8-K/A 1 l91861be8-ka.txt FERRO CORPORATION 8-K/AMENDMENT NUMBER 2 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A-2 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) SEPTEMBER 7, 2001 ----------------- FERRO CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) OHIO 1-584 34-0217820 ------------------------------- ------------ ------------------ (State or other jurisdiction of (Commission (I.R.S. Employer incorporation) File Number) Identification No.) 1000 LAKESIDE AVENUE, CLEVELAND, OH 44114-1183 ----------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (216) 641-8580 -------------- N/A --- (Former name or former address, if changed since last report) EXPLANATORY NOTE : This Current Report on Form 8-K/A-2 amends the Registrant's Current Report on Form 8-K for the event dated September 7, 2001, as filed on September 21, 2001, and the Registrant's Current Report on Form 8-K/A, filed November 23, 2001, to amend the pro forma financial information required by Item 7(b). ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. As reported in its Current Report on Form 8-K filed on September 21, 2001, on September 7, 2001, Ferro Corporation (the "Company" or the "Registrant") acquired from OM Group, Inc. ("OMG") certain businesses previously owned by dmc(2) Degussa Metals Catalysts Cerdec AG ("dmc(2)") pursuant to an agreement to purchase certain assets of dmc(2) and certain of its subsidiaries and shares of other subsidiaries. The businesses acquired include the electronic materials, performance pigments and colours, glass systems and Cerdec ceramics divisions of dmc(2) (the "Businesses"). The Company paid to OMG in cash a purchase price for these businesses of approximately $525 million, which was determined on the basis of historical cash flows, applying appropriate multiples, taking into account expected synergies between the Company's existing businesses and the acquired businesses. The acquired assets include shares of subsidiary companies, property, plant, equipment, intellectual property, accounts receivable and payable, inventory and corporate assets of the acquired dmc(2) business divisions in more than nineteen countries. The Company intends to use the acquired assets to continue designing, manufacturing and distributing electronic materials, performance pigments, glass systems and Cerdec ceramics products. The Company financed this transaction through the consummation of two senior credit facilities among the Company, Credit Suisse First Boston and National City Bank as lead arrangers and other members of a bank group. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Business Acquired. The following financial statements of the acquired businesses are filed as part of this Current Report on Form 8-K/A-2: (1) Combined Balance Sheets as of September 30, 1999, December 31, 1999, December 31, 2000, and June 30, 2001 (unaudited); (2) Combined Statements of Operations for the year ended September 30, 1999, three months ended December 31, 1999, year ended December 31, 2000, six months ended June 30, 2000 (unaudited) and six months ended June 30, 2001 (unaudited); (3) Combined Statements of Shareholder's Equity for the year ended September 30, 1999, three months ended December 31, 1999, year ended December 31, 2000, six months ended June 30, 2000 (unaudited) and six months ended June 30, 2001 (unaudited); (4) Combined Statements of Cash Flows for the year ended September 30, 1999, three months ended December 31, 1999, year ended December 31, 2000, six months ended June 30, 2000 (unaudited) and six months ended June 30, 2001 (unaudited). (Continued) 2 Independent Auditors' Report To the Supervisory Board of dmc(2) Degussa Metals Catalysts Cerdec Aktiengesellschaft: We have audited the accompanying combined balance sheets of the electronic materials, performance pigments and colours, glass systems and Cerdec ceramic businesses (the "Businesses") of dmc(2) Degussa Metals Catalysts Cerdec Aktiengesellschaft and subsidiaries as of December 31, 2000 and 1999 and September 30, 1999 and the related combined statements of operations, shareholder's equity, and cash flows for the year ended December 31, 2000, the three months ended December 31, 1999, and the year ended September 30, 1999. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits 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 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Businesses as of December 31, 2000 and 1999, and September 30, 1999, and the results of their operations and their cash flows for the year ended December 31, 2000, the three months ended December 31, 1999, and the year ended September 30, 1999 in conformity with accounting principles generally accepted in Germany. Accounting principles generally accepted in Germany vary in certain significant respects from accounting principles generally accepted in the United States of America. Application of accounting principles generally accepted in the United States of America would have affected shareholder's equity as of December 31, 2000 and 1999 and September 30, 1999 and results of operations for the year ended December 31, 2000, the three months ended December 31, 1999, and the year ended September 30, 1999 to the extent summarized in Note 25 to the combined financial statements. KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftspruefungsgesellschaft Frankfurt, Germany November 21, 2001 (Continued) 3 Combined Balance Sheets German GAAP (in DEM thousands)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------- ------------ ------------ ASSETS Intangible assets (note 13) 14,570 5,110 4,975 Property, plant and equipment, net (note 14) 251,523 259,649 292,564 Investments (note 15) 21,549 28,235 40,764 ------- ------- ------- Non-current assets 287,642 292,994 338,303 ------- ------- ------- Inventories, net (note 16) 174,624 189,555 235,116 Trade accounts receivable, net 160,994 174,503 194,817 Accounts receivable from affiliated companies 17,492 13,105 47,715 Other accounts receivable and other assets 21,276 18,582 23,712 ------- ------- ------- Accounts receivable and other assets (note 17) 199,762 206,190 266,244 ------- ------- ------- Cash and cash equivalents (note 18) 11,673 21,944 7,777 ------- ------- ------- Current assets 386,059 417,689 509,137 ------- ------- ------- Deferred charges (note 19) 22,971 27,154 28,973 ------- ------- ------- Total assets 696,672 737,837 876,413 ======= ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Investments in and advances from shareholder 239,876 223,170 361,270 ------- ------- ------- Shareholder's equity (note 20) 239,876 223,170 361,270 ------- ------- ------- Provisions for pensions and similar obligations 54,033 55,385 73,992 Other accrued liabilities 72,690 72,572 77,909 ------- ------- ------- Accrued liabilities (note 21) 126,723 127,957 151,901 ------- ------- ------- Liabilities to banks 180,186 180,789 113,959 Trade accounts payable 66,925 84,529 125,187 Liabilities to affiliated companies 50,358 95,838 90,052 Other liabilities 32,443 25,421 33,871 ------- ------- ------- Liabilities (note 22) 329,912 386,577 363,069 ------- ------- ------- Deferred income 161 133 173 ------- ------- ------- Total liabilities and shareholder's equity 696,672 737,837 876,413 ======= ======= =======
The accompanying notes are an integral part of the combined financial statements. (Continued) 4 Combined Statements of Operations German GAAP (in DEM thousands)
YEAR THREE MONTHS YEAR ENDED ENDED ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ---------- ---------- ---------- Sales (note 6) 823,793 238,994 1,107,089 Cost of sales (589,409) (194,423) (810,880) ---------- ---------- ---------- Gross profit 234,384 44,571 296,209 Selling expenses (104,496) (28,069) (112,590) General administrative expenses (68,062) (20,521) (91,231) Research and development expenses (32,594) (10,410) (49,282) Other operating income (note 7) 15,197 4,444 19,868 Other operating expenses (note 9) (18,141) (12,633) (25,691) ---------- ---------- ---------- Net operating income (loss) 26,288 (22,618) 37,283 Income from investments, net (note 10) 2,617 3,500 9,306 Interest expense, net (note 11) (13,938) (4,214) (19,748) ---------- ---------- ---------- Income (loss) before income taxes 14,967 (23,332) 26,841 Income tax (expense) benefit (11,051) 6,545 (11,367) ---------- ---------- ---------- Net income (loss) 3,916 (16,787) 15,474 ========== ========== ==========
The accompanying notes are an integral part of the combined financial statements. (Continued) 5 Combined Statements of Shareholder's Equity German GAAP (in DEM thousands) INVESTMENTS IN AND ADVANCES FROM SHAREHOLDER ------------ Balance at September 30, 1998 223,083 Advances from shareholder, net 16,897 Net income 3,916 Dividend payment (4,020) -------- Balance at September 30, 1999 239,876 Advances from shareholder, net 81 Net loss (16,787) Dividend payment -- -------- Balance at December 31, 1999 223,170 Advances from shareholder, net 126,646 Net income 15,474 Dividend payment (4,020) -------- Balance at December 31, 2000 361,270 ======== The accompanying notes are an integral part of the combined financial statements. (Continued) 6 Combined Statements of Cash Flows German GAAP (in DEM thousands)
THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 1999 1999 2000 ------------ ------------ ----------- Net income (loss) 3,916 (16,787) 15,474 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 39,768 13,738 47,868 Gain (loss) on disposal of property, plant and equipment (211) 724 711 Equity in earnings of associated companies (2,617) (3,500) (9,306) Gain on sale of interest in associated companies -- 19 -- Write down of intangible assets -- 9,176 -- Changes in operating assets and liabilities: Inventories, net 15,325 (15,010) (44,272) Trade accounts receivable, net (26,388) (13,520) (19,128) Accounts receivable from affiliated companies 2,809 2,238 (2,969) Other accounts receivable and assets (547) 2,681 (5,005) Deferred charges (2,786) (4,183) (1,819) Provisions for pensions and similar obligations 6,564 1,317 18,984 Other accrued liabilities 10,737 (166) 5,830 Trade accounts payable 8,936 17,609 41,344 Liabilities to affiliated companies (2,489) 15,225 (278) Other liabilities (28,010) (7,092) 8,511 Deferred income 120 (28) 40 ------- ------- ------- Net cash provided by operating activities 25,127 2,441 55,985 Investing activities: Purchases of intangible assets (5,994) (142) (1,666) Purchases of property, plant and equipment (45,274) (20,194) (76,487) Proceeds from disposal of property, plant and equipment 10,373 6,261 4,092 Proceeds from disposal of intangible assets 1,923 27 325 Proceeds from disposal of investments in associated companies -- -- 250 Net decrease in loans to affiliated companies -- (1,010) (1,004) Investments in associated companies (2,483) (1,557) (456) Dividends received from equity and other investments 1,340 -- 1,726 ------- ------- ------- Net cash used in investing activities (40,115) (16,615) (73,220)
7 Combined Statements of Cash Flows German GAAP (in DEM thousands)
THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 DECEMBER 31 1999 1999 2000 ------------ ------------ ----------- Financing activities: Proceeds from issuance of long-term debt 5,059 1,459 5,257 Principal repayments of long-term debt (4,987) (924) (3,153) Net increase (decrease) in short-term debt 3,527 2,677 (68,427) Net change in financial receivables and payables, affiliated companies 20,797 32,491 27,636 Increase in investments in and advances from shareholder (5,514) (12,102) 46,234 Dividend payments (4,020) -- (4,020) ------- ------- ------- Net cash provided by financing activities 14,862 23,601 3,527 Effect of foreign exchange rate changes on cash and cash equivalents 373 844 (459) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 247 10,271 (14,167) Cash and cash equivalents at beginning of period 11,426 11,673 21,944 ------- ------- ------- Cash and cash equivalents at end of period 11,673 21,944 7,777 ======= ======= =======
The accompanying notes are an integral part of the combined financial statements. 8 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (1) BASIS OF PREPARATION AND PRESENTATION (a) BASIS OF PREPARATION Effective January 1, 2000, Degussa AG (f/k/a Degussa-Huels AG), transferred the assets and liabilities constituting its precious metals and automotive catalysts businesses to its wholly-owned subsidiary, Cerdec AG, and its subsidiaries (the "Formation"). Following the Formation, Cerdec AG was renamed dmc(2) Degussa Metals Catalysts Cerdec AG ("dmc(2)"). The accompanying combined financial statements as of and for the year ended December 31, 2000, three months ended December 31, 1999 and year ended September 30, 1999 have been prepared in connection with the sale of the electronic materials, performance pigments and colours, glass systems and Cerdec ceramic businesses (the "Businesses") of dmc(2) in order to show the financial position, results of operations, shareholder's equity and cash flows of the Businesses. Ferro Corporation ("Ferro") acquired the Businesses on September 7, 2001 from OM Group, Inc. ("OMG"). OMG acquired the Businesses as part of their purchase of the businesses of dmc(2) from Degussa AG on August 10, 2001. The combined financial statements were prepared in accordance with the provisions of the German Commercial Code ("Handelsgesetzbuch" - "HGB") and the German Stock Corporation Act ("Aktiengesetz" - "AktG"). The combined financial statements of the Businesses have been prepared in accordance with accounting principles generally accepted in Germany ("German GAAP") as if the Businesses had been an established legal group during all periods presented. (b) DESCRIPTION OF BUSINESS The Businesses design, manufacture and distribute electronic materials, performance pigments and colours, glass systems and Cerdec ceramic products. The Businesses produce functional materials, multi-layer systems, and surfaces for different markets. (c) CARVE-OUT BASIS The combined financial statements have been prepared on a carve-out basis by aggregating the historical assets, liabilities and results of operations allocated to the Businesses. The Businesses did not constitute a separate legal entity; thus, the difference between allocable assets and liabilities for the Businesses is treated as a contribution from Degussa AG and stated as investments in and advances from shareholder. This information is derived from the historical accounting records of dmc(2) and Degussa AG. The combined financial statements may not necessarily be indicative of the results of operations, financial position, and cash flows of the Businesses had they operated as a separate independent company, nor are they an indicator of future performance. (Continued) 9 Notes to the Combined Financial Statements German GAAP (in DEM thousands) All revenue and expenses directly attributable to the Businesses are included in the statements of operations. The statements of operations include allocations of general corporate overhead and central organizational costs. In all cases, management believes the allocation methods used were reasonable. Indebtedness and Interest Expense The Businesses have historically been, and continue to be, dependent upon Degussa AG for their financing and capital requirements. Financing is provided by Degussa AG in the form of equity contributions and intercompany interest and non-interest bearing advances and loans. Degussa AG also guarantees financing obtained from third parties. Additionally, certain legal subsidiaries of the Businesses had incurred external indebtedness. Furthermore, interest on precious metal leases with dmc(2) was allocated to the Businesses. The capital structure and related interest expense may not necessarily be indicative of the interest expense that the Businesses would have incurred as a separate independent company. Taxation Income taxes have been calculated as if the Businesses were stand-alone entities filing separate tax returns. Income taxes as calculated may not be indicative of income tax expenses that the Businesses would have incurred had the Businesses been a separate legal entity. Change in Fiscal Year Effective January 1, 2000, dmc(2)'s fiscal year end was changed from September 30 to December 31 to conform with Degussa AG's fiscal year end. As a result, the accompanying financial statements present a three-month period ended December 31, 1999. Classification To improve clarity, certain balance sheet and statement of operations items have been combined with the detail provided in the footnotes. The statements of operations were prepared using the cost-of-sales format. Under the cost-of-sales format, operating expenses are assigned to one of four areas: manufacturing, selling, research and development, and general administration. (d) AFFILIATION WITH THE DEGUSSA AG AND E.ON AG GROUPS Prior to August 10, 2001, dmc(2) was a wholly-owned subsidiary of Degussa AG, Frankfurt am Main. dmc(2) is included in the exempting consolidated financial statements of Degussa AG, Frankfurt am Main. The consolidated group financial statements are on public record with the District Court (Amtsgericht) of Frankfurt am Main. E.ON AG, Duesseldorf, prepared the group financial statements for the largest group of companies of which dmc(2) was a part. These group financial statements are on record with the Commercial Registers in Berlin and Duesseldorf and have been published in the Federal Bulletin (Bundesanzeiger). Companies controlled directly or indirectly by E.ON AG are affiliated companies of the Businesses. (Continued) 10 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (2) COMBINED AND ASSOCIATED COMPANIES The combined financial statements include twenty-four group companies which include carved-out businesses (September 30, 1999: eighteen; December 31, 1999: eighteen) representing the Businesses. Combination was based on a voting rights majority held either directly or indirectly. dmc(2) L.P., U.S.A. was included pursuant to section 290 (2) no. 2 of HGB. The 30% interest of Cerdec AG was acquired in the year ended September 30, 1999 and the resulting goodwill was offset against investments in and from shareholder. dmc(2) Electronic Materials B.V., Netherlands was combined following its acquisition during the year ended September 30, 1999. Demeca, Mexico was founded during the year ended December 31, 2000. Certain carved-out businesses were not established as legal companies prior to fiscal year 2000. These businesses included dmc(2) Iberica S.A., dmc(2) Italia S.p.A., Cerdec Ceramics Brasil, Cerdec Ceramics Mexico and Cerdec Ceramics Inc., USA. Seven subsidiaries (September 30, 1999: eight; December 31, 1999: seven) have not been combined as they are not material to the shareholder's equity, financial position and net operating results of the Businesses. Six foreign companies of which two are subsidiaries (September 30, 1999: two, thereof one subsidiary; December 31, 1999: two, thereof one subsidiary) have been included as equity investments in the combined financial statements for the first time in accordance with the regulations on associated companies under section 311 ff. HGB in conjunction with section 312 (1) no. 1 HGB. Four of the six associated companies were included as equity investments for the first time. No adjustments to comply with uniform dmc(2) accounting and valuation guidelines or elimination of intercompany profits were made in relation to these companies. Additionally, the investment in one company (September 30, 1999: three; December 31, 1999: four) was not included as an associated company because it is not material. (3) PRINCIPLES OF COMBINATION In the process of combination, the acquisition cost of subsidiaries is offset against the book value of the pro rata share of shareholder's equity at the date of acquisition or initial combination. The resulting difference between the cost of the acquisition and shareholder's equity is allocated to the relevant assets or liabilities insofar as their fair market value differs from their book value. In general, the excess of the purchase price over the net assets acquired is offset against shareholder's equity without impacting the Businesses' results. These reserves also include negative differences from combination if related to shareholder's equity. Such differences are otherwise presented as liabilities. Businesses that did not constitute legal entities have been combined by including their respective assets and liabilities. Accounts receivable and accounts payable between combined companies have been eliminated. The valuation of assets has been adjusted to eliminate unrealized intercompany profits. Accordingly, such assets are valued at their cost to the Businesses as a whole. Intercompany sales and other income from transactions within the Businesses have been offset against the corresponding expenditures. (Continued) 11 Notes to the Combined Financial Statements German GAAP (in DEM thousands) Deferred taxes are recorded for differences in the tax charge resulting from the combination if the deferred tax is expected to reverse in subsequent financial years. Deferred tax assets and liabilities have been netted, taking into account the impact of tax adjusting entries in the individual balance sheet. (4) ACCOUNTING AND VALUATION PRINCIPLES The combined financial statements of the Businesses are prepared on a uniform basis of accounting with respect to combined subsidiaries. Intangible assets Acquired intangible assets, other than goodwill, are shown at the acquisition cost less scheduled depreciation over a maximum period of 5 years. Goodwill is depreciated over 15 years. Unscheduled depreciation is taken where declines in value are expected to be other than temporary. Property, Plant and Equipment Property, plant and equipment are stated at historical cost. The production cost of self-manufactured assets includes an allocation of overhead and depreciation on production, plant and equipment in addition to the cost of materials and labour. Depreciation is recorded on a scheduled basis over the useful life that is usual in the relevant industry sector. Where permissible for tax purposes, the declining balance method is used until the residual book value over the remaining useful life of the asset results in a higher depreciation charge. Thereafter, the depreciation method is switched to straight-line depreciation. Unscheduled depreciation is taken where a loss in value is expected to be permanent. Low-value items are expensed in full in the year of acquisition. Investments Shares in affiliated companies and investments in other companies are valued at cost of acquisition or at their lower assignable value on the balance sheet date if declines in value are other than temporary. The book values of associated enterprises have been adjusted for the pro rata amount of changes in shareholder's equity. Generally, the accounting policies locally applied by the associated enterprises were kept unchanged. The cost of acquisition was generally netted against pro rata shareholder's equity at the time of acquisition. Inventory The valuation of raw materials and supplies is based on the lower of average purchase cost or market price. Write-downs are recorded to reflect declines in value resulting from obsolete and slow moving items. Write-downs are reversed where necessary. Precious metals have generally been accounted for under the LIFO method. Work in progress and finished goods, other than precious metals, are valued at cost of production. The cost of production of work in progress and finished goods includes all amounts required to be capitalized for tax purposes. These include the cost of labour and materials, appropriate overhead costs, and a pro rata share of depreciation. (Continued) 12 Notes to the Combined Financial Statements German GAAP (in DEM thousands) Receivables Receivables are stated at nominal value less discounts and allowances. In addition to individual allowances to take into account specific risks, the general credit risk is reflected in a general allowance. Deferred taxes Deferred tax assets and liabilities are calculated for temporary differences between the valuation of assets and liabilities in the financial statements of combined companies and the carrying amounts for tax purposes using the tax rates either in effect or expected to apply in the period of reversal. No deferred tax assets are calculated with respect to tax loss carry forwards. Deferred tax assets are recognized to the extent they are expected to be realized. Pension Provisions Pension provisions and similar obligations including health care commitments are actuarially determined utilizing the projected unit credit method customarily used in international accounting. Pension provisions are calculated as the present value of the vested pension rights.
SEPTEMBER 30, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000 -------------------- -------------------- --------------------- Interest rate 6.00 % 6.25% 6.25% Annual pension increase 1.00 % 1.25% 1.25% Annual wage and salary increase 2.50 % 2.75% 2.75% Average staff fluctuation rate 2.00 % 2.00% 2.00% Actuarial table Bode & Grabner Bode & Grabner Heubeck PK Chemie 1996 PK Chemie 1996 Richttafeln 1998
Accrued Liabilities Other accrued liabilities are shown in the balance sheet at the expected payable amount. Liabilities are stated at the higher of nominal value or the amount repayable. (5) CURRENCY TRANSLATION Accounts receivable and payable in foreign currencies that are not hedged against changes in exchange rates are initially recorded at the rates of exchange in force when first entered in the accounts. Unrealized losses due to changes in exchange rates are taken into account as of the balance sheet date. Gains are recognized when realized. (Continued) 13 Notes to the Combined Financial Statements German GAAP The financial statements of foreign subsidiaries and associated companies are translated in the group financial statements using the concept of functional currencies. As a rule, the functional currency is the local currency as these companies conduct their business independently from a financial, economic and organizational point of view. Therefore, assets and liabilities are translated at closing rates on the balance sheet date, shareholder's equity is translated at historical rates, and income and expenses are translated using average report period rates. Differences arising from the currency translation of assets and liabilities compared to the previous period and translation differences between the balance sheet and statement of operations are recorded in shareholder's equity. The exchange rates for the more significant currencies in the Businesses are as follows:
CLOSING RATE -------------------------------------------------------------------- YEAR ENDED THREE MONTHS YEAR ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000 --------------------- --------------------- ------------------- DEM DEM DEM --- --- --- 1 USA USD 1.83380 1.94690 2.10191 1 Brazil BRL 0.94510 1.08740 1.07790 100 Japan JPY 1.74070 1.90390 1.82920 100 Mexico MXN 19.5192 20.5106 21.9235 AVERAGE RATE -------------------------------------------------------------------- YEAR ENDED THREE MONTHS YEAR ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000 --------------------- --------------------- ------------------- DEM DEM DEM --- --- --- 1 USA USD 1.78030 1.88330 2.11759 1 Brazil BRL 1.11840 0.98510 1.15872 100 Japan JPY 1.51770 1.80270 1.96620 100 Mexico MXN 18.5220 20.0317 22.3865
(Continued) 14 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
(6) SALES THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------------- ------------------- -------------------- Sales by product line: Cerdec 534,389 142,212 492,106 Electronic Materials 289,404 96,782 614,983 ------------------- ------------------- -------------------- Total 823,793 238,994 1,107,089 =================== =================== ==================== Sales by region: Germany 172,261 45,031 201,586 Other European countries 249,472 70,704 284,820 NAFTA 313,014 94,589 449,649 Latin America 29,727 7,276 36,473 Asia 59,319 21,394 134,561 ------------------- ------------------- -------------------- Foreign 651,532 193,963 905,503 ------------------- ------------------- -------------------- Total 823,793 238,994 1,107,089 =================== =================== ====================
The Businesses operate in two product lines: Cerdec and Electronic Materials. The Cerdec product line includes performance pigments and colours, glass systems and Cerdec ceramic products. The Electronic Materials product line includes precious metals powders and pastes and dielectric powders. (7) OTHER OPERATING INCOME Other operating income includes reimbursements in connection with insurance proceeds, income from the release of accrued liabilities, and exchange gains. DM 1,409, DM 953 and DM 9,638 for the year ended September 30, 1999, three months ended December 31, 1999 and year ended December 31, 2000, respectively, of other operating income are related to other accounting periods and include such items as the reversal of provisions and gains on the sale of property, plant and equipment. (8) FUNCTIONAL COSTS Cost of sales consists of manufacturing costs and the costs of purchased goods sold. In addition, cost of sales also includes costs of materials, external services and payroll costs, depreciation relating to manufacturing operations, machinery repairs, taxes and write-downs on inventories. Selling expenses include the cost of maintaining the sales and distribution departments and advertising expenses. Research and development expenses include the cost of maintaining the research and development departments and product and process development costs. General administrative expenses relate to management and administrative functions which are not included in manufacturing, selling and distribution, or research and development departments. (Continued) 15 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (9) OTHER OPERATING EXPENSES Other operating expenses include mainly expenses arising from write-downs of accounts receivable, additions to accruals, and expenses relating to other accounting periods. Expenses related to other accounting periods were DM 3,849, DM 1,877 and DM 1,703 for the year ended September 30, 1999, three months ended December 31, 1999 and year ended December 31, 2000, respectively. (10) INCOME FROM INVESTMENTS, NET
THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ----------------- Income from investments 1,340 -- 532 (of which affiliated companies) (513) (--) (--) Equity income from associated companies 1,277 3,500 8,774 ----------------- ----------------- ----------------- Total 2,617 3,500 9,306 ================= ================= ================= (11) INTEREST EXPENSE, NET THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ----------------- Interest and similar income 2,318 874 1,426 (of which from affiliated companies) (167) (46) (--) Interest and similar expenses (16,256) (5,088) (21,174) (of which to affiliated companies) (4,936) (2,401) (10,978) ----------------- ----------------- ----------------- Interest expense, net (13,938) (4,214) (19,748) ================= ================= =================
To a certain extent, the Businesses are provided with precious metal by the metals management unit of dmc(2). Metals management is responsible for managing the metal position of dmc(2) utilizing forward contracts and metal leases contracts with suppliers, banks, customers and other third parties. Metals management bears all risks and rewards from the metal trading activities. Metals management also finances the production needs of dmc(2) entities and the Businesses through the use of metal leases. The allocation of precious metal to dmc(2) and the Businesses does not lead to separate contracts which fulfill the requirements of a derivative instrument. However, interest expense is charged to dmc(2) and the Businesses for such metal leases. Interest expense on metal leases of DM 4,271, DM 1,775, and DM 3,455 was charged to the Businesses during the periods ended December 31, 2000, December 31, 1999 and September 30, 1999 respectively. (Continued) 16 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
(12) ADDITIONAL OPERATING INFORMATION (a) COST OF MATERIALS THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------------ ------------------ ----------------- Cost of raw materials, supplies and merchandise purchased 369,345 137,186 567,090 Cost of external services 20,986 7,220 34,120 ------------------ ------------------ ----------------- Total 390,331 144,406 601,210 ================== ================== ================= (b) PAYROLL COSTS THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------------ ------------------ ----------------- Personnel expenses Wages and salaries 177,336 49,292 206,356 Social security contributions 46,023 14,866 57,666 and expenses for pensions and similar obligations (of which for pensions) (12,318) (3,808) (21,564) ------------------ ------------------ ----------------- Total 223,359 64,158 264,022 ================== ================== =================
(Continued) 17 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (c) UNSCHEDULED DEPRECIATION OF INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT Unscheduled depreciation of intangible assets and property, plant and equipment totaled DM 9,540 for the three months ended December 31, 1999. (d) AVERAGE NUMBER OF EMPLOYEES DURING THE FINANCIAL PERIODS
THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ----------------- Administration 1,037 1,055 1,120 Production 1,222 1,246 1,315 Apprentice 10 10 10 ----------------- ----------------- ----------------- Total 2,269 2,311 2,445 ================= ================= =================
(e) AVERAGE NUMBER OF EMPLOYEES BY PRODUCT LINES DURING THE FINANCIAL PERIODS
THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ------------------ Cerdec 1,799 1,806 1,898 Electronic Materials 470 505 547 ----------------- ----------------- ------------------ Total 2,269 2,311 2,445 ================= ================= ==================
(Continued) 18 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
(13) INTANGIBLE ASSETS (a) BOOK VALUE, NET SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ----------------- Franchises, licenses and industrial property rights and similar rights and assets 1,800 1,675 2,273 Goodwill 12,770 3,435 2,702 ----------------- ----------------- ----------------- Total 14,570 5,110 4,975 ================= ================= ================= (b) DEVELOPMENT THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------------ ----------------- ----------------- Cost of acquisition or production - Opening balance 17,146 19,431 19,706 Exchange differences 103 168 187 Changes in scope of combination 1,769 -- -- Additions 5,994 142 1,666 Disposals (5,581) (35) (888) ------------------ ----------------- ----------------- Closing balance 19,431 19,706 20,671 ================== ================= ================= Accumulated depreciation - Opening balance 6,461 4,861 14,596 Exchange differences 42 50 79 Additions 2,016 9,685 1,584 Disposals (3,658) -- (563) ------------------ ----------------- ----------------- Closing balance 4,861 14,596 15,696 ================== ================= ================= Book value 14,570 5,110 4,975 ================== ================= =================
Depreciation of DM 9,685 for the three months ended December 31, 1999 includes DM 9,176 of unscheduled depreciation of goodwill relating to Colorificio Pardo S.p.A. reducing the related goodwill to zero. (Continued) 19 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
(14) PROPERTY, PLANT AND EQUIPMENT (a) BOOK VALUE, NET SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------------ ----------------- ----------------- Land, land rights, and buildings, including buildings on leased land 88,385 90,232 99,641 Technical equipment and machinery 121,952 116,941 139,937 Other plant, factory and office equipment 18,932 18,495 21,442 Advance payments and construction work in progress 22,254 33,981 31,544 ------------------ ----------------- ----------------- Total 251,523 259,649 292,564 ================== ================= ================= (b) DEVELOPMENT YEAR ENDED THREE MONTHS YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31, 1999 DECEMBER 31,1999 2000 ----------------- ----------------- ----------------- Costs of acquisition or production - Opening balance 480,271 536,387 558,044 Exchange differences 8,907 14,379 14,249 Change in scope of consolidation 17,231 -- -- Additions 45,274 20,194 76,487 Disposals (15,296) (12,916) (9,422) ----------------- ----------------- ----------------- Closing balance 536,387 558,044 639,358 ================= ================= ================= Accumulated depreciation - Opening balance 249,178 284,864 298,395 Exchange differences 3,068 6,243 6,734 Additions 37,752 13,229 46,284 Disposals (5,134) (5,941) (4,619) ----------------- ----------------- ----------------- Closing balance 284,864 298,395 346,794 ================= ================= ================= Book value 251,523 259,649 292,564 ================= ================= =================
(Continued) 20 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (15) INVESTMENTS
(a) BOOK VALUE, NET SEPTEMBER 30,1999 DECEMBER 31, 1999 DECEMBER 31, 2000 ----------------- ------------------ ------------------- Shares in affiliated companies 394 699 1,005 Shares in associated companies 15,725 19,846 34,487 Other investments 4,358 5,564 2,054 Other loans 1,072 2,126 3,218 ----------------- ------------------ ------------------- Total 21,549 28,235 40,764 ================= ================== ===================
Six associated companies (September 30, 1999, two; December 31, 1999, two) are accounted for at equity during the year ended December 31, 2000. (b) DEVELOPMENT
YEAR ENDED THREE MONTHS YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31, 1999 DECEMBER 31, 1999 2000 ------------------ ----------------- ----------------- Costs of acquisition - Opening balance 14,412 21,549 28,235 Exchange differences 1,889 1,859 130 Additions 5,248 4,873 17,517 Disposals - (46) (5,118) ------------------ ----------------- ----------------- Closing balance 21,549 28,235 40,764 ================== ================= ================= Accumulated depreciation - Opening balance -- -- -- Exchange differences -- -- -- Additions -- -- -- Disposals -- -- -- ------------------ ----------------- ----------------- Closing balance 21,549 28,235 40,764 ================== ================= =================
(Continued) 21 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (16) INVENTORIES, NET
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ------------------- ----------------- ------------------ Inventories are as follows: Raw material and supplies 38,991 36,915 53,176 Work in process 24,627 23,883 23,843 Finished products and merchandise 110,888 128,670 158,097 Advance payments 118 87 -- ------------------- ----------------- ------------------ Total 174,624 189,555 235,116 =================== ================= ==================
Inventory provisions have been established for obsolete and slow moving inventories. (17) ACCOUNTS RECEIVABLE AND OTHER ASSETS
DUE WITHIN ONE DUE AFTER ONE YEAR YEAR TOTAL ----------------- ----------------- ------------------- SEPTEMBER 30, 1999: Trade accounts receivable 160,914 80 160,994 Accounts receivable from affiliated companies 17,492 -- 17,492 Accounts receivable from companies in which investments are held 1,336 -- 1,336 Other assets 19,811 129 19,940 ----------------- ----------------- ------------------- Total 199,553 209 199,762 ================= ================= =================== DECEMBER 31, 1999: Trade accounts receivable 174,424 79 174,503 Accounts receivable from affiliated companies 12,785 320 13,105 Accounts receivable from companies in which investments are held 2,338 -- 2,338 Other assets 15,424 820 16,244 ----------------- ----------------- ------------------- Total 204,971 1,219 206,190 ================= ================= ===================
(Continued) 22 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
DECEMBER 31, 2000: Trade accounts receivable 194,780 37 194,817 Accounts receivable from affiliated companies 47,715 -- 47,715 Accounts receivable from companies in which investments are held 1,833 -- 1,833 Other assets 20,970 909 21,879 ----------------- ----------------- ------------------- Total 265,298 946 266,244 ================= ================= ===================
Accounts receivable from affiliated companies relate primarily to trade receivables. Other assets include loans, advance payments, receivables from suppliers, and tax refund claims. (18) CASH AND CASH EQUIVALENTS This item is comprised of checks, cash on hand, and bank balances. (19) DEFERRED CHARGES
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ------------------ Deferred taxes 20,544 25,804 27,498 Other deferred charges 2,427 1,350 1,475 ----------------- ----------------- ------------------ Total 22,971 27,154 28,973 ================= ================= ==================
Deferred taxes include charges relating to temporary differences arising from combination entries and inter-period tax allocation in the financial statements of individual companies. The other deferred charges also include prepaid expenses. (20) SHAREHOLDER'S EQUITY The Businesses did not constitute a separate legal entity; thus, the difference between allocable assets and liabilities for the Businesses is treated as a contribution from Degussa AG and stated as investments in and advances from shareholder. (Continued) 23 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
(21) ACCRUED LIABILITIES SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ------------------ ------------------ Provisions for pensions and similar obligations 54,033 55,385 73,992 Accrued taxes 18,198 12,099 16,162 (thereof deferred taxes) (11,683) (7,374) (6,718) Other accrued liabilities 54,492 60,473 61,747 ----------------- ------------------ ------------------ Total 126,723 127,957 151,901 ================= ================== ==================
Provisions for pensions prior to 2000 include pensions directly attributable to Cerdec AG and its subsidiaries. In addition, Degussa AG maintained pension plans for which the provision could not be allocated to the carve-out businesses. The provisions for pensions also include the severance payment commitments of certain foreign subsidiaries. Corresponding with the Formation of dmc(2) as a separate legal entity during 2000, certain pension plans were amended to increase employee benefits as well as expand the number of plan participants. Accrued taxes include the estimated liabilities for current year taxes which have not yet been assessed. It also includes deferred taxes for timing differences resulting as a consequence of combination and otherwise existing for combined entities. Other accrued liabilities include provisions for bonuses, guarantee obligations, obligations under early retirement arrangements, restructuring, and future repairs. For employees already covered by semi-retirement employment arrangements or who have signed contracts, accruals were established in the full amount for supplementary and settlement payments and pro rata for wages and salaries in the permanent leave of absence phase. The obligations were calculated under actuarial principles and discounted at 5.5%. Based on the collective bargaining agreement entered into in 2000, liabilities were also established in 2000 for a 5% of workforce maximum limit for potential semi-retirement of employees qualifying as of December 31, 2000. No accruals have been established for employees that may qualify after December 31, 2000 through December 31, 2009 (the expiration date of the collective bargaining agreement). As of December 31, 2000, this accrual included future supplementary and settlement obligations and was calculated under actuarial principles and discounted at 5.5%. (Continued) 24 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (22) LIABILITIES
DUE AFTER 1 DUE WITHIN 1 AND WITHIN 5 DUE AFTER 5 YEAR YEARS YEARS TOTAL -------------- -------------- ------------- ------------- AS OF SEPTEMBER 30, 1999: Liabilities to banks 142,071 37,492 623 180,186 Trade accounts payable 66,405 520 -- 66,925 Liabilities from the acceptance of notes and notes issued 383 820 -- 1,203 Liabilities to affiliated companies 50,358 -- -- 50,358 Liabilities to companies in which investments are held 1,267 -- -- 1,267 Other liabilities 27,364 1,514 1,095 29,973 -------------- -------------- ------------- ------------- Total 287,848 40,346 1,718 329,912 ============== ============== ============= ============= AS OF DECEMBER 31, 1999: Liabilities to banks 161,718 17,698 1,373 180,789 Trade accounts payable 84,131 398 -- 84,529 Liabilities from the acceptance of notes and notes issued 1,254 -- -- 1,254 Liabilities to affiliated companies 95,838 -- -- 95,838 Liabilities to companies in which investments are held 2,783 -- -- 2,783 Other liabilities 17,935 2,374 1,075 21,384 -------------- -------------- ------------- ------------- Total 363,659 20,470 2,448 386,577 ============== ============== ============= =============
(Continued) 25 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
DUE AFTER 1 DUE WITHIN 1 AND WITHIN 5 DUE AFTER 5 YEAR YEARS YEARS TOTAL -------------- -------------- ------------- ------------- AS OF DECEMBER 31, 2000: Liabilities to banks 101,590 11,835 534 113,959 Trade accounts payable 125,187 -- -- 125,187 Liabilities from the acceptance of notes and notes issued 241 1,118 -- 1,359 Liabilities to affiliated companies 90,052 -- -- 90,052 Liabilities to companies in which investments are held 907 2 -- 909 Other liabilities 30,094 1,509 -- 31,603 -------------- -------------- ------------- ------------- Total 348,071 14,464 534 363,069 ============== ============== ============= =============
The liabilities to affiliated companies include DM 69,478 of interest bearing loans (December 31, 1999: DM 74,335; September 30, 1999: DM 43,661) and DM 20,574 of trade payables (December 31, 1999: DM 21,503; September 30, 1999: DM 6,877). Other liabilities include social security contributions, commissions, and accrued salaries and bonuses. No security in the form of mortgages or other security interests was given for the liabilities. (23) CONTINGENT LIABILITIES
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ----------------- ------------------ Notes receivable discounted 426 162 - ----------------- ----------------- ------------------ Total 426 162 - ================= ================= ==================
(Continued) 26 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (24) OTHER FINANCIAL COMMITMENTS
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1999 1999 2000 ----------------- ------------------ ------------------ Commitments under rent and leasing agreements due for payment in the next financial year 3,379 2,938 4,359 due for payment in 2 to 5 financial years 7,416 6,592 9,007 Commitments relating to capital expenditure 1,986 2,580 4,194 Non-security repurchase agreement due in the next financial year 10,216 - - ----------------- ------------------ ------------------ Total 22,997 12,110 17,560 ================= ================== ================== (of which to affiliated companies) (3,974) (4,074) 4,196 ================= ================== ==================
(Continued) 27 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (25) RECONCILIATION TO U.S. GAAP The combined financial statements are presented in accordance with accounting principles generally accepted in Germany, which differ in certain significant respects from accounting principles generally accepted in the United States ("U.S. GAAP"). The significant differences that affect net income (loss) and shareholder's equity of the Businesses are set forth below:
THREE MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, RECONCILIATION OF NET INCOME (LOSS) TO U.S. GAAP: 1999 1999 2000 ----------------- ------------------ ------------------ NET INCOME (LOSS) AS REPORTED IN THE COMBINED STATEMENTS OF OPERATIONS UNDER GERMAN GAAP 3,916 (16,787) 15,474 Purchase accounting of the Businesses (note a) (12,556) 4,800 (18,016) Provisions and loss contingencies (note b) 641 4,316 1,811 Inventory valuation (note c) 224 (281) 1,121 Foreign currency receivables and payables (note d) 116 159 153 Allowance for doubtful accounts (note e) 271 852 1,941 Valuation of fixed assets (note f) (83) - 2,217 Equity method accounting (note g) (568) (151) (1,881) Valuation of pension liability (note h) 70 60 8,971 Purchase of minority interests in Cerdec AG (note i) (1,952) (835) (3,346) Scope of combination (note j) 5,807 (2,408) 2,171 Deferred taxes (note k) (2,901) 4,562 2,103 Other 286 (65) (700) ----------------- ------------------ ------------------ NET INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (7,301) (5,778) 12,019 ================= ================== ==================
(Continued) 28 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
RECONCILIATION OF SHAREHOLDER'S EQUITY TO U.S. GAAP SEPTEMBER 30, 1999 DECEMBER 31, 1999 DECEMBER 31, 2000 ------------------- ------------------- ------------------- SHAREHOLDER'S EQUITY AS REPORTED IN THE COMBINED BALANCE SHEETS UNDER GERMAN GAAP 239,876 223,170 361,270 Purchase accounting of the Businesses (note a) 240,845 245,745 227,155 Provisions and loss contingencies (note b) 4,247 8,595 9,385 Inventory valuation (note c) 1,407 1,227 2,409 Foreign currency receivables and payables (note d) 235 199 627 Allowance for doubtful accounts (note e) 1,714 2,231 4,570 Valuation of fixed assets (note f) 903 959 3,237 Equity method accounting (note g) 2,516 (1,418) (10,832) Valuation of pension liability (note h) 43 130 8,996 Purchase of minority interests in Cerdec AG (note i) 48,231 47,396 44,050 Scope of combination (note j) 13,926 15,889 17,093 Deferred taxes (note k) (16,099) (14,901) (29,332) Other 3,564 3,761 2,788 ------------------- ------------------- ------------------- SHAREHOLDER'S EQUITY IN ACCORDANCE WITH U.S. GAAP 541,408 532,983 641,416 =================== =================== ===================
(a) PURCHASE ACCOUNTING OF THE BUSINESSES E.ON AG (formerly Veba AG) acquired Degussa AG, including the related assets and liabilities of the Businesses, in two separate transactions. The initial 36.4% ownership interest was acquired in December 1997 with the remaining 63.6% interest acquired in February 1999. For German GAAP purposes, the recorded amounts of assets acquired and liabilities assumed, including the assets and liabilities comprising the Businesses, by E.ON AG remained at historical cost basis. For U.S. GAAP purposes, a new basis of accounting has been established for the assets and liabilities comprising the Businesses based upon the fair values of the respective assets acquired and liabilities assumed by E.ON AG at each acquisition date. The new basis of the Businesses due to the acquisition is reflected below: (Continued) 29 Notes to the Combined Financial Statements German GAAP (in DEM thousands)
USEFUL STEP I STEP II LIFE DECEMBER FEBRUARY (YEARS) 1997 1999 TOTAL COST ---------------- --------------- --------------- Inventory -- 3,055 4,076 7,131 Property, plant and equipment 5-15 6,874 12,010 18,884 Land -- 278 486 764 Patents & trademarks 13-20 1,808 3,158 4,966 Deferred taxes -- (6,848) (11,246) (18,094) Goodwill 15 86,512 151,158 237,670
As a result of the new basis of accounting, shareholder's equity was increased and additional charges reflected in the reconciliation of net income for the effects of increases in cost of sales, depreciation expense of tangible and intangible assets, and related deferred taxes. The deferred tax effect is reflected in note 25(k). Furthermore, as a result of the purchase accounting, any pre-existing goodwill or difference between fair value and book value capitalized under German GAAP was reversed and replaced by goodwill resulting from the E.ON purchase. The German GAAP goodwill in Colorificio Pardo S.P.A. is subject to unscheduled depreciation of DM 9,176 in the three months ended December 31, 1999 reducing goodwill to zero, equivalent to the U.S. GAAP value. (b) PROVISIONS AND LOSS CONTINGENCIES In accordance with German GAAP, the Businesses recognized provisions for expected costs to be incurred for certain restructurings and other anticipated future costs. Under U.S. GAAP, the recognition criteria for such provisions are more stringent and require that a number of prescribed conditions be satisfied before a liability can be recorded. (c) INVENTORY VALUATION Under German GAAP, the Businesses capitalize overhead costs in accordance with German tax law, which excludes certain indirect and other costs. Under U.S. GAAP, manufacturing overhead costs include all indirect material, labour and overhead costs. Under German GAAP, raw materials inventory is valued at the lower of average purchase cost or market price, similar to U.S. GAAP. However, for German GAAP purposes, market price is the lower of replacement cost and net realizable value. Differences may arise where sales prices are contracted at period end. (d) FOREIGN CURRENCY RECEIVABLES AND PAYABLES Under German GAAP, foreign currency denominated receivables (payables) are translated at the lower (higher) of the period end spot rate or contracted rate, respectively. Under U.S. GAAP, assets and liabilities denominated in a foreign currency are recorded at current exchange rates at period-end with any resulting adjustment recognized in operating results. (e) ALLOWANCE FOR DOUBTFUL ACCOUNTS In addition to specific reserves, the Businesses also maintain a general allowance as well as a country risk allowance for German GAAP purposes. For U.S. GAAP purposes, these allowances were reversed except for the amounts based upon the historical loss experience of the Businesses. (f) VALUATION OF FIXED ASSETS (Continued) 30 Notes to the Combined Financial Statements German GAAP (in DEM thousands) Under German GAAP, capitalization of certain construction project costs is not required. Under U.S. GAAP, certain project costs are required to be capitalized. Further, capitalization of interest during the construction phase of the project is permitted but not required under German GAAP. Under U.S. GAAP, interest is capitalized during the construction period of major construction projects. Capitalized interest and other costs are added to the cost of the underlying assets and are depreciated over the useful life of the asset. (g) EQUITY METHOD OF ACCOUNTING In accordance with German GAAP, investments in associated companies subject to significant influence (generally entities which are 20 - 50 % owned) are required to be accounted for under the equity method, or, if not material, can be recorded under the cost method (and, if applicable, the lower of cost or market value). Under U.S. GAAP, investments in associated companies are recorded using the equity method of accounting if an investment enables the investor to have significant influence over the operating and financial decisions of the investee. For both German GAAP and U.S. GAAP, the balance of each investment is increased or decreased, as appropriate, to account for the investor's proportionate share of the investee earnings. Under German GAAP, it is permissible to consolidate foreign associated companies on the basis of their local accounting principles, not restated for German GAAP. Foreign associated companies have been converted to U.S. GAAP for consolidation purposes in the U.S. GAAP reconciliation. For German GAAP, in cases where the associated company's financial year end differs from the investor's year end, the associated company's previous financial information is utilized for consolidation. For U.S. GAAP, the year end of the associated company's financial information must be within 90 days of the investor's financial year end. (Continued) 31 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (h) VALUATION OF PENSION LIABILITY For German GAAP, certain increases in pension and other similar obligations are recognised immediately in earnings. Under U.S. GAAP, changes in pension and similar obligations (including those resulting from plan amendments) as well as changes in value of plan assets are not recognised as they occur but are recognised systematically and gradually over subsequent periods. Following the Formation of dmc(2) as a legal entity in 2000, certain pension plans were amended to increase benefits as well as expand the number of participants. (i) PURCHASE OF MINORITY INTEREST IN CERDEC AG In March 1999, Degussa AG purchased the remaining minority interest of 30% in Cerdec AG from Ciba Geigy. In accordance with German GAAP, the excess of the acquisition cost of the minority interest acquired over the fair value of the net assets acquired is offset against shareholder's equity. Under U.S. GAAP, goodwill is capitalized and depreciated over its useful life. The Businesses' policy is to depreciate the goodwill over 15 years. (j) SCOPE OF COMBINATION As explained in Note 2, the Businesses do not combine a number of investments in domestic and foreign companies in its combined financial statements under German GAAP. For U.S. GAAP, the number of companies consolidated in the combined financial statements has been increased. The remaining companies not included in the scope of the consolidation for U.S. GAAP purposes are not material to the combined shareholder's equity, financial position and net operating results. (k) DEFERRED TAXES Under German GAAP, deferred tax assets and liabilities are generally recognized for temporary differences between book carrying values and tax bases of assets and liabilities, with the exception of deferred tax assets relating to net operating loss carry forwards which are recognized to the extent of offsetting deferred tax liabilities. Deferred tax assets are recognized to the extent they are expected to be realized. Under U.S. GAAP, deferred tax assets and liabilities for temporary differences using enacted tax rates in effect at period-end are recognized in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, net operating loss carryforwards that are available to reduce future taxes are recognized as deferred tax assets. Such amounts are reduced by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. (Continued) 32 Notes to the Combined Financial Statements German GAAP (in DEM thousands) (26) SUBSEQUENT EVENTS As discussed in Note 1, the businesses of dmc(2) were sold to OMG on August 10, 2001. In addition, certain assets and liabilities which constitute the Businesses have been sold by OMG to Ferro on September 7, 2001. As a result of purchase accounting which will be applied to the transactions by Ferro, significant changes can be expected to the recorded assets and liabilities of the Businesses. (Continued) 33 Notes to the Combined Financial Statements German GAAP (27) SHAREHOLDINGS OF THE BUSINESSES AS OF SEPTEMBER 30, 1999
NET INCOME EQUITY HOLDING EQUITY (LOSS) (%) (DEM MILLION) (DEM MILLION) --------------- --------------- ----------------- Magmalor GmbH Colditz/Germany 100.0 3.7 (1.3) dmc(2) Holding Co. Las Vegas, NV/USA * 100.0 54.5 10.3 dmc(2) France S.A. Limoges/France 100.0 20.2 2.0 Cerdec Iberica S.A., Castellon de la Plana/Spain 100.0 14.4 (1.6) Cerdec Italia S.p.A., Fiorano/Italy 100.0 7.1 (8.1) dmc(2) Ltda., Americana/Brasil 100.0 5.9 (4.7) dmc(2) S.A. de C.V., Mexico City/Mexico 100.0 13.2 1.6 Cerpart S.R.L. Milan/Italy 100.0 24.0 (0.3) Colorificio Pardo S.p.A., Corlo/Italy 100.0 2.8 (6.0) dmc(2) (UK) Ltd., Stoke-on-Trent/Great Britain 100.0 0.9 0.0 dmc(2) Electronic Materials B.V., Uden/Netherlands 100.0 8.9 2.3 Schilling's Graphics, Inc. Galion, Ohio/USA 100.0 1.5 0.1 dmc(2) Istanbul Seramic Boyalari Ticaret, Istanbul/Turkey 99.0 0.4 -- Zibo Cerdec Ceramic Colours Co. Ltd., Zibo City, Shandong/China 60.0 15.7 1.9 PT Cerdec Indonesia, Sidoarjo/Indonesia 59.0 1.3 0.7 Thai Ceramic Colors Co. Ltd., Bangkok/Thailand 51.0 0.9 0.2 dmc(2) Taiwan Ltd., Taipei/Taiwan** -- -- -- dmc(2) Japan Ltd., Tokyo/Japan** -- -- -- dmc(2) Degussa Metal Catalysts Cerdec Southern Africa Ltd. Midrand/South Africa ** -- -- -- dmc(2) Degussa Metal Catalysts Cerdec China Ltd. Hong Kong/China ** -- -- --
(Continued) 34 Notes to the Combined Financial Statements German GAAP dmc(2) L.P. South Plainfield, NJ/USA ** -- -- -- Ordeg Co., Ltd, Seoul/South Korea** -- -- -- Cerdec (Thailand) Co., Ltd., Bangkok/Thailand 49.0 6.4 1.3 Smaltochimica S.R.L. Spezziano di Fiorano M./Italy 40.0 2.4 2.5 Chilches Materials, S.A. Alcora/Spain 20.0 9.4 --
* after consolidation of Cerdec Sales Corporation, Virgin Islands/USA, Cerdec Royalty Co., Las Vegas, NV/USA and dmc(2) Corporation, Washington,PA/USA ** constitutes businesses which have been carved out of dmc(2) and Degussa AG and thus, are not legal entities (Continued) 35 Notes to the Combined Financial Statements German GAAP SHAREHOLDINGS OF THE BUSINESSES AS OF DECEMBER 31, 1999
NET INCOME EQUITY HOLDING EQUITY (LOSS) (%) (DEM million) (DEM million) --------------- --------------- ----------------- Magmalor GmbH Colditz/Germany 100.0 3.3 (3.8) dmc(2) Holding Co. Las Vegas, NV/USA * 100.0 57.9 0.7 dmc(2) France S.A. Limoges/France 100.0 21.0 0.8 Cerdec Iberica S.A., Castellon de la Plana/Spain 100.0 15.4 (2.5) Cerdec Italia S.p.A., Fiorano/Italy 100.0 3.9 (11.6) dmc(2) Ltda., Americana/Brasil 100.0 5.8 (1.9) dmc(2) S.A. de C.V., Mexico City/Mexico 100.0 13.5 (0.3) Cerpart S.R.L. Milan/Italy 100.0 25.1 (18.9) Colorificio Pardo S.p.A., Corlo/Italy 100.0 3.4 0.9 dmc(2) (UK) Ltd., Stoke-on-Trent/Great Britain 100.0 1.0 0.1 dmc(2) Electronic Materials B.V., Uden/Netherlands 100.0 9.2 0.2 dmc(2) Istanbul Seramic Boyalari Ticaret, Istanbul/Turkey 99.0 0.7 0.0 Zibo Cerdec Ceramic Colours Co. Ltd., Zibo City, Shandong/China 60.0 16.8 0.5 PT Cerdec Indonesia Sidoarjo/Indonesia 59.0 1.9 0.2 Thai Ceramic Colors Co. Ltd., Bangkok/Thailand 51.0 1.1 0.1 dmc(2) Taiwan Ltd., Taipei/Taiwan** -- -- -- dmc(2) Japan Ltd., Tokyo/Japan** -- -- -- dmc(2) Degussa Metal Catalysts Cerdec Southern Africa Ltd. Midrand/South Africa ** -- -- -- dmc(2) Degussa Metal Catalysts Cerdec China Ltd. Hong Kong/China ** -- -- -- dmc(2) L.P. South Plainfield, NJ/USA ** -- -- --
(Continued) 36 Notes to the Combined Financial Statements German GAAP Ordeg Co., Ltd Seoul/South Korea** -- -- -- Cerdec (Thailand) Co., Ltd., Bangkok/Thailand 49.0 7.7 0.6 Smaltochimica S.R.L. Spezziano di Fiorano M./Italy 40.0 2.7 0.3 Chilches Materials, S.A. Alcora/Spain 20.0 0.9 -- Gardenia-Quimica S.A. Castellon/Spain 20.0 0.4 0.2
* after consolidation of Cerdec Sales Corporation, Virgin Islands/USA, Cerdec Royalty Co., Las Vegas, NV/USA, dmc(2) Corporation, Washington, PA/USA and Schilling's Graphics, Inc., Galion, Ohio/USA ** constitutes businesses which have been carved out of dmc(2) and Degussa AG and thus, are not legal entities (Continued) 37 Notes to the Combined Financial Statements German GAAP SHAREHOLDINGS OF THE BUSINESSES AS OF DECEMBER 31, 2000
NET INCOME EQUITY HOLDING EQUITY (LOSS) (%) (DEM million) (DEM million) -------------- ------------- ------------- Magmalor GmbH Colditz/Germany 100.0 3.7 (0.3) Cerdec Ceramics GmbH, Oberursel, Germany 100.0 0.1 0.0 Cerdec Iberica S.A., Castellon de la Plana/Spain*** 100.0 15.5 2.2 Cerdec Italia S.p.A., Fiorano/Italy 100.0 9.3 0.7 Cerpart S.R.L. Milan/Italy 100.0 13.1 (0.4) Colorificio Pardo S.p.A., Corlo/Italy 100.0 4.8 1.3 dmc(2) Electronic Materials B.V., Uden/Netherlands 100.0 12.2 3.1 dmc(2)Italia S.p.A., Fiorano/Italy 100.0 2.8 (0.4) dmc(2)Seramic Boyalari Ticaret, Istanbul/Turkey 99.0 0.9 0.1 Zibo Cerdec Ceramic Colours Co. Ltd., Zibo City, Shandong/China 60.0 21.2 5.0 PT Cerdec Indonesia Sidoarjo/Indonesia 59.0 2.7 1.5 Thai Ceramic Colors Co. Ltd., Bangkok/Thailand 51.0 0.7 0.3 dmc(2) Holding Co. Las Vegas, NV/USA *, ** -- -- -- dmc(2) S.A. de C.V., Mexico City/Mexico**,***** -- -- -- dmc(2) France S.A. Limoges/France** -- -- -- dmc(2)Taiwan Ltd., Taipei/Taiwan** -- -- -- dmc(2) (UK) Ltd., Stoke-on-Trent/Great Britain** -- -- -- dmc(2) Japan Ltd., Tokyo/Japan** -- -- -- dmc(2) Degussa Metal Catalysts Cerdec Southern Africa Ltd. Midrand/South Africa ** -- -- -- dmc(2) Degussa Metal Catalysts Cerdec China Ltd. Hong Kong/China ** -- -- --
(Continued) 38 Notes to the Combined Financial Statements German GAAP dmc(2) L.P. South Plainfield, NJ/USA ** -- -- -- dmc(2) Ltda., Americana/Brasil**, **** -- -- -- Ordeg Co., Ltd, ** Seoul/ South Korea -- -- -- Cerdec (Thailand) Co., Ltd., Bangkok/Thailand 49.0 9.6 2.6 Smaltochimica S.R.L. Spezziano di Fiorano M./Italy 40.0 9.0 2.9 Chilches Materials, S.A. Alcora/Spain 20.0 9.4 (0.1) Gardenia-Quimica S.A. Castellon/Spain 36.0 5.7 1.7
* after consolidation of Cerdec Sales Corporation, Virgin Islands/USA, Cerdec Royalty Co., Las Vegas, NV/USA, dmc(2) Corporation, Washington, PA/USA, Schilling's Graphics, Inc., Galion, Ohio/USA and Cerdec Ceramics Inc., Dallas/USA ** constitutes businesses which have been carved out of dmc(2) and Degussa AG and thus, are not legal entities *** after consolidation of dmc(2)Degussa Metals Catalysts Cerdec Iberica S.A., Castellon, Spain **** after consolidation of Cerdec Ceramics do Brasil Ltda., Americana/Brazil ***** after consolidation of Cerdec Ceramics Mexico S.A. de C.V., Puebla/Mexico and Demeca S.A. de C.V. San Juan Xalpa, Mexico BOARD MANAGEMENT 39 Interim Condensed Combined Balance Sheet German GAAP (in DEM thousands) (Unaudited) JUNE 30, 2001 --------- ASSETS Intangible assets 6,190 Property, plant and equipment, net 329,755 Investments 46,464 --------- Non-current assets 382,409 --------- Inventories, net 230,491 Trade accounts receivable, net 200,919 Accounts receivable from affiliated companies 125,138 Other accounts receivable and other assets 24,799 --------- Accounts receivable and other assets 350,856 --------- Cash and cash equivalents 20,294 --------- Current assets 601,641 --------- Deferred charges 30,769 --------- Total assets 1,014,819 ========= LIABILITIES AND SHAREHOLDER'S EQUITY Investments in and advances from shareholder 577,831 --------- Shareholder's equity 577,831 --------- Provisions for pensions and similar obligations 79,848 Other accrued liabilities 91,309 --------- Accrued liabilities 171,157 --------- Liabilities to banks 29,196 Trade accounts payable 111,992 Liabilities to affiliated companies 88,465 Other liabilities 36,066 --------- Liabilities 265,719 --------- Deferred income 112 --------- Total liabilities and shareholder's equity 1,014,819 ========= The accompanying notes are an integral part of the interim condensed combined financial statements. (Continued) 40 Interim Condensed Combined Statements of Operations German GAAP (in DEM thousands) (Unaudited) SIX MONTHS ENDED JUNE 30, 2001 2000 -------- -------- Sales 540,401 536,433 Cost of sales (392,245) (375,023) -------- -------- Gross profit 148,156 161,410 Selling expenses (60,794) (58,216) General administrative expenses (64,482) (41,447) Research and development expenses (23,830) (18,468) Other operating income 20,582 3,064 Other operating expenses (14,506) (6,163) -------- -------- Net operating income 5,126 40,180 Income from investments, net 4,278 3,028 Interest expense, net (8,038) (8,328) -------- -------- Income before income taxes 1,366 34,880 Income tax expense (8,078) (13,649) -------- -------- Net (loss) income (6,712) 21,231 ======== ======== The accompanying notes are an integral part of the interim condensed combined financial statements. (Continued) 41 Interim Condensed Combined Statements of Shareholder's Equity German GAAP (in DEM thousands) (Unaudited) INVESTMENTS IN AND ADVANCES FROM SHAREHOLDER ------------ Balance at December 31, 1999 223,170 Advances from shareholder, net 276 Net income 21,231 Dividend payment (4,020) -------- Balance at June 30, 2000 240,657 ======== Balance at December 31, 2000 361,270 Advances from shareholder, net 231,225 Net loss (6,712) Dividend payment (7,952) -------- Balance at June 30, 2001 577,831 ======== The accompanying notes are an integral part of the interim condensed combined financial statements. (Continued) 42 Interim Condensed Combined Statements of Cash Flows German GAAP (in DEM thousands) (unaudited)
SIX MONTHS ENDED JUNE 30, 2001 2000 ------- ------- Net income (loss) (6,712) 21,231 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation 24,828 22,628 Gain (loss) on disposal of property, plant and equipment (140) 77 Equity in earnings of associated companies (4,278) (3,492) Gain on sale of interest in associated companies -- 5 Changes in operating assets and liabilities: Inventories, net 5,115 (1,613) Trade accounts receivable, net (5,696) (17,931) Accounts receivable from affiliated companies (31,260) (16,346) Other accounts receivable and assets (1,038) (6,066) Deferred charges (1,796) (752) Provisions for pensions and similar obligations 6,010 979 Other accrued liabilities 13,562 3,218 Trade accounts payable (14,288) (7,239) Liabilities to affiliated companies 8,893 33,386 Other liabilities 3,620 (8,294) Deferred income (60) 3,621 ------- ------- Net cash (used in) provided by operating activities (3,240) 23,412 Investing activities: Purchases of intangible assets (1,772) (1,464) Purchases of property, plant and equipment (54,906) (35,095) Proceeds from disposal of property, plant and equipment 7,393 2,220 Proceeds from disposal of intangible assets 9 22 Proceeds from disposal of investments in associated companies -- -- Net change in loans to affiliated companies -- (1,010) Investments in associated companies (247) (9) Dividends received from equity and other investments 938 531 ------- ------- Net cash used in investing activities (48,585) (34,805)
43 Interim Condensed Combined Statements of Cash Flows German GAAP (in DEM thousands) (unaudited)
SIX MONTHS ENDED JUNE 30, 2001 2000 -------- -------- Financing activities: Proceeds from issuance of long-term debt 636 81 Principal repayments of long-term debt (11,637) (21,156) Net decrease in short-term debt (74,699) (41,774) Net change in financial receivables and payables, affiliated companies (52,140) 4,164 Increase (decrease) in investments in and advances from shareholder 209,294 56,680 Dividend payments (7,952) (4,020) -------- -------- Net cash provided by financing activities 63,502 (6,025) Effect of foreign exchange rate changes on cash and cash equivalents 840 497 -------- -------- Net increase (decrease) in cash and cash equivalents 12,517 (16,921) Cash and cash equivalents at beginning of period 7,777 21,944 -------- -------- Cash and cash equivalents at end of period 20,294 5,023 ======== ========
The accompanying notes are an integral part of the combined financial statements. 44 Notes to the Combined Interim Financial Statements (Unaudited) German GAAP (in DEM thousands) (1) BASIS OF PREPARATION The accompanying combined financial statements were prepared in accordance with the provisions of the German Commercial Code ("Handelsgesetzbuch" - "HGB") and the German Stock Corporation Act ("Aktiengesetz" - "AktG"). These combined financial statements of the Businesses have been prepared in accordance with accounting principles generally accepted in Germany ("German GAAP") as if the Businesses had been established as a legal group during the periods presented. (2) RECONCILIATION TO U.S. GAAP The interim combined financial statements are presented in accordance with German GAAP, which differs in certain significant respects from accounting principles generally accepted in the United States ("U.S. GAAP"). The significant differences that affect net income (loss) and shareholder's equity of the Businesses are set forth below:
RECONCILIATION OF NET INCOME (LOSS) TO U.S. GAAP: SIX MONTHS ENDED JUNE 30, -------------------------------- 2001 2000 --------------- --------------- NET INCOME (LOSS) AS REPORTED IN THE COMBINED STATEMENTS OF OPERATIONS UNDER GERMAN GAAP (6,712) 21,231 Purchase accounting of the Businesses (note a) (9,009) (9,008) Provisions and loss contingencies (note b) (2,158) (1,086) Inventory valuation (note c) 155 158 Foreign currency receivables and payables (note d) (457) (158) Allowance for doubtful accounts (note e) (3,467) 2,223 Valuation of fixed assets (note f) 1,994 - Equity method accounting (note g) (558) (1,010) Valuation of pension liability (note h) (653) (78) Purchase of minority interests in Cerdec AG (note i) (1,672) (1,674) Scope of combination (note j) 406 2,948 Deferred taxes (note k) 8,830 (3,262) Other (231) (658) --------------- --------------- NET INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP (13,532) 9,626 =============== ==============
(Continued) 45 Notes to the Combined Interim Financial Statements (Unaudited) German GAAP (in DEM thousands)
JUNE 30, 2001 JUNE 30, 2000 RECONCILIATION OF SHAREHOLDER'S EQUITY TO U.S. GAAP: --------------- --------------- SHAREHOLDER'S EQUITY AS REPORTED 577,831 240,657 IN THE COMBINED BALANCE SHEETS UNDER GERMAN GAAP Purchase accounting of the Businesses (note a) 218,145 236,162 Provisions and loss contingencies (note b) 7,276 6,488 Inventory valuation (note c) 2,739 1,450 Foreign currency receivables and payables (note d) 601 280 Allowance for doubtful accounts (note e) 1,122 4,845 Valuation of fixed assets (note f) 5,223 1,020 Equity method accounting (note g) (15,735) (1,562) Valuation of pension liability (note h) 8,831 (17) Purchase of minority interests in Cerdec AG (note i) 42,377 45,722 Scope of combination (note j) 16,095 16,707 Deferred taxes (note k) (24,835) (26,952) Other 3,373 2,027 --------------- --------------- SHAREHOLDER'S EQUITY IN ACCORDANCE WITH U.S. GAAP 843,043 526,827 =============== ===============
(a) PURCHASE ACCOUNTING OF THE BUSINESSES E.ON AG (formerly Veba AG) acquired Degussa AG, including the related assets and liabilities of the Businesses, in two separate transactions. The initial 36.4% ownership interest was acquired in December 1997 with the remaining 63.6% interest acquired in February 1999. For German GAAP purposes, the recorded amounts of assets acquired and liabilities assumed, including the assets and liabilities comprising the Businesses, by E.ON AG remained at historical cost basis. For U.S. GAAP purposes, a new basis of accounting has been established for the assets and liabilities comprising the Businesses based upon the fair values of the respective assets acquired and liabilities assumed by E.ON AG at each acquisition date. The U.S. GAAP reconciliation reflects the new basis of the Businesses due to the acquisition. (b) PROVISIONS AND LOSS CONTINGENCIES In accordance with German GAAP, the Businesses recognized provisions for expected costs to be incurred for certain restructurings and other anticipated future costs. Under U.S. GAAP, the recognition criteria for such provisions are more stringent and require that a number of prescribed conditions be satisfied before a liability can be recorded. (Continued) 46 Notes to the Combined Interim Financial Statements (Unaudited) German GAAP (in DEM thousands) (c) INVENTORY VALUATION Under German GAAP, the Businesses capitalize overhead costs in accordance with German tax law, which excludes certain indirect and other costs. Under U.S. GAAP, manufacturing overhead costs include all indirect material, labour and overhead costs. Under German GAAP, raw materials inventory is valued at the lower of average purchase cost or market price, similar to U.S. GAAP. However, for German GAAP purposes, market price is the lower of replacement cost and net realizable value. Differences may arise where sales prices are contracted at period end. (d) FOREIGN CURRENCY RECEIVABLES AND PAYABLES Under German GAAP, foreign currency denominated receivables (payables) are translated at the lower (higher) of the period end spot rate or contracted rate, respectively. Under U.S. GAAP, assets and liabilities denominated in a foreign currency are recorded at current exchange rates at period end with any resulting adjustment recognized in operating results. (e) ALLOWANCE FOR DOUBTFUL ACCOUNTS In addition to specific reserves, the Businesses also maintain a general allowance as well as a country risk allowance for German GAAP purposes. For U.S. GAAP purposes, these allowances were reversed except for the amounts based upon the historical loss experience of the Businesses. (f) VALUATION OF FIXED ASSETS Under German GAAP, capitalization of certain construction project costs is not required. Under U.S. GAAP, certain project costs are required to be capitalized. Further, capitalization of interest during the construction phase of the project is permitted but not required under German GAAP. Under U.S. GAAP, interest is capitalized during the construction period of major construction projects. Capitalized interest and other costs are added to the cost of the underlying assets and are depreciated over the useful life of the asset. (g) EQUITY METHOD OF ACCOUNTING In accordance with German GAAP, investments in associated companies subject to significant influence (generally entities which are 20 - 50 % owned) are required to be accounted for under the equity method, or, if not material, can be recorded under the cost method (and, if applicable, the lower of cost or market value). Under U.S. GAAP, investments in associated companies are recorded using the equity method of accounting if an investment enables the investor to have significant influence over the operating and financial decisions of the investee. For both German GAAP and U.S. GAAP, the balance of each investment is increased or decreased, as appropriate, to account for the investor's proportionate share of the investee earnings. Under German GAAP, it is permissible to consolidate foreign associated companies on the basis of their local accounting principles, not restated for German GAAP. Foreign associated companies have been converted to U.S. GAAP for consolidation purposes in the U.S. GAAP reconciliation. (Continued) 47 Notes to the Combined Interim Financial Statements (Unaudited) German GAAP (in DEM thousands) For German GAAP, in cases where the associated company's financial year end differs from the investor's year end, the associated company's previous financial information is utilized for consolidation. For U.S. GAAP, the year end of the associated company's financial information must be within 90 days of the investor's financial year end. (h) VALUATION OF PENSION LIABILITY For German GAAP, certain increases in pension and other similar obligations are recognised immediately in earnings. Under U.S. GAAP, changes in pension and similar obligations (including those resulting from plan amendments) as well as changes in value of plan assets are not recognised as they occur but are recognised systematically and gradually over subsequent periods. Following the Formation of dmc(2) as a legal entity in 2000, certain pension plans were amended to increase benefits as well as expand the number of participants. (i) PURCHASE OF MINORITY INTEREST IN CERDEC AG In March 1999, Degussa AG purchased the remaining minority interest of 30% in Cerdec AG from Ciba Geigy. In accordance with German GAAP, the excess of the acquisition cost of the minority interest acquired over the fair value of the net assets acquired is offset against shareholder's equity. Under U.S. GAAP, goodwill is capitalized and depreciated over its useful life. The Businesses' policy is to depreciate the goodwill over 15 years. (j) SCOPE OF COMBINATION The Businesses do not combine a number of investments in domestic and foreign companies in its combined financial statements under German GAAP. For U.S. GAAP, the number of companies consolidated in the combined financial statements has been increased. The remaining companies not included in the scope of the consolidation for U.S. GAAP purposes are not material to the combined shareholder's equity, financial position and net operating results. (k) DEFERRED TAXES Under German GAAP, deferred tax assets and liabilities are generally recognized for temporary differences between book carrying values and tax bases of assets and liabilities, with the exception of deferred tax assets relating to net operating loss carry forwards which are recognized to the extent of offsetting deferred tax liabilities. Deferred tax assets are recognized to the extent they are expected to be realized. Under U.S. GAAP, deferred tax assets and liabilities for temporary differences using enacted tax rates in effect at period-end are recognized in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, net operating loss carryforwards that are available to reduce future taxes are recognized as deferred tax assets. Such amounts are reduced by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. (Continued) 48 CONSENT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Ferro Corporation: We consent to incorporation by reference in the Registration Statements (File Nos. 2-61407, 33-28520, and 33-45582) on Form S-8 and in the Registration Statements (File Nos. 33-51284 and 33-63855) on Form S-3 of Ferro Corporation of our report dated November 21, 2001 with respect to the combined balance sheets of the electronic materials, performance pigments and colours, glass systems and Cerdec ceramics businesses of dmc(2) Degussa Metals Catalysts Cerdec Aktiengesellschaft and subsidiaries as of December 31, 2000 and 1999, and September 30, 1999 and the related combined statements of operations, shareholder's equity, and cash flows for the year ended December 31, 2000, the three months ended December 31, 1999, and the year ended September 30, 1999 which report appears in the Form 8-K/A-2 of Ferro Corporation, dated December 10, 2001. KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftspruefungsgesellschaft Frankfurt, Germany December 10, 2001 (Continued) 49 (b) Pro Forma Financial Information (1) Pro Forma Condensed Combined Statements of Income for the year ended December 31, 2000, and for the nine months ended September 30, 2001 The following unaudited pro forma condensed combined statements of income have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These financial statements reflect Ferro Corporation's acquisition of the Businesses and combine for the periods indicated, the historical consolidated financial statements of Ferro Corporation and the Businesses, using the purchase method of accounting. The unaudited pro forma condensed combined statements of income reflect adjustments as if the acquisition had occurred on January 1, 2000. These unaudited pro forma condensed combined statements of income should be read in conjunction with the historical financial statements and related notes of Ferro and the Businesses contained here or previously filed. The pro forma unaudited condensed combined statements of income include preliminary estimates with respect to the allocation of the purchase price and other assumptions which management believes are reasonable. The pro forma results are not necessarily indicative of the results which would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future, and do not include any cost savings or other effects of the planned integration of Ferro and the Businesses. (Continued) 50 Ferro Corporation Unaudited Pro Forma Condensed Combined Statement of Income For the Year Ended December 31,2000 (Dollars in Thousands, except per share data)
Ferro dmc(2) Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- -------- Net sales 1,447,284 545,592 1,992,876 Cost of sales 1,053,220 395,223 3,000(a,b) 1,451,443 Selling, general and administrative expenses 254,595 132,555 (8,500)(c) 378,650 Other Charges (Credits) Interest expense 24,925 9,403 36,646(d,e) 70,974 Foreign currency transactions (2,422) (2,422) Other 351 (2,021) (1,670) ------ ----- ------- ------ Income (loss) before income taxes 116,615 10,432 (31,146) 95,901 Income tax (expense) benefit (43,476) (4,756) 14,400(f) (33,832) ------ ----- ------- ------ Net income 73,139 5,676 (16,746) 62,069 Dividend on preferred stock, net of tax 3,460 3,460 ------ ------ Net income (loss) available to common shareholders 69,679 5,676 (16,746) 58,609 ====== ===== ======= ====== Weighted average number of common shares out- standing (in thousands) 34,561 34,561 Net income per common share $ 2.02 $ 1.70 Weighted average number of common shares out- standing (in millions) - assuming dilution 37,664 37,664 Net income per common share - assuming dilution $ 1.92 $ 1.63
(Continued) 51 Ferro Corporation Unaudited Pro Forma Combined Statement of Income For the Nine Months Ended September 30, 2001 (Dollars in Thousands, except per share data)
Ferro dmc(2) Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- -------- Net sales 1,091,193 324,882 1,416,075 Cost of sales 822,773 233,843 600(a) 1,057,216 Selling, general and administrative expenses 206,502 93,896 (4,250)(c) 296,148 Other Charges (Credits) Interest expense 24,016 5,111 20,478(d,e) 49,605 Foreign currency transactions (17,477) (204) (17,681) Other 2,998 671 3,669 ------ ------ ------ ------ Income (loss) before income taxes 52,381 (8,435) (16,828) 27,118 Income tax (expense) benefit (19,151) 427 8,904(f) (9,820) ------ ------ ------ ------ Net income 33,230 (8,008) (7,924) 17,298 Dividend on preferred stock, net of tax 2,333 2,333 ----- ----- Net income (loss) available to common shareholders 30,897 (8,008) (7,924) 14,965 ====== ====== ====== ====== Weighted average number of common shares out- standing (in thousands) 34,217 34,217 Net income per common share $ 0.90 $ 0.44 Weighted average number of common shares out- standing (in millions) - assuming dilution 37,081 34,564 Net income per common share - assuming dilution $ 0.88 $ 0.43
(Continued) 52 Ferro Corporation and the Businesses Notes to Unaudited Pro Forma Condensed Combined Statements of Income (Dollars in Thousands) Note 1 - Basis of Presentation ------------------------------ The Pro Forma Condensed Combined Statements of Income for the year ended December 31, 2000 and nine months ended September 30, 2001 have been prepared assuming the acquisition had occurred on January 1, 2000. The transaction is more fully described in Item 2 and Exhibit 2 to the Company's Current Report on Form 8-K previously filed September 21, 2001. The historical statements of the Businesses contained in Item 7(a) to this Current Report on Form 8-K/A-2 are denominated in German Marks and have been prepared in accordance with German GAAP. As explained in the accompanying notes to the historical financial statements of the Businesses, German GAAP varies in certain significant respects from U. S. GAAP. The amounts shown for the Businesses in the Pro Forma Condensed Combined Statements of Income have been derived from the following statements of the Businesses (as adjusted to give effect to these German GAAP to U.S. GAAP differences): income statement for the year ended December 31, 2000 and the unaudited income statement for eight months ended August 31, 2001. The income statement of the Businesses for the one month ended September 30, 2001 is included in the Ferro Historical period for the nine months ended September 30, 2001. In addition, the amounts are presented in U.S. Dollars using average exchange rates of .4722 U.S. Dollars per German Mark for the year ended December 31, 2000, and .4540 U.S. Dollars per German Mark for the eight months ended August 31, 2001. Note 2 - Pro Forma Adjustments ------------------------------ a. Adjustments result from an increase in the depreciation expense related to the estimated fair value adjustment of $8.0 million for the properties, plants and equipment acquired using the straight line method over an estimated average remaining useful life of ten years. The estimated fair value adjustment reflects preliminary estimates with respect to the allocation of the purchase price and other assumptions which management believes are reasonable. b. Adjustment resulting from a $2.2 million increase to recognize the fair value of inventory at acquisition. c. Eliminate amortization of goodwill in historical statements of the Businesses under provisions of Financial Accounting Standards Board Statement No. 142 "Goodwill and Other Intangible Assets". d. Eliminate the interest expense related to debt not assumed in the acquisition. e. Recognize additional interest expense on acquisition debt at variable interest rates. The weighted average variable interest rates used on the acquisition debt was 8.53% and 6.34% for the year-ended December 31, 2000, and nine-month period ended September 30, 2001, respectively. f. Recognize income tax effects on above adjustments at the effective tax rate of the Company in the case of item e and at the effective tax rate of the Businesses in the case of items a, b and d. Item c is not taxable for income tax purposes. (Continued) 53 (c) Exhibits. 2.0 OMG-Ferro Purchase Agreement between the Company and OM Group, Inc. dated as of August 31, 2001. (Reference is made to Exhibit 2.0 to the Company's Current Report on Form 8-K for the event dated September 7, 2001, which Exhibit is incorporated herein by reference). The Company agrees that it shall, upon request, furnish to the Securities and Exchange Commission a copy of any exhibit or annex to the OMG-Ferro Purchase Agreement that is not filed with Exhibit 2.0. 2.1 Heads of Agreement between the Company and OM Group, Inc. dated as of April 23, 2001. (Reference is made to Exhibit 10(b) to the Company's quarterly report on From 10-Q for the quarter ended June 30, 2001, which Exhibit is incorporated herein by reference.) The Company agrees that it shall, upon request, furnish to the Securities and Exchange Commission a copy of any exhibit to the Heads of Agreement that is not filed with Exhibit 2.1. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. FERRO CORPORATION Date: 12/10/01 /s/ Bret W. Wise ------------------------- By: Bret W. Wise Senior Vice President and Chief Financial Officer 54