UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-61812
-------------------------
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 44141-3247
(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 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
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|
Indicate by check mark whether Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act). Yes |_| No |X|
The Company's voting stock is not publicly traded and does not have a
quantifiable market value.
As of February 28, 2003, there was 1 share of Registrant's Common Stock
outstanding.
NOVEON, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business ...................................................... 3
Item 2. Properties..................................................... 14
Item 3. Legal Proceedings.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 16
Item 6. Selected Financial Data........................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 18
Item 7A. Quantitative and Qualitative Disclosures of Market Risk........ 40
Item 8. Financial Statements and Supplementary Data.................... 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 41
PART III
Item 10. Directors and Executive Officers .............................. 42
Item 11. Executive Compensation......................................... 46
Item 12. Security Ownership by Certain Beneficial Owners and
Management..................................................... 54
Item 13. Certain Relationships and Related Transactions................. 57
Item 14. Controls and Procedures........................................ 60
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 61
Signatures....................................................... 62
Exhibits......................................................... E-1
--------------------------------
We will provide, upon written request and 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 44141-3247, Attention:
Secretary.
PART I
ITEM 1. BUSINESS
References to "Noveon," 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
We are a leading global producer and marketer of technologically advanced
specialty materials and chemicals used in a broad range of consumer and
industrial applications. We have organized our business into three
segments: Consumer Specialties, Specialty Materials and Performance
Coatings. We have a number of high growth, industry leading franchises
marketed under some of the industry's most recognized brand names including
Carbopol(R), TempRite(R), Estane(R) and Hycar(R). These global brands are
complemented by a diverse portfolio of historically stable, cash-generating
businesses. We have a significant presence in many niche product
categories, where customers value our long-standing ability to provide
need-specific formulations and solutions. Our products and services enhance
the value of customers' end-products by improving performance, providing
essential product attributes, lowering cost, simplifying processing or
making them more environmentally friendly.
Through our worldwide network of 27 strategically located manufacturing
facilities, we service more than 7,000 customers operating in over 25
industries. In 2002, we generated sales of $1,069.3 million, net income of
$34.7 million, cash flow from operations of $142.9 million and adjusted
EBITDA of $215.4 million, representing an adjusted EBITDA margin of 20.1%.
Adjusted 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 and consolidation costs. In 2002, we derived
approximately 63% of our sales from the United States, 18% of our sales
from Europe and 19% of our sales from the rest of the world.
Our principal executive offices are located at 9911 Brecksville Road,
Cleveland, Ohio 44141-3247 and our telephone number is (216) 447-5000.
DEVELOPMENT OF BUSINESS
We commenced operations on March 1, 2001 through the acquisition on
February 28, 2001 of the Performance Materials Segment (the "Acquisition")
of Goodrich Corporation ("Goodrich"), formerly known as The BFGoodrich
Company. The total purchase price was $1,386.5 million before fees and
expenses. The textile dyes and drug delivery systems businesses that were
operated as part of the Performance Materials Segment of Goodrich were not
part of the Acquisition.
The Acquisition was completed by PMD Investors I LLC, PMD Investors II LLC,
DLJMB Funding III, Inc. and affiliates, and DB Capital/PMD Investors, LLC.
PMD Investors I LLC and PMD Investors II LLC, collectively referred to as
"PMD," are entities owned by investor groups led by AEA Investors LLC, the
successor company of AEA Investors Inc. ("AEA"). DLJMB Funding III, Inc. is
an affiliate of Credit Suisse First Boston LLC. DLJMB Funding III, Inc. and
its affiliates who hold shares of Noveon International, Inc.'s
("International's") common stock are collectively referred to as "DLJ
Merchant Banking." DB Capital/PMD Investors, LLC was controlled by DB
Capital Partners, Inc. through February 20, 2003. DB Capital Partners, Inc.
is an affiliate of Deutsche Bank Securities Inc. From February 21, 2003
forward, DB Capital/PMD Investors, LLC is an affiliate of MidOcean
Partners, LP, which is controlled by MidOcean Associates, SPC (DB
Capital/PMD Investors, LLC, MidOcean Partners, LP, MidOcean Associates, SPC
and their affiliates, collectively "MidOcean").
To finance the Acquisition from Goodrich, we utilized funds from the
following sources:
o The equity sponsors, led by AEA, DLJ Merchant Banking and DB
Capital contributed $355.0 million of cash as equity to
International, our parent, which in turn contributed this cash to
us;
o International issued a $172.0 million seller note to Goodrich;
and
o We issued $275.0 million of 11% Senior Subordinated Notes due
2011 and borrowed $635.0 million under our credit facilities.
International 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
Consistent with our focus on industries and end-use applications, we have
organized our business into three segments: Consumer Specialties, Specialty
Materials and Performance Coatings.
CONSUMER SPECIALTIES is a global producer of specialty chemicals targeting
the personal care, pharmaceutical and food and beverage industries. Key
products in this segment include synthetic thickeners, film formers,
pharmaceutical actives and intermediates, benzoate preservatives, synthetic
food dyes and natural colorants. Consumer Specialties generated sales of
$290.8 million, operating income of $48.2 million and adjusted EBITDA of
$70.6 million in 2002.
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 gels,
cosmetics and pharmaceuticals. Our products are an important component of
the functionality and aesthetics of the end product, but typically
represent a small portion of the customer's total product costs. We
invented Carbopol(R) acrylic thickener, which is the global leader in
synthetic thickeners due to its efficient stabilizing properties and
superior thickening capabilities. Primary end-uses in the personal care
industry for Carbopol(R) acrylic thickeners include skin care, hair care
and personal and oral hygiene products. Primary end-uses in pharmaceuticals
for Carbopol(R) acrylic thickeners include topical and controlled-release
applications. Our other pharmaceutical products include calcium
polycarbophil bulk laxatives, advanced intermediates and active ingredients
such as mesalazine, which is used in the treatment of Crohn's disease, an
inflammatory disease of the gastrointestinal tract.
Food and Beverage. Our products preserve freshness and improve the color
and consistency of food and beverages, making them more appealing to
consumers. We are a leading global producer of benzoate preservatives, the
second largest U.S. supplier of synthetic colorants and an integrated
producer of flavors, fragrances and other food additives to the food and
beverage industry. Benzoates improve the shelf life of consumable goods and
are the preservative of choice for manufacturers of soft drinks, bottled
beverages, fruit-based products and prepared salads due to their
anti-microbial properties. We believe that our Kalama, Washington benzoate
facility is the largest facility of its type in North America and the
second largest in the world, giving us the capability to service large
customers globally. This facility also produces a number of high-value,
distinct flavor and fragrance products for use in many food, personal care
and soap products as well as certain intermediate products. The
intermediate products include plasticizers used in adhesives, sealants and
safety glass, and phenol, a co-product, used for adhesive resins in
forest-product applications.
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, within the colorant operation,
we produce pigment dispersions for use in architectural coatings and
technical dyes used in household dyes and other applications.
The following is a list of representative uses for Consumer Specialties
products:
CATEGORY PRODUCT DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------
Personal Care and Carbopol(R) Acrylic thickener, which imparts stability and
Pharmaceuticals improves aesthetics. Often used as a controlled
release agent.
Pemulen(R) Polymeric emulsifier reducing formulation irritancy
and providing unique sensory properties.
Avalure(R) Polymers for color cosmetics and skin care.
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.
Fixate(TM) Resin for hair styling.
Advanced intermediates Used in the production of active pharmaceutical
ingredients.
Cassia gum Gelling agents for pet food and human food (Japan).
Food and Beverage Colors
Food, drug and cosmetic Colorants for beverages, confectionary goods, dry
dyes, lakes, natural colors mixes/snacks, processed foods and pet food and
and pigments colorants for inks, paints and paper dyes.
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.
Flavors and Fragrances
Benzaldehyde-based chemicals Food, personal care and soap products.
Intermediates
Phenol, benzaldehyde, Pharmaceuticals, coatings, agrochemical products,
benzyl alcohol and benzoic plasticizers, adhesives, sealant products and alkyd
acid resins.
Consumer Specialties products are sold worldwide to major manufacturers of
cosmetics, personal care products, household products, pharmaceuticals,
soft drinks and food products.
SPECIALTY MATERIALS is the largest global supplier of chlorinated polyvinyl
chloride (CPVC) resins and compounds, thermoplastic polyurethane (TPU) and
reactive liquid polymers (RLP) sold under the trademarks TempRite(R),
Estane(R) and Hycar(R), respectively. Applications for TempRite(R) CPVC
include piping for residential and commercial plumbing and fire sprinkler
systems, for Estane(R) TPU include plastic film and sheet for various
coatings processes and for RLP include engineering adhesives. Specialty
Materials is also a leading North American producer of rubber and lubricant
antioxidants and rubber accelerators. Specialty Materials generated sales
of $402.4 million, operating income of $84.3 million and adjusted EBITDA of
$118.2 million in 2002.
Specialty Plastics. Our core specialty plastics products are TempRite(R)
CPVC, TempRite(TM) PEX and Estane(R) TPU. TempRite(R) CPVC is a
technologically advanced heat, fire and chemical resistant polymer that we
commercially developed to serve technically demanding applications not well
served by traditional PVC and other commodity plastics. Our TempRite(R)
CPVC polymers are sold to customers who produce plastic piping for the
following end-use applications: residential and commercial plumbing, fire
sprinkler systems and industrial piping applications. TempRite(R) CPVC
piping has inherent advantages over copper and other metals due to its heat
and corrosion resistance, increased insulation properties, ease of
installation and lower installed cost. We market our TempRite(R) branded
CPVC products for specific applications: FlowGuard(R) and FlowGuard Gold(R)
for residential and commercial plumbing, Corzan(R) for industrial piping
and BlazeMaster(R) for fire sprinkler systems. We believe we have built
strong end-user awareness of our brands by using a direct sales force that
markets directly to builders, contractors, plumbers, architects, engineers
and building owners.
Specialty Materials recently purchased the compounding assets and
technology uses to manufacture cross-linked polyethylene pipe, or PEX.
TempRite(TM) PEX enables Specialty Materials to add a flexible piping
compound to its rigid piping product offering. TempRite(TM) PEX is a small
but growing product within certain piping applications that demand flexible
piping systems.
Estane(R) TPU, an engineered, highly versatile thermoplastic, provides a
high quality, lower cost alternative to rigid plastics and flexible rubber.
Performance attributes of Estane(R) TPU include abrasion, heat and chemical
stress resistance, minimal fatigue from bending, ease of processing and
paintability. These performance characteristics make Estane(R) TPU
attractive for use in a broad range of end-uses, including film and sheet
for various coating processes, wire and cable insulation, athletic
equipment (such as footwear), pneumatic tubing and automotive molded parts.
Noveon has recently introduced several new product families that can extend
the uses for Estane(R) TPU. This includes products that can be melt spun
into elastic spandex fibers and materials that offer enhanced breathability
for garments. Estane(R) TPU is one of the industry's leading brand names.
We also market Stat-Rite(R) thermoplastics, which are static dissipative
materials used in packaging for the electronics industry. In addition, we
market fiber-reinforced TPU under the Estaloc(R) brand. Estaloc(R)
reinforced engineering thermoplastics offer the functional properties of
traditional TPU, yet are reinforced for higher stiffness to provide the
strength, dimensional stability and impact resistance required to withstand
a variety of tough applications and harsh environments. Applications
include automotive trim, sporting goods, agricultural equipment and other
mechanical components.
Polymer Additives. We are one of the largest global suppliers of RLP and
one of the leading North American producers 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 thermoset resin-based
formulations.
RLP is a high-growth niche product for technologically challenging
applications, including structural and engineered adhesives used in
aerospace, transportation and electronics. RLP improves impact and crack
resistance in composites and coatings and improves the toughness and
long-term durability of epoxy-based structural adhesives.
Our antioxidant products are used in rubber, plastics and lubricants and
are marketed under the Good-Rite(R) name, a leading industry brand.
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 line of
accelerators, marketed under our brand, Cure-Rite(R), which are utilized by
rubber manufacturers to reduce the vulcanization/curing time, and thereby
improve manufacturing productivity.
The following is a list of representative uses for Specialty Materials
products:
CATEGORY PRODUCT DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
Specialty Plastics CPVC
TempRite(R) Residential plumbing.
FlowGuard(R) Residential and commercial plumbing.
FlowGuard Gold(R) Residential and commercial plumbing.
Corzan(R) Industrial piping.
BlazeMaster(R) Fire sprinkler piping.
PEX
TempRite(TM)PEX Flexible piping systems.
TPU
Estane(R) Film and sheet, wire and cable insulation,
athletic equipment, pneumatic tubing, automotive
molded parts and adhesives.
Estaloc(R) Automotive trim, sporting goods, agricultural
equipment and other mechanical components.
Stat-Rite(R) Packaging of semiconductors, sensitive electronic
components, disk drive heads and cell phones.
Polymer Additives Reactive Liquid Polymer
Hycar(R) Used as a toughener and flexibilizer in thermoset
resin formulations (construction, composites,
coatings and structural adhesives).
Antioxidants
Good-Rite(R) Primarily used by rubber manufacturers to prevent
oxidative degradations, impart durability and
prevent loss of flexibility.
Accelerators
Cure-Rite(R) Helps reduce vulcanization/curing time.
Specialty Materials products are sold to a diverse customer base comprised
of major manufacturers in the construction, automotive, telecommunications,
electronics, recreation and aerospace industries.
PERFORMANCE COATINGS is a leading global producer of high performance
polymers for specialty paper, graphic arts, architectural and industrial
coatings and textile applications. Approximately 80% of Performance
Coatings' sales are generated from our water-based emulsion polymers and
compounds. We believe that we offer our customers one of the most complete
spectrums of emulsion chemistries in the industry. Performance Coatings
generated sales of $376.1 million, operating income of $59.4 million and
adjusted EBITDA of $78.6 million in 2002.
Our product offerings include a broad range of water-based polymer
emulsions, resins and auxiliaries used in the production of high-end paints
and coatings for wood, paper, metal, concrete, plastic, textiles and other
surfaces. Our water-based polymers, which are environmentally attractive
substitutes for solvent-based products, are valued for the superior gloss
and durability properties they provide. In addition, our polymers are used
as ink vehicles and in overprint varnishes for graphic arts, primarily for
use in specialty packaging applications. We are also forward integrated in
the graphic arts industry as a leading global producer of water-borne
coatings for consumer products packaging applications. We supply acrylic
emulsions used to improve the appearance, texture, durability and flame
retardance of high-end specialty textiles sold to the home furnishings,
technical fabrics and apparel industries. In addition, we believe we are
the only fully integrated U.S. supplier of glyoxal and glyoxal-based resins
for durable press and wrinkle resistant textile additives.
Our business strategy is centered on our ability to formulate and compound
polymer emulsions to create customized solutions to meet the specific needs
of our customers. We have had success with water-borne technologies as
global restrictions targeting the reduction of the volatile organic
compounds prevalent in solvent-based products have become more stringent.
We continue to develop new proprietary water-borne technologies to enhance
our portfolio of over 1,100 formulations. These formulations include
acrylic, polyurethane, nitrile, styrene-butadiene and vinyl. We expect
water-borne formulations to continue to grow faster than the overall
industry growth rate for paints and coatings.
The following is a list of representative uses for Performance Coatings
products:
CATEGORY PRODUCT DESCRIPTION
- ------------------------------------------------------------------------------------------------------------
Performance Coatings Architectural and Industrial
Paints and Coatings
Hycar(R) Water-borne acrylic emulsion for high gloss
enamels and stain blocking paint primers.
Sancure(R) Polyurethane dispersions used on wood
flooring to promote toughness and
durability.
Specialty Paper
Hycar(R)and Vycar(R) Water-borne acrylic nitrile and PVC
emulsions used to modify physical
attributes of specialty paper and nonwovens
including stiffness, porosity and water
repellency. Used in ink-jet printer paper
and tea bag sheathing.
Graphic Arts
Carboset(R) Water-borne acrylic polymers used in ink
vehicles and graphic arts coatings.
Carbotac(R) Water-borne acrylic emulsions used as
pressure-sensitive adhesives and laminating
adhesives on films and paper.
Algan(R) Water-borne coatings used to provide gloss
and protection for literature and packaging
materials.
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 manufacturing
Glyoxal resins process and add attributes such as
Fluorocarbon extenders softness, durable press and anticrease
Polymer-based softeners agents, stain repellents and flame
retardants.
Printing Chemicals
Dye thickener and binders Thickeners are used to impart viscosity to
Carbopol(R) 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.
Performance Coatings products are sold to major companies in the specialty
paper, graphic arts, paints and coatings, and textiles industries.
COMPETITION
We face a variety of competitors in each of our product lines, but we
believe 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. The following
chart sets forth our principal competitors by segment:
END-USE/PRODUCT
SEGMENT CATEGORY PRINCIPAL COMPETITORS
- ----------------------------------------------------------------------------------------------------------------
Consumer Specialties Personal Care and Cognis, Croda, Hercules, ISP, Nihon Junkayu, Rohm
Pharmaceuticals and Haas, Sigma/3V, Sumitomo Seika
Food & Beverage CPKelco, DSM, FMC, Synrise, Quest, Rhodia,
Sensient, Tessenderlo,Velsicol
Specialty Materials Specialty Plastics Atochem, BASF, Bayer, Dow, Georgia Gulf,
Huntsman, Kaneka, Nippon Carbide Industries,
Sekisui
Polymer Additives Atochem, Bayer, Crompton, Flexsys, Great Lakes,
General Quimica, Nippon Zeon
Performance Coatings Performance Coatings BASF, Bayer, Ciba, Clariant, Dow, Omnova,
Parachem, PolymerLatex, Reichhold, Rohm and Haas,
UCB
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 that 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. For the year ended December 31, 2002, we derived
approximately 63% of our sales from the United States, approximately 18%
from Europe and approximately 19% from the rest of the world.
RESEARCH, DEVELOPMENT AND TECHNOLOGY
We have a long history as an industry innovator, creating proprietary,
high-performance materials for our customers. Notably, we invented
Carbopol(R) synthetic thickeners and commercially developed TempRite(R)
CPVC. 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
research and development staff includes over 150 professionals, many of
whom possess Ph.D. or equivalent degrees. Our research and development
staff works with both our sales force and customers to utilize our wide
spectrum of technology platforms and processing capabilities to produce one
of the most comprehensive product offerings in the specialty chemicals
industry. We have developed many of our products in cooperation with our
customers, often as a result of their specific needs, resulting in
long-standing loyal customer relationships.
Our successful record of technological innovation is evidenced by the more
than 700 patents we have 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. Many of
these new products represented breakthrough innovations, including
specialty Estane(R) TPU for producing breathable fabric, new generation
TempRite(R) CPVC for impact resistant pipe, water-based acrylic urethane
emulsion blends for clear varnishes on wood flooring, FixateTM resin for
hair styling and Carbopol(R) acrylic thickener formulations for ink-jet
printing applications.
RAW MATERIALS
We use a variety of specialty and commodity chemicals in our manufacturing
processes. The majority of 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 we choose to purchase from a single
source 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. Our single largest raw material purchased
represented less than 3% of total sales in 2002. Described below is a
summary of the principal raw material requirements of each segment:
SEGMENT PRINCIPAL RAW MATERIALS
----------------------------------------------------------------------
Consumer Specialties Toluene
Glacial Acrylic Acid
Specialty Materials PVC
Chlorine
Methyl diphenyl diisocyanate (MDI)
Polytetramethylene ether glycol (PTMEG)
Aniline
Acetone
Performance Coatings Ethyl Acrylate
Butyl Acrylate
Styrene
Ethylene Glycol
EMPLOYEES
As of December 31, 2002, we have approximately 2,800 employees worldwide,
with approximately 1,900 in North and Latin America, 600 in Europe and 300
in the Asia/Pacific region. Many of our employees are highly trained. Key
plant managers possess an average of over 15 years of experience.
Six of the United States sites are organized by labor unions with
collective bargaining agreements with durations varying from three to five
years. Approximately 470 employees are covered by these contracts, with
four agreements expiring between 2003 and 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.
HEALTH, SAFETY AND ENVIRONMENTAL MATTERS
Our operations, like those of other companies engaged in similar
businesses, are subject to extensive environmental laws and regulations by
foreign, federal, state and local authorities, including those pertaining
to air emissions, wastewater discharges, occupational safety and health,
the handling and disposal of solid and hazardous wastes and the remediation
of contamination associated with the use, storage, release and disposal of
hazardous substances. We have incurred, and will continue to incur, costs
and capital expenditures in complying with these laws and regulations and
to obtain and maintain all necessary permits. In our 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. In addition, we are committed to the implementation of the
American Chemistry Council's Responsible Care(R) principles and to the
continuous improvement of our health, safety and environmental performance.
We believe that our business, operations and facilities are being operated
in compliance in all material respects with applicable environmental and
health and safety laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. Based on
information presently known to us and our existing accrued environmental
reserves, we do not expect environmental costs or contingencies to have a
material adverse effect on us. The operation of manufacturing plants
entails risks in these areas, and we may incur material costs or
liabilities in the future which could adversely affect us. Material
expenditures could potentially be required in the future. For example, we
may be required to comply with evolving environmental and health and safety
laws, regulations or requirements that may be adopted or imposed in the
future or to address newly discovered contamination or other conditions or
information that require a response.
Under certain environmental laws, including the 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. As a result, we may be subject
to liability for costs to investigate and remediate contamination without
regard to fault and under certain circumstances liability may be joint and
several resulting in one responsible party being held responsible for the
entire obligation. Liability may also include damages to natural resources.
As discussed below, Goodrich has agreed to indemnify us with respect to the
majority of environmental liabilities relating to these contaminated sites.
We reduced our environmental accrual by $23.7 million to $23.2 million on
March 1, 2001 from $46.9 million as of February 28, 2001, because under the
Acquisition agreement, Goodrich retained and did not sell to us seven
parcels of real property for which there was an environmental accrual. As
reflected in the environmental accrual as of January 1, 2001, these sites,
and various other environmental obligations retained by Goodrich,
represented $24.3 million of the accrual. Under the Acquisition agreement,
Goodrich also has agreed to indemnify us against, or has retained, certain
environmental liabilities for which our financial statements as of December
31, 2002 included reserves of $19.1 million. We estimate Goodrich's share
of such currently identified liabilities under the indemnity, which extends
to 2011, to be approximately $8.1 million. In addition to Goodrich's
indemnity, several other indemnities from third parties such as past owners
relate to specific environmental liabilities. Goodrich and other third
party indemnitors are currently indemnifying us for several environmental
remediation projects. Goodrich's share of such liabilities may increase to
the extent such third parties fail to honor their indemnity obligations
through 2011. Accordingly, the current portion of the environmental
obligations of $0.9 million is recorded in accrued expenses and $1.4
million is recorded in accounts receivable. Approximately $18.2 million is
included in non-current liabilities and $6.7 million is included in other
non-current assets, reflecting the recovery due from Goodrich.
Although we believe that our environmental reserves are adequate, given the
uncertainties involved in estimating environmental costs, it is possible
that the amount of expenses which will be required relating to remedial
actions and compliance with applicable environmental laws and regulations
will exceed the amounts reflected in our reserves or that Goodrich (or any
of other third party indemnitors) will not fulfill its indemnity
obligations. Accordingly, currently identified environmental liabilities
may not be adequately covered and additional environmental liabilities may
arise in the future that could have a material adverse effect on our
financial position, results of operations, or cash flows.
PRODUCT LIABILITY
Goodrich has agreed to indemnify us for all liabilities (including product
liability claims and product recalls) arising in connection with product
lines no longer manufactured or sold by us. In addition, Goodrich has
agreed to indemnify us against all product liability, product warranty and
product defect claims made prior to the 10th anniversary of the closing of
the Acquisition, relating to products manufactured, sold or delivered by
Goodrich prior to the closing of the Acquisition and involving damages of
at least $2.0 million. However, Goodrich may not fulfill its indemnity
obligations.
ITEM 2. PROPERTIES
Our headquarters and primary research facility is 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.
Kalama, Washington Owned 550,000 sq. ft.
Antwerp, Belgium Owned 81,000 sq. ft.
Oevel, Belgium Owned 215,000 sq. ft.
Lyon, France Leased 13,500 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.
Qingpu, People's Republic of China Leased 13,000 sq. ft.
Wenzhou, People's Republic of China Leased 53,000 sq. ft.
Pohang, South Korea Leased/Owned 49,000 sq. ft.
Barcelona, Spain Leased 76,000 sq. ft.
Barnsley, United Kingdom Owned 50,000 sq. ft.
We possess global manufacturing, sales and technical service facilities
enabling us to provide customers with worldwide service and a reliable
supply of products. We have 27 manufacturing sites, with two of the
facilities, located at Kalama, Washington and Pohang, South Korea,
certified to ISO 14000 and all but two U.S. plants, three European plants
and two Asian plants certified to ISO 9002 standards. The non-certified
plants are recent acquisitions or recent startups. In addition, the three
plants located at Calvert City, Kentucky; Chennai, India and Raubling,
Germany operate to "current good manufacturing practices" standards (cGMP)
and manufacture products suitable for use in the production of
pharmaceutical products. Each plant has rigorous productivity and quality
assessment programs in place, with performance metrics summarized and
reviewed on a monthly basis by our management.
We have met increases in global demand through internal expansion,
acquisitions and joint ventures, as well as by investment in new or
significantly expanded existing production facilities in the United States,
Europe and Asia. Since 1997, we have made investments in a Carbopol(R)
acrylic thickener and latex facility in Antwerp, Belgium, a TempRite(R)
CPVC compounding facility in Oevel, Belgium, an Estane(R) TPU plant
expansion in Avon Lake, Ohio, an acrylic plant expansion in Gastonia, North
Carolina, a benzoate plant expansion in Kalama, Washington, a static
control polymers plant in Senawang, Malaysia, as well as a compounding
facility in Qingpu, People's Republic of China.
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, 2002.
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 February 28, 2003, we had one holder of record of our
voting common stock. Other than a restricted payment in the form of a
dividend of $45.0 million to International for the repayment of a portion
of the seller note, we have not declared any dividends in the year ended
December 31, 2002 or the ten months ended December 31, 2001, and we 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 year ended December 31, 2002 and
the ten months ended December 31, 2001 are derived from the audited
consolidated financial statements of Noveon, Inc. The data for the two
months ended February 28, 2001 and the years ended 2000, 1999 and 1998 are
derived from the audited consolidated historical financial statements of
the Performance Materials Segment of Goodrich. 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.
NOVEON, INC. PERFORMANCE MATERIALS SEGMENT OF GOODRICH
----------------------------------------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 YEAR ENDED DECEMBER 31
2002 2001 2001 2000 1999 1998
----------------------------------------------------------------------------
(dollars in millions)
Statement of Operations Data:
Sales $1,069.3 $ 876.4 $ 187.0 $1,167.7 $1,217.7 $1,195.2
Cost of sales 726.8 628.1 137.3 819.5 832.2 817.8
----------------------------------------------------------------------------
Gross profit 342.5 248.3 49.7 348.2 385.5 377.4
Selling and administrative expenses 201.6 160.5 35.2 201.1 218.2 223.4
Amortization expense 13.9 26.5 4.0 24.4 24.6 18.2
Restructuring and consolidation costs 6.1 3.1 - 40.5 37.3 -
----------------------------------------------------------------------------
Operating income 120.9 58.2 10.5 82.2 105.4 135.8
Interest (expense) income, net (75.6) (73.5) 0.6 4.4 0.5 (0.7)
Other (expense) income, net (2.4) (0.7) (1.5) (0.4) (1.5) (0.2)
----------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 42.9 (16.0) 9.6 86.2 104.4 134.9
Income tax expense (8.2) (4.6) (4.0) (35.9) (42.3) (55.4)
----------------------------------------------------------------------------
Income (loss) from continuing
operations 34.7 (20.6) 5.6 50.3 62.1 79.5
Loss from discontinued
operations-net of taxes - - - - - (1.6)
----------------------------------------------------------------------------
Net income (loss) $ 34.7 $ (20.6) $ 5.6 $ 50.3 $ 62.1 $ 77.9
============================================================================
Other Data:
Cash flow provided (used) by
operating activities $ 142.9 $ 153.9 $ (31.6) $ 180.9 $ 156.1 $ 168.7
Cash flow (used) by investing
activities (79.7) (1,218.7) (7.6) (75.3) (97.3) (449.3)
Cash flow (used) provided by
financing activities (107.5) 1,184.4 37.5 (100.2) (54.4) 273.7
Adjusted EBITDA(A) 215.4 150.6 24.9 209.4 229.6 211.9
Depreciation and amortization 84.7 83.0 14.4 86.7 86.9 76.1
Capital expenditures 52.3 28.5 7.6 64.0 79.6 70.7
Balance Sheet Data:
Cash and cash equivalents $ 79.5 $ 120.0 N/A $ 15.7 $ 10.6 $ 6.6
Working capital, net(B) 99.9 106.2 N/A 134.2 152.5 163.8
Property, plant and equipment, net 670.7 672.5 N/A 563.2 600.8 610.8
Total assets 1,629.1 1,661.8 N/A 1,359.2 1,430.6 1,439.0
Total debt 847.5 900.7 N/A 30.0 42.7 69.3
Goodrich's investment - - N/A 910.4 950.9 938.1
Stockholder's equity 499.7 496.2 N/A - - -
(A) Adjusted 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.
Adjusted 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. Adjusted EBITDA is not a measure of operating income,
operating performance or liquidity under GAAP. We include adjusted
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 adjusted EBITDA differently and therefore adjusted EBITDA as
presented for us may not be comparable to adjusted EBITDA reported by
other companies. Differences exist between the various agreements
governing our indebtedness with respect to the definition of adjusted
EBITDA or comparable terms.
Adjusted EBITDA is calculated as follows:
NOVEON, INC. PERFORMANCE MATERIALS SEGMENT OF GOODRICH
--------------------------------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
2002 2001 2001 2000 1999 1998
--------------------------------------------------------------------
(dollars in millions)
Operating income $ 120.9 $ 58.2 $ 10.5 $ 82.2 $ 105.4 $135.8
Depreciation and amortization 84.7 83.0 14.4 86.7 86.9 76.1
Investor management fees 3.7 3.3 - - - -
Restructuring and consolidation costs 6.1 3.1 - 40.5 37.3 -
Non-cash cost of sales impact of
inventory write-up from purchase
accounting - 3.0 - - - -
----------------------------------------------------------------
Adjusted EBITDA $ 215.4 $ 150.6 $ 24.9 $ 209.4 $ 229.6 $211.9
================================================================
(B) Working capital, net is defined as current assets excluding cash and
cash equivalents less current liabilities excluding short-term debt
and the current portion of long-term debt.
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 Performance
Materials Segment of Goodrich included elsewhere in this document.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from
those discussed in the forward-looking statements as a result of various
factors. See "Forward-Looking Information" for a discussion of the
uncertainties, risks and assumptions associated with these statements.
OVERVIEW
We are a leading global producer and marketer of technologically advanced
specialty materials and chemicals used in a broad range of consumer and
industrial applications. We have a number of high growth, industry-leading
franchises marketed under some of the industry's most recognized brand
names including Carbopol(R), TempRite(R), Estane(R) and Hycar(R). These
global brands are complemented by a diverse portfolio of historically
stable, cash generating businesses. We have a significant presence in many
niche product categories, where customers value our long-standing ability
to provide need-specific formulations and solutions. Our products and
services enhance the value of customers' end-products by improving
performance, providing essential product attributes, lowering cost,
simplifying processing or making them more environmentally friendly.
Through our worldwide network of 27 strategically located manufacturing
facilities, we service more than 7,000 customers operating in over 25
industries. In 2002, we derived approximately 63% of our sales from the
United States, 18% of our sales from Europe and 19% of our sales from the
rest of the world.
Consistent with our focus on industries and end-use applications, we have
organized our business into three segments: Consumer Specialties, Specialty
Materials and Performance Coatings.
We commenced operations on March 1, 2001 through the Acquisition on
February 28, 2001 of the Performance Materials 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 International. We are a wholly owned subsidiary of
International.
International 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. International has no independent operations or investments other
than its investment in us. International 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 International 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 International 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%. International may be dependent on our cash flows to
repay the seller note upon maturity in 2011. At December 31, 2002, there
was $145.2 million outstanding on the seller note.
The Acquisition was recorded using the purchase method of accounting. The
purchase price before fees and expenses, totaling $21.4 million, was
$1,386.5 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 International
issued to Goodrich.
Pursuant to the Agreement for Sale and Purchase of Assets between Goodrich
and the Company (the "Agreement"), the purchase price was subject to a
post-closing working capital adjustment. On June 28, 2002, the Company
entered into an agreement with Goodrich settling the working capital
adjustment pursuant to which the Company paid Goodrich $14.5 million. The
settlement payment and the costs associated with the settlement efforts
have been reflected as an adjustment to the purchase price in the Company's
financial statements and increased the goodwill associated with the
Acquisition.
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 International. The proceeds
from the credit facilities included $125.0 million on a six-year Term Loan
A facility that matures in 2007 and $510.0 million on a Term Loan B
facility that matures in 2008. The proceeds from the 11% Senior
Subordinated Notes due 2011 were $275.0 million.
The assets acquired and liabilities assumed of the Performance Materials
Segment of Goodrich have been recorded at fair values. 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, 2002, goodwill
and identifiable intangible assets arising principally from the
Acquisition, represented 22.4% and 11.2%, respectively, of total assets and
they represented 73.1% and 36.4%, respectively, of total stockholder's
equity.
RESTRUCTURING MATTERS
To improve the productivity of our electronics industry-related product
lines, during 2002, we consolidated our static control manufacturing
facilities into Malaysia and closed the Twinsburg, Ohio leased facility. In
conjunction with this consolidation, we incurred personnel-related charges
as well as closure costs, totaling $1.3 million, related to this leased
facility in 2002.
In 2001, we implemented a plan to restructure and streamline our operations
to increase efficiency and productivity, reduce costs and support our
global growth strategy. As part of this plan, we reduced headcount
throughout our global operations, restructured our colorants business in
Cincinnati, Ohio and discontinued our flush pigments and colorformers
products lines. Through these restructuring efforts, we will be eliminating
approximately 440 positions. Approximately 92% of the affected employees
have left their positions as of December 31, 2002. In conjunction with this
restructuring plan, the Company recorded net consolidation costs of $4.7
million in 2002 consisting of $1.2 million in personnel-related costs
associated with the closing of a plant in England and $3.5 million of other
restructuring related expenses. The restructuring accrual has been reduced
in 2002 by $1.6 million, which represents a revision of prior estimates
recorded in purchase accounting at the date of Acquisition, with a
corresponding reduction in goodwill. As of December 31, 2002, approximately
$2.7 million remains accrued for restructuring costs with substantially all
of the remaining costs anticipated to be paid in 2003. As a result of these
restructuring efforts, we estimate annualized savings of approximately
$17.0 million attributable to reduced employee expenses. These savings were
partially recognized beginning in the third quarter of 2001.
FACTORS THAT AFFECT OUR BUSINESS
Economic and Industry Conditions. Economic growth rates have varied in each
geographic region in which we operate and may do so in the future. Our
results in the past have been negatively impacted by reduced demand in the
paper and packaging, textile, construction and electronics industries
during cyclical periods. We have also experienced pricing pressure in parts
of Performance Coatings and Specialty Materials as a result of
consolidation among some of our competitors and customers and as some of
the industries we serve have matured. Furthermore, our results in the past
have been negatively affected by increases in feedstock and energy costs.
Raw materials that affect our results include toluene, ethyl and butyl
acrylate, glacial acrylic acid, chlorine, MDI, PTMEG, aniline, acetone,
PVC, styrene and ethylene glycol.
Our Current and Future Indebtedness Could Significantly Impact Our
Business. For example, our indebtedness could impair our ability to make
investments and obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate or other purposes; limit
our ability to use operating cash flow in other areas of our business
because we must dedicate a substantial portion of these funds to make
principal and interest payments on our indebtedness; put us at a
competitive disadvantage to competitors that have less debt; increase our
vulnerability to interest rate increases to the extent our variable-rate
debt is not effectively hedged; and hinder our ability to adjust to rapidly
changing economic and industry conditions. As of December 31, 2002, our
total debt was $847.5 million. In addition, under our credit facility, we
have total borrowing capacity of $125.0 million, of which $120.1 million
was available as of December 31, 2002, net of $4.9 million of outstanding
letters of credit.
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, disruption in the financial markets and delays in
implementing strategic projects.
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 2002, we generated approximately 28% of our sales in
foreign currency, and we incurred approximately 26% 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 from 1998
through 2002 had a negative impact on our sales and operating income as
reported in U.S. dollars in our historical consolidated financial
statements. 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. At December 31, 2002, approximately
$31.6 million and $31.7 million were outstanding on Term Loan A and Term
Loan B, respectively, and payable in Euros.
ACQUISITIONS AND DIVESTITURES
The acquisitions by us and Goodrich 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 2002, the Consumer Specialties segment purchased certain tangible
assets of a Latin American personal care and pharmaceutical distributor;
certain assets, technology, and other intellectual property from a
dispersions business; and certain assets, technology and other intellectual
property related to aroma chemicals. During 2002, the Performance Coatings
segment purchased certain tangible assets and technology of a textile
coatings business. During 2002, the Specialty Materials segment acquired
the common stock of Gemoplast SA, which is a business located in Lyon,
France engaged in the conception, production and marketing of plastic
alloys. The total cash paid for these 2002 acquisitions was $11.9 million.
In December 2001, we acquired certain intellectual property and tangible
assets as an addition to our TempRite(R) product family within our
Specialty Materials segment for $3.6 million.
During 2000, Goodrich 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.
In March 2000, Goodrich contributed $17.9 million of net assets related to
the North American Telene(R) product line for a 50% interest in a joint
venture with Advanced Polymer Technologies, Inc. We sold our interest in
this joint venture in March 2002.
RESULTS OF OPERATIONS
HISTORICAL BASIS
The following table presents the major components of the statement of
operations on a historical basis. Consistent with our focus on industries
and end-use applications, we have organized our business into three
segments: Consumer Specialties, Specialty Materials and Performance
Coatings. The textile dyes business and the drug delivery systems business,
which were not part of our Acquisition of the Performance Materials Segment
of Goodrich, had sales and an operating loss of $1.1 million and $0.6
million, respectively, during the two months ended February 28, 2001 and
sales and operating loss of $15.7 million and $3.6 million, respectively,
for the year ended December 31, 2000. The results of the textile dyes
business and the drug delivery systems business are included in the data
for the year ended December 31, 2000 and for the two months ended February
28, 2001. We show segment sales as a percent of total sales and segment
gross profit and operating income as a percentage of segment sales.
NOVEON, INC. PERFORMANCE MATERIALS SEGMENT OF GOODRICH
-------------------------------------------------------------------------------------
YEAR ENDED TEN MONTHS ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
-------------------- -------------------- ------------------- ---------------------
2002 % 2001 % 2001 % 2000 %
-------------------- -------------------- ------------------- ---------------------
SALES
Consumer Specialties $ 290.8 27.2% $ 238.8 27.2% $ 45.2 24.2% $ 283.3 24.3%
Specialty Materials 402.4 37.6% 324.4 37.0% 73.1 39.1% 426.7 36.5%
Performance Coatings 376.1 35.2% 313.2 35.8% 68.7 36.7% 457.7 39.2%
-------------------- -------------------- ------------------- ---------------------
Total sales $1,069.3 100.0% $ 876.4 100.0% $ 187.0 100.0% $1,167.7 100.0%
==================== ==================== =================== =====================
GROSS PROFIT
Consumer Specialties $ 88.9 30.6% $ 64.5 27.0% $ 10.5 23.2% $ 84.8 29.9%
Specialty Materials 147.6 36.7% 106.5 32.8% 25.6 35.0% 149.4 35.0%
Performance Coatings 106.0 28.2% 77.3 24.7% 13.6 19.8% 114.0 24.9%
----------- ---------- ---------- -----------
Total gross profit $ 342.5 32.0% $ 248.3 28.3% $ 49.7 26.6% $ 348.2 29.8%
=========== ========== ========== ===========
OPERATING INCOME
Consumer Specialties $ 48.2 16.6% $ 30.8 12.9% $ 2.1 4.6% $ 40.2 14.2%
Specialty Materials 84.3 20.9% 52.3 16.1% 16.9 23.1% 98.3 23.0%
Performance Coatings 59.4 15.8% 34.5 11.0% 3.2 4.7% 52.5 11.5%
Corporate costs (64.9) (6.1)% (56.3) (6.4)% (11.7) (6.3)% (68.3) (5.8)%
----------- ---------- ---------- -----------
127.0 11.9% 61.3 7.0% 10.5 5.6% 122.7 10.5%
Restructuring and
consolidation
costs (6.1) (0.6)% (3.1) (0.4)% - - (40.5) (3.5)%
----------- ---------- ---------- -----------
Total operating
income $ 120.9 11.3% $ 58.2 6.6% $ 10.5 5.6% $ 82.2 7.0%
=========== ========== ========== ===========
PRO FORMA BASIS
The following table presents major components of the historical and pro
forma statements of operations. The major components of the pro forma
consolidated statements of operations reflect the effect of the Acquisition
of the Performance Materials Segment of Goodrich on February 28, 2001 as if
it occurred on January 1, 2001 and excludes the results of the textile dyes
business and drug delivery systems business. The primary effects of the
Acquisition include: increased depreciation for the write-up of property,
plant and equipment; increased amortization expense for goodwill and
intangible assets; the impact of increased stand-alone costs; management
fees; amortization expense of debt issuance costs associated with the
credit facilities; increased interest expense associated with the credit
facilities; and the associated income tax impact of these items.
The components of the pro forma consolidated statements of operations for
the year ended December 31, 2001 are derived from the audited consolidated
financial statements of the Performance Materials Segment of Goodrich for
the two months ended February 28, 2001 and the audited consolidated
financial statements of Noveon, Inc. for the ten months ended December 31,
2001.
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
PRO
ACTUAL FORMA ACTUAL
2002 % 2001 % 2000 %
---------------------- ---------------------- ---------------------
STATEMENT OF OPERATIONS
Sales $1,069.3 100.0% $1,062.3 100.0% $1,167.7 100.0%
Cost of sales 726.8 68.0% 765.5 72.1% 819.5 70.2%
--------------------- ---------------------- ---------------------
Gross profit 342.5 32.0% 296.8 27.9% 348.2 29.8%
Selling and administrative
expenses 201.6 18.8% 195.7 18.4% 201.1 17.2%
Amortization expense 13.9 1.3% 31.8 3.0% 24.4 2.1%
Restructuring and consolidation
costs 6.1 0.6% 3.1 0.3% 40.5 3.5%
--------------------- ---------------------- ---------------------
Operating income 120.9 11.3% 66.2 6.2% 82.2 7.0%
Interest (expense) income-net (75.6) (7.1)% (87.8) (8.3)% 4.4 0.4%
Other (expense) income-net (2.4) (0.2)% (2.2) (0.2)% (0.4) -
--------------------- ---------------------- ---------------------
Income (loss) before income taxes 42.9 4.0% (23.8) (2.3)% 86.2 7.4%
Income tax expense (8.2) (0.8)% (5.5) (0.5)% (35.9) (3.1)%
--------------------- ---------------------- ---------------------
Net income (loss) $ 34.7 3.2% $ (29.3) (2.8)% $ 50.3 4.3%
===================== ====================== =====================
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
PRO
ACTUAL FORMA ACTUAL
2002 % 2001 % 2000 %
---------------------- ---------------------- ---------------------
SALES
Consumer Specialties $ 290.8 27.2% $ 284.0 26.7% $ 283.3 24.3%
Specialty Materials 402.4 37.6% 397.5 37.4% 426.7 36.5%
Performance Coatings 376.1 35.2% 380.8 35.9% 457.7 39.2%
--------------------- ---------------------- ---------------------
Total sales $1,069.3 100.0% $1,062.3 100.0% $1,167.7 100.0%
===================== ====================== =====================
GROSS PROFIT
Consumer Specialties $ 88.9 30.6% $ 74.7 26.3% $ 84.8 29.9%
Specialty Materials 147.6 36.7% 131.6 33.1% 149.4 35.0%
Performance Coatings 106.0 28.2% 90.5 23.8% 114.0 24.9%
------------ ------------ -----------
Total gross profit $ 342.5 32.0% $ 296.8 27.9% $ 348.2 29.8%
============ ============ ===========
OPERATING INCOME
Consumer Specialties $ 48.2 16.6% $ 32.6 11.5% $ 40.2 14.2%
Specialty Materials 84.3 20.9% 66.9 16.8% 98.3 23.0%
Performance Coatings 59.4 15.8% 38.1 10.0% 52.5 11.5%
Corporate costs (64.9) (6.1)% (68.3) (6.4)% (68.3) (5.8)%
------------ ------------ -----------
127.0 11.9% 69.3 6.5% 122.7 10.5%
Restructuring and consolidation
costs (6.1) (0.6)% (3.1) (0.3)% (40.5) (3.5)%
------------ ------------ -----------
Total operating income $ 120.9 11.3% $ 66.2 6.2% $ 82.2 7.0%
============ ============ ===========
2002 COMPARED WITH PRO FORMA 2001
The comparison of the year ended December 31, 2002 to the pro forma year
ended December 31, 2001 has been completed by using audited consolidated
financial information for 2002 and unaudited pro forma consolidated
financial information for 2001. This unaudited pro forma consolidated
financial information is provided for informational purposes only and does
not purport to be indicative of the results which would have actually been
obtained had the Acquisition of the Performance Materials Segment of
Goodrich occurred on January 1, 2001.
TOTAL COMPANY ANALYSIS
Sales. Sales increased $7.0 million, or 0.7%, from $1,062.3 million in pro
forma 2001 to $1,069.3 million in 2002. The increase was primarily the
result of higher sales within our TempRite(R) CPVC product lines of $17.3
million and personal care product lines of $9.8 million, principally
related to increased volume. Additionally, current year acquisitions
resulted in increased sales of approximately $11.4 million. These increases
were offset by lower sales of $12.4 million in Specialty Materials,
excluding TempRite(R) CPVC, due primarily to lower industrial and European
demand and competitive price pressure, and $4.7 million in Performance
Coatings, primarily due to lower textile application volume. Furthermore,
sales decreased in our food colorants business by $5.9 million, principally
due to the impact of product lines discontinued in 2001.
Cost of Sales. Cost of sales as a percentage of sales decreased from 72.1%
in pro forma 2001 to 68.0% in 2002. The decrease in cost of sales as a
percentage of sales was primarily attributable to a decrease in raw
material and utility costs across all segments and, to a lesser extent,
lower manufacturing spending.
Gross Profit. Gross profit increased $45.7 million, or 15.4%, from $296.8
million in pro forma 2001 to $342.5 million in 2002. As a percentage of
sales, gross profit increased from 27.9% in pro forma 2001 to 32.0% in
2002. The increase in gross profit was primarily associated with decreases
in raw material and utility costs and lower manufacturing spending. The
increase was partially offset by competitive pricing pressure and an
unfavorable sales mix shift.
Selling and Administrative Expenses. Selling and administrative expenses
increased $5.9 million, or 3.0%, from $195.7 million in pro forma 2001 to
$201.6 million in 2002. The increase in selling and administrative expenses
is primarily attributable to the strategic addition of sales and marketing
resources and the additional costs associated with our variable incentive
plans, driven by improved financial performance during 2002 and expansion
of the variable incentive plans to include substantially all employees
beginning in 2002. The increase was partially offset by cost reductions
attributable to our restructuring efforts. Selling and administrative
expenses as a percentage of sales increased from 18.4% in pro forma 2001 to
18.8% in 2002.
Amortization Expense. Amortization expense decreased $17.9 million, or
56.3%, from $31.8 million in pro forma 2001 to $13.9 million in 2002. The
decrease was primarily due to the elimination of $18.1 million of goodwill
amortization, as required by the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142 beginning in 2002.
Restructuring and Consolidation Costs. Restructuring and consolidation
costs increased $3.0 million from $3.1 million in pro forma 2001 to $6.1
million in 2002. This increase was related to the consolidation of the
static control manufacturing facilities into Malaysia and the closing of
the Twinsburg, Ohio leased facility, which occurred in the third quarter of
2002, expenses related to our effort to increase efficiency and
productivity, reduce costs and support our global growth strategy, and to
additional pension expenses associated with the exit of a facility in
Europe.
Operating Income. Operating income increased by $54.7 million, or 82.6%,
from $66.2 million in pro forma 2001 to $120.9 million in 2002. The
increase in operating income was primarily attributable to decreases in raw
material and utility costs, lower manufacturing spending, increased volumes
within our TempRite(R) CPVC and personal care product lines and reduced
amortization expense for goodwill. The increase was partially offset by
competitive pricing pressure and an unfavorable sales mix shift and an
increase in selling and administrative expenses.
Interest (Expense) Income-Net. Interest expense decreased $12.2 million
from $87.8 million in pro forma 2001 to $75.6 million in 2002. The decrease
in expense was attributable to lower interest rates in 2002, debt repayment
and interest income from our cash balances.
Other (Expense) Income-Net. Other expense was $2.4 million in 2002 and $2.2
million in pro forma 2001.
Income Tax Expense. Income tax expense was $8.2 million in 2002 compared to
income tax expense of $5.5 million in pro forma 2001. The income tax
expense in 2002 and pro forma 2001 was primarily associated with our
international operations. The effective tax rate for 2002 and pro forma
2001 was 19.1% and 23.1%, respectively.
For pro forma 2001, we incurred pro forma domestic losses. These pro forma
cumulative losses and a lack of prior earnings history in our new capital
structure provided substantial evidence regarding our inability to realize
certain deferred tax assets. As a result, under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, we established a tax
valuation allowance to offset domestic income tax benefits associated with
domestic losses for 2001.
For the year ended December 31, 2002, sufficient income was generated to
realize certain of the deferred tax assets. Therefore, under the provisions
of SFAS No. 109, income tax expense for 2002 has been offset by $4.8
million related to the net reversal of tax valuation allowances.
As of December 31, 2002, we still have cumulative losses and intend to
maintain tax valuation allowances for the balance of deferred tax assets
until sufficient positive evidence (for example, cumulative positive
domestic earnings and taxable income) exists to support the reversal of the
tax valuation allowances.
Net Income (Loss). As a result of the factors discussed above, net income
increased by $64.0 million from a net loss of $29.3 million in pro forma
2001 to net income of $34.7 million in 2002.
Adjusted EBITDA is an important performance measure used by us and our
stakeholders. Adjusted 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 and restructuring and consolidation
costs. We believe that adjusted EBITDA provides additional information for
determining our ability to meet future obligations and debt service
requirements. The components of adjusted EBITDA are the measurements used
by our primary lenders to measure performance. However, adjusted EBITDA is
not indicative of operating income or cash flow from operations as
determined under generally accepted accounting principles. Adjusted EBITDA
for 2002 and pro forma 2001 is calculated as follows (dollars in millions):
ACTUAL PRO FORMA
2002 2001
-----------------------------
Operating income $ 120.9 $ 66.2
Depreciation and amortization 84.7 99.3
Investor management fees 3.7 3.9
Restructuring and consolidation costs 6.1 3.1
Non-cash cost of sales impact of inventory
write-up from purchase accounting - 3.0
-----------------------------
Adjusted EBITDA $ 215.4 $ 175.5
=============================
SEGMENT ANALYSIS
Consumer Specialties--Sales increased $6.8 million, or 2.4%, from $284.0
million in pro forma 2001 to $290.8 million in 2002. The increase is
primarily attributable to the impact of higher sales of $9.8 million in our
personal care product lines, principally due to higher Carbopol(R) acrylic
thickener sales volumes and the impact of the success of new product
introductions. The increase was partially offset by lower sales in our food
colorants business of $5.9 million, principally the result of discontinued
product lines.
Gross profit increased $14.2 million, or 19.0%, from $74.7 million in pro
forma 2001 to $88.9 million in 2002. As a percentage of sales, gross profit
increased from 26.3% in pro forma 2001 to 30.6% in 2002. The increase in
gross profit was primarily associated with decreases in raw material and
utility costs, lower manufacturing spending and higher personal care
volumes.
Operating income increased $15.6 million, or 47.9%, from $32.6 million in
pro forma 2001 to $48.2 million in 2002. The increase was primarily
associated with decreases in raw material and utility costs, lower
manufacturing spending, higher personal care volumes and $5.2 million in
reduced amortization expense for goodwill.
Specialty Materials--Sales increased by $4.9 million, or 1.2%, from $397.5
million in 2001 to $402.4 million in 2002. The increase was primarily
attributable to higher sales of $17.3 million in TempRite(R) CPVC,
primarily related to volume increases, partially offset by lower sales of
$12.4 million in polymer additives product lines, static control and
Estane(R) TPU, principally resulting from competitive pricing pressure and
soft industrial demand.
Gross profit increased $16.0 million, or 12.2%, from $131.6 million in pro
forma 2001 to $147.6 million in 2002. As a percentage of sales, gross
profit increased from 33.1% in pro forma 2001 to 36.7% in 2002. The
increase in gross profit was primarily attributable to decreases in raw
material and utility costs, higher TempRite(R) CPVC volume and lower
manufacturing spending.
Operating income for the segment increased $17.4 million, or 26.0%, from
$66.9 million in pro forma 2001 to $84.3 million in 2002. The increase was
primarily attributable to decreases in raw material and utility costs,
higher TempRite(R) CPVC volume, lower manufacturing spending and $7.6
million in reduced amortization expense for goodwill. The increase was
partially offset by lower sales in Estane(R) TPU and polymer additives as
mentioned above and increases in selling and administrative expenses,
primarily related to the addition of sales and marketing resources and the
additional costs associated with our variable incentive plans, driven by
improved financial performance during 2002.
Performance Coatings--Sales decreased $4.7 million, or 1.2%, from $380.8
million in pro forma 2001 to $376.1 million in 2002. The decrease was
primarily attributable to a decline in demand in textile applications,
competitive pricing pressure and an unfavorable sales mix shift.
Gross profit increased $15.5 million, or 17.1%, from $90.5 million in pro
forma 2001 to $106.0 million in 2002. As a percentage of sales, gross
profit increased from 23.8% in pro forma 2001 to 28.2% in 2002. The
increase in gross profit was primarily associated with decreases in raw
material and utility costs. The increase was partially offset by a decline
in demand in textile applications.
Operating income for the segment increased $21.3 million, or 55.9%, from
$38.1 million in 2001 to $59.4 million in 2002. The increase was primarily
associated with the decrease in raw material and utility costs, and $5.3
million in reduced amortization expense for goodwill. The increase was
partially offset by a decline in demand in textile applications.
Corporate--Corporate costs decreased $3.4 million, or 5.0% from $68.3
million in pro forma 2001 to $64.9 million in 2002. This decrease was
primarily the result of our restructuring efforts, partially offset by
additional costs associated with our variable incentive plans, driven by
improved financial performance during 2002 and expansion of the variable
incentive plans to include substantially all employees beginning in 2002.
SHORT PERIOD DISCUSSIONS
Since Noveon acquired the Performance Materials Segment of Goodrich on
February 28, 2001, the Performance Materials Segment of Goodrich and Noveon
are reported under different bases. Accordingly, there are short reporting
periods that are not comparable to other periods. Discussions follow for
the short periods, including the ten months ended December 31, 2001 for
Noveon and the two months ended February 28, 2001 for the Performance
Materials Segment of Goodrich.
TEN MONTHS ENDED DECEMBER 31, 2001
TOTAL COMPANY ANALYSIS
For the ten months ended December 31, 2001, we generated sales of $876.4
million, with cost of sales of $628.1 million resulting in a gross profit
of $248.3 million and a gross profit margin of 28.3%. Selling and
administrative expenses were $160.5 million, or 18.3% of sales.
Amortization was $26.5 million, restructuring and consolidation costs were
$3.1 million and operating income was $58.2 million, or 6.6% of sales.
Interest expense was $73.5 million, other expense was $0.7 million, income
tax expense was $4.6 million and net loss was $20.6 million.
SEGMENT ANALYSIS
Consumer Specialties--For the ten months ended December 31, 2001, the
Consumer Specialties segment generated sales of $238.8 million, with a
gross profit of $64.5 million and a gross profit margin of 27.0%. Operating
income was $30.8 million, or 12.9% of sales.
Specialty Materials--For the ten months ended December 31, 2001, the
Specialty Materials segment generated sales of $324.4 million, with a gross
profit of $106.5 million and a gross profit margin of 32.8%. Operating
income was $52.3 million, or 16.1% of sales.
Performance Coatings--For the ten months ended December 31, 2001, the
Performance Coatings segment generated sales of $313.2 million, with a
gross profit of $77.3 million and a gross profit margin of 24.7%. Operating
income was $34.5 million, or 11.0% of sales.
Corporate--For the ten months ended December 31, 2001, corporate expense
was $56.3 million.
TWO MONTHS ENDED FEBRUARY 28, 2001
TOTAL COMPANY ANALYSIS
For the two months ended February 28, 2001, the Performance Materials
Segment of Goodrich generated sales of $187.0 million, with cost of sales
of $137.3 million, resulting in a gross profit of $49.7 million and a gross
profit margin of 26.6%. Selling and administrative expenses were $35.2
million, or 18.8% of sales. Amortization expense was $4.0 million and
operating income was $10.5 million, or 5.6% of sales. Interest income was
$0.6 million, other expense was $1.5 million, income tax expense was $4.0
million and net income was $5.6 million, or 3.0% of sales.
SEGMENT ANALYSIS
Consumer Specialties--For the two months ended February 28, 2001, the
Consumer Specialties segment of the Performance Materials Segment of
Goodrich generated sales of $45.2 million, with a gross profit of $10.5
million and a gross profit margin of 23.2%. Operating income was $2.1
million, or 4.6% of sales.
Specialty Materials--For the two months ended February 28, 2001, the
Specialty Materials segment of the Performance Materials Segment of
Goodrich generated sales of $73.1 million, with a gross profit of $25.6
million and a gross profit margin of 35.0%. Operating income was $16.9
million, or 23.1% of sales.
Performance Coatings--For the two months ended February 28, 2001, the
Performance Coatings segment of the Performance Materials Segment of
Goodrich generated sales of $68.7 million, with a gross profit of $13.6
million and a gross profit margin of 19.8%. Operating income was $3.2
million, or 4.7% of sales.
Corporate--For the two months ended February 28, 2001, the corporate
expense of the Performance Materials Segment of Goodrich was $11.7 million.
PRO FORMA 2001 COMPARED WITH 2000
The comparison of the pro forma year ended December 31, 2001 to the year
ended December 31, 2000 has been completed by using unaudited pro forma
consolidated financial information for 2001 and audited consolidated
financial information for 2000. This unaudited pro forma consolidated
financial information is provided for informational purposes only and does
not purport to be indicative of the results that would have actually been
obtained had the Acquisition of the Performance Materials Segment of
Goodrich occurred on January 1, 2001.
TOTAL COMPANY ANALYSIS
Sales. Sales decreased $105.4 million, or 9.0%, from $1,167.7 million in
2000 to $1,062.3 million in pro forma 2001. The decline is related to lower
sales of $76.9 million in Performance Coatings and $29.2 million in
Specialty Materials, primarily related to volume declines in products sold
to the paper and packaging, graphic arts, textiles and automotive
industries and a reduction of $15.7 million associated with the disposition
of the textile dyes product line prior to the Acquisition, as well as
reduced sales due to our decision to discontinue various product lines
within our food colorants business in June 2001. These decreases were
partially offset by increased sales of 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 72.1% in pro forma 2001. The increase in cost of sales as a
percentage of sales in pro forma 2001 was attributable to an increase in
raw material and utility costs, reduced utilization of facilities due to
lower production volume, incremental depreciation expense associated with
the write-up of property, plant and equipment in purchase accounting and
the incremental cost of sales in pro forma 2001 associated with the
non-cash write-up of inventory in purchase accounting resulting in
approximately $3.0 million of expense. The increase was partially offset by
lower manufacturing spending.
Gross Profit. Gross profit decreased $51.4 million, or 14.8%, from $348.2
million in 2000 to $296.8 million in pro forma 2001. The decrease was
primarily associated with sales volume reductions, an increase in raw
material and utility costs, 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. The decrease
was partially offset by lower manufacturing spending.
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 pro forma 2001. Selling and administrative expenses as a percent
of sales increased from 17.2% in 2000 to 18.4% in pro forma 2001. The
increase in selling and administrative expenses as a percent of sales in
pro forma 2001 was a result of lower sales volumes and investor management
fees of $3.9 million in pro forma 2001.
Amortization Expense. Amortization expense increased $7.4 million, or
30.3%, from $24.4 million in 2000 to $31.8 million in pro forma 2001. The
increase was 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.
Restructuring and Consolidation Costs. Restructuring and consolidation
costs decreased from $40.5 million in 2000 to $3.1 million in pro forma
2001. Goodrich recorded net restructuring and 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 costs
include $3.7 million of severance related to the textile restructuring
associated with Goodrich's divestiture of its Performance Materials Segment
and $0.5 million for other workforce reductions.
The pro forma 2001 costs of $3.1 million include $1.9 million of
restructuring expenses associated with Goodrich's textile restructuring and
$1.2 million associated with our restructuring and consolidation plan.
Operating Income. Operating income decreased by $16.0 million, or 19.5%,
from $82.2 million in 2000 to $66.2 million in pro forma 2001. The decrease
in operating income was primarily attributable to sales volume declines,
higher raw material and energy costs, 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. The
decrease was partially offset by increased sales volume of products within
the Consumer Specialties segment, lower manufacturing spending, selling and
administrative cost controls and reduced consolidation costs in pro forma
2001.
Interest (Expense) Income-Net. Interest income, net was $4.4 million in
2000 and interest expense, net was $87.8 million in pro forma 2001. The
increase in expense was primarily attributable to the change in the debt
structure associated with the Acquisition.
Other (Expense) Income-Net. Other expense was $0.4 million in 2000 and $2.2
million in pro forma 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. Income tax expense was $5.5 million in pro forma 2001
compared to an income tax expense of $35.9 million in 2000. During 2001, we
determined, based on our domestic losses incurred in 2001 and lack of prior
earnings history in our new capital structure, that it was uncertain
whether our future taxable income would be sufficient to recognize certain
deferred tax assets. As a result, a valuation allowance at December 31,
2001 was established. The effective tax rate was 41.6% in 2000 and 23.1% in
pro forma 2001. The principal difference in the tax rates between pro forma
2001 and 2000 is due to the establishment of certain tax valuation
allowances in 2001.
Net Income (Loss). As a result of the factors discussed above, net income
(loss) decreased by $79.6 million from net income of $50.3 million in 2000
to a net loss of $29.3 million in pro forma 2001.
Adjusted EBITDA for the pro forma year ended December 31, 2001 and the year
ended December 31, 2000 is calculated as follows (dollars in millions):
PRO FORMA ACTUAL
2001 2000
------------------------------
Operating income $ 66.2 $ 82.2
Depreciation and amortization 99.3 86.7
Investor management fees 3.9 -
Restructuring and consolidation costs 3.1 40.5
Non-cash cost of sales impact of inventory
write-up from purchase accounting 3.0 -
------------------------------
Adjusted EBITDA $ 175.5 $ 209.4
==============================
SEGMENT ANALYSIS
Consumer Specialties. Sales increased $0.7 million, or 0.2%, from $283.3
million in 2000 to $284.0 million in pro forma 2001. The increase was
driven by higher volume in products sold to the food and beverage and other
consumer related industries. These increases were partially offset by
unfavorable price and product sales mix, the discontinuation of various
product lines within our food colorants business in June 2001 and the
unfavorable exchange impact of the weakened Euro.
Gross profit decreased $10.1 million, or 11.9%, from $84.8 million in 2000
to $74.7 million in pro forma 2001. As a percentage of sales, gross profit
decreased from 29.9% in 2000 to 26.3% in pro forma 2001. The decrease in
gross profit was primarily associated with unfavorable price and product
sales mix and the discontinuation of various product lines within our food
colorants business.
Operating income decreased $7.6 million, or 18.9%, from $40.2 million in
2000 to $32.6 million in pro forma 2001. The decrease was primarily due to
unfavorable price and product mix and the lower margins associated with the
discontinuance of various product lines within our food colorants business.
These effects were partially offset by increased sales volumes and a
reduction in selling and administrative expenses in the segment.
Specialty Materials. Sales decreased by $29.2 million, or 6.8%, from $426.7
million in 2000 to $397.5 million in pro forma 2001. The decrease was
primarily attributable to lower sales of $15.9 million in Estane(R) TPU
product lines and $10.7 million in polymer additives, primarily related to
volume declines and the unfavorable exchange impact of the weakened Euro
and $3.4 million due to the exclusion of the North America Telene(TM)
business that was contributed to a joint venture on March 31, 2000.
Gross profit decreased $17.8 million, or 11.9%, from $149.4 million in 2000
to $131.6 million in pro forma 2001. As a percentage of sales, gross profit
decreased from 35.0% in 2000 to 33.1% in pro forma 2001. The decrease was
primarily attributable to volume reductions in the polymer additives and
Estane(R) TPU product lines along with reduced utilization of facilities
due to lower production volume. These effects were partially offset by
lower manufacturing spending.
Operating income for the segment decreased $31.4 million, or 31.9%, from
$98.3 million in 2000 to $66.9 million in pro forma 2001. The decrease was
primarily attributable to volume reductions for the polymer additives and
Estane(R) TPU 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
spending.
Performance Coatings. Sales decreased $76.9 million, or 16.8%, from $457.7
million in 2000 to $380.8 million in pro forma 2001. The decrease was
primarily attributable to lower demand for products sold in the paper and
packaging and textile industries and $15.7 million due to the disposition
of the textile dyes product line prior to the Acquisition.
Gross profit decreased $23.5 million, or 20.6%, from $114.0 million in 2000
to $90.5 million in pro forma 2001. As a percentage of sales, gross profit
decreased from 24.9% in 2000 to 23.8% in pro forma 2001. The decrease was
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, an
increase in raw material and energy costs and incremental expenses
associated with the write-up of assets in purchase accounting. The decrease
was partially offset by lower manufacturing spending.
Operating income for the segment decreased $14.4 million, or 27.4%, from
$52.5 million in 2000 to $38.1 million in pro forma 2001. The decrease was
primarily associated with 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, an increase in
raw materials and energy costs, and incremental expenses associated with
the write-up of assets in purchase accounting. The decrease was partially
offset by lower manufacturing spending and selling and administrative cost
controls.
Corporate. Corporate costs remained unchanged at $68.3 million for both
2000 and pro forma 2001.
RAW MATERIAL COST TRENDS
We have benefited from reduced costs for raw materials for the year ended
December 31, 2002 compared to the comparable period in 2001. Raw material
prices began to increase in the second half of 2002 and forecasts
anticipate that these costs will continue to increase in fiscal 2003. Raw
material cost increases could have an unfavorable impact on our financial
results.
LIQUIDITY AND CAPITAL RESOURCES
DEBT AND COMMITMENTS
Our credit facilities include (1) a Term Loan A facility in the original
amount of $125.0 million that matures in 2007, (2) a Term Loan B facility
in the original amount of $510.0 million that matures in 2008 and (3) a
revolving credit facility in the amount of $125.0 million that matures in
2007. 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, usage under which will reduce the amount available
under the domestic revolving credit facility. Borrowings under the
revolving credit facility may be used for working capital and for general
corporate purposes. We and each of our direct and indirect material
domestic subsidiaries guarantee our obligations under the credit
facilities.
We amended our Term Loan agreements in 2002 allowing us to prepay $45.0
million of our outstanding Term Loans and dividend to International $45.0
million in cash so that International could reduce the seller note based
upon an agreed discount arranged between International and Goodrich. As a
result of the prepayment of the Term Loans, we have no current maturities
of long-term debt at December 31, 2002.
As of December 31, 2002, we had a cash balance of $79.5 million. We had
$120.1 million available for borrowing under the revolving credit facility
of $125.0 million, net of $4.9 million of outstanding letters of credit. As
of December 31, 2002, the balance on Term Loan A was $72.9 million, and the
balance on Term Loan B was $498.9 million.
Our $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.
Principal and interest payments under the credit facilities and the senior
subordinated 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 senior subordinated
notes is payable semi-annually and interest and principal on the credit
facilities is 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. As of December 31, 2002, we were in compliance with all of the
covenants of our credit facilities.
We believe 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 and tax obligations for the foreseeable future.
However, our ability to fund working capital, capital expenditures, debt
service requirements and tax obligations will be dependent upon our future
financial performance and our 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.
The table below summarizes our debt obligations and operating lease
commitments as of December 31, 2002 (dollars in millions):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN 1-3 4-5 AFTER
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------------------------------------------------------------------
Term Loan A $ 72.9 $ - $ 42.0 $ 30.9 $ -
Term Loan B 498.9 - 10.8 11.0 477.1
11% Senior Subordinated Notes 275.0 - - - 275.0
Other debt 0.7 0.4 0.2 0.1 -
Operating leases 10.3 4.3 4.5 1.4 0.1
----------------------------------------------------------------------
Total debt obligations $ 857.8 $ 4.7 $ 57.5 $ 43.4 $ 752.2
======================================================================
CASH FLOWS
Cash flows provided by operating activities increased $20.6 million from
$122.3 million in 2001 to $142.9 million in 2002. The increase was
primarily related to improved operating results.
Investing activities used $79.7 million of cash in 2002. Investing
activities in 2002 included the working capital settlement with Goodrich
discussed below, totaling $14.5 million, payments made in connection with
acquisitions and $52.3 million of capital expenditures. Investing
activities in 2001 included the Acquisition of the Performance Materials
Segment of Goodrich for $1,187.5 million and capital expenditures of $36.1
million in 2001.
Financing activities used $107.5 million in 2002 primarily related to the
$45.0 million prepayment of principal on our Term Loans and the $45.0
million dividend to International which utilized the proceeds to prepay a
portion of the seller note. Financing activities provided $1,221.9 million
of cash in 2001, primarily related to the funding of the Acquisition from
Goodrich.
CAPITAL EXPENDITURES
We believe 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. Our capital
expenditures for 2002 were $52.3 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. We expect capital expenditures for the
years 2003 and 2004 to be between $50.0 million and $60.0 million annually.
WORKING CAPITAL ADJUSTMENT
Pursuant to the purchase agreement between us and Goodrich, the purchase
price for the Acquisition was subject to a post-closing working capital
adjustment. On June 28, 2002, we entered into an agreement with Goodrich
settling the working capital adjustment and in which we agreed to pay
Goodrich $14.5 million. We paid that amount to Goodrich on June 28, 2002
using cash on hand. The settlement payment and the costs associated with
the settlement efforts have been reflected as an adjustment to the purchase
price in our financial statements and increased the goodwill associated
with the Acquisition.
CONTINGENCIES
We have numerous purchase commitments for materials, supplies and energy
incident to the ordinary course of business. We have numerous sales
commitments to supply product 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 adverse 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 regulated by
various laws and governmental regulations. Although we believe past
operations were in substantial compliance with the then-applicable
regulations, either we or the Performance Materials Segment of Goodrich
have been designated as potentially responsible parties by the U.S.
Environmental Protection Agency, or similar state agencies, in connection
with several disposal sites. These laws and regulations, including the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 and similar state laws, generally impose liability for costs to
investigate and remediate contamination without regard to fault and under
certain circumstances liability may be joint and several resulting in one
responsible party being held responsible for the entire obligation.
Liability may also include damages to natural resources.
We initiate corrective and/or preventive environmental projects to ensure
environmental compliance and 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 our existing operating sites. This process includes
investigation and remedial action selection and implementation, as well as
negotiations with other potentially responsible parties and governmental
agencies.
Goodrich provided us with an indemnity for various environmental
liabilities. We estimate Goodrich's share of such currently identified
liabilities under the indemnity, which extends to 2011, to be about $8.1
million. In addition to Goodrich's indemnity, several other indemnities
from third parties such as past owners relate to specific environmental
liabilities. Goodrich and other third party indemnitors are currently
indemnifying us for several environmental remediation projects. Goodrich's
share of all of these liabilities may increase to the extent such third
parties fail to honor their indemnity obligations through 2011. Our
December 31, 2002 balance sheet includes liabilities, measured on an
undiscounted basis, of $19.1 million to cover future environmental
expenditures either payable by us or indemnifiable by Goodrich.
Accordingly, the current portion of the environmental obligations of $0.9
million is recorded in accrued expenses and $1.4 million is recorded in
accounts receivable. Approximately $18.2 million is included in non-current
liabilities and $6.7 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. We believe that it is reasonably possible that additional
costs may be incurred beyond the amounts accrued as a result of new
information, newly discovered conditions or a change in the law. However,
the additional costs, if any, cannot be currently estimated.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued SFAS No. 142,
"Goodwill and Other Intangible Assets," in July 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board 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 adopted SFAS No. 142 effective January 1, 2002.
After giving effect to the elimination of goodwill amortization, as
required by SFAS No. 142, net income (loss) for the ten months ended
December 31, 2001, the two months ended February 28, 2001, and the year
ended December 31, 2000, would have been $(5.5) million, $8.5 million and
$68.3 million, respectively. During the second quarter of 2002, we
performed the first of the required impairment tests of goodwill as of
January 1, 2002. During the fourth quarter of 2002, we performed our annual
impairment test of goodwill. We have determined that no goodwill impairment
has occurred during 2002.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," that requires 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 SFAS No. 143 by
January 1, 2003. However, management has not yet determined the effect of
this Statement on the Company's consolidated financial condition of results
of operations.
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." SFAS No. 144 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 SFAS No. 144 effective January 1,
2002. The effect of adoption had no impact to our consolidated financial
condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." For most companies, SFAS No. 145 will require gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously
required under SFAS No. 4. Extraordinary treatment will be required for
certain extinguishments as provided in APB Opinion No. 30. Upon adoption,
any gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented that does not meet the
criteria of APB Opinion No. 30 for such classification should be
reclassified to conform with the provisions of SFAS No. 145. SFAS No. 145
also amends certain extinguishments as provided in APB Opinion No. 30. SFAS
No. 145 also amends SFAS No. 13 to require certain modifications to capital
leases to be treated as a sale-leaseback and modifies the accounting for
sub-leases when the original lessee remains a secondary obligor (or
guarantor). We adopted SFAS No. 145 during the second quarter of 2002 and
the effect of which had no impact on the Company's consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, various
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. The provisions
of SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted this Statement
effective January 1, 2003. The effect of adoption had no impact on the
Company's consolidated financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation--Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The disclosure provisions of SFAS No.
148 are effective for fiscal years ending after December 15, 2002. The
Company has included these disclosures for the year ended December 31,
2002.
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 our
consolidated financial statements.
REVENUE AND INCOME RECOGNITION
Revenue from the sale of products is recognized at the point of passage of
title, which is at the time of shipment or consumption by the customer for
inventory on consignment. We require that persuasive evidence of a revenue
arrangement exists, delivery of product has occurred or services have been
rendered, the price to the customer is fixed and determinable and
collectibility is reasonably assured before revenue is realized and earned.
Rebates, customer claims, allowances, returns and discounts are reflected
as reductions from gross sales in determining net sales. In 2002, the total
of rebates, customer claims, returns and allowances and discounts amounted
to 3.5% of gross sales. Rebates are accrued based on contractual
relationships with customers as shipments are made. Customer claims,
returns and allowances and discounts are accrued based on our history of
claims and sales returns and allowances. Allowances for doubtful accounts
are maintained for estimated losses resulting from the inability of
customers to make required payments.
INVENTORIES
Inventories are stated at the lower of cost or market. The elements of
inventory cost include raw materials and labor and manufacturing overhead
costs attributed to the production process. Most domestic inventories are
valued by the last-in, first-out, or LIFO, cost method. Inventories not
valued by the LIFO method are valued principally by the average cost
method. We provide for allowances for excess and obsolete inventory based
on the age and quality of our products.
DERIVATIVE AND HEDGING ACTIVITIES
As required by our credit agreement, 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. The net payments or receipts under these agreements are
recognized as an adjustment to interest expense in the Company's results of
operations. For the year ended December 31, 2002, the Company recorded $6.5
million of interest expense as a result of these swap agreements. As of
December 31, 2002, the fair value of these swap arrangements included in
other non-current liabilities totaled approximately $14.7 million. The
offsetting impact of this hedge transaction is included in accumulated
other comprehensive loss.
We enter into currency forward exchange contracts, totaling $10.3 million
as of December 31, 2002, 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 was not
material to the Company's results of operations, cash flow or financial
position.
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 year ended December 31,
2002, we recognized $10.1 million of net losses 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. We provide valuation allowances
against the deferred tax assets if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax assets will
not be realized.
In determining the adequacy of the valuation allowance, which totaled $36.0
million as of December 31, 2002, management assesses our profitability by
taking into account the present and anticipated amounts of domestic and
international earnings, as well as the anticipated taxable income as a
result of the reversal of future taxable temporary differences.
Although we generated sufficient income in 2002 to realize certain deferred
tax assets, we still have cumulative losses and a lack of prior earnings
history in our new capital structure. Therefore, we intend to maintain the
recorded valuation allowances until sufficient positive evidence (for
example, cumulative positive domestic earnings and future taxable income)
exists to support a reversal of the tax valuation allowances.
FORWARD-LOOKING INFORMATION
Certain statements in this section and elsewhere in this report include
forward-looking statements, including those that relate to our future
plans, objectives, expectations and intentions. Statements that are
predictive in nature, that depend upon or refer to future events or
conditions or that include the words "expects," "anticipates," "intends,"
"plans," "believes," "estimates," "seeks," "thinks" and variations of these
words and similar expressions are forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results and performance to be materially
different from any future results or performance expressed or implied by
these forward-looking statements. Although we believe that these statements
are based upon reasonable assumptions, our goals may not be achieved. These
forward-looking statements are made as of the date of this report, and,
except as required under the federal securities laws and the rules and
regulations of the Commission, we assume no obligation to update or revise
them or provide reasons why actual results may differ.
Important factors that may affect our expectations, estimates or
projections include:
o the effects of the substantial debt we have incurred in
connection with our Acquisition of the Performance Materials
Segment from Goodrich and our ability to refinance or repay that
debt;
o changes in customer requirements in markets or industries we
serve;
o general economic and market conditions;
o competition within our industry;
o our access to capital markets and any restrictions placed on us
by any current or future financing arrangements;
o environmental and government regulations;
o the effect of risks of investing in and conducting operations in
foreign countries, including political, social, economic,
currency and regulatory factors;
o changes in the price and supply of major raw materials; and
o the effect of fluctuations in currency exchange rates on our
international operations.
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 transactional risk of foreign currency fluctuations.
The fair value of these contracts at December 31, 2002 was not material to
our results of operations, cash flow or financial position.
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
As required by our credit agreement, 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, 2002 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 fair value of the interest rate swap agreements reduced stockholder's
equity $9.0 million in 2002.
At December 31, 2002, we carried $847.5 million of outstanding debt on our
balance sheet, with $392.5 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 year ended December 31, 2002, interest expense would
increase or decrease by $2.4 million. In addition, if interest rates
hypothetically increased or decreased by 10% on December 31, 2002, with all
other variables held constant, the fair market value of our $275.0 million,
11% senior subordinated notes would decrease or increase by approximately
$16.5 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 67 Chairman of the Board and Director
Steven J. Demetriou 44 Director, Chief Executive Officer and
President
T. J. Dermot Dunphy 70 Director
John L. Garcia 46 Director
Brian R. Hoesterey 35 Director
William J. Lovejoy 35 Director
Vincent A. Sarni 74 Director
Susan C. Schnabel 41 Director
Christopher R. Clegg 45 Senior Vice President, General Counsel and
Secretary
Sarah R. Coffin 50 Senior Vice President and General Manager,
Performance Coatings Global Business Unit
Michael D. Friday 51 Senior Vice President and Chief Financial
Officer
William B. Sedlacek 48 Senior Vice President and General Manager,
Personal Care and Pharmaceuticals Global
Business Unit
Kumar Shah 54 Senior Vice President, Corporate and
Business Development
Sean M. Stack 36 Vice President and Treasurer
H. William Lichtenberger has been our Chairman of the Board of Directors
since March 2001. 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 has been our Chief Executive Officer since March 2001
and our President since May 2001, and has served on our Board of Directors
since March 2001. Prior to joining us, 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. Prior to working for Cytec, Mr. Demetriou worked
for Exxon Chemical Company for 16 years and held various leadership
positions during that time. Mr. Demetriou serves on the Board of Directors
of Commonwealth Industries, Inc. Mr. Demetriou holds a bachelor of science
in chemical engineering from Tufts University.
T. J. Dermot Dunphy has served on our Board of Directors since March 2001.
Mr. Dunphy has been the Chairman of Kildare Enterprises, LLC, a private
equity management and investment firm since December 2001. 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 Sealed Air.
From 1971 until he retired in 2000, Sealed Air's annual sales grew from
approximately $5 million to approximately $3 billion. 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 Sealed Air
Corporation and FleetBoston Financial Corporation and was formerly a
director of Public Service Enterprise Group, 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 has served on our Board of Directors since March 2001. Mr.
Garcia is President of AEA Investors LLC, the successor company of AEA
Investors Inc., of which he has been President since September 2002.
Previously, he was a Managing Director of AEA Investors Inc. from May 1999.
From 1994 to 1999, Mr. Garcia was a Managing Director with Credit Suisse
First Boston Corporation, where he served as Global Head of the Chemicals
Investment Banking Group and Head of the European Acquisition and Leveraged
Finance and Financial Sponsor Groups. His previous experience was at ARCO
Chemicals, in research, strategic planning and commercial development
roles. Mr. Garcia is currently a director of Acetex Corporation and
Sovereign Specialty Chemicals, Inc. and is on the advisory board of
Internet Capital Group. 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 has served on our Board of Directors since March 2001.
Mr. Hoesterey is a Managing Director of AEA Investors LLC, the successor
company of AEA Investors Inc., of which he has been a Managing Director
since September 2002, and had been a Director from July 1999 to September
2002. Prior to joining AEA, he was an Associate with BT Capital Partners,
the private equity investment vehicle of Bankers Trust, from 1998 to 1999.
Mr. Hoesterey worked for McKinsey & Co. as an Engagement Manager from 1995
to 1997 and the investment banking division of Morgan Stanley & Co.
Incorporated in both New York and Hong Kong from 1989 to 1993. He is
currently an officer of Sovereign Specialty Chemicals, Inc. Mr. Hoesterey
obtained a bachelor of business administration degree from Texas Christian
University and holds a master's degree in business administration from
Harvard Business School.
William J. Lovejoy has served on our Board of Directors since March 2001.
Mr. Lovejoy has been a Managing Director of DB Capital Partners, Inc., the
private equity arm of Deutsche Bank AG since May 2000. Prior to joining DB
Capital, he was a Principal of Lazard Capital Partners, the private equity
investing affiliate of Lazard Freres & Co. LLC, from May 1999. Before
joining Lazard, Mr. Lovejoy was a director of Castle Harlan, Inc., a
private equity investment firm from December 1999. Prior to entering the
merchant banking industry, Mr. Lovejoy was a management consultant with The
Boston Consulting Group, Inc. Mr. Lovejoy obtained a bachelor of science
degree in engineering from the University of Michigan and holds a master's
degree in business administration from Harvard Business School.
Vincent A. Sarni has served on our Board of Directors since March 2001. Mr.
Sarni retired from PPG Industries, Inc. in August 1993, concluding a
25-year career with the company, and is currently an independent
consultant. 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 has served on our Board of Directors since March 2001.
Ms. Schnabel has been a Managing Director in the Private Equity group of
Credit Suisse First Boston since December 2000. 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 Holding, Inc. and Shoppers Drug Mart. Ms. Schnabel
received a bachelor of science in chemical engineering from Cornell
University and holds a master's degree in business administration from
Harvard Business School.
Christopher R. Clegg is our Senior Vice President, General Counsel and
Secretary and has served in that capacity since March 2001. 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 Corporate Counsel for Goodrich Aerospace since May 1991. Prior to
joining Goodrich, Mr. Clegg was a corporate lawyer in private practice with
the law firms of Squire, Sanders & Dempsey in Cleveland, Ohio from March
1988 to May 1991 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 and has served in that capacity
since March 2001. Prior to that, Ms. Coffin served as Group President of
the Performance Coatings Group for the Performance Materials Segment of
Goodrich since July 1999 to March 2001. Ms. Coffin joined Goodrich in 1998
with responsibility for the Specialty Materials 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 in that capacity since March 2001. Mr. Friday had 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 degree 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 and has served in
that capacity since March 2001. Mr. Sedlacek had served as Group President
of the Consumer Specialties Group for the Performance Materials Segment of
Goodrich since 1998. 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(R) Reactive Liquid Polymers
business unit. Mr. Sedlacek was named Vice President and General Manager of
the consumer specialties business unit in 1995 and promoted to Group
President in 1998. 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 and Business Development
and has served in that capacity since March 2001. Prior to joining us, Mr.
Shah was an independent consultant from July 2000 to May 2001. Mr. Shah
served as Senior Vice President-Corporate Development of International
Specialty Products Inc., a specialty chemicals firm, from March 1999 to
April 2000. From 1993 to February 1999, Mr. Shah served as Vice
President-Corporate Development, 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 and has served in that
capacity since March 2001. Prior to joining us, Mr. Stack served as Vice
President and Treasurer for Specialty Foods Corporation from May 1996 to
December 2000. Specialty Foods filed for bankruptcy in September 2000 and
emerged from bankruptcy in December 2000. 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's
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.
Currently, Mr. Garcia is President and Mr. Hoesterey is a Managing Director
of AEA. Mr. Lovejoy is currently a Managing Director of DB Capital
Partners, Inc. Ms. Schnabel is currently a Managing Director in the Private
Equity group of Credit Suisse First Boston, an affiliate of DLJ Merchant
Banking. For a more detailed discussion of relationships among our
stockholders, AEA, DB Capital Partners, Inc., Credit Suisse First Boston
LLC and us, see "Certain Relationships and Related Transactions."
ITEM 11. EXECUTIVE COMPENSATION
The table below summarizes compensation information for our Chief Executive
Officer and our four other most highly compensated executive officers for
the period of March 1, 2001 through December 31, 2002.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION SECURITIES
---------------------------------------------------------
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME YEAR SALARY($) BONUS($) COMPENSATION ($) OPTIONS(#)(1) COMPENSATION ($)
- -----------------------------------------------------------------------------------------------------------------------
Steven J. Demetriou 2002 $600,000 $ 600,000 $ 61,577 0 $ 26,241 (2)
Chief Executive Officer 2001 475,000 (3) 500,000 157,115 (4) 98,611 214,400
and President
Michael D. Friday 2002 $261,250 $ 255,078 $ 22,040 0 $ 13,306 (5)
Senior Vice President and 2001 203,400 (3) 71,250 25,620 30,000 3,476
Chief Financial Officer
Sarah R. Coffin 2002 $291,500 $ 217,593 $ 29,728 300 (6) $ 17,520 (7)
Senior Vice President and 2001 242,916 (3) 59,055 38,455 10,000 6,330
General Manager, Performance
Coatings Global Business Unit
William B. Sedlacek 2002 $238,700 $ 170,264 $ 32,886 300 (6) $ 16,352 (8)
Senior Vice President and 2001 198,920 (3) 78,224 51,732 10,000 5,555
General Manager, Personal
Care and Pharmaceuticals
Global Business Unit
Christopher R. Clegg 2002 $240,000 $ 172,484 $ 32,365 300 (6) $ 12,766 (9)
Senior Vice President, 2001 179,167 (3) 62,700 22,157 10,000 52,118
General Counsel and Secretary
- --------------------------------
(1) The securities underlying these option grants are shares of common
stock of International.
(2) Reflects premiums paid of $15,241 for excess liability and life
insurance policies for Mr. Demetriou and a payment of $11,000 for
our matching contributions under our 401(k) plan for the 2002 plan
year.
(3) 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.
(4) Includes reimbursements of $73,000 for expenses relating to Mr.
Demetriou's temporary housing and living expenses associated with
relocation.
(5) Reflects payment of $11,000 for our matching contributions under
our 401(k) plan for the 2002 plan year and premiums paid of $2,306
for a life insurance policy for Mr. Friday.
(6) The compensation committee of the board of directors of
International approved the grant of options to purchase shares of
International common stock on January 21, 2002 as follows: Ms.
Coffin, 300; Mr. Sedlacek, 300; and Mr. Clegg, 300.
(7) Reflects payment of $11,000 for our matching contributions under
our 401(k) plan for the 2002 plan year and premiums paid of $6,520
for excess long-term disability and life insurance policies for Ms.
Coffin.
(8) Reflects payment of $11,000 for our matching contributions under
our 401(k) plan for the 2002 plan year and premiums paid of $5,352
on excess long-term disability and life insurance policies for Mr.
Sedlacek.
(9) Reflects payment of $11,000 for our matching contributions under
our 401(k) plan for the 2002 plan year and premiums paid of $1,766
for a life insurance policy for Mr. Clegg.
STOCK OPTIONS
The table below sets forth information concerning options to purchase
shares of common stock of International to the executives listed in the
Summary Compensation Table as of December 31, 2002.
OPTION GRANTS IN FISCAL YEAR 2002
INDIVIDUAL GRANTS (1)
-----------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE EXPIRATION OPTION TERM (2)
NAME GRANTED(#) FISCAL YEAR(3) ($/SHARE)(4) DATE 5% ($) 10% ($)
------------------------------------------------------------------------------------------------------------------------
Steven J. Demetriou 0 - - - - -
Michael D. Friday 0 - - - - -
Sarah R. Coffin 300 2.6% $ 128.57 2012 $ 10,296 $ 39,241
William B. Sedlacek 300 2.6% 128.57 2012 10,296 39,241
Christopher R. Clegg 300 2.6% 128.57 2012 10,296 39,241
- -----------
(1) The compensation committee of the board of directors of
International approved the grant of options to purchase shares of
International common stock on January 21, 2002 as follows: Ms.
Coffin, 300; Mr. Sedlacek, 300; and Mr. Clegg, 300.
(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 Commission and do not represent our estimate or projection of
future stock price.
(3) Pursuant to International's stock option plan, an aggregate of
394,444 shares of common stock of International were reserved for
options to be granted to our key employees, consultants and
directors. As of December 31, 2002, International had granted
options to purchase 316,911 shares of its common stock, which
includes 20,000 shares of common stock for options granted to
certain directors of International.
(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 information concerning the value of
options for shares of common stock of International held by each of the
executives listed in the Summary Compensation Table as of December 31,
2002.
AGGREGATE OPTION EXERCISES AND OPTION VALUES
---------------------------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS OPTIONS ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
-------------------------------------------------------------------------------------------------
Steven J. Demetriou 0 0 19,722/78,889 0/0
Michael D. Friday 0 0 6,000/24,000 0/0
Sarah R. Coffin 0 0 2,000/8,300 0/0
William B. Sedlacek 0 0 2,000/8,300 0/0
Christopher R. Clegg 0 0 2,000/8,300 0/0
- -----------
(1) There is no public trading market for shares of common stock of
International. Accordingly these values of exercisable and
unexercisable in-the-money options are based on the fair market
value of International 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.
EMPLOYMENT AGREEMENT AND EQUITY PLANS
Employment Agreements
We have entered into an agreement with Steven J. Demetriou providing for
his employment as our Chief Executive Officer for a three-year term
beginning on March 15, 2001. Mr. Demetriou's minimum annual salary is
$600,000. He received a signing bonus of $200,000. Mr. Demetriou is
eligible for an annual performance-based bonus under the 2002 Management
Incentive Plan based primarily on attainment of Noveon's actual adjusted
EBITDA and working capital targets. Under this plan for 2002, Mr. Demetriou
received a bonus of $600,000. For 2001, he received a guaranteed bonus of
$300,000. Mr. Demetriou also received a bonus of $200,000 for the 2001
fiscal year based upon the attainment of working capital targets and the
achievement of personal management objectives agreed upon by Mr. Demetriou
and our compensation committee.
Mr. Demetriou purchased from International 10,000 shares of its common
stock at a per share purchase price of $100 in exchange for a full recourse
note of $1.0 million with a term of 10 years and an interest rate of 7% per
annum. For a description of this note, see "Certain Relationships and
Related Transactions."
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 times 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 in connection with 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. Mr. Demetriou has the right to
terminate his employment at any time on 30 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, in connection
with 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
International's stock option plan. A copy of the stock option plan has been
incorporated by reference as an exhibit to this Form 10-K.
In 2001, International adopted the stock option plan to provide for the
grant of nonqualified stock options to key employees, consultants and
directors of International and its subsidiaries (including us) and
affiliates. The maximum number of shares of International 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 International. 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
International 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 45
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
International, 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 International common stock receiving payments or securities in
respect of, or in exchange for, their International common stock that do
not result in a change in control of International, 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 International
common stock in connection with the transaction.
In the event of either of the above-described transactions, International
may cancel any options unexercised as of the transaction date upon
substitution of equivalent options or a payment from International 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 International common stock issuable upon exercise of the options.
The International 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 International common stock, and equitably adjusted as determined by
the committee for any other increase or decrease in the number of issued
shares of International 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 International common stock or any
substantial sale of the assets of International.
The International 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 10 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.
YEARS OF BENEFIT SERVICE
-------------------------------------------------------------------------------------------------
FINAL
AVERAGE
EARNINGS 10 15 20 25 30 35 40
- ---------------------------------------------------------------------------------------------------------------
$ 100,000 $ 14,021 $ 21,032 $ 28,043 $ 35,054 $ 42,064 $ 49,075 $ 54,825
$ 125,000 $ 18,021 $ 27,032 $ 36,043 $ 45,054 $ 54,064 $ 63,075 $ 70,263
$ 150,000 $ 22,021 $ 33,032 $ 44,043 $ 55,054 $ 66,064 $ 77,075 $ 85,700
$ 200,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 250,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 300,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 350,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 400,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 450,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 500,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 600,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 700,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 800,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 900,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
$ 1,000,000 $ 30,021 $ 45,032 $ 60,043 $ 75,054 $ 90,064 $ 105,075 $ 116,575
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 $43,968. 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 December 31, 2002, Mr. Demetriou had 1.9 years of credited service;
Mr. Clegg had 11.7 years of credited service and his pension benefit will
be subject to an estimated offset under the Goodrich Pension Plan of
$23,700; Ms. Coffin had 4.5 years of credited service and her pension
benefit will be subject to such offset, estimated to be $6,600; Mr.
Sedlacek had 25.1 years of credited service and his pension benefit will be
subject to such offset, estimated to be $58,900; and Mr. Friday had 5.9
years of credited service and his pension benefit will be subject to such
offset, estimated to be $9,800.
2002 MANAGEMENT INCENTIVE PLAN
On January 21, 2002, we adopted the 2002 Management Incentive Plan to more
closely align compensation of key management employees with our
performance.
Our 2002 Management Incentive Plan is administered by the compensation
committee of our Board of Directors. Participants are selected and approved
annually by the President and Chief Executive Officer. Incentive awards
under the plan take the form of cash payments made to participants based
primarily on attainment of our actual adjusted EBITDA, working capital and
sales targets and are calculated based on the base salary, position and
location of each participant. Any awards under the plan are entirely
discretionary.
SPECIAL DEFERRED COMPENSATION PLAN
We adopted the 2001 Special Deferred Compensation Plan to provide a select
group of senior managers of the Performance Materials Segment of Goodrich
who became employees of Noveon the ability to defer the receipt of
compensation for periods provided in the plan. Effective November 1, 2002,
the plan was amended and restated, in part to permit additional senior
managers to participate in the Noveon, Inc. Special Deferred Compensation
Plan.
To participate in the plan, certain eligible employees make an election by
executing assignment and election agreements. The election agreement states
the amount of the compensation to be deferred and the date and manner in
which it shall be paid to the participant. We have established a deferred
account representing each participant's deferred compensation, which has
been placed in a trust. Account balances are deemed to be invested among
certain investment choices selected by each participant. The account
balances are adjusted at least quarterly to reflect the actual performance
of the selected investment allocation.
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 International.
Messrs. Sarni and Dunphy each also received 5,000 options to purchase
common shares of International. 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 31, 2002, the compensation committee of our Board of
Directors is comprised of Messrs. Lichtenberger, Dunphy and Garcia. In
addition to being the President of AEA, Mr. Garcia is also Chairman of the
Board of Directors of a wholly owned subsidiary of AEA, which is the
general partner of each of the partnerships that wholly own PMD Investors I
LLC and PMD Investors II LLC. Mr. Garcia is also a limited partner in each
of these partnerships. AEA owns approximately 43% of the common stock of
International, 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 International. The following table sets
forth information with respect to the beneficial ownership of the common
stock of International by (a) any person or group who will beneficially own
more than five percent of the common stock of International (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 OUTSTANDING
OF COMMON
NAME OF BENEFICIAL OWNER SHARES STOCK(1)
- -------------------------------------------------------------------------------
DLJ Merchant Banking Partners III, L.P.
and related owners (2)(3) 1,500,000 41.7%
PMD Investors II LLC (4) 1,361,215 37.8%
DB Capital/PMD Investors, LLC (5)(6) 500,000 13.9%
PMD Investors I LLC (7) 188,785 5.2%
Steven J. Demetriou (8) 29,722 *
H. William Lichtenberger (9)(10) 7,000 *
T. J. Dermot Dunphy (11) 8,000 *
John L. Garcia (9) - *
Brian R. Hoesterey (9) - *
William J. Lovejoy (12) - *
Vincent A. Sarni (13) 1,500 *
Susan C. Schnabel (14) - *
Christopher R. Clegg 3,060 *
Sarah R. Coffin 4,060 *
Michael D. Friday 7,250 *
William B. Sedlacek 4,560 *
Kumar Shah 5,500 *
Sean M. Stack 1,800 *
All directors and executive officers as a
group (14 persons) 72,452 2.0%
- ----------------------
* 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. Ownership includes the following number of options that
become exercisable within 60 days of December 31, 2002: Mr.
Demetriou, 19,722; Mr. Lichtenberger, 2,000; Mr. Dunphy, 1,000; Mr.
Sarni, 1,000; Mr. Clegg, 2,060; Ms. Coffin, 2,060; Mr. Friday,
6,000; Mr. Sedlacek, 2,060; Mr. Shah, 4,000; and Mr. Stack, 800.
The percentage ownerships are calculated by totaling outstanding
shares of common stock and vested options that become exercisable
within 60 days of December 31, 2002.
(2) 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; DLJ MB PartnersIII GmbH & Co. KG and Millennium
Partners II, L.P. Investment and voting decisions on behalf of the
partnerships are generally controlled by DLJ Merchant Banking III,
Inc. and DLJ Merchant Banking III, L.P., as general partners or
adviser and managing limited partner of the partnerships. The
general partner of DLJ Merchant Banking III, L.P. is DLJ Merchant
Banking III, Inc., an affiliate of Credit Suisse First Boston LLC.
Most major decisions regarding investments by the partnerships and
DLJMB Funding III, Inc. are made by an investment committee whose
composition may change. No individual has authority to make any
such decisions without the approval of the investment committee.
Certain matters may also require the approval of an advisory
committee comprised of limited partners that are not affiliated
with DLJ Merchant Banking III, Inc.
(3) 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.
(4) These shares may be deemed to be beneficially owned by AEA. The
managing member of PMD Investors II, LLC is PMD Investors II LP.
The general partner of PMD Investors II LP is AEA PMD Investors
Inc., or "AEA PMD". John L. Garcia is a Director and Chairman of
the Board of AEA PMD. Brian R. Hoesterey is a Director, President
and Treasurer of AEA PMD. AEA disclaims beneficial ownership of
these shares except to the extent of its pecuniary interest
therein. The address for AEA and PMD Investors II LLC is c/o AEA
Investors LLC, Park Avenue Tower, 65 East 55th Street, New York,
New York 10022.
(5) DB Capital/PMD Investors, LLC was an indirect wholly owned
subsidiary of DB Capital Partners, Inc., part of the Corporate
Investments division of Deutsche Bank AG, until February 20, 2003.
From February 20, 2003, DB Capital Investors, L.P., DB Capital
Partners, L.P., Existing Fund GP, Ltd., MidOcean Partners, LP and
MidOcean Associates, SPC may all be deemed to be beneficial owners
of the shares as a result of their direct or indirect control
relationship with DB Capital/PMD Investors, LLC. DB Capital
Investors, L.P. is the managing member of DB Capital/PMD Investors,
LLC. DB Capital Partners, L.P. is the general partner of DB Capital
Investors, L.P. Existing Fund GP, Ltd. is the general partner of DB
Capital Partners, L.P. MidOcean Partners, LP is the sole owner of
Existing Fund GP, Ltd. and a limited partner in DB Capital
Partners, L.P., and MidOcean Associates, SPC is the general partner
of MidOcean Partners, LP. On February 20, 2003, MidOcean Partners,
LP, and Existing Fund GP, Ltd. acquired an 80% limited partnership
interest and a general partnership interest, respectively, in DB
Capital Partners, L.P. from DB Capital Partners, Inc. Prior to this
time, none of Existing Fund GP, Ltd., MidOcean Partners, LP or
MidOcean Associates, SPC had a beneficial ownership interest in the
shares.
(6) The address for DB Capital/PMD Investors, LLC, DB Capital
Investors, L.P., DB Capital Partners, L.P., Existing Fund GP, Ltd.,
MidOcean Partners, LP and MidOcean Associates, SPC is 345 Park
Avenue, 16th Floor, New York, New York 10154. The address for DB
Capital Partners, Inc. is 31 West 52nd Street, New York, New York
10019.
(7) These shares may be deemed to be beneficially owned by AEA. The
managing member of PMD Investors I LLC is PMD Investors I LP. The
general partner of PMD Investors I LP is AEA PMD. John L. Garcia is
a Director and Chairman of the Board of AEA PMD. Brian R. Hoesterey
is a Director, President and Treasurer of AEA PMD. AEA disclaims
beneficial ownership of these shares except to the extent of its
pecuniary interest therein. The address for AEA and PMD Investors I
LLC is c/o AEA Investors LLC, Park Avenue Tower, 65 East 55th
Street, New York, New York 10022.
(8) Pursuant to an employment agreement, Mr. Demetriou purchased 10,000
shares of common stock of International.
(9) Does not include shares beneficially owned by AEA, 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, Hoesterey and Lichtenberger serve
on International's board of directors as designees of PMD. Messrs.
Garcia and Hoesterey are limited partners in PMD Investors I LP,
the partnership that owns PMD Investors I LLC and in PMD Investors
II LP, the partnership that owns PMD Investors II LLC, and are
officers and directors of AEA PMD, the general partner of PMD
Investors I LP and PMD Investors II LP. Mr. Garcia and Mr.
Hoesterey are also officers of AEA.
(10) Includes 5,000 shares held by H. William Lichtenberger FlintTM
Trust, dated July 20, 2001, which may be deemed to be beneficially
owned by Mr. Lichtenberger.
(11) Mr. Dunphy serves on International's board of directors as a
designee of DLJ Merchant Banking.
(12) Does not include shares beneficially owned by DB Capital Partners,
Inc. or MidOcean Partners, LP. Mr. Lovejoy is an officer of DB
Capital Partners, Inc. Mr. Lovejoy disclaims beneficial ownership
of the shares owned by DB Capital/PMD Investors, LLC except to the
extent of his pecuniary interest therein. The address for DB
Capital Partners, Inc. is 345 Park Avenue, 16th Floor, New York,
New York 10154. Mr. Lovejoy serves on our Board of Directors as a
designee of MidOcean Partners, LP.
(13) Includes 500 shares held by Ms. Sandra P. Sarni, Vincent A. Sarni's
wife, which may be deemed to be beneficially owned by Mr. Sarni.
Mr. Sarni serves on International's board of directors as a
designee of DLJ Merchant Banking.
(14) Does not include shares beneficially owned by DLJ Merchant Banking
Partners III, L.P. and related owners. Ms. Schnabel is a managing
director in the Private Equity Group of Credit Suisse First Boston,
the indirect parent of DLJ Merchant Banking Partners III, L.P. and
related owners. Ms. Schnabel denies beneficial ownership of these
shares. Ms. Schnabel serves on International's board of directors
as a designee of DLJ Merchant Banking.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
The following is a summary of the material terms of the stockholders
agreement among International, PMD, DLJ Merchant Banking and DB Capital/PMD
Investors, LLC dated as of November 28, 2000, as amended, and entered into
with respect to the shares of International. As of December 31, 2002, PMD
owns approximately 43% of the common stock of International, DLJ Merchant
Banking owns approximately 42% and DB Capital owns approximately 14%.
The stockholders agreement provides PMD, DLJ Merchant Banking and DB
Capital/PMD Investors, LLC with various corporate governance rights so long
as specific stock ownership levels are maintained. PMD and DLJ Merchant
Banking each have the right to designate three members to the board of
directors of International, and to jointly designate one additional
director. DB Capital/PMD Investors, LLC has the right to designate one
director. The agreement also provides that International's chief executive
officer will serve as a director.
Pursuant to the terms of the stockholders agreement, prior to an initial
public offering, or IPO, of International, 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 will require the approval of a majority of the
International directors, which majority must include at least one director
designated by each of PMD and DLJ Merchant Banking so long as, in each
case, PMD or DLJ Merchant Banking, respectively owns at least 15% of the
common stock of International. Such board actions include, among other
things:
o amending International's certificate of incorporation or by-laws;
o entering into transactions between International and any of PMD,
DLJ Merchant Banking and DB Capital/PMD Investors, LLC, with
limited exceptions; and
o causing International's liquidation, dissolution or voluntary
bankruptcy.
If any of PMD, DLJ Merchant Banking or DB Capital/PMD Investors, LLC,
together with their affiliates (as defined in the stockholders agreement),
cease to hold at least 5% of International's common stock, such stockholder
will lose its special voting rights and its right to designate directors.
In addition, such stockholders will also lose these rights upon the earlier
of February 28, 2011 or the date following the completion of an IPO on
which such stockholders collectively cease to own at least 25% of
International's common stock.
Pursuant to the stockholders agreement, AEA, Credit Suisse First Boston
LLC, formerly known as Credit Suisse First Boston Corporation, ("CSFB") and
Deutsche Bank Securities Inc. received advisory services fees of $8.75
million, $5.5 million and $1.75 million, respectively, from us, upon
consummation of our Acquisition of the Performance Materials Segment of
Goodrich in February 2001. Advisory service fees were determined by
agreement among us, the arrangers of our credit facilities, AEA, DLJ
Merchant Banking, DB Capital/PMD Investors, LLC, CSFB and Deutsche Bank
Securities Inc.
MANAGEMENT AGREEMENTS
Pursuant to the stockholders agreement, we entered into management
agreements with each of AEA, DLJ Merchant Banking and DB Capital/PMD
Investors, LLC. Under the management agreements, we pay AEA, DLJ Merchant
Banking and DB Capital/PMD Investors, LLC annual fees 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.
Since we commenced operations on March 1, 2001, we have paid $3.4 million,
$1.9 million and $0.9 million to AEA, DLJ Merchant Banking and DB
Capital/PMD Investors, LLC, respectively, pursuant to these management
agreements. Management fees were determined by agreement among us, the
arrangers of our credit facilities, AEA, DLJ Merchant Banking and DB
Capital/PMD Investors, LLC. In addition, we agreed to indemnify AEA, DLJ
Merchant Banking and DB Capital/PMD Investors, LLC and their respective
affiliates for liabilities arising from their actions under the management
agreements.
Pursuant to the stockholders agreement, we entered into an advisory
services agreement, dated as of February 5, 2001, with CSFB. Under the
advisory services agreement, we pay CSFB an annual fee of $0.5 million plus
reasonable out-of-pocket expenses as compensation for strategic and
financial planning advisory services. Since we commenced operations on
March 1, 2001, we have paid $0.9 million to CSFB pursuant to the advisory
services agreement. The annual fee was determined by agreement among us,
the arrangers of our credit facilities, AEA, DLJ Merchant Banking, DB
Capital/PMD Investors, LLC and CSFB. In addition, we agreed to indemnify
CSFB and its respective affiliates for liabilities arising from their
actions under the advisory services agreement.
The fee provisions of each of the management agreements and the advisory
services agreement terminate, with respect to each of AEA, DLJ Merchant
Banking and DB Capital/PMD Investors, LLC, upon the earlier of the third
anniversary of an IPO of International common stock and the date on which
either of AEA or DLJ Merchant Banking, respectively, ceases to own at least
15% of International's common stock or DB Capital/PMD Investors, LLC ceases
to own at least 5% of International's common stock.
NOTE RECEIVABLE
Our Chief Executive Officer and President purchased 10,000 shares of common
stock in International that 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 10 years.
We purchased the note from International at face value and have reflected
the note receivable in other assets on the balance sheet. As of December
31, 2002, the total amount outstanding on the note, including interest, was
$1.1 million. The principal amount of the note, together with accrued
interest, is payable upon the earliest of:
o the expiration of the 10-year term of the note;
o 30 days after Mr. Demetriou's employment is terminated for any
reason, other than a termination without "cause" (as defined in
his employment agreement); and
o a "change in control" of International (as defined in his
employment agreement) or the receipt of proceeds by Mr. Demetriou
from the sale of shares of International's common stock (provided
that Mr. Demetriou will only be obligated to repay that amount of
the note that is equal to the amount of proceeds received from
each such sale of shares until all amounts due under the note are
repaid in full), and, in either case, a termination of Mr.
Demetriou's employment by us without cause or by Mr. Demetriou
with good reason.
RECEIVABLE FROM INTERNATIONAL
International incurred $1.2 million in expenses and fees associated with
International's attempted public offering. We paid for these amounts on
behalf of International. These amounts may be paid to the Company out of
the proceeds of a completed public offering by International.
TAX SHARING AGREEMENT
We and International are parties to a tax sharing agreement pursuant to
which International files a consolidated federal income tax return with us
and our domestic affiliated subsidiaries, and the federal income tax
liability of us and our domestic affiliated subsidiaries is included in the
International consolidated federal income tax liability. Under the tax
sharing agreement, we and our domestic subsidiaries will make periodic tax
payments to International which generally are determined as though we and
International file separate returns. Under applicable tax law, which
provides that each member of a consolidated group is jointly and severally
liable for the income tax liability of each member of the consolidated
group, we could be held liable for the taxes of International even if they
fail to make the payments required under the tax sharing agreement.
MANAGEMENT STOCKHOLDERS AGREEMENT
We, International, AEA, DLJ Merchant Banking and DB Capital/PMD Investors,
LLC entered into a management stockholders agreement on October 31, 2001
with International's executive officers who hold shares of International
common stock. The agreement restricts the transfer of shares held by these
executive officers except in certain circumstances. These transfer
restrictions expire on the earlier of a sale of International or the second
anniversary of an IPO of International common stock. Under this agreement,
International has the right to repurchase the shares of common stock if the
executive officer is no longer employed by International.
CREDIT FACILITIES
Credit Suisse First Boston, an affiliate of DLJ Merchant Banking, and
Deutsche Bank Securities Inc., which was an affiliate of DB Capital/PMD
Investors, LLC through February 20, 2003, are joint lead arrangers and
joint book managers under our credit facilities. Deutsche Bank Trust
Company Americas, which was an affiliate of DB Capital/PMD Investors, LLC
through February 20, 2003, is administrative agent and a lender and Credit
Suisse First Boston is syndication agent and a lender under our credit
facilities and they receive fees customary for performing these services
and interest on such indebtedness.
SENIOR SUBORDINATED NOTES
On February 28, 2001, CSFB, an affiliate of DLJ Merchant Banking, and
Deutsche Bank Securities Inc., which was an affiliate of DB Capital/PMD
Investors, LLC through February 20, 2003, were initial purchasers of $275.0
million aggregate principal amount of our senior subordinated notes, which
they purchased at an aggregate purchase price, net of underwriting fees, of
$266.8 million.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of our disclosure controls and procedures within 90 days
before the filing date of this report. Based on that evaluation, our
management, including the CEO and CFO, concluded that our disclosure
controls and procedures were effective. We have established a formal
Disclosure Committee comprised of members of operational and functional
management. The Disclosure Committee reports directly to the CEO and CFO
regarding the committee's formal evaluation of disclosure controls and
procedures.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective
actions were required or undertaken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) LIST OF FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page F-1. for
the financial statements of Noveon, Inc. and its subsidiaries,
and the auditor's report thereon.
(A) (2) LIST OF FINANCIAL STATEMENT SCHEDULES
All financial statement schedules for Noveon, Inc. and its
subsidiaries have been included in the consolidated financial
statements or the related footnotes, or they are either
inapplicable or not required.
(A) (3) LIST OF EXHIBITS
See Exhibits Index on Page E-1.
(B) REPORTS ON FORM 8-K
October 31, 2002--The Registrant filed a Current Report of Form
8-K, which was reported under Item 5, Other Events and Item 7,
Financial Statements and Exhibits with respect to a press release
containing information about an amendment to its credit
agreement.
November 14, 2002--The Registrant filed a Current Report on Form
8-K, which was reported under Item 5, Other Events and Item 7,
Financial Statements and Exhibits with respect to a press release
containing its financial results for the third quarter of 2002.
No other reports on Form 8-K were filed during the fourth quarter
of 2002.
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.
Dated: February 28, 2003 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 February 28, 2003
- ------------------------------------
H. William Lichtenberger
/s/ Steven J. Demetriou Director, Chief Executive February 28, 2003
- ------------------------------------ Officer and President
Steven J. Demetriou (Principal Executive Officer)
/s/ T. J. Dermot Dunphy Director February 28, 2003
- ------------------------------------
T.J. Dermot Dunphy
/s/ Vincent A. Sarni Director February 28, 2003
- ------------------------------------
Vincent A. Sarni
/s/ John L. Garcia Director February 28, 2003
- ------------------------------------
John L. Garcia
/s/ Brian R. Hoesterey Director February 28, 2003
- ------------------------------------
Brian R. Hoesterey
/s/ Susan C. Schnabel Director February 28, 2003
- ------------------------------------
Susan C. Schnabel
/s/ William J. Lovejoy Director February 28, 2003
- ------------------------------------
William J. Lovejoy
/s/ Michael D. Friday Senior Vice President and February 28, 2003
- ------------------------------------ Chief Financial Officer
Michael D. Friday (Principal Financial Officer)
/s/ Sean M. Stack Vice President and Treasurer February 28, 2003
- ------------------------------------
Sean M. Stack
/s/ Scott A. McKinley Vice President and Controller February 28, 2003
- ------------------------------------ (Principal Accounting Officer)
Scott A. McKinley
FORM 10-K CERTIFICATIONS
I, Steven J. Demetriou, the Chief Executive Officer of Noveon, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Noveon, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: February 28, 2003 /s/ Steven J. Demetriou
--------------------------------------------
Steven J. Demetriou
President and Chief Executive Officer
I, Michael D. Friday, the Chief Financial Officer of Noveon, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Noveon, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: February 28, 2003 /s/ Michael D. Friday
--------------------------------------------
Michael D. Friday
Senior Vice President and Chief Financial
Officer
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, 2002. 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., filed on May 29, 2001 as Exhibit 2.1 to our Registration
Statement on Form S-4 (Commission File No. 333-61812) ("Registration Statement No. 333-61812"), and
incorporated herein by reference.+
3.1 Corrected Restated Certificate of Incorporation of Noveon, Inc., filed as Exhibit 3.1 to Form 10-Q
for the quarter ended June 30, 2002, and incorporated herein by reference.
3.2 Amended and Restated By-Laws of Noveon, Inc., filed as Exhibit 3.2 to Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference.
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, filed as Exhibit 4.1 to Registration
Statement No. 333-61812, and incorporated herein by reference.
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), filed as Exhibit 4.2 to Registration Statement No.
333-61812, and incorporated herein by reference.
4.3 Form of Guarantee (contained in Exhibit 4.1 as Exhibit E thereto), filed as Exhibit 4.3 to
Registration Statement No. 333-61812, and incorporated herein by reference.
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, filed as Exhibit
4.4 to Registration Statement No. 333-61812, and incorporated herein by reference.
10.1 Amended and Restated Management Agreement, dated June 26, 2001, between Noveon, Inc. and DLJ
Merchant Banking III, Inc., filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 2001,
and incorporated herein by reference.
10.2 Management Agreement, dated February 5, 2001, between PMD Group Inc. and DB Capital/PMD Investors,
LLC, filed as Exhibit 10.2 to Registration Statement No. 333-61812, and incorporated herein by
reference.
10.3 Management Agreement, dated February 5, 2001, between PMD Group Inc. and AEA Investors Inc, filed as
Exhibit 10.3 to Registration Statement No. 333-61812, and incorporated herein by reference.
10.4 Advisory Services Agreement, dated as of February 5, 2001, by and between PMD Group Inc. and Credit
Suisse First Boston Corporation, filed as Exhibit 10.4 to Registration Statement No. 333-61812, and
incorporated herein by reference.+
10.5 Credit Agreement by and among PMD Group Inc., PMD Group Holdings Inc., Bankers Trust Company and
Credit Suisse First Boston, dated as of February 28, 2001, filed as Exhibit 10.5 to Registration
Statement No. 333-61812, and incorporated herein by reference.+
10.6 First Amendment to Credit Agreement by and among Noveon International, Inc., Noveon, Inc., Deutsche
Bank Trust Company Americas, Credit Suisse First Boston and the financial institutions signatory
thereto dated as of October 31, 2002.
10.7 Tax Sharing Agreement by and between PMD Group Holdings Inc. and PMD Group Inc., dated as of
February 28, 2001, filed as Exhibit 10.6 to Registration Statement No. 333-61812, and incorporated
herein by reference.
10.8 Settlement Agreement and Release between Goodrich Corporation and Noveon, Inc. dated June 28, 2002,
filed as Exhibit 10.12 to Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by
reference.
10.9 Employment Agreement, dated March 9, 2001, between PMD Group Holdings Inc., PMD Group Inc., and
Steven J. Demetriou, filed as Exhibit 10.8 to Registration Statement No. 333-61812, and incorporated
herein by reference.+
10.10 Noveon Holdings, Inc. Amended and Restated Stock Option Plan, filed as Exhibit 10.8 to Form 10-K
for year ended December 31, 2001, and incorporated herein by reference.
10.11 Noveon, Inc. Special Deferred Compensation Plan (First Restatement effective
November 1, 2002).
10.12 Noveon, Inc. 2002 Management Incentive Plan, filed as Exhibit 10.11 to Form 10-Q for the quarter
ended March 31, 2002, and incorporated herein by reference.+
10.13 Promissory Note dated November 30, 2001 between Steven J. Demetriou as maker and Noveon Holdings,
Inc. as payee.
10.14 Security Agreement dated November 30, 2001 between Steven J. Demetriou as pledgee and Noveon
Holdings, Inc. as pledgor.
10.15 Assignment effective as of November 30, 2001 between Noveon Holdings, Inc. as assignor and Noveon,
Inc. as assignee.
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.
* Copies of these Exhibits have been filed with the Commission. Security
holders may obtain a copy of any exhibit, upon payment of reproduction
costs, by writing Noveon Investor Relations, at 9911 Brecksville Road,
Cleveland, Ohio 44141-3257.
Noveon, Inc.
Year Ended December 31, 2002 and
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
and Year Ended December 31, 2000
Consolidated Financial Statements
INDEX
Reports of Independent Auditors............................................F-2
Consolidated Financial Statements
Consolidated Statement of Operations for the year ended
December 31, 2002, the ten months ended December 31, 2001,
the two months ended February 28, 2001 and the year ended
December 31, 2000........................................................F-5
Consolidated Balance Sheet as of December 31, 2002 and 2001................F-6
Consolidated Statement of Cash Flows for the year ended
December 31, 2002, the ten months ended December 31, 2001,
the two months ended February 28, 2001 and the year ended
December 31, 2000........................................................F-7
Consolidated Statement of Stockholder's Equity for the year ended
December 31, 2002 and the ten months ended December 31, 2001
and the Consolidated Statement of BFGoodrich Investment for
the two months ended February 28, 2001 and the year ended
December 31, 2000........................................................F-8
Notes to Consolidated Financial Statements.................................F-9
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, 2002 and 2001, and the related consolidated statements
of operations, stockholder's equity, and cash flows for the year ended
December 31, 2002 and 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 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 consolidated financial position of Noveon,
Inc. at December 31, 2002 and 2001, and the consolidated results of their
operations and their cash flows for the year ended December 31, 2002 and
the ten months ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
As explained in Note I to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 13, 2003
Report of Independent Auditors
Board of Directors of
Noveon, Inc.
We have audited the accompanying consolidated statements of operations,
BFGoodrich investment and cash flows of BFGoodrich Performance Materials
(as defined in Note A) (a segment of The BFGoodrich Company) for the two
months ended February 28, 2001. These financial statements are the
responsibility of the management of Noveon, Inc. Our responsibility is to
express an opinion on these financial statements based on our audit.
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 of the financial statements provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of the operations and
cash flows of BFGoodrich Performance Materials for the two months ended
February 28, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
September 5, 2002
Report of Independent Auditors
Board of Directors of
The BFGoodrich Company
We have audited the accompanying consolidated statements of operations,
BFGoodrich investment, and cash flows of BFGoodrich Performance Materials
(as defined in Note A) (a segment of The BFGoodrich Company) for the year
ended December 31, 2000. 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 consolidated results of operations and cash
flows of BFGoodrich Performance Materials (as defined in Note A) for the
year ended December 31, 2000, 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
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
NOVEON, INC. PERFORMANCE MATERIALS
--------------------- ---------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
2002 2001 2001 2000
--------------------- ---------------------
SALES $1,069.3 $ 876.4 $ 187.0 $1,167.7
Cost of sales 726.8 628.1 137.3 819.5
--------------------- ---------------------
GROSS PROFIT 342.5 248.3 49.7 348.2
Selling and administrative
expenses 201.6 160.5 35.2 201.1
Amortization expense 13.9 26.5 4.0 24.4
Restructuring and
consolidation costs 6.1 3.1 - 40.5
--------------------- ---------------------
OPERATING INCOME 120.9 58.2 10.5 82.2
Interest (expense) income-net (75.6) (73.5) 0.6 4.4
Other (expense) income-net (2.4) (0.7) (1.5) (0.4)
--------------------- ---------------------
Income (loss) before
income taxes 42.9 (16.0) 9.6 86.2
Income tax expense (8.2) (4.6) (4.0) (35.9)
--------------------- ---------------------
NET INCOME (LOSS) $ 34.7 $ (20.6) $ 5.6 $ 50.3
===================== ======================
See notes to consolidated financial statements.
Noveon, Inc.
Consolidated Balance Sheet
(dollars in millions, except share amounts)
DECEMBER 31
2002 2001
-----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 79.5 $ 120.0
Accounts and notes receivable, net of allowances
($9.0 and $8.7 at December 31, 2002
and 2001, respectively) 135.7 133.8
Inventories 144.1 140.2
Prepaid expenses and other current assets 7.2 4.5
-----------------------
TOTAL CURRENT ASSETS 366.5 398.5
Property, plant and equipment--net 670.7 672.5
Goodwill 365.5 346.9
Technology intangible assets--net 139.7 148.2
Other identifiable intangible assets--net 42.4 43.8
Receivable from Parent 1.2 -
Other assets 43.1 51.9
-----------------------
TOTAL ASSETS $1,629.1 $1,661.8
=======================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term bank debt $ 0.4 $ 1.3
Accounts payable 111.2 97.1
Accrued expenses 70.6 74.2
Income taxes payable 5.3 1.0
Current maturities of long-term debt - 23.2
-----------------------
TOTAL CURRENT LIABILITIES 187.5 196.8
Long-term debt 847.1 876.2
Postretirement benefits other than pensions 5.8 5.3
Accrued pensions 34.9 32.8
Deferred income taxes 18.1 24.6
Accrued environmental 18.2 20.7
Other non-current liabilities 17.8 9.2
STOCKHOLDER'S EQUITY
Common stock ($.01 par value, 1,000 shares authorized,
1 share issued and outstanding at December 31, 2002
and 2001, respectively) - -
Paid in capital 498.0 527.0
Retained deficit (1.9) (20.6)
Accumulated other comprehensive income (loss) 3.6 (10.2)
-----------------------
Total stockholder's equity 499.7 496.2
-----------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,629.1 $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
NOVEON, INC. PERFORMANCE MATERIALS
--------------------- ---------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
2002 2001 2001 2000
--------------------- ---------------------
OPERATING ACTIVITIES
Net income (loss) $ 34.7 $(20.6) $ 5.6 $ 50.3
Adjustments to reconcile net income
(loss) to net cash
provided (used) by operating
activities:
Consolidation costs:
Expenses 6.1 3.1 - 40.5
Payments (8.5) (11.8) (2.0) (4.9)
Depreciation and amortization 84.7 83.0 14.4 86.7
Deferred income taxes (0.6) 0.4 (5.2) (1.2)
Debt issuance cost amortization
in interest expense 5.6 6.8 - -
Change in assets and liabilities,
net of effects of
acquisitions and dispositions of
businesses:
Receivables 2.2 45.9 (7.2) (1.5)
Inventories 3.4 35.8 (3.1) (2.8)
Other current assets (2.6) 0.9 (0.1) 1.9
Accounts payable 9.2 (4.0) (16.8) (1.0)
Accrued expenses (0.7) 13.4 5.7 1.5
Income taxes payable 5.4 - (27.9) 5.2
Other non-current assets and
liabilities 4.0 1.0 5.0 6.2
----------------------- -----------------------
Net cash provided (used) by operating
activities 142.9 153.9 (31.6) 180.9
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (52.3) (28.5) (7.6) (64.0)
Proceeds from sale of property and
business - 0.9 - 0.3
Payments made in connection with
acquisitions,
net of cash acquired (27.4) (1,191.1) - (11.6)
----------------------- -----------------------
Net cash (used) by investing
activities (79.7) (1,218.7) (7.6) (75.3)
FINANCING ACTIVITIES
Decrease in short-term debt (0.2) (25.8) (3.7) (11.3)
Proceeds from issuance of long-term
debt - 910.0 - -
Repayments of long-term debt (63.9) (8.5) - (0.3)
Proceeds from sale of receivables,
net 2.2 (1.9) 0.5 (1.9)
Debt issuance costs (0.6) (44.4) - -
Equity contribution from stockholder - 355.0 - -
Dividend to Parent (45.0) - - -
Transfers from (to) BFGoodrich - - 40.7 (86.7)
----------------------- -----------------------
Net cash (used) provided by financing
activities (107.5) 1,184.4 37.5 (100.2)
Effect of exchange rate changes on
cash and cash equivalents 3.8 0.4 - (0.3)
----------------------- -----------------------
Net (decrease) increase in cash and
cash equivalents (40.5) 120.0 (1.7) 5.1
Cash and cash equivalents at
beginning of period 120.0 - 15.7 10.6
----------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 79.5 $ 120.0 $ 14.0 $ 15.7
======================= =======================
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
FEBRUARY 28 DECEMBER 31
2001 2000
--------------------------
BFGOODRICH INVESTMENT
BEGINNING OF PERIOD $ 910.4 $ 950.9
Net income 5.6 50.3
Cumulative translation adjustment 2.6 (4.1)
--------------------------
Comprehensive income 8.2 46.2
Net transfers from (to) BFGoodrich 40.7 (86.7)
--------------------------
END OF PERIOD $ 959.3 $ 910.4
==========================
ACCUMULATED
OTHER
COMMON PAID IN RETAINED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME (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, - 527.0 (20.6) (10.2) 496.2
2001
Dividend to Parent - (29.0) (16.0) - (45.0)
Comprehensive income:
Net income - - 34.7 - 34.7
Net change in fair value
of cash
flow hedges - - - (9.0) (9.0)
Cumulative translation
adjustment - - - 22.8 22.8
----------
Total comprehensive income - 48.5
--------------------------------------------------
BALANCE AT DECEMBER 31,
2002 $ - $498.0 $(1.9) $ 3.6 $499.7
==================================================
See notes to consolidated financial statements.
Noveon, Inc.
Year Ended December 31, 2002
and 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
and Year Ended December 31, 2000
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 the Performance Materials (the "Predecessor
Company" or "Performance Materials") Segment of The BFGoodrich Company
("Goodrich"), now known as Goodrich Corporation, (the "Acquisition"). The
Company is a wholly owned subsidiary of Noveon International, Inc.
("International" or "Parent").
International 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 (DLJ Merchant
Banking) and DB Capital Partners, Inc. (DB Capital). International has no
independent operations or investments other than its investment in the
Company. International 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 International 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 International and increases to
a rate of 15% after 5 years. If the interest is paid in cash, the interest
rate remains at 13%. International may be dependent on the cash flows of
the Company to repay the seller note upon maturity in 2011. At December 31,
2002, there was $145.2 million outstanding on the seller note.
The Acquisition of the Predecessor Company was recorded under the purchase
method of accounting. The purchase price before fees and expenses, totaling
$21.4 million, was $1,386.5 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 International issued to Goodrich.
Pursuant to the Agreement for Sale and Purchase of Assets between Goodrich
and the Company (the "Agreement"), the purchase price was subject to a
post-closing working capital adjustment. On June 28, 2002, the Company
entered into an agreement with Goodrich settling the working capital
adjustment pursuant to which the Company paid Goodrich $14.5 million. The
settlement payment and the costs associated with the settlement efforts
have been reflected as an adjustment to the purchase price in the Company's
financial statements and increased the goodwill associated with the
Acquisition.
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)
The Acquisition of the Predecessor Company from Goodrich was financed
through term loan borrowings under the Company's credit facilities,
proceeds from the offering of senior subordinated notes, and the $527.0
million equity contribution from International. The proceeds from the
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 fair values. 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 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 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 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, 2001 and 2000 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) 2001 2000
--------------------------------------------------------------------------
Net sales $1,062.3 $1,152.0
Operating income 66.2 92.1
Net income (loss) (29.3) 3.9
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
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.
During the two months ended February 28, 2001 and the year ended December
31, 2000, Performance Materials was allocated $0.8 million and $6.1 million
in costs from Goodrich, respectively. Certain costs, such as employee
benefits, legal and executive compensation, were specifically attributed to
Performance Materials. These costs amounted to $0.5 million and $3.2
million for the two months ended February 28, 2001 and the year ended
December 31, 2000. Certain costs, such as the corporate aircraft, tax,
accounting, and other corporate shared services, were allocated to
Performance Materials primarily based on estimates of the time spent on
Performance Materials matters. These costs amounted to $0.3 million and
$2.9 million for the two months ended February 28, 2001 and the year ended
December 31, 2000, respectively. Performance Materials also participated in
certain benefit plans of Goodrich, the cost of which was 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.
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 International.
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
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.
REVENUE AND INCOME RECOGNITION
Revenue from the sale of products is recognized at the point of passage of
title, which is at the time of shipment or consumption by the customer for
inventory on consignment. The Company requires that persuasive evidence of
a revenue arrangement exists, delivery of product has occurred or services
have been rendered, the price to the customer is fixed and determinable and
collectibility is reasonably assured before revenue is realized and earned.
Rebates, customer claims, allowances, returns and discounts are reflected
as reductions from gross sales in determining net sales. Rebates are
accrued based on contractual relationships with customers as shipments are
made. Customer claims, returns and allowances and discounts are accrued
based on our history of claims and sales returns and allowances. Allowances
for doubtful accounts are maintained for estimated losses resulting from
the inability of customers to make required payments.
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. The elements of
inventory cost include raw materials and labor and manufacturing overhead
costs attributed to the production process. 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. The
Company provides for allowances for excess and obsolete inventory based on
the age and quality of the Company's products.
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)
LONG-LIVED ASSETS
Property, plant and equipment of the Predecessor Company and property,
plant and equipment 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 are 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. See Note I
for an additional discussion of the impairment tests performed in 2002
related to goodwill.
Impairment of long-lived assets, other than 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 remaining estimated useful life of the
assets are less than the carrying value of the assets. 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 associated with the issuance of the Company's credit facilities and
senior subordinated notes 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.
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)
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.
DERIVATIVE AND HEDGING ACTIVITIES
Effective January 1, 2001, Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was adopted. 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.
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)
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.
As required by the credit agreement, 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 through 2005. These agreements require the Company to
pay a fixed rate of interest while receiving a variable rate. The net
payments or receipts under these agreements are recognized as an adjustment
to interest expense in the Company's results of operations. For the year
ended December 31, 2002, the Company recorded $6.5 million of interest
expense as a result of these swap agreements. At December 31, 2002 and
2001, the fair value of these swap arrangements, included in other
non-current liabilities, totaled approximately $14.7 million and $5.7
million, respectively. The offsetting impact of this hedge transaction is
included in accumulated other comprehensive loss, net of the related tax
benefit.
The Company entered into currency forward exchange contracts, totaling
$10.3 million and $10.5 million at December 31, 2002 and 2001,
respectively, 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 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, 2002 and 2001 was not material to the Company's
results of operations, cash flow or financial position.
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 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 year ended
December 31, 2002 and ten months ended December 31, 2001, the Company
recognized $10.1 million of net losses and 2.1 million of net gains,
respectively, included in the cumulative translation adjustment related to
the foreign denominated floating rate debt.
STOCK-BASED COMPENSATION
As more fully described in Note S, the Company's Parent has a stock option
plan in which certain eligible employees of the Company participate. The
Company and the Predecessor Company account for stock-based employee
compensation using the intrinsic value method in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under the plan had an exercise price greater than the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
BFGOODRICH
PERFORMANCE
NOVEON, INC. MATERIALS
----------------------------------------
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2002 2001 2000
-------------------------------------------------------------------------
Net income (loss) as reported $ 34.7 $(20.6) $ 50.3
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (1.7) (1.0) (0.8)
----------------------------------------
Pro forma net income (loss) $ 33.0 $(21.6) $ 49.5
========================================
The effects of applying SFAS No. 123 may not be representative of the
effects on reportable net income (loss) in future years.
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)
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.
The Company's operations will be included in the consolidated income tax
returns filed by International. 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.
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.
RESEARCH AND DEVELOPMENT EXPENSE
The Company performs research and development under Company-funded programs
for commercial products. Total research and development expenditures for
the year ended December 31, 2002, the ten months ended December 31, 2001,
the two months ended February 28, 2001 and the year ended December 31, 2000
were $24.1 million, $18.2 million, $4.3 million and $32.9 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.
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)
NEW ACCOUNTING STANDARDS
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 by January 1, 2003. However, management has not yet
determined the effect of this Statement on the Company's consolidated
financial condition or results of operations.
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 had no impact on the Company's
consolidated financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." In most cases, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
SFAS No. 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. Upon adoption, any gain
or loss on extinguishment of debt previously classified as an extraordinary
item in prior periods presented that does not meet the criteria of APB
Opinion No. 30 for such classification should be reclassified to conform
with the provisions of SFAS No. 145. SFAS No. 145 also amends SFAS No. 13
to require certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor (or guarantor). The Company adopted the
Statement during the second quarter of 2002, the effect of which had no
impact on the Company's consolidated financial position 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)
C. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. The provisions
of SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted this Statement
effective January 1, 2003. The effect of adoption had no impact on the
Company's consolidated financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The disclosure provisions of SFAS No.
148 are effective for fiscal years ending after December 15, 2002. The
Company has included these disclosures for the year ended December 31,
2002.
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 2002, the Consumer Specialties segment purchased certain tangible
assets of a Latin American personal care and pharmaceutical distributor;
certain assets, technology, and other intellectual property from a
dispersions business; and certain assets, technology and other intellectual
property related to aroma chemicals. During 2002, the Performance Coatings
segment purchased certain tangible assets and technology of a textile
coatings business. During 2002, the Specialty Materials segment acquired
the common stock of Gemoplast SA, which is a business located in Lyon,
France engaged in the conception, production and marketing of plastic
alloys. The total cash paid for these 2002 acquisitions was $11.9 million.
During 2001, the Company acquired certain intellectual property and
tangible assets as an addition to the Company's TempRite(R) product family
within the Specialty Materials segment for $3.6 million.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
D. ACQUISITIONS (CONTINUED)
During 2000, Performance Materials 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.
E. RESTRUCTURING AND CONSOLIDATION COSTS
To improve productivity in the electronics industry-related product lines,
during 2002, the Company announced the consolidation of its static control
manufacturing facilities into Malaysia and the closing of the Twinsburg,
Ohio leased facility. In conjunction with this consolidation, the Company
incurred personnel-related charges as well as closure costs related to this
leased facility. The restructuring accrual is summarized below:
BALANCE BALANCE
JANUARY 1 DECEMBER 31
(IN MILLIONS) 2002 PROVISION ACTIVITY 2002
-----------------------------------------------------------------------
Personnel-related
costs $ - $ 0.1 $(0.1) $ -
Facility closure
costs - 1.1 (0.9) 0.2
Relocation and
restructuring
expense - 0.1 (0.1) -
--------------------------------------------------
$ - $ 1.3 $(1.1) $ 0.2
==================================================
In order to increase efficiency and productivity, reduce costs and support
the Company's global growth strategy, the Company has reduced headcount at
facilities throughout its global operations, restructured its colorants
business in Cincinnati, Ohio, and discontinued its flush pigments and
colorformers product lines in June 2001. Through these restructuring
efforts, the Company will be eliminating approximately 440 positions.
Approximately 92% of the affected employees have left their positions as of
December 31, 2002. In conjunction with this restructuring plan, the Company
recorded net consolidation costs of $4.7 million in 2002 consisting of $1.2
million in personnel-related costs associated with the closing of a plant
in England and $3.5 million of other restructuring related expenses. The
restructuring accrual has been reduced by $1.6 million, which represents a
revision of prior estimates recorded at the date of the Acquisition, with a
corresponding reduction in goodwill.
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)
The restructuring accrual at December 31, 2001 and 2002 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
===================================================
ADJUSTMENT
BALANCE TO BALANCE
JANUARY 1 ACQUISITION DECEMBER 31
(IN MILLIONS) 2002 PROVISION ACTIVITY COST 2002
----------------------------------------------------------------------------
Personnel-related
costs $ 6.0 $ 1.2 $ (3.5) $ (1.6) $ 2.1
Facility closure
costs 0.7 0.4 (0.5) - 0.6
Relocation and
restructuring
expense - 3.1 (3.1) - -
-------------------------------------------------------
$ 6.7 $ 4.7 $ (7.1) $ (1.6) $ 2.7
=======================================================
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 and 2002 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)
E. RESTRUCTURING AND CONSOLIDATION COSTS (CONTINUED)
BALANCE BALANCE
JANUARY 1 DECEMBER 31
(IN MILLIONS) 2002 PROVISION ACTIVITY 2002
-------------------------------------------------------------------------
Personnel-related
costs $ 0.2 $ - $(0.2) $ -
Relocation and
restructuring
expense - 0.1 (0.1) -
----------------------------------------------------
$ 0.2 $ 0.1 $(0.3) $ -
====================================================
F. ACCOUNTS RECEIVABLE
The Company has an agreement to sell certain Spanish Peseta denominated
trade accounts receivable without recourse, up to a maximum of
approximately $5.5 million. At December 31, 2002 and 2001, $2.2 million and
$2.1 million, respectively, 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 summarizes the activity in allowances for accounts
receivable:
BALANCE AT BALANCE
BEGINNING COSTS AND AT END
(IN MILLIONS) OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------------------------------------------------------------------------
Year ended December 31, 2000 $ 7.3 $26.8 $ 27.2 $6.9
Two months ended February 28,
2001 6.9 6.3 6.7 6.5
Ten months ended December 31,
2001 6.5 25.0 22.8 8.7
Year ended December 31, 2002 8.7 21.9 21.6 9.0
Costs and expenses relate to allowances for returns, sales credits and
provisions for bad debts. Deductions include sales credits issued and
write-offs of doubtful accounts, net of recoveries. Write-offs of doubtful
accounts, net of recoveries, were $0.8 million, $1.2 million, $0.4 million
and $2.2 million for the year ended December 31, 2002, the ten months ended
December 31, 2001, the two months ended February 28, 2001 and the year
ended December 31, 2000, respectively.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
G. INVENTORIES
Inventories consisted of the following:
(IN MILLIONS) 2002 2001
---------------------------------------------------------------------------
Finished products $ 107.4 $ 107.5
In process 3.6 2.5
Raw materials 33.1 30.2
-----------------------
Total $ 144.1 $ 140.2
=======================
Approximately 53% and 57% of inventory was valued by the LIFO method in
2002 and 2001, respectively. At December 31, 2002 and 2001, LIFO inventory
approximated first-in, first-out (FIFO) cost.
H. PROPERTY, PLANT AND EQUIPMENT--NET
Property, plant and equipment - net consisted of the following:
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------
Land $ 40.5 $ 36.4
Buildings and improvements 143.3 129.8
Machinery and equipment 580.8 536.1
Construction in progress 35.2 25.7
------------------------
799.8 728.0
Less allowances for depreciation (129.1) (55.5)
------------------------
Total $ 670.7 $ 672.5
========================
Amounts charged to expense for depreciation were $70.8 million, $56.5
million, $10.4 million and $62.3 million for the year ended December 31,
2002, the ten months ended December 31, 2001, the two months ended February
28, 2001, and the year ended December 31, 2000, respectively.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
I. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
The FASB 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 Accounting
Principles Board ("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
adopted SFAS No. 142 effective January 1, 2002. During the second quarter
of 2002, the Company performed the first of the required impairment tests
of goodwill as of January 1, 2002. During the fourth quarter of 2002, the
annual impairment test of goodwill was performed. The Company determined
that no goodwill impairment has occurred.
After giving effect to the elimination of goodwill amortization, as
required by the provisions of SFAS No. 142, net income (loss) for the ten
months ended December 31, 2001, the two months ended February 28, 2001 and
the year ended December 31, 2000 would have been as follows:
BFGOODRICH
NOVEON, INC. PERFORMANCE MATERIALS
----------------------------------------
TEN MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 2001 2001 2000
--------------------------------------------------------------------------
Reported net income (loss) $ (20.6) $ 5.6 $ 50.3
Goodwill amortization 15.1 3.0 18.6
Tax effect on amortization - (0.1) (0.6)
----------------------------------------
Pro forma net income (loss) $ (5.5) $ 8.5 $ 68.3
========================================
The changes in the carrying amount of goodwill by reporting segment during
the year ended December 31, 2002 are as follows:
CONSUMER SPECIALTY PERFORMANCE
(IN MILLIONS) SPECIALTIES MATERIALS COATINGS TOTAL
---------------------------------------------------------------------------
Goodwill balance at January 1,
2002 $102.3 $144.7 $ 99.9 $346.9
Finalization of purchase price
allocation for acquisitions
in 2001 7.1 3.7 2.5 13.3
Effect of acquisitions in 2002 1.2 2.1 2.0 5.3
------------------------------------------
Goodwill balance at December
31, 2002 $110.6 $150.5 $104.4 $365.5
==========================================
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
I. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Intangible assets that continue to be subject to amortization were
comprised of the following at December 31, 2002:
WEIGHTED
GROSS NET AVERAGE
CARRYING ACCUMULATED CARRYING AMORTIZATION
(DOLLARS IN MILLIONS) AMOUNT AMORTIZATION AMOUNT PERIOD
---------------------------------------------------------------------------
Technology $158.9 $19.2 $ 139.7 15.0 years
Trademarks 47.0 5.8 41.2 15.1 years
Non-compete agreements 1.3 0.1 1.2 5.0 years
---------------------------------------
Total $207.2 $25.1 $ 182.1 15.0 years
=======================================
Intangible assets that continue to be subject to amortization were
comprised of the following at December 31, 2001:
WEIGHTED
GROSS NET AVERAGE
CARRYING ACCUMULATED CARRYING AMORTIZATION
(DOLLARS IN MILLIONS) AMOUNT AMORTIZATION AMOUNT PERIOD
---------------------------------------------------------------------------
Technology $156.9 $ 8.7 $ 148.2 15.0 years
Trademarks 46.3 2.5 43.8 15.0 years
---------------------------------------
Total $203.2 $11.2 $ 192.0 15.0 years
=======================================
Amortization expense for intangible assets subject to amortization was
$13.9 million, $11.4 million, $1.0 million and $5.8 million for the year
ended December 31, 2002, the ten months ended December 31, 2001, the two
months ended February 28, 2001 and the year ended December 31, 2000,
respectively.
Estimated annual amortization expense for intangible assets subject to
amortization approximates $14.0 million for each of the next five years.
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) 2002 2001
--------------------------------------------------------------------------
Wages, vacations, pensions and other employment
costs $ 31.3 $ 24.4
Accrued interest 10.9 10.9
Accrued rebates 9.5 9.4
Taxes, other than federal and foreign taxes on
income 7.4 7.0
Consolidation costs 2.9 6.9
Accrued environmental liabilities 0.9 3.0
Other 7.7 12.6
------------------------
Total $ 70.6 $ 74.2
========================
K. FINANCING ARRANGEMENTS
Short-term Bank Debt
At December 31, 2002 and 2001, the Company had $0.4 million and $1.3
million of short-term bank debt outstanding under various foreign
facilities. Weighted-average interest rates on short-term borrowings were
3.7%, 10.0%, 5.4% and 5.1%, for the year ended December 31, 2002, the ten
months ended December 31, 2001, the two months ended February 28, 2001 and
the year ended December 31, 2000, respectively.
Long-term Debt
In connection with the Acquisition, the Company entered into credit
facilities and issued subordinated notes.
The credit facilities include (1) a Term Loan A facility in the amount of
$125.0 million that matures in 2007, (2) a Term Loan B facility in the
amount of $510.0 million that matures in 2008 and (3) a revolving credit
facility in the amount of $125.0 million that expires in 2007. 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. At December 31, 2002, approximately $31.6 million and $31.7 million
were outstanding on Term Loan A and Term Loan B, respectively, and payable
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 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, 2002 are 2.75% for the revolving loan facility
and Term Loan A and 3.50% for Term Loan B. The applicable borrowing margins
for the base rate loans at December 31, 2002 are 1.75% for the revolving
loan facility and Term Loan A and 2.50% for Term Loan B. 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, 2002, the average interest rates for Term Loans
A and B were 5.53% and 5.62%, respectively, exclusive of the effects of the
swap agreements disclosed in Note C. At December 31, 2001, the average
interest rates for Term Loans A and B were 5.81% and 5.89%, respectively,
exclusive of the effects of the swap agreements. At December 31, 2002 and
2001 the average interest rate for Term Loan B was 6.91% and 7.10%,
respectively, inclusive of the effects of the swap agreements.
The 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 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, 2002 and 2001, the Company has no amounts outstanding on
the revolving credit facility and $120.1 million is available for
borrowing, net of $4.9 million on outstanding letters of credit.
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)
The 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, 2002.
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 customary
provisions for events of default. The Company was in compliance with all
terms and conditions of the senior subordinated notes at December 31, 2002.
The Company amended its Term Loan agreements in 2002 allowing the Company
to prepay $45.0 million of its outstanding Term Loans and dividend to its
Parent $45.0 million in cash so the Parent could reduce the seller note
based upon an agreed discount arranged between the Parent and Goodrich. As
a result of the prepayment of the Term Loans, the Company has no current
maturities of long-term debt at December 31, 2002.
Maturities of these long-term financing arrangements are as follows:
TERM TERM SUBORDINATED
(IN MILLIONS) LOAN A LOAN B NOTES OTHER TOTAL
----------------------------------------------------------------------
2003 $ - $ - $ - $ - $ -
2004 19.7 5.4 - 0.1 25.2
2005 22.3 5.4 - 0.1 27.8
2006 24.5 5.5 - - 30.0
2007 6.4 5.5 - 0.1 12.0
Thereafter - 477.1 275.0 - 752.1
----------------------------------------------------
$ 72.9 $498.9 $275.0 $ 0.3 $847.1
====================================================
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, 2002:
(IN MILLIONS)
---------------------------------------------------------
2003 $ 4.3
2004 2.9
2005 1.6
2006 1.0
2007 0.4
Thereafter 0.1
----------
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 $10.6 million, $8.2 million, $2.0 million and $12.1
million for the year ended December 31, 2002, the ten months ended December
31, 2001, the two months ended February 28, 2001 and the year ended
December 31, 2000, 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.
The Company maintains adequate funding to offset the accumulated benefit
obligation of the Company's qualified pension plans.
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 following table summarizes information regarding the Company's defined
benefit pension plans and defined benefit postretirement plans as of
December 31, 2002 and 2001 and the amounts recorded in the consolidated
balance sheet at these dates. In describing the period changes in the
table, the period of March 1, 2001 through December 31, 2001 was used to
describe the effect of activity for 2001.
UNITED STATES EUROPEAN UNITED STATES
PENSION PENSION OTHER
BENEFITS BENEFITS BENEFITS
--------------------------------------------
(IN MILLIONS) 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------
Change in projected benefit
obligations:
Projected benefit obligation
at beginning of period $30.1 $ 26.0 $14.9 $13.5 $5.4 $ 4.8
Service cost 2.6 2.0 1.0 1.0 0.1 0.2
Interest cost 2.3 1.7 0.8 0.6 0.3 0.3
Amendments 0.1 0.2 - - (0.8) -
Actuarial losses 3.8 0.2 1.7 1.5 0.2 0.1
Acquisitions and other - - 1.8 (1.5) - -
Benefits paid (0.1) - (0.6) (0.2) (0.1) -
Curtailments - - (2.0) - - -
--------------------------------------------
Projected benefit obligation
at end of period $38.8 $ 30.1 $17.6 $14.9 $5.1 $ 5.4
============================================
Change in plan assets:
Fair value of plan assets at
beginning of period $ 0.1 $ - $ 9.9 $ 9.0 $- $ -
Actual return on plan assets - - 0.3 0.4 - -
Acquisitions and other - - 1.0 - - -
Company contributions 6.1 0.1 0.8 0.7 - -
Settlements - - (2.5) - - -
Benefits paid (0.1) - (0.4) (0.2) - -
--------------------------------------------
Fair value of plan assets at
end of period $ 6.1 $ 0.1 $ 9.1 $ 9.9 $- $ -
============================================
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)
UNITED STATES EUROPEAN UNITED STATES
PENSION PENSION OTHER
BENEFITS BENEFITS BENEFITS
--------------------------------------------
(IN MILLIONS) 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------
Funded status (underfunded):
Funded status $(32.7) $(30.0) $(8.5) $(5.0) $(5.1) $(5.4)
Unrecognized net actuarial
loss (gain) 4.1 0.3 1.9 1.7 0.2 0.1
Unrecognized prior service
cost 0.3 0.2 - - (0.9) -
--------------------------------------------
Accrued benefit cost $(28.3) $(29.5) $(6.6) $(3.3) $(5.8) $(5.3)
============================================
Amounts recognized in the
statement of financial
position consist of:
Accrued benefit liability $(28.3) $(29.5) $(6.6) $(3.3) $(5.8) $(5.3)
============================================
Weighted-average assumptions
as of December 31:
Discount rate 6.75% 7.50% 5.82% 6.00% 6.75% 7.50%
Expected return on plan
assets 8.50% 8.50% 5.37% 5.79% - -
Rate of compensation
increase 4.00% 4.00% 4.45% 4.29% - -
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 year ended December 31, 2002, the ten months ended December 31,
2001 and the year ended December 31, 2000.
UNITED STATES EUROPEAN
PENSION BENEFITS PENSION BENEFITS
-------------------------------------------
(IN MILLIONS) 2002 2001 2000 2002 2001 2000
--------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 2.6 $2.0 $ 4.2 $1.0 $1.0 $ 1.0
Interest cost 2.3 1.7 15.1 0.8 0.6 0.7
Expected return on plan assets (0.1) - (21.0) (0.4) (0.3) (0.4)
Amortization of prior
service cost - - 1.1 - - -
Amortization of transition
obligation - - 0.9 - - 0.1
Recognized net actuarial loss - - 0.2 - - -
Curtailment and settlement
losses - - - 0.5 - -
Other - - - 1.5 - -
-------------------------------------------
Total net periodic benefit cost $ 4.8 $3.7 $ 0.5 $3.4 $1.3 $ 1.4
===========================================
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)
UNITED STATES
OTHER BENEFITS
---------------------
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $0.1 $0.2 $ 0.5
Interest cost 0.3 0.3 5.6
Amortization of prior
service cost (0.1) - (0.1)
Recognized net actuarial loss - - 0.7
---------------------
$0.3 $0.5 $ 6.7
=====================
Net periodic benefits costs for pension benefits and other benefits were
$0.2 million and $1.0 million, respectively, for the two months ended
February 28, 2001.
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 2002 $ - $ -
Effect on postretirement benefit obligation
as of December 31, 2002 $ 0.3 $ (0.3)
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 $6.2 million, $4.8 million, $1.1 million and $6.5 million for the
year ended December 31, 2002, the ten months ended December 31, 2001, the
two months ended February 28, 2001 and the year ended December 31, 2000,
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
The Company's operations will be included in the consolidated income tax
returns filed by International. 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. Tax valuation allowances were recorded in 2002 and 2001.
Income (loss) before income taxes as shown in the consolidated statement of
operations consisted of the following:
BFGOODRICH
NOVEON, INC. PERFORMANCE MATERIALS
-----------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 2002 2001 2001 2000
--------------------------------------------------------------------------
Domestic $ 25.1 $(25.2) $ 5.7 $ 60.7
Foreign 17.8 9.2 3.9 25.5
-----------------------------------------------
Total $ 42.9 $(16.0) $ 9.6 $ 86.2
===============================================
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)
A summary of income tax (expense) benefit in the consolidated statement of
operations was as follows:
BFGOODRICH
NOVEON, INC. PERFORMANCE MATERIALS
-----------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 2002 2001 2001 2000
--------------------------------------------------------------------------
Current:
Federal $ - $ - $ (7.4) $(25.6)
Foreign (8.8) (4.2) (1.6) (8.5)
State - - (0.2) (3.0)
-----------------------------------------------
(8.8) (4.2) (9.2) (37.1)
Deferred:
Federal (1.9) - 5.2 1.2
State (0.3) - - -
Foreign 2.8 (0.4) - -
-----------------------------------------------
0.6 (0.4) 5.2 1.2
-----------------------------------------------
Total $ (8.2) $ (4.6) $ (4.0) $(35.9)
===============================================
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 and certain
changes in valuation allowances. During 2002, sufficient income was
generated to realize certain of the deferred tax assets. As a result,
income tax expense associated with income before income taxes for the year
ended December 31, 2002 has been offset by $4.8 million related to the net
reversal of tax valuation allowances.
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 significant components of deferred income tax assets and liabilities at
December 31, 2002 and 2001, are as follows:
(IN MILLIONS) 2002 2001
---------------------------------------------------------------------
Deferred income tax assets:
Pension accruals $ 9.4 $ 11.2
Accrual for postretirement benefits other
than pensions 2.0 1.9
Other nondeductible accruals 10.9 16.7
Reserve for environmental liabilities 7.3 10.0
Inventory 2.0 -
Net operating loss carryovers and credits 67.7 19.3
Other 0.6 5.8
----------------------
Total deferred income tax assets 99.9 64.9
Less valuation allowance (36.0) (35.6)
----------------------
Net deferred income tax assets 63.9 29.3
Deferred income tax liabilities:
Property, plant and equipment (81.0) (41.8)
Intangible amortization (1.0) (0.8)
Inventory - (9.5)
Other - (1.8)
----------------------
Total deferred income tax liabilities (82.0) (53.9)
----------------------
Net deferred income taxes $(18.1) $(24.6)
======================
At December 31, 2002, the Company had domestic net operating loss
carryforwards and credits of $155.6 million which expire in 2021 and 2022.
Additionally, the Company had foreign net operating loss carryforwards and
credits of $28.7 million at December 31, 2002 of which $5.9 million expires
in years 2005 through 2010, and $22.8 million that have an indefinite
carryforward period.
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 $36.0 million at December 31, 2002 has been
recorded. This valuation allowance relates to net domestic deferred tax
assets recorded in purchase accounting, acquired foreign net deferred tax
assets associated with net operating losses and credits and deferred tax
assets resulting from domestic and foreign tax net operating losses and
credits generated subsequent to the Acquisition date. Any reversal of the
valuation allowance that was recorded in purchase accounting would reduce
goodwill. In the current year, a reduction of the valuation allowance of
$2.2 million was allocated to goodwill. Additionally, a tax benefit of $2.9
million was allocated to goodwill as a result of changes in estimated
deferred taxes recorded in purchase accounting associated with our foreign
entities.
In determining the adequacy of the $36.0 million valuation allowance,
management assessed the Company's profitability taking into account the
present and anticipated amounts of domestic and international earnings as
well as the anticipated taxable income as a result of the reversal of
future taxable temporary differences. The Company will maintain tax
valuation allowances for the balance of deferred tax assets until
sufficient positive evidence (for example, cumulative positive domestic
earnings and future taxable income) exists to support the reversal of the
tax valuation allowances.
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 effective income tax rate varied from the statutory federal income tax
rate as follows:
PERCENT OF PRETAX INCOME
-----------------------------------------------
BFGOODRICH
NOVEON, INC. PERFORMANCE MATERIALS
-----------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 2002 2001 2001 2000
- ------------------------------------------------------------------------------
Statutory federal income
tax rate 35.0% (35.0)% 35.0% 35.0%
State and local taxes, net
of federal benefit 1.8 (5.6) 1.6 2.3
Amortization of
nondeductible goodwill - 9.4 8.7 4.8
Tax exempt income from
foreign sales (0.2) (3.4) (3.1) (2.1)
Foreign partnership losses (2.7) (13.1) (7.4) (2.0)
Differences in rates on
consolidated foreign
subsidiaries (5.5) (5.2) 2.2 (0.5)
Other items 1.9 (1.1) 4.7 4.1
Valuation allowance (11.2) 82.8 - -
----------------------------------------------
Effective income tax rate 19.1% 28.8 % 41.7% 41.6%
==============================================
The Company has not provided for U.S. income and foreign withholding taxes
on approximately $34.5 million of foreign subsidiaries' undistributed
earnings as of December 31, 2002, 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.
Noveon, Inc.
and
BFGoodrich Performance Materials
(The Predecessor Company and a Segment of The BFGoodrich Company)
Notes to Consolidated Financial Statements (continued)
O. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 2002 and 2001 are provided in the following table.
2002 2001
------------------------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
------------------------------------------------------------------------
Term Loan A $ 72.9 $ 72.9 $117.9 $117.2
Term Loan B 498.9 501.4 506.5 506.5
Subordinated notes 275.0 298.4 275.0 292.9
Other 0.3 0.3 - -
P. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Total accumulated other comprehensive income (loss) for the year ended
December 31, 2002 and the ten months ended December 31, 2001 consisted of
the following:
NET
CHANGE ACCUMULATED
IN CASH CUMULATIVE OTHER
FLOW TRANSLATION COMPREHENSIVE
(IN MILLIONS) HEDGES ADJUSTMENT INCOME (LOSS)
- -------------------------------------------------------------------------
BALANCE AT MARCH 1, 2001 $ - $ - $ -
Net comprehensive income
(loss) changes during the year (5.7) (4.5) (10.2)
-------------------------------------
BALANCE AT DECEMBER 31, 2001 (5.7) (4.5) (10.2)
Net comprehensive income (loss)
changes during the year (9.0) 22.8 13.8
-------------------------------------
BALANCE AT DECEMBER 31, 2002 $ (14.7) $ 18.3 $ 3.6
======================================
The accumulated other comprehensive loss was $17.8 million and $20.4
million at February 28, 2001 and December 31, 2000, respectively, and
represents unrealized translation adjustments and is included in the
BFGoodrich investment.
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
The Company's operations are classified into three reportable business
segments: Consumer Specialties, Specialty Materials and Performance
Coatings. In 2002, the Company changed the name of its Polymer Solutions
segment to Specialty Materials. The accounting policies of the segments are
the same as those described in Note C.
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. 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.
The Specialty Materials 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 Specialty Materials segment products through the primary
product categories of specialty plastics and polymer additives. The
Specialty Materials 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. Restructuring and
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.
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
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.
Sales are attributed to geographic areas based on the country to which the
product was shipped.
As a result of the Company's evaluation of SFAS No. 142, certain segment
allocations for amortization expense and intangible assets, have been
reclassified between the reporting segments. The effects of this
reclassification on operating income, depreciation and amortization
expense, and total assets are reflected in the following table summarizing
business segment information:
BFGOODRICH
NOVEON, INC. PERFORMANCE MATERIALS
-------------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 2002 2001 2001 2000
- -------------------------------------------------------------------------------
Sales:
Consumer Specialties $ 290.8 $238.8 $ 45.2 $ 283.3
Specialty Materials 402.4 324.4 73.1 426.7
Performance Coatings 376.1 313.2 68.7 457.7
--------------------------------------------------
Total sales $1,069.3 $876.4 $ 187.0 $1,167.7
==================================================
Operating income:
Consumer Specialties $ 48.2 $ 30.8 $ 2.1 $ 40.2
Specialty Materials 84.3 52.3 16.9 98.3
Performance Coatings 59.4 34.5 3.2 52.5
Corporate costs (64.9) (56.3) (11.7) (68.3)
Restructuring and
consolidation costs (6.1) (3.1) - (40.5)
--------------------------------------------------
Total operating income $ 120.9 $ 58.2 $ 10.5 $ 82.2
==================================================
Capital expenditures:
Consumer Specialties $ 17.0 $ 10.9 $ 1.9 $ 24.5
Specialty Materials 10.4 7.0 1.7 12.9
Performance Coatings 12.8 7.0 2.6 19.7
Corporate 12.1 3.6 1.4 6.9
--------------------------------------------------
Total capital expenditures $ 52.3 $ 28.5 $ 7.6 $ 64.0
==================================================
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
NOVEON, INC. PERFORMANCE MATERIALS
--------------------------------------------------
TEN MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 FEBRUARY 28 DECEMBER 31
(IN MILLIONS) 2002 2001 2001 2000
- -------------------------------------------------------------------------------
Depreciation and
amortization expense:
Consumer Specialties $ 22.4 $ 21.4 $ 4.4 $ 25.0
Specialty Materials 33.9 32.0 3.8 22.7
Performance Coatings 19.2 20.8 4.5 29.0
Corporate 9.2 8.8 1.7 10.0
----------------------------------------------------
Total depreciation and
amortization $ 84.7 $ 83.0 $ 14.4 $ 86.7
====================================================
Net sales:
United States $ 675.2 $ 566.0 $ 122.6 $ 804.6
Europe 191.0 158.4 35.7 180.0
Other foreign 203.1 152.0 28.7 183.1
----------------------------------------------------
Total $1,069.3 $ 876.4 $ 187.0 $1,167.7
====================================================
Assets:
Consumer Specialties $ 466.8 $ 480.1
Specialty Materials 576.8 562.1
Performance Coatings 397.0 415.2
Corporate 188.5 204.4
----------------------
Total assets $1,629.1 $1,661.8
======================
Property:
United States $ 497.5 $ 511.6
Europe 160.0 149.3
Other foreign 13.2 11.6
----------------------
Total $ 670.7 $ 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,
including information related to acquisitions accounted for under the
purchase method:
(IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------
Estimated fair value of tangible
assets acquired $ 4.6 $1,091.8 $ 1.4
Liabilities assumed (1.1) (294.4) -
Goodwill and identifiable intangible
assets acquired 23.9 565.7 10.2
Less: seller note issued by Noveon
International, Inc. - (172.0) -
-------------------------------------
Net cash paid, including fees and
expenses $ 27.4 $1,191.1 $ 11.6
=====================================
Interest paid $ 71.9 $ 57.0 $ 3.6
=====================================
Income taxes paid $ 4.6 $ 4.8 $ -
=====================================
Equity contribution $ - $ 172.0 $ -
=====================================
Assets contributed to joint venture $ - $ - $ 17.9
=====================================
S. STOCK OPTIONS
Stock Option Plan of International
The Company does not have a stock option plan; however, certain eligible
employees of the Company participate in International's Stock Option Plan
(the "International Plan"). Options granted by International 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 International Plan
have been granted at not less than 100% of market value, as determined by
the Board of Directors of International, 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
International 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 Black-Scholes pricing method with the
following weighted-average assumptions: (1) a risk-free interest rate of
5.7%; (2) a dividend yield of 0.0%; (3) an expected volatility percentage
of 37.2%; and (4) an 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 International during 2002 and 2001 was $38.30
and $42.24, respectively.
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)
International's stock option activity relating to the Company was as
follows for the year ended December 31, 2002 and the ten months 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
Granted 11.4 128.57
Exercised - -
Forfeited (7.5) 128.57
--------------------------
Outstanding at December 31, 2002 316.9 $ 128.57
==========================
There were 61,102 options exercisable at December 31, 2002. There were no
options 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 Goodrich'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.
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)
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:
2000
----------
Risk-free interest rate (%) 5.0
Dividend yield (%) 3.4
Volatility factor (%) 37.5
Weighted average expected life of the options
(years) 7.0
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 was $8.65.
Goodrich disclosed pro forma expense of $5.3 million in 2000. This amount
related primarily to stock options. At December 31, 2000, employees of
Performance Materials had 1,245,442 stock options outstanding, which
represented approximately 14.6% 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 lower than that reported in 2000.
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,
Goodrich issued 172,400 phantom performance shares to employees of
Performance Materials. During 2000, 10,800 performance shares were
forfeited by employees of Performance Materials. In 2000, $(0.1) million
was charged to income 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 would have been $23.12 per share.
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)
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.
T. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, AEA and affiliates of Credit Suisse
First Boston LLC, formerly known as Credit Suisse First Boston Corporation,
("CSFB") and DB Capital, the initial purchasers of the notes, provided
acquisition advisory services. At the closing, AEA, an affiliate of CSFB
and an affiliate of DB Capital 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 Capital were each arrangers and agents of the
credit facilities and received customary fees in connection with these
credit facilities. CSFB is an affiliate of DLJ Merchant Banking. DLJ
Merchant Banking and DB Capital are stockholders of International.
CSFB and DB Capital were each initial purchasers of the notes and received
fees in connection with their initial purchase.
Total debt financing fees in connection with the Acquisition paid to
affiliates of CSFB and DB Capital were $10.4 million and $19.6 million,
respectively.
The Company entered into management agreements with each of AEA and
affiliates of DLJ Merchant Banking and DB Capital. Under the management
agreements, the Company 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, the Company 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 among International, AEA and affiliates of DLJ
Merchant Banking and DB Capital is in effect.
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)
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.
For the year ended December 31, 2002 and the ten months ended December 31,
2001, the Company recognized management fee expense of $3.7 million and
$3.3 million, respectively.
International 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, amounting to $1.1 million,
including interest, at December 31, 2002, was transferred to the Company
and is included in other assets on the balance sheet. The Company also
reflected a $1.0 million liability to International included in current
liabilities at December 31, 2001. The amount due to International was
repaid in 2002.
At December 31, 2002, a receivable from International totaling $1.2 million
is included as a non-current asset and reflects expenses incurred by
International but paid by the Company for International's attempted public
offering.
U. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
The Company has numerous purchase commitments for materials, supplies and
energy incident to the ordinary course of business. The Company has
numerous sales commitments for product supply contracts incident to the
ordinary course of business.
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)
GENERAL
There are pending or threatened against the Company 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. The
Company believes that any liability that may finally be determined with
respect to commercial and product liability claims should not have a
material adverse 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
The Company and its subsidiaries are generators of both hazardous and
non-hazardous wastes, the treatment, storage, transportation and disposal
of which are regulated by various laws and governmental regulations.
Although the Company believes past operations were in substantial
compliance with the then-applicable regulations, either the Company or the
Performance Materials segment of Goodrich have been designated as a
potentially responsible party (PRP) by the U.S. Environmental Protection
Agency, or similar state agencies, in connection with several disposal
sites. These laws and regulations, including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and similar
state laws, generally impose liability for costs to investigate and
remediate contamination without regard to fault and under certain
circumstances liability may be joint and several resulting in one
responsible party being held responsible for the entire obligation.
Liability may also include damages to natural resources.
The Company initiates corrective and/or preventive environmental projects
to ensure environmental compliance and safe and lawful activities at its
current operations. The Company 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, results of operations, cash flows or competitive position.
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 action selection and
implementation, as well as negotiations with other PRPs and governmental
agencies.
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)
Goodrich provided the Company with an indemnity for various environmental
liabilities. The Company estimates Goodrich's share of such currently
identified liabilities under the indemnity, which extends to 2011, to be
about $8.1 million. In addition to Goodrich's indemnity, several other
indemnities from third parties such as past owners relate to specific
environmental liabilities. Goodrich and other third party indemnitors are
currently indemnifying the Company for several environmental remediation
projects. Goodrich's share of all of these liabilities may increase to the
extent such third parties fail to honor their indemnity obligations through
2011. The Company's December 31, 2002 balance sheet includes liabilities,
measured on an undiscounted basis, of $19.1 million to cover future
environmental expenditures either payable by the Company or indemnifiable
by Goodrich. Accordingly, the current portion of the environmental
obligations of $0.9 million is recorded in accrued expenses and $1.4
million is recorded in accounts receivable. Approximately $18.2 million is
included in non-current liabilities and $6.7 million is included in other
non-current assets, reflecting the recovery due from Goodrich.
The following table summarizes the activity in the environmental liability
from January 1, 2001 to December 31, 2002 (dollars in millions):
BALANCES AT JANUARY 1, 2001 $ 47.6
Payments from January 1, 2001 to February 28, 2001 (0.7)
----------
Balance at February 28, 2001 before transfer of
liabilities to Goodrich in closing 46.9
Environmental liabilities of sites retained by
Goodrich (23.7)
----------
TOTAL ENVIRONMENTAL LIABILITY AT MARCH 1, 2001 23.2
Payments from March 1, 2001 to December 31, 2001 (0.2)
Revisions of environmental liabilities recorded
in the opening balance sheet 0.7
----------
BALANCE AT DECEMBER 31, 2001 23.7
Payments in 2002 (0.2)
Environmental expense in 2002 0.1
Reduction in estimated indemnified liabilities (4.5)
----------
BALANCE AT DECEMBER 31, 2002 $ 19.1
==========
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 believes that its reserves are adequate based on currently
available information. The Company believes that it is reasonably possible
that additional costs may be incurred beyond the amounts accrued as a
result of new information, newly discovered conditions or a change in the
law. However, the additional costs, if any, cannot be currently estimated.
V. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
The Company as presented below represents Noveon, Inc. (or the Predecessor
Company for periods prior to March 1, 2001) exclusive of its guarantor
subsidiaries and its non-guarantor subsidiaries.
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:
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
INCOME STATEMENT DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------------------------------------------------------
(IN MILLIONS)
Sales $ 664.6 $ 172.9 $ 340.1 $(108.3) $1,069.3
Cost of sales 430.0 150.2 254.9 108.3 726.8
------------------------------------------------------
Gross profit 234.6 22.7 85.2 - 342.5
Selling and
administrative
expenses 133.5 10.8 57.3 - 201.6
Amortization expense 0.3 9.1 4.5 - 13.9
Restructuring and
consolidation costs 2.5 - 3.6 - 6.1
-------------------------------------------------------
Operating income 98.3 2.8 19.8 - 120.9
Interest (expense)
income--net (68.0) (6.7) (0.9) - (75.6)
Other (expense)
income--net (1.6) 0.3 (1.1) - (2.4)
-------------------------------------------------------
Income (loss) before
income taxes 28.7 (3.6) 17.8 - 42.9
Income tax (expense)
benefit (4.7) 2.5 (6.0) - (8.2)
-------------------------------------------------------
Net income (loss) $ 24.0 $ (1.1) $ 11.8 $ - $ 34.7
======================================================
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)
DECEMBER 31, 2002
-----------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
BALANCE SHEET DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- ------------------------------------------------------------------------------
(IN MILLIONS)
CURRENT ASSETS
Cash and cash
equivalents $ 27.7 $ 0.1 $ 51.7 $ - $ 79.5
Accounts and notes
receivable 58.4 20.0 57.3 - 135.7
Inventories 66.3 30.3 47.5 - 144.1
Prepaid expenses and
other
current assets 4.0 0.9 2.3 - 7.2
------------------------------------------------------
TOTAL CURRENT ASSETS 156.4 51.3 158.8 366.5
Property, plant and
equipment--net 399.3 98.2 173.2 - 670.7
Goodwill 246.2 0.5 118.8 - 365.5
Technology intangible
assets--net - 93.8 45.9 - 139.7
Other identifiable
intangible
assets--net 2.6 28.0 11.8 - 42.4
Intercompany
receivables 358.6 0.7 23.8 (383.1) -
Investment in
subsidiaries 430.8 48.9 - (479.7) -
Receivable from Parent 1.2 - - - 1.2
Other assets 35.0 7.6 0.5 - 43.1
------------------------------------------------------
TOTAL ASSETS $1,630.1 $ 329.0 $ 532.8 $(862.8) $1,629.1
======================================================
CURRENT LIABILITIES
Short-term bank debt $ - $ 0.1 $ 0.3 $ - $ 0.4
Accounts payable 62.5 11.8 36.9 - 111.2
Accrued expenses 57.5 5.0 8.1 - 70.6
Income taxes payable - - 5.3 - 5.3
------------------------------------------------------
TOTAL CURRENT
LIABILITIES 120.0 16.9 50.6 - 187.5
Long-term debt 846.8 - 0.3 - 847.1
Postretirement
benefits
other than pensions 4.5 1.3 - - 5.8
Accrued pensions 22.1 6.2 6.6 - 34.9
Deferred income taxes - - 18.1 - 18.1
Accrued environmental 1.4 16.8 - - 18.2
Intercompany payables 151.5 142.6 89.0 (383.1) -
Other non-current
liabilities 15.8 - 2.0 - 17.8
------------------------------------------------------
TOTAL LIABILITIES 1,162.1 183.8 166.6 (383.1) 1,129.4
Paid in capital 498.0 - - - 498.0
Capital stock of
subsidiaries - 148.2 331.5 (479.7) -
Retained earnings
(deficit) (15.3) (3.0) 16.4 - (1.9)
Accumulated other
comprehensive income (14.7) - 18.3 - 3.6
------------------------------------------------------
TOTAL STOCKHOLDER'S
EQUITY 468.0 145.2 366.2 (479.7) 499.7
------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $1,630.1 $ 329.0 $ 532.8 $(862.8) $1,629.1
======================================================
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, 2002
-----------------------------------------------------
COMBINED COMBINED
THE GUARANTOR NON-GUARANTOR
CASH FLOW DATA COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- -------------------------------------------------------------------------------
(IN MILLIONS)
Net cash provided by
operating activities $ 101.0 $ 8.4 $ 33.5 $ - $142.9
Investing activities:
Purchases of
property, plant
and equipment (31.0) (8.6) (12.7) - (52.3)
Payments made in -
connection with
acquisitions, net
of cash acquired (27.4) - - (27.4)
-------------------------------------------------------
Net cash (used) by
investing activities (58.4) (8.6) (12.7) - (79.7)
Financing activities:
Decrease in
short-term debt - - (0.2) - (0.2)
Repayments of
long-term debt (63.9) - - - (63.9)
Proceeds from sale
of receivables,
net - - 2.2 - 2.2
Debt issuance costs (0.6) - - - (0.6)
Dividend to Parent (45.0) - - - (45.0)
-------------------------------------------------------
Net cash (used) by
financing activities (109.5) - 2.0 - (107.5)
Effect of exchange
rate changes on
cash and cash
equivalents - - 3.8 - 3.8
-------------------------------------------------------
Net (decrease)
increase in cash
and cash equivalents (66.9) (0.2) 26.6 - (40.5)
Cash and cash
equivalents
at beginning of year 94.6 0.3 25.1 - 120.0
-------------------------------------------------------
Cash and cash
equivalents
at end of year $ 27.7 $ 0.1 $ 51.7 $ - $ 79.5
=======================================================
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
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
expenses 109.7 9.2 41.6 - 160.5
Amortization expense 10.6 7.6 8.3 - 26.5
Restructuring and
consolidation costs 3.1 - - - 3.1
-------------------------------------------------------
Operating income
(loss) 50.2 (3.6) 11.6 - 58.2
Interest (expense)
income--net (73.4) 1.6 (1.7) - (73.5)
Other (expense)
income--net (0.1) 0.1 (0.7) - (0.7)
-------------------------------------------------------
Income (loss) before
income taxes (23.3) (1.9) 9.2 - (16.0)
Income tax expense - - (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--net 416.0 95.6 160.9 - 672.5
Goodwill--net 241.8 - 105.1 - 346.9
Technology intangible
assets--net - 98.7 49.4 - 148.2
Identifiable
intangible
assets--net 1.5 29.7 12.7 - 43.8
Intercompany
receivables 443.7 - 63.5 (507.2) -
Investment in
subsidiaries 246.9 328.9 - (575.8) -
Other assets 39.5 10.0 2.4 - 51.9
----------------------------------------------------
TOTAL ASSETS $1,622.8 $614.8 $ 507.2 $(1,083.0) $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 long-term 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 - 231.2 344.6 (575.8) -
Retained earnings
(deficit) (23.3) (1.9) 4.6 - (20.6)
Accumulated other
comprehensive
loss (5.7) - (4.5) - (10.2)
----------------------------------------------------
TOTAL STOCKHOLDER'S
EQUITY 498.0 229.3 344.7 (575.5) 496.2
----------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $1,622.8 $614.8 $ 507.2 $(1,083.0) $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 cash acquired (1,191.1) - - - (1,191.1)
-----------------------------------------------------
Net cash (used) by
investing activities (1,205.0) (6.3) (7.4) - (1,218.7)
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
-----------------------------------------------------
Net increase in cash
and cash equivalents 94.6 0.3 25.1 - 120.0
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
expenses 25.0 1.7 8.5 - 35.2
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)
income--net (1.0) - (0.5) - (1.5)
---------------------------------------------------------
Income (loss) before
income taxes 7.7 (2.5) 4.4 - 9.6
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 activities $ (10.7) $(10.6) $(10.3) $ - $(31.6)
Investing activities:
Purchases of
property, plant
and equipment (5.2) (0.7) (1.7) - (7.6)
-------------------------------------------------------
Net cash (used) by
investing activities (5.2) (0.7) (1.7) - (7.6)
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
------------------------------------------------------
Net decrease in cash
and cash equivalents - (0.1) (1.6) - (1.7)
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
========================================================
YEAR ENDED 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
expenses 144.8 9.1 47.2 - 201.1
Amortization expense 8.2 14.5 1.7 - 24.4
Restructuring and
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 taxes 59.8 (0.8) 28.1 (0.9) 86.2
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)
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)
Repayments 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)
W. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary data relating to the results of operations for each quarter of the
years ended December 31, 2002 and 2001 follows:
NOVEON, INC.
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------------------------------------
(IN MILLIONS)
2002
Net sales $ 259.4 $ 280.9 $ 273.2 $ 255.8
Gross profit 82.4 94.6 89.0 76.5
Operating income 29.4 38.3 33.1 20.1
Net income (loss) 8.5 15.8 12.3 (1.9)
BFGOODRICH
PERFORMANCE
MATERIALS NOVEON, INC.
------------------------------------------------------
TWO ONE
MONTHS MONTH
ENDED ENDED SECOND THIRD FOURTH
FEBRUARY 28 MARCH 31 QUARTER QUARTER QUARTER
------------------------------------------------------
(IN MILLIONS)
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
Net income (loss) 5.6 (0.6) (6.9) (6.0) (7.1)