-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TkyPkeScV+gr8xWATtodKoNg7kwPk23larI/ViiB1QzRd+Ldpnq83a83FZqeg+u+ XKsG41D3lMv2Z3Pmx8olaw== 0001068800-00-000070.txt : 20000307 0001068800-00-000070.hdr.sgml : 20000307 ACCESSION NUMBER: 0001068800-00-000070 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991222 ITEM INFORMATION: FILED AS OF DATE: 20000306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLUTIA INC CENTRAL INDEX KEY: 0001043382 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 431781797 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-13255 FILM NUMBER: 561737 BUSINESS ADDRESS: STREET 1: 575 MARYVILLE CENTRE DRIVE STREET 2: P O BOX 66760 CITY: ST. LOUIS STATE: MO ZIP: 63166-6760 BUSINESS PHONE: 3146741000 MAIL ADDRESS: STREET 1: P O BOX 66760 CITY: ST. LOUIS STATE: MO ZIP: 63166-6760 FORMER COMPANY: FORMER CONFORMED NAME: QUEENY CHEMICAL CO DATE OF NAME CHANGE: 19970804 8-K/A 1 SOLUTIA INC. FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 22, 1999 SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE -------- (STATE OF INCORPORATION) 001-13255 43-1781797 --------- ---------- (COMMISSION (IRS EMPLOYER FILE NUMBER) IDENTIFICATION NO.) 575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760 - --------------------------------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 674-1000 -------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE Solutia Inc. (Solutia) hereby files Amendment No. 1 to its Form 8-K filed on January 4, 2000. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired (i) Financial statements of Viking Resins Group Holdings B.V. and subsidiaries, as of and for the nine months ended September 30, 1999, together with the related Independent Auditors' Report, attached as Exhibit 99.1 and incorporated by reference. (b) Pro Forma Financial Information (i) Unaudited Pro Forma Combined Condensed Statement of Financial Position as of September 30, 1999, including notes thereto. (ii) Unaudited Pro Forma Combined Condensed Statements of Income for the year ended December 31, 1998, and the nine months ended September 30, 1999, including notes thereto. (c) Exhibits See the Exhibit Index attached hereto and incorporated herein by reference. Unaudited Pro Forma Combined Condensed Financial Statements The following unaudited pro forma combined condensed financial statements give effect to the acquisition of Viking Resins Group Holdings B.V. and subsidiaries (Viking Resins) using the purchase method of accounting, after giving effect to the pro forma adjustments described in the notes to the unaudited pro forma combined condensed financial statements. The unaudited pro forma combined condensed financial statements were prepared from, and should be read in conjunction with: (a) The historical financial statements of Solutia Inc. for the periods ended September 30, 1999, and December 31, 1998; and, (b) The historical financial statements of Viking Resins for the nine months ended September 30, 1999, attached to this Form 8-K/A as Exhibit 99.1 and incorporated by reference. It is necessary to present the unaudited pro forma combined condensed financial information with cautions as to its interpretations and usefulness. The purchase price allocations are based on preliminary assumptions and are subject to revision. Accordingly, it is probable that purchase accounting adjustments will differ from the pro forma adjustments. The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition of Viking Resins by Solutia had been consummated as of the dates indicated, nor is it necessarily indicative of future operating results or financial position of Solutia. Further, the unaudited pro forma combined condensed financial information does not reflect any benefits or synergies that are expected to result from the acquisition. The Unaudited Pro Forma Combined Condensed Statement of Financial Position gives effect to the acquisition as if it had occurred on September 30, 1999, combining the statement of consolidated financial position for Solutia as of September 30, 1999, and the consolidated balance sheet for Viking Resins as of September 30, 1999. The Unaudited Pro Forma Combined Condensed Statements of Income give effect to the acquisition as if it had occurred at the beginning of the earliest period presented, combining the results of Solutia for the year ended December 31, 1998, and the nine months ended September 30, 1999, with the results of Viking Resins for the year ended December 31, 1998, and the nine months ended September 30, 1999, respectively. In the fourth quarter of 1999, Solutia issued approximately $669 million of commercial paper to finance the acquisition of Viking Resins. For purposes of the unaudited pro forma combined condensed financial statements, this commercial paper is assumed to be outstanding during the periods presented. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 1999 (DOLLARS IN MILLIONS)
HISTORICAL -------------------------- VIKING PRO FORMA PRO FORMA SOLUTIA RESINS ADJUSTMENTS COMBINED ------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7 $ 55 $ -- $ 62 Trade receivables 442 90 -- 532 Miscellaneous receivables and prepaid expenses 131 8 -- 139 Deferred income tax benefit 103 -- -- 103 Inventories 337 59 1 397 ------ ---- ----- ------ TOTAL CURRENT ASSETS 1,020 212 1 1,233 NET PROPERTY, PLANT AND EQUIPMENT 1,094 189 26 1,309 INVESTMENTS IN AFFILIATES 396 8 -- 404 LONG-TERM DEFERRED INCOME TAX BENEFIT 251 13 -- 264 GOODWILL 83 167 233 483 OTHER ASSETS 189 30 (10) 209 ------ ---- ----- ------ TOTAL ASSETS $3,033 $619 $ 250 $3,902 ====== ==== ===== ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 296 $ 45 $ -- $ 341 Accrued liabilities 527 43 3 573 Short-term debt 76 11 669 756 ------ ---- ----- ------ TOTAL CURRENT LIABILITIES 899 99 672 1,670 LONG-TERM DEBT 597 444 (440) 601 POSTRETIREMENT LIABILITIES 970 21 -- 991 OTHER LIABILITIES 497 71 2 570 SHAREHOLDERS' EQUITY (DEFICIT): Common stock 1 4 (4) 1 Additional contributed capital (137) 10 (10) (137) Treasury stock (200) -- -- (200) Unearned ESOP shares (21) -- -- (21) Accumulated other comprehensive income -- (2) 2 -- Reinvested earnings 427 (28) 28 427 ------ ---- ----- ------ TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 70 (16) 16 70 ------ ---- ----- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $3,033 $619 $ 250 $3,902 ====== ==== ===== ====== See accompanying notes to unaudited pro forma combined condensed statement of financial position.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 1999 The pro forma adjustments to the Unaudited Pro Forma Combined Condensed Statement of Financial Position were made to reflect the following: [FN] To record the write-off of Viking Resins' historical equity. To record Solutia's issuance of $669 million of commercial paper to fund the acquisition of Viking Resins, the refinancing of debt assumed, as required by the purchase and sale agreements, and the write-off of capitalized debt finance costs and accrued interest payable related to the debt refinanced. To record the excess of the purchase price of Viking Resins over the fair market value of Viking Resins net assets, and to adjust Viking Resins net assets acquired to estimated fair market values. To record liabilities assumed in the acquisition. To record deferred taxes related to Notes (3) and (4) above, based on an effective tax rate of 32%. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (DOLLARS IN MILLIONS)
HISTORICAL -------------------------- VIKING PRO FORMA PRO FORMA SOLUTIA RESINS ADJUSTMENTS COMBINED ------------------------------------------------------------ NET SALES $2,094 $382 $(11) $2,465 Cost of goods sold 1,613 278 2 1,893 ------ ---- ---- ------ GROSS PROFIT 481 104 (13) 572 Marketing expenses 108 25 (11) 122 Administrative expenses 91 25 -- 116 Technological expenses 58 12 -- 70 Amortization expense 2 7 8 17 ------ ---- ---- ------ OPERATING INCOME 222 35 (10) 247 Equity income from affiliates 26 -- -- 26 Interest expense (30) (31) 3 (58) Other income (expense) - net 10 1 -- 11 ------ ---- ---- ------ INCOME BEFORE INCOME TAXES 228 5 (7) 226 Income taxes 73 10 (2) 81 ------ ---- ---- ------ NET INCOME (LOSS) $ 155 $ (5) $ (5) $ 145 ====== ==== ==== ====== BASIC EARNINGS PER SHARE $1.40 $1.31 ===== ===== DILUTED EARNINGS PER SHARE $1.34 $1.25 ===== ===== Weighted-average equivalent shares (in millions): Basic 111.1 111.1 Effect of dilutive securities: Common share equivalents - common stock issuable upon exercise of outstanding stock options 4.5 4.5 ----- ----- Diluted 115.6 115.6 ===== =====
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN MILLIONS)
HISTORICAL ---------------------------- VIKING PRO FORMA PRO FORMA SOLUTIA RESINS ADJUSTMENTS COMBINED ------------------------------------------------------------- NET SALES $2,835 $533 $(15) $3,353 Cost of goods sold 2,085 384 2 2,471 ------ ---- ---- ------ GROSS PROFIT 750 149 (17) 882 Marketing expenses 145 61 (15) 191 Administrative expenses 136 30 -- 166 Technological expenses 83 20 -- 103 Amortization expense -- 2 18 20 ------ ---- ---- ------ OPERATING INCOME 386 36 (20) 402 Equity income from affiliates 25 -- -- 25 Interest expense (43) (8) (30) (81) Other income (expense) - net 7 2 -- 9 ------ ---- ---- ------ INCOME BEFORE INCOME TAXES 375 30 (50) 355 Income taxes 126 12 (17) 121 ------ ---- ---- ------ NET INCOME $ 249 $ 18 $(33) $ 234 ====== ==== ==== ====== BASIC EARNINGS PER SHARE $2.16 $2.03 ===== ===== DILUTED EARNINGS PER SHARE $2.03 $1.91 ===== ===== Weighted-average equivalent shares (in millions): Basic 115.5 115.5 Effect of dilutive securities: Common share equivalents - common stock issuable upon exercise of outstanding stock options 7.3 7.3 ----- ----- Diluted 122.8 122.8 ===== ===== See accompanying notes to unaudited pro forma combined condensed statements of income.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 The pro forma adjustments to the Unaudited Pro Forma Combined Condensed Statements of Income were made to reflect the following: [FN] To record additional depreciation and amortization expense resulting from the fair market value adjustments to property, plant and equipment and goodwill recorded in connection with the acquisition. To record interest expense related to the issuance of $669 million of commercial paper to fund the acquisition. To record the income tax effects of the tax-deductible pro forma adjustments in Notes 1 and 2, based on an effective tax rate of 32.0% for the nine months ended September 30, 1999, and 33.6% for the year ended December 31, 1998. To reclassify to conform to Solutia's presentation. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOLUTIA INC. --------------------------------------------- (Registrant) /s/ James M. Sullivan --------------------------------------------- Vice President and Controller (Principal Accounting Officer) DATE: March 6, 2000 EXHIBIT INDEX These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description - ------- ----------- 2 1. Agreement, dated November 10, 1999, for the sale and purchase of class A shares, preference shares and loan stock and the cancellation of warrants in Viking Resins Group Holdings B.V. between (a) Solutia Inc., as purchaser, (b) the holders of the A shares, preference shares and loan stock as sellers, and (c) the warrantholders, plus identification of contents of omitted schedules and agreement to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request (incorporated herein by reference to Exhibit 2.1 of Solutia's Form 8-K filed January 4, 2000). 2. Agreement, dated December 22, 1999, for the sale and purchase of class B shares in Viking Resins Group Holdings B.V. between Helmut Strametz, as seller and Solutia Inc., as purchaser, plus (a) identification of contents of omitted schedules and agreement to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request and (b) a schedule identifying substantially identical documents between Solutia Inc. and the other minority shareholders (incorporated herein by reference to Exhibit 2.2 of Solutia's Form 8-K filed January 4, 2000). 3. Agreement, dated December 21, 1999, for the sale and purchase of class B shares in Viking Resins Group Holdings B.V. between Heinrich Otto Geidt, as seller and Solutia Inc., as purchaser, plus identification of contents of omitted schedules and agreement to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request (incorporated herein by reference to Exhibit 2.3 of Solutia's Form 8-K filed January 4, 2000). 23 1. Consent of Deloitte & Touche Accountants. 99 1. Financial statements of Viking Resins Group Holdings B.V. and subsidiaries as of and for the nine months ended September 30, 1999. 2. Press release dated December 22, 1999, issued by Solutia Inc., announcing the completion of Solutia's acquisition of the Vianova Resins business (incorporated herein by reference to Exhibit 99.1 of Solutia's Form 8-K filed January 4, 2000). 3. Press release dated November 11, 1999, issued by Solutia Inc., announcing Solutia's agreement to acquire the Vianova Resins business (incorporated by reference to Exhibit 99.1 of Solutia's Form 8-K filed November 12, 1999). EX-23.1 2 CONSENT OF EXPERTS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Solutia's Registration Statements on Form S-8 (Nos. 333-34561, 333-34587, 333-34589, 333-34591, 333-34593, 333-34683, 333-35689, 333-47911, 333-51081, 333-74463, and 333-74465) of our opinion dated March 1, 2000 (relating to the financial statements of Viking Resins Group Holdings B.V. and subsidiaries), appearing in Exhibit 99.1 to this Form 8-K/A of Solutia Inc. Deloitte & Touche Accountants Amsterdam, The Netherlands March 1, 2000 EX-99.1 3 FINANCIAL STATEMENTS VIKING RESINS GROUP HOLDINGS B.V. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 VIKING RESINS GROUP HOLDINGS B.V. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 CONTENTS PAGE INDEPENDENT AUDITORS' REPORT 2 CONSOLIDATED STATEMENT OF OPERATIONS 3 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) 3 CONSOLIDATED BALANCE SHEET 4 CONSOLIDATED CASH FLOW STATEMENT 5 GENERAL INFORMATION AND ACCOUNTING POLICIES 6-11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12-27 1 INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDER AND BOARD OF DIRECTORS OF VIKING RESINS GROUP HOLDINGS B.V. AND SUBSIDIARIES: We have audited the consolidated balance sheet of Viking Resins Group Holdings B.V. and subsidiaries (the company) as of September 30, 1999 and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flow for the nine months ended September 30, 1999. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Viking Resins Group Holdings B.V. and subsidiaries as of September 30, 1999 and the results of their operations and their cash flows for the nine months ended September 30, 1999, in conformity with International Accounting Standards. Deloitte & Touche Accountants Amsterdam, The Netherlands March 1, 2000 2 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- (all amounts in Deutsche Mark thousands) NOTES Sales 698,143 Cost of sales (508,208) ---------------------- Gross profit 189,935 Marketing and selling expenses (45,851) Research and development expenses (23,268) Other general and administrative expenses (42,620) Other operating income 11,382 Other operating expenses 3 (26,424) ---------------------- Operating profit 1 63,154 ---------------------- Interest income 1,813 Interest expense (36,229) Interest expense on preference shares 22 (19,664) ---------------------- Other financial income/expense, net (54,080) ---------------------- Income before income tax 9,074 Income tax 4 (17,320) ---------------------- Net loss (8,246) ======================
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) - see notes 23, 28
(all amounts in Deutsche Mark SHARE CAPITAL CURRENCY ACCUMULATED TOTAL thousands) CAPITAL RESERVES REVALUATION DEFICIT EQUITY (DEFICIT) ------------------------------------------------------------------------ BALANCE AT JANUARY 1, 1999 AS RESTATED 8,260 18,947 (3,338) (44,172) (20,303) Shares issued 36 74 - - 110 Currency translation differences - - 141 - 141 Net loss - - - (8,246) (8,246) ------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1999 8,296 19,021 (3,197) (52,418) (28,298) ======================================================================== The accompanying notes form an integral part of these consolidated financial statements.
3 CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999 -------------------------- (all amounts in Deutsche Mark thousands) NOTES ASSETS NON-CURRENT ASSETS Intangible assets 5 327,438 Property, plant and equipment 6 350,487 Other investments 7 14,989 Deferred debt financing costs 14 39,135 Deferred tax assets 4,15 23,336 ----------- 755,385 CURRENT ASSETS Inventories 8 110,646 Trade receivables 9 167,104 Accounts receivable from related parties 108 Prepaid expense and other assets 10 14,721 Cash and cash equivalents 11 101,158 ----------- 393,737 ------------- TOTAL ASSETS 1,149,122 ============= EQUITY (DEFICIT) AND LIABILITIES Shareholders' equity (deficit) 23 (28,298) Minority interest 24 1,914 ----------- (26,384) ------------- NON-CURRENT LIABILITIES Provisions Deferred tax liabilities 15 55,850 Pensions 16 39,703 Other provisions 18 74,377 Preference shares 22 263,876 Borrowings 14 559,068 ----------- 992,874 CURRENT LIABILITIES Trade payables 12 82,731 Other liabilities 13 37,637 Current tax liabilities 4 14,948 Borrowings, current portion 14 19,926 Other payables 17 27,390 ----------- 182,632 ------------- TOTAL LIABILITIES 1,175,506 ------------- TOTAL EQUITY (DEFICIT) AND LIABILITIES 1,149,122 ============= The accompanying notes form an integral part of these consolidated financial statements.
4 CONSOLIDATED CASH FLOW STATEMENT
(all amounts in Deutsche Mark thousands) FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- CONSOLIDATED NET LOSS (8,246) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortisation 43,145 Allowance for doubtful debt 558 Reversal of inventory reserves 1,488 Loss on disposals of fixed assets, net (27) Changes in balance sheet items (incl. currency differences): Accounts receivable (19,302) Inventories 17,071 Prepaid expenses and other assets 14,917 Accounts payable 1,465 Accrued expenses and other liabilities (10,093) ---------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 40,976 ---------------------- CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (13,269) Proceeds from sale of fixed assets 4,366 Acquisition of investments and other intangible assets (392) ---------------------- NET CASH USED IN INVESTING ACTIVITIES (9,295) ---------------------- CASH FLOW FROM FINANCING ACTIVITIES Increase of share capital 36 Increase of capital reserves 74 Amortisation of deferred debt financing costs 2,680 Change in short term debt (3,720) Change in long term debt (6,115) ---------------------- NET CASH USED IN FINANCING ACTIVITIES (7,045) ---------------------- Effect of exchange rates 232 ---------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 24,868 Cash and cash equivalents beginning of the period 76,290 ---------------------- CASH AND CASH EQUIVALENTS END OF THE PERIOD 101,158 ====================== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid 28,856 Income taxes paid 17,974 The accompanying notes form an integral part of these consolidated financial statements.
5 GENERAL INFORMATION The parent company of the Vianova Resins Group is Viking Resins Group Holdings B.V. (the company), which is a limited liability company and is incorporated and domiciled in the Netherlands. The company acts as a holding company for the Group's entities. The official registration of the legal entity was made effective September 27, 1998. The address of its registered office is as follows: Viking Resins Group Holdings B.V. Diemerhof 36 NL - 1112XN Diemen With a share purchase and assignment agreement between Hoechst and Viking Resins Group Holdings B.V. dated October 7, 1998, Viking Resins Group Holdings B.V. acquired the Vianova Resins Group of companies hereinafter collectively referred to as "Vianova" or the "Group" with effect retroactive to October 1, 1998. (see note 29) Vianova develops, produces and sells chemical products, mostly resins. Vianova has three production sites in Germany and one each in Austria, France, Spain, Thailand, Denmark, Italy and Brazil. ACCOUNTING POLICIES (IN THE NOTES ALL AMOUNTS ARE SHOWN IN DEUTSCHE MARK THOUSANDS UNLESS OTHERWISE STATED) (TDM DEFINED AS THOUSANDS OF DEUTSCHE MARKS) The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: BASIS OF PREPARATION The consolidated financial statements are prepared in accordance with and comply with International Accounting Standards. The consolidated financial statements are prepared under the historical cost convention. The preparation of financial statements in conformity with IAS requires management to a certain degree to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In view of the country of the Group's main operations, the amounts shown in these financial statements are presented in Deutsche Mark. CONSOLIDATION Subsidiary undertakings, which are those companies in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, have been consolidated. All other subsidiaries are consolidated from the date on which effective control is transferred to the Group and are no longer consolidated from the date of disposal. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. Separate disclosure is made of minority interests. A listing of the Group's principal subsidiaries is set out in Note 27. The financial effect of the acquisition and disposal of subsidiaries will be shown separately as it occurs. 6 FOREIGN CURRENCIES Income statements of foreign entities are translated into the Group's reporting currency at average exchange rates for the nine-month period ending September 30, 1999 and the balance sheets are translated at the month-end exchange rates ruling on September 30, 1999. Exchange differences arising from the translation of the net investment in foreign subsidiaries and associated undertakings are taken to "Currency Translation Differences" in the statement of shareholders' equity (deficit) and are shown net of their income tax effect. The functional currencies of the company's foreign subsidiaries are their respective local currencies. Foreign currency transaction gains and losses are recorded in net earnings. At year end such balances are translated at year-end exchange rates unless hedged by forward foreign exchange contracts, in which case the rates specified in such forward contracts are used. Exchange gains and losses and hedging costs arising on contracts entered into as hedges of specific revenue or expense transactions and of anticipated future transactions are deferred until the date of such transactions at which time they are included in the determination of such revenue and expenses. All other exchange gains and losses relating to hedge transactions are recognised in the income statement in the same period as the exchange differences on the items covered by the hedge transactions. Costs on such contracts are amortised over the life of the hedge contract. Gains and losses on contracts which are no longer designated as hedges are included in the income statement. FINANCIAL INSTRUMENTS Financial instruments carried on the balance sheet include cash and cash equivalents, receivables, trade payables and borrowings. The carrying values of cash equivalents and other current assets and liabilities approximate fair values due to the short-term maturity of these instruments. The company and the Group are also parties to financial instruments that reduce exposure to fluctuations in foreign currency exchange and interest rates. These instruments, which mainly comprise foreign currency forward contracts and interest rate derivatives agreements, are not recognised in the financial statements on inception. The purpose of these instruments is to hedge risk exposures. None of the derivative instruments are used for trading or speculative purposes. Foreign currency forward contracts protect the Group from movements in exchange rates by establishing the rate at which a foreign currency asset or liability will be settled. Any increase or decrease in the amount required to settle the asset or liability is off-set by a corresponding movement in the value of the forward exchange contract. The gains and losses are therefore off-set for financial reporting purposes and are not recognised in the financial statements. The fee incurred in establishing each agreement is amortised over the contract period. Interest rate derivatives agreements are designed to protect the Group from movements in interest rates. The company entered into an interest rate derivative in order to control funding costs by fixing effective interest rates paid on existing variable rate debt. Any differential to be paid or received on an interest rate derivative agreement is recognised as a component of interest revenue or expense over the period of the agreement. Gains and losses on early termination of interest rate swaps or on repayment of the borrowing are taken to the income statement. Disclosures about financial instruments to which the Group is a party are provided in note 19. 7 GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired company at the date of acquisition. Goodwill on acquisitions is reported in the balance sheet as an intangible asset and is amortised using the straight-line method over its estimated useful life of 20 years. In determining the period of amortisation the Group considered the expected period of benefits to be received from the acquired companies which is based on factors such as the type of business, customer relationships and the distribution network. The carrying amount of goodwill is reviewed annually and written down for permanent impairment where it is considered necessary. RESEARCH AND DEVELOPMENT Research and development acquired from Hoechst was capitalised at its fair value at the time of the transaction. Management believes that the recorded value of TDM 14,545 represents the fair market value. Subsequent to the acquisition research and development costs are charged to expense as incurred. OTHER INTANGIBLE ASSETS Expenditure on acquired patents, trademarks software and other licences is capitalised and amortised using the straight-line method over their useful lives, generally over 2-7 years. The carrying amount of each intangible asset is reviewed annually and adjusted for permanent impairment where it is considered necessary. MARKETABLE SECURITIES Marketable securities classified as long term are carried at acquisition cost. Marketable securities classified as current assets are carried at lower cost or market value. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the income statement. PROPERTY, PLANT AND EQUIPMENT All property, plant and equipment is recorded at historical cost less subsequent depreciation. Following the acquisition of the Vianova Group of companies effective October 1, 1998, the fair market value of the acquired land, buildings, machinery and equipment was determined based primarily on valuations by external appraisers. Depreciation is calculated on the straight-line method to write off the cost of each asset, or the revalued amounts, to their residual values over their estimated useful life as follows: Manufacturing plants and buildings 15-50 years Machinery and equipment 3-20 years Office equipment and motor vehicles 3-15 years Land is not depreciated as it is deemed to have an indefinite life. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. 8 Interest costs on borrowings to finance the construction of property, plant and equipment are expensed. ACCOUNTING FOR LEASES - WHERE A GROUP COMPANY IS THE LESSEE Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which the decision to terminate takes place. INVENTORIES Inventories are stated at the lower of cost or net realisable value. Cost is determined by weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs of completion, selling expenses and mark-up on profit. Net realisable value for raw materials is determined based on replacement costs. In determining net realisable value deterioration and obsolescence have been considered. TRADE RECEIVABLES Trade receivables are carried at anticipated realisable value. An estimate is made for doubtful receivables based on a review of all outstanding amounts at the year end. Bad debts are written off during the year in which they are identified. Bankers acceptances are discounted. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash in hand and highly liquid instruments with maturity of three months or less. In the balance sheet, bank overdrafts are included in borrowings in current liabilities. TRADE PAYABLES, OTHER LIABILITIES AND PROVISIONS Trade accounts payable and other liabilities are stated at their expected settlement amounts. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the balance sheet date. Accruals, including those for loss contingencies and environmental liabilities are based on best estimates. The Group accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable. RESTRUCTURING PROVISIONS Costs specifically attributable to a restructuring mainly comprise employee termination payments, and are recognised in the period in which they meet the criteria to be accrued. Employee termination costs are recognised only after either an agreement is in place with the appropriate employee representatives specifying the terms of redundancy and the numbers of employees affected, for those under a collective agreement, or individual agreements are in place for those employees on individual 9 contracts. Any fixed assets that are no longer required for their original use are transferred to current assets and carried at the lower of the carrying amount or estimated realisable value. PENSION OBLIGATIONS Provisions for defined benefit plans are determined using the "projected unit credit method". Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees. Actuarial calculations are performed on a yearly basis. The pension obligation is measured as the present value of the estimated future cash outflows using interest rates of government securities which have terms to maturity approximating the terms of the related liability. All actuarial gains and losses are spread forward over the average remaining service lives of employees. Defined contribution plans are administered by independent external trusts or insurance companies. The Group's contributions to these pension plans are charged to the income statement in the year to which they relate. The amount of pension liabilities as at September 30, 1999 has been accrued on the basis of actuarial computations performed as at December 31, 1999. DEFERRED INCOME TAXES Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax. Under this method the Group is required to make a provision for deferred income taxes on the revaluation of certain non-current assets and, in relation to an acquisition, on the difference between the fair values of the net assets acquired and their tax base. Provision for taxes, mainly withholding taxes, which could arise on the remittance of retained earnings, principally relating to subsidiaries, is only made where there is a current intention to remit such earnings. The principal temporary differences arise from depreciation on property, plant and equipment, revaluations of certain non-current assets and provisions for pensions. Deferred tax assets relating to the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. REVENUE RECOGNITION Revenues are recognised upon shipment of products to the customer or performance of services. Such revenues are recorded on the basis of sales prices net of applicable discounts and customer bonuses. The company has the choice of replacing goods or refunding the purchase price in case of justified complaints. Adequate accruals have been set up for future warranty costs. Other revenues earned by the Group are recognised on the following bases: Royalty income - when earned if collectability is reasonably assured. Interest income - as it accrues unless collectability is in doubt. Dividend income - when the shareholder's right to receive payment is established. IMPAIRMENT OF ASSETS Whenever there is an indication that an asset has been impaired, the asset is written down to the recoverable amount and an impairment loss is recognised in the income statement. 10 RISK CONCENTRATION Credit Risk Financial instruments which potentially subject the company to concentrations of credit risk are primarily accounts receivable and cash equivalents. The Group performs ongoing credit evaluations of its customers' financial condition. In addition, insurances for political and transfer risks are established for various countries. Generally, collateral is not required from customers. Allowances are provided for both specific and general risks inherent in receivables. Approximately TDM 45,185 or 27% of the company's trade accounts receivable were geographically concentrated in Germany, TDM 35,995 or 22% in Italy, TDM 19,746 or 12% in Spain and TDM 13,029 or 8% in Austria at September 30, 1999. The company's management does not expect these potential risk factors to have a material adverse impact on its results of operations or financial position. Market Risk Herberts GmbH, which was a wholly-owned Hoechst subsidiary has been acquired by DuPont. Through this transaction Herberts/DuPont is the single biggest customer of the company and accounted, with its subsidiaries, for approximately 16% of net sales in the nine-month period ended September 30, 1999. The company is engaged in the Asian region (Thailand) and in South America (Brazil). The financial and economic crisis in these regions increases the market risks faced by the company. 11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 OPERATING PROFIT The following items have been charged in arriving at operating profit:
PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- Depreciation on property, plant and equipment (Note 6) 28,533 Net loss on disposal of fixed assets 27 Amortisation of intangible assets (Note 5) - goodwill (included in "Other operating expenses") 12,188 - other intangible assets (included in "Other general and administrative expenses") 2,424 Operating lease rentals 2,886 Staff costs (Note 2) 124,487 Restructuring costs (Note 17) 1,682 Currency transaction gains and losses - gains (included in other operating income) 1,852 - losses (included in other operating expense) 235 2 STAFF COSTS PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- Wages and salaries 95,381 Termination benefits 2,518 Social security costs 21,738 Pension costs - defined contribution and defined benefit plans 4,850 ---------------------- 124,487 ====================== Average number of persons employed by the Group during the year: PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- Germany 583 Austria 474 Italy 197 Other 399 ---------------------- 1,653 ====================== 12 3 OTHER OPERATING EXPENSES PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- Amortisation of goodwill 12,188 Other operating expense 14,236 ---------------------- 26,424 ====================== 4 INCOME TAX PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- Current tax (12,433) Deferred tax (Note 15) (4,887) ---------------------- (17,320) ======================
Income is initially taxed at 40% under the German corporate income tax system. Upon distribution of earnings the income tax is reduced to 30% through a credit. There is a surcharge of 5.5% on the corporate income tax. For financial reporting purposes income tax has been calculated using a rate of 45% for the nine-month period ended September 30, 1999, comprising of the distributed earnings rate (assuming full distribution of earnings), trade income taxes and surcharge on income taxes. The actual income tax charge attributable to income before income taxes for the nine-month period ended September 30, 1999 differed from the amount computed by applying a tax rate of 45% to income before income taxes as a result of the following:
PERIOD FROM JANUARY 1 TO SEPTEMBER 30, 1999 ---------------------- Income before tax 9,074 ====================== Tax calculated at a tax rate of 45% 4,083 Effect of different tax rates in other countries 508 Tax effect of income not subject to tax (1,605) Tax effect of expenses not deductible for tax purposes (principally goodwill amortisation and interest expense on preference shares) 14,334 ---------------------- Tax charge 17,320 ======================
The company's Thailand subsidiary has been granted a promotion certificate for the production of certain products. The promotional privilege includes exemption from corporate income tax for the promoted activities for a period of 8 years from the start of earnings derived from the promoted business and another 50% exemption for another period of 5 years thereafter. Earnings from the promoted business commenced 1999. The Thailand subsidiary has net operating loss carry forwards of TDM 25,284 as of September 30, 1999 which have not been recognised. 13 5 INTANGIBLE ASSETS
OTHER INTANGIBLE GOODWILL ASSETS TOTAL ------------------------------------------------- AT COST January 1, 1999 328,948 20,042 348,990 Exchange differences 43 228 271 Additions - 243 243 Disposals (2,475) (3) (2,478) Reclassification - 319 319 ------------------------------------------------- Closing amount 326,516 20,829 347,345 ------------------------------------------------- ACCUMULATED AMORTISATION January 1, 1999 4,077 988 5,065 Exchange differences - 231 231 Additions 12,188 2,424 14,612 Disposals - (1) (1) ------------------------------------------------- Closing amount 16,265 3,642 19,907 ------------------------------------------------- Net book amount 310,251 17,187 327,438 =================================================
Other intangible assets comprise acquired software, patents and trademarks. 6 PROPERTY, PLANT AND EQUIPMENT
FACTORY PREPAY- LAND & PLANT & & OFFICE MENTS BUILDINGS MACHINERY EQUIPMENT & CIP TOTAL ------------------------------------------------------------------------------------- January 1, 1999 204,051 153,301 29,818 5,586 392,756 Exchange differences (365) (32) 474 77 154 Additions 964 3,056 2,211 7,038 13,269 Disposals (2,017) (1,124) (1,631) - (4,772) Reclassification 1,106 2,248 (796) (2,877) (319) ------------------------------------------------------------------------------------- Closing amount 203,739 157,449 30,076 9,824 401,088 ------------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION January 1, 1999 3,768 14,338 6,128 220 24,454 Exchange differences 5 221 305 (7) 524 Additions 5,815 17,239 5,190 289 28,533 Disposals (742) (865) (1,303) - (2,910) Reclassifications 677 - (677) - - ------------------------------------------------------------------------------------- Closing amount 9,523 30,933 9,643 502 50,601 ------------------------------------------------------------------------------------- Net book amount 194,216 126,516 20,433 9,322 350,487 =====================================================================================
The effects of foreign currency translation are primarily related to the business in Thailand and in Brasil. 14 7 OTHER INVESTMENTS SEPTEMBER 30, 1999 ----------------- Participating interest 8,411 Marketable securities 5,887 Other 691 ----------------- 14,989 ================= Participating interests represent Vianova's 7% interest in InfraServ GmbH & Co. Wiesbaden KG, the entity who provides services for the Wiesbaden production site. The company made payments to InfraServ of TDM 12,225 for the period ended September 30, 1999. The company accounts for this investment on the cost basis which is assumed to approximate market value. The company invested in marketable securities in Austria in order to fund long term personnel related accruals (pension scheme). As of September 30, 1999 the fair market value of such securities amounted to TDM 5,836. 8 INVENTORIES SEPTEMBER 30, 1999 ----------------- Raw materials 37,902 Work in process 14,032 Finished goods 63,177 Merchandise 3,247 ----------------- 118,358 Reserves (7,712) ----------------- Inventories, net 110,646 ================= 9 TRADE RECEIVABLES SEPTEMBER 30, 1999 ----------------- Gross amount 181,199 Allowances (14,095) ----------------- 167,104 ================= 10 PREPAID EXPENSES AND OTHER ASSETS SEPTEMBER 30, 1999 ----------------- Receivables from tax authorities 2,599 Prepayments 5,786 Receivables from employees 1,434 Other receivables 4,902 ----------------- 14,721 ================= 15 11 CASH AND CASH EQUIVALENTS SEPTEMBER 30, 1999 ----------------- Cash at bank and in hand 46,395 Short-term bank deposits 54,763 ----------------- 101,158 ================= The weighted average effective interest rate on short-term bank deposits was 3.3%. 12 TRADE PAYABLES Trade payables result mainly from receipt of goods and services for the production process. Suppliers are paid within the payment terms agreed. Cash discounts for accelerated payments are utilised where possible. 13 OTHER LIABILITIES SEPTEMBER 30, 1999 ----------------- Payroll and social security 19,938 Other taxes 6,081 Accrued expenses 5,902 Other payables 5,716 ----------------- 37,637 ================= 14 BORROWINGS SEPTEMBER 30, 1999 ----------------- CURRENT Bank overdraft 14,926 Short-term portion of long-term debt 5,000 ----------------- 19,926 NON-CURRENT Bank borrowings 559,068 ----------------- 578,994 ================= 16
TDM Interest rate ------------------------------ The non-current borrowings are comprised of: Term A loan with defined repayment schedule 270,000 Libor + 2.0% Term B loan with defined repayment schedule 81,889 Libor + 2.5% Term C loan with defined repayment schedule 83,111 Libor + 3.0% ----------- 435,000 ----------- Mezzanine loan (subordinated to term loans) 53,000 Libor + 4.0% + (maturing in December 2008) 4.7% Roll up Mezzanine loan (subordinated to term loans) 32,000 Libor + 4.25% + (maturing in December 2008) 4.7% Roll up ----------- 85,000 ----------- Shareholder's loan stock instrument (unsecured) 32,000 10% Roll-up with defined repayment schedule starting after repay- ment of mezzanine loans, earliest June 30, 2006 Other (including roll-up) 7,068 1.5% - 3.0% ----------- 559,068 ===========
The interest rates are cash interest rates, in general payable every three months, if the borrower does not select another payment period. The roll-up interest rate has to be capitalised annually and is payable when the principal amount in respect of which it has accrued is repaid. 3-months-Libor as at September 30, 1999 was 3.4%. After taking account of interest rate derivatives signed in 1999, the interest rate exposure of the borrowings of the Group will be as follows:
SEPTEMBER 30, 1999 ----------------- Total borrowings: - at fixed rates 457,068 - at floating rates 121,926 ----------------- 578,994 ================= Weighted average effective interest rates: - bank overdrafts 7.2% - bank borrowings 6.9%
The carrying amounts and fair values of certain non-current borrowings are as follows:
CARRYING AMOUNTS FAIR VALUES SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 ---------------------- ---------------------- Non-current bank borrowings 559,068 548,976 ====================== ======================
The fair values are based on discounted cash flows using a discount rate based upon the borrowing rate which the directors expect would be available to the Group at the balance sheet date. The carrying amounts of short-term borrowings, approximate their fair value. 17 Maturity of non current borrowings:
SEPTEMBER 30, 1999 ----------------- Between 1 and 2 years 44,345 Between 2 and 5 years 132,949 Over 5 years 381,774 ----------------- 559,068 =================
BORROWING FACILITIES The Group has the following undrawn committed borrowing facilities:
SEPTEMBER 30, 1999 ----------------- Floating rate - expiring within one year - - expiring beyond one year 70,000 ----------------- Fixed rate - 70,000 =================
The term loans and mezzanine loans, which are subordinated to the term loans, are secured by substantially all of the assets of the Group. Depending on country specific regulations substantially all assets and shares in consolidated companies have been pledged as security for the credit facility where possible. As part of the consideration for obtaining the mezzanine loans the company issued 6,160 warrants to buy ordinary A shares for 90 Dutch Guilders less an 86 Dutch Guilders administration fee. The company valued these warrants upon issuance at TDM 18,673 and recorded such amount in capital reserve and deferred debt financing costs respectively. (see note 28) Deferred debt financing costs are amortised over the life of the loans to which they relate. 15 DEFERRED INCOME TAXES Deferred income taxes are calculated on all temporary differences under the liability method. The movement on the deferred income tax account is as follows: AT JANUARY 1, 1999 Deferred tax assets 27,899 Deferred tax liabilities (55,526) ----------- (27,627) Deferred tax expense (Note 4) (4,887) ----------- Deferred tax asset 23,336 Deferred tax liability (55,850) ----------- AT SEPTEMBER 30, 1999 (32,514) ===========
18
SEPTEMBER 30, 1999 ----------------- DEFERRED TAX LIABILITIES Property, plant and equipment (except land) 39,013 Inventory 1,770 Prepaid expenses, debt financing costs and other assets 8,138 Reversal of local untaxed reserves 4,718 Accrued expenses 2,211 ----------------- Total deferred tax liabilities 55,850 ----------------- DEFERRED TAX ASSETS Property, plant and equipment 136 Inventory 1,820 Employee pensions and other benefits 6,589 Prepaid expenses and other assets 3,017 Accrued expenses 418 Deferred tax asset on net operating losses 8,279 Other 3,077 ----------------- Total deferred tax assets 23,336 ----------------- Net deferred tax liability 32,514 =================
16 PENSIONS Provisions for pension and similar obligations have been recorded for the entities in Germany, Austria and Italy. In several other countries, pension arrangements are administered by independent external trusts or insurance companies. Amounts recognised in the balance sheet are: SEPTEMBER 30, 1999 ----------------- Germany 19,096 Austria 14,901 Italy 5,706 ----------------- 39,703 ================= 19 In Germany the company has a defined benefit pension plan which covers substantially all of its domestic employees. Plan benefits are generally based on employees' years of service and compensation. Consistent with normal business practice in Germany, the pension obligation is unfunded. The components of net pension expense for the German pension plan for the nine-month period ending September 30, 1999 are as follows: Service costs 1,100 Interest cost on projected benefit obligation 593 ----------------- Net periodic pension cost 1,693 =================
SEPTEMBER 30, 1999 ----------------- Actuarial present value of benefit obligation: Accumulated benefit obligation 17,534 ----------------- Defined benefit obligation 17,406 Unrecognised loss (515) ----------------- Accrued pension liability 16,891 ================= Defined benefit obligation January 1, 1999 15,807 Pension expense 1,693 Benefits paid 73 Contribution received (167) ----------------- Defined benefit obligation September 30, 1999 17,406 =================
For 1999 the defined benefit obligation was determined using an assumed discount rate of 6.5%, an assumed long-term rate of compensation increase of 3.0% and a projected pension increase of 2.0%. In addition, TDM 2,205 were accrued for other post-employment benefits related to employees in Germany. The German company also sponsors a defined contribution plan for its employees and contributed TDM 144 to a legally separated pension fund ("Pensionskasse"). Accruals in Austria for pension, disability, death and involuntary termination benefits as required by Austrian law have been determined based on actuarial calculations using an assumed discount rate of 6.5% and an assumed rate of compensation increase of 3.5%. In Italy the company provides termination benefits to its employees in accordance with legal requirements. The benefit is based on a percentage of salary, plus an adjustment for inflation, and vest immediately. Prior to December 31, 1998 the employees of the U.S. subsidiary participated in a pension plan sponsored by Hoechst Celanese Corporation. Beginning January 1, 1999 the employees may participate in a defined contribution plan. The company made contributions of approximately TDM 158 for the nine months ended September 30, 1999. The employees in Spain are entitled to participate in a defined benefit plan (employees who joined the company prior to October 31, 1987) and a defined contribution plan (employees who joined the company after November 1, 1987). The plans are administered by an external pension fund and costs of TDM 406 are expensed as incurred. 20 17 OTHER PAYABLES
SEPTEMBER 30, 1999 ----------------- Personnel related cost 5,687 Outstanding supplier invoices 5,760 Environmental liabilities 5,675 Warranty and claims 3,048 Rebates 3,292 Restructuring costs 1,682 Other 2,246 ----------------- 27,390 =================
PERSONNEL RELATED COST Personnel related costs mainly refer to payroll liabilities such as bonuses, vacation etc. ENVIRONMENTAL LIABILITIES Environmental liabilities relate mainly to the operations in Germany and amount to DM 5.0 million in connection with clean up costs for a waste deposit site. WARRANTY AND CLAIMS The amount refers to a claim made in respect of an alleged patent infringement. RESTRUCTURING The accrued restructuring costs of TDM 1,682 are expected to be paid out in the years 2000 and after. OTHER Other payables comprise provisions in respect of various legal claims. The management believes that disclosure of further details of these claims could seriously prejudice the Group's negotiating position and accordingly further information on the nature of the obligation has not been provided. 18 OTHER PROVISIONS
SEPTEMBER 30, 1999 ----------------- Interest expense preference shares (see note 22) 20,821 Environmental liabilities 11,725 Anniversary payments 5,418 Other 36,413 ----------------- 74,377 =================
The environmental provision relating to Germany amounts to DM 8.2 million and relates to probable obligations for clean-up if the sites would be dismantled. The environmental provision relating to Austria amounts to DM 3.5 million and was set up for the restoration of underground water storage tanks. Payments in connection with the water purification system are expected to be made over a period of more than 10 years. 21 19 FINANCIAL INSTRUMENTS i) OBJECTIVES AND SIGNIFICANT TERMS AND CONDITIONS In order to manage the risks arising from fluctuations in currency exchange rates and interest rates, the company and the Group make or will make use of the following derivative financial instruments: FORWARD FOREIGN EXCHANGE CONTRACTS Forward foreign exchange contracts are entered into to manage exposure to fluctuations in foreign currency exchange rates on specific transactions. At September 30, 1999 the open forward contracts were not material to the Group's position. INTEREST RATE DERIVATIVES The Group has entered into an interest rate derivative contract (Hedge) with a nominal amount of TDM 450,000 effective January 15, 1999 which matures at December 31, 2003, that entitles it to receive interest at floating rates on notional principal amounts and obliges it to pay interest at fixed rates on the same amounts. The interest rate derivative allows the Group to raise long-term borrowings at floating rates and swap them into fixed rates that are lower than those available if it borrowed at fixed rates directly. Under the interest rate derivative, the Group agrees with the counter party to exchange, at specified intervals (mainly semi-annually), the difference between fixed-rate and floating-rate interest amounts calculated by reference to the agreed notional principal amounts. ii) CREDIT RISK The company and the Group have no significant concentrations of credit risk. Derivative instruments are entered into with, and cash is placed with financial institutions. 20 CONTINGENCIES AND CONTINGENT LIABILITIES At September 30, 1999 the Group had contingent liabilities in respect of bank and other guarantees and other matters arising in the ordinary course of business from which it is anticipated that no material liabilities will arise for which appropriate accruals have not been made. 21 COMMITMENTS CAPITAL COMMITMENTS Capital expenditures contracted for at the balance sheet date but not recognised in the financial statements are as follows: SEPTEMBER 30, 1999 ----------------- Property, plant and equipment 3,258 ================= 22 OPERATING LEASE COMMITMENTS - WHERE A GROUP COMPANY IS THE LESSEE The future minimum lease payments under non cancellable operating leases are as follows: SEPTEMBER 30, 1999 ----------------- Not later than 1 year 1,987 Later than 1 year and not later than 5 years 2,169 Later than 5 years 89 ----------------- 4,245 ================= 22 PREFERENCE SHARES (SEE NOTE 28) SEPTEMBER 30, 1999 ----------------- Preference shares (authorised and issued 229,146 shares) 2 Premium on preference shares 263,874 ----------------- 263,876 ================= On December 15, 1998 the company issued to the A-class shareholders 38,191 class I preference shares, 38,191 class II preference shares, 38,191 class III preference shares, 38,191 class IV preference shares, 38,191 class V preference shares and 38,191 class VI preference shares. The total nominal value of the preference shares is TDM 2 (NLG '000 2.3) and a premium over nominal value was paid in totalling TDM 263,874 (NLG '000 297,318). The right of preference shareholders to receive dividends is set at 10% per annum of the total amount paid in for the preference shares, including the premium, totalling TDM 263,876 (NLG '000 297,320). The accumulated unpaid dividend attributable to preference shareholders as at September 30, 1999 amounted TDM 20,821 (NLG '000 23,460). Under the terms of the Subscription and Shareholders' agreement the preference shares are to be redeemed at various dates beginning January 1, 2006 through July 1, 2008 and require redemption upon other defined changes in the ownership of the company. The redemption value is equal to nominal value of the shares and their associated share premium reserve plus all dividends in arrears and accrued interest thereon. If the redemption is not permitted by law or the "Finance Documents" (the documents which set forth the terms of the Term Loans) the company is required to redeem such shares as soon as it is permitted to do so. The company is accreting such shares to their redemption value. 23 23 SHAREHOLDERS' EQUITY (DEFICIT) (See Note 28) SEPTEMBER 30, 1999 ----------------- Share capital Ordinary A shares par value 90 Dutch Guilders (authorised 103,605; issued 97,445 shares) 7,784 Ordinary B shares par value 90 Dutch Guilders (authorised 8,400; issued 6,888 shares) 512 ----------------- 8,296 ----------------- Capital reserves Premium on A shares 40 Premium on B shares 308 Warrants 18,673 ----------------- 19,021 ----------------- Currency revaluation (3,197) Accumulated deficit (52,418) ----------------- (28,298) ================= Ordinary A and B shares 924 B-shares reserved for management were issued and paid in during the nine-month period ended September 30, 1999 in the amount of TDM 36. A share premium was paid in on the newly issued B-shares of TDM 74 (NLG '000 83). The A and B shareholders have the right to share in dividend and other equity distributions according to the nominal value of their shares, but only after the accumulated rights of the preference shareholders have been satisfied. The company has reserved 1,512 B shares for issuance to Management by the board. In addition the company has reserved 6,160 A shares for issuance in connection with the outstanding warrants. 24 MINORITY INTEREST SEPTEMBER 30, 1999 ----------------- 1,914 ================= The minority interest relates to the investment in Vianova Resins Ltd., Bangkok, Thailand, where the Group had only 81% share at the date of acquisition by Viking Resins Group Holdings B.V. The remaining 19% were held by Bangkok Bank and affiliates. In order to give the Thai operation a solid basis Group management decided to increase the capital of the Thailand entity. The minority shareholder did not take part in the capital increase which led to a reduction in its stake to 4.15%. As a result of the contractual agreement underlying the capital increase, it is not expected that Bangkok Bank and affiliates will participate in the earnings of the Thailand subsidiary for the foreseeable future. 24 25 RELATED PARTY TRANSACTIONS The Group was formed by the purchase of the Vianova Resins business and Group of companies from Hoechst AG with an effective date of October 1, 1998. As at December 31, 1998 and for the period then ended, ROPA Beteiligungsgesellschaft mbH ("ROPA") held a majority stake in Viking Resins Group Holdings B.V. and was therefore the immediate parent company. The ultimate parent company as at December 31, 1998 and for the period then ended was Deutsche Bank AG. On January 6, 1999, ROPA entered into binding agreements to transfer parts of its stake to funds managed by Morgan Grenfell Private Equity Limited, a subsidiary of Deutsche Bank AG, and various other investors. As from that date the shareholding of ROPA was reduced to 39.95%. (see note 29) The following transactions were carried out with related parties: i) LOAN AND FINANCING AGREEMENTS SEPTEMBER 30, 1999 ----------------- Unsecured Shareholders' Loan stock instrument 32,000 ----------------- 32,000 ================= With respect to the terms and conditions of the loans please refer to note 14. No interest was paid for the loan stock instrument. ii) OUTSTANDING BALANCES ARISING FROM BANK BORROWINGS - INTEREST All amounts are paid on a timely basis. No outstanding balances are material for the Group's position iii) DIRECTORS' REMUNERATION Tom Leader Mark Weston Helmut Strametz Jurgen Reichhold Total director's remuneration amounted to TDM 915. 25 26 BUSINESS HELD FOR SALE On June 1, 1998 the company signed a secrecy agreement and on October 21, 1998 a letter of intent to sell the Printing Ink Resins business to an interested party. It was intended to sell the business (customer list including know how), fixed assets and inventories. The workers council was informed about management's intention to sell the business. Within the agreed timeframe the parties did not achieve a definitive agreement. Management is now approaching other interested parties. The assets held for sale are comprising as followed: SEPTEMBER 30, 1999 ----------------- Assets 14,461 Liabilities (953) In the period up to September 30, 1999 the business has generated net sales of TDM 29,994 and an operating loss of TDM (5,477). The net cash flow amounted to TDM 1,233 and capital expenditures were TDM 190. 27 PRINCIPAL SUBSIDIARY UNDERTAKINGS The entities included in the consolidated financial statements of the Group as well as the percentage deemed owned either directly or indirectly are: Vianova Resins GmbH & Co. KG, Mainz Kastel, Germany 100.00% Vianova Resins AG, Graz, Austria 100.00% Vianova Resins S.A., Longvic, France 100.00% Vianova Resins S.A., La Llagosta, Spain 100.00% Vianova Resins A/S, Soborg, Denmark 100.00% Vianova Resins Inc., Charlotte, U.S.A 100.00% Vianova Resins Canada Inc., Montreal, Canada 100.00% Vianova Resins S.p.A., Romano d'Ezzelino, Italy 100.00% Viking Finance III B.V. (Netherlands) 100.00% Erste Viking Resins Germany 1 GmbH (Germany) 100.00% Zweite Viking Resins Germany 2 GmbH (Germany) 100.00% Viking Resins Germany Holding GmbH & Co KG (Germany) 100.00% Vianova Resins do Brazil Ltda., Sao Paulo, Brazil 100.00% Vianova Resins Ltd., Hounslow, UK 100.00% Vianova Resins Ltd., Bangkok, Thailand 95.85% Vianova Resins N. V., Belgium 100.00% Vianova Resins Germany Management GmbH (Germany) 100.00% Vianova Resins EPE, Greece 99.00% Vianova Resins Quimicas, Limitada, Portugal 100.00% Diogenes 15. Vermogensverwaltungs GmbH 100.00% Vianova Resins Ltd. Sti.; Sefakoy-Istanbul, Turkey 100.00% Vianova Resins Ltd. Seoul, Korea 100.00% In 1999 the Viking Resins Spain SA, Viking Resins Beteiligungsverwaltungs AG, Austria and Viking Resins Italy S.p.A. were merged with the relating Vianova company in the respective country. The Viking companies were subsequently renamed Vianova Resins S.A., Spain, Vianova Resins AG, Austria and Vianova Resins S.p.A. Italy. Furthermore, Policondensati Vianova S.r.l., Italy was merged to the now called Vianova Resins S.p.A., Italy. 26 28 RESTATEMENT The company has restated its 1998 consolidated financial statements prepared in accordance with IAS to recognise the following items:
Share Capital Capital Reserves Accumulated Deficit ---------------------------------------------------------------- DECEMBER 31, 1998 - AS PREVIOUSLY REPORTED 8,262 264,148 (5,416) Repayment term of preferences shares (see note 22) (2) (263,874) (1,157) Warrants issued in connection with Loans (see note 14) - 18,673 (258) Liabilities recognised - - (37,341) ---------------------------------------------------------------- DECEMBER 31, 1998 - AS RESTATED 8,260 18,947 (44,172) ================================================================ 29 POST BALANCE SHEET EVENTS Effective December 22, 1999 the shares of Viking Resins Group Holdings B.V. were sold to Solutia Inc., St. Louis, Missouri/USA.
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