0.5
===============================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
M. PENSIONS AND POSTRETIREMENT BENEFITS (CONTINUED)
The table below quantifies the impact of a one percentage point change in
the assumed health care cost trend rate.
1 PERCENTAGE 1 PERCENTAGE
POINT POINT
(IN MILLIONS) INCREASE DECREASE
------------------------------------------------------------------------------
Effect on total of service and interest
cost components in 2001 $0.1 $(0.1)
Effect on postretirement benefit
obligation as of December 31, 2001 $0.6 $(0.4)
The Company's employees also participate in voluntary retirement savings
plans for salaried and wage employees. Under provisions of these plans,
eligible employees can receive varying matching contributions on up to the
first 6% of their eligible earnings. Expense for defined contribution plans
totaled $4.8 million, $1.1 million, $6.5 million and $6.7 million for the
ten month period ended December 31, 2001, the two month period ended
February 28, 2001 and the years ended December 31, 2000 and 1999,
respectively.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
N. INCOME TAXES
Income (loss) before income taxes for the ten month period ended December
31, 2001 and the years ended December 31, 2000 and 1999 as shown in the
consolidated statement of operations consists of the following:
(IN MILLIONS) 1999 2000 2001
---------------------------------------------------------------------------
Domestic $ 93.7 $ 60.7 $ (25.2)
Foreign 10.7 25.5 9.2
------------------------------------------------
Total $ 104.4 $ 86.2 $ (16.0)
================================================
A summary of income tax (expense) benefit for the ten month period ended
December 31, 2001 and the years ended December 31, 2000 and 1999 in the
consolidated statement of operations is as follows:
(IN MILLIONS) 1999 2000 2001
---------------------------------------------------------------------------
Current:
Federal $ (22.8) $ (25.6) $ -
Foreign (4.6) (8.5) (4.2)
State (4.7) (3.0) -
------------------------------------------------
(32.1) (37.1) (4.2)
Deferred:
Federal (10.2) 1.2 -
Foreign - - (0.4)
------------------------------------------------
(10.2) 1.2 (0.4)
------------------------------------------------
Total $ (42.3) $ (35.9) $ (4.6)
================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
N. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At
December 31, 2001, the Company had domestic net operating loss
carryforwards and credits of $32.4 million which expire in the year 2021.
Additionally, the Company had foreign net operating loss carryforwards and
credits of $23.7 million at December 31, 2001 of which $7.3 million expires
in years 2005 through 2010, and $16.4 million which have an indefinite
carryforward period. The significant components of deferred income tax
assets and liabilities at December 31, 2001 and 2000, are as follows:
(IN MILLIONS) 2000 2001
----------------------------------------------------------------------------
Deferred income tax assets:
Pension accruals $ 0.4 $ 11.2
Accrual for postretirement benefits other
than pensions 24.0 1.9
Other nondeductible accruals 12.5 16.7
Reserve for environmental liabilities 16.6 10.0
Inventory 4.8 -
Net operating loss carryovers and credits - 19.3
Other - 5.8
--------------------------
Total deferred income tax assets 58.3 64.9
Less valuation allowance - (35.6)
--------------------------
Net deferred income tax assets 58.3 29.3
Deferred income tax liabilities:
Property, plant and equipment (86.0) (41.8)
Intangible amortization (21.5) (0.8)
Inventory - (9.5)
Other - (1.8)
--------------------------
Total deferred income tax liabilities (107.5) (53.9)
--------------------------
Net deferred income taxes $ (49.2) $ (24.6)
==========================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
N. INCOME TAXES (CONTINUED)
Management has determined, based on the Company's new capital structure and
lack of prior earnings history based on this new structure, that it is
uncertain that future taxable income of the Company will be sufficient
enough to recognize certain of these net deferred tax assets. As a result,
a valuation allowance of $35.6 million at December 31, 2001 has been
established. This valuation allowance relates to net domestic deferred tax
assets established in purchase accounting, acquired foreign net deferred
tax assets associated with net operating losses and credits and deferred
tax assets resulting from current year domestic and foreign net operating
losses and credits. Any reversal of the valuation allowance that was
established in purchase accounting would reduce goodwill. In the current
year, a tax benefit of $0.7 million was allocated to goodwill.
Management believes that sufficient book and taxable income will be
generated to realize the benefit of the remaining net deferred tax assets.
This assessment of profitability takes into account the Company's present
and anticipated split of domestic and international earnings as well as the
anticipated taxable income as a result of the reversal of future taxable
temporary differences.
The effective income tax rate for the ten month period ended December 31,
2001 and the years ended December 31, 2000 and 1999 varied from the
statutory federal income tax rate as follows:
PERCENT OF PRETAX INCOME
-----------------------------------
1999 2000 2001
-----------------------------------
Statutory federal income tax rate 35.0% 35.0% (35.0)%
State and local taxes, net of federal
benefit 3.0 2.3 (5.6)
Amortization of nondeductible goodwill 4.6 4.8 9.4
Tax exempt income from foreign sales (1.0) (2.1) (3.4)
Foreign partnership losses (2.2) (2.0) (13.1)
Differences in rates on consolidated
foreign subsidiaries 0.8 (0.5) (5.2)
Other items 0.3 4.1 (1.1)
Valuation allowance - - 82.8
-----------------------------------
Effective income tax rate 40.5% 41.6% 28.8%
===================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
N. INCOME TAXES (CONTINUED)
The Company has not provided for U.S. income and foreign withholding taxes
on $15.0 million of foreign subsidiaries' undistributed earnings as of
December 31, 2001, because such earnings are intended to be reinvested
indefinitely. Accordingly, no provision has been made for U.S. or foreign
withholding taxes which may become payable if undistributed earnings of
foreign subsidiaries were paid as dividends to the Company. The additional
taxes that would result had such earnings actually been repatriated are not
practically determinable.
O. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December
31, 2001 is provided in the following table.
CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE
-----------------------------------------------------------------------
Term Loan A $ 117.9 $ 117.2
Term Loan B 506.5 506.5
Subordinated notes 275.0 292.9
Off-balance sheet derivative financial instruments at December 31, 2000
were as follows:
CONTRACT/
NOTIONAL FAIR
(IN MILLIONS) AMOUNT VALUE
-----------------------------------------------------------------------
Interest rate swaps $ 20.5 $ (0.2)
Foreign currency forward contracts 5.7 -
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
P. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) for the ten months ended December 31,
2001, the two months ended February 28, 2001 and the years ended December
31, 2000 and 1999 consisted of the following:
BFGOODRICH PERFORMANCE MATERIALS NOVEON, INC.
------------------------------------------------------------------
TWO MONTHS TEN MONTHS
YEARS ENDED ENDED ENDED
DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 1999 2000 2001 2001
-----------------------------------------------------------------------------------------------------------
Net income (loss) $ 62.1 $ 50.3 $ 5.6 $ (20.6)
Net change in fair value of cash flow
hedges - - - (5.7)
Cumulative translation adjustment
(20.8) (4.1) 2.6 (4.5)
------------------------------------------------------------------
Total comprehensive income (loss)
$ 41.3 $ 46.2 $ 8.2 $ (30.8)
==================================================================
Accumulated other comprehensive loss of $20.4 million in 2000 and $16.3
million in 1999 represents unrealized translation adjustments and are
included in the BFGoodrich Investment.
Q. BUSINESS SEGMENT INFORMATION
The Company's operations are classified into three reportable business
segments: Consumer Specialties, Polymer Solutions and Performance Coatings.
The Consumer Specialties Segment is a major global producer of synthetic
thickeners, film formers, pharmaceutical actives and intermediates,
benzoate preservatives, synthetic food dyes and natural colorants. The
Company markets products from the Consumer Specialties Segment to the
following primary end-use industries: personal care, pharmaceuticals, and
food and beverage. The Consumer Specialties Segment products are sold to
customers worldwide. These customers include major manufacturers of
cosmetics, personal care products, household products, soft drinks and food
products.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
Q. BUSINESS SEGMENT INFORMATION (CONTINUED)
The Polymer Solutions Segment is the largest global supplier of chlorinated
Polyvinyl chloride ("CPVC"), thermoplastic polyurethane ("TPU") and
reactive liquid polymers ("RLP") and is a leading North American producer
of rubber and lubricant antioxidants and rubber accelerators. The Company
markets Polymer Solutions Segment products through the primary product
categories of specialty plastics and polymer additives. The Polymer
Solutions Segment products are sold to a diverse customer base comprised of
major manufacturers in the construction, automotive, telecommunications,
electronics, recreation and aerospace industries.
The Performance Coatings Segment is a leading global producer of
high-performance polymers for specialty paper, graphic arts, architectural
and industrial coatings and textile applications. The Company markets the
Performance Coatings Segment through the primary product categories of
performance polymers and coatings and textile performance chemicals. The
Performance Coatings Segment services major companies in the specialty
paper, graphic arts, paints and coatings, and textile industries.
Segment operating income is total segment revenue reduced by operating
expenses identifiable with that business segment. Consolidation costs are
presented separately and corporate costs include general corporate
administrative expenses that are not specifically identifiable with just
one of the reportable business segments.
During 2001, the composition of certain business segments was changed to
reflect management's current method of analyzing the business. Further,
general corporate administrative expenses are no longer associated with
individual business segments as they are not considered in the evaluation
of, or specifically identifiable with, the business segments. All prior
periods have been restated to reflect these changes.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
Q. BUSINESS SEGMENT INFORMATION (CONTINUED)
The Company conducts business on a global basis with manufacturing and
sales undertaken in various locations throughout the world. The Company's
products are principally sold to customers in North America and Europe.
The following table summarizes business segment information:
BFGOODRICH PERFORMANCE MATERIALS NOVEON, INC.
---------------------------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 1999 2000 2001 2001
---------------------------------------------------------------------------------------------------------------
Sales:
Consumer Specialties $ 287.3 $ 283.3 $ 45.2 $ 238.8
Polymer Solutions 438.5 426.7 73.1 324.4
Performance Coatings 491.9 457.7 68.7 313.2
---------------------------------------------------------------
TOTAL SALES $ 1,217.7 $ 1,167.7 $ 187.0 $ 876.4
===============================================================
Operating income:
Consumer Specialties $ 39.6 $ 40.2 $ 2.1 $ 29.0
Polymer Solutions 105.4 98.3 16.9 59.1
Performance Coatings 70.5 52.5 3.2 29.5
Corporate costs (72.8) (68.3) (11.7) (56.3)
Consolidation costs (37.3) (40.5) - (3.1)
---------------------------------------------------------------
TOTAL OPERATING INCOME $ 105.4 $ 82.2 $ 10.5 $ 58.2
===============================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
Q. BUSINESS SEGMENT INFORMATION (CONTINUED)
BFGOODRICH PERFORMANCE MATERIALS NOVEON, INC.
---------------------------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 1999 2000 2001 2001
--------------------------------------------------------------------------------------------------------------
Capital expenditures:
Consumer Specialties $ 26.3 $ 24.5 $ 1.9 $ 10.9
Polymer Solutions 18.0 12.9 1.7 7.0
Performance Coatings 30.5 19.7 2.6 7.0
Corporate 4.8 6.9 1.4 3.6
---------------------------------------------------------------
Total capital expenditures $ 79.6 $ 64.0 $ 7.6 $ 28.5
===============================================================
Depreciation and amortization expense:
Consumer Specialties $ 23.5 $ 25.0 $ 4.4 $ 22.9
Polymer Solutions 25.5 22.7 3.8 25.2
Performance Coatings 26.3 29.0 4.5 26.1
Corporate 11.6 10.0 1.7 8.8
---------------------------------------------------------------
Total depreciation and amortization $ 86.9 $ 86.7 $ 14.4 $ 83.0
===============================================================
Net sales:
United States $ 801.8 $ 804.6 $ 122.6 $ 566.0
Europe 223.7 180.0 35.7 158.4
Other foreign 192.2 183.1 28.7 152.0
---------------------------------------------------------------
Total $ 1,217.7 $ 1,167.7 $ 187.0 $ 876.4
===============================================================
Assets:
Consumer Specialties $ 453.9 $ 500.7 $ 542.4
Polymer Solutions 397.6 379.4 528.7
Performance Coatings 579.1 479.1 590.7
--------------------------------- ----------------
Total assets $ 1,430.6 $ 1,359.2 $ 1,661.8
================================= ================
Property:
United States $ 484.3 $ 450.0 $ 511.6
Europe 109.9 104.3 149.3
Other foreign 6.6 8.9 11.6
--------------------------------- ----------------
Total $ 600.8 $ 563.2 $ 672.5
================================= ================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
R. SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information related
to acquisitions accounted for under the purchase method:
(IN MILLIONS) 1999 2000 2001
-------------------------------------------------------------------------------------------------------------
Estimated fair value of tangible assets acquired $ 5.2 $ 1.4 $ 1,091.8
Liabilities assumed - - (294.4)
Goodwill and identifiable intangible assets acquired 14.4 10.2 565.7
Less: Seller Note issued by Noveon Holdings, Inc. - - (172.0)
-----------------------------------------------------
Net cash paid, including fees and expenses $ 19.6 $ 11.6 $ 1,191.1
=====================================================
Interest paid (net of amount capitalized) $ 3.3 $ 3.6 $ 57.0
=====================================================
Income taxes paid $ - $ - $ 4.8
=====================================================
S. STOCK OPTIONS
Stock Option Plan of Holdings
The Company does not have a stock option plan; however, certain eligible
employees of the Company participate in Holdings' Stock Option Plan (the
"Holdings' Plan"). Options granted by Holdings vest on each of the first
five anniversaries of the grant date at 20% per year subject to continued
employment. The term of each option cannot exceed 10 years from the date of
grant. All options granted under the Holdings' Plan have been granted at
not less than 100% of market value, as determined by the Board of Directors
of Holdings, on the date of grant.
Pro forma information regarding net income is required by SFAS No. 123,
"Accounting for Stock-Based Compensation," and has been determined as if
Holdings had accounted for its employee stock options under the fair value
method described within that statement. The fair value for these options
was estimated using the minimum value option pricing method with the
following weighted-average assumptions: (1) a risk-free interest rate of
5.8%; (2) a dividend yield of 0.0%; and (3) a weighted average expected
life of the options of 7.0 years. The option pricing method requires the
input of highly subjective assumptions that can materially affect the fair
value estimate. The weighted-average fair value of stock options granted by
Holdings during 2001 was $14.33.
For purposes of the pro forma disclosures required by SFAS No. 123, the
estimated fair value of the options is amortized to expense over the
options' vesting period. The Company's pro forma SFAS 123 net income would
have been $0.4 million lower for the ten months ended December 31, 2001.
The effects of applying SFAS No. 123 may not be representative of the
effects on reportable net income (loss) in future years.
S. STOCK OPTIONS (CONTINUED)
Holdings' stock option activity is as follows for the ten month period
ended December 31, 2001:
WEIGHTED
AVERAGE
(OPTIONS IN THOUSANDS) OPTIONS EXERCISE PRICE
------------------------------------------------------------------------------
Outstanding at March 1, 2001: - $ -
Granted 323.0 128.57
Exercised - -
Forfeited (10.0) 128.57
--------------------------------------
Outstanding at December 31, 2001 313.0 $ 128.57
======================================
No options were exercisable at December 31, 2001.
Goodrich's Stock Option Plan
As an operating segment of Goodrich, Performance Materials had no employee
stock option plan; however, certain eligible employees of Performance
Materials participated in BFGoodrich's Stock Option Plan (the "Plan").
Generally, options granted by Goodrich were exercisable at the rate of 35%
after one year, 70% after two years and 100% after three years. Certain
options are fully exercisable immediately after grant. The term of each
option cannot exceed 10 years from the date of grant. All options granted
under the Plan have been granted at not less than 100% of market value (as
defined) on the date of grant.
Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if Goodrich had accounted for its employee stock
options under the fair value method described within that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
1999 2000
-----------------
Risk-free interest rate (%) 6.7 5.0
Dividend yield (%) 3.5 3.4
Volatility factor (%) 36.0 37.5
Weighted average expected life of the options (years) 7.0 7.0
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
S. STOCK OPTIONS (CONTINUED)
The option valuation model requires the input of highly subjective
assumptions, primarily stock price volatility, changes in which can
materially affect the fair value estimate. The weighted-average fair values
of stock options granted by Goodrich during 2000 and 1999 were $8.65 and
$12.13, respectively.
Goodrich disclosed pro forma expense of $5.3 million and $12.3 million in
2000 and 1999, respectively. These amounts related primarily to stock
options. At December 31, 2000 and 1999, employees of Performance Materials
had 1,245,442 and 931,093 stock options outstanding, respectively; which
represented approximately 14.6% and 11.9%, respectively, of total
outstanding options of Goodrich. Using the ratio of options held by
Performance Materials' employees to total options outstanding for Goodrich,
the Company's pro forma SFAS 123 net income would have been $0.8 million
and $1.5 million lower than that reported in 2000 and 1999, respectively.
The Stock Option Plan of BFGoodrich also provides that shares of common
stock may be awarded as phantom performance shares to certain key
executives having a critical impact on long-term performance.
Dividends are earned on phantom shares and are reinvested in additional
phantom shares. Under this plan, compensation expense is recorded based on
the extent performance objectives are expected to be met. During 2000 and
1999, Goodrich issued 172,400 and 83,253 phantom performance shares to
employees of Performance Materials, respectively. During 2000 and 1999,
10,800 and 3,024 performance shares, respectively, were forfeited by
employees of Performance Materials. In 2000 and 1999, $(0.1) million and
$0.9 million, respectively, were charged to (income) expense for
performance shares. If the provisions of SFAS 123 had been used to account
for awards of performance shares, the weighted-average grant-date fair
value of performance shares granted in 2000 and 1999 would have been $23.12
and $35.66 per share, respectively.
In 2000, a final pro rata payout (approximately 33,000 shares for employees
of Performance Materials) of the 1998 and 1999 performance share awards was
made in connection with the Company's adoption of new performance measures.
In 1999, a partial payout (approximately 23,000 shares for employees of
Performance Materials) of the 1998 performance share awards was made under
change in control provisions as a result of Goodrich's merger with Coltec
Industries Inc.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
T. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, AEA and affiliates of Credit Suisse
First Boston Corporation ("CSFB") and DB, the initial purchases of the
notes, provided acquisition advisory services. At the closing, AEA and an
affiliate of CSFB and an affiliate of DB received $8.8 million, $5.5
million and $1.7 million, respectively, for these services. In addition,
direct expenses of $1.3 million, $0.5 million and $0.1 million,
respectively, were reimbursed to them. All of these amounts have been
considered in the purchase price allocation.
Affiliates of CSFB and DB were each arrangers and agents of the new credit
facilities and received customary fees in connection with these credit
facilities. CSFB is an affiliate of DLJMB. DLJMB and DB are stockholders of
Holdings.
CSFB and DB are each initial purchasers of the notes and received fees in
connection with their initial purchase.
Total debt financing fees in connection with the Transactions paid to
affiliates of CSFB and DB were $10.4 million and $19.6 million,
respectively.
The Company entered into management agreements with each of AEA and
affiliates of DLJMB and DB. Under the management agreements, the Company
will pay AEA, DLJMB and DB an annual fee of $1.9 million, $1.1 million and
$0.5 million, respectively, plus reasonable out-of-pocket expenses as
compensation for the appointed directors, various advisory and consulting
services and for monitoring and management costs, as applicable. In
addition, the Company agreed to indemnify AEA, DLJMB and DB and their
respective affiliates for liabilities arising from their actions under the
management agreements. The management agreements will remain in effect for
as long as the stockholders agreement is in effect.
The Company entered into an advisory services agreement, dated as of
February 5, 2001, with CSFB. Under the advisory services agreement, the
Company will pay CSFB an annual fee of $0.5 million plus reasonable
out-of-pocket expenses as compensation for strategic and financial planning
advisory services. In addition, the Company agreed to indemnify CSFB and
its respective affiliates for liabilities arising from their actions under
the advisory services agreement.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
T. RELATED PARTY TRANSACTIONS (CONTINUED)
For the ten months ended December 31, 2001, the Company recognized
management fee expense of $3.3 million.
Noveon Holdings, Inc. issued stock to the Company's Chief Executive Officer
and President for a $1.0 million full recourse note. The note carries
interest at 7% and is due on November 30, 2011. The note was transferred to
the Company and is included in other assets on the balance sheet at
December 31, 2001. The Company also reflects a $1.0 million liability to
Holdings included in current liabilities at December 31, 2001. The amount
due to Holdings was paid subsequent to December 31, 2001.
U. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have numerous purchase commitments for
materials, supplies and energy incident to the ordinary course of business.
CONTINGENCIES
General--There are pending or threatened against the Company or its
subsidiaries various claims, lawsuits and administrative proceedings, all
arising from the ordinary course of business with respect to commercial,
product liability, and environmental matters, which seek remedies or
damages. The Company believes that any liability that may finally be
determined with respect to commercial and product liability claims, should
not have a material effect on the Company's consolidated financial
position, results of operations, or cash flows. From time to time, the
Company is also involved in legal proceedings as a plaintiff involving
contract, patent protection, environmental and other matters. Gain
contingencies, if any, are recognized when they are realized.
Environmental--The Company and its subsidiaries are generators of both
hazardous wastes and non-hazardous wastes, the treatment, storage,
transportation and disposal of which are subject to various laws and
governmental regulations. Although past operations were in substantial
compliance with the then-applicable regulations, the Company has been
designated as a potentially responsible party (PRP) by the U.S.
Environmental Protection Agency (EPA), or similar state agencies, in
connection with several sites.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
U. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company initiates corrective and/or preventive environmental projects
of its own to ensure safe and lawful activities at its current operations.
It also conducts a compliance and management systems audit program. The
Company believes that compliance with current laws and regulations will not
have a material adverse effect on its capital expenditures, earnings,
competitive position, or cash flows.
The Company's environmental engineers and consultants review and monitor
environmental issues at past and existing operating sites, as well as
off-site disposal sites at which the Company has been identified as a PRP.
This process includes investigation and remedial selection and
implementation, as well as negotiations with other PRPs and governmental
agencies.
At December 31, 2001, the Company had recorded total liabilities of $23.7
million, to cover future environmental expenditures. Goodrich has
indemnified the Company for environmental liabilities totaling $12.5
million. Accordingly, the current portion of the environmental obligation
of $3.0 million is recorded in accrued expenses and $3.2 million is
recorded in accounts receivable. Approximately $20.7 million is included in
non-current liabilities and $9.3 million is included in other non-current
assets, reflecting the recovery due from Goodrich. At December 31, 2000,
the Predecessor Company had recorded in accrued expenses and in other
non-current liabilities a total of $47.6 million to cover future
environmental expenditures. These amounts are recorded on an undiscounted
basis.
The Company believes that its reserves are adequate based on currently
available information. Management believes that it is reasonably possible
that additional costs may be incurred beyond the amounts accrued as a
result of new information. However, the amounts, if any, cannot be
estimated and management believes that they would not have a material
adverse effect on the Company's results of operations, financial position
or cash flows in a given period.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
The Company's domestic subsidiaries, all of which are directly or
indirectly wholly-owned, are the only guarantors of the 11% Senior
Subordinated Notes. The guarantees are full, unconditional and joint and
several. Separate financial statements of these guarantor subsidiaries are
not presented as management has determined that they would not be material
to investors.
The Company's foreign subsidiaries are not guarantors of the 11% Senior
Subordinated Notes. Summarized consolidating financial information for the
Company, the guarantor subsidiaries, and the non-guarantor, foreign
subsidiaries is as follows (in thousands):
TEN MONTHS ENDED DECEMBER 31, 2001
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 536.4 $ 150.1 $ 265.8 $ (75.9) $ 876.4
Cost of sales 362.8 136.9 204.3 (75.9) 628.1
-----------------------------------------------------------------------------
Gross profit 173.6 13.2 61.5 - 248.3
Selling and administrative 109.7 9.2 41.6 - 160.5
expenses
Amortization expense 10.6 7.6 8.3 - 26.5
Consolidation costs 3.1 - - - 3.1
-----------------------------------------------------------------------------
Operating income 50.2 (3.6) 11.6 - 58.2
Interest income (expense)--net (73.4) 1.6 (1.7) - (73.5)
Other income (expense)--net (0.1) 0.1 (0.7) - (0.7)
-----------------------------------------------------------------------------
Income (loss) before income (23.3) (1.9) 9.2 - (16.0)
taxes
Income tax (expense) benefit - - (4.6) - (4.6)
-----------------------------------------------------------------------------
Net income (loss) $ (23.3) $ (1.9) $ 4.6 $ - $ (20.6)
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
DECEMBER 31, 2001
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents $ 94.6 $ 0.3 $ 25.1 $ - $ 120.0
Accounts and notes receivable 62.8 20.1 50.9 - 133.8
Inventories 74.5 30.7 35.0 - 140.2
Prepaid expenses and other -
current assets 1.5 0.8 2.2 4.5
-----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 233.4 51.9 113.2 - 398.5
Property, plant and equipment, 416.0 95.6 160.9 - 672.5
net
Goodwill--net 241.8 - 105.1 - 346.9
Identifiable intangible 1.5 128.4 62.1 - 192.0
assets--net
Intercompany receivables 443.7 - 63.5 (507.2) -
Investment in subsidiaries 252.6 328.9 - (581.5) -
Other assets 39.5 10.0 2.4 - 51.9
-----------------------------------------------------------------------------
TOTAL ASSETS $ 1,628.5 $ 614.8 $ 507.2 $(1,088.7) $ 1,661.8
=============================================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ - $ 1.3 $ - $ 1.3
Accounts payable 59.3 10.4 27.4 - 97.1
Accrued expenses 60.2 7.9 6.1 - 74.2
Income taxes payable - - 1.0 - 1.0
Current maturities of debt 23.2 - - - 23.2
-----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 142.7 18.3 35.8 - 196.8
Long-term debt 876.2 - - - 876.2
Postretirement benefits other
than pensions 4.6 0.7 - - 5.3
Accrued pensions 22.1 7.4 3.3 - 32.8
Deferred income taxes - - 24.6 - 24.6
Accrued environmental 1.3 19.4 - - 20.7
Intercompany payables 70.5 339.7 97.0 (507.2) -
Other non-current liabilities 7.4 - 1.8 - 9.2
-----------------------------------------------------------------------------
TOTAL LIABILITIES 1,124.8 385.5 162.5 (507.2) 1,165.6
STOCKHOLDER'S EQUITY
Paid in capital 527.0 - - - 527.0
Capital stock of subsidiaries - 231.2 350.3 (581.5) -
Retained earnings (deficit) (23.3) (1.9) 4.6 - (20.6)
Accumulated other comprehensive
loss - - (10.2) - (10.2)
-----------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 503.7 229.3 344.7 (581.5) 496.2
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 1,628.5 $ 614.8 $ 507.2 $(1,088.7) $ 1,661.8
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
TEN MONTHS ENDED DECEMBER 31, 2001
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided by operating
activities $ 112.3 $ 6.6 $ 35.0 $ - $ 153.9
Investing activities:
Purchases of property, plant
and equipment (14.8) (6.3) (7.4) - (28.5)
Proceeds from sale of
property and business 0.9 - - - 0.9
Payments made in connection
with acquisitions; net of (1,191.1) - - - (1,191.1)
cash acquired
-----------------------------------------------------------------------------
Net cash used in investing (1,205.0) (6.3) (7.4) - (1,218.7)
activities
Financing activities:
Decrease in short-term debt - - (25.8) - (25.8)
Proceeds from issuance of
long-term debt 910.0 - - - 910.0
Repayments of long-term debt (8.5) - - - (8.5)
Proceeds from sale of
receivables, net - - (1.9) - (1.9)
Debt issuance costs (44.4) - - - (44.4)
Equity contribution from
stockholder 355.0 - - - 355.0
Intercompany transfers (24.8) - 24.8 - -
-----------------------------------------------------------------------------
Net cash provided (used) by
financing activities 1,187.3 - (2.9) - 1,184.4
Effect of exchange rate changes
on cash and cash equivalents - - 0.4 - 0.4
-----------------------------------------------------------------------------
Increase in cash and cash 94.6 0.3 25.1 - 120.0
equivalents
Cash and cash equivalents
at beginning of period - - - - -
-----------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 94.6 $ 0.3 $ 25.1 $ - $ 120.0
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
TWO MONTHS ENDED FEBRUARY 28, 2001
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 120.2 $ 26.9 $ 56.7 $ (16.8) $ 187.0
Cost of sales 85.6 26.0 42.5 (16.8) 137.3
-----------------------------------------------------------------------------
Gross profit 34.6 0.9 14.2 - 49.7
Selling and administrative 25.0 1.7 8.5 - 35.2
expenses
Amortization expense 1.2 2.4 0.4 - 4.0
-----------------------------------------------------------------------------
Operating income (loss) 8.4 (3.2) 5.3 - 10.5
Interest income (expense)--net 0.3 0.7 (0.4) - 0.6
Other (expense)--net (1.0) - (0.5) - (1.5)
-----------------------------------------------------------------------------
Income (loss) before income 7.7 (2.5) 4.4 - 9.6
taxes
Income tax (expense) benefit (3.0) 0.6 (1.6) - (4.0)
-----------------------------------------------------------------------------
Net income (loss) $ 4.7 $ (1.9) $ 2.8 $ - $ 5.6
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
TWO MONTHS ENDED FEBRUARY 28, 2001
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash used by operating $ (10.7) $ (10.6) $ (10.3) $ - $ (31.6)
activities
Investing activities:
Purchases of property, plant
and equipment (5.2) (0.7) (1.7) - (7.6)
-----------------------------------------------------------------------------
Net cash used by investing (5.2) (0.7) (1.7) - (7.6)
activities
Financing activities:
Decrease in short-term debt - - (3.7) - (3.7)
Proceeds from sale of
receivables, net - - 0.5 - 0.5
Transfers from Goodrich 15.9 11.2 13.6 - 40.7
-----------------------------------------------------------------------------
Net cash provided by financing
activities 15.9 11.2 10.4 - 37.5
-----------------------------------------------------------------------------
Decrease in cash and cash - (0.1) (1.6) - (1.7)
equivalents
Cash and cash equivalents
at beginning of period 0.1 0.2 15.4 - 15.7
-----------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 0.1 $ 0.1 $ 13.8 $ - $ 14.0
=============================================================================
DECEMBER 31, 2000
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 772.5 $ 170.3 $ 331.7 $ (106.8) $ 1,167.7
Cost of sales 523.6 150.9 250.9 (105.9) 819.5
-----------------------------------------------------------------------------
Gross profit 248.9 19.4 80.8 (0.9) 348.2
Selling and administrative 144.8 9.1 47.2 - 201.1
expenses
Amortization expense 8.2 14.5 1.7 - 24.4
Consolidation costs 38.8 - 1.7 - 40.5
-----------------------------------------------------------------------------
Operating income (loss) 57.1 (4.2) 30.2 (0.9) 82.2
Interest income (expense)--net 1.9 3.4 (0.9) - 4.4
Other income (expense)--net 0.8 - (1.2) - (0.4)
-----------------------------------------------------------------------------
Income (loss) before income 59.8 (0.8) 28.1 (0.9) 86.2
taxes
Income tax (expense) benefit (24.6) (2.1) (9.5) 0.3 (35.9)
-----------------------------------------------------------------------------
Net income (loss) $ 35.2 $ (2.9) $ 18.6 $ (0.6) $ 50.3
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
DECEMBER 31, 2000
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash equivalents $ 0.1 $ 0.2 $ 15.4 $ - $ 15.7
Accounts and notes receivable 109.9 15.0 56.7 - 181.6
Inventories 87.8 33.2 50.3 (3.9) 167.4
Deferred income taxes 17.1 (1.1) - - 16.0
Prepaid expenses and other
current assets 1.0 0.5 3.3 - 4.8
-----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 215.9 47.8 125.7 (3.9) 385.5
Property, plant and equipment, 344.4 105.6 113.2 - 563.2
net
Prepaid pension 19.3 6.4 - - 25.7
Goodwill--net 86.8 192.6 27.6 - 307.0
Identifiable intangible 6.9 50.9 1.1 - 58.9
assets--net
Intercompany receivables 104.5 87.1 125.9 (317.5) -
Investment in subsidiaries 511.5 47.8 - (559.3) -
Other assets 23.0 0.7 (4.8) - 18.9
-----------------------------------------------------------------------------
TOTAL ASSETS $ 1,312.3 $ 538.9 $ 388.7 $ (880.7) $ 1,359.2
=============================================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ 0.1 $ 29.0 $ - $ 29.1
Accounts payable 75.9 13.0 31.7 - 120.6
Accrued expenses 56.8 13.3 7.8 - 77.9
Income taxes payable 34.5 (6.6) 9.5 (0.3) 37.1
Current maturities of - - 0.9 - 0.9
long-term debt
-----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 167.2 19.8 78.9 (0.3) 265.6
Postretirement benefits
other than pensions 61.4 7.1 - - 68.5
Accrued pensions 3.6 1.2 0.9 - 5.7
Deferred income taxes 46.9 18.3 - - 65.2
Accrued environmental 0.2 38.1 - - 38.3
Intercompany payables 124.9 60.4 132.2 (317.5) -
Other non-current liabilities 1.5 0.6 3.4 - 5.5
-----------------------------------------------------------------------------
TOTAL LIABILITIES 405.7 145.5 215.4 (317.8) 448.8
BFGoodrich investment 906.6 1.8 5.6 (3.6) 910.4
Capital stock of subsidiaries - 391.6 167.7 (559.3) -
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND
BFGOODRICH INVESTMENT $ 1,312.3 $ 538.9 $ 388.7 $ (880.7) $ 1,359.2
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided by operating
activities $ 132.7 $ 14.6 $ 33.6 $ - $ 180.9
Investing activities:
Purchases of property, plant
and equipment (31.9) (13.7) (18.4) - (64.0)
Proceeds from sale of
property and business 0.3 - - - 0.3
Payments made in connection
with acquisitions, net of
cash acquired (11.6) - - - (11.6)
-----------------------------------------------------------------------------
Net cash used by investing
activities (43.2) (13.7) (18.4) - (75.3)
Financing activities:
Decrease in short-term debt - - (11.3) - (11.3)
Repayment of long-term debt - - (0.3) - (0.3)
Proceeds from sale of
receivables, net - - (1.9) - (1.9)
Transfers (to)/from Goodrich (89.8) (1.0) 4.1 - (86.7)
-----------------------------------------------------------------------------
Net cash used by financing
activities (89.8) (1.0) (9.4) - (100.2)
Effect of exchange rate changes
on cash and cash equivalents - - (0.3) - (0.3)
-----------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (0.3) (0.1) 5.5 - 5.1
Cash and cash equivalents
at beginning of year 0.4 0.3 9.9 - 10.6
-----------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 0.1 $ 0.2 $ 15.4 $ - $ 15.7
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 789.7 $ 191.9 $ 336.6 $ (100.5) $ 1,217.7
Cost of sales 514.5 162.0 255.5 (99.8) 832.2
-----------------------------------------------------------------------------
Gross profit 275.2 29.9 81.1 (0.7) 385.5
Selling and administrative 158.2 12.5 47.5 - 218.2
expenses
Amortization expense 6.8 15.8 2.0 - 24.6
Consolidation costs 37.3 - - - 37.3
-----------------------------------------------------------------------------
Operating income (loss) 72.9 1.6 31.6 (0.7) 105.4
Interest income (expense)--net 1.0 3.6 (4.1) - 0.5
Other income (expense)--net - 0.1 (1.6) - (1.5)
-----------------------------------------------------------------------------
Income (loss) before income tax 73.9 5.3 25.9 (0.7) 104.4
Income tax (expense) benefit (28.2) (4.2) (10.2) 0.3 (42.3)
-----------------------------------------------------------------------------
Net income (loss) $ 45.7 $ 1.1 $ 15.7 $ (0.4) $ 62.1
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided by operating
activities $ 85.5 $ 34.7 $ 35.9 $ - $ 156.1
Investing activities:
Purchases of property, plant
and equipment (37.6) (15.1) (26.9) - (79.6)
Proceeds from sale of
property and business - - 1.9 - 1.9
Payments made in connection
with acquisitions, net of (19.6) - - - (19.6)
cash acquired
-----------------------------------------------------------------------------
Net cash used by investing (57.2) (15.1) (25.0) - (97.3)
activities
Financing activities:
Decrease in short-term debt - - (21.4) - (21.4)
Repayment of long-term debt - - (4.7) - (4.7)
Proceeds from sale of
receivables, net - - 0.2 - 0.2
Transfers (to)/from Goodrich (28.0) (20.2) 19.7 - (28.5)
-----------------------------------------------------------------------------
Net cash used by financing (28.0) (20.2) (6.2) - (54.4)
activities
Effect of exchange rate changes
on cash and cash equivalents - - (0.4) - (0.4)
-----------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 0.3 (0.6) 4.3 - 4.0
Cash and cash equivalents
at beginning of year 0.1 0.9 5.6 - 6.6
-----------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 0.4 $ 0.3 $ 9.9 $ - $ 10.6
=============================================================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
W. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary data relating to the results of operations for each quarter of the
years ended December 31, 2001 and 2000 follows:
BFGOODRICH
PERFORMANCE
MATERIALS NOVEON, INC.
------------------------------------------------------------------------------
TWO ONE
MONTHS MONTH
ENDED ENDED SECOND THIRD FOURTH
FEBRUARY 28 MARCH 31 QUARTER QUARTER QUARTER
------------------------------------------------------------------------------
2001
Net sales $ 187.0 $ 95.8 $ 271.1 $ 262.4 $ 247.1
Gross profit 49.7 27.8 70.7 70.8 79.0
Operating income 10.5 9.4 12.7 15.0 21.1
Income (loss) from continuing
operations 5.6 (0.6) (6.9) (6.0) (7.1)
Net income (loss) 5.6 (0.6) (6.9) (6.0) (7.1)
BFGOODRICH PERFORMANCE MATERIALS
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------------------------------------------------------
2000
Net sales $ 307.7 $ 298.4 $ 284.9 $ 276.7
Gross profit 93.5 89.3 84.2 81.2
Operating income (loss) 35.7 32.6 27.4 (13.5)
Income (loss) from continuing
operations 21.2 15.6 20.8 (7.3)
Net income (loss) 21.2 15.6 20.8 (7.3)
The fourth quarter of 2000 includes a $40.5 million charge for
consolidation costs.