PRESENTATION OF DEGUSSA DENTAL FINANCIAL INFORMATION
In 2000, Degussa AG commenced a programme to focus its operations on core
competencies related to the manufacture and distribution of specialty
engineered chemical products. In connection with this programme, Degussa AG
formed Degussa Dental GmbH & Co. KG ("Dental KG") and DH Zweite
Vermogensverwaltungs GmbH ("DH GmbH"). Subsequently, Degussa AG transferred
substantially all dental-related investments, operations and activities to
Dental KG and DH GmbH. German-based dental investments, operations and
activities were contributed to Dental KG while non- German-based dental
investments, operations and activities were contributed to DH GmbH. Together,
Dental KG, DH GmbH and their majority owned subsidiaries comprise Degussa
Dental.
The combined financial statements of Degussa Dental included on pages F-51
to F- 70 of this document (the "Degussa Dental Combined Financial
Statements") have been prepared in accordance with U.S. GAAP and include the
results of operations and assets and liabilities directly related to Degussa
Dental's operations. The accompanying combined financial statements may not
necessarily be indicative of the results of operations, financial positions
and cash flows of Dental KG and DH GmbH had they operated as separate
independent companies for the duration of the periods presented, nor are they
an indicator of future performance. See further Note 1 to the Degussa Dental
Combined Financial Statements.
6
DEGUSSA DENTAL GROUP
COMBINED STATEMENTS OF INCOME
Six months Year ended
ended December 31,
June 30, 2001 2000
(euro, in thousands)
Net sales (note 14) 246,312 489,517
Cost of products sold (note 14) 155,472 343,256
Gross profit 90,840 146,261
Selling, general and administrative expenses (note 14) 61,181 123,729
Other operating expense, net 7,342 6,059
Operating income 22,317 16,473
Other income and expenses:
Interest expense (note 14) 2,449 4,635
Interest income (note 14) (672) (2,717)
Minority interest 91 306
Earnings before income taxes 20,449 14,249
Income taxes 8,449 840
Net income 12,000 13,409
<FN>
The accompanying notes are an integral part of the combined financial statements.
</FN>
7
DEGUSSA DENTAL GROUP
COMBINED BALANCE SHEETS
December 31,
June 30, 2001 2000
(euro, in thousands)
Assets
Current assets:
Cash and cash equivalents (note 14) 2,978 14,677
Accounts and notes receivable-trade, net 67,000 63,593
Receivables from related parties (note 14) 1,700 10,202
Inventories 103,408 111,533
Deferred tax assets 4,554 3,030
Prepaid expenses and other current assets 3,788 13,317
Total current assets 183,428 216,352
Property, plant and equipment, net 57,631 56,628
Identifiable intangible assets, net 34,841 34,138
Costs in excess of fair value of net assets acquired, net 100,877 104,840
Deferred tax assets 5,703 8,282
Other non-current assets 1,679 1,807
Total assets 384,159 422,047
Liabilities and combined equity
Current liabilities:
Current portion of long-term debt 3,135 2,917
Short-term notes payable 21,562 71,764
Accounts payable-trade 13,587 10,856
Payables to related parties (note 14) 4,856 18,099
Accrued liabilities 18,707 22,509
Income taxes payable 23,278 11,061
Deferred tax liabilities 10,231 10,856
Other current liabilities 8,639 14,078
Total current liabilities 103,995 162,140
Long-term debt, excluding current portion 6,726 8,696
Pension obligation 15,045 14,596
Obligations under capital lease, excluding current installments 9,111 9,092
Deferred tax liabilities 14,774 16,278
Other non-current liabilities 7,439 5,312
Minority interests in consolidated subsidiaries 830 661
Commitments and contingencies (note 16)
Total liabilities 157,920 216,775
Combined equity:
Investments by and advances from Degussa AG 220,852 200,718
Accumulated other comprehensive income 5,387 4,554
Total combined equity 226,239 205,272
Total liabilities and combined equity 384,159 422,047
<FN>
The accompanying notes are an integral part of the combined financial statements.
</FN>
8
DEGUSSA DENTAL GROUP
COMBINED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
Investments Accumulated
by and other
advances from comprehensive Combined
Degussa AG income equity
(euro, in thousands)
Balance as of December 31, 1999 253,949 3,681 257,630
Net activity with Degussa AG (note 14) (66,640) -- (66,640)
Comprehensive income:
Net income 13,409 -- 13,409
Foreign currency translation -- 873 873
Comprehensive income 14,282
Balance as of December 31, 2000 200,718 4,554 205,272
Net activity with Degussa AG 8,134 -- 8,134
Comprehensive income:
Net income 12,000 -- 12,000
Foreign currency translation -- 833 833
Comprehensive income -- -- 12,833
Balance as of June 30, 2001 220,852 5,387 226,239
<FN>
The accompanying notes are an integral part of the combined financial statements.
</FN>
9
DEGUSSA DENTAL GROUP
COMBINED STATEMENTS OF CASH FLOWS
Year ended
Six months ended December 31,
June 30, 2001 2000
(euro, in thousands)
Cash flows from operating activities:
Net income 12,000 13,409
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 3,500 7,304
Amortization 5,294 10,553
Deferred income taxes (1,850) (10,128)
Increases in pension obligation and other non-current liabilities 2,788 6,024
Loss on disposal of property, plant and equipment 4 70
Other non-cash expense 656 3,438
Changes in current operating assets and liabilities, net:
Receivables from related parties 8,502 (4,532)
Accounts and notes receivable-trade, third parties, net (3,292) (5,800)
Inventories 8,320 (3,414)
Prepaid expenses and other current assets 9,529 (10,095)
Payables to related parties (13,243) 9,929
Accounts payable-trade, third parties (2,099) 6,224
Accrued liabilities (3,801) (3,701)
Income taxes payable 12,217 7,605
Other, net (170) 1,308
Net cash provided by operating activities 38,355 28,194
Cash flows from investing activities:
Expenditures for identifiable intangible assets (1,942) (1,380)
Proceeds from sale of property, plant and equipment 1,098 663
Capital expenditures (4,571) (10,009)
Net cash used in investing activities (5,415) (10,726)
Cash flows from financing activities:
Equity distributions to Degussa AG (2,747) (7,223)
Equity contributions by Degussa AG 10,225 --
Payments of capital lease obligations (185) (327)
Net repayments of long-term borrowings (1,998) (2,306)
Repayments of short-term borrowings (1,048) (899)
Net repayments of short-term borrowings, related parties (48,910) (2,560)
Net cash used in financing activities (44,663) (13,315)
Effect of exchange rate changes on cash and cash equivalents 24 90
Net increase (decrease) in cash and cash equivalents (11,699) 4,243
Cash and cash equivalents at beginning of period 14,677 10,434
Cash and cash equivalents at end of period 2,978 14,677
<FN>
The accompanying notes are an integral part of the combined financial statements.
</FN>
10
DEGUSSA DENTAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Degussa Dental Group ("Degussa Dental" or the "Company") designs, develops
and manufactures a broad range of dental products and complete system
solutions used in preventative, restorative and orthodontic treatment by
dental laboratories, dentists, orthodontists and oral surgeons. Products
marketed primarily to dental laboratories include alloys, veneering
porcelain, ceramics systems attachments, consumables and laboratory
equipment. Products marketed directly to dentists include filling materials,
cements, impression materials, local anesthetics and dedicated equipment for
the application of the respective materials. Orthodontic products include all
necessary appliances for the movement and realignment of teeth, and products
marketed to oral surgeons consist of complete systems to replace teeth using
artificial roots implanted into the jawbone of a patient. The Company has
operations and investments located in Europe, Asia, South America and the
United States. Degussa Dental's customers are primarily located in Europe,
Asia, and North and South America.
Basis of Presentation
In 2000, Degussa AG commenced a program to focus its operations on core
competencies related to the manufacture and distribution of specialty
engineered chemical products. In connection with this program, Degussa AG
formed Degussa Dental GmbH & Co. KG ("Dental KG") and DH Zweite
Vermogensverwaltungs GmbH ("DH GmbH"). Subsequently, Degussa AG transferred
substantially all dental-related investments, operations and activities to
Dental KG and DH GmbH, with the exception of certain retiree pension
obligations, which were maintained by Degussa AG. German- based dental
investments, operations and activities were contributed to Dental KG while
non-German-based dental investments, operations and activities were
contributed to DH GmbH. Collectively, Dental KG, DH GmbH, and their majority
owned subsidiaries, comprise Degussa Dental.
On May 29, 2001, Degussa AG entered into a sale and purchase agreement to
sell Degussa Dental to Dentsply International, Inc. ("DENTSPLY"), subject to
regulatory approval. The combined financial statements are presented on a
historical cost basis and do not reflect any adjustments that might be
recorded by DENTSPLY in its application of purchase accounting.
The accompanying combined financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") and include the results of operations and assets and
liabilities directly related to Degussa Dental's operations. The accompanying
combined financial statements may not necessarily be indicative of the
results of operations, financial positions and cash flows of Dental KG and DH
GmbH had they operated as separate independent companies for the duration of
the periods presented, nor are they an indicator of future performance.
As the businesses in the combined financial statements are included in
multiple consolidated tax returns and in multiple tax jurisdictions, the
effective tax rate does not reflect the structure and tax strategies that
could be in place if the businesses were conducted by a separate legal entity.
The effects of capital transactions between Degussa Dental and Degussa AG
are included in "Investments by and advances from Degussa AG" in the
accompanying combined balance sheets and statements of equity and
comprehensive income.
Degussa Dental's operations have been financed partly through
contributions from Degussa AG and partly through third-party debt. Prior to
the formation of Degussa Dental in July 2000, Degussa AG did not allocate
interest charges to the contributed businesses. Accordingly, such interest
expense is not included in the accompanying combined statements of income. In
connection with the formation of Degussa Dental certain loans with Degussa AG
were created. Interest expense associated with those related party loans that
accrue interest is included in the accompanying combined statements of income.
11
Unless otherwise noted, all amounts are stated in thousands of euro.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements of the Company include all significant
entities in which Dental KG or DH GmbH have legal or effective control after
completion of the reorganization program described above. All significant
transactions between combined businesses have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less, including cash pool position with related
parties, to be cash equivalents (see note 14).
Inventories
Inventories are stated at the lower of cost or market. The cost of
precious metals inventories are determined using the last-in, first-out
("LIFO") method while the cost of other inventory components is determined
primarily using the average cost method. Cost consists of purchased component
costs and manufacturing costs, which are comprised of direct material and
labor costs and applicable indirect costs.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of". This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstance indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount which
the carrying amount exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or the fair
value less costs to sell.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation. Plant and equipment under capital leases are stated at the
present value of minimum lease payments. Expenditures for maintenance and
repairs are charged to expense as incurred while replacements and major
improvements are capitalized.
Depreciation on plant and equipment is recognized using accelerated or
straight-line methods over the useful lives of related assets. Useful lives
range from 10 to 40 years for buildings and from 3 to 15 years for machinery
and equipment.
Identifiable Intangible Assets
Identifiable intangible assets primarily consist of patents, trademarks
and capitalized software costs and are amortized on a straight-line basis
over their estimated useful lives.
Costs in Excess of Fair Value of Net Assets Acquired
The excess of costs of acquired businesses over the fair value of net
assets acquired ("goodwill") is amortized on a straight-line basis over the
expected periods to be benefited, generally 15 years, and is stated net of
accumulated amortization of 21.7 million and 17.8 million as of June 30, 2001
and December 31, 2000, respectively. The Company assesses the recoverability
of goodwill
12
based on projected undiscounted future operating cash flows of
the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows.
Costs of Computer Software Developed or Obtained for Internal Use
Certain external direct costs of materials and services consumed in
developing or obtaining internal use computer software and payroll related
costs for employees associated with internal-use software projects are
capitalized and amortized on a straight- line basis over four years. While no
material software costs were capitalized in the six months ended June 30,
2001, costs of 1.2 million were capitalized during the year ended December
31, 2000. Amortization expense was 200 for both the six months ended June 30,
2001 and the year ended December 31, 2000.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective Date of FASB
Statement No. 133", which amended SFAS No. 133 to delay its effective date by
one year. SFAS No. 133 requires that all derivative instruments be recorded
in the balance sheet at fair value. Changes in the fair value of derivatives
will be recorded each period in earnings or other comprehensive income,
depending on whether a derivative is designated as a part of a hedge
transaction and, if it is, the type of hedge transaction. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedge Activities" which amended SFAS No. 133. This statement, as
amended by SFAS 137 and SFAS 138, was adopted effective January 1, 2001. The
adoption of SFAS 133 did not have a material impact on net income for the six
months ended June 30, 2001.
The Company utilizes a limited number of derivative financial instruments
in order to manage a portion of its exposure related to foreign exchange,
interest rate and commodity price fluctuations. All derivatives are
recognized in the accompanying combined balance sheets at their fair value.
As these financial instruments do not meet the criteria established by SFAS
No. 133 for deferring unrealized gains and losses on hedging transactions,
changes in fair value are reported in current-period earnings. The aggregate
notional amount and fair value of all derivative instruments is 6.5 million
and (24), respectively, as of June 30, 2001 and 1.9 million and 10,
respectively, as of December 31, 2000. The Company does not enter into
derivatives for trading purposes.
Foreign Currency
Assets and liabilities of foreign subsidiaries where the functional
currency is other than the euro are translated at exchange rates as of the
respective balance sheet dates. Revenues and expenses of those subsidiaries
are translated at the weighted average year- to-date exchange rates of the
respective period. The effects of these translation adjustments are included
in other comprehensive income and reported as a separate component of
combined equity.
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transaction. Receivables and payables denominated in
foreign currencies are remeasured at the exchange rate in effect as of the
respective balance sheet dates. Net foreign currency transaction gains of 373
and 47 for the six months ended June 30, 2001 and for December 31, 2000,
respectively, are included in other operating expense, net in the
accompanying combined statements of income.
Revenue Recognition
Revenue, net of allowances for related discounts, is recognized when
finished product is shipped and risk of ownership has transferred to the
customer.
A significant portion of Degussa Dental's products include precious
metals. Market prices of precious metals are highly volatile and can lead to
significant fluctuations in the Company's sales prices and gross profit
margins (see note 4).
13
Research and Development Costs
Research and development costs are expensed as incurred. For the six
months ended June 30, 2001 and the year ended December 31, 2000, research and
development costs of 7.3 million and 18.1 million, respectively, are included
in selling, general and administrative expense in the accompanying combined
statements of income.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The businesses in the combined financial statements are included in
multiple consolidated tax returns and in multiple tax jurisdictions. There is
no formal tax allocation agreement between the various Degussa Dental
businesses and Degussa AG. The tax amounts reflected in the accompanying
combined financial statements have been computed as if each of the
contributed businesses had filed separate tax returns.
While the legal forms of Dental KG, and Ducera Dental GmbH & Co. KG
("Ducera") in 2000, were limited partnerships which are not generally subject
to German corporation income tax, the income tax expense for these German
entities has been presented in the accompanying combined financial statements
as if Dental KG, and Ducera in 2000, were stand-alone corporate entities.
Accordingly, the German corporation tax effects normally passed through to
Degussa AG are included in the accompanying combined financial statements as
if all earnings were distributed currently.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment
can be reasonably estimated.
Minority Interests
Minority interests in the equity and results of the entities controlled by
Degussa Dental are shown as a separate item in the combined financial
statements. The entities included in the combined financial statements that
have minority interests as of June 30, 2001 and December 31, 2000 are as
follows:
Minority
Ownership
Percentage
Sankin Kogyo K.K., Tokyo 5.6%
Probem S.A., Catanduva 40.0%
New Accounting Standards Not Yet Adopted
In June 2001, the FASB issued SFAS No.141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
the use of the purchase method of accounting for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies the types of
acquired intangible assets that are required to be recognized and reported
separately from goodwill and those acquired intangible assets that are
required to be included in goodwill. SFAS No. 142 will require that goodwill
no longer be amortized, but instead tested for impairment at least annually.
SFAS No. 142 will also require recognized other intangible assets to be
amortized over their respective estimated useful lives and reviewed for
impairment in accordance with SFAS No. 121,
14
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". Any recognized intangible asset determined to have an
indefinite useful life will not be amortized, but instead tested for impairment
until its life is determined to no longer be indefinite.
The Company is required to adopt the provisions of SFAS No. 141 and SFAS
No. 142 on January 1, 2002, with the exception of the immediate requirement
to use the purchase method of accounting for all future business combinations
completed after September 30, 2001. Early adoption and retroactive
application of these standards is not permitted. However, goodwill, and any
intangible asset determined to have an indefinite useful life, that is
acquired in a business combination completed after June 30, 2001 will not be
amortized. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized until December
31, 2001.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
over the asset's useful life. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 retains the
current requirement to recognize an impairment loss only if the carrying
amounts of long-lived assets to be held and used are not recoverable from
their expected undiscounted future cash flows. However, goodwill is no longer
required to be allocated to these long-lived assets when determining their
carrying amounts. SFAS No. 144 requires that a long-lived asset to be
abandoned, exchanged for a similar productive asset, or distributed to owners
in a spin- off be considered held and used until it is disposed. However,
SFAS No. 144 requires the depreciable life of an asset to be abandoned be
revised. SFAS No. 144 requires that long- lived assets to be disposed of by
sale be recorded at the lower of their carrying amount or fair value less
cost to sell and to cease depreciation (amortization). Therefore,
discontinued operations are no longer measured on a net realizable value
basis, and future operating losses are no longer recognized before they
occur. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001.
The Company is not currently able to determine the potential effects of
adopting these new standards.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
The Company sells dental equipment and supplies primarily to the end user.
For customers on credit terms, the Company performs ongoing credit evaluation
and generally does not require collateral. Accounts and notes
receivable-trade are stated net of an allowance for doubtful accounts of 4.5
million and 2.9 million as of June 30, 2001 and December 31, 2000,
respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2001 2000
Finished goods 82,633 92,956
Work-in-process 10,481 8,937
Raw materials and supplies 10,294 9,640
103,408 111,533
15
Inventories valued under the LIFO method are 40.4 million and 55.0
million, respectively. The current cost of LIFO inventories as of June 30,
2001 and December 31, 2000 was greater than the amount at which these
inventories were carried in the combined balance sheet by 52.1 million and
89.1 million, respectively.
As a result of LIFO inventory liquidation, earnings before taxes was
increased by approximately 15.0 million for the six months ended June 30,
2001. For the year ended December 31, 2000, earnings before taxes was not
affected because there was no LIFO inventory liquidation.
NOTE 5 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses relate primarily to advance payments for leases and
rental and maintenance contracts.
Other current assets consist primarily of V.A.T. refunds receivable of 1.4
million and 10.8 million as of June 30, 2001 and December 31, 2000,
respectively.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, December 31,
2001 2000
Assets, at cost:
Land 19,636 19,248
Buildings and improvements (note 12) 50,227 49,707
Machinery and equipment 62,245 59,708
Construction in progress 942 898
133,050 129,561
Less: accumulated depreciation (note 12) 75,419 72,933
57,631 56,628
NOTE 7 - IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets consist of the following:
Estimated
useful
June 30, December 31, lives
2001 2000 (years)
Acquired patents 17,792 16,028 5-20
Acquired trademarks 21,003 21,003 5-20
Capitalized software 2,341 2,570 4
Other 76 82 3-10
41,212 39,683
Less: accumulated amortization 6,371 5,545
34,841 34,138
16
NOTE 8 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
June 30, December 31,
2001 2000
Allowance for customer discounts and rebates 4,591 8,366
Personnel expenses 8,047 7,668
Other 6,069 6,475
18,707 22,509
NOTE 9 - FINANCING ARRANGEMENTS
Short-term notes payable
June 30, December 31,
2001 2000
Notes payable to banks, weighted average
interest rate 15.82% 6,112 7,404
Loans payable to Degussa AG 15,450 64,360
21,562 71,764
Degussa Dental has unused lines of credit for short-term financing of 14
million as of June 30, 2001. Interest applicable to these lines of credit
varies according to market conditions in the country of origin.
Letters of credit of Degussa AG secure 4.9 million of the short-term notes
payable to banks outstanding as of June 30, 2001. Inventory is pledged to
secure additional amounts of 0.2 million, and the remaining amount is
unsecured.
On March 9, 2001 the Company repaid a 50 million loan from Degussa AG,
bearing interest at the European overnight interest rate average, which was
outstanding as of December 31, 2000.
Approximately 13 million of the loans payable to Degussa AG as of June 30,
2001 and December 31, 2000 represents a non-interest bearing loan to DH GmbH.
No imputed interest expense has been recorded in the accompanying combined
financial statements related to this loan.
The remaining balance of loans payable to Degussa AG as of June 30, 2001
is comprised of a 2.4 million loan to the Japanese operating subsidiary which
bears interest at 0.2%. This loan renews monthly on a roll-over basis.
Long-Term Borrowings
June 30, December 31,
2001 2000
Secured mortgage notes payable, weighted average
rate 2.96%, due 2002-2005 7,489 8,813
Installment loans, weighted average rate 2.50%,
due 2002-2004 2,372 2,800
9,861 11,613
Less: current portion of long-term debt 3,135 2,917
6,726 8,696
Outstanding installment loans are guaranteed by letters of credit from
Degussa AG.
17
Aggregate maturities of long-term debt are as follows:
Year ending June 30
2002 3,135
2003 2,265
2004 2,955
2005 1,329
2006 177
9,861
NOTE 10 - INCOME TAXES
The components of earnings before income taxes are as follows:
Six months Year
ended ended
June 30, December 31,
2001 2000
Germany 16,009 6,083
Foreign 4,440 8,166
20,449 14,249
The components of income tax expense (benefit) are as follows:
Six months Year
ended ended
June 30, December 31,
2001 2000
Current:
German 8,772 7,395
Foreign 1,527 3,574
Total 10,299 10,969
Deferred:
German (1,930) (9,199)
Foreign 80 (930)
Total (1,850) (10,129)
Total income tax expense 8,449 840
In 2000, the German government enacted new tax legislation which, among
other changes, will reduce the statutory corporate tax rate for German
companies from 40% on retained earnings and 30% on distributed earnings to a
uniform 25% effective for the year beginning January 1, 2001. The effects of
the reductions in the tax rate and other tax law changes on the deferred tax
assets and liabilities of the Group's German companies were recognized in the
year of enactment and resulted in deferred tax benefit of 8.6 million for the
year ended December 31, 2000.
Prior to the 2000 tax law changes becoming effective, German corporation
tax law applied a split rate imputation system to the income taxation of a
corporation and its shareholders. Upon distribution of retained earnings in
the form of a dividend, shareholders subject to German tax received a credit
for corporation taxes paid by the corporation on such distributed earnings.
In addition, the corporation received a tax refund to the extent such
earnings had been initially subjected to a corporation income tax in excess
of 30%. The tax refund was also distributed to the shareholders.
18
In general, prior to 2001, retained (undistributed) German corporate
income was initially subject to a federal corporation income tax currently at
a rate of 40% for 2000 plus a surcharge of 5.5% on federal corporate taxes
payable. Giving effect to the surcharge, the federal corporate tax rate was
42.2% for the year ended December 31, 2000. Upon distribution of certain
retained earnings generated in Germany to stockholders, the corporate income
tax rate on the earnings was adjusted to 30%, plus a solidarity surcharge of
5.5% for a total of 31.65%, by means of a refund for taxes previously paid.
Under the new German corporate tax system, during a 15 year transition period
beginning on January 1, 2001, Degussa Dental will continue to receive a
refund or pay additional taxes on the distribution of retained earnings which
existed as of December 31, 2000.
As discussed in Note 2, actual income tax expense reflects the amount of
distribution of that year's earnings of the German operations. As such, the
refund of tax described above is reflected in the income tax expense
reconciliation presented below.
For the six months ended June 30, 2001 and the year ended December 31,
2000, actual income tax expense differed from the amounts computed by
applying the German federal corporation income tax rate of 25% for 2001 and
40% for 2000, to earnings before income taxes as a result of the following:
Six months Year
ended ended
June 30, December 31,
2001 2000
Expected income tax at statutory federal rate 5,112 5,700
Effect of:
Trade tax & solidarity tax, net of Federal
benefit 3,783 2,022
Benefit of distributed rate -- (1,503)
Tax holiday (123) (782)
Nondeductable expenses 440 1,377
Goodwill 788 2,522
Provision release (1,618) --
Tax rate change -- (8,577)
Other 67 81
Actual income tax expense 8,449 840
The tax effect of temporary differences giving rise to deferred tax assets
and liabilities are as follows:
June 30, December 31,
2001 2000
Deferred tax assets:
Intangible assets 224 984
Property, plant and equipment 432 404
Financial assets 88 942
Inventories 2,008 1,840
Receivables and other current assets 338 427
Pension accruals 3,531 3,232
Other accruals 2,109 1,865
Payables 449 374
Tax loss carry-forwards 1,078 1,244
Total deferred tax assets 10,257 11,312
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June 30, December 31,
2001 2000
Deferred tax liabilities:
Intangible assets (12,180) (13,028)
Property, plant and equipment (2,410) (2,438)
Inventories (10,251) (11,414)
Receivables and other current assets (131) (220)
Other accruals (33) (34)
Total deferred tax liabilities (25,005) (27,134)
Net deferred tax liabilities (14,748) (15,822)
The combined financial statements include certain assets, goodwill and
other intangibles, the tax bases of which will remain with Degussa AG upon
completion of the sale of Degussa Dental to DENTSPLY. Deferred tax benefits
related to this goodwill and other intangibles of 854 and 503 as of June 30,
2001 and December 31, 2000, respectively, have been included in the combined
financial statements.
Subsidiaries of the Company in Brazil and Japan have tax loss
carry-forwards of 4.7 million as of June 30, 2001, of which 1.2 million
expire through 2006 and 3.5 million may be carried forward indefinitely. The
Company believes that sufficient future taxable income will be generated by
these subsidiaries to realise the benefits of these tax loss carry-forwards.
As no distributions in the foreseeable future from foreign subsidiaries
are planned, deferred taxes have not been recorded for these undistributed
earnings. If such distributions were to occur, it is expected that the
related tax effects would be partially offset by tax benefits generated from
the distribution. Undistributed earnings as of June 30, 2001 amounted to 6.1
million.
NOTE 11 - BENEFIT PLANS
The Company maintains a number of separate contributory and
non-contributory defined benefit pension plans for a significant portion of
its hourly and salaried employees. Pension benefits are generally based upon
age, salary and years of service.
Unrecognized actuarial gains and losses are amortized over the average
remaining service lives of employees, with the exception of actuarial gains
and losses related to German plans, which are recorded in the year in which
they arise.
SFAS No. 87 requires the recognition of a minimum pension liability if a
plan's accumulated benefit obligation is greater than its projected benefit
obligation less unrecognized items. As this is the case for certain foreign
plans, 143 and 148 are included in the pension liability as of June 30, 2001
and December 31, 2000, respectively, with corresponding amounts recorded as
intangible assets and included in other non-current assets in the
accompanying combined balance sheets.
20
June 30, 2001 December 31, 2000
German Foreign Total German Foreign Total
Reconciliation of Projected
Benefit Obligation
Benefit obligation at beginning
of period 8,592 11,593 20,185 7,840 10,860 18,700
Service cost 182 493 675 342 876 1,218
Interest cost 257 225 482 490 394 884
Participant contributions -- 27 27 -- 58 58
Actuarial (gains) losses (221) 1,371 1,150 (80) 121 41
Benefits assumed and paid -- (420) (420) -- (716) (716)
Benefit obligation at end of
period 8,810 13,289 22,099 8,592 11,593 20,185
Reconciliation of Plan Assets
Fair value of plan assets at
beginning of period -- 4,662 4,662 -- 4,196 4,196
Actual return on assets -- 108 108 -- 171 171
Employer contributions -- 508 508 -- 853 853
Participant contributions -- 27 27 -- 58 58
Benefits paid -- (397) (397) -- (617) (617)
Fair value of plan assets at end
of period -- 4,908 4,908 -- 4,661 4,661
Reconciliation of Funded Status
Actuarial present value of
projected benefit obligations 8,810 13,289 22,099 8,592 11,593 20,185
Plan assets at fair value -- 4,908 4,908 -- 4,662 4,662
Funded status (8,810) (8,381) (17,191) (8,592) (6,931) (15,523)
Adjustment to recognize
minimum liability -- (143) (143) -- (148) (148)
Unrecognized net actuarial gain (10) 2,299 2,289 13 1,062 1,075
Accrued benefit cost (8,820) (6,225) (15,045) (8,579) (6,017) (14,596)
The amounts recognized in the accompanying combined balance sheets are
as follows:
June 30, 2001 December 31, 2000
German Foreign Total German Foreign Total
Pension obligation 8,820 6,225 15,045 8,579 6,017 14,596
Identifiable intangible assets -- 143 143 -- 148 148
Net amount recognized 8,820 6,082 14,902 8,579 5,869 14,448
The aggregate benefit obligation for those plans where the accumulated
benefit obligation exceeded the fair value of plan assets was 2.8 million as
at June 30, 2001 and December 31, 2000, respectively.
21
June 30, 2001 December 31, 2000
German Foreign Total German Foreign Total
Service cost 182 493 675 342 876 1,218
Interest cost 837 225 1,062 1,928 394 2,322
Expected return on plan assets -- (108) (108) -- (186) (186)
Gains and losses (219) 147 (72) (80) 293 213
Net periodic benefit cost 800 757 1,557 2,190 1,377 3,567
The weighted average assumptions used in accounting for the Company's
plans are as follows:
June 30, 2001 December 31, 2000
German Foreign German Foreign
Discount rate 6.3% 3.7% 6.3% 3.8%
Expected return on plan assets -- 4.6% -- 4.4%
Rate of compensation increase 2.6% 4.3% 2.6% 4.1%
As described in Note 1, certain pension obligations related to retirees
were not transferred from Degussa AG upon formation of Degussa Dental.
Accordingly, those obligations are not included in the benefit obligation
noted above. However, as they are clearly identifiable to Degussa Dental,
interest costs on the retiree pension obligation of 0.6 million and 1.4
million are included in net periodic pension cost for the six months ended
June 30, 2001 and the year ended December 31, 2000, respectively.
NOTE 12 - LEASES
The Company is obligated under a capital lease with a related party
covering its headquarters in Hanau, Germany that expires in eighteen years.
As of June 30, 2001 and December 31, 2000, the gross amount of the building
and related accumulated amortization recorded under the capital lease were as
follows:
June 30, December 31,
2001 2000
Buildings 11,758 11,758
Less: accumulated amortization 2,458 2,294
9,300 9,464
Amortization of assets held under capital leases was 0.2 million and 0.3
million for the six months ended June 30, 2001 and the year ended December
31, 2000.
The Company also has several noncancelable operating leases for
automobiles and certain office, warehouse, machinery and equipment and
manufacturing facilities. These leases generally require the Company to pay
all executory costs such as maintenance and insurance.
Rental expense for the six months ended June 30, 2001 and the year ended
December 31, 2000 was 2.7 million and 4.7 million, respectively.
22
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of June 30, 2001 are:
Year ending Capital Operating
June 30, leases leases
2002 1,009 2,487
2003 1,009 1,815
2004 1,009 1,691
2005 1,009 1,531
2006 1,009 1,371
Later years, through 2018 10,887 --
Total minimum lease payments 15,932 8,895
Less: interest discount 6,440
Present value of net minimum capital lease
payments 9,492
Less: current installments 381
Obligations under capital leases, excluding
current installments 9,111
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying amounts of cash and cash equivalents,
accounts receivable, prepaid expenses and other current assets, accounts
payable, accrued liabilities, income taxes payable and short-term debt
approximate fair value due to the short-term nature of these instruments. The
Company also believes the carrying amount of long-term debt approximates fair
value as the interest rates are either variable or close to current market
rates.
NOTE 14 - RELATED PARTY TRANSACTIONS
In the normal course of business, Degussa Dental conducts transactions
with Degussa AG and entities under the direct control of Degussa AG
(together, "Related Parties").
The Company maintains its cash in a bank controlled by Degussa AG and
participates in a cash pool administered by Degussa AG. Degussa Dental
companies which are part of the different euro-cash-pools in Germany and the
Netherlands deposit their excess cash in overnight cash-pool accounts at a
rate of EONIA minus 0.125%.
In addition, Degussa Dental sells a portion of its products to entities
under the direct control of Degussa AG for resale to third parties.
Associated amounts receivable from Related Parties as of the respective
balance sheet dates consist of the following:
June 30, December 31,
2001 2000
Trade receivables 1,700 6,692
Other receivables -- 3,510
Total 1,700 10,202
Related party interest income of 0.3 million and 1.1 million is recorded
in the accompanying combined statements of income for the six months ended
June 30, 2001 and the year ended December 31, 2000, respectively.
23
Degussa Dental buys certain raw materials, primarily precious metals, from
entities under the direct control of Degussa AG. Associated liabilities due
to related parties as of the respective balance sheet dates consist of the
following:
June 30, December 31,
2001 2000
Trade payables 4,856 3,468
Other payables -- 14,631
Total 4,856 18,099
For the six months ended June 30, 2001 and the year ended December 31,
2000 related party interest expense of 1.2 million and 3.1 million,
respectively is recorded in the accompanying combined statements of income.
Sale and purchase activity with Related Parties during the six months
ended June 30, 2001 and the year ended December 31, 2000 was as follows:
2001 2000
Sales 11,505 15,303
Purchases 92,738 200,512
Historically, Degussa AG has provided services to and incurred costs on
behalf of Degussa Dental. The types of services provided include:
administrative services, employee benefit administration, insurance, tax
services, treasury services, and accounting and reporting. The cost of such
services has been allocated based upon service contracts between the relevant
parties as well other methods including the use of time estimates, headcount
and transaction statistics, working capital ratios and other similar
activity- based or financial relationships. Allocated related party expenses
of 8.3 million and 17.1 million for the six months ended June 30, 2001 and
the year ended December 31, 2000, respectively, are included in the
accompanying combined statements of income.
While management believes the allocations supporting these expenses is
reasonable, such expenses may not be indicative of the costs that would have
been incurred if Degussa Dental had performed the related functions or
received services as a stand-alone entity. It is not practicable to estimate
what these expenses would have been had Degussa Dental operated as an
unaffiliated entity.
The components of net activity with Degussa AG during the six months ended
June 30, 2001 and the year ended December 31, 2000 are as follows:
2001 2000
Creation of short-term debt upon legal formation -- (64,360)
Interest expense related to pension obligations
not transferred upon legal formation 656 1,438
Common costs incurred and paid by Degussa AG -- 2,200
Distributions to Degussa AG (2,747) (7,223)
Contributions from Degussa AG 10,225 --
Other -- 1,305
8,134 (66,640)
24
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
Six months
ended Year ended
June 30, December 31,
2001 2000
Interest paid 1,819 2,577
Income taxes paid 1,062 1,947
NOTE 16 - COMMITMENTS, CONTINGENCIES AND SIGNIFICANT RISKS
Degussa Dental is subject to various lawsuits, claims and proceedings
arising in the normal course of business. Management believes the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position or results of operations or liquidity.
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating
results and cause actual results to vary materially from historical results
include, but are not limited to, significant seasonal fluctuations relating
especially to summer vacation effects on dental practices and laboratories in
Germany, as well as overall economic developments, both domestic and foreign,
and in particular relating to Germany, the United States, Japan and Brazil.
NOTE 17 - SUBSEQUENT EVENT
On October 2, 2001 Degussa AG completed the sale of Degussa Dental to
DENTSPLY.
25
DEGUSSA DENTAL
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Degussa AG:
We have audited the accompanying combined balance sheets of Degussa Dental
Group as of June 30, 2001 and December 31, 2000, and the related combined
statements of income, equity and comprehensive income, and cash flows for the
six months ended June 30, 2001 and the year ended December 3l, 2000. 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
combined financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the combined 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 financial position of Degussa
Dental Group as of June 30, 2001 and December 31, 2000, and the results of
its operations and its cash flows for the six months ended June 30, 2001 and
the year ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG Deutsche Treuhand-Gesellschaft AG
KPMG Deutsche Treuhand-Gesellschaft AG
Wirtschaftsprufungsgesellschaft
Frankfurt am Main, Germany
September 28, 2001 (except as to note 17, which is as of October 2, 2001)
26