Exhibit 1.1
ANNUAL REPORT FOR DYNEA INTERNATIONAL OY
FOR THE YEAR ENDED DECEMBER 31, 2004
PREPARED PURSUANT TO THE INDENTURE DATED AUGUST 8, 2000, BY AND
BETWEEN THE BANK OF NEW YORK AS TRUSTEE, DYNEA CHEMICALS OY, AS
GUARANTOR AND DYNEA INTERNATIONAL OY, AS ISSUER
TABLE OF CONTENTS
Market Information ........................................................i
Certain Definitions ......................................................ii
Forward Looking Statements ..............................................iii
Item 1. Identity of Directors, Senior Management and Advisers ............5
Item 2. Offer Statistics and Expected Timetable ..........................5
Item 3. Key Information ..................................................6
Item 4. Information on the Company ......................................17
Item 5. Operating and Financial Review and Prospects ....................29
Item 6. Directors, Senior Management and Employees. .....................52
Item 7. Major Shareholders and Related Party Transactions ..............54
Item 8. Financial Information ...........................................57
Item 9. The Offer and Listing ...........................................57
Item 10. Additional Information ..........................................58
Item 11. Quantitative and Qualititative Disclosures About Market Risk ....67
Item 12. Description of Securities Other than Equity Securities ..........68
Item 13. Defaults, Dividend Arrearages and Deliquencies ..................69
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds .............................................69
Item 15. Controls and Procedures .........................................69
Item 16. Audit Committee Financial Expert, Code of Ethics,
Principal Accountant Fees and Services ..........................70
Item 17. Financial Statements ............................................71
Dynea International Oy Financial Statements ...............F-1
Dynea Chemicals Oy Financial Statements .................G-1
Item 18. Financial Statements ............................................72
Item 19. Exhibits ........................................................72
This annual report describes the operations of Dynea International Oy
and the operations of Dynea Chemicals Oy, a subsidiary of Dynea International
Oy, as the businesses of Dynea International Oy and Dynea Chemicals Oy are
identical since all operations are conducted at or below the level of Dynea
Chemicals Oy.
MARKET INFORMATION
Information regarding market share, market position and industry data pertaining
to our business contained in this annual report consists of estimates based on
data and reports compiled by industry professional organizations and analysts
and our knowledge of our sales and markets. We take responsibility for compiling
and extracting but have not independently verified market data provided by third
parties or industry or general publications. Similarly, while we believe our
internal estimates to be reliable, they have not been verified by any
independent sources.
CERTAIN DEFINITIONS
As used in this annual report, "we," "our," "us," and "Dynea
International" refer to Dynea International Oy, a holding company incorporated
under the laws of Finland, together with Dynea Chemicals Oy, its wholly-owned
holding company subsidiary incorporated under the laws of Finland and, where the
context requires, their subsidiaries. Dynea Chemicals Oy is referred to as
"Dynea Chemicals" and "the guarantor", which also includes, where the context
requires, its subsidiaries, and contains the resins manufacturing operations
that were acquired from Fortum Oyj and, where the context requires, the other
operations that historically were operations of Dynea Chemicals Oy and that have
been sold. "Dynea" means Dynea Oy (formerly Nordkemi Oy). We are a wholly-owned
subsidiary of Dynea Oy. "Neste" refers to the chemicals business, which was
acquired from Fortum Oyj, on November 30, 1999. "Dyno" means Dyno ASA, a company
incorporated under the laws of Norway, together with its subsidiaries,
containing the resins manufacturing, paper overlays and oil field chemicals
production operations that were acquired on August 8, 2000, and, where the
context requires, the other operations that historically were operations of Dyno
ASA and that have been sold.
FORWARD-LOOKING STATEMENTS
Some statements in this annual report are not historical facts and are
"forward-looking." Words such as "believes," "expects," "estimates," "may,"
"intends," "will," "should" or "anticipates" and similar expressions or their
negatives frequently identify forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance, achievements or industry results to
be materially different from those expressed or implied by those forward-looking
statements. From time to time, we have made or may make forward-looking
statements orally or in writing. Those forward-looking statements may be
included in, among other things, press releases, filings with or submissions to
the U.S. Securities and Exchange Commission, reports to shareholders and note
holders and other communications or oral statements made by or with the approval
of an authorized executive officer.
Forward-looking statements, such as statements regarding our ability to
develop and expand our business, our ability to reduce costs, our ability to
take advantage of new technologies, the effects of regulations (including tax
regulations), litigation, our anticipated future revenues, capital spending and
financial resources and other statements contained in this annual report
regarding matters that are not historical facts, involve predictions. Actual
events or results may differ materially as a result of risks and uncertainties
that we face. Those risks and uncertainties include:
o the significant amount of indebtedness we and our subsidiaries
incurred and our obligations to service that indebtedness;
o contractual restrictions on our ability to receive dividends
or loans from some of our subsidiaries;
o changes in our business strategy or development plans;
o our ability to attract and retain qualified personnel;
o worldwide economic and business conditions;
o increased competition from other or new resins manufacturing
companies;
o customer purchasing behavior or trends toward consolidation or
up-stream integration;
o changing technology;
o regulatory, legislative and judicial developments; and
o operating difficulties.
Some of these factors are discussed in more detail elsewhere in this
annual report including, under the captions "Item 3. Key Information--Risk
Factors," "Item 4. Information on the Company--Business" and "Item 5. Operating
and Financial Review and Prospects."
We caution that the above list of important factors is not exhaustive.
When relying on forward-looking statements to make decisions with respect to us,
investors and others should carefully consider the foregoing factors and other
uncertainties and events. Such forward-looking statements speak only as of the
date on which they are made and we do not undertake any obligation to update or
revise any of them, whether as a result of new information, future events or
otherwise.
Item 1. Identity of Directors, Senior Management and Advisers.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
SELECTED CONSOLIDATED
HISTORICAL FINANCIAL DATA OF DYNEA INTERNATIONAL
The table below sets forth selected consolidated historical financial
data for Dynea International as of and for the periods indicated. The selected
consolidated financial data as of December 31, 2000, 2001, 2002, 2003 and 2004,
and the years ended December 31, 2000, December 31, 2001, December 31, 2002,
December 31, 2003 and December 31, 2004 have been derived from the audited
consolidated financial statements of Dynea International, which have been
audited by PricewaterhouseCoopers Oy, independent accountants. Dynea
International has prepared its financial statements in accordance with
International Financial Reporting Standards ("IFRS"). The selected consolidated
historical financial data of Dynea International should be read in conjunction
with "Item 5. Operating and Financial Review and Prospects" and the consolidated
financial statements of Dynea International included elsewhere in this annual
report.
SELECTED CONSOLIDATED
HISTORICAL FINANCIAL DATA OF DYNEA INTERNATIONAL
Year ended
((euro)millions) December 31,
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2000 2001 2002 2003 2004
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Income Statement Data:
Sales........................................... (euro) 1,054.6 (euro) 1,049.6 (euro) 955.8 (euro) 979.0 (euro)1,065.0
Cost of sales .................................. (913.4) (894.1) (798.0) (857.8) (935.0)
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Gross profit ................................... 141.2 155.5 157.8 121.2 130.0
Other operating income ......................... 18.2 11.3 13.8 12.3 11.9
Selling and distribution expenses .............. (49.2) (41.8) (41.3) (32.8) (30.0)
Research and development expenses .............. (17.9) (15.6) (17.6) (20.0) (20.2)
Administrative expenses ........................ (59.1) (65.8) (55.5) (56.4) (56.9)
Other operating expenses ....................... (41.2) (10.6) (13.9) (8.7) (6.3)
Profit on sale of associates ................... 3.0 (1.9)
Profit/(loss) on sale of discontinued
operations .................................. (3.3) 1.4
Impairment write-downs ......................... (6.4) (2.3) (4.4) (8.1)
Amortization of goodwill(1) .................... (6.9) (15.1) (14.6) (11.1)
----------- ----------- ----------- ----------- -----------
Operating (loss) profit ....................... (21.3) 15.3 28.7 1.5 18.5
Finance costs .................................. (75.1) (80.2) (50.0) (59.2) (53.4)
Share of income in associates and joint
ventures(1) ................................. 15.2 12.2 3.9 13.1 15.7
----------- ----------- ----------- ----------- -----------
Loss before income taxes ....................... (81.2) (52.7) (17.4) (44.6) (19.2)
Income tax benefit (expense)(1). ............... 19.6 8.4 5.0 (18.8) 0.4
----------- ----------- ----------- ----------- -----------
Loss for the period ............................ (61.6) (45.9) (12.4) (63.4) (18.8)
Loss attributable to equity holders ............ (euro)(62.3) (euro)(48.3) (euro)(14.9) (euro)(64.8) (euro)(20.5)
Minority interest expense....................... 0.7 2.4 2.5 1.4 1.7
----------- ----------- ----------- ----------- -----------
Loss for the period............................. (euro)(61.6) (euro)(45.9) (euro)(12.4) (euro)(63.4) (euro)(18.8)
=========== =========== =========== =========== ===========
Supplemental Operating Data:
Capital expenditures ........................... 27.1 28.9 25.0 29.3 22.3
Cash Flow Statement Data:
Net cash inflow (outflow) from operating
activities ..................................... (26.5) 0.3 14.9 37.2 15.5
Net cash inflow (outflow) from investing
activities .................................. 39.1 46.1 (25.1) 11.1 (24.4)
Net cash inflow (outflow) from financing
activities .................................. (7.9) (27.3) (17.7) (56.4) 15.8
Amounts in Accordance with U.S. GAAP:
Net (loss) income ............................. (63.5) (49.3) 0.3 (54.1) (20.3)
As of December 31,
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2000 2001 2002 2003 2004
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Balance Sheet Data:
Cash and cash equivalents....................... (euro) 40.2 (euro) 59.5 (euro) 31.9 (euro)21.2 (euro)27.6
Working capital(2) ............................. 58.9 18.4 (24.0) (23.1) (23.3)
Intangible assets .............................. 277.9 269.2 252.7 178.9 191.6
Total assets ................................... 1,302.0 1,065.9 972.2 841.5 866.2
Total debt(3) .................................. 720.4 669.8 631.1 511.9 529.8
Shareholders' equity ........................... 200.0 174.4 130.5 116.1 115.7
Amounts in accordance with U.S. GAAP
Shareholders' equity ........................... 195.5 163.9 133.4 109.0 86.7
(1) As of January 1, 2004, Dynea International has applied the revised
standards for business combinations, International Financial Reporting
Standard 3 (IFRS 3) and IAS 16 Property, Plant and Equipment to its
financial reporting. In accordance with the new standard, IFRS 3, goodwill
and other intangible assets with indefinite useful lives should not be
amortized. The revised IAS 16 requires major overhaul costs to be
capitalized and the 2003 comparison figures were adjusted accordingly.
(2) Working capital is computed as current assets less current liabilities.
(3) Total debt comprises long-term loans (including first years' installments),
bank loans, overdrafts and related party borrowings.
Exchange Rates
The following table describes, for the periods and dates indicated,
information concerning the noon buying rate for the euro in New York City for
cable transfers as certified for customs purposes by the Federal Reserve Bank of
New York. Amounts are expressed in euro per $1.00, and average figures reflect
the average of the noon buying rates on the last day of each month during the
relevant period. The rate on April 15, 2005 was 0.7735.
Period-end rate Average rate High Low
Year
2004....................... 0.7387 0.8048 0.8474 0.7339
2003....................... 0.7938 0.8853 0.9652 0.7938
2002....................... 0.9530 1.0605 1.1615 0.9530
2001....................... 1.1235 1.1224 1.1947 1.0488
2000....................... 1.0652 1.0861 1.2092 0.9676
March 2005................. 0.7711 0.7584 0.7766 0.7427
February 2005.............. 0.7534 0.7685 0.7829 0.7534
January 2005............... 0.7663 0.7621 0.7720 0.7421
December 2004.............. 0.7387 0.7453 0.7562 0.7339
November 2004.............. 0.7542 0.7687 0.7872 0.7526
October 2004............... 0.7846 0.7997 0.8149 0.7823
Risk Factors
You should carefully consider all the information in this annual
report, including these material risk factors.
Risks Relating to Our Business
Our business is highly competitive, and in the future the activities of our
competitors may negatively impact our market share or profitability.
The markets for some of our products are highly competitive. We are
exposed to the competitive characteristics of several different geographic
markets and industries. We have identified a variety of competitive factors that
may affect our customers' choice of supplier. These include:
o product quality;
o product price;
o reliability of product supply;
o technical support and other customer services; and
o proximity to customers.
Some of our competitors, including Borden Chemicals Inc.,
Georgia-Pacific Corporation and BASF AG, are larger and have greater financial
resources than we do. We also compete with a large number of smaller regional
companies. We may lose market share to these or other competitors.
In the past several years, there have been a number of mergers,
acquisitions and spin-offs in the chemicals industry. This restructuring
activity may result in our competitors consisting of fewer, larger producers. We
believe that restructuring is further advanced in the North American resins
market, but we expect significant restructuring in Europe and Asia. In addition,
as the markets for our products expand, we expect that additional competition
will emerge and that existing competitors may commit more resources to the
markets in which we participate. This could lead to changes in the competitive
environment, cause a decrease in our revenues and cash flow and have a
detrimental effect on our business and operations.
We may possibly face competition from producers of materials that are
substitutes for formaldehyde-based resins and paper overlays, which could lead
to declines in sales or revenues from our sales of these products.
We face the possibility of competition from a number of products that
are potential substitutes for formaldehyde-based resins and paper overlays.
Currently, we estimate that formaldehyde-based resins make up most of the resins
used as panel board resins, wood and specialty adhesives and industrial resins.
However, in some markets, non-formaldehyde based resins are a viable alternative
to our formaldehyde-based resins. For example:
o We estimate that, in North America, about 20% of the resins
used for oriented strand board ("OSB") are polyurethane-based
products. Although such resins are more expensive than
formaldehyde-based resins, less amounts are needed to produce
the same amount of OSB, they are more water resistant than
formaldehyde-based OSB resins and they allow for faster
production speeds.
o Acrylic resins are used as a substitute for formaldehyde-based
resins in some applications of insulation. A major insulation
manufacturer has replaced certain phenolic-formaldehyde resins
with acrylic resins in the manufacture of some of its building
insulation products.
o Various latex and polyurethane products are used as
substitutes for wood and specialty adhesives by furniture
manufacturers.
o With regard to paper overlays, high pressure laminates, wood
veneers, powder coatings, plastics, paint and lacquer are all
substitutes. These products are increasingly popular
substitutes for paper overlays, although they do not have
identical characteristics to paper overlays.
Considerable growth in these substitutes for resins or paper overlays
could adversely affect our market share, net sales and profit margins.
Furthermore, within our market, new products could be developed in the future
which could further threaten our market share for some of our products.
We may face competition from our current customers in the panel board resins
market, which could lead to declines in sales or revenues from these products.
Many of our customers for panel board resins are currently large
producers that are continuing to grow. As these large manufacturers expand their
operations and build new facilities, they may choose to build their own panel
board resin production facilities and begin to produce their own panel board
resins, particularly those customers who use predominantly urea-formaldehyde
resins. In some cases, those plants could be newer or more cost-effective than
the plants we are currently using to supply those customers. Some of the larger
wood panel producers already manufacture formaldehyde-based resins for their own
use. Captive production of formaldehyde-based resins tends to be limited to the
largest producers. These customers do, however, represent an important part of
the market. We estimate that approximately 60 % of our annual sales in 2004
derived from sales of urea-formaldehyde resins. If any customers begin to
produce their own resins, either using a new plant or an existing facility
purchased from another party, we could lose such customers, which could cause
our revenues and cash flow to decline. If one of our plants is particularly
dependent on such a customer, we could be forced to close that facility. In
addition, if one or more of our customers decide to construct new facilities to
produce their own resins, they may become our competitors.
We may lose market share as a result of customer consolidation, which could
cause our income to decline and our net losses to increase.
We are the third largest supplier of resins in North America. However,
we estimate that both of our larger competitors supply about twice as much resin
to the North American market (on a tonnage basis) than we do. This is due, in
part, to considerable consolidation among our customers in that market over the
past few years. Customers who intend to use a sole or dual-source supplier
strategy may choose to pick one of or both of our two large competitors.
Accordingly, our market share in North America may decline in future years,
which could cause our revenues and cash flow to decline. In addition, there has
been similar, although less extensive, consolidation in Europe, which could
reduce our European market share.
Declines in worldwide economic conditions could lead to declines in our sales or
could cause our net losses to increase.
Our resins and paper overlays production businesses depend on the
construction and furniture manufacturing industries, which are global industries
subject to regional or national cycles. These industries are particularly
affected by any downturn in gross domestic product and, accordingly, any decline
in gross domestic product in a given market could have a detrimental impact on
our business, cash flow, results of operations and financial condition in that
market.
Raw material prices may fluctuate significantly, which could lead to decreased
profit margins for some of our products in some circumstances. In addition, we
are somewhat dependent on certain suppliers for some of the raw materials we use
to produce our resins and paper overlays.
Our raw material costs in connection with the production of resins and
paper overlays in 2004 consisted mainly of the cost of methanol, urea, phenol
and melamine. For our paper overlays operations, paper is also a principal raw
material. We purchase the majority of our raw materials as bulk commodities
through a combination of long-term contracts of one to three years in duration,
informal long-term arrangements with suppliers (typically one year at the time)
and purchases on the spot market. Approximately 70% to 80% of our supply
contracts for raw materials are long-term contracts or informal agreements with
long-term suppliers. Our long-term contracts generally specify a supply volume
level and guarantee availability of that supply. Prices under these contracts
are either negotiated monthly or quarterly or they are tied to a formula based
on a given benchmark reported by independent sources, such as the Independent
Commodity Information Service (ICIS) or Chemical Market Associates Inc. (CMAI).
We also purchase raw materials directly on the spot market. Spot prices
fluctuate and may be significantly less or greater than the prices we have paid
for our raw materials purchased under long-term agreements.
As the prices we pay for our raw materials change quarterly or monthly,
we are subject to considerable volatility in the prices we pay for such
materials. Prices of methanol, urea and phenol are highly volatile, while the
price of melamine has traditionally been more stable. In 2004, the prices of
urea and phenol were very volatile. Due to this considerable price volatility in
our main raw materials, our raw material costs can vary significantly both from
year to year and during any given year. We are not always able to fully pass
through to our customers the fluctuations in the prices of our raw materials.
When increases occur, our sales may generate lower margins, particularly with
respect to sales that are made under contracts with periodic adjustment
features. These failures to recover costs can result in part from competitive
pressures, the timing of changes to the prices of raw materials and because at
times, in some markets, industry over-capacity prevents selling prices from
being raised. Furthermore, raw material cost decreases are generally reflected
more quickly in our sales prices than raw material cost increases due to
pressure from our customers.
In addition, we may not be able to continue to purchase the volumes of
raw materials that we require from our suppliers in the future. The loss of any
of our major suppliers would take us, on average, three to six months and
potentially as long as one year, to replace and could require that we in the
interim make purchases on the spot market at potentially higher prices.
We depend on continued technological and product innovation for our future
growth, and any failure to improve our products could lead to a decline in our
market share and a resultant decrease in revenues.
All of our businesses experience gradual periodic technological change,
ongoing incremental product improvements and obsolescence of existing products.
Manufacturers periodically introduce new products or production processes. In
the past, we have benefited from our ability to operate at the forefront of some
markets. We produce resins in thousands of different formulations, the great
majority of which are individually tailored to meet the specific requirements of
our customers. We continually seek to develop innovative, technically advanced
products. These efforts typically result in the turnover of our portfolio of
product formulations every three to five years. Our future growth will depend on
our ability to gauge the direction of the commercial and technological progress
in all key markets and successfully develop, manufacture and market products in
such markets. We must identify, develop and market innovative products on a
timely basis to replace existing products in order to maintain our competitive
position.
We devote significant resources to the development of new
technologically advanced products and intend to continue to devote a substantial
amount of spending to the research, development and technology process functions
of our businesses. However, there can be no assurances that we will be able to
successfully develop new products and/or technology or our customers may not be
satisfied with our new products or technology. If we fail to keep pace with the
evolving technological innovations in our markets, then our sales, profitability
and cash flow may decline as our customers turn to newer products produced by
our competitors.
Risks Relating to Our Company
Since our assets and all of the assets of our subsidiaries are already pledged
as security for the obligations of our subsidiaries under the senior credit
facility and other debt, we may find it difficult or impossible to borrow
additional funds if we need to do so.
The lenders under our existing senior credit agreement have a first
ranking security interest in substantially all of the tangible and intangible
assets our subsidiaries and a security interest in the shares we own of Dynea
Chemicals Oy. In addition, some of the other debt of our subsidiaries is secured
under similar, lower-ranking pledges of assets of those subsidiaries. These
lenders are not obligated to allow us to enter into further security
arrangements with these assets, or to allow us to grant similar security
interests to new lenders. As a result, we and our subsidiaries may not be able
to obtain additional loans from lenders who require us to provide them with
security interests in those assets unless we can first repay all of our existing
outstanding indebtedness under the senior credit agreement and other subsidiary
debt. This may prevent us from obtaining additional funds when needed and could
negatively affect our business and our results of operations.
We are subject to restrictive debt covenants that prevent us from taking a
number of actions, including some actions which might increase our income or
improve our financial results.
The indentures governing our notes contain covenants with respect to us
and our restricted subsidiaries that restrict, among other things:
o the incurrence of additional indebtedness;
o the payment of dividends on, and redemptions of, capital stock
and the redemption of indebtedness that is junior in right of
payment to the notes;
o some other restricted payments including, without limitation,
investments;
o some transactions with affiliates;
o some transfers or sales of assets;
o the grant of liens on our properties;
o the execution of sale and leaseback transactions;
o the sale of stock or the issuance of disqualified stock and
preferred stock of restricted subsidiaries;
o the guarantee of indebtedness of our company, other than the
notes, by our subsidiaries;
o our expansion into unrelated businesses;
o the creation of restrictions on distributions from restricted
subsidiaries; and
o consolidations, mergers and transfers of all or substantially
all of our assets.
These restrictions may prevent us from taking a number of actions,
including some actions which might increase our income or otherwise improve our
financial results.
Our subsidiaries are subject to restrictive debt covenants that prevent them
from taking a number of actions, including some actions which might increase our
income or improve our financial results, and which may prevent us from obtaining
funds from them to repay the notes.
Our subsidiaries are subject to the restrictive covenants and events of
default provisions contained in the senior credit facility. These covenants and
provisions restrict, among other things, the ability of our subsidiaries to make
any payments or distributions to us in order to enable us to prepay the notes or
make the interest payments under the notes while indebtedness under the senior
credit facility is outstanding. In addition, such covenants and provisions may
restrict us from taking certain actions, which would have otherwise increased
our income or improved our financial results.
Our subsidiaries are required to satisfy and maintain certain financial
conditions, which if breached, may result in an event of default under our
senior credit facility.
Our senior credit facility requires our subsidiaries to maintain
specified financial ratios and to satisfy certain financial conditions. The
ability of our subsidiaries to meet those financial ratios and conditions can be
affected by events beyond our control, and our subsidiaries have in the past and
may in the future fail to meet such ratios and conditions. In December 2004, we
presented a new business plan for the period from 2005 to 2007 to our senior
lenders and also proposed an amendment to the financial covenants relating to
minimum debt service, cash flow and interest coverage covenants from the fourth
quarter of 2004 through 2006 based on our new business plan. The senior lenders
agreed to the proposed amendments in January 2005. After 2006 we will need to
comply with original financial covenants, and as these tests and financial
ratios become more restrictive over the life of the senior credit facility, this
may result in breaches of such covenants.
A breach of any of these covenants, ratios, tests or restrictions could
result in an event of default under the senior credit facility. Upon the
occurrence of any event of default under the senior credit facility, the senior
lenders could elect to declare all amounts outstanding under the senior credit
facility, together with accrued interest, to be immediately due and payable. If
our subsidiaries cannot repay such amounts or if any other enforcement event
under the security documents arises, the senior lenders could proceed against
the collateral granted to them to secure repayment of any such amounts. If the
senior lenders accelerate the payment of such amounts, the assets of our
subsidiaries may not be sufficient to repay in full these amounts, to satisfy
all other liabilities of our subsidiaries and to enable us to repay the notes in
full.
We may still be able to incur substantially more debt which may be senior debt,
in addition to that which we have already incurred, which could further increase
the risks described above.
We and our subsidiaries may be able to incur substantial additional
debt in the future. We could, for example, incur an additional (euro)21.2
million of debt under the revolving credit facility pursuant to the senior
credit agreement beyond that which we had incurred as of December 31, 2004. The
terms of the indenture restrict, but do not fully prohibit, us and our
subsidiaries from borrowing additional debt. The additional debt we incur could
be secured and debt of the guarantor could be senior to the guarantee. Debt
incurred by our subsidiaries will be effectively senior in right of payment to
the notes. If new debt is added to our and our subsidiaries' current debt
levels, the related risks that we and they now face could intensify.
We may not succeed in making further acquisitions or may not successfully
integrate any further acquired operations, which could cause our net losses to
increase or could lead to declines in our overall revenues or profitability.
As part of our strategy, we may acquire companies or operations engaged
in similar or complementary businesses to our own. Restrictions in the terms of
the notes may, however, preclude our ability to make some acquisitions. Further,
for acquisitions that are not precluded, we may need to borrow money which will
increase our debt service requirements and could make it harder for us to make
payments on the notes. In order to manage any acquisitions we successfully
complete, we will need to continue to implement and improve our operational,
financial and management information systems. If making acquisitions or
integrating any acquired business diverts too much management attention from the
operations of our core businesses, this could adversely affect our financial
condition and results of operations. Any acquisition that we make could be
subject to a number of risks, including:
o failure to discover liabilities of the acquired company for
which we may be responsible despite any investigation we may
make before the acquisition;
o our ability to assimilate the operations and personnel of the
acquired company; and
o the loss of key personnel in the acquired company.
Any acquisition we consummate may fail to provide the benefits we
originally anticipate. Furthermore, we may fail to identify attractive
acquisition candidates, complete and finance potential acquisitions on favorable
terms, or integrate acquired operations with our existing businesses.
We will have ongoing costs and may have additional costs, obligations or
liabilities with respect to environmental matters, which may cause our net
losses to increase in the future.
Our operations are subject to extensive environmental, health and
safety laws and regulations. Among other things, these laws and regulations:
o regulate air emissions, wastewater discharges and other
releases to the environment, the handling and use of hazardous
materials, the generation, treatment, storage and disposal of
wastes, and workplace conditions, as well as other aspects of
our operations and products;
o impose requirements relating to the clean-up of contamination;
o impose liability in the event of harm to human health, the
environment and natural resources; and
o provide for substantial fines and potential criminal sanctions
for violations.
We incur substantial costs in our efforts to comply with these laws and
regulations. At some of our sites, there may be contamination from past
operations, which requires, or is anticipated to require, investigation and
remediation. The nature of the chemical industry also exposes us to risks of
liability under these laws and regulations due to the production, storage,
transportation and sale of materials that can cause harm to human health, the
environment and natural resources. In addition, individuals could seek damages
for alleged personal injury or property damage due to exposure to chemicals at
our facilities or to chemicals otherwise produced, owned or controlled by us.
We expect that our operations will continue to be subject to
increasingly stringent environmental and health and safety laws and regulations.
We anticipate that these laws and regulations will continue to require increased
costs and impose additional liabilities. Future changes to environmental, health
and safety laws and regulations may be significant, and contamination could
occur or be identified in the future. Our future cash flow may decline as a
result of increased expenditures on environmental health or safety matters as
the amounts we have currently provided may not be adequate. For example, the
International Agency for Research on Cancer ("IARC"), the advisory body of WHO,
recently reclassified formaldehyde from Class 2A "probable carcinogen to human"
to Class 1 "carcinogen to human". Since formaldehyde has a significant role as
raw material in our manufacturing processes, the future unanticipated regulatory
changes relating to formaldehyde may have a negative material impact on our
business. See below in "Item 4. Information on the Company - Environmental,
Health and Safety Matters."
In addition, other parties that have contractual commitments to us in
connection with potential environmental liability matters may fail to honor such
commitments. For example, the agreement with Fortum Oyj relating to the
acquisition of Neste in 1999 provides a cost-sharing mechanism for remedial
costs relating to environmental contamination. See below in "Item 4. Information
on the Company - Environmental, Health and Safety Matters." If Fortum Oyj fails
in the future to honor its commitments under the cost-sharing mechanism, we may
incur additional expenditures on environmental health or safety matters.
We may have ongoing liabilities associated with the explosives business of Dyno
vis-a-vis third parties, which could lead to unforeseen expenses and could cause
our net losses to increase in the future.
Dyno ASA had historically owned and operated the explosives business of
Dyno in Norway. The assets related to that business were transferred to Dyno
Nobel ASA at the time we acquired Dyno ASA. Some of the liabilities related to
the activities of that business prior to that transfer may remain with us. In
addition, the explosives business of Dyno in countries other than Norway was
conducted by former and current subsidiaries of Dyno ASA, and we may have some
remaining liabilities from past activities of those subsidiaries as well.
However, Dyno Nobel ASA has agreed to indemnify us for any loss, liability,
claim, damage or defense we may face as a result of Dyno's prior ownership of
the assets related to the explosives business.
The nature of Dyno's former explosives business involved storage and
detonation of explosives, which is treated in the United States as an inherently
dangerous and ultra-hazardous activity. Accordingly, Dyno's former subsidiaries
in the United States which have been transferred to Dyno Nobel ASA or its
affiliates, including companies that are still subsidiaries of Dyno, may be held
liable for personal injury or property damage that resulted from the storage or
detonation of explosives in the past, regardless of the degree of care they
exercised.
While Dyno and those of its subsidiaries engaged in the explosives
business followed regulations and industry standards applicable to storage and
distribution of ammonium nitrate and explosive products prior to the transfer of
those operations to Dyno Nobel ASA, the possibility of criminal misuse of
products produced by Dyno or its former explosives-related operations cannot be
excluded. Dyno's products may have been stolen or diverted to improper use and
litigation might be brought against us seeking to hold Dyno liable in such a
case. Litigation is impossible to predict and future legal actions may be
material. Similarly, attempts may be made to sue Dyno ASA or its affiliates in
the future under a variety of legal theories in Norway, the United States, or in
other countries for its previous ownership of the explosives business. However,
no such attempts have been made to date.
Our operations are exposed to various risks because we operate in different
countries around the world, which may lead us to incur unanticipated expenses or
encounter unanticipated difficulties that negatively impact our business, our
future revenues or our future profitability.
Because liquid resins cannot generally be transported economically over
long distances, our resins production facilities are located close to our
customers around the world. Our international operations are generally subject
to many additional risks, including:
o multiple and possibly conflicting laws and unexpected changes
in regulatory requirements;
o difficulties and costs of staffing and managing international
operations;
o potentially adverse tax consequences;
o import and export restrictions and tariffs;
o political instability;
o local natural disasters;
o cultural differences; and
o increased expenses due to inflation.
Any one of these factors could hurt our sales of services and products
to international customers, which could cause our revenues to decline and
adversely impact our business, cash flow, financial position and results of
operations.
As a large portion of our revenues are denominated in currencies other than the
euro, changes in exchange rates could cause our financial results to decline as
reported in euros.
Our revenues, costs, assets and liabilities are denominated in multiple
currencies, particularly the U.S. dollar, the Canadian dollar and the Norwegian
crown. This exposes us to fluctuations in various currencies, which may affect
our financial condition and results of operations as reported in euro.
In addition, changes in exchange rates could hurt our ability to make
planned capital expenditures as well as servicing our debts as a result of
increased costs relating to our operations in various jurisdictions. We may not
in all cases be able to use currency hedging transactions to protect against
transaction risk.
We are also subject to interest rate risk relating to raises in
interest rates, as borrowings under our senior debt facility are based on
floating interest rates, such that if interest rates increase, our interest
expenses will also increase. This risk is only partially mitigated by interest
rates swaps from floating to fixed interest rates into which we have entered.
An adjustment to the carrying value of our goodwill would adversely affect our
operating results and net worth.
We have a significant amount of goodwill. As of December 31, 2004 we
had unamortized goodwill of (euro)188.6 million, which represents 22% of our
total assets, 30% of our total non-current assets and 163% of shareholder's
equity. A significant change in market conditions that reduces the estimated
future cash flows of the company may trigger an impairment of our goodwill. This
would result in a non-cash charge and reduce the operating profit in the year
the impairment is recognized.
We have an unfunded pension obligation, which could cause us to incur additional
future expenses, which may cause our net losses to increase.
As of December 31, 2004, we have an unfunded pension obligation of
(euro)38.5 million, which exceeds the accrued pension cost on our balance sheet
by (euro)21.0 million. In the event of changes in the structure of the company,
insolvency, or other circumstances, an unrecognized obligation may become
payable under the terms of the company's pension plans. This obligation is
senior to our obligation to repay amounts due under the notes.
Item 4. Information on the Company.
History and Development
Dynea International Oy and Dynea Chemicals Oy consist primarily of the
combined panel board resins and industrial and surfacing businesses of Neste
Chemicals and Dyno ASA. Dynea International Oy, formerly known as Neste
Chemicals International Oy, is a limited liability company, domiciled in
Helsinki, Finland, founded on June 30, 2000, and registered with the Finnish
Trade Register on July 3, 2000, in connection with the acquisition of Dyno ASA.
Dynea International Oy represents the successor entity created from the
acquisition of Neste Chemicals on November 30, 1999 and the acquisition of Dyno
ASA on August 8, 2000. Dynea International Oy had no operations until November
30, 1999 when we acquired the Neste Chemicals chemicals businesses from Fortum
Oyj, the Finnish state oil and gas company. "Neste" represents the predecessor
combined specialty chemicals businesses carved-out from Fortum Oyj.
Prior to June 30, 2000, the operations of Dynea International were
conducted by Dynea Chemicals Oy. Dynea Chemicals Oy, domiciled in Helsinki,
Finland, was founded on September 8, 1999 and was registered with the Finnish
Trade Register on September 13, 1999. Our address is Siltasaarenkatu 18-20 A,
00530, Helsinki, Finland, and our telephone number is + 358 10 585 2000. Dynea
International Oy is a wholly owned subsidiary of Dynea Oy, formerly Nordkemi Oy,
a company controlled by Industri Kapital AB, and Dynea Chemicals Oy is a wholly
owned subsidiary of Dynea International Oy.
The Acquisition of Neste
In November 1999, our parent company, Dynea Oy, which was then known as
Nordkemi Oy, acquired the Neste chemicals business controlled by Fortum Oyj.
Shortly after our incorporation, Dynea Oy contributed all of the issued and
outstanding shares in Dynea Chemicals Oy (which had been incorporated in
September 1999 as part of the acquisition of Neste and was formerly known as
Neste Chemicals Oy) to us in exchange for all of our issued and outstanding
shares.
The Acquisition of Dyno
We acquired Dyno ASA on August 8, 2000. Prior to the acquisition of
Dyno ASA, Dyno ASA was a public company organized under the laws of Norway whose
global operations spanned several industrial activities in the fields of
explosives and chemicals. We acquired the resins manufacturing, paper overlays
and oil field chemicals production operations and other operations which
historically were operations of Dyno ASA.
Recent Acquisitions and Investments
During 2002 and 2003, Dynea International invested in a new resins
plant in Gaoyao, Guandong, Peoples Republic of China. The new paper overlays
plant built at the same site was taken on-stream in September 2004. Our
investments in Dynea (Guangdong) Co Ltd amounted to (euro)2.3 million in 2004.
In 2004, Dynea Chemicals Oy invested in a new resins plant in Gubakha,
in the Perm region, Russia. The new company, Z.A.O. MetaDynea is jointly owned
by Dynea Chemicals Oy and the leading Russian methanol production company JSC
Metafrax. The company was incorporated and granted business license on March 3,
2004 and start-up of the production was in October 2004. Our investments in the
Gubakha plant totaled (euro)1.9 million in 2004.
As a part of an overall expansion project that has been going on during
2003 and 2004, a new world-scale formaldehyde plant was taken on-stream in
Moncure, North-Carolina, USA in May 2004. The plant has a capacity of 50 000
tons of formaldehyde (100%), and it is based on Dynea's proprietary process
technology. Our investments in Moncure amounted to (euro)5.1 million in 2004.
During 2004, Dynea ASA invested in optimizing the resin operations in
Norway. The project included major efficiency and capacity investments at the
Lillestr0m plant together with mothballing the manufacturing operations at the
production plant in Engene. Consequently the production of formaldehyde and
resins in Engene was transferred to Lillestr0m. The consolidation of the
operations became effective in September 2004. Our total investments in Norway
amounted to (euro)4.2 million in 2004.
Corporate Structure
The following chart is a summary of our corporate structure and
ownership at December 31, 2004.
[GRAPHIC OMITTED]
Markets
We are a global specialty chemicals company. We develop, manufacture
and sell a diverse range of resins, adhesives and paper overlays and operate
primarily in the panel board resins and industrial and surfacing industry. We
operate primarily in Europe, North America and Asia. The following chart shows
our revenues by geographic location for the past three years:
2002 2003 2004
---- ---- ----
Europe (euro) 413.3 (euro) 455.7 (euro) 489.7
Americas 378.9 385.8 421.1
Asia and Oceania 156.7 133.0 149.4
Other 6.9 4.5 4.8
The following chart shows our revenue by product group for the past
three years:
2002 2003 2004
---- ---- ----
Panel Board Resins (euro) 468.0 (euro) 489.3 (euro) 540.0
Industrial and Surfacing 389.5 461.5 497.6
Discontinued Operations 71.2 -- --
Other 27.1 28.2 27.4
The overall market for formaldehyde-based resins is primarily driven by
production levels in the construction and furniture industries, which are in
turn affected by general economic conditions. This market is also driven by
reduced availability and increased prices of log timber, which is expected to
continue to result in composite boards gaining market share in the wood products
market.
As with formaldehyde-based resins, the market for paper overlays is
driven in large part by activity levels in the construction and furniture
industries, which are in turn affected by general economic conditions. Both
markets are somewhat seasonal, as demand drops off in December and during the
summer holidays, due to the decreased number of working days.
Products
We develop, manufacture and sell a diverse range of panel board resins
as well as industrial and surfacing products in the form of formaldehyde-based
resins and paper overlays.
Panel Board Resins (which we estimate were approximately 51% of our
2004 total revenues). Our customers use panel board resins to bond various
combinations of woodchips, fibers and veneer to manufacture different types of
wood based panels. The most common wood based panels are particleboard, plywood,
medium density fiberboards ("MDF") and oriented strand boards ("OSB"), which is
a substitute for plywood. Different types of panel board resins are used
depending on requirements such as water resistance, pressing time, strength and
appearance. In 2004, we produced 1.8 million tons of panel board resins.
Industrial and Surfacing (which we estimate were approximately 47% of
our 2004 total revenues). In 2004, we produced 0.5 million tones of industrial
and wood and specialty adhesive resins.
We manufacture primarily the following three types of products:
o Industrial resins (which we estimate were approximately 48% of
our 2004 industrial and surfacing related revenues). Our
customers use industrial resins to produce paper overlays,
insulation materials and specialty products for applications
such as abrasives, foam, friction products, filters, resins
for foundry, molding compounds etc. The construction related
products are used by manufacturers in the construction and
building materials industry who use them in a number of
industrial applications such as roofing and in insulation
materials. This category also includes some
non-formaldehyde-based resins. The specialty products
(technical resins) are primarily used in automotive and metal
working industries. The degree of customization of these
products varies considerably depending on their end use.
o Wood and specialty adhesives (which we estimate were
approximately 24% of our 2004 industrial and surfacing related
revenues). Generally, our customers use our wood solutions to
manufacture both engineered and interior wood products.
Engineered wood products include laminated beams, I-beams,
posts and other wood supports for construction; interior wood
products include furniture, cabinets, doors, window frames and
parquet flooring. Additionally, we supply specialty adhesives
to the paper packaging, shoe and construction industries. Our
adhesive solutions are customized and designed to improve
customer efficiency and to meet all regulatory requirements.
o Paper Overlays (which we estimate were approximately 28% of
our 2004 industrial and surfacing related revenues). We
produce both industrial and decorative paper overlays. In
2004, we produced approximately 320 million square meters of
paper overlays. Sales of industrial overlays accounted for
approximately 62% of the total volume of paper overlays sold
in 2004. Paper overlays consist of paper that has been
saturated or coated with resins. These papers are then
generally bonded under pressure and at high temperatures onto
a variety of core materials, including particle board, MDF,
OSB and plywood, for use as surface enhancements or finishes
for decorative or industrial applications. Industrial paper
overlays provide strength and protection and are used in the
manufacture of signboards, concrete molds, truck beds and
exterior siding. Decorative paper overlays are used in
manufacturing products such as furniture, kitchen cabinets,
store fixtures and laminated flooring.
Sales and Marketing
We employ approximately 300 people in our worldwide sales and marketing
operations, who are supplemented by a technical support staff (of approximately
120 persons) responsible for assisting our customers in developing and
implementing solutions for use in their production processes. In addition, local
and senior management is also involved in marketing and selling our products and
services. Our sales representatives have on average more than ten years'
experience with our company or our predecessors. We provide what we believe to
be a high level of support and service to all of the targeted customer segments.
We believe our sales and marketing staff is experienced, well known and
respected by our customers.
Our sales force includes both individual sales representatives based
locally in all of the major markets we serve and special key account teams
operating from bases in Europe, North America and Asia. Our key account teams
market the full range of our solutions to some selected high-value customers and
are responsible for coordinating our total offering to these accounts, including
sales and technical support. In addition, for some customers for whom we are a
sole supplier, we monitor the supply of resins and provide them with consignment
stock services securing continuing supply service and stock control. We also
sell our paper overlays products through agents on a commission basis in markets
where we do not have our own sales staff. Recently the sales and marketing focus
and resource allocation has been under a continuous review, and they have been
sharpened based on the customer need segmentation and EBITDA -level customer
profitability analysis.
Contracts and Pricing
The majority of our sales are made under long-term contracts or
long-standing informal relationships with our customers. The prices for our
products depend significantly on a number of factors, including the type of
product being sold, raw material prices, the competitive market price and supply
situation, volume discount arrangements and the overall scope of services
provided for the customer on top of the product.
Resins. Most of our supply-agreements contain a volume supply
commitment, and their duration is typically one year, sometimes a quarter of a
year. Despite the volume commitment, the prices may be adjusted during the
contract period. The pricing adjustments are usually made monthly or quarterly
based on a formula that takes into consideration the changes in raw material
prices, but other factors, such as general market conditions, may also have an
effect on the adjusted price. We also offer volume rebates under some sales
contracts. In part of the sales, however, the pricing mechanism is more market
and relationship-based and is rather independent of the raw material price
development. For example, in wood and specialty adhesives, more than half of the
European sales are made on the basis of long-term relationships with customers,
and pricing and volumes are set individually every quarter. In some cases, we
also sell resins on a spot-basis to customers with whom we do not have contracts
or long-term relationships. These sales are typically phenolic powder resins to
areas where we do not have own manufacturing.
As a summary, the sales prices of our panel board resins and industrial
resins are primarily influenced by the prices of the raw materials we use to
make our products, transportation costs and market conditions. The sales prices
for our wood and specialty adhesives are on the contrary more influenced by the
product performance, customer service solution package provided, and general
market conditions.
Paper Overlays. About half of our sales of industrial paper overlays
are made under contracts having duration of one year or more. More than
three-quarters of our largest industrial paper overlays contracts are
requirements contracts under which we are our customers' sole supplier for a
given product or range of products. About half of our sales of decorative paper
overlays are made under contracts having duration of one year or more, while
remainder consisting of sales to clients with whom we have no contract.
The price of our paper overlays is primarily related to the prices of
the papers and raw materials for the resins used in their manufacture. This is
particularly true in decorative overlays, even in the case of long-term
contracts. However, pricing for industrial paper overlays differs somewhat. In
industrial paper overlays, the pricing is fairly stable, in large part due to
our long-term contracts, and in part due to the applied market pricing
mechanism.
Customers
Our customers range from some of the largest companies in the building
materials and furniture industries to small-scale local furniture and wood
materials manufacturers.
Resins. Our customers include major panel board producers in Europe,
North America and Asia. We have long-standing relationships with the majority of
our resins customers.
Customer size varies both by product and by region. In general, our
customers for panel board resins tend to be quite large, especially in North
America and Europe. In contrast, and with some exceptions, our customers for
wood and specialty adhesives and industrial resins are smaller. Customers in the
Asia-Pacific region, Eastern Europe and South America all tend to be smaller and
the markets more fragmented, although there are a few large panel board resin
customers in these areas as well.
Currently, a limited number of our customers operate in more than one
region. We believe, however, that the number of multiregional customers will
continue to increase due to growth in newer markets, such as the Asia-Pacific
region and South America, and due to additional consolidation in more mature
markets. We believe that some customers will seek centrally negotiated supplier
contracts with international suppliers like us, and that we are better
positioned than some of the local and regional competitors to fulfill their
needs.
In Western Europe, some panel board resins customers have built and
operate their own resins production facilities within their panel production
plants in an effort to ensure supply and capture incremental margins. While we
believe there might be a slight trend toward this so-called "captive" production
in Western Europe, this trend appears to be limited to large panel board
manufacturers in new production facilities. See "Item 3. Key Information--Risk
Factors--Risks Relating to our Business--We may potentially face competition
from our current customers in the panel board resins market." In the United
States, we have also noticed an emerging trend toward captive production.
However, especially in production of phenolic resins that are more complex, some
North American customers have moved away from captive production. We believe we
are well positioned to take advantage of any move away from this type of
production in any of the markets we serve.
In the industrial resins market certain resin manufacturers have
stopped their own resin production and have begun to purchase the resins for on
sale from specialty companies like Dynea because of rising environmental
pressures and the growing investment requirements of speciality chemistry
required in such production.
Paper Overlays. Customers of our paper overlays products include major
users of industrial and decorative paper overlays in Europe, Asia-Pacific, South
America and North America.
The paper overlays market is predominantly composed of local and
regional customers who serve the construction and furniture industries, which
are also largely local and regional in nature. We do not have many global or
multi-regional paper overlays customers. However, there are a few panel board
and furniture producers who are global or multi-regional, and we expect them to
increase their purchases on a multi-regional basis.
The production of industrial paper overlays is more limited than
decorative paper overlays due to smaller and more fragmented customers and end
markets, and the technical engineering required in product design and
application.
Within the United States, there is a trend toward growth in decorative
products generally, particularly laminate flooring, and we believe we are well
positioned to take advantage of the future development of this business.
Manufacturing and Production
We operate 51 production facilities in 25 countries in Europe, the
Asia-Pacific region, North America and South America. Some of the plants in
China, Indonesia, Malaysia, Thailand, Australia, Brazil, Denmark, Hungary, and
Pakistan are owned and operated by us as majority owned entities or joint
ventures, or represent investments in which we hold minority interests of 20% to
50%. The maximum capacity of the plants is presented in the following tables.
However, our actual capacity at any given time may vary depending upon a variety
of factors, including the types of products being made, the number of production
runs required to make them and the mix of products being manufactured.
Resins. Our total resins manufacturing capacity is approximately 3.5
million metric tons per year. In 2004, we produced approximately 2.3 million
metric tons of resins. Our main operations are focused in North America, Western
Europe and the Asia-Pacific region.
The table below shows the amount of formaldehyde-based resins and
formaldehyde (37% solution) we are able to produce each year in each of the
countries in which we have resins production facilities.
Formaldehyde- Formaldehyde
based -------------------
Country* resins (tons) (tons)
Australia................................. 52,000 40,000
Austria................................... 260,000 260,000
Belgium................................... 130,000 90,000
Brazil.................................... 149,000 64,000
Canada.................................... 378,000 225,000
China..................................... 105,000** --
Denmark................................... 80,000** 80,000
Finland................................... 200,000 90,000
France.................................... 37,000 --
Germany................................... 75,000** --
Hungary................................... 41,000** --
Indonesia................................. 50,000** 33,000
Ireland................................... 125,000 65,000
Malaysia.................................. 60,000 43,000
Mexico.................................... 42,000 15,000
The Netherlands........................... 210,000 189,000
New Zealand............................... 179,000 120,000
Norway.................................... 150,000 120,000
Poland.................................... 14,000 --
Russia.................................... 200,000 --
Singapore................................. 90,000 99,000
Thailand.................................. 60,000** --
United Kingdom............................ 110,000 --
United States............................. 860,000 550,000
Vietnam................................... 18,000 --
Total..................................... 3,675,000 2,083,000
- ------------------
* We have more than one plant in most of these countries. In addition,
our operations in China, Indonesia, Malaysia and Thailand are operated
as majority-owned companies and our operations in Australia, Denmark,
Russia and one plant in Brazil are operated as joint ventures.
** We produce an additional 12,000, 5,000, 3,000, 25,000, 5,000 and 5,000
tons of non-formaldehyde-based resins in China, Denmark, Germany,
Indonesia, Thailand and Hungary, respectively.
Paper Overlays. We currently have a total annual production capacity of 210
million square meters of decorative paper overlays and 330 million square meters
of industrial paper overlays. In 2004, we produced and sold approximately 320
million square meters of paper overlays.
Our paper overlay production facilities are located in the United
States, Finland, China, Indonesia and Brazil. The table below shows the amount
of paper overlays we are able to produce each year in each of the countries in
which we have paper overlays facilities.
Decorative Paper Industrial Paper
Country Overlays Overlays
- ------- -------- --------
(million sq. m.)
Brazil*.............................. 35 --
China -- 25
Finland.............................. -- 55
Indonesia**.......................... -- 35
United States........................ 175 215
Total................................ 210 330
- ---------------------
* Operated as a 50% owned joint venture.
** Operated as a 70% majority-owned company.
Suppliers, Raw Materials and Procurement Practices
The majority of our raw materials are bulk commodities. We are not
highly dependent on any one supplier for any of our raw materials, and with
sufficient notice (of approximately six months to a year, depending on the raw
material) we believe we could replace even our key suppliers with purchases from
other suppliers, on the spot market or through suppliers from other markets.
Resins. The principal raw materials we use to manufacture resins are
methanol (which we use to manufacture formaldehyde, an intermediate product),
urea, phenol and melamine. Together these raw materials make up approximately
60-90% of our total resin-related raw material costs. All of the raw materials
we purchase are bulk commodities with standard specifications.
We have centralized purchasing in North America and Europe for our four
main raw materials. We have during 2004 increased our global focus on purchase
of all chemicals from bulk commodities to smaller chemicals. We endeavor to make
purchases that allow us to benefit from economies of scale to the extent
possible, and, therefore, often concentrate our purchases from global suppliers,
when available. Since all of our raw materials are bulk commodities, we have
significant flexibility in selecting our suppliers.
We obtain our raw materials through long-term contracts of one to three
years in duration, informal long-term arrangements with suppliers, and purchases
on the spot market. Our long-term contracts typically provide for a fixed volume
of raw materials while under our informal long-term arrangements volumes are
more flexible and usually negotiated on a quarterly or monthly basis. Prices
under our contracts are sometimes based on formulas, but more often, and
especially in the case of our informal long-term arrangements, prices are set
either quarterly or monthly and are based on a number of factors, including spot
prices, regional price variations, our volume and delivery needs and overall
market supply.
For all of our raw materials, we rely on a number of different
suppliers. We purchase from most of the major producers in each industry as
complemented by local and regional producers as well as raw material traders.
Since many of our operations rely on local or regional suppliers and since many
of our facilities are in remote locations, we are not always able to negotiate
better prices solely based on our size.
Paper Overlays. Paper and resins constitute the main raw materials used
in the paper overlays business. In 2004, we produced approximately half of the
resins we used to manufacture paper overlays and purchased the remaining resins
from other manufacturers.
We purchase paper from a number of suppliers. Our purchase contracts
for industrial paper are mostly one-year contracts with fixed price terms, while
we purchase decorative paper under informal arrangements whereby volumes and
prices are set quarterly. Approximately 85% of the paper we buy is standardized
while 15% is custom produced by printers to meet customers' specific needs. When
we purchase custom produced papers, our customers commit to purchase the paper,
thereby allowing us to pass paper costs directly to customers. We maintain an
inventory of standardized papers, enabling us to avoid backlogs and production
delays.
Environmental, Health and Safety Matters
We are subject to extensive, evolving and increasingly stringent
environmental, health and safety laws and regulations governing our operations
and products in many of the locations in which we operate. The laws and
regulations applicable to our operations address, among other things, the
following:
o air emissions;
o wastewater discharges to surface and subsurface waters;
o other releases into the environment;
o handling, use and disposal of hazardous materials;
o generation, handling, storage, transportation, treatment and
disposal of wastes; and
o maintenance of safe conditions in the workplace.
Obtaining, producing and distributing many of our products involve the
use, storage, transportation and disposal of toxic and hazardous materials.
Although we devote considerable effort to limiting emissions, there are
significant environmental, health and safety risks inherent in our operations
and products, and we may be subject to liability in the event of harm to human
health or the environment. Both the raw materials and resins produced by us,
including methanol, phenol, urea, melamine and formaldehyde, pose risks of acute
and chronic health effects and sensitization (development of allergies), as well
as fire hazard. The high toxicity means that ground and surface water must be
protected from contamination.
In 2004, we continued our global safety program to reduce the risks
associated with the production of phenolic resins. Our particular focus was on
process safety including formulations and process control. Safety in general has
been a focus area for us in 2003 and 2004. Both recordable injury rate and lost
time injury rate have improved continually since 2001 from 16 to 10 in 2004 and
9 to 5,5 in 2004 (per million working hours), respectively.
In June 2004, the International Agency for Research on Cancer ("IARC"),
the advisory body of WHO, reclassified formaldehyde, our main raw material in
resin production, from Class 2A "probable carcinogen to human" to Class 1
"carcinogen to human". The IARC classification is advisory in nature, and any
stricter regulatory impact needs further risk evaluation. We have been working
with the formaldehyde reclassification issue together with other industry
parties in the Formaldehyde Council Inc. ("FCI"), as well as in the European
Chemical Industry Council ("CEFIC"). These industry organizations are committed
to incorporating new findings based on the IARC review and on potential further
risk assessments, in product stewardship programs to ensure the safety of
workers and consumers, and in programs to protect the environment.
We also are subject to environmental laws and regulations that may
require us to investigate and remediate the effects of the disposal or release
of chemical substances at various sites. Under some of these laws and
regulations, a current or previous owner or operator of property may be held
liable for the costs of removal or remediation of hazardous substances on,
under, or in our property, without regard to whether the owner or operator knew
of or caused the presence of the contaminants, and regardless of whether the
practices that resulted in the contamination were legal at the time they
occurred.
As is typical in the chemical businesses, at some of our production
sites with an extended history of industrial use, it is likely that significant
soil and groundwater contamination has occurred in the past. Contamination
requiring, or anticipated to require, investigation and remediation has been
identified at some sites, and contamination might occur or be discovered in the
future at other sites. For example, when Dynea Chemicals purchased the Ste.
Therese, Canada resins plant from Reichhold Ltd. in 1992, the site had already
been contaminated and a project to clean up the property on the site had already
begun. All the clean-up work was completed to the satisfaction of the Canadian
environmental ministry in 2002.
It is difficult to estimate the future costs of environmental
investigation and remediation because of many uncertainties, including the
possibility that additional contamination could occur or be identified in the
future and potential future changes to laws and regulations. Subject to the
foregoing, but taking into consideration our experience to date regarding
environmental matters of a similar nature and currently known facts, we believe
that the costs related to environmental remediation will not have a material
adverse effect on our business and financial results. Because of the nature of
our operations, however, there can be no assurance that significant liabilities
and costs relating to environmental, safety and health matters will not be
incurred in the future.
The agreement relating to the acquisition of Neste in 1999 provides a
cost-sharing mechanism for remedial costs relating to environmental
contamination. This cost-sharing mechanism will be in place for a period of 8.5
years from the completion of that agreement. An oxidizer system at the
formaldehyde plant in North Bay, Canada was installed in 2003 to eliminate, in
practice, all the VOC emissions. In addition, the agreement relating to the
acquisition of Neste contains an indemnity provision in connection with the
litigation relating to the Ste. Therese site described below in "Item 8.
Financial Information--Legal Proceedings." The agreement relating to the
acquisition of Neste provides that we shall be indemnified and held harmless by
the seller with respect to losses arising from ongoing litigation among Neste
Canada Inc., Dynea Canada Ltd., Reichhold Chemicals Inc. and Reichhold Limited
regarding environmental remedial work and environmental remediation work
projects at the Ste. Therese facility in Canada.
Insurance
We hold property damage insurance and business interruption insurance
for periods of up to two years and up to (euro)100 million per site (property
damage and business interruption combined). We also carry global third party
liability coverage for products and activities of up to (euro)275 million as
well as liability insurance of up to (euro)50 million on behalf of our directors
and officers. Additionally, we carry cargo insurance covering the value of
shipped goods of up to (euro)2.5 million.
Property
We operate 51 manufacturing facilities in 25 countries. The following
table sets forth information with respect to these facilities.
Approximate
Leased/ area Principal
Property/Location Owned (square meters) products manufactured % Ownership
- ----------------- ----- --------------- --------------------- -----------
Dynea
Bunbury, Australia ..................... Leased 31,500 Resins, formaldehyde 50
Krems, Austria ......................... Owned 274,000 Resins, formaldehyde 100
Gent, Belgium .......................... Leased 27,500 Resins, formaldehyde 100
Araucaria, Brazil ...................... Owned 91,400 Resins, formaldehyde 50
Curitiba, Brazil ....................... Leased 8,700 Paper overlays 50
Sao Paolo, Brazil ...................... Owned and leased 6,500 Resins 99
Kamloops, Canada ....................... Owned 28,000 Resins 100
North Bay, Canada ...................... Owned 105,200 Resins, formaldehyde 100
Ste. Therese, Canada ................... Owned 90,600 Resins, formaldehyde 100
Thunder Bay, Canada .................... Owned 93,000 Resins, formaldehyde 100
Shanghai, China ........................ Leased 4,000 Resins (non-formaldehyde) 100
Beijing, China ......................... Leased 6,500 Resins 55
Guangdong, China ....................... Owned 45,000 Resins, paper overlays 100
Arhus, Denmark ......................... Leased 16,200 Resins, formaldehyde 50
Kvistgard, Denmark ..................... Leased 1,300 Resins 50
Vejle, Denmark ......................... Leased 1,900 Resins 50
Hamina, Finland ........................ Leased 102,600 Resins, formaldehyde 100
Joroinen, Finland ...................... Leased 18,700 Hardeners 100
Kitee, Finland ......................... Owned 13,400 Paper overlays 100
Brebieres, France ...................... Owned 28,200 Resins 100
Dielheim, Germany ...................... Leased 2,000 Resins 100
Erkner, Germany ........................ Owned 120,000 Resins 100
Kazincbarcika, Hungary ................. Owned and leased 40,000 Resins 100
Jakarta, Indonesia ..................... Owned and leased 18,500 Resins (non-formaldehyde) 51
Surabaya, Indonesia .................... Owned 8,100 Resins (non-formaldehyde) 51
Langsa, Indonesia ...................... Leased 20,000 Resins 70
Medan, Indonesia ....................... Leased 20,000 Paper overlays 70
Cork, Ireland .......................... Leased 26,300 Resins, formaldehyde 100
Seremban, Malaysia ..................... Owned 7,300 Resins, formaldehyde 68.7
Durango, Mexico ........................ Owned 36,000 Resins, formaldehyde 100
Delfzijl, The Netherlands .............. Leased 85,000 Resins, formaldehyde 100
Nelson, New Zealand .................... Owned 21,700 Resins, formaldehyde 100
New Plymouth, New Zealand .............. Owned 90,100 Resins, formaldehyde 100
Lillestr0m, Norway ..................... Owned 263,000 Resins, formaldehyde, hardener 100
Trzemeszno, Poland ..................... Owned 34,400 Resins 100
Gubakha, Russia ........................ Owned 21,600 Resins 50
Singapore .............................. Leased 27,500 Resins, formaldehyde 100
Krabi, Thailand ........................ Owned 15,200 Resins 55
Samutprakarn, Thailand ................. Owned 3,000 Resins (non-formaldehyde) 60
Aycliffe, United Kingdom ............... Owned 9,500 Resins 100
Mold, United Kingdom ................... Leased 4,500 Resins 100
Andalusia, AL, USA ..................... Owned 86,700 Resins, formaldehyde 100
Moncure, NC, USA ....................... Owned 222,500 Resins, formaldehyde 100
Springfield, OR, USA ................... Owned 69,000 Resins, formaldehyde 100
Toledo, OH, USA ........................ Owned 54,600 Resins, formaldehyde 100
Winnfield, LA, USA ..................... Owned 145,700 Resins, formaldehyde 100
Hayward, WI, USA ....................... Owned 80,900 Paper overlays 100
Portland, OR, USA ...................... Owned 55,600 Paper overlays 100
Tacoma, WA, USA, ....................... Leased 21,800 Paper overlays 100
Welcome, NC, USA ....................... Owned 46,000 Paper overlays 100
Ho Chi Minh City, Vietnam .............. Leased 30,000 Resins 100
For a discussion of the productive capacity of our facilities, see
"Manufacturing and Production".
Significant Subsidiaries
Our principal subsidiary undertakings as at December 31, 2004 are as
follows:
Country of % Ownership
Subsidiary Incorporation December 31, 2004
Dynea ASA Norway 100
Dynea Austria GmbH Austria 100
Dynea B.V. Netherlands 100
Dynea Chemicals Oy Finland 100
Dynea Erkner GmbH Germany 100
Dynea Ireland Limited Ireland 100
Dynea NV Belgium 100
Dynea Finland Oy Finland 100
Dynea UK Limited UK 100
Dynea Resins France SAS France 100
Dynea Canada Ltd. Canada 100
Dynea Overlays, Inc- USA 100
Dynea U.S.A. Inc. USA 100
Dynea NZ Limited New Zealand 100
Dynea Singapore Pte Ltd Singapore 100
PT Dynea Indria Indonesia 51
Sale of Oil Field Chemicals
In January 2003, we sold our oil field chemicals business to M-I LLC,
for (euro)76 million in cash. In 2002, sales of oil field production chemicals
generated revenues of approximately (euro)71 million. In the year ended December
31, 2004 there was a purchase price correction of (euro)1.9 million related to
the sale of the oil field chemicals business.
Item 5. Operating and Financial Review and Prospects.
This discussion and analysis should be read together with the
consolidated financial statements of Dynea International, and the notes to those
financial statements, which are included in this annual report. The consolidated
financial statements of Dynea International have been prepared in accordance
with IFRS. IFRS differs in some significant respects from U.S. GAAP. The most
significant differences between IFRS and U.S. GAAP are described in the notes to
the Dynea International financial statements.
Our Operations
We are a global specialty chemicals company. We develop, manufacture
and sell a diverse range of resins and paper overlays. We have 51 production
sites located in 25 countries, with operations in Europe, North America and
South America and the Asia-Pacific region. In 2004, we had revenues of
(euro)1,065.0 million and a loss for the period of (euro)18.8 million.
The principal segments on which we focus our business are panel board
resins and industrial and surfacing, which consists of resins, adhesives and
paper overlays products. We estimate that sales of panel board resins products
represented approximately 51% of our total revenues in 2004 and sales of
industrial and surfacing products represented approximately 47% of our total
revenues in 2004. The remaining revenues in 2004 (approximately 2%) were related
to small, non-core operations.
Current Operations
Our operations have been divided into Panel Board Resins and
Industrial and Surfacing operating segments, to reflect the ongoing operations
of our business. In addition, our other non-core operations are reported
separately.
Panel Board Resins business segment consists of various mainly
formaldehyde-based resins that are used in manufacture of particle board,
plywood, medium density fiberboard and oriented strand board. Dynea
International manufactures panel board resins in 31 plants in 23 countries. Most
of the panel board resins plants also manufacture products for the industrial
and surfacing segment.
Industrial and Surfacing business segment includes industrial resins,
wood and specialty adhesives and paper overlays products. Industrial resins are
used for producing paper overlays, insulation materials and specialty products
for use in abrasives, foam, friction products, filters, resins for foundry and
molding compounds. Wood adhesives are used in manufacture of engineered and
interior wood products whereas specialty adhesives are used for paper and
packaging applications. The paper overlays products we produce are used in
manufacturing products such as furniture, kitchen cabinets, store fixtures and
laminated flooring.
Other Operations business segment includes several small non-core
operations such as a polyvinyl chloride manufacturing plant in Finland, and
certain business support, corporate functions and treasury operations.
Discontinued Operations
In order to form a leading global panel board resins and industrial and
surfacing products company, we have sold a number of our non-core operations.
The latest of these divestments was in January, 2003 when we sold our Oil Field
Chemicals business. In 2004, we have concentrated on streamlining our remaining
resins and formaldehyde operations with particular focus on restructuring our
resin production processes in Norway.
To optimize use of our Norwegian operations, reduce costs, utilize
capacity at Lillestr0m and get full capitalization of the excess energy produced
by formaldehyde production, in 2004 we mothballed our resin plant in Engene,
Norway, and transferred the resin production to our site in Lillestr0m, Norway.
50,000 tons of resin and formaldehyde has been successfully transferred to
Lillestr0m. Engene has been mothballed according to Norwegian and Dynea
regulations. Engene is now operated as a raw material terminal for the Norwegian
operations.
Factors Affecting our Core Operations
We have operation facilities in Europe, North America, South America
and the Asia-Pacific region. Our resins and paper overlays production businesses
depend on the building, construction and furniture manufacturing industries,
which are global industries subject to regional and national cycles. Our overall
market is primarily driven by production levels in the construction and
furniture industries, which are in turn affected by general economic conditions.
General economic conditions in 2004 have clearly improved as economic growth
increased in most of our markets. As a result, additional construction activity
increased the demand for many of our products. Other factors, such as increased
prices for raw materials and increased competition in certain markets, had on
the contrary a negative impact on our results of operations.
Revenues
In 2004, we derived revenues from the sale of panel board resins,
industrial resins, wood and specialty adhesives, paper overlays and other
products to our customers. We support our sales by providing many of our
customers with on-site technical services and marketing support with respect to
our product lines. As a result of seasonal, market, or other fluctuations, our
results of operations for interim periods may not necessarily be indicative of
results for the full year. Our revenues are driven primarily by:
o the prices at which we sell our products; and
o the sales volumes of our products.
Pricing. The prices of our products reflect significantly the prices of
the raw materials we use to manufacture our products. For most of our products,
therefore, our per-unit sales margin --the amount of per-unit revenues remaining
after the deduction of the per-unit variable cost of production-- tends to
remain relatively stable other than at times of significant raw material price
volatility. In 2004, the significant volatility of phenol prices has had a major
effect on the per-unit sales margins of our phenolic resins. The prices we
charge under our contracts:
o are often subject to adjustment on a periodic basis (usually
monthly or quarterly) based on factors such as changes in raw
material costs, the availability of resins from competitors
and general market conditions; and
o may be discounted with volume rebates in the case of large
volume accounts
In most cases, the periodic nature of these price adjustments results
in some delay in our ability to pass price changes in raw materials through to
our customers. Furthermore, in some cases, we may not be able to pass through
the full impact of a price increase due to competitive pressures in the markets
in which we operate. However, in the case of raw material price reduction, the
delay in price adjustments results in positive margins.
The prices of certain higher margin products, such as some of our wood
and specialty adhesives, use different, market pricing mechanisms. See "Item 3.
Key Information--Risk Factors--Risks Relating to our Business--Raw material
prices may fluctuate significantly."
Sales Volumes. Because customer demand in the building products and
furniture industries (which together account for approximately 90% of our panel
board resins and industrial and surfacing product sales) is affected by general
economic conditions, our sales volumes are primarily driven by the level of
general economic activity in the local markets in which we operate. In each of
these local markets, therefore, levels of new home or office construction, home
or office remodeling and furniture production have a corresponding effect on the
sales volumes of our resins, wood and specialty adhesives and paper overlays
products.
Costs and Expenses
Our principal costs and expenses are:
o raw materials;
o employees;
o maintenance;
o transportation; and
o other expenses.
Raw Materials. Raw materials constituted approximately 70% of our
resins manufacturing costs in 2004. The principal raw materials we use to
manufacture resins are methanol, urea, phenol and melamine. These four main raw
materials used for resin production account for approximately 80% of our total
raw material expenses. In 2004, approximately 25% of our raw material expenses
were related to purchases of methanol, approximately 20% to purchases of urea,
approximately 25% to purchases of phenol, and approximately 10% to the purchases
of melamine.
Raw materials constituted approximately 80% of our paper overlays
manufacturing costs in 2004. Paper, resins and other chemicals and additives
constitute the main raw materials used in the paper overlays business. In 2004,
50% of our total raw material expense for paper overlays was related to the
purchase of paper and 20% related to the purchase of resins. In 2004, we
produced approximately 50% of the resins we used to manufacture paper overlays,
and purchased the remaining resins from other manufacturers.
Employees. Personnel costs in 2004 represented approximately 12% of our
overall operating expenses, excluding depreciation and amortization,
restructuring charges, and impairment charges.
Maintenance. We periodically make significant expenditures on routine
maintenance relating to our operations. These expenditures typically relate to
routine repair operations, cleaning our manufacturing equipment, replacing
defective equipment and general maintenance to maintain the existing standard of
our current facilities.
Transportation. The expense of delivering our products is another
factor that affects per-unit product expenses. In particular, our liquid resins
are expensive to transport. Depending upon customer location and competitive
factors, either we or our customer may directly bear freight costs. When our
customer bears the freight cost, there may be a corresponding decrease in our
sales price. Accordingly, except for customers located near our production
facilities, freight costs are a significant factor in our expense levels and/or
profitability.
Other Expenses. Other expenses that we incur include energy expenses,
service costs, insurance, rents, research and development costs, advertising and
marketing costs and various other charges.
Depreciation and Amortization
We incur depreciation charges with respect to our investment in
tangible assets. Our tangible assets primarily consist of our property, plant
and manufacturing equipment.
Restructuring
In conjunction with the decision to close the Europoort plant by
January 1, 2002, Dynea International recorded a (euro)7.2 million provision
relating to contractual lease payments for the closed plant site, employee
termination benefits for involuntarily terminated employees, environmental site
remediation, and demolition costs. In 2001, (euro)1.5 million was paid and
(euro)0.9 million of contractual lease payments reversed as Dynea International
exited the Europoort site earlier than estimated. At December 31, 2001, the
remaining provision included contractual lease payments for the closed plant
site and employee termination benefits for these terminated employees of
(euro)4.8 million, of which (euro)0.4 million was paid during 2002 and (euro)0.4
million was paid and (euro)1.1 million released during 2003. At December 31,
2003 the remaining provision related to the restructuring charges amounted to
(euro)2.9 million. In 2004, (euro)0.1 million of this was paid, and the same
amount registered as new provisions. At December 31, 2004 the remaining
provision related to the Europoort plant was still (euro)2.9 million. As
(euro)2.7 million of this amount relates to the Europoort environmental site
remediation, it is reclassified to other provisions as an environmental
provision.
Dynea International has continuously streamlined its operations. At
December 31, 2001 the provision related to these other restructuring activities
totaled (euro)5.8 million of which (euro)2.1 was paid and (euro)0.7 million
released during 2002, (euro)0.5 million was paid and (euro)0.6 million released
during 2003, and (euro) 1.2 million was paid during 2004. At December 31, 2004
the remaining provision related to these other restructuring charges amounted to
(euro)0.7 million.
In 2003, Dynea International decided to restructure and optimize Dynea
resins operations in Norway. The decision led to personnel redundancies and the
provision related to the employee termination charges in 2003 amounted to
(euro)1.2 million. This was paid in 2004 as the production at Dynea's Engene
plant was relocated to Dynea's Lillestr0m plant.
In March 2004, Dynea International initiated a reorganization of its
North American resins business. The reorganization included changes in
management and a reduction of personnel. As a result, approximately 70 positions
were made redundant. The cost for the reorganization was (euro)3.6 million, of
which (euro)2.2 million was paid during 2004. At December 31, 2004 the remaining
provision related to North American restructuring amounted to (euro)1.4 million.
Currency
Effect of Currency Movements on Revenues, Expenses and Results of
Operations. As we conduct business in North America, South America, Europe and
Asia-Pacific, our results of operations are subject to currency translation and
transaction risks. Currency translation risk is the effect of transactions
conducted in other currencies as reported in our financial statements in euro,
and currency transaction risk is the effect of an operation entering into either
a purchase or sales transaction using a currency other than its functional
currency. Approximately 80% to 90% of our revenues and costs are denominated in
euros, U.S. dollars, Canadian dollars, Norwegian crown and currencies which are
either formally or informally linked to the euro and the U.S. dollar.
Currency Translation Risk. With respect to currency translation risk,
we generally keep our operating subsidiaries' accounts in the functional
currency of the jurisdiction in which the given subsidiary primarily operates.
We then translate profits and losses and cash flows from operations denominated
in currencies other than euro into euro at average rates of exchange during the
relevant financial period and assets and liabilities of our operations
denominated in currencies other than euro into euro at the exchange rate on the
balance sheet date for inclusion in our consolidated financial statements. The
resulting gains and losses, as well as currency differences arising from the
translation at period end rates of the net investment in overseas operations and
exchange gains and losses arising on foreign currency borrowings which finance a
proportion of foreign currency investments, are treated as a movement in equity.
The effect of currency translation on our financial statements arising
from the depreciation of the euro against other currencies shows a positive
impact on our revenues and net income as reported in euro in our financial
statements, while the appreciation of the euro against other currencies shows a
negative impact. For example, the table below illustrates the effect on Dynea
International's operations of appreciation and depreciation of the U.S. dollar,
the Canadian dollar and the Norwegian crown as reported on a euro basis from
2002 to 2004. This table reflects the exchange rates used by Dynea International
in preparing its consolidated accounts.
U.S. dollars
--------------------------------------------------------------------
Euro Appreciation Revenue Effect of Cost Effect of
(Depreciation) U.S. Operations U.S. Operations
2003 to 2004 10.6% (euro)(31.4) million (euro)(28.3) million
2002 to 2003 19.6% (euro)(53.7) million (euro)(52.7) million
Canadian dollars
--------------------------------------------------------------------
Euro Appreciation Revenue Effect of Cost Effect of
(Depreciation) Canada Operations Canada Operations
2003 to 2004 3.0% (euro)(3.0) million (euro)(2.8) million
2002 to 2003 7.0% (euro)(6.3) million (euro)(6.0) million
Norwegian crown
---------------------------------------------------------------------
Euro Appreciation Revenue Effect of Cost Effect of
(Depreciation) Norway Operations Norway Operations
2003 to 2004 8.4% (euro)(5.8) million (euro)(5.4) million
2002 to 2003 6.4% (euro)(5.3) million (euro)(4.7) million
Currency Transaction Risk. In addition to currency translation risk, we
incur currency transaction risk whenever one of our operating subsidiaries
enters into either a purchase or sales transaction using a currency other than
its functional currency. We are generally able to hedge against currency
transaction risk by matching revenues and costs in the same currency. In Europe,
we price a large portion of our sales and purchases in euros and, in the United
States, we price most sales and purchases in U.S. dollars. To the extent that
there is a deficit between local currency funds generated by our manufacturing
operations and our local currency payment requirements, we generally hedge those
deficits using spot or forward foreign exchange contracts approved by our
corporate treasury function. Counterparties in those transactions are internally
approved commercial banks. To a degree, we are also able to hedge against this
risk by periodically adjusting our prices to account for exchange rate
fluctuations.
Seasonality
Our sales are somewhat seasonal, and, in particular, sales of resins
and paper overlays are linked to the performance of the construction and
furniture industries. The periods of highest demand for these products and,
therefore, highest volumes are in the spring and fall. Sales volumes of these
products are somewhat lower in December and during the summer holidays, due to
the reduced number of working days.
Dynea International--Results of Operations
Results
The following table sets forth the consolidated operating results for
Dynea International for the years ended December 31, 2002, December 31, 2003 and
December 31, 2004.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2003 2004
---- ---- ----
Sales
Panel Board Resins (euro) 468.0 (euro) 489.3 (euro) 540.0
Industrial & Surfacing 389.5 461.5 497.6
Other Operations 27.1 28.2 27.4
Discontinued Operations 71.2 - -
-------------------------------------------------------------------------------------------------
Total (euro) 955.8 (euro) 979.0 (euro) 1,065.0
Primary Operating Expenses (1)
Panel Board Resins (euro) 420.4 (euro) 458.4 (euro) 505.7
Industrial & Surfacing 352.7 430.8 452.5
Other Operations 35.1 39.0 39.2
Discontinued Operations 65.1 - -
-------------------------------------------------------------------------------------------------
Total (euro) 873.3 (euro) 928.2 (euro) 997.4
EBITDA(2)
Panel Board Resins (euro) 47.6 (euro) 30.9 (euro) 34.3
Industrial & Surfacing 36.8 30.7 45.1
Other Operations (8.0) (10.8) (11.8)
Discontinued Operations 6.1 - -
-------------------------------------------------------------------------------------------------
Total (euro) 82.5 50.8 67.6
Depreciation and Amortization (3)
Panel Board Resins (euro) 20.3 (euro) 20.1 (euro) 17.5
Industrial & Surfacing 26.6 27.2 18.7
Other Operations 3.1 3.4 11.0
Discontinued Operations 3.8 - -
-------------------------------------------------------------------------------------------------
Total (euro) 53.8 (euro) 50.7 (euro) 47.2
Profit/(Loss) on sale of operations
Discontinued Operations - 1.4 (1.9)
Operating Profit
Panel Board Resins (euro) 27.3 (euro) 10.8 (euro) 16.8
Industrial & Surfacing 10.2 3.5 26.5
Other Operations (11.1) (14.2) (22.9)
Discontinued Operations 2.3 1.4 (1.9)
-------------------------------------------------------------------------------------------------
(euro) 28.7 (euro) 1.5 (euro) 18.5
Finance Costs 50.0 59.2 53.4
Shares of Results of Associates and Joint
Ventures (4) 3.9 13.1 15.7
Income Tax (Benefit)/Expense (4) (5.0) 18.8 (0.4)
-------------------------------------------------------------------------------------------------------
Loss for the period (euro) (12.4) (euro) (63.4) (euro) (18.8)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Loss attributable to equity holders (euro) (14.9) (euro) (64.8) (euro) (20.5)
-------------------------------------------------------------------------------------------------------
Minority Interest Expense 2.5 1.4 1.7
-------------------------------------------------------------------------------------------------------
Loss for the period (euro) (12.4) (euro) (63.4) (euro) (18.8)
-------------------------------------------------------------------------------------------------------
(1) Primary operating expenses represent changes in inventories of finished
goods and work in progress, raw materials and consumables used services
and rents, staff costs, and other operating expense, offset by other
operating income and are equivalent to the sum of variable and fixed
costs, less restructuring and impairment charges, in prior periods.
(2) EBITDA, as defined by the company, represents earnings before interest,
taxes, and depreciation and amortization charges. Because EBITDA is not
calculated identically by all companies, the presentation herein may
not be comparable to other similarly titled measures of other
companies. We have included the EBITDA, a non-GAAP measure, because we
understand that EBITDA is used by certain investors, not as a measure
of our operating results, but as a measure of our historical ability to
meet debt service and capital expenditure requirements. EBITDA should
not be considered as an alternative measure of operating results, cash
flow from operations, or debt determined under generally accepted
accounting principles (GAAP).
(3) Due to the adoption of IFRS 3 goodwill amortization was ceased in 2004.
(4) Comparison figures have been adjusted to the effect of early adoption
of IAS 16.
The following table sets forth the reconciliation between EBITDA and cash flow
from operations for Dynea International for the years ended December 31, 2002,
December 31, 2003 and December 31, 2004.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2003 2004
---- ---- ----
EBITDA (euro) 82.5 (euro) 50.8 (euro) 67.6
Profit(loss) (0.7) 3.9 (1.9)
Working capital changes 4.2 8.4 (9.4)
Cash flow from operations (euro) 86.0 (euro) 63.1 (euro) 56.3
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Sales. Sales increased 9% to (euro)1,065.0 million in 2004 from
(euro)979.0 million in 2003. Excluding the impact of foreign exchange rate
fluctuations Dynea International's sales increased 13%. Sales grew as a result
of higher average prices which resulted from increased raw material prices, and
higher volumes.
Panel Board Resins. Sales of panel board resins products increased 10%
to (euro)540.0 million in 2004 from (euro)489.3 million in 2003. During the same
period, our sales volumes increased by 9% due to strong demand for our products.
We sold 1,985 thousand tons of panel board resins and formaldehyde in 2004
compared to 1,825 thousand tons in 2003. The overall increase in sales for panel
board resins products was due to both higher volumes, and an increase in average
selling prices in 2004 compared to 2003.
Sales and sales volumes of panel board resins products varied across
markets. In Europe, volumes increased compared to 2003 due to increasing demand.
Sales value increased more than sales volume in 2004 as compared to 2003 due to
higher selling prices toward the end of 2004. In North America, sales volumes
and value of panel board resins products had a healthy growth rate in 2004
compared to 2003. This was due to the improved business environment and strong
demand. In Asia, the volumes and value of panel board resins sales increased the
most of all market areas.
Industrial and Surfacing. Sales of industrial and surfacing products
increased by 8% to (euro)497.6 million in 2004 from (euro)461.5 million in 2003.
The increase was due to higher demand for our products and higher selling prices
caused by increased raw material costs.
Within Industrial and Surfacing, the sales volumes of industrial resins
increased 13% to 413 thousand tons in 2004 from 364 thousand tons in 2003. Due
to changes in our product mix, the sales value increased at a more modest rate.
Sales volumes of wood and specialty adhesives increased 11% from 131
thousand tons in 2003 to 146 thousand tons in 2004. However, the corresponding
increase in sales value of wood and specialty adhesives was more modest due to
the impact of weaker Norwegian crown.
Sales volume of paper overlays grew 11% during 2004 compared to 2003.
In 2004, we sold 322 square meters of paper overlays compared to 291 square
meters in 2003. However, due to the weak US dollar during 2004, sales values
grew by only 5%.
Other Operations. Sales from other operations decreased 3%, to
(euro)27.4 million in 2004 from (euro)28.2 million in 2003. These sales were
predominantly from the operations of Dynea International's PVC manufacturing
plant.
Operating profit. Operating profit increased to (euro)18.5 million
in 2004 from (euro)1.5 million in 2003. This increase in operating profit was a
consequence of increased sales value and higher demand in 2004. Another factor
driving the increase in operating profit included the termination of goodwill
amortization pursuant to IFRS 3 (as discussed below) as of January 1, 2004,
which increased operating profit by (euro)11.1 million in 2004. In addition, as
a result of relocating the production at the Engene plant to Lillestr0m plant in
Norway during the 2004, Dynea International recorded a gain of (euro)1.8 million
on the sale of assets within industrial and surfacing business. In 2004,
additional expenses related to the sale of the oil field chemicals business
amounted to (euro)1.9 million as compared to a one-off gain of (euro)3.8 million
from the sale in 2003.
As of January 1, 2004, Dynea International has applied the revised
standard for business combinations, International Financial Reporting Standard 3
(IFRS 3), to its financial reporting. In accordance with the new standard,
goodwill and other intangible assets with indefinite useful lives should not be
amortized, but tested for impairment at least annually. Dynea International's
annual goodwill amortization amounted to (euro)11.1 million in 2003. In
addition, in accordance with IFRS 3, negative goodwill should be derecognized
with a corresponding adjustment to the opening balance of retained earnings.
Dynea International derecognized negative goodwill of (euro)14.1 million as at
January 1, 2004. Consequently, goodwill amounted to (euro)188.6 million as at
December 31, 2004 compared to (euro)174.5 million as at December 31, 2003.
In March 2004, Dynea International initiated a reorganization of its
North American resins businesses. The reorganization included changes in
management and a reduction of personnel. As a result, approximately 70 positions
were made redundant. The cost for the reorganization is (euro)3.6 million.
Annual savings are expected to exceed (euro)4.0 million.
Panel Board Resins. Operating profit associated with panel board resins
products increased by 56%, to (euro)16.8 million in 2004 from (euro)10.8 million
in 2003. The increase in operating profit was largely due to increased sales
value. The North American restructuring charges mentioned above had a negative
impact of (euro)3.6 million on Panel Board Resins' operating profit.
During this period our primary operating expenses associated with panel
board resins products increased 11%, to (euro)502.1 million in 2004 from
(euro)453.9 million in 2003. Within panel board resins operations significant
changes occurred in our raw material prices. At the end of 2004, the prices of
our key raw materials, phenol and urea, were approximately 67% and 33% higher
than in the end of 2003. As a result, our average raw material prices and,
consequently, our raw material related expenses, were higher in 2004 than in
2003.
In Europe, operating profits increased during the year largely due to
an increase in sales. In North America, our operating profit from panel board
resins decreased in 2004 compared to 2003 due to above mentioned restructuring
charges. In Asia Pacific, our operating profit was higher in 2004 than in 2003
primarily due to the increase in demand.
Depreciation and amortization charges associated with panel board
resins products decreased to (euro)17.5 million in 2004 from (euro)20.1 million
in 2003 mainly due to the above mentioned ceasing of the goodwill amortization.
Depreciation and amortization charges included goodwill amortization of
(euro)2.7 million in year 2003.
Industrial and Surfacing. Operating profit from industrial and
surfacing products increased to (euro)26.5 million in 2004 from (euro)3.5
million in 2003. The increase in operating profit was mainly attributable to
increased sales volume and the fact that the 2004 operating profit contains a
gain of (euro)1.8 million on the sale of assets. The ceasing of goodwill
amortization also improved the operating profit for industrial and surfacing.
Operating profit from industrial resins increased in 2004 compared to
2003 mainly due to increased sales volumes in most regions. Wood and specialty
adhesives' operating profit showed improvement in 2004 compared to 2003
predominantly due to strong sales volumes and higher product margins. Also the
above mentioned one-off gain on the sale of assets improved wood and specialty
adhesives' operating profit. Increased demand in North America led to an
increase in the operating profit of Paper Overlays in 2004 compared to 2003.
Depreciation and amortization charges associated with industrial and
surfacing products decreased to (euro)18.7 million in 2004 from (euro)27.2
million in 2003, mainly due to ceasing of goodwill amortization charges.
Depreciation and amortization charges associated with industrial and surfacing
products included goodwill amortization of (euro)8.4 in 2003.
Other Operations. Operating loss from other operations increased by
61%, to (euro)22.9 million in 2004 from (euro)14.2 million in 2003. This
increase in operating loss is mainly attributable to an impairment write-down of
manufacturing plant and assets in Porvoo, Finland.
Depreciation and amortization charges related to our other operations
increased to (euro)11.0 million in 2004 compared to (euro)3.4 million in 2003.
The change is due to the above mentioned write-down of assets.
Discontinued Operations. In 2004, there was an operating loss of
(euro)1.9 million reported from discontinued operations compared to operating
profit of (euro)1.4 million in 2004, which were related to the sale of the oil
field chemicals business in January 2003.
Finance Costs. Dynea International's finance costs decreased 10%, to
(euro)53.4 million in 2004 from (euro)59.2 million in 2003. The net interest
expense amounted to (euro)45.1 million in 2004 compared to (euro)48.1 million in
2003. The net interest expense reduction of (euro)3.0 million in 2004 resulted
mainly from decreasing interest rates, which reduced the cost of our senior bank
financing. Net foreign exchange gains and losses showed a loss of (euro)0.3
million in 2004 compared to a (euro)2.4 million loss in 2003. Other financial
costs decreased (euro)0.6 million mainly due lower capitalized fees, which were
higher in 2003 due to prepayments resulting from the sale oil field chemicals
business.
Share of Results of Associates and Joint Ventures. Our share of results
from associates and joint ventures increased to (euro)15.7 million in 2004 from
(euro)13.1 million in 2003, primarily due to the positive results of Methanor
v.o.f, a methanol production company in which we have a 40% investment. The
early adoption of IAS 16 (revised) resulted in a change in the accounting
policies for capitalizing major overhaul costs, and improved the operating
profit. 2003 figures have been adjusted (euro)1.5 million to the effect of early
adoption of IAS 16.
Income Tax Expense. In 2004, an income tax benefit of (euro)0.4 million
for 2004 was recorded compared to an income tax expense of (euro)18.8 million in
2003 due to the tax effect of the disposal of oil field chemicals.
Minority Interest. Minority interest expense increased to (euro)1.7
million in 2004 compared to (euro)1.4 million in 2003.
Loss for the period. Loss for the period decreased significantly to a
loss of (euro)18.8 million in 2004 from a loss of (euro)63.4 million in 2003,
primarily as a result of higher operating profit generated by our panel board
resins and industrial and surfacing operations, and the above mentioned ceasing
of goodwill amortization.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Sales. Sales increased 2% to (euro)979.0 million in 2003 from
(euro)955.8 million in 2002. Dynea International's sales increased 10% excluding
the impact of foreign exchange rate fluctuations and changes in Group structure.
Sales increased due to higher average prices as a result of increased raw
material prices and due to higher volumes. The Chemitec companies, which Dynea
International acquired from its parent, Dynea Oy, in January 2003, contributed
(euro)91.1 million to sales in 2003. There were no sales reported from
discontinued operations in 2003 as opposed to (euro)71.2 million in 2002 due to
sale of the oil field chemicals business in January 2003.
Panel Board Resins. Sales from panel board resins products increased 5%
to (euro)489.3 million in 2003 from (euro)468.0 million in 2002. The overall
increase in sales for panel board resins products was mainly due to the average
prices for our products being higher in 2003 than in 2002. Prices for our
products were higher as a result of the average prices of our raw materials
being higher in 2003 than in 2002. During the same period, our sales volumes
decreased by 2%. We sold 1,825 thousand tons of resins and formaldehyde in 2003
compared to 1,860 in 2002.
Sales and sales volumes of panel board resins products varied across
markets. In Europe, sales volumes of panel board resins increased overall,
although performance varied depending on the country. Strong demand and
production difficulties encountered by our competitor resulted in an increase in
the volumes of panel board resins sold in Europe. Sales values also grew as a
result of an increase in prices for our products. In North America sales volumes
of panel board resins products increased in 2003 compared to 2002. As a result
of higher prices due to higher raw material costs the value of sales in 2003
rose compared with 2002. In Asia, the slowdown in demand for panel board resins
resulted in a decrease in sales volume. Sales values of panel board resins in
Asia also decreased from 2003 to 2002.
Industrial and Surfacing. Sales from industrial and surfacing increased
by 18% to (euro)461.5 million in 2003 from (euro)389.5 million in 2002. In 2003,
the Chemitec companies contributed (euro)86 million to the sales. During 2003,
our sales volumes of resins and formaldehyde increased by 27%. We sold 495
thousand tons of resins and formaldehyde in 2003 compared to 390 thousand tons
in 2002. The Chemitec companies contributed 90 thousand tons of resins and
formaldehyde to the sales volumes in 2003.
Sales volumes of industrial resins increased in 2003 compared to 2002
due to the Chemise companies, which Dynea International acquired from Dynea Oy
in January 2003. In addition, as in other product areas, sales values rose due
to higher prices.
With regard to wood adhesives, sales volumes increased in 2003 compared
to 2002 due to our marketing and sales efforts and our improved market position
in Asia Pacific. However, sales values of wood and specialty adhesives decreased
during 2003 compared to 2002 due to the impact of the weak Norwegian crown.
With regard to sales of paper overlays, sales values decreased during
2003 compared to 2002 primarily due to an unfavorable product mix and the weak
U.S. dollar. We sold 290 million square meters of paper overlays in 2003
compared to 265 in 2002. A substantial part of this increase was due to
increased deliveries from our facilities located in Welcome, North Carolina. In
addition, we succeeded in increasing our sales volumes in Asia, facilitated by
exports to China from our plant in Indonesia.
Other Operations. Sales from other operations increased 4%, to
(euro)28.2 million in 2003 from (euro)27.1 million in 2002. This increase was
mainly attributable to increased sales of certain research and development
services.
Discontinued Operations. There were no sales associated with
discontinued operations in 2003. Sales from discontinued operations were
(euro)71.2 million in 2002 including the operations of our oil field chemicals
business, which was sold in January 2003.
Operating profit. Operating profit decreased to (euro)1.5 million in
2003 from (euro)28.7 million in 2002.
Panel Board Resins. Operating profit associated with panel board resins
products decreased by 60%, to (euro)10.8 million in 2003 from (euro)27.3 million
in 2002. The decrease in operating profit was largely due to an increase in
operating expenses, which in turn was attributable to the increase in the prices
of the main raw materials used to make panel board resins products in 2003
compared with 2002.
During this period our operating expenses associated with panel board
resins products increased 8%, to (euro)453.9 million in 2003 from (euro)420.4
million in 2002. Within panel board resins operations significant changes
occurred in our raw material prices. At the beginning of 2003, the prices of our
key raw materials (methanol, phenol, melamine, and urea) were approximately 10%
to 50% higher than in the beginning of 2002. As a result, our average raw
material prices and, consequently, our raw material related expenses, were
higher in 2003 than in 2002.
In Europe, operating profits decreased during the year largely due to
an increase in operating expenses. Difficult market conditions reduced sales and
placed downward pressure on prices. In North America, our operating profit from
panel board resins decreased in 2003 compared to 2002. This was due to the
difficult business environment in the North American market and general economic
downturn, which affected the Dynea International's customer industries. In
addition, our operating expenses increased in North America in 2003 compared to
2002. In Asia Pacific, our operating profit was lower in 2003 than in 2002
primarily due to the drop in demand and increased raw material prices.
In 2003, we incurred a restructuring expense and impairment write-down
of (euro)5.6 million relating to the decision to restructure and optimize Dynea
resins operations in Norway but we released a (euro)1.1 million restructuring
provisions related to the closure of the Europoort plant.
Depreciation and amortization charges associated with panel board
resins products decreased to (euro)20.1 million in 2003 from (euro)20.3 million
in 2002 mainly due to foreign exchange gains. Depreciation and amortization
charges included goodwill amortization of (euro)2.7 million in both 2003 and
2002.
Industrial and Surfacing. Operating profit from industrial and
surfacing products decreased 66% to (euro)3.5 million in 2003 from (euro)10.2
million in 2002. During this period our operating expenses associated with
industrial and surfacing products increased 22%, to (euro)430.8 million in 2003
from (euro)352.7 million in 2002 due to the significant increases in raw
material prices. In particular, prices of phenol increased significantly and
rapidly during the second quarter of 2003.
Operating profit from industrial resins increased in 2003 compared to
2002 due to higher demand in Europe and contributions from the Chemitec
companies. Operating profit from wood and specialty adhesives decreased in 2003
compared to 2002 predominantly due to increases in raw material costs for wood
and specialty adhesives during 2003. High raw material prices and a less
profitable product mix led to a decrease in operating profit from paper overlays
in 2003 compared to 2002.
Depreciation and amortization charges associated with industrial and
surfacing products increased by 2%, to (euro)27.2 million in 2003 from
(euro)26.6 million in 2002, mainly due to decreased goodwill amortization
charges. Depreciation and amortization charges associated with industrial and
surfacing products included goodwill amortization of (euro)8.4 million and
(euro)9.2 million in 2003 and 2002, respectively.
Other Operations. Operating loss from other operations increased by
28%, to (euro)14.2 million in 2003 from (euro)11.1 million in 2002. This
increase in operating loss was mainly attributable to the increases in the
administrative expenses of corporate functions.
In 2003 and 2002, we released (euro)0.6 million and (euro)0.7 million
in restructuring provisions, respectively, associated with other operations.
Deprecation and amortization charges related to our other operations
were essentially stable at (euro)3.4 million in 2003 compared to (euro)3.1
million in 2002.
Discontinued Operations. In 2003, operating profit reported from
discontinued operations amounted to (euro)1.4 million, which consisted of the
gain on the sale of the oil field chemicals segment in January 2003. In 2002, we
had a profit of (euro)2.3 million, which reflected the revenues from our oil
field chemicals business.
Finance Costs. Dynea International's finance costs increased 18%, to
(euro)59.2 million in 2003 from (euro)50.0 million in 2002. The net interest
expense amounted to (euro)48.1 million in 2003 compared to (euro)61.6 million in
2002. The net interest expense reduction of (euro)13.5million in 2003 resulted
mainly from decreasing interest rates, which reduced the cost of our senior bank
financing, and from the repayments of senior bank loans. Net foreign exchange
gains and losses showed a loss of (euro)2.4 million in 2003 compared to a
(euro)16.5 million gain in 2002. Other financial costs increased (euro)3.7
million mainly due to lower fair value gains from the interest rate swaps in
2003 than 2002 and from additional amortization of capitalized arrangement fees
relating to the prepayments of senior bank loans with proceeds from the sale of
the oil field chemicals business.
Share of Results of Associates and Joint Ventures. Our share of results
from associates and joint ventures increased to (euro)13.1 million in 2003 from
(euro)3.9 million in 2002, primarily due to the positive results of Methanor
v.o.f, a methanol production company in which we have a 40% investment. Over the
course of 2003, demand for and the price of methanol increased considerably
compared to 2002.
Income Tax Expense. Income tax expense increased to (euro)18.8 million
for 2003 from a benefit of (euro)5.0 million in 2002. The income tax expense in
2003 comprised a current year tax charge of (euro)12.2 million compared to
(euro)10.3 million in 2002, net of the movement in deferred tax expense of
(euro)6.6 million compared to deferred tax benefit of (euro)15.3 million in
2002. The income tax in 2003 was mainly comprised of the tax effect from the
disposal of the oil field chemicals segment.
Minority Interest. Minority interest expense decreased to (euro)1.4
million in 2003 compared to (euro)2.5 million in 2002.
Net Loss. Net loss increased significantly to a loss of (euro)63.4
million in 2003 from a loss of (euro)12.4 million in 2002, primarily as a result
of lower operating profit generated by our panel board resins and industrial and
surfacing operations and foreign exchange losses as well as increased impairment
charges, offset by higher income from associates and joint ventures.
Liquidity and Capital Resources
Our liquidity requirements arise primarily from the need to meet our
ongoing debt service requirements, to fund capital expenditures for the general
maintenance and expansion of our production facilities, to build and acquire new
facilities, and to fund our working capital requirements. Due to the seasonality
of our business, our liquidity needs are highest in the spring and fall. Our
principal sources of funds have been cash flows from operations, proceeds from
the sale of businesses, equity financing from our parent and related companies
and amounts available under our existing revolving credit facility.
Dynea International agreed in February 2004 with the senior lenders to
introduce a new six year term loan facility under the senior credit agreement,
the Tranche D loan facility, amounting to (euro)31.7 million. The new facility
was underwritten by our parent company, Dynea Oy, and was drawn in February and
August 2004. The new facility carries an interest of LIBOR +3% plus 1%
capitalized interest.
We have currently outstanding the following financing facilities, which
were raised by Dynea International and its direct and indirect subsidiaries in
2000:
o (euro) 250.0 million 12 1/4% notes due 2010 (originally (euro)
240.0 million in August 2000).
o A senior credit agreement comprised of (euro) 175.8 million
(originally (euro) 379.5 million) in term loans and a (euro)
100.0 million revolving loan and guarantee facility.
o An additional Senior Term D loan facility amounting to
(euro)31.7 million called Tranche D was drawn in 2004.
At December 31, 2004, Dynea International's net debt stood as follows:
December 31, 2002 December 31, 2003 December 31, 2004
-------------------------------------------------------------------
Gross debt, nominal value (euro) 631.1 (euro) 511.9 (euro) 529.8
Capitalized fees (26.3) (21.9) (17.7)
Gross debt, carrying value 604.8 490.0 512.1
Cash 31.9 21.2 27.6
Marketable securities 1.4 1.5 1.5
Net Debt 571.5 467.3 483.0
In November 15, 2001, we entered into agreement with the senior banks
to use the proceeds of the sale of our polyester business (which we disposed of
during 2001) to repay amounts under the senior loans in accordance with the
terms of the senior credit agreement. The repayment was allocated, pursuant to
the credit agreement, on a pro rata basis to each tranche of credit and the
repayment took place in the fourth quarter of 2001 and the first quarter of
2002. In conjunction with the repayment, we also agreed to a retroactive waiver
with the senior lenders of certain possible financial covenant breaches for the
twelve months ending September 2001 and certain modifications to the terms of
the senior credit agreement, including amended financial covenants relating to
minimum debt-service and interest-coverage ratios until June 30, 2003, in order
to provide us with greater flexibility in meeting those ratios. In July 2002, we
agreed to an additional retroactive waiver with the senior lenders of certain
possible covenant breaches for the twelve months ending June 2002 and amendments
of the financial covenants relating to minimum debt-service and
interest-coverage ratios until September 2002. This was done in order to provide
us with greater flexibility in meeting those ratios.
We negotiated a further waiver of certain covenants in the senior
credit agreement with effect from February 10, 2003. In accordance with the
waiver, the senior lenders agreed to modify the covenant ratios contained in the
senior credit agreement for the years ending in 2003 and 2004 and also granted a
waiver for potential breaches of the financial covenants for the quarter ending
December 31, 2002. The senior lenders also approved the purchase by Dynea
Chemicals of the Chemitec businesses from our parent, Dynea Oy, for an asset
value of (euro)35.0 million to be paid for from the proceeds of sale of our oil
field chemicals business. Dynea Oy in turn agreed to increase its equity in
Dynea International Oy by (euro)35.0 million, and Dynea International Oy agreed
to lend the same amount to Dynea Chemicals as a subordinated loan. Dynea
Chemicals also agreed to use (euro)25.0 million of the proceeds of the sale of
our oil field chemicals business to prepay certain senior term loans in
accordance with the senior credit agreement.
In October 2003, we negotiated a further waiver of potential breaches
of all financial covenants relating to the 12 months ending September 30, 2003
subject to the approval of majority senior lenders of the company's business
plan for the period from 2004 to 2006.
In February 2004, the senior lenders approved our 2004 business plan
and we negotiated a waiver for all breaches of financial covenants relating to
the 12 months ending December 31, 2003 and certain modifications to the terms of
the senior credit agreement, including the new Tranche D loan facility and
amended financial covenants relating to minimum debt-service, cash flow and
interest-coverage ratios until December 31, 2004, in order to provide us with
greater flexibility in meeting such ratios.
In December 2004, we presented a new business plan for 2005 - 2007 to
lenders and also proposed an amendment of certain financial covenants for the
period from 12 months ended December 31, 2004 to 12 months ended December 31,
2006. It was also proposed that the owners of Dynea International will make
additional equity injections in cash of (euro) 11 million in both 2005 and 2006
to Dynea Chemicals Oy. Additionally, it was proposed to include a new redemption
premium to the credit agreement, which will be an amount equal to 0.50 % of the
principal amount repaid or prepaid if such repayment or prepayment occurs after
30 November 2005 but prior to 30 April 2006; and 1.50 % of the principal amount
repaid or prepaid if such repayment or prepayment occurs on or after 30 April
2006. The senior lenders agreed to the proposed amendments in January 2005.
We made two scheduled repayments under the senior credit agreement,
totaling (euro)9.9 million in June 2004 and (euro)9.8 million in December 2004.
At the end of June, 2004, Dynea International also made a prepayment of senior
term-loans of (euro)1.4 million and (euro)0.8 million at the end of September
from the proceeds of asset sales. At the end of 2004, we had outstanding
(euro)78.8 million drawn under our (euro)100.0 million revolving credit
facility, (euro)63.1 million as short-term loans and (euro)15.7 million as
guarantees and letters of credit. Both the short-term loans and the guarantees
and letters of credit are in the revolving credit facility limit utilization
calculations taken into account with their original euro amount i.e. drawings
denominated in currencies other than euro are converted to euros at the exchange
rate on the drawdown date of each advance. For this reason the amount utilized
under the revolving credit facility as short-term loans, (euro)63.1 million,
differs from the valuation in our accounts, as in the accounts the drawings
denominated in other currencies than euros are converted to euros using the
latest available monthly closing exchange rates. The undrawn amount from the
revolving credit facility at December 31, 2004 was (euro)21.2 million.
We believe that our cash flows from operations and the waiver we
received from our senior lenders in January 2005, together with the new Tranche
D loan facility, amounting to (euro)31.7 million, will be sufficient for our
operating needs (other than future acquisitions) and debt service requirements
as they become due for at least the next twelve months. However, our future
operating performance and ability to service or refinance our existing debt,
including the notes, will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control. If
we were to face a recession in any of our main markets or have a significant
adverse change in our working capital development, we would need to raise
additional capital either through additional equity contributions from our
shareholders or by raising additional debt. Furthermore, in the event that we do
not generate sufficient cash flow from our operations to service our existing
debt, we expect we would be able to obtain sufficient cash flow by reducing or
postponing certain discretionary expenditures for repairs and maintenance or
future expansion. In addition, we expect that we will need to refinance all or
part of the notes at final maturity.
Scheduled repayments on the senior credit agreement will significantly
impact liquidity. Loans under the senior credit agreement are issued under four
loans, designated Senior Term Loan A, Senior Term Loan B, Senior Term C and the
new Term D a description of each is contained in "Item 10. Additional
Information--Materials Contracts--The Senior Credit Agreement."
We are currently scheduled to make the following debt payments of term
loans, under the senior credit agreement, as translated into euro at December
31, 2004:
Total Payment
Year Amount
---- ------
((euro)in millions)
2005........................................................................... (euro)23.0
2006 - 2009.................................................................... 184.6
Total.......................................................................... (euro)207.6
Under the senior credit agreement, we will be required to make
mandatory prepayments in some circumstances from the proceeds of vendor
payments, surplus cash, asset disposals, certain insurance claims and in the
event of change of control. We will also be permitted to make voluntary
prepayments on the loans. Borrowings under the senior credit agreement bear an
interest at LIBOR-based floating rates for varying interest periods. We are also
required to comply with certain financial covenants including minimum debt
service and interest-coverage ratios. As discussed above, we negotiated with the
senior lenders under the senior credit agreement: (i) a waiver of certain
financial covenants for the twelve months to September 30, 2001; (ii) certain
financial covenant ratios until June 30, 2003; (iii) a waiver of certain of
these covenants for the twelve months to June 2002; (iv) certain financial
covenant ratios until September 2002; (v) a waiver of certain covenants for
financial years 2003 and 2004; (vi) waiver of breaches of financial undertakings
for the twelve months ending December 2002; (vii) a waiver of breaches of all
financial covenants relating to the 12 months ending September 2003, subject to
the approval of majority senior lenders of the company's business plan for 2004;
(viii), a waiver for all breaches of financial covenants relating to the 12
months ending December 31, 2003, (ix) certain modifications to the terms of the
senior credit agreement, including amended financial covenants for 2004 and (x)
certain modifications to the terms of the senior credit agreement, including
amended financial covenants for the period from 12 months ending December 2004
to 12 months ending December 2006. A description of the senior credit agreement,
including the amended terms, is contained in the section "Item 10. Additional
Information--Material Contracts."
The notes will be repaid in one installment in 2010. However, the note
holders will be able to require us to purchase the notes in the event of change
of control. We may not be able to do so without the consent of our lenders under
the senior credit agreement.
We are a holding company that does not conduct any business operations.
Accordingly, the notes are structurally subordinated to the obligations of our
subsidiaries, including the debt of those subsidiaries. Our subsidiaries are
separate and distinct legal entities. Other than Dynea Chemicals Oy, which is
also a holding company, they are not obliged, to pay any amount due under the
notes or to make any funds available to us to allow us to make those payments.
The only assets of Dynea International Oy are shares in our wholly owned
subsidiary, Dynea Chemicals Oy, and intercompany loans to Dynea Chemicals Oy.
Our cash flow and our ability to service debt depend solely upon the cash flow
of our subsidiaries and our receipt of funds from them in the form of loans,
dividends or otherwise. Our subsidiaries may not generate cash flow sufficient
to enable us to meet our payment obligations. In addition, the terms of the
senior credit agreement and the intercreditor agreement restrict our
subsidiaries' ability to provide funds to us. Applicable laws and regulations
and the terms of other agreements to which our subsidiaries may become subject
may further restrict this ability. The senior credit agreement and the
intercreditor agreement only allow payments by our subsidiaries to us for
payments of interest and payment of principal so long as there is no default or
event of default under the senior credit agreement. Although the indenture
limits the ability of our subsidiaries to enter into consensual restrictions on
their ability to pay dividends or to make other payments to us, these
limitations are subject to significant exceptions.
At December 31, 2004, we have been advised by our parent company, Dynea
Oy, that Dynea Oy had purchased approximately 45% of Dynea International's
outstanding 12 1/4% notes due 2010 in open market and privately negotiated
transactions. Dynea Oy holds 45% of Dynea International's outstanding 12 1/4%
notes due 2010 as at December 31, 2004. It is our understanding that, depending
on market conditions and the trading price of the notes, Dynea Oy or its
affiliates may from time to time purchase additional notes in open market or
privately negotiated transactions.
Historical Cash Flows
Year ended December 31, 2004. Cash generated from operations was
(euro)56.3 million in 2004 compared to (euro)63.1 million in 2003. This decrease
related mainly to an increase in working capital requirements during 2004 due to
high raw material prices and the resulting higher sales. During 2004, the
company-wide working capital reduction project that was begun in 2003 continued
in Asia-Pacific; working capital was also reviewed in other regions during the
year. During 2004, the net working capital used cash of (euro)9.4 million
compared to generating cash of (euro)8.4 million in 2003. Net cash provided in
operating activities decreased to (euro)15.5 million in 2004 from (euro)37.2
million in 2003, primarily due to reduction in other financial income and
decreases in dividends from associates. The decrease in other financial income
was attributable to decreased realized foreign exchange gains in 2004 compared
to 2003. Net interest costs decreased due to reduced interest paid, which was
caused by a reduction in interest rates as well as a reduction in gross debt.
Dividends from associates decreased to (euro)6.2 million in 2004 compared to
(euro)9.0 million in 2003. The decrease was mainly due to dividends received
from Methanor ((euro)4.8 million in 2004 compared to (euro)7.6 million in 2003).
Income taxes paid were reduced to (euro)4.7 compared to (euro)8.8 in 2003.
Investing activities used (euro)24.4 million of cash in 2004 compared
to generating (euro)11.1 million in cash in 2003. The cash generated by
investing activities decreased in 2004 because the disposal of oil field
chemicals business segment contributed (euro)73.9 million to investing cash flow
in 2003, compared with a negative cash flow of (euro)4.1 million relating to
post-closing adjustments in 2004 in connection with the disposal of that
business segment. In 2004, disposal of businesses included also a positive
purchase price adjustment of (euro)1.5 million related to sale of KCA Chemische
Produkte GmbH to the parent of Dynea International, Dynea Oy, in December 2000.
Acquisitions decreased to (euro)1.9 million in 2004 from (euro)36.2 million in
2003. Acquisitions consisted of the purchase of shares of joint venture
investment in Russia in 2004 and purchase of the Chemitec companies totaling
(euro)36.2 million, including (euro)1.2 million net cash, during 2003. Purchase
of property, plant and equipment decreased to (euro)22.3 in 2004 from (euro)29.3
million in 2003.
Financing activities provided (euro)15.8 million of cash in 2004
compared to using (euro)56.4 million in cash in 2003 due to cash received from
long-term borrowings. Long-term borrowings provided (euro)14.8 million of cash
as Tranche D loan facility, amounting to (euro)31.7 million was drawn in 2004
compared to using (euro)71.0 cash in 2003. Issuance of share capital and group
contributions amounted to (euro)7.5 million in 2004 compared to (euro)40.0
million in 2003.
Year ended December 31, 2003. Cash generated from operations was
(euro)63.1 million in 2003 compared to (euro)86.0 million in 2002. This decrease
related mainly to a decrease in profitability in 2003 compared to 2002. Net cash
provided in operating activities increased to (euro)37.2 million in 2003 from
(euro)14.9 million in 2002, primarily due to reduction in net financial costs,
increases in dividends from associates and reduction in taxes paid. Net
financial costs decreased due to a decrease in the net interest costs, which was
caused by reduction in interest rates as well as reduction in gross debt, and
due to increased realized foreign exchange gains in 2003 compared to 2002.
Dividends from associates increased to (euro)9.0 million in 2003 compared to
(euro)1.3 million in 2002. The increase was mainly due to dividends received
from Methanor. Income taxes paid were reduced to (euro)8.8 compared to
(euro)10.6 in 2002.
Cash provided by investing activities increased to (euro)11.1 million
from cash used in investing activities of (euro)25.1 million in 2002.
Acquisitions consisted of the purchase of the Chemitec companies totaling
(euro)36.2 million, including (euro)1.2 million net cash, during 2003. In 2003,
the net cash provided from investing activities included (euro)71.5 million of
cash received from the disposal of Oil Field Chemicals business. Purchase of
property, plant and equipment increased to (euro)29.3 in 2003 from (euro)25.0
million in 2002. Because there was no cash received from disposals in 2002, the
cash provided from investing activities increased in 2003 compared to 2002.
Cash used in financing activities increased to (euro)56.4 million in
2003 from (euro)17.7 million in 2002 due to higher net repayments of borrowings.
Issuance of share capital and group contributions amounted to (euro)40.0 million
in 2003 compared to (euro)15.2 million in 2002.
Capital Expenditures
The nature of our business requires us to make annual capital
expenditures for general maintenance and refitting of our plant facilities.
These routine expenditures are in addition to any capital expenditure for new
facilities.
Dynea International made capital expenditures of (euro)22.3 million in
2004 and (euro)29.4 million in 2003. In 2004, significant capital expenditures
included the new plant investments in China, a formaldehyde capacity expansion
project in North America, and restructuring the resin production in Norway. The
remaining capital expenditures were mainly for replacement investments at
several sites.
In 2003, significant capital expenditures included the new plant
investments in China, in Thailand and in Indonesia, as well as capacity
expansion projects in North America. The remaining capital expenditures were
mainly for replacement investments at several sites.
In 2002, significant capital expenditures included the new plant
investments in China and in Thailand, as well as capacity expansion projects in
North America and in Indonesia. The remaining capital expenditures were mainly
for replacement investments at several sites.
We anticipate that our capital expenditure will be approximately
(euro)27 million in 2005. Capital expenditure in 2005 will mainly consist of
productivity improvement projects. The main investments will be an expansion of
the Russian plant, and expansion of resin production in Thailand with a new
plant in Hatyai. The estimated expenses for these investments are approximately
(euro)5.9 million in 2005. The rest of the budgeted capital expenditures mainly
relates to productivity improvements and replacements at various sites.
We expect to fund our other cash requirements in the future from
operating cash flow and existing borrowing facilities. Our capital expenditures
will be primarily for general maintenance and refitting and expanding our
existing facilities although we may also build or acquire new facilities. We
expect that the level of capital expenditures for capacity will remain
essentially constant after 2005 over the medium term, allowing us to improve
quality and capacity, and to compete with our competitors.
Research and Development
In 2004 and 2003, we spent approximately (euro)20.2 million and
(euro)20.0 million in global research and development, and employed around 215
people and 220 people, respectively in this function. In 2002, our research and
development expenditure was approximately (euro)17.6 million.
Our research and development group is focused on specific projects
within the areas of product technology, application technology and process
technology. Research in product technology generally involves developing
chemical formulations in order to improve existing as well as to develop new
products. With new chemical formulations it is possible to improve the cost
efficiency of resin production, and to develop value adding product qualities.
Application technology involves providing technological support to our customers
in the form of laboratory and on-site assistance when they use our products.
This area of research covers the development of offering packages involving
other chemical components than resins, such as additives and hardeners, as well
as application machinery. Process technology develops Dynea's own assets with
special focus on state of the art automation and Dynea's formaldehyde silver
process. The research work with the formaldehyde process supports both our own
investments and the external technology sales.
Some of our research and development efforts have been particularly
beneficial for our operations. For example, our research and development has
focused on developing and producing environmentally friendly products and
production processes. Many of our products have a low environmental impact and
low emissions simultaneously with a superior product performance. This focus has
enabled us to take advantage of recent consumer preferences for those products,
which we believe will continue to increase as environmental laws and consumer
demands continue to become stricter.
Resins. We currently have six major research and development centers
situated in close proximity to customers. These facilities, located in Austria,
Germany, Canada, Norway, Singapore and the United States, have global
responsibilities for product development and application technology for
formaldehyde-based resins and paper overlays. We also have five specialized
technology centers located in Finland, Brazil, UK, China and New Zealand, which
provide global support and advice on specific types of resins.
Our resins research and development plays an important role in
improving the quality and performance of our offering. Beyond keeping the state
of the art of existing technologies, a substantial portion of our project work
was directed in developing technology leadership. The research and development
focuses especially on helping our customers to improve their own production
systems in order to increase efficiency and reduce production costs. For
example, we have developed and commercialized specific glue application
machinery for wood gluing and specialty resols for the abrasives industry. In
addition, we have enlarged our product portfolio in foundry binder resins and
introduced a new superior Aminoplast technology to the oriented strand board
(OSB) industry.
Our resins research and development plays also an important role in
improving our manufacturing systems in order to increase yields and to reduce
cycle times and raw material inputs. We have developed resin process technology
and expertise with respect to reactor design and automation to ensure that
resins are being produced consistently. These processes enable us to manufacture
resins with increased cost efficiency and further improved product quality.
Increases in our production capacity without investments into additional
manufacturing equipment are also a result of process technology research.
Aggregate expenditure on resins research and development decreased to
(euro)11.5 million in 2004 from (euro)11.7 million in 2003. A portion of our
research and development is conducted through partnerships and alliances with
customers and universities under which research and development expenses are
shared. As of December 31, 2004, we employed approximately 175 people in resins
research and development.
Paper Overlays. Our research and development functions for paper
overlays are coordinated from the United States. Most of our research and
development initiatives relating to specific applications for paper overlays are
conducted at skill centers in the United States, Finland and Indonesia. In 2004,
we spent approximately (euro)1.7 million on and employed 17 people in our paper
overlays research and development, whose efforts are principally focused on
improving both our own and our customers' production systems and processes.
Other. In addition to Resins and Paper Overlays -related R&D, we sell
R&D services to an external party in Finland. This unit employed 23 people, and
the expenditures were (euro)7.0 million in 2004.
Off-Balance Sheet Arrangements
None.
Tabular Disclosure of Contractual Obligations
The following schedule summarizes our contractual obligations and
commitments to make future payments as of December 31, 2004.
Payments Due by Period
((euro)in millions)
Less than After
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------- ----- ------ --------- --------- -------
Long-term Debt................. (euro) 463.1 (euro) 24.0 (euro) 70.4 (euro) 118.6 (euro) 250.1
Operating Leases............... 23.8 3.1 4.7 3.6 12.4
Purchase obligations(1)........ 3.2 2.2 1.0 - -
Other Long-Term Liabilities(2). 2.7 - 1.0 - -
Total.......................... (euro) 491.1 (euro) 29.3 (euro) 77.1 (euro) 122.2 (euro) 262.5
- ------------------
(1) Includes (euro)3.2 million irrevocable purchase obligations and no
capital commitments at December 31, 2004.
(2) Includes other long-term liabilities and non-interest bearing long-term
liabilities.
Principal U.S. GAAP Differences Related to Dynea International
You should read Note 26 to the Dynea International financial statements
as of and for the years ended December 31, 2002, December 31, 2003 and December
31, 2004 included in "Item 17--Financial Statements" for a detailed discussion
of the differences between IFRS and U.S. GAAP.
Some of the differences between IFRS and U.S. GAAP include:
o the identification of discontinued operations;
o the determination of pension expense for defined benefit
plans;
o the recognition of additional minimum pension liability;
o the level and method of goodwill testing;
o the treatment of negative goodwill; and
o the accounting for cost associated with exit or disposal
activities.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based on figures that have been prepared in accordance with IFRS.
The preparation of these financial statements requires our management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, our management evaluates its estimates,
including those related to impairments, pensions, income taxes, restructuring,
bad debts, contingencies and litigation. Our management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our significant accounting polices are described in Note 2 in our
financial statements and we consider the following policies to be the most
critical in understanding the judgments that are involved in preparing our
financial statements and the uncertainties that could impact our results of
operations, financial conditions and cash flows.
Valuation of long-lived assets and goodwill
We review the carrying amounts of long-lived assets at the balance
sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset may be impaired. We assess the impairment of
goodwill annually, or more frequently if events or changes in circumstances
indicate that the carrying value may not be recoverable. Examples of indicators,
which could trigger an impairment review, include the following:
o significant under performance relative to expected historical
or projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and
o significant negative industry or economic trends.
When the carrying value of long-lived assets and goodwill may not be
recoverable based upon the existence of one or more indicators of impairment, we
measure any impairment based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with current
market assessments of the time value of money and the risks specific to the
asset. The most significant variables in determining cash flows are discount
rates, terminal values, the number of years on which to base the cash flow
projections, as well as assumptions and estimates used to determine the cash
inflows and outflows. Based on such reviews there is no need for impairment
charges other than as presented in the financial statements. However, there can
be no assurance that the change in the factors listed above may not cause
material impairment charges in the future.
Pensions
The determination of our obligation and expense for pension and other
post-retirement benefits is dependent on our selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions are described
in Note 15 to the consolidated financial statements and include, among others,
the discount rate, rate of compensation increase and expected long-term rate of
return on plan assets. In accordance with IFRS, actual results that differ from
our assumptions are accumulated and amortized over future periods if they are
over 10% of the greater of defined benefit obligation or fair value of plan
assets at beginning of year and therefore generally affect our recognized
expense and recorded obligation in such future periods. While we believe that
our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our
pension and other post-retirement obligations and our future expense.
Deferred taxes
Deferred income tax is provided in full, using the liability method, on
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. Deferred tax assets are
recognized to the extent that it is probable that future taxable profit will be
available against which the temporary differences can be utilized. Should the
actual results differ from these estimates, revisions to the deferred tax assets
would be required.
Recent Changes in Accounting Standards - IFRS
In 2004, Dynea International adopted the IFRS below, which are relevant
to its operations. The 2003 accounts have been amended as required, in
accordance with the relevant requirements. All changes in the accounting
policies have been made in accordance with the transition provisions in the
respective standards.
IAS 1 (revised 2003) Presentation of Financial Statements
IAS 2 (revised 2003) Inventories
IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and
Errors
IAS 10 (revised 2003) Events after the Balance Sheet Date
IAS 16 (revised 2003) Property, Plant and Equipment
IAS 17 (revised 2003) Leases
IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates
IAS 24 (revised 2003) Related Party Disclosures
IAS 27 (revised 2003) Consolidated and Separate Financial Statements
IAS 28 (revised 2003) Investments in Associates
IAS 31 (revised 2003) Interest in Joint Ventures
IAS 32 (revised 2003) Financial Instruments: Disclosure and Presentation
IAS 39 (revised 2003 and 2004) Financial Instruments: Recognition and
Measurement
IFRS 2 (issued 2004) Share-based Payment
IFRS 3 (issued 2004) Business Combinations
IAS 36 (revised 2004) Impairment of Assets
IAS 38 (revised 2004) Intangible Assets
IFRS 5 (issued 2004) Non-current Assets Held for Sale and Discontinued
Operations
The early adoption of IAS 1, 2, 8, 10, 17, 24, 27, 28,31 and 32 (all revised
2003) did not result in substantial changes to the Dynea International's
accounting policies. In summary:
o IAS 1 (revised 2003) has affected the presentation of minority
interest and other disclosures.
o IAS 2, 8, 10, 17, 27, 28, 31, 32 and 39 had no material effect
on the Company's policies.
o IAS 24 (revised 2003) has affected the identification of
related parties and some other related-party disclosures.
The early adoption of IAS 16 (revised) resulted in a change in the
accounting policies for capitalizing major overhaul costs. Previously major
overhaul costs were recognized as an expense as incurred. The IAS 16 (revised)
requires that Dynea International capitalizes overhaul expenses as a component
of asset.
The early adoption of IAS 21 (revised in 2003) resulted in a change in
the accounting policy on the translation of goodwill and fair value adjustments
arising from the acquisition of foreign entities. Goodwill and fair value
adjustments on acquisitions occurring on or after January 1, 2004 are translated
at the exchange rate at each balance sheet date instead of the exchange rate at
the date of acquisition applied previously.
IFRS 2 (issued 2004) will affect the accounting for share-based
compensation, but the Company did not in 2004 have any such arrangements.
The early adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised
2004) resulted in a change in the accounting policy for goodwill. Until 31
December 2003, goodwill was:
o Amortized on a straight line basis over its estimated useful
life, not to exceed 20 years; and
o Assessed for an indication of impairment at each balance sheet
date.
In accordance with the provisions of IFRS 3, IAS 36 and IAS 38:
o Dynea International ceased its annual goodwill amortization of
(euro)11.1 million from 1 January 2004 and derecognized its
negative goodwill of (euro)14.1 million with a corresponding
adjustment to opening balance of retained earnings;
o From the year ended 31 December 2004 onwards, goodwill is
tested annually for impairment, as well as when there are
indications of impairment.
o The Group reassessed the useful lives of its intangible assets
in accordance with the provisions of IAS 38. No adjustment
resulted from this reassessment.
Recent Changes in Accounting Standards - U.S. GAAP
In January 2003, the FASB (Financial Accounting Standards Board) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), which was amended in December 2003 when the FASB issued FIN 46-R. Under the
interpretation, as amended, certain entities known as "Variable Interest
Entities" (VIE) must be consolidated by the "primary beneficiary" of the entity.
The primary beneficiary is generally defined as having the majority of the risks
and rewards arising from the VIE.
FIN 46-R is effective for Dynea International's December 31, 2004
financial statements for any new arrangements created after December 31, 2003.
Dynea International has identified one new arrangement that was created late in
2004 and therefore is in the scope of the new standard already as of December
31, 2004. The impact of this arrangement on the Company's December 31, 2004
financial statements is however considered immaterial as the operations were
only started in December 2004. The new arrangement will be evaluated in
accordance with FIN 46-R starting from January 1, 2005.
FIN 46-R is effective also for possible VIEs created before December
31, 2003 for Dynea International's December 31, 2005 financial statements and
the Company is currently evaluating the impact on its results of operations and
financial position under U.S. GAAP.
In November 2004 the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 151, Inventory Costs - an amendment of ARB No.
43, Chapter 4 (revised ) (FAS 151). FAS 151 amends the guidance in ARB No. 43,
Chapter 4, 'Inventory Pricing,' to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). FAS 151 requires that those items be recognized as current-period
charges. In addition, FAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. FAS 151 is effective for Dynea International for its year
ended December 31, 2006. The new standard is not expected to have material
impact on the Company's results of operations and financial position under U.S.
GAAP.
In December 2004 the FASB issued Financial Accounting Standard No.
123R, Share-Based Payment (FAS 123R). FAS 123R requires that companies expense
the value of employee stock options and other awards. FAS 123R allows companies
to choose an option pricing model that appropriately reflects their specific
circumstances and the economics of their transactions, and allows companies to
select from three transition methods for adoption of the provisions of the
standard. FAS 123R is effective for Dynea International for its year ended
December 31, 2006. The Company is currently investigating the impact of the
statement on the results of operations and financial position under U.S. GAAP.
In December 2004 the FASB issued Financial Accounting Standard No. 153,
Exchanges of Nonmonetary Assets (FAS 153). FAS 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions, to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. FAS 153 is effective for Dynea for nonmonetary exchanges
occurring on or after January 1, 2006. The new standard is not expected to have
material impact on the Company's results of operations and financial position
under U.S. GAAP.
Item 6. Directors, Senior Management and Employees.
Directors of Dynea International Oy and Dynea Chemicals Oy
We are a wholly owned subsidiary of Dynea Oy, and we are the sole
shareholder of Dynea Chemicals Oy. Our board of directors and those of Dynea Oy
and Dynea Chemicals Oy are composed of the same individuals, who are as follows:
Name Date of Birth
- ---- -------------
Stig Gustavson*........................................ June 17, 1945
Bjorn Saven............................................ Sept. 29, 1950
Thomas Ramsay.......................................... April 22, 1969
Svein Rennemo.......................................... July 24, 1947
Michael Rosenlew....................................... May 2, 1959
* Chairman
Executive Officers of Dynea International Oy and Dynea Chemicals Oy
Our executive officers are:
Roger Carlstedt, President and Chief Executive Officer, born August 17,
1950. Mr. Carlstedt joined Dynea in November 2003. Prior to joining the company,
Mr. Carlstedt held various executive positions within ABB. From 2001 to 2003 he
held the position of Business Area Manager for ABB Utilities AB, while between
1999 and 2001 he acted as President of ABB High Voltage Cables and between 1993
and 1998 as President of ABB Switchgear AB. Mr. Carlstedt graduated from Lund
University of Technology, Sweden, in 1976 with a M.Sc. in Electro Technique and
in 1970 from Ebersteinska Skolan, Norrkoping, Sweden, with a Bachelor of
Science.
David Foot, Executive Vice President, born May 25, 1954. Mr. Foot
joined Dyno Western Australia in 1990 as Operations Engineer after holding
various engineering positions within the Western Australian mining and mineral
processing industries. In 1996, Mr. Foot was appointed General Manager in
Western Australia and in 2001 as Managing Director of our New Zealand
operations. Mr. Foot holds a B.Eng. in Mechanical Engineering (1984) and a MBA
(Technology Management) from Deakin University, Victoria, Australia (1998).
Filip Frankenhaeuser, Executive Vice President and Chief Financial
Officer, born February 12, 1951. Mr. Frankenhaeuser joined Dynea in March 2000.
Prior to joining Dynea, Mr. Frankenhaeuser held various international financial
positions, including Finance Director of Euroheat AB from 1983 to 1988 and Group
Financial Controller of the Amer Group in 1988 and 1989. Between 1989 and 1999,
Mr. Frankenhaeuser worked for Cultor Oyj, the international food and food
Ingredients Company, where he held the position of CFO (1991-1998). Mr.
Frankenhaeuser holds a M.Sc. in Economics from the Swedish School of Economics,
Helsinki (1980).
Randy Schwartzhoff, Executive Vice President, born July 23, 1953.
Mr.Schwartzhoff joined Dyno in 1989 as President of Noresin, Inc. Mr.
Schwartzhoff's latest position was Senior Vice President, Paper Overlays. Prior
to joining the company Mr. Schwartzhoff held various management positions within
Champion International and Georgia Pacific Corporation. Mr. Schwartzhoff holds a
B.Sc. in Forest Products Marketing (1975) and an M.B.A. (1984), both from the
University of Minnesota, USA.
Tom Vestli, Executive Vice President, born October 26, 1949. Mr. Vestli
joined Dyno in 1975 as a Project Engineer. After holding various positions
within the firm he became Regional Vice President, Chemicals Group responsible
for Asia Pacific in 1993 and for Europe in 1997. Mr. Vestli's latest position
was Senior Vice President, Panel Board Resins, Europe. Mr. Vestli holds a M.Sc.
in Chemical Engineering from the Norwegian Institute of Technology (1974).
Executive and Director Compensation
Total salaries, bonuses and other amounts paid to those current members
of our board and executive management referred to above who were employed by the
Dynea group during 2004 (12 individuals) were approximately (euro)2.1 million.
No compensation was provided to these individuals in the form of stock options
or pursuant to a profit-sharing plan.
Based on the authorisation by the extra general meeting of the
shareholders, the Board of Directors of Dynea Oy have decided in January 2005 to
grant an offer in total 3.296.800 share options to the B-shareholders of Dynea
Oy being current key managers employed by Dynea Oy and its subsidiaries of Dynea
International Oy. Under IFRS 2, Share-based payment transactions require an
expense to be recognized in Dynea International when share options are granted
as part of the remuneration package to its key managers. The share options in
Dynea Oy are measured at fair value and the charge will be reflected in the
financial statements of Dynea International in 2005.
Employees
The average number of our employees was 3,135 during 2004. The
following chart shows the number of our employees by geographic location for the
past three yeas:
2002 2003 2004
---- ---- ----
Europe 973 1,172 1,191
Americas 837 870 828
Asia and Oceania 1,183 1,113 1,118
Other 20 -- --
Board Practices
Each member of the board of directors of Dynea International is elected
at the annual general meeting of shareholders for a set term that expires at the
end of the next annual general meeting of shareholders. The annual general
meeting of shareholders must be held within six months after the end of Dynea
International's financial year. Matters considered by the shareholders at the
annual general meeting include the remuneration of the members of the board of
directors and the adoption of the annual accounts. There are no contracts
between us and the members of the board of directors of Dynea International that
would provide for any benefits upon termination of their employment.
The independent members of the board of directors of Dynea
International act as the audit committee of Dynea International. The audit
committee members currently include Stig Gustavson, Svein Rennemo and Thomas
Ramsay. The audit committee is responsible for the appointment, compensation and
oversight of the work of the independent auditor of Dynea International. Matters
considered by the audit committee include pre-approval of the audit and
non-audit services performed by the independent auditor. The articles of
association of Dynea International do not provide for a remuneration committee.
Each member of the board of directors of Dynea Chemicals is elected at
the annual general meeting of shareholders for a term, which expires at the end
of the next annual general meeting of shareholders following that election. The
annual general meeting of shareholders must be held within six months after the
end of Dynea Chemical's financial year. Matters considered by the shareholders
at the annual general meeting include the remuneration of the members of the
board of directors and the adoption of the annual accounts. There are no
contracts between the members of the board of directors of Dynea Chemicals and
Dynea Chemicals that provide for any benefits upon termination of their
employment. The articles of association of Dynea Chemicals do not provide for an
audit committee or a remuneration committee.
Item 7. Major Shareholders and Related Party Transactions.
Major Shareholders
Ownership
Dynea International Oy is a wholly-owned subsidiary of Dynea Oy, and
Dynea Chemicals Oy is a wholly-owned subsidiary of Dynea International Oy. Dynea
Oy is controlled by two private equity funds, the Industri Kapital 1997 Fund and
the Industri Kapital 2000 Fund, both of which are managed by affiliates of
Industri Kapital Limited, a leading European private equity firm.
As of December 31, 2004 our current ownership is detailed below:
o The Industri Kapital 1997 Fund and the Industri Kapital 2000
Fund own collectively 88.86% of Dynea Oy's capital stock and
control 90.27% of the voting rights attached to that capital
stock. These funds are not legal entities, but rather
contractual arrangements between, on the one hand, the funds'
investment manager/general partner (IK 1997 Ltd. and IK 2000
Ltd., respectively) and, on the other hand, the investors in
the funds. Bjorn Saven, a director of Dynea International Oy,
is also a director of both IK 1997 Ltd. and IK 2000 Ltd.
Michael Rosenlew, a director of Dynea International Oy, is an
alternate director of both IK 1997 Ltd. and IK 2000 Ltd. Bjorn
Saven and Michael Rosenlew could be deemed to be beneficial
owners of a minority of the shares managed by IK 1997 Ltd. and
IK 2000 Ltd. The other directors and alternate directors of IK
1997 Ltd. and IK 2000 Ltd. (who are identified below) disclaim
beneficial ownership of the shares managed by those entities.
o Other investors own 9.13% of Dynea Oy's capital stock and
9.32% of the voting rights attached to that stock. None of
these investors individually owns 5% or more of Dynea's
capital stock.
o Management shareholders own 2.01% of Dynea Oy's capital stock
and 0.41% of the voting rights attached to that stock. No one
member of management owns more than 1% of Dynea's capital
stock.
With respect to the shares held by the Industri Kapital 1997 Fund and
the Industri Kapital 2000 Fund and managed by IK 1997 Ltd. and IK 2000 Ltd., the
following limited partnerships, which are investors in those funds, hold more
than 5% of the outstanding share capital of Dynea Oy:
Partnership
As of December 31,
2003
----
Industri Kapital 1997 Limited Partnership I 6.63%
Industri Kapital 1997 Limited Partnership III 5.16%
Industri Kapital 2000 Limited Partnership I 7.21%
Industri Kapital 2000 Limited Partnership II 6.63%
Industri Kapital 2000 Limited Partnership III 8.44%
Industri Kapital 2000 Limited Partnership IV 7.18%
Industri Kapital 2000 Limited Partnership V 7.82%
Industri Kapital 2000 Limited Partnership VII 5.34%
Industri Kapital 2000 Limited Partnership IX 6.04%
Industri Kapital 2000 Limited Partnership X 5.15%
The directors of IK 1997 Ltd. are: Bo Ennerberg, Bjorn Saven, Michael
Richardson, Peter Byrne, Kim Wahl, Carl-Johan Granvik and Finn Jebsen. The
alternate directors of IK 1997 are: Alan Dart, Gustav Ohman, Michael Robinson,
Michael Rosenlew, Niclas Ekestubbe, Mikko Koivusalo and Ola Uhre. The directors
of IK 2000 Ltd. are: Bo Ennerberg, Bjorn Saven, Michael Richardson, Peter Byrne,
Kim Wahl, Carl-Johan Granvik and Finn Jebsen. The alternate directors of IK 2000
are: Alan Dart, Gustav Ohman, Michael Robinson, Michael Rosenlew, Niclas
Ekestubbe, Mikko Koivusalo and Ola Uhre. Bjorn Saven, Kim Wahl, Michael Rosenlew
and Gustav Ohman could be deemed to be beneficial owners of a minority of the
shares managed by IK 1997 Ltd. and IK 2000 Ltd. The other directors and
alternate directors of IK 1997 Ltd. and IK 2000 Ltd. disclaim beneficial
ownership of the shares managed by those entities.
Share Structure
Under the articles of association of Dynea Oy, that company has two
classes of ordinary shares: series A ordinary shares and series B ordinary
shares. When voting at the meeting of shareholders of Dynea Oy, the series A
shares have five votes each and the series B shares have one vote each. All
other rights connected to the shares are essentially the same between the series
A shares and the series B shares. The series B shares are held by management and
employees within the Dynea group. In addition, there are in place a
shareholders' agreement and a managers' shareholder agreement with respect to
the series A shares and the series B shares. Under these agreements, Industri
Kapital has, in certain situations, including an initial public offering and a
sale of the business of Dynea Oy, the right to act on behalf of all Dynea Oy
shareholders.
Dynea Oy's issued and outstanding share capital consists of
(euro)96,179,080.20 divided into 21,100,615 series A ordinary shares with par
value of approximately (euro)4.44 per share and 561,340 series B ordinary shares
with par value of approximately (euro)4.44 per share. Approximately 235,818, or
1.09%, of the ordinary shares of Dynea Oy are held of record by 16 investors
with addresses in Finland, and approximately 340,654, or 1.57%, of these shares
are held of record by 15 investors with addresses in the United States.
Related Party Transactions
During the year ended December 31, 2004, the following transactions
were carried out with related parties:
Sale of Shares
In the year ended December 31 2004, Dynea Oy paid a purchase price
adjustment (euro)1.5 million to Dynea International relating to KCA Chemische
Produkte GmbH.
Sales and Purchases of Goods
During the year ended December 31, 2004 Dynea International sold
products, at market prices, to associates totaling approximately (euro)5.6
million, and to companies controlled by the Industri Kapital 1997 Fund and the
Industri Kapital 2000 Fund, totaling approximately (euro)10.7 million. At
December 31, 2004, Dynea International had receivables of (euro)1.9 million
related to these sales.
During the year ended December 31, 2004 Dynea International purchased
materials and supplies, at market prices, from associates totaling approximately
(euro)19.8 million, and from companies controlled by the Industri Kapital 1997
Fund and the Industri Kapital 2000 Fund, totaling approximately (euro)15.2
million. At December 31, 2004, Dynea International had payables of (euro)6.4
million related to these purchases.
Other Income and Expenses
During the year ended December 31, 2004 Dynea International received
other income from associates totaling (euro)1.9 million, and from companies
controlled by the Industri Kapital 1997 Fund and the Industri Kapital 2000 Fund,
totaling (euro)0.1 million. During the year ended December 31, 2004 Dynea
International received other income from companies controlled by the Industri
Kapital 1997 Fund and the Industri Kapital 2000 Fund, totaling (euro)0.1
million.
A service agreement exists between Dynea International and Dynea Oy to
provide management and support services. These management and support expense
charges amounted to (euro)9.5 million in 2004.
In addition, Dynea International's other expenses to companies
controlled by the Industri Kapital 1997 Fund and the Industri Kapital 2000 Fund
totaled (euro)0.1 million.
Interest Expenses and Loan Liability
Dynea International accrued interest expense in the amount of
(euro)15.9 million to Dynea Oy during the year ended December 31, 2004. At
December 31, 2004, Dynea International had a loan payable of (euro)143.1 million
to Dynea Oy including the Term D Loan Facility and Dynea International's 12 1/4%
notes held by Dynea Oy.
Other Receivables and Payables
At December 31, 2004 Dynea International had loan receivables of
(euro)0.6 million and (euro)0.9 other current receivables from associated
companies and other current receivables of (euro)7.3 million from Dynea Oy and
(euro)1.6 million from other companies controlled by the Industri Kapital 1997
Fund and the Industri Kapital 2000 Fund.
At December 31, 2004, Dynea International had interest liability of
(euro)5.9 million to companies controlled by the Industri Kapital 1997 Fund and
the Industri Kapital 2000 Fund.
Guarantees
Dynea International had given guarantees on behalf of associated
companies of (euro)0.2 million at December 31, 2004.
Group Contributions
In 2004, group contribution amounting to (euro) 7.9 million was made by
companies controlled by the Industri Kapital 1997 Fund and the Industri Kapital
2000 Fund to Dynea International.
Item 8. Financial Information.
Financial Statements
See pages F-1 through F-44 and G-1 through G-37.
Significant Changes
There has been no significant change in our financial or trading
position since December 31, 2004.
Legal Proceedings
We are involved in some legal proceedings arising in the normal course
of our business, including proceedings involving our subsidiaries Neste Canada
Inc. and Dynea Canada Ltd. (formerly Neste Chemicals Canada Inc.), who are
currently involved in litigation with Reichhold Chemicals Inc. and Reichhold
Limited regarding responsibility for costs associated with completing the
clean-up of environmental contamination at our Ste. Therese facility existing at
the time we acquired the Ste. Therese operations. We made an initial claim
against Reichhold in this litigation for a total approximate amount of $22.0
million Canadian dollars. Reichhold has brought a counter-claim against us in
this litigation for a total approximate amount of $8.1 million Canadian dollars,
the amount already drawn by Neste under the letter of credit relating to the
sale. The agreement relating to the acquisition of Neste provides that we shall
be indemnified and held harmless in respect of some of the losses we may incur
as a result of this litigation.
We believe that none of these proceedings, either individually or in
the aggregate, are likely to have a material adverse effect on our business or
our consolidated financial position.
Item 9. The Offer and Listing.
The notes are listed on the Luxembourg Stock Exchange.
Item 10. Additional Information.
Articles of Association
Dynea International Oy
Incorporated by reference from Dynea International Oy and Dynea
Chemicals Oy annual report on Form 20-F filed with the Securities and Exchange
Commission on April 30, 2001.
Dynea Chemicals Oy
Incorporated by reference from Dynea International Oy and Dynea
Chemicals Oy annual report on Form 20-F filed with the Securities and Exchange
Commission on April 30, 2001.
Material Contracts
The following provision summarizes the material terms of our recent
material contracts.
The Senior Credit Agreement
On February 13, 2004, the borrowers and senior lenders signed an
amendment and restatement agreement, including a novated and amended credit
agreement. The amendments included amended financial covenants for 2004 and a
waiver by senior lenders of any possible breaches of covenants relating to 2003.
Under the amended covenants, we were allowed to maintain the following amended
ratios from March 31, 2004 until December 31, 2004:
o the EBITDA to total net interest costs ratio for the twelve
months to March 31, 2004 through the twelve months to December
31, 2004 was amended from ratios of 1.75:1 ranging to 1.95:1
for that period to the following new covenants:
12 months to 31 March 2004 1.33:1
12 months to 30 June 2004 1.16:1
12 months to 30 September 2004 1.22:1
12 months to 31 December 2004 1.60:1
o net debt to EBITDA ratio for the twelve months to March 31,
2004 through the twelve months to December 31, 2004 was
amended from ratios of 5.85:1 ranging to 5.30:1 for that
period to the following new covenants:
31 March 2004 8.42:1
30 June 2004 9.57:1
30 September 2004 9.20:1
31 December 2004 6.72:1
o EBITDA to total net senior interest costs ratio for the twelve
months to March 31, 2004 through the twelve months to December
31, 2004 was amended from ratios of 3.90:1 ranging to 4.20:1
for that period to the following new covenants:
12 months to 31 March 2004 3.91:1
12 months to 30 June 2004 3.56:1
12 months to 30 September 2004 3.70:1
12 months to 31 December 2004 4.94:1
o cash flow to total funding costs ratio for the twelve months
to March 31, 2004 through the twelve months to December 31,
2004 was amended from ratios of 0.75:1 ranging to 0.80:1 for
that period to the following new covenants:
31 March 2004 0.95:1
30 June 2004 0.78:1
30 September 2004 0.76:1
31 December 2004 1.10:1
in each case as those terms are defined in the senior credit agreement.
It was also agreed to introduce a new six years term loan facility,
amounting to (euro)31.7 million under the senior credit agreement called Tranche
D, as more fully described below.
Additionally, in December 2004 we presented a new business plan for
2005 - 2007 to lenders and also proposed an amendment of certain financial
covenants for the period from 12 months ended December 31, 2004 to 12 months
ended December 31, 2006. On January 21, 2004, the borrowers and the facility
agent on behalf of senior lenders signed an amendment letter to credit
agreement. The amendment letter included amended financial covenants for 12
months ended December 31, 2004 and for the years 2005 and 2006. Under the
amended covenants, we were allowed to maintain the following amended ratios from
December 31, 2004 until December 31, 2006:
o the EBITDA to total net interest costs ratio for the twelve
months to December 31, 2004 through the twelve months to
December 31, 2006 was amended from ratios of 1.60:1 ranging to
2.60:1 for that period to 1.60:1 to 2.03:1;
o net debt to EBITDA ratio for the twelve months to December 31,
2004 through the twelve months to December 31, 2006 was
amended from ratios of 6.72:1 ranging to 3.10:1 for that
period to 7.20:1 to 5.04:1;
o cash flow to total funding costs ratio for the twelve months
to December 31, 2004 through the twelve months to December 31,
2006 was amended from ratios of 1.10:1 ranging to 1.10:1 for
that period to 0.90:1 to 0.78:1.
It was also agreed that the owners of Dynea International will make
additional equity injections in cash of (euro) 11 million in both 2005 and 2006
to Dynea Chemicals Oy. Additionally, it was agreed to include a new redemption
premium to the credit agreement, which will be an amount equal to 0.50 % of the
principal amount repaid or prepaid if such repayment or prepayment occurs after
30 November 2005 but prior to 30 April 2006; and 1.50 % of the principal amount
repaid or prepaid if such repayment or prepayment occurs on or after 30 April
2006. The senior lenders also waived for financial years 2005 and 2006 the
requirement whereby Dynea International would procure either for two periods of
five successive days, or one period of 10 days, in each of its financial years,
the aggregate of all drawings under the revolving credit facility shall not
exceed (euro)10.0 million.
As regards the other terms of the senior credit agreement, they remain
the same as in the original credit agreement signed on August 7, 2000. Under
that agreement, Dynea Chemicals Oy entered into a credit agreement at the
closing date of the acquisition of Dyno, with the Lenders named in the senior
credit agreement, Salomon Brothers International Limited as lead arranger and
Citibank International Plc as facility agent and security trustee. The
facilities provided under the Credit Agreement consist of:
o a (euro)190 million 7 year term loan (the "Term Loan A");
o a (euro)95 million 8 year term loan (the "Term Loan B");
o a (euro)95 million 9 year term loan (the "Term Loan C"); and
o a (euro)100 million multicurrency revolving loan and guarantee
credit facility with a 7 year maturity.
The senior credit agreement provides that Dynea Chemicals Oy and/or
some of our subsidiaries may borrow under particular tranches, in particular
amounts and, in some cases, in particular currencies.
The Term Loan A, Term Loan B, Term Loan C and the revolving credit
facility may be borrowed in euros or other currencies as agreed. Under the terms
of the senior credit agreement, and in order to provide financing for the
acquisition of Dyno, the Term Loan A, the Term Loan B and the Term Loan C were
fully drawn on the date of the acquisition of Dyno closing. Each of the Term
Loans and revolving credit facility were available only on the issuance of the
initial notes. Each of Term A, Term B and Term C were drawn in other currencies
than euros, in Norwegian Crowns, in US dollars and in Canadian dollars.
Therefore the actual repayment amounts that are stated below in euros will
change if the exchange rates between euros and these currencies change.
Term Loan A. The Term Loan A was drawn in various tranches and
currencies by Dynea Chemicals Oy and its subsidiaries in order to refinance
Neste's existing debt, to fund the acquisition of Dyno and to refinance existing
Dyno debt. The Term Loan A will amortize as detailed below, with final maturity
on June 30, 2007. Each separate advance shall be repaid pro rata and any
prepayment of senior loans needs to be allocated pro rata to Tranche A, Tranche
B and Tranche C. In 2004, Dynea Chemicals Oy made a prepayment of The Term Loan
A of (euro)0.9 million from the proceeds of asset sales. Due to the sale of the
oil field chemicals business in 2003, an additional Dynea Chemicals Oy
prepayment of The Term Loan A was made for (euro)11.2 million in 2003.
Repayment Date: Payment Amounts
--------------------
((euro)in millions)
June 30, 2005.................................. 11.5
December 31, 2005.............................. 11.5
June 30, 2006.................................. 13.1
December 31, 2006.............................. 13.1
June 30, 2007.................................. 16.4
Term Loan B. The Term Loan B was drawn in various tranches and
currencies by Dynea Chemicals Oy and its subsidiaries in order to refinance
Neste's existing debt, to fund the acquisition of Dyno and refinance existing
Dyno debt. The Term Loan B will amortize as detailed below, with final maturity
on June 30, 2008. In 2004, Dynea Chemicals Oy made a prepayment of The Term Loan
B of (euro)0.7 million from the proceeds of asset sales. Due to the sale of the
oil field chemicals business in 2003, Dynea International prepayment of The Term
Loan B was made pro rata for (euro)6.9 million in 2003.
Repayment Date: Payment Amounts
-------------------
((euro)in millions)
December 31, 2007.............................. 23.7
June 30, 2008.................................. 39.2
Term Loan C. The Term Loan C was drawn in one U.S. dollar tranche by
Dynea Chemicals Oy to refinance Neste's existing debt, to fund the acquisition
of Dyno and refinance existing Dyno debt. The Term Loan C will be repaid in one
installment on June 30, 2009. In 2004, Dynea Chemicals Oy made a prepayment of
The Term Loan A of (euro)0.6 million from the proceeds of asset sales. Due to
the sale of the oil field chemicals business in 2003 Dynea International
prepayment of The Term Loan C was made pro rata for (euro)6.3 million in 2003.
Term Loan D. A new facility, called Tranche D, was underwritten by
Dynea Oy in February 2004. (euro)15.3 million of the new loan was drawn in
February 2004 and the remainder in August 2004. The new Tranche D loan facility
carries an interest of Libor +3% plus 1% capitalized interest. Tranche D will be
repaid in one installment on December 31, 2009.
Revolving Credit Facility. The revolving credit facility provides
(euro)100 million to finance the ongoing working capital and general corporate
requirements of Dynea Chemicals Oy and some of its subsidiaries.
Prepayment. In addition to the scheduled amortization and repayment
dates described above, in some circumstances the senior credit agreement
requires mandatory prepayments of outstanding amounts under the various
facilities, including if:
o Dynea Chemicals or any of its subsidiaries receives cash
proceeds (including deferred consideration) from the sale of
assets which is not used to fund related expenses, taxes,
pension costs or costs relating to related intellectual
property rights, other than in connection with sales that are
in the ordinary course of business, are used to purchase
another replacement asset, are among members of the group or
which relate to certain other exceptions identified in the
senior credit agreement;
o Dynea Chemicals receives surplus cash during a financial year,
which consists of the amount by which its cash flow exceeds
the aggregate of its total funding costs, the aggregate amount
of prepayments made during that financial year and (euro)10.0
million;
o Dynea Chemicals or any of its subsidiaries receives insurance
proceeds in aggregate in excess of (euro)0.2 million, other
than amounts required to be paid to them as a result of the
sale of the explosives operations, and does not apply those
funds in reinstatement of the insured asset or payment of a
third party liability in respect of which they were received
within six months of being received;
o Dynea Chemicals or any of its subsidiaries receives any amount
in excess of (euro)0.1 million from any of the vendors under
the acquisition agreement relating to the acquisition of
Neste, net of any reasonable costs an expenses of recovery and
any tax payable, unless those funds are applied to make good
or purchase an asset to replace directly the asset or to pay
the liabilities in respect of which the payment was received,
or to compensate the recipient for a cash loss;
o all or substantially all of the business and assets of Dynea
Chemicals and its subsidiaries are disposed of;
o the share capital of Dynea Oy, Dynea International, Dynea
Chemicals or any other group company is admitted to any
recognized securities exchange;
o a change of control occurs (as that event is defined in the
senior credit agreement); or
o it is or it becomes illegal for any lender under the senior
credit agreement to maintain all or part of its commitment or
to continue to make available or fund or maintain its
participation in any part of the senior credit agreement.
Indebtedness under the senior credit agreement may be voluntarily
prepaid by the borrowers in whole or in part without premium or penalty. Any
prepayment of any of the term loan facilities shall be made only pro rata with
each of the other term loan facilities. Partial voluntary prepayments and any
mandatory repayments referred to above will be applied against the Term Loan A,
the Term Loan B and the Term Loan C pro rata. Dynea Chemicals Oy used (euro)25.0
million towards prepayment of senior term loans in accordance with the on
February 10, 2003 restated senior credit agreement.
Interest Rate and Fees. Advances under the Term Loan A bear interest at
LIBOR plus an initial interest margin of 2.00% per annum, together with
mandatory costs. Advances under the Term Loan B and Term Loan C bear interest at
LIBOR plus an interest margin of 2.50% and 3.00%, respectively, per annum and
mandatory costs. Advances under the Term Loan D bear interest at Libor plus an
interest margin of 3.00% plus capitalized interest of 1.00%. Advances under the
revolving credit facility bear interest at LIBOR plus an initial interest margin
of 2.00% per annum and mandatory costs. The interest margin may be reduced for
advances under the Term Loan A and the revolving credit facility if Dynea
Chemicals Oy, on a consolidated basis, meets specified financial targets during
a fiscal year with respect to each financial year beginning after December 31,
2001, but the margin may not be less that 1.25%. We currently do not benefit
from any interest margin reduction. Generally:
o in respect of any such financial year beginning after December
31, 2001, the margin shall be 1.75% per annum if the total
ratio of total net debt to EBITDA (as those terms are defined
in the senior credit agreement) for the relevant financial
year is less than or equal to 4.00:1, but, after December 31,
2002, is greater than or equal to 3.50:1;
o in respect of any such financial year beginning after December
31, 2002, the margin shall be 1.50% per annum if the total
ratio of total net debt to EBITDA for the relevant financial
year is less than or equal to 3.50:1, but, after December 31,
2003, is greater than or equal to 3.00:1;
o in respect of any such financial year beginning after December
31, 2003, the margin shall be 1.25% per annum if the total
ratio of total net debt to EBITDA for the relevant financial
year is less than or equal to 3.00:1.
If these or additional specified conditions are not met, then the
margin may be increased to 2%, including if management accounts are not provided
to the facility agent in a timely manner and if there is a default or event of
default which has occurred and is continuing under the senior credit agreement.
If the targets, which only go into effect in year 2002, were applied to the
current year, we would not currently meet them.
For the Term Loan A, the Term Loan B and the Term Loan C, Dynea
Chemicals Oy will pay a commitment fee of 0.50% per annum for the period from
the date of the credit agreement until fully drawn or cancelled. With respect to
the revolving credit facility, Dynea Chemicals Oy will pay a commitment fee
equal to 0.50% per annum, from the date of the senior credit agreement until the
close of business on the relevant final repayment date on the unused and
uncancelled portion of that facility. In addition, the borrowers will pay some
agency and other fees.
Security. The security for the borrowers' obligations under the senior
credit agreement consists of, to the extent legally or practically possible,
first priority security comprising mortgages and fixed and floating charges over
all of the assets of Dynea Chemicals Oy and its material subsidiaries and a
security interest in the shares of Dynea Chemicals Oy.
Covenants. Subject to the various amendments to the credit agreement
for the periods discussed above, the senior credit agreement contains a number
of covenants requiring the borrowers to achieve or maintain specified
consolidated financial ratios. Dynea Chemicals Oy has agreed to maintain the
following ratios for each 12-month period, as measured on every March 31, June
30, September 30 and December 31 for the preceding 12 months.
o a ratio of EBITDA to total net interest costs, which varies
between 1.54 and 2.03:1. The ratio is 1.54:1 for the 12 months
to March 31, 2005 and it is 2.60:1 for each 12-month period
ending on those dates for periods after December 31, 2006;
o a ratio of net debt to EBITDA, which varies between 7.55:1 and
5.04:1. The ratio is 7.55:1 for the 12 months to March 31,
2005 and it is 3.10:1 for each 12-month period ending on those
dates for periods after December 31, 2006;
o a ratio of EBITDA to total net senior interest costs, which
varies between 4.40:1 and 5.40:1. The ratio is 4.40 for the 12
months to March 31, 2005 and it is 5.40:1 for each 12-month
period ending on those dates for periods after December 31,
2006; and
o a ratio of cash flow to total funding costs, which varies
between 0.72:1 and 0.78:1. The ratio is 0.72:1 for the 12
months to March 31, 2005 and it is 1.10:1 for each 12-month
period ending on those dates after December 31, 2006;
in each case as those terms are defined in the senior credit
agreement. As used in the senior credit agreement, EBITDA
means, in relation to Dynea Chemicals Oy and its subsidiaries
for any period, those companies' consolidated net profit for
that period before taxes and total net interest costs and
adding back:
o Depreciation charged to the consolidated profit and loss
account of the Group during such period;
o any amount of Acquisition Goodwill amortised in that period
against the consolidated profit and loss account of the Group;
o Acquisition Costs and other non-cash items charged or
amortised in that period to, or against, the consolidated
profit and loss account of the Group;
o Restructuring Costs paid in such period to the extent the same
do not constitute an extraordinary or exceptional item;
o to the extent not taken account of in paragraph (a) above, any
insurance proceeds received in such period in respect of
business interruption to the extent such proceeds covers loss
of revenue for the Group; and
o the proceeds of any further equity injection made after the
January 21, 2005 received in such period (other than the
additional equity injections of (euro)11.0 million in both
2005 and 2006 that was agreed an amendement letter dated
January 21, 2005) up to an aggregate maximum amount, for the
period of 18 months following the January 21, 2005, of
(euro)15 million;
but excluding:
o profit and loss attributable to minority interests;
o any profit or loss arising on the disposal of fixed assets;
o income from, and investments in, participating interests in
associated undertakings and income from any other fixed asset
investment (excluding income from Methanor, which, for the
avoidance of doubt, shall be included in the consolidated net
profit of the group) ;
o amounts written off the value of investments;
o realized and unrealized exchange gains and losses;
o other restructuring costs;
o extraordinary and exceptional items; and
o all professional fees (being legal and accounting fees)
directly incurred in relation to the amendment and restatement
of the senior credit agreement in February 2004 or the
implementation the business plans for the group for the
financial years ending 31 December 2004, 31 December 2005 and
31 December 2006 to the extent taken into account in the
calculation of EBITDA for the relevant period.
The senior credit agreement also contains general covenants, which
restrict the incurrence of debt and liens, the payment of dividends, the
disposition of assets, and the incurrence of capital expenditures above certain
levels and some other activities and transactions.
The senior credit agreement generally provides that none of Dynea
Chemicals Oy or its subsidiaries may make any payments to Dynea International
Oy, by way of dividends, loans or otherwise. However, provided that no event of
default (or event which could become an event of default) has occurred, the
senior credit agreement permits payments to Dynea International Oy in order to
pay fees and expenses of an administrative nature incurred by Dynea
International Oy or Dynea Oy or to enable Dynea International Oy to pay
interest, additional amounts, and special interest on the notes and principal on
the notes at their original maturity date.
Events of Default. The senior credit agreement contains events of
default customary for senior leveraged acquisition financings, including, among
others, non-payment of principal or interest thereunder, defaults with respect
to some other indebtedness, failure to observe covenants set forth in the senior
credit agreement, some judgment defaults and some bankruptcy-related events.
Hedging Obligations. Pursuant to the senior credit agreement, we
procured to enter into interest rate hedging arrangements covering at least 50%
of commitments under the Term Loan A, the Term Loan B, the Term Loan C for a
period of at least 3 years within 60 days of the acquisition of Dyno closing.
The Intercreditor Agreement
We, Dynea Chemicals Oy, the Trustee, Citibank International Plc and
Citibank N.A. entered into an intercreditor agreement in connection with the
senior credit agreement, the issuance of the initial notes and the DCI loan
facility (which was repaid in 2000). The intercreditor agreement sets out the
respective rights of some of our creditors, Dynea Chemicals Oy and our
subsidiaries, as regards ranking of debt, security and enforcement, and defines
the circumstances in which payments may be made by Dynea Chemicals Oy and its
subsidiaries in respect of some debt (including the notes and the DCI loan
facility, Dynea Chemicals Oy's guarantee of the notes and the DCI loan facility
and the Intercompany Loans pursuant to which we will advance the proceeds from
this offering to our subsidiaries). Upon consummation of the offering of the
notes, the Trustee, on behalf of the note holders, also became a party to the
intercreditor agreement.
The Indenture
Pursuant to an indenture, dated August 8, 2000, by and between The Bank
of New York as trustee, Dynea Chemicals Oy, as guarantor and Dynea International
Oy as issuer, we issued an aggregate principal amount of (euro)250 million of 12
1/4% Senior Notes due 2010. At our option, we may redeem these notes on or after
August 15, 2005 at redemption prices beginning at 106.125% and declining
thereafter. We may also redeem these notes prior to August 15, 2005 at a
make-whole price. Upon the occurrence of specified change of control events, as
described in the indenture, each holder of the notes will have the right to
require us to purchase such notes at a price equal to 101% of the principal and
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase. In addition, pursuant to the indenture, we and our restricted
subsidiaries are subject to certain restrictive covenants, including, without
limitation, our ability to incur indebtedness, to pay dividends and to make
investments.
Exchange controls
There are currently no Finnish laws, which may affect the import or
export of capital, or the remittance of dividends, interest or other payments to
non-Finnish holders or our securities.
DOCUMENTS ON DISPLAY
You may read and copy this annual report, including the attached
exhibits, and any reports, statements or other information that we submit to the
SEC at the SEC's public reference room in Washington, D.C. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms.
In addition, the indenture governing the notes requires us to deliver
to our note holders and to the trustee for the note holder's copies of all
reports that we submit to the SEC without any cost to our note holders. We will
also furnish those other reports as we may determine or as the law requires. So
long as the notes continue to be listed on the Luxembourg Stock Exchange, copies
of any such reports will be available during normal business hours on any
business day at the office of Banque Internationale a Luxembourg.
You should rely only on the information provided in this annual report.
No person has been authorized to provide you with different information.
The information in this annual report is accurate as of the date on the
front cover. You should not assume that the information contained in this annual
report is accurate as of any other date.
Some terms mentioned in this annual report are registered in some
jurisdictions as our trademarks. This annual report also refers to the
trademarks of other companies.
Item 11. Quantitative and Qualitative Disclosures About Market Risk.
Financial Risk Management
Our business operations give rise to market risks exposure due to
changes in foreign exchange and interest rates as well as raw material prices.
Also our high level of debt makes us exposed to changes in interest rates. To
manage these risks, we enter into hedging transactions and generally use
derivative financial instruments, pursuant to established guidelines and
policies, which enable us to mitigate the adverse effects of financial market
risk. These hedging instruments are classified in a manner consistent with the
item being hedged, meaning that the associated asset and liability items are
marked-to-market at each balance sheet date through current period earnings.
We do not anticipate any material adverse effect on our consolidated
position, result of operations, or cash flows, resulting from the use of
derivative financial instruments. We cannot guarantee, however, that our hedging
strategies will be effective, or that translation losses can be minimized or
forecast accurately.
Foreign Exchange Risk and Interest Rate Risk
Our operations are conducted by many entities in many countries, and
accordingly, our results of operations are subject to currency transaction risk
and currency translation risk. Dynea's historical results were particularly
affected by exchange rate fluctuations between the euro and other currencies,
such as the U.S. dollar, the Norwegian crown, and the Canadian dollar and by
exchange rate fluctuations between the Norwegian crown against other currencies,
such as the U.S. dollar. Foreign exchange exposures are managed against various
local currencies, as we have a significant amount of worldwide production and
sales.
Because we have global investments, production facilities and other
operations, we have assets and liabilities and cash flows in currencies other
than the euro. The equity changes caused by movements in foreign exchange rates
are shown as translation difference in our financial statements. Dynea
International's main exposures are related to assets and liabilities denominated
in the currencies of the United States, Norway and Canada. Our businesses
includes a large portion of cross border and other sales incurring foreign
exchange transaction risks, as well as raw material sourcing and other costs in
various currencies. Our main adhesive resin business sales are, however, largely
conducted within a limited geographic area near our production sites, which
somewhat limits our foreign exchange transaction exposures.
Our main objective of interest rate risk management will continue to be
to reduce our total funding cost and to alter the interest rate exposure to the
desired risk profile. Under the terms of the senior credit agreement, we were
required to hedge at least 50% of the aggregate amount of the senior term loans
through interest rate protection agreements for a period of at least three
years. We have historically primarily borrowed in the euro, U.S. dollar,
Canadian dollar, and Norwegian crown, among other currencies. Our historical
policy was to hedge approximately 50% of borrowings against future movements in
interest rates.
Raw Material Price Risk
Our operations are exposed to raw material price risk arising mainly
from movements in the price of the main raw materials methanol, urea, phenol,
and melamine. As the prices we pay for the raw materials change quarterly or
monthly, we are subject to considerable volatility in the prices we pay for such
materials. Prices of methanol, urea and phenol are highly volatile, while the
price of melamine has traditionally been more stable. In 2004, the prices of
urea and phenol were very volatile. The sales prices of our products are
primarily a function of several items including the prices of the raw materials
we use to make our products. This connection between the raw material prices and
our sales prices gives protection against adverse changes in the raw material
prices. However, we are not always able to fully pass through to the customers
the fluctuations in the prices of the raw materials. Centralized supply and
logistics organization hedges us against some of the raw material price
fluctuations through the use of purchasing contracts or commodity derivatives.
Interest Rate Exposure
As of December 31, 2004, Dynea International had (euro)207.6 million in
syndicated long-term variable rate debt, of which (euro)117.1 million was hedged
through LIBOR-based interest rate swaps. The swaps had a remaining average life
of approximately 1.6 years. An interest rates average increase of 25 basis
points would cause Dynea International's annual interest expense to increase
about (euro)0.4 million, with those interest rates being below the capped rates
of interest.
Interest rate swaps involve the exchange of floating for fixed rate
interest payments to effectively convert floating rate debt into fixed rate
debt. The fair value of Dynea International's interest rate derivatives
outstanding as of December 31, 2004 and December 31, 2003 were (euro)(0.3)
million and (euro)(0.8), respectively.
Notional
Interest Rate Swaps at December 31, 2004 Amount Maturity
---------------------------------------- ------ --------
(in(euro)000)
Variable to Fixed:
Norwegian crown.................... 42.5 October 2006 / March 2006 / November 2006
U.S. dollar ....................... 62.4 March 2005 / August 2006 / September 2006 /
October 2006 / November 2006
Canadian dollar ................... 12.2 March 2006
Short-term loans also involve interest rate risk. We mainly borrow
under our revolving credit facility to cover working capital and other needs.
The balance of revolving credit facility was (euro)62.9 million as of December
31, 2004.
Foreign Currency Exchange Rate Exposure
At December 31, 2004, Dynea International had foreign exchange
contracts outstanding in various currencies. Dynea International's primary net
foreign currency exposures at December 31, 2004 included U.S. dollar, Norwegian
crown and Canadian dollar. As of December 31, 2004 and December 31, 2003, Dynea
International recognized a net gain of (euro)1.2 million and (euro)11.0 million,
respectively, related to foreign currency forwards. There were no gains or
losses deferred at either date. Consistent with the nature of the economic hedge
of those foreign currency exchange contracts, decreases or increases of the
underlying instrument or transaction being hedged would offset the corresponding
unrealized gains or losses, respectively. The fair value of Dynea
International's forward exchange contracts that were outstanding as of December
31, 2004 and December 31, 2003, were (euro)(0.5) and (euro)0.9 million,
respectively.
Raw Material Price Exposure
Dynea International's primary raw material price exposure at December
31, 2004 included methanol, urea, phenol, and melamine. Dynea International had
no commodity derivatives at December 31, 2004.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
Not applicable.
Item 15. Controls and Procedures.
The Company has carried out an evaluation under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. There
are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon the Company's
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2004, the disclosure controls and procedures
are effective to provide reasonable assurance that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There has been no change in the Company's internal control over
financial reporting during the Company's 2004 fiscal year that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 16. Audit Committee Financial Expert, Code of Ethics and Principal
Accountant Fees and Services.
Audit Committee Financial Expert
The independent members of our Board of Directors act as our Audit
Committee. Our Audit Committee does not include a financial expert as such a
qualification has not been considered necessary by our Board of Directors for
serving on the Audit Committee.
Code of Ethics
We have not adopted a formal corporate code of ethics as we believe
that such a code is not necessary to deter wrongdoing within our corporate
structure.
Principal Accountant Fees and Services
Year Ended Year Ended
December 31, 2003 December 31, 2004
------------------ -----------------
Audit fees 1.4 1.0
Audit-related fees 0.4 0.2
Tax fees 0.4 0.2
All other fees 0.1 0.2
--- ---
Total fees (euro) 2.3 (euro) 1.6
========== ==========
Audit-related fees include services such as pension and benefit plan
audits, consultations concerning accounting and financial reporting standards,
internal control reviews, due diligence services, affiliate and product line
special purpose audits and other auditing procedures and issuance of special
purpose reports. Tax fees include services such as transfer pricing advice and
assistance, expatriate tax services, U.S. Extra Territorial Income analysis,
U.S. state and local tax planning, tax related due diligence services, review of
U.S. federal income tax returns, consultations on various U.S. federal tax
matters, assistance with tax examinations, international tax compliance and
international tax planning. All other fees include services such as audits or
reviews of third parties to assess compliance with contracts, risk management
reviews and assessments, internal investigations, expatriate administrative
services, review of actuarial reports and calculations, training and advisory
services with respect to non-financial systems.
The Audit Committee is responsible for the appointment, compensation
and oversight of the work of the independent auditor. As part of this
responsibility, the Audit Committee is required to pre-approve certain audit and
non-audit services performed by our independent auditor, PricewaterhouseCoopers,
in order to assure that they do not impair the auditor's independence. Pursuant
to Dynea International Oy's Audit and Non-Audit Services Pre-Approval Policy,
proposed services either may be pre-approved by agreeing to a framework with
descriptions of allowable services with the Audit Committee, or require the
specific pre-approval of the Audit Committee. As at December 31, 2003 services
that have received general pre-approval included audit services, audit-related
services such as pension and benefit plan audits and consultations concerning
accounting and financial reporting standards, tax services and certain other
non-audit services, but not including internal investigations. The Audit
Committee will periodically review and approve the types of services that are
pre-approved.
None of the accountant services listed above was approved by the Audit
Committee pursuant to any de minimis exception from the pre-approval policy.
Item 17. Financial Statements.
See pages F-1 to F-44 and G-1 to G-37.
Item 18. Financial Statements.
Not applicable.
Item 19. Exhibits.
Pursuant to the rules and regulations of the Securities and Exchange Commission,
Dynea International Oy and Dynea Chemicals Oy have filed or incorporated by
reference certain agreements as exhibits to this Annual Report on Form 6-K.
These agreements may contain representations and warranties by the parties.
These representations and warranties have been made solely for the benefit of
the other party or parties to such agreements and (i) may have been qualified by
disclosures made to such other party or parties, (ii) were made only as of the
date of such agreements or such other date(s) as may be specified in such
agreements and are subject to more recent developments, which may not be fully
reflected in Dynea International Oy's and Dynea Chemical Oy's public disclosure,
(iii) may reflect the allocation of risk among the parties to such agreements
and (iv) may apply materiality standards different from what may be viewed as
material to investors. Accordingly, these representations and warranties may
not describe either Dynea International Oy's or Dynea Chemical Oy's actual state
of affairs at the date hereof and should not be relied upon.
Item Exhibit
1.1* Articles of Association of Dynea Chemicals Oy (formerly Neste Chemicals
Oy).
1.2* Articles of Association of Dynea International Oy (formerly Neste
Chemicals International Oy).
2.1** Indenture, dated as of August 8, 2000, among Neste Chemicals
International Oy, Neste Chemicals Oy and The Bank of New York.
4.1* Amendment and Restatement Agreement dated November 15, 2001 relating to
the Credit Agreement Dated 7 August 2000, among Dynea Chemicals Oy,
Nordkem AS, Citibank International Plc, Citibank, N.A. and Salomon
Brothers International Limited.
4.2*** Amendment Agreement dated February 11, 2003 to terms of Senior Credit
Agreement dated August 7, 2000 among Dynea Chemicals Oy, certain banks,
Citibank International Plc, Citibank N.A. and Salomon Brothers
International Limited.
4.3**** Amendment and Restatement Agreement dated February 13, 2004 relating to
the Credit Agreement Dated 7 August 2000, among Dynea Chemicals Oy,
Nordkem AS, Citibank International Plc, Citibank, N.A., Citigroup
Global Markets Limited and Dynea Oy.
4.4***** Amendment Letter dated January 21, 2005 to the Credit Agreement dated 7
August 2000, among Dynea Chemicals Oy, Nordkem AS, Citibank
International Plc, Citibank, N.A., Citigroup Global Markets Limited and
Dynea Oy as subsequently amended and restated by an amendment and
restatement agreement dated February 31, 2004 and as subsequently
amended by an amended letter dated 21 April, 2004.
8.1 Principal subsidiary undertakings as at December 31, 2004.
12.1 CEO Certificate.
12.2 CFO Certificate.
- -----------------
* Exhibits to the company's Annual Report on Form 20-F filed April 30,
2001 under the Securities Exchange Act, as amended, hereby incorporated
by reference in this annual report.
** Exhibit to the company's Registration Statement on Form F-4 (No.
333-13782 and 333-13782-01) filed August 2, 2001 under the Securities
Act of 1933, as amended, hereby incorporated by reference in this
annual report.
*** Exhibit to the company's Report on Form 6-K submitted February 19, 2003
under the Securities Exchange Act, as amended, hereby incorporated by
reference in this annual report.
**** Exhibit to the company's Annual Report on Form 6-K submitted April 22,
2004 under the Securities Exchange Act, as amended, hereby incorporated
by reference in this annual report.
***** Exhibit to the company's Report on Form 6-K submitted February 7, 2005
under the Securities Exchange Act, as amended, hereby incorporated by
reference in this annual report.
SIGNATURES
The company hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
DYNEA INTERNATIONAL OY
Company
/s/ Filip Frankenhaeuser
------------------------
Name: Filip Frankenhaeuser
Title: Executive Vice President
and Chief Financial Officer
DYNEA CHEMICALS OY
Company
/s/ Filip Frankenhaeuser
------------------------
Name: Filip Frankenhaeuser
Title: Executive Vice President
and Chief Financial Officer
Date: April 20, 2005
INDEX TO FINANCIAL STATEMENTS
Audited consolidated financial statements of Dynea International Oy and
Subsidiaries as of December 31, 2004 and 2003 and for the years ended December
31, 2004, 2003 and 2002:
Reports of Independent Accountants ........................ F-2
Consolidated Balance Sheet ................................ F-3
Consolidated Income Statement ............................. F-4
Consolidated Statement of Changes in Equity ............... F-5
Consolidated Cash Flow Statement .......................... F-6
Notes to Consolidated Financial Statements ................ F-7
Audited financial statements of Methanor as of December 31, 2004 and 2003
and for the years ended December 31, 2004, 2003 and 2002:
Reports of Independent Accountants ....................... F-38
Balance Sheet ............................................ F-39
Income Statement ......................................... F-40
Statement of Changes in Partners' Capital................. F-40
Cash Flow Statement ...................................... F-41
Notes to Financial Statements ............................ F-42
Audited consolidated financial statements of Dynea Chemicals Oy and
Subsidiaries as of December 31, 2004 and 2003 and for the years ended December
31, 2004, 2003 and 2002:
Reports of Independent Accountants ....................... G-1
Consolidated Balance Sheet ............................... G-2
Consolidated Income Statement ............................ G-3
Consolidated Statement of Changes in Equity .............. G-4
Consolidated Cash Flow Statement ......................... G-5
Notes to Consolidated Financial Statements ............... G-6
Dynea International Oy and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and the Board of Directors of Dynea International Oy and its
subsidiaries:
In our opinion, the accompanying Consolidated Balance Sheets and the related
Consolidated Income Statements, Statements of Changes in Equity and Cash Flow
Statements present fairly, in all material respects, the financial position of
Dynea International Oy and its subsidiaries ("the Company") at December 31, 2004
and 2003 and the results of their operations and their cash flows for the years
ended December 31, 2004, 2003 and 2002 in conformity with International
Financial Reporting Standards. These financial statements are the responsibility
of the Company's Board of Directors and management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
which require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
As discussed in Note 2, Dynea International Oy adopted International Accounting
Standard ("IAS") 1 (revised 2003) Presentation of Financial Statements, IAS 21
(revised 2003) The Effect of Changes in Foreign Exchange Rates, IAS 24 (revised
2003) Related Party Disclosures, International Financial Reporting Standard 3
Business Combinations, IAS 36 (revised 2003) Impairment of Assets and IAS 38
(revised 2003) Intangible Assets in 2004.
International Financial Reporting Standards vary in certain significant respects
from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented
in Note 26 to the consolidated financial statements.
Helsinki, April 18, 2005
PricewaterhouseCoopers Oy
Authorized Public Accountants
Kim Karhu
Authorized Public Accountant
Dynea International Oy and Subsidiaries
Consolidated Balance Sheet
(all amounts in (euro) millions)
As at As at
Notes December 31, 2004 December 31, 2003
Asse -----------------------------------------------
Non-current assets
Property, plant and equipment, net 5 (euro) 380.5 (euro) 410.9
Intangible assets 6 191.6 178.9
Investments in associates and joint ventures (1) 2,7 55.9 44.7
Other non-current assets 2.8 3.0
--- ---
Total non-current assets 630.8 637.5
----- -----
Current assets
Inventories 8 70.2 59.2
Accounts receivable and prepayments 9 130.3 114.6
Taxes currently receivable 4.5 5.9
Other current assets 2.8 3.1
Cash and cash equivalents 27.6 21.2
---- ----
Total current assets 235.4 204.0
----- -----
Total assets (euro) 866.2 (euro) 841.5
===== =====
Equity and liabilities
Capital and reserves attributable to the Company's equity holders
Share capital 12 (euro) 71.0 (euro) 293.0
Share premium 35.0 35.0
Related party transactions 23 36.7 29.2
Cumulative translation adjustment (43.1) (41.6)
Accumulated profit/(loss) 2 16.1 (199.5)
---- -------
Total capital and reserves 115.7 116.1
Minority interest 2 9.2 9.9
--- ---
Total Equity 124.9 126.0
----- -----
Non-current liabilities
Borrowings 13 421.2 414.4
Pension liabilities 15 16.7 17.3
Provisions 16 8.8 9.4
Deferred tax liabilities (1) 2,14 34.9 43.8
Other non-current liabilities 1.0 3.5
--- ---
Total non-current liabilities 482.6 488.4
----- -----
Current liabilities
Accounts payable 17 103.0 86.4
Accrued liabilities 18 27.4 28.5
Borrowings 13 90.9 75.6
Pension Liabilities 15 0.8 --
Provisions 16 2.1 2.6
Taxes currently payable 11.3 8.9
Other current liabilities 23.2 25.1
---- ----
Total current liabilities 258.7 227.1
----- -----
Total liabilities 741.3 715.5
----- -----
Total equity and liabilities (euro) 866.2 (euro) 841.5
============ ============
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised)
On April 18, 2005, Dynea International Oy's Board of Directors
authorized these financial statements for issue.
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea International Oy and Subsidiaries
Consolidated Income Statement
(all amounts in (euro) millions)
Year Ended Year Ended Year Ended
Notes December 31, 2004 December 31, 2003 December 31, 2002
-------------------------------------------------------------------
Sales 4 (euro) 1,065.0 (euro) 979.0 (euro) 955.8
Cost of sales 5,6,15,20 (935.0) (857.8) (798.0)
Gross profit 130.0 121.2 157.8
Other operating income 11.9 12.3 13.8
Selling and distribution expenses 5,6,15,20 (30.0) (32.8) (41.3)
Research and development expenses 5,6,15,20 (20.2) (20.0) (17.6)
Administrative expenses 5,6,15,20 (56.9) (56.4) (55.5)
Other operating expenses 16 (6.3) (8.7) (13.9)
(Loss)/profit on sale of discontinued operations 21 (1.9) 1.4 --
Impairment write-downs 5,6 (8.1) (4.4) --
Amortization of goodwill 6 -- (11.1) (14.6)
Operating profit 18.5 1.5 28.7
Finance costs 22 (53.4) (59.2) (50.0)
Share of income in associates and joint ventures(1) 2,7 15.7 13.1 3.9
---- ---- ---
Loss before income taxes (19.2) (44.6) (17.4)
Income tax benefit/(expense) (1) 2,14 0.4 (18.8) 5.0
Loss for the year (euro) (18.8) (euro) (63.4) (euro) (12.4)
======= ======= =======
Attributable to:
Equity holders of the Company (20.5) (64.8) (14.9)
------ ------ ------
Minority interest 2 1.7 1.4 2.5
--- --- ---
Loss for the year (euro) (18.8) (euro) (63.4) (euro) (12.4)
============= ============= =============
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea International Oy and Subsidiaries
Consolidated Statement of Changes in Equity
(all amounts in (euro) millions except share information)
Issued and Cumulative
Shares Paid Share Related Party Accumulated Translation Minority Total
Issued Share Capital Premium Transactions (Loss)(1) Adjustment Interest Equity
------ ------------- ------- ------------ ------ ---------- -------- ------
Balance, December 31, 2001 2,810,000(euro) 281.0 (euro) 0.0 (euro) 38.2(euro) (121.5) (euro) (25.0)(euro)10.0 (euro) 182.7
Effect of adopting IAS 16 (revised) -- -- -- -- 1.7 -- -- 1.7
Shares issued 70,000 7.0 -- -- -- -- -- 7.0
Group contribution (Note 23) -- -- -- (5.1) -- -- -- (5.1)
Net (loss)/profit for the year -- -- -- -- (14.9) -- 2.5 (12.4)
Translation adjustment -- -- -- -- -- (30.9) -- (30.9)
Dividends to minority -- -- -- -- -- -- (1.5) (1.5)
Balance, December 31, 2002 2,880,000 288.0 0.0 33.1 (134.7) (55.9) 11.0 141.5
Shares issued 50,000 5.0 35.0 -- -- -- -- 40.0
Group contribution (Note 23) -- -- -- 5.1 -- -- -- 5.1
Transaction under common control
(Note 1) -- -- -- (9.0) -- -- -- (9.0)
Net (loss)/profit for the year -- -- -- -- (64.8) -- 1.4 (63.4)
Translation adjustment -- -- -- -- -- 14.3 (1.2) 13.1
Dividends to minority -- -- -- -- -- -- (1.3) (1.3)
Balance, December 31, 2003 2,930,000 293.0 35.0 29.2 (199.5) (41.6) 9.9 126.0
Effect of adopting IFRS 3
Business Combinations (Note 2) -- -- -- -- 14.1 -- -- 14.1
Capital decrease (2,220,340) (222.0) -- -- 222.0 -- -- --
Group contribution (Note 23) -- -- -- 7.5 -- -- -- 7.5
Net (loss)/profit for the year -- -- -- -- (20.5) -- 1.7 (18.8)
Translation adjustment -- -- -- -- -- (1.5) (1.3) (2.8)
Dividends to minority -- -- -- -- -- -- (1.1) (1.1)
Balance, December 31, 2004 709,660 (euro) 71.0 (euro) 35.0 (euro) 36.7 (euro) 16.1 (euro) (43.1) (euro) 9.2 (euro) 124.9
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea International Oy and Subsidiaries
Consolidated Cash Flow Statement
(all amounts in (euro) millions)
Year Ended Year Ended Year Ended
December 31, December 31, December
Notes 2004 2003 31, 2002
------- -------------- -------------- -------------
Cash generated from operations 24 (euro) 56.3 (euro) 63.1 (euro) 86.0
------------ ---- ----
Interest received 0.5 0.7 0.7
Interest paid (45.0) (48.2) (64.9)
Other financial income and expense 2.2 21.4 2.4
Dividends from associates 6.2 9.0 1.3
Income taxes paid (4.7) (8.8) (10.6)
----- ----- ------
Net cash provided by operating activities 15.5 37.2 14.9
---- ---- ----
Investing activities
Acquisition of subsidiaries and associates, net of cash
acquired (euro)0.0, (euro)1.2 and (euro)0.1
million in 2004, 2003 and 2002 1 (1.9) (36.2) (1.1)
Disposal of businesses, net of cash disposed
(euro)1.7 in 2003 21 (2.8) 73.9 --
Purchase of property, plant, and equipment and intangibles 5,6 (22.3) (29.3) (25.0)
Proceeds from sales of property, plant, and equipment and
intangibles 5,6 2.6 2.7 1.0
Cash (used in)/provided by investing activities (24.4) 11.1 (25.1)
------ ---- ------
Financing activities
Issuance of share capital/capital contributions 12, 23 7.5 40.0 15.2
Dividends to minority shareholders (1.1) (1.3) (1.1)
Net proceeds/(repayments) from long-term borrowings 13 16.8 (71.0) (13.1)
Payments on short-term borrowings 13 (7.4) (24.1) (18.7)
Cash provided by/(used in) financing activities 15.8 (56.4) (17.7)
---- ------ ------
Increase (decrease) in cash and cash equivalents 6.9 (8.1) (27.9)
Effects of exchange rate changes (0.5) (2.6) 0.3
Cash and cash equivalents--beginning balance 21.2 31.9 59.5
---- ---- ----
Cash and cash equivalents--ending balance (euro) 27.6 (euro) 21.2 (euro) 31.9
============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea International Oy and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(all amounts in (euro) millions unless otherwise stated)
1. Description of business
Formation
Dynea International Oy (the "Company"), formerly Neste Chemicals International
Oy, is a limited liability company, domiciled in Helsinki, Finland, founded on
June 30, 2000, and registered with the Finnish Trade Register on July 3, 2000,
in connection with the acquisition of Dyno ASA ("Dyno"). Prior to June 30, 2000,
the operations of Dynea International were conducted by Dynea Chemicals Oy. Both
entities are wholly owned subsidiaries of Dynea Oy ("Dynea"), formerly Nordkemi
Oy, a company controlled by Industri Kapital AB. The Company's address is
Siltasaarenkatu 18-20, 00530, Helsinki, Finland, and our telephone number is +
358 10 585 2000.
Dynea International Oy represents the successor entity created from the
acquisition of Neste Chemicals on November 30, 1999 and the acquisition of Dyno
ASA on August 8, 2000. Dynea International Oy had no operations until November
30, 1999 when we acquired the Neste Chemicals chemicals businesses from Fortum
Oy, the Finnish state oil and gas company. "Neste" represents the predecessor
combined specialty chemicals businesses carved-out from Fortum Oy.
Dynea International is in the business of developing, manufacturing, marketing,
and selling industrial adhesion and surfacing solutions with a product portfolio
of adhesive resins and binders, and paper overlays, and operates primarily in
Europe, North and South America, and Asia/Pacific regions.
Acquisitions
Chemitec
- --------
Effective January 1, 2003 Dynea International acquired from its parent company
Dynea the Chemitec companies Dynea Erkner Gmbh and Dynea Holding B.V. with its
subsidiaries for a consideration of (euro)36.2 million. The acquisition was
accounted for as a transaction between parties under common control, resulting
in similar treatment to a pooling of interests. The value of net identifiable
assets of the companies was (euro)45.2 million at the date of acquisition. The
resulting difference of (euro)9.0 million was recorded as an adjustment to
equity.
The gross amount of excess of acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities and contingent liabilities over cost
of (euro)16.0 was recognized. The cumulative amount of excess of acquirer's
interest in the net fair value of acquiree's identifiable assets, liabilities
and contingent liabilities over cost recognized amounted to (euro)14.1 million
at December 31, 2003. In January 1, 2004, Dynea International early adopted the
IFRS 3 Business Combinations resulting in derecognizing of negative goodwill
with a corresponding adjustment to the opening balance of retained earnings.
A summary of the net identifiable assets purchased are as follows:
Property, plant and equipment (euro) 40.1
Other assets less liabilities 5.1
---
Net Identifiable Assets 45.2
Purchase price 36.2
----
Difference taken to shareholders' equity (euro) (9.0)
============
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements are prepared in accordance with and comply
with International Financial Reporting Standards ("IFRS") and are prepared under
the historical cost convention except as discussed in the accounting policies
below, for example trading and available-for-sale investments and derivative
financial instruments are shown at fair value.
Adoption of revised standards
In 2004, Dynea International adopted the IFRS below, which are relevant to its
operations. The 2003 accounts have been amended as required, in accordance with
the relevant requirements. All changes in the accounting policies have been made
in accordance with the transition provisions in the respective standards.
IAS 1 (revised 2003) Presentation of Financial Statements
IAS 2 (revised 2003) Inventories
IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and
Errors
IAS 10 (revised 2003) Events after the Balance Sheet Date
IAS 16 (revised 2003) Property, Plant and Equipment
IAS 17 (revised 2003) Leases
IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates
IAS 24 (revised 2003) Related Party Disclosures
IAS 27 (revised 2003) Consolidated and Separate Financial Statements
IAS 28 (revised 2003) Investments in Associates
IAS 31 (revised 2003) Interest in Joint Ventures
IAS 32 (revised 2003) Financial Instruments: Disclosure and Presentation
IAS 39 (revised 2003 and 2004) Financial Instruments: Recognition and
Measurement
IFRS 2 (issued 2004) Share-based Payment
IFRS 3 (issued 2004) Business Combinations
IAS 36 (revised 2004) Impairment of Assets
IAS 38 (revised 2004) Intangible Assets
IFRS 5 (issued 2004) Non-current Assets Held for Sale and Discontinued
Operations
The early adoption of IAS 1, 2, 8, 10, 17, 24, 27, 28, 31 and 32 (all revised
2003) did not result in substantial changes to the Dynea International's
accounting policies. In summary:
o IAS 1 (revised 2003) has affected the presentation of minority interest
and other disclosures.
o IAS 2, 8, 10, 17, 27, 28, 31, 32 and 39 had no material effect on the
Company's policies.
o IAS 24 (revised 2003) has affected the identification of related
parties and some other related-party disclosures.
The early adoption of IAS 16 (revised) resulted in a change in the
accounting policies for capitalizing major overhaul costs. Previously major
overhaul costs were recognized as an expense as incurred. The IAS 16 (revised)
requires that Dynea International capitalizes overhaul expenses as a component
of asset. The adoption IAS 16 (revised) resulted in the following changes:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-----------------------------------------------------
Increase (decrease) in share of income in associates (euro) 2.0 (euro) (1.6) (euro) 0.6
and joint ventures
Increase (decrease) in income tax benefit/(expense) (0.7) 0.5 (0.2)
-------- ------ -----
(Increase) decrease in loss for the year 1.3 (1.1) 0.4
==== ====== =====
Increase in investments in associates and joint
ventures 3.5 1.5 3.1
Increase in accumulated profit/(loss) 2.3 1.0 2.1
Increase (decrease) in deferred tax liabililities 1.2 0.5 1.0
The early adoption of IAS 21 (revised in 2003) resulted in a change in
the accounting policy on the translation of goodwill and fair value adjustments
arising from the acquisition of foreign entities. Goodwill and fair value
adjustments on acquisitions occurring on or after January 1, 2004 are translated
at the exchange rate at each balance sheet date instead of the exchange rate at
the date of acquisition applied previously.
IFRS 2 (issued 2004) will affect the accounting for share-based
compensation, but the Company did not in 2004 have any such arrangements.
The early adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised
2004) resulted in a change in the accounting policy for goodwill. Until 31
December 2003, goodwill was:
o Amortized on a straight line basis over its estimated useful life, not
to exceed 20 years; and
o Assessed for an indication of impairment at each balance sheet date.
In accordance with the provisions of IFRS 3, IAS 36 and IAS 38:
o Dynea International ceased its annual goodwill amortization of
(euro)11.1 million from 1 January 2004 and derecognized its negative
goodwill of (euro)14.1 million with a corresponding adjustment to
opening balance of retained earnings;
o From the year ended 31 December 2004 onwards, goodwill is tested
annually for impairment, as well as when there are indications of
impairment.
o The Group reassessed the useful lives of its intangible assets in
accordance with the provisions of IAS 38. No adjustment resulted from
this reassessment.
Use of estimates--The preparation of financial statements in conformity with
IFRS requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the balance sheet date and the reported amounts of revenues
and expenses in the reporting period. Actual results may differ from the
estimates used in the financial statements. The areas involving a higher degree
of judgment or complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements are disclosed in Note 3.
Consolidation--The consolidated financial statements include the accounts of
Dynea International Oy and all subsidiaries in which Dynea International,
directly or indirectly, has an interest of greater than one half of the voting
rights or otherwise has power to exercise control over the operations. The
purchase method of business combinations, in accordance with IFRS 3 (issued
2004), is used for acquisitions. Subsidiaries are consolidated from the date on
which effective control is transferred to Dynea International and are no longer
consolidated from the date of disposal. In determining whether consolidation is
appropriate for non-wholly-owned subsidiaries, consideration is given to the
rights the minority shareholders hold.
All significant inter-company items and transactions have been eliminated in
consolidation. Where necessary, accounting policies for subsidiaries and
acquired businesses have been changed to ensure consistency with the policies
adopted by Dynea International.
Subsidiaries, which have been acquired with the exclusive intent to be sold
within the subsequent one-year period have not been consolidated, but have been
treated as assets held for sale in accordance with IFRS 5.
A listing of Dynea International's principal subsidiaries is set out in Note 25
Minority interest represents the minority shareholders' proportionate share in
the equity or income of Dynea International's majority-owned subsidiaries:
Beijing Dynea Chemical Industry Co. Ltd., PT Dynea Mugi Indonesia, PT Dynea
Indria, Dynea (Thailand) Co. Ltd., Dynea Krabi Co Ltd. and Dynea Malaysia SDN
BHD.
Related party transactions are discussed in Note 23.
Foreign currencies--Assets and liabilities of foreign subsidiaries are
translated at the exchange rate prevailing at the balance sheet date. Revenues
and expenses are translated using the average rates of exchange prevailing
during the period. Exchange differences arising from the retranslation of the
net investment in foreign subsidiaries and associated undertakings and of
financial instruments, which are designated as and are hedges of such
investments, are taken to shareholders' equity. On disposal of the foreign
entity, the cumulative amount of the translation difference is recognized as
income or expense as part of the gain or loss on sale.
As Dynea International applied the revised IAS 21 as of January 1, 2004 goodwill
and fair value adjustments arising on the acquisition of a foreign entity after
January 1, 2004 are treated as assets and liabilities of the foreign entity and
translated at the closing rate. Goodwill and fair value adjustments that arose
on the acquisition of a foreign entity before the application of revised IAS 21
are treated as non-monetary assets and liabilities of Dynea International and
are translated at the exchange rate at the date of acquisition.
The local currency financial statements of foreign entities operating in
hyper-inflationary economies are restated using appropriate indices to current
values at the balance sheet date before translation into Dynea International's
reporting currency, in accordance with IAS 29.
Gains and losses on all other foreign currency transactions are included in
finance costs in the Income Statement.
Property, plant and equipment--Property, plant and equipment have been stated at
their fair value at the date of acquisition, and at December 31, 2004 and 2003
have been adjusted for accumulated depreciation. The cost of additions,
improvements, and interest on construction are capitalized. Subsequent costs,
including major maintenance costs, are capitalized only when the recognition
criteria are satisfied. All other repairs and maintenance are charged to expense
when incurred.
Upon sale, retirement, abandonment or other disposition of property, the cost
and related accumulated depreciation are eliminated from the accounts and any
gain or loss is reflected in income.
Depreciation is calculated on the straight-line method to write off the cost of
each asset to their residual values over their estimated useful life as follows:
Buildings ................................ 20 to 40 years
Plant and machinery ...................... 5 to 25 years
Other tangible assets .................... 5 to 20 years
Capitalized interest--Interest is capitalized on major capital expenditures
during the period of time that is required to complete and prepare the property
for its intended use, as part of the cost of the asset.
Intangible assets--Goodwill represents the excess of the cost of an acquisition
over the fair value of Dynea International's share of the identifiable net
assets of the acquired subsidiary or associated undertaking at the date of
acquisition. Goodwill is tested annually for impairment and carried at cost less
accumulated impairment losses. Goodwill is allocated to cash-generating units
for the purpose of impairment testing. Goodwill resulted from the foreign
subsidiaries acquired before adopting IFRS 3 Business Combinations at January 1,
2004, is translated by the historical rates. Goodwill resulted from the foreign
subsidiaries acquired after adopting IFRS 3 Business Combinations at January 1,
2004, is translated by the closing rates.
Other intangible assets have been stated at their fair value at the date of
acquisition or represent costs incurred on development projects to the extent
that such expenditures are expected to generate future economic benefits.
Software costs are amortized over a useful life of 3 to 5 years. Other
intangible assets, primarily patents, are amortized using the straight-line
method over their useful lives, generally six years, and at December 31, 2004
and 2003, have been adjusted for accumulated amortization. Amortization expense
is included in depreciation and amortization in the Income Statement.
Impairment--Dynea International assesses annually whether an indicator of
impairment exists for both tangible and intangible assets, including goodwill.
If an impairment indicator is present, Dynea International estimates the
recoverable amount of the asset as the higher of the asset's net selling price
or its value in use. Value in use is calculated based upon a discounted cash
flow analysis. The carrying value of a long-lived asset is considered impaired
when the recoverable amount from such asset is less than its carrying value. In
that event, an impairment loss is recognized based on the amount by which the
carrying value exceeds the recoverable amount.
Computer software development costs--Generally, costs associated with developing
computer software programs are recognized as an expense as incurred. However,
costs that are clearly associated with an identifiable and unique product that
will be controlled by Dynea International and has a probable benefit exceeding
the cost beyond one year are recognized as assets. Associated costs include
staff costs of the development team and all directly attributable costs
necessary to create and produce the asset.
Expenditures that enhance and extend the benefits of computer software programs
beyond their original specifications and lives are recognized as capital
improvements and are added to the original cost of the software. Computer
software development costs recognized as assets are amortized using the
straight-line method over the useful lives, not to exceed a period of five
years.
Research and development--Research and development costs are expensed as
incurred other than those incurred on certain development projects that are
capitalized as intangible assets to the extent that such expenditures are
expected to have future benefits. However, development costs initially
recognized as expense are not recognized as assets in subsequent periods. Dynea
International expensed research and development costs of (euro)20.2 million,
(euro)20.0 million and (euro)17.6 million for the years ended December 31, 2004,
2003 and 2002. Capitalized development costs were immaterial for all periods
presented.
Inventories--Inventories are stated at the lower of cost or net realizable
value. The cost of inventories is determined using the first in first out
method. The cost of finished goods and work in progress comprises raw materials,
direct labor, other direct costs and related production overheads, but excludes
interest expense. Net realizable value is the estimate of the selling price in
the ordinary course of business, less the costs to complete and sell the asset.
Accounts receivable--Accounts receivable are carried at anticipated realizable
value. An estimate is made for doubtful receivables based upon a review of all
outstanding amounts at the period-end. Bad debts are written off during the year
in which they are identified.
Financial instruments-- Dynea International's financial instruments include cash
and cash equivalents, accounts receivable, derivative instruments, accounts
payable and borrowings. All purchases and sales of financial assets are
recognised using settlement date accounting.
Dynea International enters into derivative financial instruments such as forward
foreign exchange contracts to hedge its exposure against foreign currency
fluctuations. Unrealized foreign exchange gains and losses on forward contracts
are calculated by valuing the forward contract with the forward exchange rate
prevailing on the balance sheet date and comparing that with the original amount
calculated by using the forward rate prevailing at the inception of the
contract. All forward foreign exchange contracts are marked-to-market at each
balance sheet date through current period earnings. The foreign exchange
forwards are entered into in order to hedge Dynea International against foreign
exchange rate exposure, however, hedge accounting, as defined in IAS 39, is not
applied to the foreign exchange forward contracts.
Dynea International enters into derivative financial instruments such as
interest rate swaps, and futures contracts to hedge its exposure to interest
rate risks. Interest receivable and payable under interest rate swaps is accrued
and recorded as an adjustment to the interest income or expense related to the
designated liability. Dynea International records the changes in fair values of
the interest rate swaps, and futures in the income statement. Further
disclosures about financial instruments to which Dynea International is a party
are provided in Note 11. The interest rate swaps and futures are entered into in
order to hedge against interest rate exposure, however, hedge accounting, as
defined in IAS 39, is not applied to the interest rate swap, and futures
contracts.
Dynea International enters into derivative financial instruments such as
commodity swap contracts in order to hedge its exposure against raw material
price fluctuations. Unrealized gains and losses on commodity swaps are
calculated by valuing the contracts with quoted market prices prevailing on the
balance sheet date and comparing that with the original amount calculated by
using the market price at the inception of the contract. All commodity
derivative contracts are marked-to-market at each balance sheet date through
current period earnings. The commodity derivative contracts are entered into in
order to hedge Dynea International against raw material price movements,
however, hedge accounting, as defined in IAS 39, is not applied to the commodity
derivatives contracts.
Investments in associates and joint ventures--Investments in associated
undertakings and joint ventures are accounted for by the equity method of
accounting. Associates are undertakings over which Dynea International controls
between 20% and 50% of the voting rights, and over which Dynea International has
the ability to exercise significant influence, but which it does not control.
Joint ventures are entities that Dynea International jointly controls with one
or more other parties under a contractual arrangement.
Equity accounting involves recognizing in the income statement, Dynea
International's share of the associates' and joint ventures' profit and loss for
the year. Dynea International's interest in the associate or joint venture is
carried in the balance sheet at an amount that reflects its share of the net
assets of the associate or joint venture and includes goodwill on acquisition.
Accounting for leases--Leases of property, plant and equipment where a
significant portion of the risks and rewards of ownership are effectively
retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the income statement on a straight-line basis
over the period of the lease. Leases of property, plant and equipment where
Dynea International assumes substantially all the benefits and risks of
ownership are classified as finance leases. Finance leases are capitalized at
the estimated present value of the underlying lease payments, and are immaterial
for all periods presented.
Cash and cash equivalents--Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less at the date of acquisition. Cash equivalents also include
restricted cash. The statement of cash flows was prepared in accordance with IAS
7.
Share capital--Ordinary shares are classified as equity. Issued but not fully
paid capital represents shares, which have been issued to the shareholder but
were not paid for at the balance sheet date. External costs directly
attributable to the issue of new shares, other than on a business combination,
are shown as a deduction, net of tax, in equity from the proceeds. Share issue
costs incurred directly in connection with a business combination are included
in the cost of acquisition.
Dividends-- Dividends on ordinary shares are recognized in equity in the period,
in which they are declared and approved by the Board of Directors and the
shareholders. Dividends are declared and paid in euros.
Borrowings--Borrowings are recognized initially at the proceeds received, net of
transaction costs incurred. In subsequent periods, borrowings are stated at
amortized cost using the effective yield method; any difference between
proceeds, net of transaction costs, and redemption value is recognized in the
income statement over the period of the borrowings.
Interest expenses are accrued for and recorded in the income statement for each
period.
Income taxes--Income tax expense/benefit includes Finnish and other national
income taxes. Dynea International intends to reinvest the earnings of its
foreign subsidiaries into those businesses. Accordingly, no provision has been
made for taxes, which would be payable if such earnings were distributed to
Dynea International.
Deferred income taxes are determined under the liability method. Deferred income
taxes represent liabilities to be paid or assets to be received in the future
and reflect the tax consequences on future years of temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Tax rates enacted or substantially enacted by the balance sheet date
are used to determine deferred income tax.
Future tax benefits, such as net operating loss carry forwards, are recognized
to the extent that it is probable that future taxable profit will be available
against which the unused tax losses can be utilized.
Employee benefits--For defined benefit plans, the pension accounting costs are
assessed using the projected unit credit method. Under this method, the cost of
providing pensions is charged to the income statement so as to spread the
regular cost over the service lives of employees in accordance with the advice
of qualified actuaries who carry out a full valuation of the plans periodically.
The pension obligation is measured as the present value of the estimated future
cash outflows using interest rates of government securities, which have terms to
maturity approximating the terms of the related liability. Actuarial gains and
losses in excess of the "10% corridor" are spread as a level amount over the
average remaining service lives of the employees.
Dynea International's contributions to the defined contribution pension plans
are charged to the income statement in the year to which they relate.
Provisions--Provisions are recognized when Dynea International has a present
legal or constructive obligation as a result of past events, it is probable that
an outflow of resources embodying economic benefit will be required to settle
the obligation, and a reliable estimate of the amount of the obligation can be
made.
A provision for restructuring is recognized in the period in which Dynea
International becomes legally or constructively committed to the payment. The
costs included in a provision for restructuring are only those costs that are
either incremental and incurred as a direct result of the exit plan or are the
result of a continuing contractual obligation with no continuing economic
benefit or a penalty incurred to cancel the contractual obligation.
Government grants--Government grants relating to the purchase of property, plant
and equipment are included in non-current liabilities as deferred income and are
credited to the income statement on a straight-line basis over the expected life
of the related asset.
Revenue recognition--Sales are recorded on shipment of product and customer
acceptance, or performance of services, net of sales taxes and certain other
sales related expenses and after the elimination of sales within Dynea
International. Revenues from licensing agreements are recognized on an accrual
basis in accordance with the substance of the relevant agreement and are
classified as other operating income on the Income Statement.
Shipping and handling costs--Shipping and handling fees are charged to customers
and are included in total sales. Costs incurred for shipping and handling are
classified in other operating expenses in the income statement.
3. Critical accounting estimates and judgments
The preparation of Dynea International's financial statements requires its
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the management evaluates its
estimates, including those related to impairments, pensions, income taxes,
restructuring, bad debts, contingencies and litigation. The management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Dynea International considers the following policies to be the most critical in
understanding the judgments that are involved in preparing its financial
statements and the uncertainties that could impact the results of operations,
financial conditions and cash flows.
Impairment of long-lived assets and goodwill--Dynea International reviews the
carrying amounts of long-lived assets at the balance sheet date or whenever
events or changes in circumstances indicate that the carrying amount of an asset
may be impaired. Dynea International assesses the impairment of goodwill
annually or more frequently if events or changes in circumstances indicate that
the carrying value may not be recoverable. Examples of indicators, which could
trigger an impairment review, include the following:
o significant under performance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and
o significant negative industry or economic trends.
When the carrying value of long-lived assets and goodwill may not be recoverable
based upon the existence of one or more indicators of impairment, Dynea
International measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be commensurate
with current market assessments of the time value of money and the risks
specific to the asset. The most significant variables in determining cash flows
are discount rates, terminal values, the number of years on which to base the
cash flow projections, as well as assumptions and estimates used to determine
the cash inflows and outflows. Those assumptions are described in Note 6. Based
on such reviews there is no need for impairment charges other than presented in
the financial statements. However, there can be no assurance that the change in
the factors listed above may not cause material impairment charges in the
future.
Pensions--The determination of Dynea International's obligation and expense for
pension and other post-retirement benefits is dependent on its selection of
certain assumptions used by actuaries in calculating such amounts. Those
assumptions are described in Note 15 to the consolidated financial statements
and include, among others, the discount rate and expected long-term rate of
return on plan assets. In accordance with IFRS, actual results that differ from
our assumptions are accumulated and amortized over future periods if they are
over 10% of the greater of defined benefit obligation or fair value of plan
assets at beginning of year and therefore generally affect Dynea International's
recognized expense and recorded obligation in such future periods. While Dynea
International believes that its assumptions are appropriate, significant
differences in its actual experience or significant changes in its assumptions
may materially affect its pension and other post-retirement obligations and its
future expense.
Deferred taxes--Deferred income tax is provided in full, using the liability
method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements. Deferred tax
assets are recognized to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be
utilized. Should the actual results differ from these estimates, revisions to
the deferred tax assets would be required.
4. Segment information
Dynea International's reportable segments are strategic business units that
offer different products and services for which internal financial information
is prepared. For the year ended December 31, 2004, Dynea International had the
following business segments:
o Panel Board Resins - producer of various mainly formaldehyde-based resins
that are used in manufacture of particleboard, plywood, MDF and OSB.
o Industrial and Surfacing - includes the industrial resins, wood and
specialty adhesives, and paper overlays product lines.
o Other - These operations mainly consist of operations that do not meet the
quantitative thresholds for separate reporting and primarily represents
corporate expenses.
Activities are primarily conducted in North America, Europe and Asia.
Additionally, for the year ended December 31, 2002 Dynea International Oy also
had the following business segment:
o Oil Field Chemicals- producer of specialty oil field chemicals used to
facilitate oil production and transportation (sold during 2003).
Operating profit/loss is used as the measurement of segment results. The
eliminations column represents eliminations of inter-company sales, expenses,
receivables and payables and the unallocated column represents corporate items
not allocated to the segments. Dynea International's operations are global.
Business Segments
Panel
Board Industrial & Oil Field
Resins Surfacing Chemicals(4) Other Unallocated Eliminations Total
------------------------------------------------------------------------------------------------
Year Ended December 31, 2004
Sales (euro) 540.0 (euro) 497.6 (euro) -- (euro) 27.4 (euro) -- (euro) -- (euro) 1,065.0
Inter-segment sales 6.8 2.9 -- -- -- (9.7)
Other operating income 1.7 3.3 -- 6.9 -- 11.9
Net operating expenses (514.2) (458.7) -- (46.1) -- 9.7 (1,009.3)
Depreciation and amortization(1) (17.3) (18.6) -- (3.2) -- -- (39.1)
Profit on sale of operations -- -- (1.9) -- -- -- (1.9)
Impairment write-downs (0.2) -- -- (7.9) -- -- (8.1)
----- --- ------ ---- --- --- --------
Operating profit/(loss) 16.8 26.5 (1.9) (22.9) -- -- 18.5
Financial expense (53.4)
Share of in come in associates
and joint ventures 3.2 1.4 -- 11.1 -- -- 15.7
--------
Loss before taxes (19.2)
Income tax benefit 0.4
--------
Loss for the period (euro) (18.8)
--------
Segment assets(2) 281.4 288.4 -- 9.3 45.9 (3.3) 621.7
Segment goodwill 44.6 144.0 -- -- -- -- 188.6
Investments in associates and
joint ventures 12.9 4.4 -- 38.6 -- -- 55.9
------ ------- ----- ---- ------ --- -------
Total assets 338.9 436.8 -- 47.9 45.9 (3.3) (euro) 866.2
Total liabilities(2) (81.2) (73.3) -- (14.3) (575.8) 3.3 (741.3)
Capital expenditures(3) 11.2 10.9 -- 0.2 -- -- 22.3
Panel
Board Industrial & Oil Field
Resins Surfacing Chemicals(4) Other Unallocated Eliminations Total
------------------------------------------------------------------------------------------------
Year Ended December 31, 2003(5)
Sales (euro) 489.3 (euro) 461.5 (euro) -- (euro) 28.2 (euro) -- (euro) -- (euro) 979.0
Inter-segment sales 5.4 1.5 -- -- -- (6.9)
Other operating income 3.0 3.8 -- 5.5 -- -- 12.3
Net operating expenses (462.4) (436.1) -- (44.5) -- 6.9 (936.1)
Depreciation and amortization(1) (17.4) (18.8) -- (3.4) -- -- (39.6)
Goodwill amortization (2.7) (8.4) -- -- -- -- (11.1)
Profit on sale of operations -- -- 1.4 -- -- -- 1.4
Impairment write-downs (4.4) -- -- -- -- -- (4.4)
----- --- --- --- --- --- -----
Operating profit/(loss) 10.8 3.5 1.4 (14.2) -- -- 1.5
Financial expense -- -- (59.2)
Share of income in associates
and joint ventures(5) 2.8 1.0 9.3 13.1
-----------
Loss before taxes 44.6)
Income tax expense (18.8)
-----------
Loss for the period (euro) (63.4)
-----------
Segment assets(2) 280.0 287.3 -- 21.1 36.2 (2.3) 622.3
Segment goodwill 44.6 129.9 -- -- -- -- 174.5
Investments in associates and 9.0 3.3 -- 32.4 -- -- 44.7
joint ventures(5) ------ ------- ----- ----- ----- ------ -----------
Total assets 333.6 420.5 -- 53.5 36.2 (2.3) (euro) 841.5
Total liabilities(2), (5) (69.0) (64.8) -- (20.3) (563.7) 2.3 (715.5)
Capital expenditures(3) 18.9 10.1 -- 0.3 -- -- 29.3
1 Depreciation and amortization include depreciation on tangible assets and
amortization of intangible assets excluding goodwill.
2 Segment assets and liabilities exclude deferred tax assets and liabilities
in accordance with IAS 14.
3 Capital expenditures exclude investment in affiliates and payments for
long-lived assets acquired as part of a business acquisition.
4 Oil Field Chemicals business segment was sold in January 2003 (Note 21).
5 Figures were adjusted to early adoption of IAS 16 (revised).
Panel
Board Industrial & Oil Field
Resins Surfacing Chemicals(4) Other Unallocated Eliminations Total
------------------------------------------------------------------------------------------------
Year Ended December 31, 2002(5)
Sales (euro) 468.0 (euro) 389.5 (euro) 71.2 (euro) 27.1 (euro) -- (euro) -- (euro) 955.8
Inter-segment sales 8.6 0.8 -- -- -- (9.4)
Other operating income 2.9 5.7 0.2 5.0 -- -- 13.8
Net operating expenses (431.9) (359.2) (65.3) (40.1) -- 9.4 (887.1)
Depreciation and amortization(1) (17.6) (17.4) (1.1) (3.1) -- -- (39.2)
Goodwill amortization (2.7) (9.2) (2.7) -- -- -- (14.6)
----- ----- ----- --- --- --- -----
Operating profit/(loss) 27.3 10.2 2.3 (11.1) -- -- 28.7
Financial expense (50.0)
Share of income in associates and joint
ventures(5) 1.4 0.7 0.0 1.8 -- -- 3.9
---------
Loss before taxes (17.4)
Income tax benefit 5.0
---------
Loss for the period (euro)(12.4)
=========
Segment assets(2) 305.0 269.6 29.7 23.1 62.2 (6.0) 683.6
Segment goodwill 47.3 153.2 47.3 -- -- -- 247.8
Investments in associates and joint 7.3 2.7 0.2 30.6 -- -- 40.8
ventures(5) ----- ----- ----- ----- --- -- ---------
Total assets 359.6 425.5 77.2 53.7 62.2 (6.0) (euro) 972.2
Total liabilities(2), (5) (76.1) (49.4) (7.8) (24.9) (678.5) 6.0 (830.7)
Capital expenditures(3) 18.1 6.4 0.4 0.1 -- -- 25.0
1 Depreciation and amortization include depreciation on tangible assets and
amortization of intangible assets excluding goodwill.
2 Segment assets and liabilities exclude deferred tax assets and liabilities
in accordance with IAS 14.
3 Capital expenditures exclude investment in affiliates and payments for
long-lived assets acquired as part of a business acquisition.
4 Oil Field Chemicals business segment was sold in January 2003 (Note 21).
5 Figures were adjusted to early adoption of IAS 16 (revised).
Geographic segments
The following table presents external sales by country based on the location of
customers:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
------------------ ------------------ ------------------
Europe (euro) 489.7 (euro) 455.7 (euro) 413.3
Americas 421.1 385.8 378.9
Asia 118.7 102.9 127.5
Oceania 30.7 30.1 29.2
Other 4.8 4.5 6.9
----- ----- -----
Total sales (euro) 1,065.0 (euro) 979.0 (euro) 955.8
============== ============ ============
The composition of total segment assets analyzed below is based on the location
of the assets:
December 31, 2004 December 31, 2003
------------------ ------------------
Europe (euro) 355.5 (euro) 342.4
Americas 201.3 200.1
Asia 63.2 61.5
Oceania 26.1 26.5
----- -----
Total segment assets 646.1 630.5
Unallocated assets 220.1 211.0
----- -----
Total assets (euro) 866.2 (euro) 841.5
============= ============
Comparison figures were adjusted to early adoption of IAS 16 (revised).
Expenditures for long-lived assets analyzed below are based on the location of
the assets and excludes investment in affiliates and payments for long-lived
assets acquired as part of a business acquisition:
December 31, 2004 December 31, 2003 December 31, 2002
------------------ ------------------ ------------------
Europe (euro) 11.3 (euro) 12.3 (euro) 7.5
Americas 7.1 11.5 11.0
Asia 3.4 5.2 6.1
Oceania 0.5 0.3 0.3
Other -- -- 0.1
--- --- ---
Total expenditures (euro) 22.3 (euro) 29.3 (euro) 25.0
=========== =========== ===========
5. Property, plant and equipment
Property, plant and equipment, stated at cost less accumulated depreciation,
consist of:
Other
Land and Plant and Tangible Construction
Buildings Machinery Assets in Progress Total
-------------- --------------- ------------ -------------- --------------
Cost at December 31, 2003 (euro)123.3 (euro) 370.9 (euro) 25.2 (euro) 12.9 (euro) 532.3
============ ============ =========== =========== ============
Additions 1.0 5.8 1.5 14.0 22.3
Transfers 1.9 15.5 -- (17.4) --
Disposals (0.1) (1.2) (0.4) (0.2) (1.9)
Write-downs (3.0) (5.2) (8.2)
Exchange differences (1.5) (7.8) (0.4) (0.2) (9.9)
----- ----- ----- ----- -----
Cost at December 31, 2004 (euro)121.6 (euro) 378.0 (euro) 25.9 (euro) 9.1 (euro) 534.6
=========== ============ =========== ========== ============
Accumulated depreciation,
at December 31, 2003 (euro) 19.2 (euro) 89.7 (euro) 12.5 (euro) -- (euro) 121.4
=========== =========== =========== ========= ============
Depreciation expense 5.7 28.0 3.9 -- 37.6
Transfers -- -- -- -- --
Disposals -- (1.0) (0.4) -- (1.4)
Exchange differences -- (3.3) (0.2) -- (3.5)
--- ----- ----- -----
Accumulated depreciation,
at December 31, 2004 (euro) 24.9 (euro) 113.4 (euro) 15.8 (euro) -- (euro) 154.1
=========== ============ =========== ========= ============
Net book value
December 31, 2003 (euro) 104.1 (euro) 281.2 (euro) 12.7 (euro) 12.9 (euro) 410.9
December 31, 2004 (euro) 96.7 (euro) 264.6 (euro) 10.1 (euro) 9.1 (euro) 380.5
Other
Land and Plant and Tangible Construction
Buildings Machinery Assets in Progress Total
-------------- --------------- ------------ -------------- --------------
Cost at December 31, 2002 (euro)115.8 (euro) 359.2 (euro) 22.3 (euro) 13.5 (euro) 510.8
=========== ============ =========== =========== ============
Subsidiaries acquired 13.9 20.1 4.8 1.3 40.1
Additions 3.6 14.1 2.7 9.3 29.7
Transfers 1.1 9.2 (1.7) (8.6) --
Disposals (4.7) (1.8) (1.6) -- (8.1)
Write-downs -- (4.4) -- -- (4.4)
Exchange differences (6.4) (25.5) (1.3) (2.6) (35.8)
----- ------ ----- ----- ------
Cost at December 31, 2003 (euro)123.3 (euro) 370.9 (euro) 25.2 (euro) 12.9 (euro) 532.3
=========== ============ =========== =========== ============
Accumulated depreciation,
at December 31, 2002 (euro) 14.5 (euro) 68.6 (euro) 10.4 (euro) -- (euro) 93.5
=========== =========== =========== =========== ===========
Depreciation expense 5.9 28.1 3.9 -- 37.9
Transfers -- 0.1 (0.1) -- --
Disposals (0.3) (1.0) (1.1) -- (2.4)
Exchange differences (0.9) (6.1) (0.6) -- (7.6)
----- ----- -----
Accumulated depreciation,
at December 31, 2003 (euro) 19.2 (euro) 89.7 (euro) 12.5 (euro) -- (euro) 121.4
=========== =========== =========== ========== ============
Net book value
December 31, 2002 (euro) 101.3 (euro) 290.6 (euro) 11.9 (euro) 13.5 (euro) 417.3
December 31, 2003 (euro) 104.1 (euro) 281.2 (euro) 12.7 (euro) 12.9 (euro) 410.9
Capitalized interest was immaterial for all periods presented.
6. Intangible assets
Intangible assets, stated at cost less
accumulated amortization, consist of:
Other
Computer Intangible
Goodwill Software Assets Total
-------------- --------------- ---------------- -----------
Cost at December 31, 2003 (euro) 219.4 (euro) 6.0 (euro) 5.6 (euro) 231.0
============ =========== =========== ============
Effect of adopting IFRS 3
business combinations 14.9 -- -- 14.9
Additions -- 0.0 0.0 0.0
Disposals -- -- -- --
Exchange differences (1.1) -- 0.0 (1.1)
----- ----- ----- -----
Cost at December 31, 2004 (euro) 233.2 (euro) 6.0 (euro) 5.6 (euro) 244.8
============ =========== =========== ============
Accumulated amortization,
at December 31, 2003 (euro) 44.9 (euro) 4.1 (euro) 3.1 (euro) 52.1
============ =========== =========== ===========
Effect of adopting IFRS
3 business combinations 0.8 -- -- 0.8
Amortization expense -- 0.9 0.6 1.5
Disposals -- -- -- --
Exchange differences (1.1) -- (0.1) (1.2)
----- ----- ----- -----
Accumulated amortization,
at December 31, 2004 (euro) 44.6 (euro) 5.0 (euro) 3.6 (euro) 53.2
============ =========== =========== ===========
Net book value
December 31, 2003 (euro) 174.5 (euro) 1.9 (euro) 2.5 (euro) 178.9
December 31, 2004 (euro) 188.6 (euro) 1.0 (euro) 2.0 (euro) 191.6
Other
Computer Intangible
Goodwill Software Assets Total
-------------- --------------- ---------------- -----------
Cost at December 31, 2002 (euro) 284.7 (euro) 5.8 (euro) 5.1 (euro) 295.6
============ =========== =========== ============
Subsidiaries acquired (15.0) -- 0.2 (14.8)
Additions -- 0.2 1.0 1.2
Disposals (47.6) -- (0.3) (47.9)
Exchange differences (2.7) -- (0.4) (3.1)
----- ----- ----- -----
Cost at December 31, 2003 (euro) 219.4 (euro) 6.0 (euro) 5.6 (euro) 231.0
============ =========== =========== ============
Accumulated amortization,
at December 31, 2002 (euro) 36.9 (euro) 3.3 (euro) 2.7 (euro) 42.9
=========== =========== =========== ============
Amortization expense 11.1 0.8 0.9 12.8
Disposals (0.5) -- (0.2) (0.7)
Exchange differences (2.6) -- (0.3) (2.9)
----- -- ----- -----
Accumulated amortization,
at December 31, 2003 (euro) 44.9 (euro) 4.1 (euro) 3.1 (euro) 52.1
=========== =========== =========== ===========
Net book value
December 31, 2002 (euro) 247.8 (euro) 2.5 (euro) 2.4 (euro) 252.7
December 31, 2003 (euro) 174.5 (euro) 1.9 (euro) 2.5 (euro) 178.9
In accordance with IFRS 3 Dynea International has ceased to amortize its
goodwill amortization as of January 1, 2004. Other intangible assets principally
represent patents and have been valued based upon management calculations and
analyses.
Impairment test for goodwill
Goodwill is allocated to Dynea International's cash-generating units (CGUs). By
business segments, which consist of CGUs, the goodwill is allocated in the
following way:
December 31, 2004 December 31, 2003
--------------------- ----------------------
Panel Board Resins (euro) 44.6 (euro) 44.6
Industrial and Surfacing 144.0 129.9
----- -----
Total (euro) 188.6 (euro) 174.5
============ ============
The recoverable amount of CGUs is based on value-in-use calculations. These
calculations use cash flow projections based on financial plans approved by the
Board of Directors of Dynea International covering a three-year period. Cash
flows beyond the three-year period until 2009 are projected to be stable. Cash
flows beyond 2009 are incorporated to terminal value, which is calculated as
seven times EBITDA in year 2009. Cash flows and terminal value are discounted
using a 7% discount rate to December 31, 2004.
These assumptions have been used for the analysis of each CGU within the
business segments, Panel Board Resins and Industrial and Surfacing. Management
has determined the budgeted EBITDA and volume growth rates based on past
performance and expectations for market development. The discount rates used are
pre-tax and reflect specific risks relating to the relevant segment (Chemical
industry). As the recoverable amounts of CGUs exceeded their carrying amounts no
impairment charge for goodwill was recognized.
7. Investments in associates and joint ventures
December 31, December 31, 2003
2004
---------------------------------------
Associates:
Opening net book amount (euro) 2.5 (euro) 2.8
Sale of shares -- (0.2)
Exchange differences (0.1) (0.1)
Share of results of associates 0.3
0.2
Distribution of profits (0.1) (0.2)
Closing net book amount 2.6 2.5
--- ---
Joint Ventures:
Opening net book amount (1) 42.2 38.0
Purchase of shares 1.9 --
Exchange differences (0.1) 0.2
Share of results of joint ventures(1) 15.4 12.9
Distributions of profits (6.1) (8.9)
Closing net book amount 53.3 42.2
-------- ------
Total (euro) 55.9 (euro) 44.7
=========== ===========
1)Comparison figures were adjusted to early adoption of IAS 16
(revised).
The principal joint venture is:
Country of Profit/ % Interest held
Incorporation Assets Revenues Liabilities (Loss)
-----------------------------------------------------------------------------------------------------
Joint Venture:
Methanor V.O.F. Netherlands
Year ended December 31, 2004 (euro)105.7 (euro)186.2 (euro)29.6 (euro) 27.7 40
Year ended December 31, 2003(1) (euro)82.0 (euro)207.7 (euro)21.7 (euro) 24.6 40
1) Comparison figures were adjusted to early adoption of IAS 16 (revised).
8. Inventories
December 31, 2004 December 31, 2003
-------------------------------------------
Inventories consist of:
Raw material (euro) 45.8 (euro) 38.8
Work in progress 1.1 0.5
Finished goods 24.6 22.2
------- -------
Total 71.5 61.5
Obsolescence provision (Note 10) (1.3) (2.3)
------- --------
Total (euro) 70.2 (euro) 59.2
=========== ===========
9. Accounts receivable
Accounts receivable consist of:
December 31, 2004 December 31, 2003
--------------------- ----------------------
Trade receivables (net of allowances for doubtful accounts
of (euro)4.4 and (euro)5.8, respectively, Note 10) (euro) 101.4 (euro) 88.9
Related party receivable (Note 23) 11.6 5.4
Prepayments 0.6 3.1
Fair value of foreign exchange forward contracts 0.1 1.4
Fair value of interest rate swaps and futures contracts 0.5 --
Other receivables 16.1 15.8
---- ----
Total (euro) 130.3 (euro) 114.6
============ ============
10. Valuation accounts
Provisions from assets to which they apply:
Beginning Acquired Charged to Change in Tax Discontinued Ending
Balance Operations Expenses Utilized Legislation Operations Balance
-------------------------------------------------------------------------------------
Year ended December 31, 2003
Allowance for doubtful accounts receivable (euro) 4.9 (euro) 0.8 (euro) 0.4 (euro) (0.3) -- -- (euro) 5.8
Obsolescence provision for inventory 0.7 -- 2.0 (0.4) -- -- 2.3
Valuation allowance for deferred tax assets 79.5 -- 92.5 (9.6) -- (2.4) 160.0
Year ended December 31, 2004
Allowance for doubtful accounts receivable (euro) 5.8 -- (euro) 0.1 (euro) (1.5) -- -- (euro) 4.4
Obsolescence provision for inventory 2.3 -- 0.5 (1.5) -- -- 1.3
Valuation allowance for deferred tax assets 160.0 -- 7.0 (14.7) (95.0) -- 57.3
11. Derivatives and financial instruments
Nominal values of derivative financial instruments
December 31, 2004 December 31, 2003
----------------------------------------
Interest rate swaps and futures contracts (euro) 117.1 (euro) 83.6
Foreign exchange forward contracts 84.7 110.7
Maturity of interest rate swap contracts:
Under 1 year 7.3 15.8
2-5 years 109.7 67.8
Fair values of derivative financial instruments
December 31, 2004 December 31, 2003
-------------------------------------------------------------------
Positive Negative Net Net
fair values fair values fair values Fair values
Interest rate swaps and futures contracts (euro) 0.5 (euro) (0.8) (euro) (0.3) (euro) (0.8)
Foreign exchange forward contracts 0.1 (0.6) (0.5) 0.9
Maturity of interest rate swap contracts:
Under 1 year 0.0 -- (0.0) (0.1)
2-5 years 0.5 (0.8) (0.3) (0.7)
Fair values of the interest rate swaps, futures, and foreign exchange forward
contracts are recognized in the Balance Sheet under Current Assets or Current
Liabilities. Positive and negative fair values of financial instruments are
shown under Accounts receivable (See Note 9) or Accrued Liabilities (See Note
18) in accordance with IAS 39. Dynea International had no commodity derivatives
at December 31, 2004.
Fair value of other financial instruments- The carrying amount and fair value of
financial instruments used by Dynea International are as follows:
December 31, 2004 December 31, 2003
-------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------
Assets
Cash and cash equivalents (euro) 27.6 (euro) 27.6 (euro) 21.2 (euro) 21.2
Accounts and related party receivables 113.0 113.0 94.3 94.3
Other receivables 16.7 16.7 17.3 17.3
Liabilities
Accounts and related party payables 103.0 103.0 86.4 86.4
Long-term debt due currently and short-term borrowings 90.9 90.9 75.6 75.6
Long-term debt 421.2 438.9 414.4 436.3
Other financial instruments
Financial guarantees and letters of credit -- 0.2 -- 0.2
The following methods and assumptions were used to determine the above fair
values:
i) The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt due currently and short-term borrowings
approximate their fair values because of the short maturity of these
instruments.
ii) The fair values of interest rate swaps are based upon valuations provided
by the counterparty, which are calculated using a discounted cash flow
analysis.
iii) The fair values of foreign exchange forward contracts are calculated using
year-end market rates.
iv) The fair values of financial guarantees and letters of credit is based upon
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparts at
the reporting date.
v) The fair value of long-term debt is based upon current rates for similar
debt arrangements.
vi) No comparable market exists for the related party balances. The carrying
value is assumed to approximate fair value. vii) Carrying amount of
derivative financial instruments equal fair values. viii) The fair values
of futures contracts are based upon valuations provided by the
counterparty, which are based on quoted market rates at the balance sheet
day.
The nominal amounts of derivatives summarized in the above table do not
represent amounts exchanged by parties and, thus, are not a measure of Dynea
International's exposure from its use of derivatives. The nominal amounts for
the forward exchange contracts include positions, which have been effectively
closed off.
Hedge of net investment in foreign equity
Dynea International's Canadian dollar borrowing of CAD 33.2 million (part of
Term A CAD tranche and part of Term B CAD tranche under the Senior credit
agreement) was designated as a hedge of the net investment in its foreign
subsidiary in Canada until it was terminated at June 8, 2004. The foreign
exchange gain of (euro)0.2 million net of taxes on translation of the borrowing
to Euro at the balance sheet date was recognized in shareholder's equity.
Dynea International's U.S. dollar borrowing of $30.5 million (part of Term A USD
tranche and part of Term B USD tranche under the Senior credit agreement) was
designated as a hedge of the net investment in its foreign subsidiary in the
United States until it was terminated at June 8, 2004. The foreign exchange loss
of (euro)(0.7) million net of taxes on translation of the borrowing to Euro at
the balance sheet date was recognized in shareholders' equity.
Financial risk management
Dynea International has operations in over 20 countries. Approximately 90% of
Dynea International's revenues are generated from international customers.
The overall objective of the Group's Treasury is to provide centralized and
cost-effective funding to subsidiaries as well as to manage financial risks in
order to minimize the negative effects of market fluctuations on Dynea
International's net income. The main exposures for Dynea International managed
by Group's Treasury are interest rate risk and currency risk. In addition there
is a risk of adverse raw material price fluctuations, which is managed by the
centralized procurement organization.
Risk management is mainly carried out by a central Treasury operation under
policies approved by the Board of Directors. Corporate Treasury identifies,
evaluates and hedges financial risks in close co-operation with the business
units. Raw material price risk is managed by the Group's centralized procurement
organization in close co-operation with the business units.
Interest rate risk--Dynea International is exposed to changes in interest rates.
Dynea International's policy is to have a minimum of 30% of its total debt as
fixed interest rate debt. This is achieved by swapping floating interest rate
debt to fixed interest rate debt using interest rate swap agreements and futures
contracts.
Foreign exchange risk--Dynea International is exposed to foreign exchange risk
arising mainly from movements in the values of Norwegian kroner, U.S. dollar and
Canadian dollar. Subsidiaries are encouraged, but not required, to use forward
exchange contracts transacted with Corporate Treasury, to hedge their exposure
to foreign currency risk in the local reporting currency. Corporate Treasury
hedges the exposures in each currency using external forward exchange contracts.
All forward foreign exchange contracts are marked-to-market at each balance
sheet date through current period earnings.
Dynea International's policy is to minimize translation risk exposure by funding
assets, whenever economically possible, in the same currency. If matching of the
assets and liabilities in the same currency is not possible, hedging of the
remaining translation risk of the net investment in foreign entities may occur.
Dynea International uses long-term liabilities to hedge translation risk.
Concentrations and credit risk--Counterpart risk encompasses issuer risk on
settlement risk on derivative and money market contracts and credit risk on cash
and time deposits. Dynea International maintains credit policies with regard to
its counterparts that management believes significantly minimize overall credit
risk. Dynea International does not obtain collateral to support the agreements
but monitors the financial viability of counterparts and credit risk is minimal
on these transactions. The extent of this exposure varies with the prevailing
interest and currency rates and was not material throughout the period. Dynea
International does not expect any losses from non-performance by these
counterparts and does not have any significant grouping of exposures to
financial sector or country risk.
Raw material price risk--Dynea International is exposed to raw material price
risk arising mainly from movements in the price of the main raw materials
methanol, urea, phenol, and melamine. As the prices Dynea International pays for
the raw materials change quarterly or monthly, Dynea International is subject to
considerable volatility in the prices it pays for such materials. Prices of
methanol and urea are highly volatile, while prices of phenol and melamine are
generally slightly less so. The sales prices of Dynea International's products
are primarily a function of several items including the prices of the raw
materials Dynea International uses to make the products. This connection between
the raw material prices and the sales prices gives significant protection
against adverse changes in raw material prices. However, Dynea International is
not always able to fully pass through to the customers the fluctuations in the
prices of raw materials. Centralized procurement organization hedges Dynea
International against the raw material price fluctuations through purchasing
contracts or commodity derivatives. Commodity derivative contracts are
marked-to-market at each balance sheet date through current period earnings.
12. Share capital
In 2002, additional 70,000 shares at par value of (euro)100 were issued to
Dynea. These shares were paid in March 2002 and registered in the Finnish Trade
Register on May 8, 2002. In 2003, additional 50,000 shares at par value of
(euro)100 were issued to Dynea. These shares were paid in March 2003 and
registered in the Finnish Trade Register on March 3, 2003. Because Dynea
International Oy's equity was below 50% of the share capital at December 31,
2003, the annual general meeting of the shareholders determined to lower the
share capital of Dynea International by (euro)222,034,000.00 to cover the
accumulated losses. The lowering of the share capital took place through the
cancellation of the corresponding number of common shares. Therefore the par
value of the shares remained the same. The decrease in equity was registered in
the Finnish Trade Register on May 7, 2004. Thus total share capital at December
31, 2004 consisted of 709,660 shares at par value of (euro)100.
Dynea International is subject to certain dividend restrictions under their loan
and senior note agreements. Dynea International may not pay a dividend if there
is a default or potential default of any loan covenant or if there is a due, but
unpaid principal amount.
13. Borrowings
Borrowings consist of the following:
Outstanding Carrying Value
Nominal as at 31 December as at 31 December
Value Issued 2004 2003 2004 2003
---------------------------------------------------------------------
Senior notes (euro)250.0 (euro) 250.0 (euro) 250.0 (euro) 237.7 (euro) 235.4
Senior credit agreement 207.6 202.0 202.2 194.7
Other long-term loans with financial institutions 5.5 5.0 5.5 5.0
Short-term borrowings 66.7 54.9 66.7 54.9
---- ---- ---- ----
Total borrowings (euro) 250.0 (euro)529.8 (euro)511.9 (euro)512.1 (euro) 490.0
----- ----- ----- -----
Less: Current portion of long-term loans 24.2 20.7 24.2 20.7
Short-term borrowings 66.7 54.9 66.7 54.9
----- ----- ----- ----
Long-term debt, less amounts due currently (euro) 438.9 (euro) 436.3 (euro) 421.2 (euro) 414.4
============ ============ ============ ============
Senior notes
- ------------
On August 8, 2000, Dynea International issued (euro) 240.0 million in senior
notes due August 15, 2010, at 12 1/4%. On August 24, 2000, Dynea International
issued an additional (euro)10.0 million in senior notes due August 15, 2010, at
12 1/4%. The total issue was registered and as at December 31, 2004 the total
issued amount is outstanding. Interest is payable every six months, on February
15 and August 15 of each year. These notes are unsecured and rank senior in
right of payment to all future subordinated debt and equal in right of payment
to all existing and future un-subordinated debt. The notes are guaranteed by
Dynea Chemicals Oy, a wholly owned subsidiary of Dynea International (Note 1),
on a senior subordinated basis. The notes will be redeemed at par at maturity.
On or after August 15, 2005, Dynea International has the right to redeem any or
all of the notes at a specified redemption price beginning at 106.125% and
declining thereafter. Prior to that date, Dynea International may only redeem
all of the notes at a redemption price equal to the principal amount plus a
specified premium (make-whole price), unless an equity offering occurs.
Unamortized arrangement fees for the senior notes totaled (euro)12.3 million at
December 31, 2004.
Senior credit agreement
- -----------------------
In conjunction with the acquisition of Dyno, Dynea International refinanced its
existing loans and line of credit during 2000 under three new term loan
facilities, for up to (euro)190 million ("Term A"), (euro) 95 million ("Term
B"), and (euro) 95 million ("Term C"), respectively. The loans are due June 30,
2007, 2008 and 2009, respectively. The Term A loan and the Revolving Credit
Facility (as discussed below under Short-term borrowings) contain a margin
ratchet, whereby the interest rate will vary between LIBOR plus two percent and
LIBOR plus one and one-quarter percent depending on the ratio of total net debt
to earnings before interest, taxes, depreciation and amortization (EBITDA), as
defined. The Term B loan carries an interest rate of LIBOR plus 2.5%, and the
Term C loan carries an interest rate of LIBOR plus 3.0%.
Dynea International agreed in February 2004 with the senior lenders to introduce
a new six years term loan facility under the senior credit agreement, the
Tranche D loan facility, amounting to (euro)31.7 million. The new facility was
underwritten by our parent company, Dynea Oy, and was drawn in February 2004 and
in August 2004. The new facility carries an interest of LIBOR +3% plus 1%
capitalized interest.
The weighted-average interest rate on amounts outstanding under the senior
credit agreement and other long-term loans with financial institutions was 5.06%
at December 31, 2004.
At the end of June and September 2004, Dynea International made a prepayment of
senior term-loans of (euro)1.4 million and (euro)0.8 million, respectively, from
the proceeds of asset sales. In connection with the extinguishment of debt due
to the asset sales, Dynea International incurred a loss on extinguishment of
debt of (euro)0.1 million (Note 22). This loss resulted from write-offs of
unamortized debt issuance costs. Unamortized arrangement fees for the senior
credit agreement totaled (euro)5.4 million at December 31, 2004.
Dynea International sold its Oil Field Chemicals businesses to M-I L.C.C. on
January 28, 2003. The net proceeds from the sale were approximately (euro)55.0
million. In accordance with the terms and conditions of the senior credit
agreement, part of these proceeds were to be applied as a prepayment against the
outstanding loan facilities on a pro-rata basis. These payments totaled
(euro)25.0 million, when the money was transferred to blocked currency
denominated accounts at the beginning of 2003. At the prepayment dates the money
from the blocked accounts was used for the prepayments and the payments amounted
to (euro)11.2 million, (euro)6.9 million and (euro)6.3 million for Term A, Term
B and Term C, respectively, during 2003. In connection with the extinguishment
of debt due to the Oil Field Chemicals Businesses prepayment during 2003, Dynea
International incurred a loss on extinguishment of debt of (euro)0.8 million
(Note 22). This loss resulted from write-offs of unamortized debt issuance
costs.
Short-term borrowings
- ---------------------
Under the senior credit agreement, Dynea International also obtained a
multi-currency, revolving loan for up to (euro)100 million ("Revolving Credit
Facility"). The Revolving Credit Facility expires June 30, 2007. At December 31,
2004, (euro)62.9 million (2003: (euro)51.6 million) was outstanding on the
Revolving Credit Facility. Letters of credit issued by the financial institution
reduces the available credit amount. The available credit amount was (euro)21.2
million at December 31, 2004 (2003: (euro)30.7 million).
The weighted average interest rate on short-term loans was 4.60% at December 31,
2004. This amount consists of 4 tranches denominated in either euros or U.S.
dollars and totaling (euro)62.9 million at December 31, 2004 under the Revolving
Credit Facility. In addition, subsidiaries of Dynea International have
short-term loans from financial institutions totaling (euro)3.8 million.
After taking account of interest rate swaps, the interest rate exposure of the
borrowings of Dynea International was as follows:
December 31, 2004 December 31, 2003
-------------------------------------------
Total borrowings:
at fixed rates (euro) 372.4 (euro) 337.6
at floating rates 157.4 174.3
----- -----
(euro) 529.8 (euro) 511.9
============ ============
Borrowing balances are denominated in the following currencies:
December 31, 2004 December 31, 2003
--------------------------------------------
U.S. dollars 23% 24%
Euro 56% 52%
Canadian Dollars 4% 5%
Norwegian Kroner 15% 18%
Others 2% 1%
Borrowings are repayable as follows:
December 31, 2004
---------------------
2005 (euro) 90.7
2006 - 2009 189.0
Thereafter 250.1
-----
Total (euro) 529.8
============
Dynea International's debt agreements contain certain debt covenants, including:
ratios of EBITDA to interest, debt to EBITDA, earnings to fixed charges, and
cash flow to funding costs and limits on capital expenditures.
Substantially all of the assets of Dynea International Oy and its subsidiaries,
including all of its property, plant and equipment, are pledged as collateral on
these obligations (Note 19). In addition, individual subsidiaries have
guaranteed loans of the parent company.
14. Taxation
The components of income tax benefit are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---------------------------------------------------------
Current:
Finland (euro) 0.7 (euro) 0.7 (euro) 2.1
Foreign 7.9 11.5 8.2
----- ----- -----
(euro)8.6 (euro)12.2 (euro)10.3
========= ========== ==========
Deferred:
Finland (euro) (7.1) (euro) (1.1) (euro) (1.1)
Foreign (1.9) 7.7 (14.2)
----- ----- ------
(euro)( 9.0) (euro)6.6 (euro) (15.3)
============ ========== =============
Total income tax
(benefit) expense (euro) (0.4) (euro) 18.8 (euro) (5.0)
============ =========== ============
Comparison figures were adjusted to early adoption of IAS 16 (revised).
Significant components of Dynea International's deferred tax assets and
liabilities are as follows:
December 31, 2004 December 31, 2003
-------------------------------------------
Deferred tax assets:
Tax loss carry-forwards (euro) 75.7 (euro) 34.8
Excess of tax value over book value of fixed assets 0.0 1.6
Reserves and accruals 6.1 5.1
Pensions 2.4 2.7
Write-down in investments 0.3 139.7
Other 7.3 6.0
Valuation allowance for deferred tax assets (57.3) (160.0)
------ -------
Deferred tax assets (euro) 34.5 (euro) 29.9
=========== ===========
Deferred tax liabilities:
Excess of book value over tax value of fixed assets (53.9) (63.7)
Reserves and accruals (0.8) (0.5)
Other (14.7) (9.5)
------ -----
Deferred tax liabilities (euro) (69.4) (euro) (73.7)
============= =============
Net deferred tax liability (euro)(34.9) (euro)(43.8)
============= =============
Comparison figures were adjusted to early adoption of IAS 16 (revised).
The recognized deferred tax asset is based upon the expected future utilization
of net operating loss carry forwards and the reversal of other temporary
differences. For financial reporting purposes, Dynea International has
recognized a valuation allowance for those benefits for which realization is not
probable. Dynea International continually reviews the adequacy of the valuation
allowance and is recognizing these benefits only as reassessment indicates that
it is probable that the benefits will be realized.
At December 31, 2004, Dynea International had net operating loss carry forwards
of (euro)293.0 million that were available to offset future taxable income. The
total net operating loss carry forwards included (euro)46.1 million with no
expiration dates, (euro)15.0 million that expire after more than 10 years, and
(euro)232.9 million that expire in less than 10 years.
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when the deferred income taxes relate to the same fiscal authority. The net
non-current deferred tax liability was (euro)34.9 and (euro)43.8 million at
December 31, 2004 and 2003, respectively. The non-current deferred tax
liabilities also included (euro)3.4 million of deferred tax liabilities expected
to reverse in the following twelve months as of December 31, 2004.
Income tax benefit at the statutory tax rate is reconciled below to the actual
income tax benefit:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---------------------------------------------------------
Finland (euro) (43.5) (euro) (18.3) (euro) 3.4
Foreign 24.3 (26.3) (20.8)
----- ------ ------
Total loss before income taxes and minority interest (euro) (19.2) (euro) (44.6) (euro) (17.4)
============== ============== ==============
Tax benefit at Finnish statutory rate (29%) (euro) (5.6) (euro) (13.0) (euro) (5.0)
Unrecognized deferred tax asset 4.8 9.9 3.5
Previously unrecognized utilized deferred tax asset (1.1) (4.2) (10.1)
Effect of foreign tax rates -- -- 1.0
Non-deductible goodwill -- 16.4 4.2
Non-deductible expenses 1.0 9.1 0.2
Income taxes from previous periods
0.5 0.6 1.2
------ ------ ------
Income tax (benefit) expense (euro) (0.4) (euro) 18.8 (euro) (5.0)
============= ============ =============
Comparison figures were adjusted to early adoption of IAS 16 (revised).
15. Employee benefits
Dynea International operates a number of defined benefit and defined
contribution plans throughout the world, which are financed according to local
practice.
Defined benefit post-employment obligations are determined by actuarial
valuations using a method based on projected salaries to the end of employment
(the projected unit credit method). The total liability in respect of pension
obligations to pensioners is determined as well as the liability relating to the
past service of employees. For retirement indemnities, the commitment based on
estimated total service in the Group is determined and provision made for past
service using the projected unit credit method.
Assumptions as to mortality, withdrawal of employees and salary projections take
into account the economic and demographic conditions specific to each country
and company.
Under IAS 19 the annual post-employment benefit cost comprises the estimated
cost of benefits accruing in the period as determined in accordance with IAS 19
(revised 2002), which requires the significant actuarial assumptions to reflect
market and economic conditions at the balance sheet date. In particular,
discount rates reflect the yield on high quality corporate bonds of an
appropriate term.
The majority of the Group's defined benefit post-employment benefits are
provided for its employees and former employees in Austria, Canada, France,
Germany, the Netherlands, Norway, Singapore, the United Kingdom and the United
States. Post-employment benefits provided for other overseas participants are,
in general, either government-provided or defined contribution. In Finland,
benefits are provided under the state plan, which are defined benefit in nature.
However, due to the nature of funding for these benefits, Dynea is accounting
for these benefits under IAS 19 using a defined contribution approach, and the
pension expense is equal to the cash payable.
Actuarial gains and losses in excess of the "10% corridor" are spread as a level
amount over the expected average remaining service lives of the employees.
December 31, 2004 December 31, 2003 December 31, 2002
-------------------------------------------------------------
Weighted average assumptions:
Discount rate 5.1% 5.7% 6.1%
Rate of compensation increase 3.1% 3.1% 3.9%
Expected return on plan assets 6.4% 6.2% 6.8%
Future pension increase rate(1) 2.2% 1.3% 1.3%
Amounts recognized in the balance sheet:
Fair value of plan assets (euro) 71.3 (euro) 67.4 (euro) 67.6
Defined benefit obligation (109.8) (100.9) (107.9)
------- ------- -------
Funded status (38.5) (33.5) (40.3)
Unrecognized prior service cost (0.2) -- --
Unrecognized net actuarial (gain)/loss 21.2 16.2 24.0
------- ------- -------
Balance sheet prepaid/(accrued) pension cost (euro) (17.5) (euro) (17.3) (euro) (16.3)
============= ============= =============
Made up of :
Balance sheet prepaid pension cost 1.9 2.0 2.9
Balance sheet (accrued) pension cost (19.4) (19.3) (19.2)
Amounts recognized in the income statement:
Service cost 3.1 3.6 3.8
Interest cost 5.9 6.0 6.4
Expected return on assets (4.3) (4.3) (5.4)
Recognized actuarial (gain)/loss 0.9 0.7 0.4
Past service cost (0.1) 0.6 --
Settlement and curtailment gains (0.2) (0.7) --
------- ------- --
Total (benefit)/expense included in staff costs (euro) 5.3 (euro) 5.9 (euro) 5.2
========== ========== ==========
Movement in the balance sheet:
Beginning balance (17.3) (16.3) (14.2)
Effect of acquisitions -- (0.5) --
Total net periodic benefit (cost)/income
(excluding gain on disposal) 5.3) (5.9) (5.2)
Employer contribution 5.0 4.3 3.2
Exchange differences 0.1 1.1 (0.1)
------ ------- -------
Ending balance (euro) (17.5) (euro) (17.3) (euro) (16.3)
============== ============= =============
1 Pension increases are applied to pension benefits provided in the UK,
Netherlands and Norway.
The settlement and curtailment gains of (euro)0.2 million and (euro)0.7 million
in 2004 and 2003, respectively, relate to the reorganization in North America
and the sale of several subsidiaries during 2004 and 2003, as discussed in Note
21.
Dynea International's contributions to the defined contribution pension plans
are charged to the income statement in the year to which they relate and during
2004, 2003 and 2002 amounted to (euro)3.4 million, (euro)3.6 million and
(euro)3.3 million, respectively (Note 20).
The actual returns on assets for years ended December 31, 2004, 2003 and 2002
were (euro)4.3 million, (euro)7.1 million and (euro)(5.6) million, respectively.
16. Provisions Provisions consist of:
Restructuring Other Total
----------------------------------------------
At December 31, 2003 (euro) 6.0 (euro) 6.0 (euro)12.0
New provisions 1.6 1.9 3.5
Utilized during the period (2.5) (1.8) (4.3)
Released during the period (0.1) (0.2) (0.3)
Reclassification (2.7) 2.7
----- -----
At December 31, 2004 (euro) 2.3 (euro) 8.6 (euro)10.9
========== ========== ==========
Restructuring Provisions
In March 2004, Dynea International initiated a reorganization of its
North American Resins business. The reorganization included changes in
management and a reduction of personnel. As a result, approximately 70 positions
were made redundant. The cost for the reorganization was (euro)3.6 million, of
which (euro)2.2 million was paid during 2004. At December 31, 2004 the remaining
provision related to North American restructuring amounted to (euro)1.4 million.
In 2003, Dynea International decided to restructure and optimize Dynea resins
operations in Norway. The decision led to personnel redundancies and the
provision related to the employee termination charges in 2003 amounted to
(euro)1.2 million. This was paid during 2004 as the production at Engene plant
was relocated to Lillestr0m plant.
In conjunction with the decision to close the Europoort plant by January 1,
2002, Dynea International recorded a (euro)7.2 million provision relating to
contractual lease payments for the closed plant site, employee termination
benefits for involuntarily terminated employees, environmental site remediation,
and demolition costs. In 2001, (euro)1.5 million was paid and (euro)0.9 million
of contractual lease payments reversed as Dynea International exited the
Europoort site earlier than estimated. At December 31, 2001, the remaining
provision included contractual lease payments for the closed plant site and
employee termination benefits for these terminated employees of (euro)4.8
million, of which (euro)0.4 million was paid during 2002 and (euro)0.4 million
was paid and (euro)1.1 million released during 2003. At December 31, 2003 the
remaining provision related to the restructuring charges amounted to (euro)2.9
million. In 2004, (euro)0.1 million of this was paid, and the same amount
recorded as new provisions. At December 31, 2004 the remaining provision related
to the Europoort plant was still (euro)2.9 million. As (euro)2.7 million of this
amount relates to the Europoort environmental site remediation, it is
reclassified to other provisions as an environmental provision.
Dynea International has continuously streamlined its operations. At December 31,
2001 the provision related to these other restructuring activities totaled
(euro)5.8 million of which (euro)2.1 was paid and (euro)0.7 million released
during 2002, (euro)0.5 million was paid and (euro)0.6 million released during
2003, and (euro) 1.2 million was paid during 2004. At December 31, 2004 the
remaining provision related to these other restructuring charges amounted to
(euro)0.7 million.
Other Provisions
- ----------------
In 2004, other provisions include mainly a provision related to an onerous
contract and the environmental provision related to the Europoort site
remediation.
17. Accounts payable
Accounts payable consist of:
December 31, 2004 December 31, 2003
-----------------------------------------
Trade payables (euro)96.7 (euro) 79.5
Related party payables (Note 23) 6.3 6.9
--- ---
Total (euro) 103.0 (euro) 86.4
============ ===========
18. Accrued liabilities
Accrued liabilities consist of:
December 31, 2004 December 31, 2003
-----------------------------------------
Accrued interest (euro)6.7 (euro) 9.8
Fair value of foreign exchange forward contracts 0.6 0.5
Fair value of interest rate
swaps and futures contracts 0.8 0.8
Related party liabilities 5.9 2.8
Other accrued liabilities 13.4 14.6
---- ----
Total (euro) 27.4 (euro) 28.5
============= ===========
19. Commitments and Contingencies
Dynea International evaluates its position relative to asserted and unasserted
claims, loss-making purchase commitments or future commitments and records
provisions as needed.
Litigation and claims - Various lawsuits and claims are pending against Dynea
International. Although the outcome of such lawsuits and claims cannot be
predicted with certainty, the expected deposition thereof will not, in the
opinion of the management, either individually or in the aggregate result in a
material adverse effect on Dynea International's results of operations and
financial position.
Operating lease commitments--The future aggregate minimum lease payments at
December 31, 2004, under non-cancelable operating leases were as follows:
December 31, 2004
----------------------
2005 (euro) 3.1
2006 -2009 8.3
Thereafter 12.4
-------
Total (euro) 23.8
===========
The operating lease commitments relate to leases for autos, buildings, land,
office space, support services and equipment.
Mortgages, pledges and other guarantees given - Substantially all of the assets
of Dynea International Oy and its subsidiaries, including all of its property,
plant and equipment, are pledged as collateral of its loan obligations (Note
13). Mortgages, pledges and guarantees given consist of:
December 31, 2004 December 31, 2003
-------------------------------------
Chattel mortgages (euro) 90.3 (euro) 90.3
Real estate mortgages 193.1 199.3
Investments in subsidiaries at historical cost 769.5 768.0
Other pledges given 206.7 201.3
Guarantees given 11.8 4.1
Other commitments--Dynea International has both a land lease agreement through
December 31, 2030 and a supply agreement with Fortum Oil and Gas Oy on process
cooling water tunnel system, steam, electricity, and drinking water through
December 31, 2006. Fortum Oil and Gas Oy sets the prices on a monthly basis
based on costs incurred. In addition, Dynea International has a supply agreement
with Borealis Polymers Oy on process cooling water, salt free water, compressed
air, and wastewater treatment through December 31, 2008. Borealis Polymers Oy
sets the prices on a monthly basis based on costs incurred.
Dynea International has several long-term Methanol purchase contract. The
contracts with Celanese, Methanex and Statoil are for around 310,000 tons in
2005, 410,000 tons in 2006 and 200,000 tons in 2007 and the pricing is tied to a
formula based on a given benchmark reported by independent sources, such as the
Independent Commodity Information Service (ICIS) or Chemical Market Associates
Inc. (CMAI). The contracts with Celanese and Statoil are valid until December
31, 2006 and the contract with Methanex is valid until December 31, 2007. Dynea
International has several long-term Phenol purchase contracts. The contracts
with Borealis and Novapex are totally for approximately 30,000 tons and the
contracts with Georgia Gulf and Shell are totally for 50,000 thousands of
kilograms per year and the pricing is based on ICIS or market prices. The
contracts with Borealis and Novapex are through December 31, 2007, the contract
with Georgia Gulf is through February 28, 2007 and the contract with Shell is
valid until December 31, 2006.
Dynea International had no material capital commitments at December 31, 2004.
Dynea International has a processing agreement, agreement on technical services,
and agreement on commercial services with Shin-Etsu PVC NV through December 31,
2005. Additionally Dynea International has R&T&D agreement with Perstorp AB,
which is valid for the time being. Dynea International is subject to business
risks that are actively managed against exposures.
Financial Guarantees--Wholly owned subsidiaries have guaranteed long-term
borrowings of the parent company. Dynea International has letters of credit and
guarantees with financial institutions.
20. Staff costs
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---------------------------------------------
Wages and salaries (euro) 96.6 (euro) 101.4 (euro) 99.3
Indirect employee costs 17.4 16.2 17.0
Pension costs--defined contribution plans 3.4 3.6 3.3
Pension costs--defined benefit plans 4.4 6.8 5.7
----- ----- -----
Total staff costs (euro) 121.8 (euro) 128.0 (euro) 125.3
============ ============ ============
The average number of persons employed during the years ended December 31, 2004,
2003 and 2002, totaled 3,135, 3,155, and 3,013, respectively. Total salaries,
bonuses and other amounts paid to those current members of our board and
executive management who were employed by the Dynea International group were
approximately (euro)2.1 million and (euro)1.4 million during 2004 and 2003
respectively. No compensation was provided to these individuals in the form of
stock options or pursuant to a profit-sharing plan during 2004 and 2003. The
retirement age of the management of the group companies is between 60 and 65
years. For the Chief Executive Officer the retirement age is 62 years and other
three executive officers' retirement age is between 60 and 62 years.
21. Discontinued operations
On January 28, 2003, Oil Field Chemicals segment was disposed including business
in Norway, subsidiaries in Australia, Great Britain, Indonesia, Middle-East and
Singapore, and the shares of an associated company in India. The deal became
effective as of January 1, 2003. Cash flows and net assets disposed for Oil
Field Chemicals segment were as follows:
Year Ended
December 31, 2002
-----------------
Operating cash flows (euro) 5.3
Investing cash flows (0.4)
Financing cash flows (3.4)
-----
Total cash flows (euro) 1.5
==========
Total assets to be disposed 70.2
Total liabilities to be disposed (7.8)
------
Net assets to be disposed (euro) 62.4
===========
The pretax gain on sale of Oil Field Chemicals segment was (euro)1.4 million and
the tax expense of OFC disposal amounted to (euro)10.5 million in the year ended
December 31, 2003. The net cash inflow on the sales was determined as follows in
year 2003:
Oil Field
Chemicals
------------------
Proceeds from sale (euro) 75.6
Less: cash and cash equivalent in subsidiary sold (1.7)
-----
Net cash inflow on sale (euro) 73.9
===========
In the year ended December 31, 2004 purchase price adjustment of (euro)4.3
million was paid related to the sale of the oil field chemicals business.
22. Finance costs
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-----------------------------------------
Interest income (euro) (1.1) (euro) (2.1) (euro) (2.0)
Other financial income (0.2) (0.2) (2.8)
Net foreign exchange transaction (gains) losses 0.3 2.4 (16.5)
Interest expense 46.2 50.2 63.6
Other financial expense 8.1 8.1 7.7
Loss on early extinguishments of debt (Note 13) 0.1 0.8 --
----- ----- -----
Net finance costs (euro) 53.4 (euro) 59.2 (euro) 50.0
============ ============ ============
23. Related party transactions
Dynea Oy owns 100% of Dynea International's shares. The ultimate parent of Dynea
International is Industri Kapital, which controls 88% of the voting rights of
Dynea Oy indirectly through its two investment funds, Industri Kapital 1997
Limited and Industri Kapital 2000 Limited. Management and other shareholders own
the remaining shares.
The following transactions were carried out with related parties:
Acquisitions
- ------------
Effective January 1, 2003 Dynea International acquired from its parent company
Dynea the Chemitec companies Dynea Erkner Gmbh and Dynea Holding B.V. with its
subsidiaries for a consideration of (euro)36.2 million (Note 1).
Sale of Shares
- --------------
In the year ended December 31 2004, Dynea Oy paid a purchase price adjustment
(euro)1.5 million to Dynea International relating to KCA Chemische Produkte
GmbH.
Related Party Balances (in addition to the above mentioned)
- -----------------------------------------------------------
December 31, 2004 December 31, 2003
----------------------------------------
Loan receivables from associated companies (euro) 0.6 (euro) 0.7
Other current receivables from other related parties 8.9 1.3
Other current receivables from associated companies 0.9 --
Accounts receivables from associated companies 0.7 1.7
Accounts receivables from other related parties 1.2 2.5
Loan payables to other related parties 143.1 61.2
Interest liabilities to other related parties 5.9 2.8
Accounts payables to associated companies 2.3 2.0
Accounts payables to other related parties 4.1 4.9
Other current liabilities to other related parties -- 0.1
Guarantees given on behalf associated companies 0.2 0.2
Related Party Transactions (in addition to the above mentioned)
- ---------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------------------------------------------------------
Sales to associated companies (euro) 5.6 (euro) 7.1 (euro) 5.2
Sales to other related parties 10.7 13.4 13.8
Purchases from associated companies 19.8 24.4 19.2
Purchases from other related parties 15.2 12.0 6.7
Management service charges from related parties 9.5 7.9 3.2
Other income from associated companies 1.9 1.3 --
Other income from other related parties 0.1 0.5 --
Other expenses to related parties 0.1 -- --
Interest income from other related parties 0.1 0.1 --
Interest expenses to other related parties 15.9 6.7 --
Dynea International accrued interest expense in the amount of (euro)15.9 million
to Dynea Oy during the year ended December 31, 2004. At December 31, 2004, Dynea
International had a loan payable of (euro)143.1 million to Dynea Oy including
the Term D Loan Facility and Dynea International's 12 1/4% notes held by Dynea
Oy.
Group Contributions
- -------------------
Group contributions amounting to (euro)38.2 million were made by Dynopart AS and
Dynopart Holding AS to Nordkem AS in 2001 of which (euro) 30 million was paid in
cash during October 2001 and (euro)8.2 million during September 2002. The group
contribution received by Nordkem AS is not considered to be taxable and
therefore the total group contribution of (euro)38.2 million was taken to
shareholders' equity. In 2002, group contributions amounting to (euro)0.9
million were made by Dynopart to Nordkem in 2002 and a group contribution
amounting to (euro)6.0 million was made by Dynea Finland Oy to Dynea Oy. In
2003, group contributions amounting to (euro)0.2 million were made by Dynopart
to Nordkem in 2003 and a group contribution amounting to (euro)5.0 million was
made by Dynea Oy to Dynea Chemicals Oy. In 2004, group contribution amounting to
(euro) 7.3 million was made by Dynea Oy to Dynea Chemicals Oy. In 2004, group
contribution amounting to (euro) 0.2 million was made by Nordkem Dynopart
Holding A/S, Dynopart Holding A/S and Dynopart A/S to Nordkem AS.
24. Notes to the cash flow statement
Year Ended Year Ended Year Ended
December 31, December December 31,
Notes 2004 31, 2003 2002
-----------------------------------------------------
Operating activities
Loss for the year (euro) (20.5) (euro) (64.8) (euro) (14.9)
Adjustments for:
Depreciation and amortization 5, 6 39.1 50.2 53.1
Impairment write downs 5, 6 8.1 4.4 --
(Profit) on sale of discontinued operations 21 -- (1.4) --
Share in undistributed earnings of associated
companies and joint ventures 7 (15.7) (13.1) (3.9)
Finance costs 22 53.4 59.2 50.0
Income tax expense (benefit) 14 (0.4) 18.8 (5.0)
Minority interest 2 1.7 1.4 2.5
----- ----- -----
Working capital changes:
(Increase) decrease in inventory 8 (13.0) 7.5 (6.6)
(Increase) decrease in accounts and related party
receivables 9 (12.5) 1.5 2.6
(Increase) decrease in other current assets (0.8) (1.9) 3.4
Decrease (increase) in other non-current assets 0.2 (0.7) 0.1
Increase in accounts and related party payables 17 18.3 0.7 14.9
(Decrease) increase in accrued liabilities 18 (0.6) 4.9 (1.3)
Increase (decrease) in other current liabilities 2.3 0.8 (4.6)
Increase in pension liabilities 15 0.1 2.0 1.8
(Decrease) increase in provisions (1.2) 4.5 (3.8)
(Decrease) in other non-current liabilities 16 (2.4) (1.2) (2.3)
Adjustment for disposals and acquisitions 0.2 (9.7) --
----- ----- -----
Cash generated from operations (euro)56.3 (euro) 63.1 (euro) 86.0
---------- ----------- -----------
25. Other principal subsidiary undertakings
Principal subsidiary undertakings as at December 31, 2004:
Country of % Ownership
Subsidiary Incorporation December 31, 2004
------------------------------------------------------------------------------
Dynea ASA Norway 100
Dynea Austria GmbH Austria 100
Dynea B.V. Netherlands 100
Dynea Chemicals Oy Finland 100
Dynea Erkner GmbH Germany 100
Dynea Ireland Limited Ireland 100
Dynea NV Belgium 100
Dynea Finland Oy Finland 100
Dynea UK Limited UK 100
Dynea Resins France SAS France 100
Dynea Canada Ltd Canada 100
Dynea Overlays, Inc. USA 100
Dynea U.S.A. Inc. USA 100
Dynea NZ Limited New Zealand 100
Dynea Singapore Pte Ltd Singapore 100
PT Dynea Indria Indonesia 51
All holdings are in the ordinary share capital of the undertaking concerned.
26. Differences between IFRS and U.S. Generally Accepted Accounting Principles
Dynea International's consolidated financial statements are prepared in
accordance with IFRS, which differ in certain respects from accounting
principles generally accepted in the United States ("U.S. GAAP"). The principal
differences between IFRS and U.S. GAAP that affect the consolidated net loss and
total shareholder's equity are presented below together with explanations of
those differences. Various differences that have insignificant or no impact,
such as principals related to leases, impairments, and taxes, among others, have
not been presented.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---------------------------------------------------
Reconciliation of net income (loss):
Net (loss) reported under IFRS (1) (euro) (20.5) (euro) (64.8) (euro) (14.9)
U.S. GAAP adjustments:
Depreciation expense a 1.4 1.4 1.4
Pension expense b (0.1) 0.6 --
Marketable securities c -- (0.2) --
Reversal of amortization of goodwill e -- 8.9 14.6
Discontinued operations f -- (2.8) --
Treatment of excess of acquirer's interest in
the net fair value of acquiree's identifiable
assets, liabilities and contingent liabilities
over cost g 2.1 2.1 --
One-time termination benefits h (1.2) 1.2 --
Major overhaul costs i (2.0) 1.6 (0.6)
Deferred tax effect of U.S. GAAP adjustments (0.0) (2.1) (0.2)
----- ----- -----
Net (loss) income under U.S. GAAP (euro) (20.3) (euro) (54.1) (euro) 0.3
============= ============= ==========
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
Presentation of net loss in accordance with U.S. GAAP:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-----------------------------------------------
(Loss) from continuing operations
Discontinued operations: f (euro)(18.4) (euro)(39.5) (euro)(1.1)
(Loss) income from discontinued operations, net
of taxes of (euro)0.0 million, (euro)10.5 million
and (euro)0.5 million, respectively (1.9) (14.6) 1.4
----- ------ ------
Net (loss) income in accordance with U.S. GAAP (euro) (20.3) (euro) (54.1) (euro) 0.3
============== ============== ==========
December 31, December 31,
2004 2003
-------------------------------
Reconciliation of shareholder's equity:
Total shareholder's equity reported under IFRS (1) (euro) 115.7 (euro) 116.1
U.S. GAAP adjustments:
Assets held for sale a 2.2 2.2
Depreciation of tangible assets a 7.5 6.1
Amortization of goodwill a 0.5 0.5
Pension expense b 1.4 1.5
Additional minimum pension liability b (10.9) (7.1)
Goodwill and fair value translation adjustments d (54.7) (35.3)
Reversal of amortization of goodwill e 23.5 23.5
Treatment of excess of acquirer's interest in the
net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost g 4.2 2.1
One-time termination benefits h -- 1.2
Major overhaul costs i (3.5) (1.5)
Deferred tax effect of U.S. GAAP adjustments 0.8 (0.3)
----- -----
Total shareholder's equity under U.S. GAAP (euro) 86.7 (euro) 109.0
=========== ============
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
(a) Assets Held For Sale
In 1999, under U.S. GAAP, Dynea International determined that there were
businesses which should be classified as assets held for sale in accordance with
EITF 87-11 "Allocation of Purchase Price to Assets to be Sold." These businesses
were principally comprised of Oxo, Polyester, and NC Trading. The amount of net
profit/ (loss) on the sold operations that has been excluded from the income
statement on a U.S. GAAP basis is (euro) 3.7 million and (euro)(5.9) million,
respectively for 2000 and 1999 and gives rise to a total adjustment to equity of
(euro)2.2 million.
When goodwill was allocated to the assets to be sold at acquisition in order to
reflect them at their fair value, excess of acquirer's interest in the net fair
value of acquiree's identifiable assets, liabilities and contingent liabilities
over cost was created. Accordingly, the carrying value of long-lived assets was
reduced when that excess of acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities and contingent liabilities over cost
was eliminated under U.S.GAAP. This creates a difference between IFRS and U.S.
GAAP related to goodwill amortization ((euro)0.5 million adjustment to equity at
December 31, 2004 and December 31, 2003, respectively) and depreciation expense
((euro)7.5 million and (euro) 6.1 million adjustment to equity at December 31,
2004 and December 31, 2003, respectively). In 2002, the adjustment related to
goodwill amortization was discontinued due to a new adjustment to reverse all
goodwill amortization under U.S. GAAP.
(b) Pension Expense
Under IFRS the Company accounts for pension costs and similar obligations in
accordance with IAS 19 (revised 2002), "Employee Benefits." For purposes of U.S.
GAAP, pension costs for defined benefit plans are accounted for in accordance
with SFAS No. 87, "Employers' Accounting for Pensions". The Company has the
following differences in applying the two standards:
Certain subsidiaries maintain a "flat dollar" pension plan where benefit
increases may be granted periodically. Under IFRS, these increases are accrued
when calculating the projected benefit obligation and service cost, as they are
considered a constructive obligation arising from an informal practice to grant
such increases. However, under U.S. GAAP, these benefit increases are only
accrued when the employer is deemed to be substantively committed to granting
these increases. Otherwise, these increased benefits are treated as plan
amendments when they occur.
Company's benefit plans were amended in France in 2004, in the United States in
2004 and 2003 and in Canada in 2001. Under IFRS the plan amendments, to the
extent vested, are recognized through the income statement in the year they
occur. Under U.S. GAAP the impact is amortized over the expected services terms
of the related employees.
In addition, the two frameworks differ in the treatment of curtailments and
settlements. Under IFRS, gains or losses on a plan curtailment are recognized
when Dynea International is demonstrably committed to making a material
reduction in the future service benefits covered by a plan. U.S. GAAP, however,
requires that an enterprise recognize gains related to a curtailment when the
related employees terminate or the plan suspension or amendment is adopted, and
recognize losses when it is probable that the curtailment will occur and the
effects can be reasonably estimated. Both IFRS and U.S. GAAP allow for
accelerated recognition of unrecognized amounts on curtailments and settlements.
However, the methods used in determining the portion of unrecognized amounts
differ under the two frameworks.
Under U.S. GAAP, the employer should recognize an additional minimum pension
liability charged to other comprehensive income in shareholders' equity to the
extent that the unfunded accumulated benefit obligation ("ABO") exceeds the fair
value of the plan assets and this amount is not covered by the pension liability
already recognized in the balance sheet. The calculation of the ABO is based on
the actuarial present value of the vested benefits to which the employee is
currently entitled, based on the employee's expected date of separation or
retirement. IFRS does not require the recognition of an additional minimum
liability.
The following is a reconciliation of the balance sheet and income statement
amounts recognized for IFRS and U.S. GAAP for pensions as of December 31, 2004,
December 31, 2003 and December 31, 2002.
December 31, 2004 December 31, 2003 December 31, 2002
--------------------------------------------------------
Liability recognized for IFRS (euro) (17.5) (euro) (17.3) (euro) (16.3)
Difference in actuarial value of scheme liabilities 1.1 1.0 0.2
Difference in unrecognized amounts 0.0 0.4 0.7
----- ----- -----
Liability recognized for US GAAP before additional minimum pension
liability (euro) (16.4) (euro) (15.9) (euro) (15.4)
Equity adjustment for minimum pension liability (10.9) (7.1) (7.6)
------ ------ -----
Liability recognized for U.S. GAAP (euro) (27.3) (euro) (23.0) (euro) (23.0)
============= ============= =============
Net periodic post-employment expense (benefit) recognized for IFRS (euro) 5.3 (euro) 5.9 (euro) 5.2
Difference in service and interest cost (0.2) (0.1) --
Difference in recognition of unrecognized amounts 0.1 (0.3) --
Difference in settlements/curtailments 0.2 (0.2) --
------ ------ -----
Net periodic post-employment benefit recognized for U.S. GAAP (euro) 5.4 (euro) 5.3 (euro) 5.2
========== ========== ==========
(c) Marketable securities
Under U.S. GAAP, investments classified as available-for-sale are carried at
fair value, with any unrealized gain or loss recorded as a separate component of
equity. The decline in fair value below the amortized cost relating to
individual marketable securities should be recorded through earnings if
considered other than temporary. Therefore, in 2003 the fair value decline below
carrying value ((euro)0.2 million), which had been recorded as a separate
component of equity in 2000, was recorded to net income (loss) under U.S. GAAP.
(d) Goodwill and fair value translation adjustments
In connection with the revision of IAS 21 in 2003 the difference between IFRS
and US GAAP with regards to the translation of goodwill and fair value
adjustments arising from the acquisition of foreign entities was eliminated.
Dynea International applies the revised standard prospectively to all
acquisitions occuring on or after January 1, 2004. Goodwill and fair value
adjustments arising from the acquisition of foreign entities before January 1,
2004 were translated at the exchange rate at the date of acquisition. Under U.S.
GAAP, SFAS 52 "Foreign Currency Translation" requires these amounts to be
translated at the exchange rate at each balance sheet date. This remaining
translation adjustment is included in comprehensive income under U.S. GAAP.
On January 1, 2004, Dynea International early adopted IFRS 3 resulting in
derecognition of negative goodwill with a corresponding adjustment to the
opening balance of retained earnings under IFRS.The cumulative amount of excess
of acquirer's interest in the net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost recognized amounted to
(euro)14.1 million at December 31, 2003. Under SFAS 142, the excess of
acquirer's interest in the net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost is allocated to long-lived
assets of acquired companies and depreciated over their useful life. Therefore,
the amount recognized in retained earnings on January 1, 2004 under IFRS is
reversed under US GAAP.
(e) Reversal of Amortization of Goodwill
Amortization of Goodwill
- ------------------------
In accordance with IFRS, Dynea International amortized all intangible assets
including goodwill on a straight-line basis over the expected useful lives of
the assets until December 31, 2003. After the issuance of IFRS 3 in 2004,
goodwill and intangible assets with indefinite lives are no longer amortized
after January 1, 2004, but are subject to an annual impairment test similarly to
the provisions of SFAS 142, "Goodwill and Other Intangible Assets", which was
adopted by Dynea International on January 1, 2002. The U.S.GAAP adjustment still
remaining reverses the amortization expense recorded under IFRS before the
adoption of IFRS 3.
Impairment of Goodwill
- ----------------------
Dynea International has evaluated its existing goodwill relating to prior
business combinations and has determined that an adjustment or reclassification
to intangible assets as of January 1, 2002 was not required in order to conform
to the new requirements of SFAS 142. The company has also reassessed the useful
lives and carrying values of other intangible assets, and will continue to
amortize these over their remaining useful lives.
As of January 1, 2002, Dynea International performed the transitional impairment
test under FAS 142 and compared the carrying value for each reporting unit to
its fair value, which was determined based on discounted cash flows. Upon
completion of the transitional impairment test, Dynea International determined
that there was no impairment as of January 1, 2002, as the carrying value of
each reporting unit did not exceed its fair value. The Company also completed
its annual impairment test required by SFAS 142 during the fourth quarter of
2002, 2003 and 2004, which was also performed by comparing the carrying value of
each reporting unit to its fair value based on discounted cash flow. No
impairment was recognized.
(f) Discontinued operations
In December 2002, Dynea International's Board of Directors approved a detailed
formal plan to sell its Oil Field Chemicals business segment. On January 28,
2003 the disposal of the business segment to M-I L.C.C. was completed. The deal
became effective as of January 1, 2003 and included Oil Field Chemicals business
in Norway, the subsidiaries in Australia, Great Britain, Indonesia, Middle-East
and Singapore, and the shares of an associated company in India. The income from
discontinued operations is presented separately from the income from continuing
operations. The adjustment ((euro)2.8 million in 2003) relates to the
translation of goodwill relating to the units sold (see (d) Translation
Adjustments).
(g) Treatment of excess of acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities and contingent liabilities over cost
Effective January 1, 2003 Dynea International acquired from its parent company
Dynea the Chemitec companies consisting of Dynea Erkner Gmbh and Dynea Holding
B.V. with its subsidiaries for a consideration of (euro)36.2 million. The
acquisition was regarded as a transaction between parties under common control
and handled as uniting of interest. The transaction resulted in a excess of
acquirer's interest in the net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost of (euro)15.0 million, which
was credited against goodwill under IFRS and recognised as income in the line
depreciation and amortization over 17 years. Under SFAS 142 excess of acquirer's
interest in the net fair value of acquiree's identifiable assets, liabilities
and contingent liabilities over cost is allocated to long-lived assets of
acquired companies and depreciated over their useful life. This leads to lower
depreciation charges of these assets compared to IFRS. The difference between
IFRS and U.S. GAAP was therefore eliminated when IFRS 3 was issued in 2004.
However, as IFRS 3 is applied prospectively, an adjustment remains with the
acquisition of the Chemitec companies.
(h) One-time termination benefits
In December 2003, the Board of Directors of Dynea Chemicals approved a detailed
formal plan to relocate the production from Engene to Lillestr0m during 2004.
Under IFRS the company recognizes a liability for termination benefits when it
has a constructive obligation to provide these benefits, thus, a liability was
recognized in 2003. According to FAS 146 one-time termination benefits are
measured at the communication date and then recognized ratably over the future
service period. The employees were terminated in 2004 and thus, under US GAAP
the cost was recognized in its entirety in 2004.
(i) Major overhaul costs
Under IFRS, the early adoption of IAS 16 (revised) at January 1, 2004 resulted
in a change in the accounting for major overhaul costs: such costs are now
capitalized as part of the cost of an asset. Under U.S. GAAP the costs of major
overhauls are expensed as incurred. As the change in the IFRS accounting policy
is applied retrospectively starting from the earliest year presented, that is,
from January 1, 2002 onwards, an adjustment is shown in the U.S. GAAP
reconciliation for all years presented.
(j) New accounting standard
In January 2003, the FASB (Financial Accounting Standards Board) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46),
which was amended in December 2003 when the FASB issued FIN 46-R. Under the
interpretation, as amended, certain entities known as "Variable Interest
Entities" (VIE) must be consolidated by the "primary beneficiary" of the entity.
The primary beneficiary is generally defined as having the majority of the risks
and rewards arising from the VIE.
FIN 46-R is effective for Dynea International's December 31, 2004 financial
statements for any new arrangements created after December 31, 2003. Dynea
International has identified one new arrangement that was created late in 2004
and therefore is in the scope of the new standard already as of December 31,
2004. The impact of this arrangement on the Company's December 31, 2004
financial statements is however considered immaterial as the operations were
only started in December 2004. The new arrangement will be evaluated in
accordance with FIN 46-R starting from January 1, 2005. FIN 46-R is effective
also for possible VIEs created before December 31, 2003 for Dynea
International's December 31, 2005 financial statements and the Company is
currently evaluating the impact on its results of operations and financial
position under U.S. GAAP.
In November 2004 the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 151, Inventory Costs - an amendment of ARB No.
43, Chapter 4 (revised ) (FAS 151). FAS 151 amends the guidance in ARB No. 43,
Chapter 4, 'Inventory Pricing,' to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). FAS 151 requires that those items be recognized as current-period
charges. In addition, FAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. FAS 151 is effective for Dynea International for its year
ended December 31, 2006. The new standard is not expected to have material
impact on the Company's results of operations and financial position under U.S.
GAAP.
In December 2004 the FASB issued Financial Accounting Standard No. 123R,
Share-Based Payment (FAS 123R). FAS 123R requires that companies expense the
value of employee stock options and other awards. FAS 123R allows companies to
choose an option pricing model that appropriately reflects their specific
circumstances and the economics of their transactions, and allows companies to
select from three transition methods for adoption of the provisions of the
standard. FAS 123R is effective for Dynea International for its year ended
December 31, 2006. The Company is currently investigating the impact of the
statement on the results of operations and financial position under U.S. GAAP.
In December 2004 the FASB issued Financial Accounting Standard No. 153,
Exchanges of Nonmonetary Assets (FAS 153). FAS 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions, to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. FAS 153 is effective for Dynea for nonmonetary exchanges
occurring on or after January 1, 2006. The new standard is not expected to have
material impact on the Company's results of operations and financial position
under U.S. GAAP.
27. Subsequent Events
On January 21, 2005, Dynea International and senior lenders signed an amendment
letter to the senior credit agreement. The amendments include amended financial
covenants for fourth quarter 2004 to fourth quarter 2006 and a commitment from
the owners of Dynea International to make additional equity injections in cash
of (euro)11.0 million in both 2005 and 2006 to Dynea Chemicals Oy. Additionally,
a new redemption premium was included to the credit agreement, the redemption
premium will be an amount equal to 0.50 % of the principal amount repaid or
prepaid if such repayment or prepayment occurs after 30 November 2005 but prior
to 30 April 2006; and 1.50 % of the principal amount repaid or prepaid if such
repayment or prepayment occurs on or after 30 April 2006.
Based on the authorisation by the extra general meeting of the shareholders, the
Board of Directors of Dynea Oy have decided in January 2005 to grant an offer in
total 3.296.800 share options to the B-shareholders of Dynea Oy being current
key managers employed by Dynea Oy and its subsidiaries of Dynea International
Oy. Under IFRS 2, Share-based payment transactions require an expense to be
recognized in Dynea International when share options are granted as part of the
remuneration package to its key managers. The share options in Dynea Oy are
measured at fair value and the charge will be reflected in the financial
statements of Dynea International in 2005.
Dynea International's reportable primary business segments have been changed to
four geographical areas, Europe, North America, Asia Pacific and South America
following the new business structure announced on March 21, 2005.
Report of Independent Registered Public Accounting Firm
Partners
Methanor v.o.f.
We have audited the accompanying balance sheets of Methanor v.o.f. (Partnership)
as of December 31, 2004 and 2003, and the related statements of income and
changes in partners'capital, and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the Netherlands and the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Methanor v.o.f. at December 31,
2004 and 2003, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the Netherlands and comply with the
financial reporting requirements included in Part 9, Book 2 of the Netherlands
Civil Code.
Accounting principles generally accepted in The Netherlands vary in certain
respects from accounting principles generally accepted in the United States. The
application of the latter did affect the determination of net income for the
year ended December 31, 2004, and the determination of partners' capital at
December 31, 2004 as summarized in Note 5 to the financial statements.
Ernst & Young Accountants
Groningen, The Netherlands
January 31, 2005
Methanor v.o.f.
Balance Sheets
(Amounts in thousands of euro)
December 31, December 31,
2004 2003
----------------- ----------------
Assets
Non-current assets
Property, plant and equipment, net (euro) 38,286 (euro) 35,424
Current assets
Inventories 10,355 7,352
Trade accounts receivable, net 19,880 19,771
Receivables from partners 4,090 3,666
Other debtors 57 1,682
Pre-payments 50 406
Cash and cash equivalents 24,239 10,083
Total current assets 58,671 42,960
---------------- ----------------
Total assets (euro) 96,957 (euro) 78,384
================ ================
Partners' capital and liabilities
Partners' capital
Partners' capital (euro) 15,882 (euro) 15,882
Undistributed profit 51,291 40,669
Total capital 67,173 56,551
Non-current liabilities
Provisions 500 500
Current liabilities
Trade creditors 24,035 16,033
Amounts owed to partners 4,451 3,903
Other current liabilities 798 1,397
---------------- ----------------
Total current liabilities 29,284 21,333
---------------- ----------------
Total partners' capital and liabilities (euro) 96,957 (euro) 78,384
The accompanying notes are an integral part of these financial statements.
Methanor v.o.f.
Statements of Income and Changes in Partners' Capital
(Amounts in thousands of euro)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---------------- ---------------- -----------------
Net sales to external parties (euro) 153,442 (euro) 157,624 (euro) 116,222
Net sales to related parties 32,742 50,081 46,742
-------------- -------------- ---------------
Total net sales 186,184 207,705 162,964
Cost of sales 151,685 166,024 141,345
-------------- -------------- ---------------
Gross profit 34,499 41,681 21,619
Selling and distribution costs 11,025 12,156 11,156
General and administration costs 1,321 1,164 1,132
Other operating (income) expense (125) (46) 302
-------------- -------------- ---------------
Total operating expenses 12,221 13,274 12,590
Operating income 22,278 28,407 9,029
Interest income 344 227 190
Interest expense - - -
-------------- -------------- ---------------
Net income (euro) 22,622 (euro) 28,634 (euro) 9,219
============== ============== ===============
Year Ended Year Ended Year Ended
December December December
Changes in Partners' Capital: 31, 2004 31, 2003 31, 2002
-----------------------------------------
Partners' Capital
Balance at the beginning and end of the year (euro) 15,882 (euro) 15,882 (euro) 15,882
Undistributed Profits
Balance at the beginning of the year (euro) 40,669 (euro) 31,035 (euro) 21,816
Partnership distribution (12,000) (19,000) -
Net income 22,622 28,634 9,219
------------- ------------- -------------
Balance at the end of the year (euro) 51,291 (euro) 40,669 (euro) 31,035
------------- ------------- -------------
Total Capital (euro) 67,173 (euro) 56,551 (euro) 46,917
============= ============= =============
The accompanying notes are an integral part of these financial statements.
Methanor v.o.f.
Statements of Cash Flows
(Amounts in thousands of euro)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
-------------- ------------- --------------
Net income (euro) 22,622 (euro) 28,634 (euro) 9,219
Adjustments to reconcile net income to cash flow from operations:
Depreciation 4,743 4,178 2,147
Decrease (increase) in inventory (3,003) (2,794) 9,263
Decrease (increase) in trade accounts receivables (109) (582) (8,464)
Decrease (increase) in other assets 1,557 (2,500) 2,133
Increase (decrease) in trade creditors 8,002 (6,606) 10,460
Increase (decrease) in other liabilities (51) 3,728 (4,847)
Increase in provisions - - 394
-------------- -------------- --------------
Cash provided by operating activities 33,761 24,058 20,305
-------------- -------------- --------------
Cash used in investing activity:
Purchases of tangible fixed assets (7,605) (9,888) (13,585)
-------------- -------------- --------------
Cash used in financing activity:
Partnership distribution (12,000) (19,000) -
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 14,156 (4,830) 6,720
Cash and cash equivalents--beginning balance (euro) 10,083 (euro) 14,913 (euro) 8,193
Cash and cash equivalents--ending balance (euro) 24,239 (euro) 10,083 (euro) 14,913
The accompanying notes are an integral part of these financial statements.
Methanor v.o.f.
Notes to Financial Statements
(Amounts in thousands of euro)
1. Description of Business
Methanor v.o.f. ("Methanor") is a European methanol producer with a production
facility in Delfzijl, The Netherlands. Methanor is organized as a partnership
and is ultimately owned by: Dynea International (40%), Akzo Nobel (30%), and DSM
(30%) (collectively, the "Partners").
2. Summary of Significant Accounting Policies
Basis of presentation
The financial statements are prepared in accordance with accounting principles
generally accepted in The Netherlands and the requirements included in Part 9,
Book 2 of the Netherlands Civil Code. All assets and liabilities are stated at
their face value unless otherwise mentioned.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in The Netherlands 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.
Related party transactions
Methanor contracts with its Partners for several key services including
personnel, maintenance, capital projects, environmental remediation, lease of
property, and legal. Methanor also sells methanol to all its Partners.
Management believes that all transactions are conducted at arms-length.
Significant expenditures are approved by the board of directors, on which each
Partner is represented. Amounts due to and due from the Partners are included on
the balance sheets.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
The cost of additions and improvements are capitalized, while maintenance and
repairs are charged to expense when incurred. Depreciation is calculated on the
straight-line method to write off the cost of each asset to their residual
values over their estimated useful life of 10 years. Property, plant and
equipment are reviewed for impairment whenever events or circumstances indicate
the carrying value of the asset may not be recoverable. No impairment was
recorded in any of the years presented.
Inventories
Inventories consist of the following:
December 31, December 31,
2004 2003
----------------------------------
Catalysts (euro) 2,891 (euro)1,957
Methanol 7,464 5,395
-------------- --------------
(euro) 10,355 (euro) 7,352
Catalysts are amortized over the expected lifetime of the catalyst. Methanol is
valued at the lower of cost (using the average cost method) or market value. The
cost of methanol at the end of the period is equal to the standard production
costs including current market value of the energy costs (which approximates
cost). Raw materials and catalysts used in the production of methanol are
received from three and two different suppliers, respectively.
Accounts receivable
Accounts receivable are carried at nominal value less a provision for doubtful
accounts from which it is expected that these cannot or cannot partly be
collected. The provision amounts to (euro) 100 at December 31, 2004 and 2003.
Cash and cash equivalents
Cash equivalents consist of highly liquid deposits which are readily convertible
into cash and have maturities of three months or less at the date of
acquisition.
Partnership Distribution
According to article 8 of the partnership agreement the Partners will agree
which part of the profit will be distributed.
Borrowings
Methanor has an (euro) 18,200 debt facility available with a commercial bank. No
amounts are outstanding under this facility at December 31, 2004 and 2003. The
facility is guaranteed by the Partners.
Taxes
As Methanor is organized as a partnership, all income taxes are the
responsibility of the Partners. Methanor forms part of a value added tax fiscal
unity and each member of the unity is severally liable for the payment of the
value added tax due by the unity.
Employee benefits
Methanor does not have any employees. All employee costs are paid by the
Partners and Methanor reimburses the Partners for the costs of the employees.
Provisions
Provisions consist of expected soil remediation costs required under Dutch law
at its operating facility. Provisions are recognized when Methanor has a present
legal or constructive obligation as a result of past events, it is probable that
an outflow of resources embodying economic benefit will be required to settle
the obligation, and a reasonable estimate of the amount of the obligation can be
made. The provision was estimated by Methanor with assistance from environmental
specialists from DSM's Chemelot unit and is not discounted. It is possible that
Methanor's estimate of the provision for soil remediation costs may change in
the future or that actual costs may deviate from the current provision.
Revenue recognition
Methanor recognizes revenue when all of the following factors have occurred:
persuasive evidence of an arrangement exists, amounts due from customers are
fixed, determinable and deemed collectible, and delivery has occurred. These
factors are typically met upon delivery of methanol to the customer.
Approximately 18%, 23% and 27% of Methanor's revenue during 2004, 2003 and 2002,
respectively, related to sales to entities affiliated with its Partners.
Foreign currencies
Monetary assets and liabilities in currencies other than euro are translated at
the exchange rate prevailing at the balance sheet date and recorded as a gain or
loss and included in selling and distribution costs.
3. Property, Plant, and Equipment
Other
Land and Plant and Tangible Construction
Buildings Machinery Assets in Progress Total
------------------------------------------------------------------------
Cost at December 31, 2003 (euro) 3,992 (euro) 139,729 (euro) 387 (euro) 3,995 (euro) 148,103
Additions 174 11,017 9 (3,595) 7,605
Disposals - (889) (10) (899)
------------ --------------- ----------- ------------- ---------------
Cost at December 31, 2004 (euro) 4,166 (euro) 149,857 (euro) 386 (euro) 400 (euro) 154,809
============ =============== =========== ============= ===============
Accumulated depreciation, at December 31, (euro) 3,323 (euro) 109,099 (euro) 257 ( euro) - (euro) 112,679
2003
Depreciation expense 34 4,670 39 - 4,743
Disposals - (889) (10) - (899)
------------ --------------- ----------- ------------- ---------------
Accumulated depreciation, at December 31,
2004 (euro) 3,357 (euro) 112,880 (euro) 286 (euro) - (euro) 116,523
============ =============== =========== ============= ===============
Net book value
December 31, 2003 (euro) 669 (euro) 30,630 (euro) 130 (euro) 3,995 (euro) 35,424
December 31, 2004 (euro) 809 (euro) 36,977 (euro) 100 (euro) 400 (euro) 38,286
4. Commitments
Methanor leases the site where the production facility is located from Akzo
Nobel and Dynea under a long-term lease expiring in 2054 with options to extend
the term in 50 year increments unless notice is given by the lessor 10-years
prior to expiration. The annual lease payments are indexed to inflation and
Methanor paid (euro)210, (euro)208 and (euro)193 in rent expense during 2004,
2003 and 2002, respectively. Methanor's minimum lease commitments are as
follows:
2005 (euro) 210
2006 210
2007 210
2008 210
2009 210
Thereafter 9,450
Total ----------
(euro)10,500
At the expiration of its long-term lease, Methanor is obligated to remove all
physical structures, including plants, from the leased land. This obligation is
not included in the balance sheet due to the long-term nature of the lease and
the continuation of production for an undefined period of time.
Methanor has purchase commitments of (euro) 177 of fixed assets during 2005, and
incurred total purchase costs under these commitments of (euro)106 and (euro)111
during 2004 and 2003, respectively.
5. Partners' Capital and Net Income under Accounting Principles Generally
Accepted in the United States
The financial statements have been prepared in accordance with generally
accepted accounting principles in The Netherlands ("Dutch GAAP"), which differ
in certain respects from generally accepted accounting principles in the United
States ("U.S. GAAP"). The application of U.S. GAAP did impact the determination
of net income for the year ended December 31, 2004 and Partners' Capital at
December 31, 2004 by the accounting for asset retirement obligations. The
initial amount at January 1, 2003 under Property, plant and equipment and under
Provisions would be (euro) 256 (discounted at 8%). We have not utilized a market
premium in our calculation because we do not believe a reasonable estimate can
be made at this time due to the period of time currently projected for the
liability to be settled (in approximately 50 years). The depreciation in 2004
would be (euro) 6 (2003 (euro) 6) and the interest expense in 2004 would be
(euro) 22 (2003 (euro) 20). This results in a reduction of net income and on
Partners' Capital under US GAAP for the year ended December 31, 2004 of (euro)
28 (2003 (euro) 26).
Reclassification Adjustments
In the 2004 Dutch GAAP financial statements, inventory purchase or sale
commitments are included or excluded in inventory, respectively. The following
reclassification adjustments, which did not impact net income or Partners'
Capital, are necessary to present the balance sheet in accordance with U.S.
GAAP.
December 31,
2004 2003
-----------------------------
Decrease in inventory (euro) 367 (euro) 577
Decrease in other current liabilities (euro) 367 (euro) 577
Dynea Chemicals Oy and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholder and the Board of Directors of Dynea Chemicals Oy and its
subsidiaries:
In our opinion the accompanying Consolidated Balance Sheets and the related
Consolidated Income Statements, Statements of Changes in Equity and Cash Flow
Statements present fairly, in all material respects, the financial position of
Dynea Chemicals Oy and its subsidiaries ("the Company") at December 31, 2004 and
2003 and the results of their operations and their cash flows for the years
ended December 31, 2004, 2003 and 2002 in conformity with International
Financial Reporting Standards. These financial statements are the responsibility
of the Company's Board of Directors and management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
which require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
As discussed in Note 2, Dynea Chemicals Oy adopted International Accounting
Standard ("IAS") 1 (revised 2003) Presentation of Financial Statements, IAS 21
(revised 2003) The Effect of Changes in Foreign Exchange Rates, IAS 24 (revised
2003) Related Party Disclosures, International Financial Reporting Standard 3
Business Combinations, IAS 36 (revised 2003) Impairment of Assets and IAS 38
(revised 2003) Intangible Assets in 2004.
International Financial Reporting Standards vary in certain significant respects
from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented
in Note 26 to the consolidated financial statements.
Helsinki, April 18, 2005
PricewaterhouseCoopers Oy
Authorized Public Accountants
Kim Karhu
Authorized Public Accountant
Dynea Chemicals Oy and Subsidiaries
Consolidated Balance Sheet
(all amounts in (euro) millions)
As at As at
Notes December 31, 2004 December 31, 2003
----------------------------------------------
Assets
Non-current assets
Property, plant and equipment, net 5 (euro) 380.5 (euro) 410.9
Intangible assets 6 191.6 178.9
Investments in associates and joint ventures (1) 2,7 55.9 44.7
Other non-current assets 2.8 2.9
--- ---
Total non-current assets 630.8 637.4
----- -----
Current assets
Inventories 8 70.2 59.2
Accounts receivable and prepayments 9 131.6 115.3
Taxes currently receivable 4.5 5.9
Other current assets 3.9 7.0
Cash and cash equivalents 27.6 21.2
---- ----
Total current assets 237.8 208.6
----- -----
Total assets 868.6 846.0
===== =====
Equity and liabilities
Capital and reserves attributable to Company's equity holders
Share capital 12 63.2 283.5
Related party transactions 23 36.5 27.6
Cumulative translation adjustment (43.1) (41.6)
Accumulated loss 2 16.0 (197.1)
---- -------
Total capital and reserves 72.6 72.4
Minority interest 2 9.2 9.9
--- ---
Total Equity 81.8 82.3
---- ----
Non-current liabilities
Borrowings 13 460.2 455.7
Pension liabilities 15 16.7 17.3
Provisions 16 8.8 9.4
Deferred tax liabilities (1) 2,14 34.9 44.1
Other non-current liabilities 1.0 3.5
--- ---
Total non-current liabilities 521.6 530.0
----- -----
Current liabilities
Accounts payable 17 103.0 86.4
Accrued liabilities 18 28.9 30.2
Borrowings 13 95.9 80.6
Pension Liabilities 15 0.8 --
Provisions 16 2.1 2.6
Taxes currently payable 11.3 8.9
Other current liabilities 23.2 25.0
---- ----
Total current liabilities 265.2 233.7
----- -----
Total liabilities 786.8 763.7
----- -----
Total equity and liabilities (euro) 868.6 (euro) 846.0
============ ============
(1) Comparative figures have been adjusted for the retrospective application
of IAS 16 (revised).
On April 18, 2005, Dynea Chemicals Oy's Board of Directors authorized
these financial statements for issue.
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea Chemicals Oy and Subsidiaries
Consolidated Income Statement
(All amounts in (euro) millions)
Year Ended Year Ended Year Ended
Notes December 31, 2004 December 31, 2003 December 31, 2002
----------- ------------------ -------------------- ------------------
Sales 4 (euro) 1,065.0 (euro) 979.0 (euro) 955.8
Cost of sales 5,6,15,20 (935.0) (857.8) (798.0)
Gross profit 130.0 121.2 157.8
Other operating income 11.9 12.3 13.8
Selling and distribution expenses 5,6,15,20 (30.0) (32.8) (41.3)
Research and development expenses 5,6,15,20 (20.2) (20.0) (17.6)
Administrative expenses 5,6,15,20 (56.3) (56.0) (54.9)
Other operating expenses 16 (6.3) (8.7) (14.0)
(Loss)/profit on sale of discontinued operations 21 (1.9) 1.4 --
Impairment write-downs 5,6 (8.1) (4.4) --
Amortization of goodwill 6 -- (11.1) (14.6)
Operating profit 19.1 1.9 29.2
Finance costs 22 (55.1) (60.7) (49.2)
Share of income in associates and joint ventures1) 2,7 15.7 13.1 3.9
---- ---- ---
Loss before income taxes (20.3) (45.7) (16.1)
Income tax benefit/ (expense)(1) 2,14 0.7 (18.9) 5.0
Loss for the year (euro) (19.6) (euro) (64.6) (euro) (11.1)
============= ============= =============
Attributable to
Equity holders of the Company (21.3) (66.0) (13.6)
------ ------ ------
Minority interest 2 1.7 1.4 2.5
--- --- ---
Loss for the year (euro) (19.6) (euro) (64.6) (euro) (11.1)
============= ============= =============
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea Chemicals Oy and Subsidiaries
Consolidated Statement of Changes in Equity
(All amounts in (euro) millions except share information)
Cumulative
Shares Issued and Paid Related Party Accumulated Translation Minority Total
Issued Share Capital Transactions Profit/(Loss) Adjustment Interest Equity
------ --------------- ------------- -------------- ----------- -------- ------
(1)
Balance, December 31, 2001 16,440,342 276.5 36.8 (119.2) (25.0) 10.0 179.1
Effect of adopting IAS 16
(revised) -- -- -- 1.7 -- -- 1.7
Shares issued 416,201 7.0 -- -- -- -- 7.0
Group contribution (Note 23) -- -- (5.9) -- -- -- (5.9)
Net loss for the year -- -- -- (13.6) -- 2.5 (11.1)
Translation adjustment -- -- -- -- (30.9) -- (30.9)
Dividends to minority -- -- -- -- -- (1.5) (1.5)
Balance, December 31, 2002 16,856,543 283.5 30.9 (131.1) (55.9) 11.0 138.4
Group contribution (Note 23) -- -- 5.7 -- -- -- 5.7
Transaction under common control
(Note 1) -- -- (9.0) -- -- -- (9.0)
Net loss for the year -- -- -- (66.0) -- 1.4 (64.6)
Translation adjustment -- -- -- -- 14.3 (1.2) 13.1
Dividends to minority -- -- -- -- -- (1.3) (1.3)
Balance, December 31, 2003 16,856,543 283.5 27.6 (197.1) (41.6) 9.9 82.3
========== ===== ==== ======= ====== === ====
Effect of adopting IFRS 3
business combinations (Note 2) -- -- -- 14.1 -- -- 14.1
Capital decrease -- (220.3) -- 220.3 -- -- --
Group contribution (Note 23) -- -- 8.9 -- -- -- 8.9
Net loss for the year -- -- -- (21.3) -- 1.7 (19.6)
Translation adjustment -- -- -- -- (1.5) (1.3) (2.8)
Dividends to minority -- -- -- -- -- (1.1) (1.1)
Balance, December 31, 2004 16,856,543 (euro)63.2 (euro) 36.5 (euro) 16.0 (euro) (43.1) (euro) 9.2 (euro) 81.8
========== ========== =========== =========== ============= ========== ===========
- ----------------------------------
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea Chemicals Oy and Subsidiaries
Consolidated Cash Flow Statement
(All amounts in (euro) millions)
Year Ended Year Ended Year Ended
December December December
Notes 31, 2004 31, 2003 31, 2002
-------- -------- --------
Cash generated from operations 24 57.0 63.5 87.0
---- ----- ----
Interest received 0.7 1.0 0.9
Interest paid (49.5) (44.4) (65.6)
Other financial income and expense 2.6 21.4 2.4
Dividends from associates 6.2 9.0 1.3
Income taxes paid (4.8) (8.8) (10.6)
----- ----- ------
Net cash provided by operating activities 12.2 41.7 15.4
---- ---- ----
Investing activities
Acquisition of subsidiaries and associates, net of cash
acquired (euro)0.0, (euro)1.2 and (euro)0.1 million in 2004, 2003 and 2002 1 (1.9) (36.2) (1.1)
Disposal of businesses, net of cash disposed (euro)1.7 in 2003 21 (2.8) 73.9 --
Purchase of property, plant, and equipment and intangibles 5, 6 (22.3) (29.3) (25.0)
Proceeds from sales of property, plant, and equipment and
intangibles 5, 6 2.6 2.7 1.0
Cash (used in)/provided by investing activities (24.4) 11.1 (25.1)
------ ---- ------
Financing activities
Issuance of share capital/capital contributions 12, 23 -- 15.2
8.9
Dividends to minority shareholders (1.1) (1.3) (1.1)
Repayments on long-term borrowings 13 16.8 (36.0) (15.4)
Net (payments) from short-term borrowings 13 (5.5) (23.5) (16.8)
Cash (used in)/provided by financing activities 19.1 (60.8) (18.1)
---- ------ ------
Increase/(decrease) in cash and cash equivalents 6.9 (8.0) (27.8)
Effects of exchange rate changes (0.5) (2.6) 0.3
Cash and cash equivalents--beginning balance 21.2 31.8 59.3
---- ---- ----
Cash and cash equivalents--ending balance (euro) 27.6 (euro) 21.2 (euro) 31.8
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Dynea Chemicals Oy and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
(All amounts in (euro) millions unless otherwise stated)
1. Description of business
Formation
Dynea Chemicals Oy, formerly Neste Chemicals Oy (the "Company" or "Guarantor"),
is a limited liability company, domiciled in Helsinki, Finland, which was
founded on September 8, 1999, and registered with the Finnish Trade Register on
September 13, 1999. On November 30, 1999, Dynea Chemicals acquired all of the
assets and liabilities of the specialty chemicals operations of Fortum Oyj
("Fortum"), a company controlled by the Finnish government, including
substantially all of the shares held by Neste Chemicals Benelux Holdings B.V., a
company wholly owned by Fortum. The acquisition of the Fortum specialty
chemicals business and Neste Chemicals Benelux Holdings B.V. was accounted for
as a purchase business combination. The Company's address is Siltasaarenkatu
18-20, 00530, Helsinki, Finland, and our telephone number is + 358 10 585 2000.
Prior to August 2000, the operations and financial statements of the Guarantor,
Dynea Chemicals Oy, were the same as all of the operations and related
consolidated financial statements of Dynea International Oy.
Dynea Chemicals is in the business of developing, manufacturing, marketing, and
selling industrial adhesion and surfacing solutions with a product portfolio of
adhesive resins and binders, and paper overlays, and operates primarily in
Europe, North and South America, and Asia/Pacific regions.
Acquisitions
Chemitec
- --------
Effective January 1, 2003 Dynea Chemicals acquired from its parent company Dynea
the Chemitec companies Dynea Erkner Gmbh and Dynea Holding B.V. with its
subsidiaries for a consideration of (euro)36.2 million. The acquisition was
accounted for as a transaction between parties under common control, resulting
in similar treatment to a pooling of interests. The value of net identifiable
assets of the companies was (euro)45.2 million at the date of acquisition. The
resulting difference of (euro)9.0 million was recorded as an adjustment to
equity.
The gross amount of excess of acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities and contingent liabilities over cost
of (euro)16.0 was recognized. The cumulative amount of excess of acquirer's
interest in the net fair value of acquiree's identifiable assets, liabilities
and contingent liabilities over cost recognized amounted to (euro)14.1 million
at December 31, 2003. In January 1, 2004, Dynea Chemicals early adopted the IFRS
3 Business Combinations resulting in derecognizing of negative goodwill with a
corresponding adjustment to the opening balance of retained earnings.
A summary of the net identifiable assets purchased are as follows:
Property, plant and equipment (euro) 40.1
Other assets less liabilities 5.1
---
Net Identifiable Assets 45.2
Purchase price 36.2
----
Difference taken to shareholders' equity (euro) (9.0)
============
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements are prepared in accordance with and comply
with International Financial Reporting Standards ("IFRS") and are prepared under
the historical cost convention except as discussed in the accounting policies
below, for example trading and available-for-sale investments and derivative
financial instruments are shown at fair value.
Adoption of revised standards
In 2004, Dynea International adopted the IFRS below, which are relevant to its
operations. The 2003 accounts have been amended as required, in accordance with
the relevant requirements. All changes in the accounting policies have been made
in accordance with the transition provisions in the respective standards.
IAS 1 (revised 2003) Presentation of Financial Statements
IAS 2 (revised 2003) Inventories
IAS 8 (revised 2003) Accounting Policies, Changes in Accounting Estimates and
Errors
IAS 10 (revised 2003) Events after the Balance Sheet Date
IAS 16 (revised 2003) Property, Plant and Equipment
IAS 17 (revised 2003) Leases
IAS 21 (revised 2003) The Effects of Changes in Foreign Exchange Rates
IAS 24 (revised 2003) Related Party Disclosures
IAS 27 (revised 2003) Consolidated and Separate Financial Statements
IAS 28 (revised 2003) Investments in Associates
IAS 31 (revised 2003) Interest in Joint Ventures
IAS 32 (revised 2003) Financial Instruments: Disclosure and Presentation
IAS 39 (revised 2003 and 2004) Financial Instruments: Recognition and
Measurement
IFRS 2 (issued 2004) Share-based Payment
IFRS 3 (issued 2004) Business Combinations
IAS 36 (revised 2004) Impairment of Assets
IAS 38 (revised 2004) Intangible Assets
IFRS 5 (issued 2004) Non-current Assets Held for Sale and Discontinued
Operations
The early adoption of IAS 1, 2, 8, 10, 17, 24, 27, 28,31 and 32 (all revised
2003) did not result in substantial changes to the Dynea International's
accounting policies. In summary:
o IAS 1 (revised 2003) has affected the presentation of minority
interest and other disclosures.
o IAS 2, 8, 10, 17, 27, 28, 31, 32 and 39 had no material effect
on the Company's policies.
o IAS 24 (revised 2003) has affected the identification of
related parties and some other related-party disclosures.
The early adoption of IAS 16 (revised) resulted in a change in the
accounting policies for capitalizing major overhaul costs. Previously major
overhaul costs were recognized as an expense as incurred. The IAS 16 (revised)
requires that Dynea International capitalizes overhaul expenses as a component
of asset.. The adoption IAS 16 (revised) resulted in the following changes:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---- ---- ----
Increase (decrease) in share of income in associates (euro) 2.0 (euro) (1.6) (euro) 0.6
and joint ventures
Increase (decrease) in income tax benefit/(expense) (0.7) 0.5 (0.2)
----- --- -----
1.3 (1.1) 0.4
(Increase) decrease in loss for the year === ===== ===
Increase in investments in associates and joint
ventures 3.5 1.5 3.1
Increase in accumulated profit/(loss) 2.3 1.0 2.1
Increase (decrease) in deferred tax liabililities 1.2 0.5 1.0
The early adoption of IAS 21 (revised in 2003) resulted in a change in
the accounting policy on the translation of goodwill and fair value adjustments
arising from the acquisition of foreign entities. Goodwill and fair value
adjustments on acquisitions occurring on or after January 1, 2004 are translated
at the exchange rate at each balance sheet date instead of the exchange rate at
the date of acquisition applied previously.
IFRS 2 (issued 2004) will affect the accounting for share-based
compensation, but the Company did not in 2004 have any such arrangements.
The early adoption of IFRS 3, IAS 36 (revised 2004) and IAS 38 (revised
2004) resulted in a change in the accounting policy for goodwill. Until 31
December 2003, goodwill was:
o Amortized on a straight line basis over its estimated useful
life, not to exceed 20 years; and
o Assessed for an indication of impairment at each balance sheet
date.
In accordance with the provisions of IFRS 3, IAS 36 and IAS 38:
o Dynea International ceased its annual goodwill amortization of
(euro)11.1 million from 1 January 2004 and derecognized its
negative goodwill of (euro)14.1 million with a corresponding
adjustment to opening balance of retained earnings;
o From the year ended 31 December 2004 onwards, goodwill is
tested annually for impairment, as well as when there are
indications of impairment.
o The Group reassessed the useful lives of its intangible assets
in accordance with the provisions of IAS 38. No adjustment
resulted from this reassessment.
Use of estimates--The preparation of financial statements in conformity with
IFRS requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the balance sheet date and the reported amounts of revenues
and expenses in the reporting period. Actual results may differ from the
estimates used in the financial statements. The areas involving a higher degree
of judgment or complexity, or areas where assumptions and estimates are
significant to the consolidated financial statements are disclosed in Note 3.
Consolidation--The consolidated financial statements include the accounts of
Dynea Chemicals Oy and all majority-owned subsidiaries in which Dynea Chemicals,
directly or indirectly, has an interest of greater than one half of the voting
rights or otherwise has power to exercise control over the operations. The
purchase method of business combinations, in accordance with IFRS 3 (issued
2004), is used for acquisitions. Subsidiaries are consolidated from the date on
which effective control is transferred to Dynea Chemicals and are no longer
consolidated from the date of disposal. In determining whether consolidation is
appropriate for non-wholly-owned subsidiaries, consideration is given to the
rights the minority shareholders hold.
All significant inter-company items and transactions have been eliminated in
consolidation. Where necessary, accounting policies for subsidiaries and
acquired businesses have been changed to ensure consistency with the policies
adopted by Dynea Chemicals.
Subsidiaries, which have been acquired with the exclusive intent to be sold
within the subsequent one-year period have not been consolidated, but have been
treated as assets held for sale in accordance with IFRS 5.
A listing of Dynea principal subsidiaries is set out in Note 25.
Minority interest represents the minority shareholders' proportionate share in
the equity or income of Dynea Chemical's majority-owned subsidiaries: Beijing
Dynea Chemical Industry Co. Ltd., PT Dynea Mugi Indonesia, PT Dynea Indria,
Dynea (Thailand) Co. Ltd., Dynea Krabi Co Ltd. and Dynea Malaysia SDN BHD.
Related party transactions are discussed in Note 23.
Foreign currencies--Assets and liabilities of foreign subsidiaries are
translated at the exchange rate prevailing at the balance sheet date. Revenues
and expenses are translated using the average rates of exchange prevailing
during the period. Exchange differences arising from the retranslation of the
net investment in foreign subsidiaries and associated undertakings and of
financial instruments, which are designated as and are hedges of such
investments are taken to shareholders' equity. On disposal of the foreign
entity, the cumulative amount of the translation difference is recognized as
income or expense as part of the gain or loss on sale.
As Dynea Chemicals applied the revised IAS 21 as of January 1, 2004 goodwill and
fair value adjustments arising on the acquisition of a foreign entity after
January 1, 2004 are treated as assets and liabilities of the foreign entity and
translated at the closing rate. Goodwill and fair value adjustments that arose
on the acquisition of a foreign entity before the application of revised IAS 21
are treated as non-monetary assets and liabilities of Dynea Chemicals and are
translated at the exchange rate at the date of acquisition.
The local currency financial statements of foreign entities operating in
hyper-inflationary economies are restated using appropriate indices to current
values at the balance sheet date before translation into Dynea Chemicals'
reporting currency, in accordance with IAS 29.
Gains and losses on all other foreign currency transactions are included in
finance costs in the Income Statement.
Property, plant and equipment--Property, plant and equipment have been stated at
their fair value at the date of acquisition, and at December 31, 2004 and 2003
have been adjusted for accumulated depreciation. The cost of additions,
improvements, and interest on construction are capitalized. Subsequent costs,
including major maintenance costs, are capitalized only when the recognition
criteria are satisfied. All other repairs and maintenance are charged to expense
when incurred.
Upon sale, retirement, abandonment or other disposition of property, the cost
and related accumulated depreciation are eliminated from the accounts and any
gain or loss is reflected in income.
Depreciation is calculated on the straight-line method to write off the cost of
each asset to their residual values over their estimated useful life as follows:
Buildings .......................................... 20 to 40 years
Plant and machinery ................................ 5 to 25 years
Other tangible assets .............................. 5 to 20 years
Capitalized interest--Interest is capitalized on major capital expenditures
during the period of time that is required to complete and prepare the property
for its intended use, as part of the cost of the asset.
Intangible assets--Goodwill represents the excess of the cost of an acquisition
over the fair value of Dynea Chemicals's share of the identifiable net assets of
the acquired subsidiary or associated undertaking at the date of acquisition.
Goodwill is tested annually for impairment and carried at cost less accumulated
impairment losses. Goodwill is allocated to cash-generating units for the
purpose of impairment testing. Goodwill resulted from the foreign subsidiaries
acquired before adopting IFRS 3 Business Combinations at January 1, 2004, is
translated by the historical rates. Goodwill resulted from the foreign
subsidiaries acquired after adopting IFRS 3 Business Combinations at January 1,
2004, is translated by the closing rates.
Other intangible assets have been stated at their fair value at the date of
acquisition or represent costs incurred on development projects to the extent
that such expenditures are expected to generate future economic benefits.
Software costs are amortized over a useful life of 3 to 5 years. Other
intangible assets, primarily patents, are amortized using the straight-line
method over their useful lives, generally six years, and at December 31, 2004
and 2003, have been adjusted for accumulated amortization. Amortization expense
is included in depreciation and amortization in the Income Statement.
Impairment--Dynea Chemicals assesses annually whether an indicator of impairment
exists for both tangible and intangible assets, including goodwill. If an
impairment indicator is present, Dynea Chemicals estimates the recoverable
amount of the asset as the higher of the asset's net selling price or its value
in use. Value in use is calculated based upon a discounted cash flow analysis.
The carrying value of a long-lived asset is considered impaired when the
recoverable amount from such asset is less than its carrying value. In that
event, an impairment loss is recognized based on the amount by which the
carrying value exceeds the recoverable amount.
Computer software development costs--Generally, costs associated with developing
computer software programs are recognized as an expense as incurred. However,
costs that are clearly associated with an identifiable and unique product that
will be controlled by Dynea Chemicals and has a probable benefit exceeding the
cost beyond one year are recognized as assets. Associated costs include staff
costs of the development team and all directly attributable costs necessary to
create and produce the asset.
Expenditures that enhance and extend the benefits of computer software programs
beyond their original specifications and lives are recognized as capital
improvements and are added to the original cost of the software. Computer
software development costs recognized as assets are amortized using the
straight-line method over the useful lives, not to exceed a period of five
years.
Research and development--Research and development costs are expensed as
incurred other than those incurred on certain development projects that are
capitalized as intangible assets to the extent that such expenditures are
expected to have future benefits. However, development costs initially
recognized as expense are not recognized as assets in subsequent periods. Dynea
Chemicals expensed research and development costs of (euro)20.2 million,
(euro)20.0 million and (euro)17.6 million for the years ended December 31, 2004,
2003 and 2002. Capitalized development costs were immaterial for all periods
presented.
Inventories--Inventories are stated at the lower of cost or net realizable
value. The cost of inventories is determined using the first in first out
method. The cost of finished goods and work in progress comprises raw materials,
direct labor, other direct costs and related production overheads, but excludes
interest expense. Net realizable value is the estimate of the selling price in
the ordinary course of business, less the costs to complete and sell the asset.
Accounts receivable--Accounts receivable are carried at anticipated realizable
value. An estimate is made for doubtful receivables based upon a review of all
outstanding amounts at the period-end. Bad debts are written off during the year
in which they are identified.
Financial instruments-- Dynea Chemicals' financial instruments include cash and
cash equivalents, accounts receivable, derivative instruments, accounts payable
and borrowings. All purchases and sales of financial assets are recognised using
settlement date accounting.
Dynea Chemicals enters into derivative financial instruments such as forward
foreign exchange contracts to hedge its exposure against foreign currency
fluctuations. Unrealized foreign exchange gains and losses on forward contracts
are calculated by valuing the forward contract with the forward exchange rate
prevailing on the balance sheet date and comparing that with the original amount
calculated by using the forward rate prevailing at the inception of the
contract. All forward foreign exchange contracts are marked-to-market at each
balance sheet date through current period earnings. The foreign exchange
forwards are entered into in order to hedge Dynea Chemicals against foreign
exchange rate exposure, however, hedge accounting, as defined in IAS 39, is not
applied to the foreign exchange forward contracts.
Dynea Chemicals enters into derivative financial instruments such as interest
rate swaps, and futures contracts to hedge its exposure to interest rate risks.
Interest receivable and payable under interest rate swaps is accrued and
recorded as an adjustment to the interest income or expense related to the
designated liability. Dynea Chemicals records the changes in fair values of the
interest rate swaps and futures in the income statement. Further disclosures
about financial instruments to which Dynea Chemicals is a party are provided in
Note 11. The interest rate swaps and futures are entered into in order to hedge
against interest rate exposure, however, hedge accounting, as defined in IAS 39,
is not applied to the interest rate swap agreements or futures contracts.
Dynea Chemicals enters into derivative financial instruments such as commodity
swap contracts in order to hedge its exposure against raw material price
fluctuations. Unrealized gains and losses on commodity swaps are calculated by
valuing the contracts with quoted market prices prevailing on the balance sheet
date and comparing that with the original amount calculated by using the market
price at the inception of the contract. All commodity derivative contracts are
marked-to-market at each balance sheet date through current period earnings. The
commodity derivative contracts are entered into in order to hedge Dynea
Chemicals against raw material price movements, however, hedge accounting, as
defined in IAS 39, is not applied to the commodity derivatives contracts.
Investments in associates and joint ventures--Investments in associated
undertakings and joint ventures are accounted for by the equity method of
accounting. Associates are undertakings over which Dynea Chemicals controls
between 20% and 50% of the voting rights, and over which Dynea Chemicals has the
ability to exercise significant influence, but which it does not control. Joint
ventures are entities that Dynea Chemicals jointly controls with one or more
other parties under a contractual arrangement.
Equity accounting involves recognizing in the income statement, Dynea Chemicals'
share of the associates' and joint ventures' profit and loss for the year. Dynea
Chemicals' interest in the associate or joint venture is carried in the balance
sheet at an amount that reflects its share of the net assets of the associate or
joint venture and includes goodwill on acquisition.
Accounting for leases--Leases of property, plant and equipment where a
significant portion of the risks and rewards of ownership are effectively
retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the income statement on a straight-line basis
over the period of the lease. Leases of property, plant and equipment where
Dynea Chemicals assumes substantially all the benefits and risks of ownership
are classified as finance leases. Finance leases are capitalized at the
estimated present value of the underlying lease payments, and are immaterial for
all periods presented.
Cash and cash equivalents--Cash equivalents consist of highly liquid
investments, which are readily convertible into cash and have maturities of
three months or less at the date of acquisition. Cash equivalents also include
restricted cash. The statement of cash flows was prepared in accordance with IAS
7.
Share capital--Ordinary shares are classified as equity. Issued but not fully
paid capital represents shares, which have been issued to the shareholder but
were not paid for at the balance sheet date. External costs directly
attributable to the issue of new shares, other than on a business combination,
are shown as a deduction, net of tax, in equity from the proceeds. Share issue
costs incurred directly in connection with a business combination are included
in the cost of acquisition.
Dividends-- Dividends on ordinary shares are recognized in equity in the period,
in which they are declared and approved by the Board of Directors and the
shareholders. Dividends are declared and paid in euros.
Borrowings--Borrowings are recognized initially at the proceeds received, net of
transaction costs incurred. In subsequent periods, borrowings are stated at
amortized cost using the effective yield method; any difference between
proceeds, net of transaction costs, and redemption value is recognized in the
income statement over the period of the borrowings.
Interest expenses are accrued for and recorded in the income statement for each
period.
Income taxes--Income tax expense/benefit includes Finnish and other national
income taxes. Dynea Chemicals intends to reinvest the earnings of its foreign
subsidiaries into those businesses. Accordingly, no provision has been made for
taxes, which would be payable if such earnings were distributed to Dynea
Chemicals.
Deferred income taxes are determined under the liability method. Deferred income
taxes represent liabilities to be paid or assets to be received in the future
and reflect the tax consequences on future years of temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Tax rates enacted or substantially enacted by the balance sheet date
are used to determine deferred income tax.
Future tax benefits, such as net operating loss carry forwards, are recognized
to the extent that it is probable that future taxable profit will be available
against which the unused tax losses can be utilized.
Employee benefits--For defined benefit plans, the pension accounting costs are
assessed using the projected unit credit method. Under this method, the cost of
providing pensions is charged to the income statement so as to spread the
regular cost over the service lives of employees in accordance with the advice
of qualified actuaries who carry out a full valuation of the plans periodically.
The pension obligation is measured as the present value of the estimated future
cash outflows using interest rates of government securities, which have terms to
maturity approximating the terms of the related liability. Actuarial gains and
losses in excess of the "10% corridor" are spread as a level amount over the
average remaining service lives of the employees.
Dynea Chemicals' contributions to the defined contribution pension plans are
charged to the income statement in the year to which they relate.
Provisions--Provisions are recognized when Dynea Chemicals has a present legal
or constructive obligation as a result of past events, it is probable that an
outflow of resources embodying economic benefit will be required to settle the
obligation, and a reliable estimate of the amount of the obligation can be made.
A provision for restructuring is recognized in the period in which Dynea
Chemicals becomes legally or constructively committed to the payment. The costs
included in a provision for restructuring are only those costs that are either
incremental and incurred as a direct result of the exit plan or are the result
of a continuing contractual obligation with no continuing economic benefit or a
penalty incurred to cancel the contractual obligation.
Government grants--Government grants relating to the purchase of property, plant
and equipment are included in non-current liabilities as deferred income and are
credited to the income statement on a straight-line basis over the expected life
of the related asset.
Revenue recognition--Sales are recorded on shipment of product and customer
acceptance, or performance of services, net of sales taxes and certain other
sales related expenses and after the elimination of sales within Dynea
Chemicals. Revenues from licensing agreements are recognized on an accrual basis
in accordance with the substance of the relevant agreement and are classified as
other operating income on the Income Statement.
Shipping and handling costs--Shipping and handling fees are charged to customers
and are included in total sales. Costs incurred for shipping and handling is
classified in other operating expenses in the income statement.
3. Critical accounting estimates and judgments
The preparation of Dynea Chemicals' financial statements requires its management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the management evaluates its estimates,
including those related to impairments, pensions, income taxes, restructuring,
bad debts, contingencies and litigation. The management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Dynea Chemical's considers the following policies to be the most critical in
understanding the judgments that are involved in preparing its financial
statements and the uncertainties that could impact the results of operations,
financial conditions and cash flows.
Impairment of long-lived assets and goodwill--Dynea Chemicals reviews the
carrying amounts of long-lived assets at the balance sheet date or whenever
events or changes in circumstances indicate that the carrying amount of an asset
may be impaired. Dynea Chemicals assesses the impairment of goodwill annually or
more frequently if events or changes in circumstances indicate that the carrying
value may not be recoverable. Examples of indicators, which could trigger an
impairment review, include the following:
o significant under performance relative to expected historical
or projected future operating results;
o significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and
o significant negative industry or economic trends.
When the carrying value of long-lived assets and goodwill may not be recoverable
based upon the existence of one or more indicators of impairment, Dynea
Chemicals measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be commensurate
with current market assessments of the time value of money and the risks
specific to the asset. The most significant variables in determining cash flows
are discount rates, terminal values, the number of years on which to base the
cash flow projections, as well as assumptions and estimates used to determine
the cash inflows and outflows. Those assumptions are described in Note 6. Based
on such reviews there is no need for impairment charges other than presented in
the financial statements. However, there can be no assurance that the change in
the factors listed above may not cause material impairment charges in the
future.
Pensions--The determination of Dynea Chemicals's obligation and expense for
pension and other post-retirement benefits is dependent on its selection of
certain assumptions used by actuaries in calculating such amounts. Those
assumptions are described in Note 15 to the consolidated financial statements
and include, among others, the discount rate and expected long-term rate of
return on plan assets. In accordance with IFRS, actual results that differ from
our assumptions are accumulated and amortized over future periods if they are
over 10% of the greater of defined benefit obligation or fair value of plan
assets at beginning of year and therefore generally affect Dynea Chemicals's
recognized expense and recorded obligation in such future periods. While Dynea
Chemicals believes that its assumptions are appropriate, significant differences
in its actual experience or significant changes in its assumptions may
materially affect its pension and other post-retirement obligations and its
future expense.
Deferred taxes--Deferred income tax is provided in full, using the liability
method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements. Deferred tax
assets are recognized to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be
utilized. Should the actual results differ from these estimates, revisions to
the deferred tax assets would be required.
4. Segment information
Dynea Chemicals' reportable segments are strategic business units that offer
different products and services for which internal financial information is
prepared. For the year ended December 31, 2004 Dynea Chemicals had the following
business segments:
o Panel Board Resins - producer of various mainly
formaldehyde-based resins that are used in manufacture of
particle board, plywood, MDF and OSB.
o Industrial and Surfacing - includes the industrial resins,
wood and specialty adhesives, and paper overlays product
lines.
o Other - These operations mainly consist of operations that do
not meet the quantitative thresholds for separate reporting
and primarily represents corporate expenses.
Activities are primarily conducted in North America, Europe and Asia.
Additionally, for the year ended December 31, 2002 Dynea Chemicals also had the
following business segment:
o Oil Field Chemicals- producer of specialty oil field chemicals
used to facilitate oil production and transportation (sold
during 2003).
Operating profit/loss is used as the measurement of segment results. The
eliminations column represents eliminations of inter-company sales, expenses,
receivables and payables and the unallocated column represents corporate items
not allocated to the segments. Dynea Chemicals' operations are global.
Dynea Chemicals Oy and Subsidiaries
Notes to the Consolidated Financial Statements (continued)
(All amounts in (euro) millions unless otherwise stated
Business Segments
- -----------------
Panel Board Industrial & Oil Field
Resins Surfacing Chemicals(4) Other Unallocated
---------------------------------------------------------------------------
Year Ended December 31, 2004
Sales (euro) 540.0 (euro) 497.6 -- (euro) 27.4 (euro) --
Inter-segment sales 6.8 2.9 -- -- --
Other operating income 1.7 3.3 -- 6.9 --
Net operating expenses (514.2) (458.7) -- (45.5) --
Depreciation and amortization1 (17.3) (18.6) -- (3.2) --
Profit/ (Loss) on sale of operations -- -- (1.9) -- --
Impairment write-downs (0.2) -- -- (7.9) --
---- ---- ----- ----- ----
Operating profit/(loss) 16.8 26.5 (1.9) (22.3) --
Financial expense
Share of income in associates and joint ventures 3.2 1.4 -- 11.1 --
Loss before taxes
Income tax benefit
Loss for the period
Segment assets(2) 281.4 288.4 -- 9.3 48.3
Segment goodwill 44.6 144.0 -- -- --
Investments in associates and joint ventures 12.9 4.4 -- 38.6 --
---- ---- ----- ----- ----
Total assets 338.9 436.8 -- 47.9 48.3
Total liabilities(2) (81.2) (73.3) -- (14.3) (621.3)
Capital expenditures(3) 11.2 10.9 -- 0.2 --
Eliminations Total
------------------------
Year Ended December 31, 2004
Sales -- (euro) 1,065.0
Inter-segment sales (9.7)
Other operating income 11.9
Net operating expenses 9.7 (1,008.7)
Depreciation and amortization(1) -- (39.1)
Profit/ (Loss) on sale of operations -- (1.9)
Impairment write-downs -- (8.1)
---- ------------
Operating profit/(loss) -- 19.1
Financial expense (55.1)
Share of income in associates and joint ventures -- 15.7
Loss before taxes (20.3)
------------
Income tax benefit 0.7
------------
Loss for the period (euro)(19.6)
============
Segment assets(2) (3.3) 624.1
Segment goodwill -- 188.6
Investments in associates and joint ventures -- 55.9
---- ------------
Total assets (3.3) (euro) 868.6
Total liabilities(2) 3.3 (786.8)
Capital expenditures(3) -- 22.3
Panel Board Industrial & Oil Field
Resins Surfacing Chemicals 4 Other Unallocated
----------------------------------------------------------------------------
Year Ended December 31, 2003(5)
Sales (euro) 489.3 (euro) 461.5 -- (euro) 28.2 (euro) --
Inter-segment sales 5.4 1.5 -- -- --
Other operating income 3.0 3.8 -- 5.5 --
Net operating expenses (462.4) (436.1) -- (44.1) --
Depreciation and amortization(1) (17.4) (18.8) -- (3.4) --
Goodwill amortization (2.7) (8.4) -- -- --
Profit on sale of operations -- -- 1.4 -- --
Impairment write-downs (4.4) -- -- -- --
Operating profit/(loss) 10.8 3.5 1.4 (13.8) --
Financial expense
Share of income in associates and joint ventures(5) 2.8 1.0 -- 9.3 --
Loss before taxes
Income tax expense
Loss for the period
Segment assets(2) 280.0 287.3 -- 21.8 40.0
Segment goodwill 44.6 129.9 -- -- --
Investments in associates and joint ventures(5) 9.0 3.3 -- 32.4 --
Total assets 333.6 420.5 -- 54.2 40.0
Total liabilities(2),(5) (69.0) (64.8) -- (22.0) (610.2)
Capital expenditures(3) 18.9 10.1 -- 0.3 --
Eliminations Total
------------------------
Year Ended December 31, 2003(5)
Sales -- (euro) 979.0
Inter-segment sales (6.9)
Other operating income -- 12.3
Net operating expenses 6.9 (935.7)
Depreciation and amortization(1) -- (39.6)
Goodwill amortization -- (11.1)
Profit on sale of operations -- 1.4
Impairment write-downs -- (4.4)
------------
Operating profit/(loss) -- 1.9
Financial expense (60.7)
Share of income in associates and joint ventures(5) -- 13.1
Loss before taxes (45.7)
------------
Income tax expense (18.9)
------------
Loss for the period (euro) (64.6)
------------
Segment assets(2) (2.3) 626.8
Segment goodwill -- 174.5
Investments in associates and joint ventures(5) -- 44.7
Total assets (2.3) (euro) 846.0
Total liabilities(2),(5) 2.3 (763.7)
Capital expenditures(3) -- 29.3
(1) Depreciation and amortization include depreciation on tangible assets and
amortization of intangible assets excluding goodwill.
(2) Segment assets and liabilities exclude deferred tax assets and liabilities
in accordance with IAS 14.
(3) Capital expenditure exclude investment in affiliates and payments for
long-lived assets acquired as part of a business acquisition.
(4) Oil Field Chemicals business segment was sold in January 2003 (Note 21).
(5) Figures were adjusted to early adoption of IAS 16 (revised)
Panel Board Industrial & Oil Field
Resins Surfacing Chemicals 4 Other Unallocated
-------------------------------------------------------------------------------
Year Ended December 31, 2002(5)
Sales (euro) 468.0 (euro) 389.5 (euro) 71.2 (euro) 27.1 (euro) --
Inter-segment sales 8.6 0.8 -- -- --
Other operating income 2.9 5.7 0.2 5.0 --
Net operating expenses (431.9) (359.2) (65.3) (39.6) --
Depreciation and amortization(1) (17.6) (17.4) (1.1) (3.1) --
Goodwill amortization (2.7) (9.2) (2.7) -- --
Operating profit/(loss) 27.3 10.2 2.3 (10.6) --
Financial expense
Share of income in associates and joint ventures(5) 1.4 0.7 0.0 1.8 --
Loss before taxes
Income tax benefit
Loss for the period
Segment assets(2) 305.0 269.6 29.7 23.2 62.2
Segment goodwill 47.3 153.2 47.3 -- --
Investments in associates and joint ventures(5) 7.3 2.7 0.2 30.6 --
Total assets 359.6 425.5 77.2 53.8 62.2
Total liabilities(2),(5) (76.1) (49.4) (7.8) (28.1) (678.5)
Capital expenditures(3) 18.1 6.4 0.4 0.1 --
Eliminations Total
--------------------------
Year Ended December 31, 2002(5)
Sales (euro) -- (euro) 955.8
Inter-segment sales (9.4)
Other operating income -- 13.8
Net operating expenses 9.4 (886.6)
Depreciation and amortization(1) -- (39.2)
Goodwill amortization -- (14.6)
-------------
Operating profit/(loss) -- 29.2
Financial expense (49.2)
Share of income in associates and joint ventures(5) -- 3.9
-------------
Loss before taxes (16.1)
Income tax benefit 5.0
-------------
Loss for the period (euro)(11.1)
-------------
Segment assets (2) (6.0) 683.7
Segment goodwill -- 247.8
Investments in associates and joint ventures(5) -- 40.8
Total assets (6.0) 972.3
Total liabilities(2),(5) 6.0 (euro)(833.9)
Capital expenditures(3) -- 25.0
(1) Depreciation and amortization include depreciation on tangible assets and
amortization of intangible assets excluding goodwill.
(2) Segment assets and liabilities exclude deferred tax assets and liabilities
in accordance with IAS 14.
(3) Capital expenditure exclude investment in affiliates and payments for
long-lived assets acquired as part of a business acquisition.
(4) Oil Field Chemicals business segment was sold in January 2003 (Note 21).
(5) Figures were adjusted to early adoption of IAS 16 (revised).
Geographic segments
- -------------------
The following table presents external sales by country based on the location of
customers:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
Europe (euro) 489.7 (euro) 455.7 (euro) 413.3
Americas 421.1 385.8 378.9
Asia 118.7 102.9 127.5
Oceania 30.7 30.1 29.2
Other 4.8 4.5 6.9
-------------- ------------ -----------
Total sales (euro) 1,065.0 (euro) 979.0 (euro) 955.8
============== ============ ============
The composition of total segment assets analyzed below is based on the location
of the assets: December 31, 2004 December 31, 2003
Europe (euro) 357.9 (euro) 343.1
Americas 201.3 200.1
Asia 63.2 61.5
Oceania 26.1 26.5
---- ----
Total segment assets 648.5 631.2
Unallocated assets 220.1 214.8
----- -----
Total assets (euro) 868.6 (euro) 846.0
============= ============
Comparison figures were adjusted to early adoption of IAS 16 (revised)
Expenditures for long-lived assets analyzed below are based on the location of
the assets and excludes investment in affiliates and payments for long-lived
assets acquired as part of a business acquisition:
December 31, 2004 December 31, 2003 December 31, 2002
------------------ ------------------ ------------------
Europe (euro) 11.3 (euro) 12.3 (euro) 7.5
Americas 7.1 11.5 11.0
Asia 3.4 5.2 6.1
Oceania 0.5 0.3 0.3
Other -- -- 0.1
----------- ----------- -----------
Total expenditures (euro) 22.3 (euro) 29.3 (euro) 25.0
=========== =========== ===========
5. Property, plant and equipment
Property, plant and equipment, stated at cost less accumulated depreciation,
consist of:
Other
Land and Plant and Tangible Construction
Buildings Machinery Assets in Progress Total
Cost at December 31, 2003 (euro) 123.3 (euro) 370.9 (euro) 25.2 (euro) 12.9 (euro) 532.3
============ ============ =========== =========== ============
Additions 1.0 5.8 1.5 14.0 22.3
Transfers 1.9 15.5 -- (17.4) --
Disposals (0.1) (1.2) (0.4) (0.2) (1.9)
Write-downs (3.0) (5.2) (8.2)
Exchange differences (1.5) (7.8) (0.4) (0.2) (9.9)
------------ ------------ ----------- ---------- ------------
Cost at December 31, 2004 (euro) 121.6 (euro) 378.0 (euro) 25.9 (euro) 9.1 (euro) 534.6
============ ============ =========== ========== ============
Accumulated depreciation, at December 31, 2003 (euro) 19.2 (euro) 89.7 (euro) 12.5 (euro) -- (euro) 121.4
=========== =========== =========== ========= ============
Depreciation expense 5.7 28.0 3.9 -- 37.6
Transfers -- -- -- -- --
Disposals -- (1.0) (0.4) -- (1.4)
Exchange differences -- (3.3) (0.2) -- (3.5)
----------- ------------ ----------- ---------- ------------
Accumulated depreciation, at December 31, 2004 (euro) 24.9 (euro) 113.4 (euro) 15.8 (euro) -- (euro) 154.1
=========== ============ =========== ========== ============
Net book value
December 31, 2003 (euro) 104.1 (euro) 281.2 (euro) 12.7 (euro) 12.9 (euro) 410.9
December 31, 2004 (euro) 96.7 (euro) 264.6 (euro) 10.1 (euro) 9.1 (euro) 380.5
Other
Land and Plant and Tangible Construction
Buildings Machinery Assets in Progress Total
Cost at December 31, 2002 (euro) 115.8 (euro) 359.2 (euro) 22.3 (euro) 13.5 (euro) 510.8
============ =========== =========== =========== ============
Subsidiaries acquired 13.9 20.1 4.8 1.3 40.1
Additions 3.6 14.1 2.7 9.3 29.7
Transfers 1.1 9.2 (1.7) (8.6) --
Disposals, other (4.7) (1.8) (1.6) -- (8.1)
Write-downs -- (4.4) -- -- (4.4)
Exchange differences (6.4) (25.5) (1.3) (2.6) (35.8)
------------ ------------ ----------- ----------- ------------
Cost at December 31, 2003 (euro) 123.3 (euro) 370.9 (euro) 25.2 (euro) 12.9 (euro) 532.3
============ ============= =========== =========== ============
Accumulated depreciation, at December 31, 2002 (euro) 14.5 (euro) 68.6 (euro) 10.4 (euro) -- (euro) 93.5
=========== =========== =========== ========= ===========
Depreciation expense 5.9 28.1 3.9 -- 37.9
Transfers -- 0.1 (0.1) -- --
Disposals (0.3) (1.0) (1.1) -- (2.4)
Exchange differences (0.9) (6.1) (0.6) -- (7.6)
----------- ----------- --------- --------- ------------
Accumulated depreciation, at December 31, 2003 (euro) 19.2 (euro) 89.7 (euro) 12.5 (euro) -- (euro) 121.4
=========== ============ =========== ========= ============
Net book value
December 31, 2002 (euro) 101.3 (euro) 290.6 (euro) 11.9 (euro) 13.5 (euro) 417.3
December 31, 2003 (euro) 104.1 (euro) 281.2 (euro) 12.7 (euro) 12.9 (euro) 410.9
Capitalized interest was immaterial for all periods presented.
6. Intangible assets
Intangible assets, stated at cost less accumulated amortization, consist of:
Other
Computer Intangible
Goodwill Software Assets Total
-------- -------- ------ -----
Cost at December 31, 2003 (euro) 219.4 (euro) 6.0 (euro) 5.6 (euro) 231.0
============ ========== ========== ============
Effect of adopting IFRS 3 business combinations 14.9 -- -- 14.9
Additions -- 0.0 0.0 0.0
Disposals -- -- -- --
Exchange differences (1.1) -- 0,0 (1.1)
Cost at December 31, 2004 (euro) 233.2 (euro) 6.0 (euro) 5.6 (euro) 244.8
============ ========== ========== ============
Accumulated amortization, at December 31, 2003 (euro) 44.9 (euro) 4.1 (euro) 3.1 (euro) 52.1
============ ========== ========== ============
Effect of adopting IFRS 3 business combinations 0.8 -- -- 0.8
Amortization expense -- 0.9 0.6 1.5
Disposals -- -- -- --
Exchange differences (1.1) (0.1) (1.2)
------------
Accumulated amortization, at December 31, 2004 (euro) 44.6 (euro) 5.0 (euro) 3.6 (euro) 53.2
============ ========== ========== ============
Net book value
December 31, 2003 (euro) 174.5 (euro) 1.9 (euro) 2.5 (euro) 178.9
December 31, 2004 (euro) 188.6 (euro) 1.0 (euro) 2.0 (euro) 191.6
Other
Computer Intangible
Goodwill Software Assets Total
-------- -------- ------ -----
Cost at December 31, 2002 (euro) 284.7 (euro) 5.8 (euro) 5.1 (euro) 295.6
============ ========== ========== ============
Subsidiaries acquired (15.0) -- 0.2 (14.8)
Additions -- 0.2 1.0 1.2
Disposals (47.6) -- (0.3) (47.9)
Exchange differences (2.7) -- (0.4) (3.1)
Cost at December 31, 2003 (euro) 219.4 (euro) 6.0 (euro) 5.6 (euro) 231.0
============ ========== ========== ============
Accumulated amortization, at December 31, 2002 (euro) 36.9 (euro) 3.3 (euro) 2.7 (euro) 42.9
============ ========== ========== ============
Amortization expense 11.1 0.8 0.9 12.8
Disposals (0.5) -- (0.2) (0.7)
Exchange differences (2.6) -- (0.3) (2.9)
Accumulated amortization, at December 31, 2003 (euro) 44.9 (euro) 4.1 (euro) 3.1 (euro) 52.1
============ ========== ========== ============
Net book value
December 31, 2002 (euro) 247.8 (euro) 2.5 (euro) 2.4 (euro) 252.7
December 31, 2003 (euro) 174.5 (euro) 1.9 (euro) 2.5 (euro) 178.9
In accordance with IFRS 3 Dynea Chemicals has ceased to amortize its goodwill
amortization as of January 1, 2004. Other intangible assets principally
represent patents and have been valued based upon management calculations and
analyses.
Impairment test for goodwill
Goodwill is allocated to Dynea International's cash-generating units (CGUs). By
business segments, which consist of CGUs, the goodwill is allocated in the
following way:
December 31, 2004 December 31, 2003
----------------- -----------------
Panel Board Resins (euro) 44.6 (euro) 44.6
Industrial and Surfacing 144.0 129.9
----------- ------------
Total (euro) 188.6 (euro) 174.5
============ ============
The recoverable amount of CGUs is based on value-in-use calculations. These
calculations use cash flow projections based on financial plans approved by the
Board of Directors of Dynea Chemicals covering a three-year period. Cash flows
beyond the three-year period until 2009 are projected to be stable. Cash flows
beyond 2009 are incorporated to terminal value, which is calculated as seven
times EBITDA in year 2009. Cash flows and terminal value are discounted using a
7% discount rate to December 31, 2004. These assumptions have been used for the
analysis of each CGU within the business segments, Panel Board Resins and
Industrial and Surfacing. Management has determined the budgeted EBITDA and
volume growth rates based on past performance and expectations for market
development. The discount rates used are pre-tax and reflect specific risks
relating to the relevant segment (Chemical industry). As the recoverable amounts
of CGUs exceeded their carrying amounts no impairment charge for goodwill was
recognized.
7. Investments in associates and joint ventures
December 31, 2004 December 31, 2003
------------------ ------------------
Associates:
Opening net book amount (euro) 2.5 (euro) 2.8
Sale of shares -- (0.2)
Exchange differences (0.1) (0.1)
Share of results of associates 0.3 0.2
Distribution of profits (0.1) (0.2)
Closing net book amount 2.6 2.5
---------- ----------
Joint Ventures:
Opening net book amount (1) 42.2 38.0
Purchase of shares 1.9 --
Exchange differences (0.1) 0.2
Share of results of joint ventures (1) 15.4 12.9
Distributions of profits (6.1) (8.9)
Closing net book amount 53.3 42.2
---------- ----------
Total (euro) 55.9 (euro) 44.7
=========== ===========
1) Comparison figures were adjusted to early adoption of IAS 16 (revised).
The principal joint venture is:
Country of Profit/ % Interest
Incorporation Assets Revenues Liabilities (Loss) held
------------- ------ -------- ----------- ------ ----
Joint Venture:
Methanor V.O.F. Netherlands
Year ended December 31, 2004 (euro)105.7 (euro)186.2 (euro)29.6 (euro) 27.7 40
Year ended December 31, 2003 1) (euro)82.0 (euro)207.7 (euro)21.7 (euro) 24.6 40
1) Comparison figures were adjusted to early adoption of IAS 16 (revised).
8. Inventories
Inventories consist of:
December 31, 2004 December 31, 2003
------------------ ------------------
Raw material (euro) 45.8 (euro) 38.8
Work in progress 1.1 0.5
Finished goods 24.6 22.2
----------- -----------
Total 71.5 61.5
Obsolescence provision (Note 10) (1.3) (2.3)
----------- -----------
Total (euro) 70.2 (euro) 59.2
============ ===========
9. Accounts receivable
Accounts receivable consist of:
December 31, December 31,
2004 2003
---- ----
Trade receivables (net of allowances for doubtful accounts
of (euro)4.4 and (euro)5.8, respectively, Note 10) (euro) 101.4 (euro) 88.9
Related party receivable (Note 23) 13.0 6.1
Prepayments 0.6 3.1
Fair value of foreign exchange forward contracts 0.1 1.4
Fair value of interest rate swaps and futures contracts 0.5 --
Other receivables 16.0 15.8
---- ----
Total (euro) 131.6 (euro) 115.3
============ ============
10. Valuation accounts
Provisions from assets to which they apply:
Change in
Beginning Acquired Charged to Tax
Balance Operations Expenses Utilized Legislation
------- ---------- -------- -------- -----------
Year ended December 31, 2003
Allowance for doubtful accounts receivable (euro) 4.9 (euro) 0.8 (euro) 0.4 (euro) (0.3) --
Obsolescence provision for inventory 0.7 -- 2.0 (0.4) --
Valuation allowance for deferred tax assets 79.5 -- 92.5 (9.6) --
Year ended December 31, 2004
Allowance for doubtful accounts receivable (euro) 5.8 0.1 (1.5) --
Obsolescence provision for inventory 2.3 -- 0.5 (1.5) --
Valuation allowance for deferred tax assets 160.0 -- 7.0 (14.7) (95.0)
Discontinued Ending
Operations Balance
Year ended December 31, 2003
Allowance for doubtful accounts receivable -- (euro) 5.8
Obsolescence provision for inventory -- 2.3
Valuation allowance for deferred tax assets (2.4) 160.0
Year ended December 31, 2004
Allowance for doubtful accounts receivable -- (euro) 4.4
Obsolescence provision for inventory -- 1.3
Valuation allowance for deferred tax assets -- 57.3
11. Derivatives and financial instruments
Nominal values of derivative financial instruments
December 31, 2004 December 31, 2003
------------------- --------------------
Interest rate swaps and futures contracts (euro) 117.1 (euro) 83.6
Foreign exchange forward contracts 84.7 110.7
Maturity of interest rate swap contracts:
Under 1 year 7.3 15.8
2-5 years 109.7 67.8
Fair values of derivative financial instruments
December 31, 2004 December 31, 2003
----------------- -----------------
Positive Negative Net Net
fair values fair values fair values Fair values
Interest rate swaps and futures contracts (euro) 0.5 (euro) (0.8) (euro) (0.3) (euro) (0.8)
Foreign exchange forward contracts 0.1 (0.6) (0.5) 0.9
Maturity of interest rate swap contracts:
Under 1 year 0.0 -- (0.0) (0.1)
2-5 years 0.5 (0.8) (0.3) (0.7)
Fair values of the interest rate swaps, futures contracts, and foreign exchange
forward contracts are recognized in the Balance Sheet under Current Assets or
Current Liabilities. Positive and negative fair values of financial instruments
are shown under under Accounts receivable (See Note 9) or Accrued Liabilities
(See Note 18) in accordance with IAS 39. Dynea Chemicals had no commodity
derivatives at December 31, 2004.
Fair value of other financial instruments - The carrying amount and fair value
of financial instruments used by Dynea Chemicals are as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Assets
Cash and cash equivalents (euro) 27.6 (euro) 27.6 (euro) 21.2 (euro) 21.2
Accounts and related party receivables 114.4 114.4 95.0 95.0
Other receivables 16.6 16.6 17.3 17.3
Liabilities
Accounts and related party payables 103.0 103.0 86.4 86.4
Long-term debt due currently and short-term borrowings 95.9 95.9 80.6 80.6
Long-term debt 460.2 465.6 455.7 463.0
Other financial instruments
Financial guarantees and letters of credit -- 0.2 -- 0.2
The following methods and assumptions were used to determine the above fair
values:
i) The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt due currently and short-term
borrowings approximate their fair values because of the short maturity
of these instruments.
ii) The fair values of interest rate swaps are based upon valuations
provided by the counterparty, which are calculated using a discounted
cash flow analysis.
iii) The fair values of foreign exchange forward contracts are calculated
using year-end market rates.
iv) The fair values of financial guarantees and letters of credit is based
upon fees currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparts at the reporting date.
v) The fair value of long-term debt is based upon current rates for
similar debt arrangements.
vi) No comparable market exists for the related party balances. The
carrying value is assumed to approximate fair value.
vii) Carrying amount of derivative financial instruments equal fair values.
viii) The fair values of futures contracts are based upon valuations provided
by the counterparty, which are calculated based on quoted market rates
at the balance sheet day.
The nominal amounts of derivatives summarized in the above table do not
represent amounts exchanged by parties and, thus, are not a measure of Dynea
Chemicals exposure from its use of derivatives. The nominal amounts for the
forward exchange contracts include positions, which have been effectively closed
off.
Hedge of net investment in foreign equity
Dynea Chemical's Canadian dollar borrowing of CAD 33.2 million (part of Term A
CAD tranche and part of Term B CAD tranche under the Senior credit agreement)
was designated as a hedge of the net investment in its foreign subsidiary in
Canada until it was terminated at June 8, 2004. The foreign exchange gain of
(euro)0.2 million net of taxes on translation of the borrowing to Euro at the
balance sheet date was recognized in shareholder's equity.
Dynea Chemical's U.S. dollar borrowing of $ 30.5 million (part of Term A USD
tranche and part of Term B USD tranche under the Senior credit agreement) was
designated as a hedge of the net investment in its foreign subsidiary in the
United States until it was terminated at June 8, 2004. The foreign exchange loss
of (euro)(0.7) million net of taxes on translation of the borrowing to Euro at
the balance sheet date was recognized in shareholders' equity.
Financial risk management
Dynea Chemicals has operations in over 20 countries. Approximately 90% of Dynea
Chemicals' revenues are generated from international customers.
The overall objective of the Group's Treasury is to provide centralized and
cost-effective funding to subsidiaries as well as to manage financial risks in
order to minimize the negative effects of market fluctuations on Dynea Chemicals
net income. The main exposures managed by Group's Treasury for Dynea Chemicals
are interest rate risk and currency risk. In addition there is a risk of adverse
raw material price fluctuations, which is managed by the centralized procurement
organization.
Risk management is mainly carried out by a central Treasury operation under
policies approved by the Board of Directors. Corporate Treasury identifies,
evaluates and hedges financial risks in close co-operation with the business
units. Raw material price risk is managed by the Group's centralized procurement
organization in close co-operation with the business units.
Interest rate risk--Dynea Chemicals is exposed to changes in interest rates.
Dynea Chemicals' policy is to have a minimum of 30% of its total debt as fixed
interest rate debt. This is achieved by swapping floating interest rate debt to
fixed interest rate debt using interest rate swap agreements and futures
contracts.
Foreign exchange risk--Dynea Chemicals is exposed to foreign exchange risk
arising mainly from movements in the values of Norwegian kroner, U.S. dollar and
Canadian dollar. Subsidiaries are encouraged, but not required, to use forward
exchange contracts transacted with Corporate Treasury, to hedge their exposure
to foreign currency risk in the local reporting currency. Corporate Treasury
hedges the exposures in each currency using external forward exchange contracts.
All forward foreign exchange contracts are marked-to-market at each balance
sheet date through current period earnings.
Dynea Chemicals' policy is to minimize translation risk exposure by funding
assets, whenever economically possible, in the same currency. If matching of the
assets and liabilities in the same currency is not possible, hedging of the
remaining translation risk of the net investment in foreign entities may occur.
Dynea Chemicals uses long-term liabilities to hedge translation risk.
Concentrations and credit risk--Counterpart risk encompasses issuer risk on
settlement risk on derivative and money market contracts and credit risk on cash
and time deposits. Dynea Chemicals maintains credit policies with regard to its
counterparts that management believes significantly minimize overall credit
risk. Dynea Chemicals does not obtain collateral to support the agreements but
monitors the financial viability of counter parties and credit risk is minimal
on these transactions. The extent of this exposure varies with the prevailing
interest and currency rates and was not material throughout the period. Dynea
Chemicals does not expect any losses from non-performance by these counterparts
and does not have any significant grouping of exposures to financial sector or
country risk.
Raw material price risk--Dynea Chemicals is exposed to raw material price risk
arising mainly from movements in the price of the main raw materials methanol,
urea, phenol, and melamine. As the prices Dynea Chemicals pays for the raw
materials change quarterly or monthly, Dynea Chemicals is subject to
considerable volatility in the prices it pays for such materials. Prices of
methanol and urea are highly volatile, while prices of phenol and melamine are
generally slightly less so. The sales prices of Dynea Chemicals' products are
primarily a function of several items including the prices of the raw materials
Dynea Chemicals uses to make the products. This connection between the raw
material prices and the sales prices gives significant protection against
adverse changes in raw material prices. However, Dynea Chemicals is not always
able to fully pass through to the customers the fluctuations in the prices of
raw materials. Centralized supply and logistics organization hedges Dynea
Chemicals against the raw material price fluctuations through purchasing
contracts or commodity derivatives. Commodity derivative contracts are
marked-to-market at each balance sheet date through current period earnings.
12. Share capital
In 2002, additional 416,201 shares at par value of (euro)16.82 were issued to
Dynea International. These shares were paid in March 2002 and registered in the
Finnish Trade Register on May 8, 2002. In 2003, no additional shares were issued
to Dynea International. Thus, total share capital at December 31, 2003 consisted
of 16,856,543 shares at par value of (euro)16.82. Because Dynea Chemicals Oy's
equity was below 50% of the share capital at December 31, 2003, the annual
general meeting of the shareholders determined to lower the share capital of
Dynea Chemicals by (euro)220,294,665.20 to cover the accumulated losses. The
lowering of the share capital took place by decreasing the par value of the
common shares of Dynea Chemicals and it was registered in the Finnish Trade
Register on May 5, 2004. Thus, total share capital at December 31, 2004
consisted of 16,856 543 shares at par value of (euro)3.75.
Dynea Chemicals is subject to certain dividend restrictions under their loan
agreement. Dynea Chemicals may not pay a dividend if there is a default or
potential default of any loan covenant or if there is a due, but unpaid
principal amount.
13. Borrowings
Borrowings consist of the following:
Outstanding Carrying Value
as at 31 December as at 31 December
2004 2003 2004 2003
------------ ------------- ------------- ------------
Long-term related party loans (euro) 276.7 (euro) 276.7 (euro) 276.7 (euro) 276.7
Senior credit agreement 207.6 202.0 202.2 194.7
Other long-term loans with financial institutions 5.5 5.0 5.5 5.0
Short-term borrowings 71.7 59.9 71.7 59.9
------------ ------------ ------------ ------------
Total borrowings (euro) 561.5 (euro) 543.6 (euro) 556.1 (euro) 536.3
------------ ------------ ------------ ------------
Less: Current portion of long-term loans 24.2 20.7 24.2 20.7
Short-term borrowings 71.7 59.9 71.7 59.9
------------ ------------ ------------ ------------
Long-term debt, less amounts due currently (euro) 465.6 (euro) 463.0 (euro) 460.2 (euro) 455.7
============ ============ ============ ============
Senior credit agreement
- -----------------------
In conjunction with the acquisition of Dyno, Dynea Chemicals refinanced its
existing loans and line of credit during 2000 under three new term loan
facilities, for up to (euro)190 million ("Term A"), (euro)95 million ("Term B"),
and (euro)95 million ("Term C"), respectively. The loans are due June 30, 2007,
2008 and 2009, respectively. The Term A loan and the Revolving Credit Facility
(as discussed below under Short-term borrowings) contain a margin ratchet,
whereby the interest rate will vary between LIBOR plus two percent and LIBOR
plus one and one-quarter percent depending on the ratio of total net debt to
earnings before interest, taxes, depreciation and amortization (EBITDA), as
defined. The Term B loan carries an interest rate of LIBOR plus 2.5%, and the
Term C loan carries an interest rate of LIBOR plus 3.0%.
Dynea International agreed in February 2004 with the senior lenders to introduce
a new six years term loan facility under the senior credit agreement, the
Tranche D loan facility, amounting to (euro)31.7 million. The new facility was
underwritten by our parent company, Dynea Oy, and was drawn in February 2004 and
in August 2004. The new facility carries an interest of LIBOR +3% plus 1%
capitalized interest.
The weighted-average interest rate on amounts outstanding under the senior
credit agreement and other long-term loans with financial institutions was 5.06%
at December 31, 2004.
At the end of June and September 2004, Dynea Chemicals made a prepayment of
senior term-loans of (euro)1.4 million and (euro)0.8 million, respectively, from
the proceeds of asset sales. In connection with the extinguishment of debt due
to the asset sales, Dynea Chemicals incurred a loss on extinguishment of debt of
(euro)0.1 million (Note 22). This loss resulted from write-offs of unamortized
debt issuance costs. Unamortized arrangement fees for the senior credit
agreement totaled (euro)5.4 million at December 31, 2004.
Dynea Chemicals sold its Oil Field Chemicals businesses to M-I L.C.C. on January
28, 2003. The net proceeds from the sale were approximately (euro)55.0 million.
In accordance with the terms and conditions of the senior credit agreement, part
of these proceeds were to be applied as a prepayment against the outstanding
loan facilities on a pro-rata basis. These payments totaled (euro)25.0 million,
when the money was transferred to blocked currency denominated accounts at the
beginning of 2003. At the prepayment dates the money from the blocked accounts
was used for the prepayments and the payments amounted to (euro)11.2 million,
(euro)6.9 million and (euro)6.3 million for Term A, Term B and Term C,
respectively, during 2003. In connection with the extinguishment of debt due to
the Oil Field Chemicals Businesses prepayment during 2003, Dynea Chemicals
incurred a loss on extinguishment of debt of (euro)0.8 million (Note 22). This
loss resulted from write-offs of unamortized debt issuance costs.
Long-term related party loans
- -----------------------------
Long-term related party loan of (euro)241.7 million relates to the allocation to
Dynea Chemicals of the net proceeds of the senior notes issued by Dynea
International Oy. On August 8, 2000, Dynea International issued (euro) 240.0
million in senior notes due August 15, 2010, at 12 1/4%. On August 24, 2000,
Dynea International issued an additional (euro) 10.0 million in senior notes due
August 15, 2010, at 12 1/4%. The total issue was registered and as at December
31, 2004 the total issued amount is outstanding. Interest is payable every six
months, on February 15 and August 15 of each year. These notes are unsecured and
rank senior in right of payment to all future subordinated debt and equal in
right of payment to all existing and future un-subordinated debt. The notes will
be redeemed at par at maturity. On or after August 15, 2005, Dynea International
has the right to redeem any or all of the notes at a specified redemption price
beginning at 106.125% and declining thereafter. Prior to that date, Dynea
International may only redeem all of the notes at a redemption price equal to
the principal amount plus a specified premium (make-whole price), unless an
equity offering occurs. These notes are guaranteed by Dynea Chemicals on a
senior subordinated basis.
Dynea Chemicals Oy received another long-term related party loan from its parent
company Dynea International Oy of (euro)35.0 million in 2003. The total
outstanding long-term related party loans as of December 31, 2004 and 2003 were
(euro)276.7 million.
Short-term borrowings
- ---------------------
Under the senior credit agreement, Dynea Chemicals also obtained multi-currency,
revolving loan for up to (euro)100 million ("Revolving Credit Facility"). The
Revolving Credit Facility expires June 30, 2007. At December 31, 2004,
(euro)62.9 million (2003: (euro)51.6 million) was outstanding on the Revolving
Credit Facility. Letters of credit issued by the financial institution reduces
the available credit amount. The available credit amount was (euro)21.2 million
at December 31, 2004 (2003: (euro)30.7 million).
The weighted average interest rate on short-term loans was 4.71% at December 31,
2004. This amount consists of 4 tranches denominated in either euros or U.S.
dollars and totaling (euro)62.9 million at December 31, 2004 under the Revolving
Credit Facility. In addition, subsidiaries of Dynea Chemicals' have short-term
loans from financial institutions totaling (euro)3.8 million. Dynea Chemicals
has also a short-term related party loan from its parent company Dynea
International Oy of (euro)5.0 million.
After taking account of interest rate swaps, the interest rate exposure of the
borrowings of Dynea Chemicals was as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
Total borrowings:
at fixed rates (euro) 364.1 (euro) 329.3
at floating rates 197.4 214.3
------------ ------------
(euro) 561.5 (euro) 543.6
============ ============
Borrowing balances are denominated in the following currencies:
December 31, 2004 December 31, 2003
----------------- -----------------
U.S. dollars 22% 23%
Euro 58% 54%
Canadian Dollars 4% 5%
Norwegian Kroner 14% 17%
Others 2% 1%
Borrowings are repayable as follows:
December 31, 2004
-----------------
2004 (euro) 95.7
2005 - 2008 189.0
Thereafter 276.8
------------
Total (euro) 561.5
============
Dynea Chemicals' debt agreements contain certain debt covenants, including:
ratios of EBITDA to interest, debt to EBITDA, earnings to fixed charges, and
cash flow to funding costs and limits on capital expenditures.
Substantially all of the assets of Dynea Chemicals Oy and its subsidiaries,
including all of its property, plant and equipment, are pledged as collateral on
these obligations (Note 19). In addition, individual subsidiaries have
guaranteed loans of the parent company.
14. Taxation
The components of income tax benefit are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---- ---- ----
Current:
Finland (euro) 0.7 (euro) 0.7 (euro) 2.1
Foreign 7.9 11.5 8.2
---------- ----------- -----------
(euro) 8.6 (euro) 12.2 (euro) 10.3
========== =========== ===========
Deferred:
Finland (euro)(7.4) (1.1) (1.1)
Foreign (1.9) 7.8 (14.2)
---------- ---------- -----------
(euro)(9.3) (euro) 6.7 (euro)(15.3)
========== ========== ===========
Total income tax (benefit) expense (euro)(0.7) (euro) 18.9 (euro) (5.0)
========== ========== ===========
Comparison figures were adjusted to early adoption of IAS 16 (revised).
Significant components of Dynea Chemicals' deferred tax assets and liabilities
are as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
Deferred tax assets:
Tax loss carry-forwards (euro)75.7 (euro)34.8
Excess of tax value over book value of fixed assets -- 1.6
Reserves and accruals 6.1 5.1
Pensions 2.4 2.7
Write-down in investments 0.3 139.7
Other 7.3 6.0
Valuation allowance for deferred tax assets (57.3) (160.0)
----------- -----------
Deferred tax assets (euro) 34.5 (euro) 29.9
=========== ===========
Deferred tax liabilities:
Excess of book value over tax value of fixed assets (53.9) (63.7)
Reserves and accruals (0.8) (0.5)
Other (14.7) (9.8)
----------- -----------
Deferred tax liabilities (euro) (69.4) (euro) (74.0)
=========== ===========
Net deferred tax liability (euro)(34.9) (euro)(44.1)
=========== ===========
Comparison figures were adjusted to early adoption of IAS 16 (revised).
The recognized deferred tax asset is based upon the expected future utilization
of net operating loss carry forwards and the reversal of other temporary
differences. For financial reporting purposes, Dynea Chemicals has recognized a
valuation allowance for those benefits for which realization is not probable.
Dynea Chemicals continually reviews the adequacy of the valuation allowance and
is recognizing these benefits only as reassessment indicates that it is probable
that the benefits will be realized.
At December 31, 2004, Dynea Chemicals has net operating loss carry forwards of
(euro)293.0 million that were available to offset future taxable income. The
total net operating loss carry forwards included (euro)46.1 million with no
expiration dates, (euro)15.0 million that expire after more than 10 years, and
(euro)232.9 million that expire in less than 10 years.
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when the deferred income taxes relate to the same fiscal authority.The net
non-current deferred tax liability was (euro)34.9 and (euro)44.1 million at
December 31, 2004 and 2003, respectively.The non-current deferred tax
liabilities also included (euro)3.4 million of deferred tax liabilities expected
to reverse in the following twelve months as of December 31, 2004.
Income tax benefit at the statutory tax rate is reconciled below to the actual
income tax benefit:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---- ---- ----
Finland (euro)(44.6) (euro)(19.4) (euro) 4.7
Foreign 24.3 (26.3) (20.8)
----------- ----------- -----------
Total loss before income taxes and minority interest (euro)(20.3) (euro)(45.7) (euro)(16.1)
=========== =========== ===========
Tax benefit at Finnish statutory rate (29%) (euro) (5.9) (euro) (13.3) (euro) (5.0)
Unrecognized deferred tax asset 4.8 10.3 3.5
Previously unrecognized utilized deferred tax asset (1.1) (4.2) (10.1)
Effect of foreign tax rates -- -- 1.0
Non-deductible goodwill -- 16.4 4.2
Non-deductible expenses 1.0 9.1 0.2
Income taxes from previous periods 0.5 0.6 1.2
----------- -----------
Income tax (benefit)expense (euro)(0.7) (euro)18.9 (euro)(5.0)
=========== =========== ===========
Comparison figures were adjusted to early adoption of IAS 16 (revised).
15. Employee benefits
Dynea Chemicals operates a number of defined benefit and defined contribution
plans throughout the world, which are financed according to local practice.
Defined benefit post-employment obligations are determined by actuarial
valuations using a method based on projected salaries to the end of employment
(the projected unit credit method).The total liability in respect of pension
obligations to pensioners is determined as well as the liability relating to the
past service of employees.For retirement indemnities, the commitment based on
estimated total service in the Group is determined and provision made for past
service using the projected unit credit method.
Assumptions as to mortality, withdrawal of employees and salary projections take
into account the economic and demographic conditions specific to each country
and company.
Under IAS 19 the annual post-employment benefit cost comprises the estimated
cost of benefits accruing in the period as determined in accordance with IAS 19
(revised 2002), which requires the significant actuarial assumptions to reflect
market and economic conditions at the balance sheet date.In particular, discount
rates reflect the yield on high quality corporate bonds of an appropriate term.
The majority of the Group's defined benefit post-employment benefits are
provided for its employees and former employees in Austria, Canada, France,
Germany, the Netherlands, Norway, Singapore, the United Kingdom and the United
States.Post-employment benefits provided for other overseas participants are, in
general, either government-provided or defined contribution. In Finland,
benefits are provided under the state plan, which are defined benefit in nature.
However, due to the nature of funding for these benefits, Dynea is accounting
for these benefits under IAS 19 using a defined contribution approach, and the
pension expense is equal to the cash payable.
Actuarial gains and losses in excess of the "10% corridor" are spread as a level
amount over the expected average remaining service lives of the employees.
December 31, 2004 December 31, 2003 December 31, 2002
Weighted average assumptions:
Discount rate 5.1% 5.7% 6.1%
Rate of compensation increase 3.1% 3.1% 3.9%
Expected return on plan assets 6.4% 6.2% 6.8%
Future pension increase rate1 2.2% 1.3% 1.3%
Amounts recognized in the balance sheet:
Fair value of plan assets (euro)71.3 (euro)67.4 (euro)67.6
Defined benefit obligation (109.8) (100.9) (107.9)
------------ ------------ ------------
Funded status (38.5) (33.5) (40.3)
Unrecognized prior service cost (0.2) -- --
Unrecognized net actuarial (gain)/loss 21.2 16.2 24.0
------------ ------------ ------------
Balance sheet prepaid/(accrued) pension cost (euro) (17.5) (euro) (17.3) (euro) (16.3)
============ ============ ============
Made up of :
Balance sheet prepaid pension cost 1.9 2.0 2.9
Balance sheet (accrued) pension cost (19.4) (19.3) (19.2)
Amounts recognized in the income statement:
Service cost 3.1 3.6 3.8
Interest cost 5.9 6.0 6.4
Expected return on assets (4.3) (4.3) (5.4)
Recognized actuarial (gain)/loss 0.9 0.7 0.4
Past service cost (0.1) 0.6 --
Settlement and curtailment gains (0.2) (0.7) --
------------ ------------ ------------
Total (benefit)/expense included in staff costs (euro) 5.3 (euro) 5.9 (euro) 5.2
============ ============ ============
Movement in the balance sheet:
Beginning balance (17.3) (16.3) (14.2)
Effect of acquisitions -- (0.5) --
Total net periodic benefit (cost)/income (excluding gain on disposal)
(5.3) (5.9) (5.2)
Employer contribution 5.0 4.3 3.2
Exchange differences 0.1 1.1 (0.1)
------------ ------------ ------------
Ending balance (euro) (17.5) (euro) (17.3) (euro) (16.3)
============ ============ ============
1 Pension increases are applied to pension benefits provided in the UK,
Netherlands and Norway.
The settlement and curtailment gains of (euro)0.2 million and (euro)0.7 million
in 2004 and 2003, respectively, relate to the reorganization in North America
and the sale of several subsidiaries during 2004 and 2003, as discussed in Note
21. Dynea International's contributions to the defined contribution pension
plans are charged to the income statement in the year to which they relate and
during 2004, 2003 and 2002 amounted to (euro)3.4 million, (euro)3.6 million and
(euro)3.3 million, respectively (Note 20). The actual returns on assets for
years ended December 31, 2004, 2003 and 2002 were (euro)4.3 million, (euro)7.1
million and (euro)(5.6) million, respectively.
16. Provisions
Provisions consist of:
Restructuring Other Total
------------- ----- -----
At December 31, 2003 (euro) 6.0 (euro) 6.0 (euro)12.0
New provisions 1.6 1.9 3.5
Utilized during the period (2.5) (1.8) (4.3)
Released during the period (0.1) (0.2) (0.3)
Reclassification (2.7) 2.7
---------- ---------- ----------
At December 31, 2004 (euro) 2.3 (euro) 8.6 (euro)10.9
========== ========== ==========
Restructuring Provisions
In March 2004, Dynea International initiated a reorganization of its
North American Resins business. The reorganization included changes in
management and a reduction of personnel. As a result, approximately 70 positions
were made redundant. The cost for the reorganization was (euro)3.6 million, of
which (euro)2.2 million was paid during 2004. At December 31, 2004 the remaining
provision related to North American restructuring amounted to (euro)1.4 million.
In 2003, Dynea International decided to restructure and optimize Dynea resins
operations in Norway. The decision led to personnel redundancies and the
provision related to the employee termination charges in 2003 amounted to
(euro)1.2 million. This was paid in 2004 as the production at Engene plant was
relocated to Lillestr0m plant.
In conjunction with the decision to close the Europoort plant by January 1,
2002, Dynea International recorded a (euro)7.2 million provision relating to
contractual lease payments for the closed plant site, employee termination
benefits for involuntarily terminated employees, environmental site remediation,
and demolition costs. In 2001, (euro)1.5 million was paid and (euro)0.9 million
of contractual lease payments reversed as Dynea International exited the
Europoort site earlier than estimated. At December 31, 2001, the remaining
provision included contractual lease payments for the closed plant site and
employee termination benefits for these terminated employees of (euro)4.8
million, of which (euro)0.4 million was paid during 2002 and (euro)0.4 million
was paid and (euro)1.1 million released during 2003. At December 31, 2003 the
remaining provision related to the restructuring charges amounted to (euro)2.9
million. In 2004, (euro)0.1 million of this was paid, and the same amount
recorded as new provisions. At December 31, 2004 the remaining provision related
to the Europoort plant was still (euro)2.9 million. As (euro)2.7 million of this
amount relates to the Europoort environmental site remediation, it is
reclassified to other provisions as an environmental provision.
Dynea International has continuously streamlined its operations. At December 31,
2001 the provision related to these other restructuring activities totaled
(euro)5.8 million of which (euro)2.1 was paid and (euro)0.7 million released
during 2002, (euro)0.5 million was paid and (euro)0.6 million released during
2003, and (euro) 1.2 million was paid during 2004. At December 31, 2004 the
remaining provision related to these other restructuring charges amounted to
(euro)0.7 million.
Other Provisions
- ----------------
In 2004, other provisions include mainly a provision related to an onerous
contract and the environmental provision related to the Europoort site
remediation.
17. Accounts payable
Accounts payable consist of:
December 31, 2004 December 31, 2003
----------------- -----------------
Trade payables (euro) 96.7 (euro) 79.5
Related party payables (Note 23) 6.3 6.9
------------ -----------
Total (euro) 103.0 (euro) 86.4
============ ===========
18. Accrued liabilities
Accrued liabilities consist of:
December 31, 2004 December 31, 2003
----------------- ------------------
Accrued interest (euro) 0.3 (euro) 1.1
Fair value of foreign exchange forward contracts 0.6 0.5
Fair value of interest rate swaps and futures contracts 0.8 0.8
Related party liabilities (Note 23) 13.9 13.2
Other accrued liabilities 13.3 14.6
----------- -----------
Total (euro) 28.9 (euro) 30.2
=========== ===========
19. Commitments and Contingencies
Dynea Chemicals evaluates its position relative to asserted and unasserted
claims, loss-making purchase commitments or future commitments and records
provisions as needed.
Litigation and claims-- Various lawsuits and claims are pending against Dynea
Chemicals. Although the outcome of such lawsuits and claims cannot be predicted
with certainty, the expected deposition thereof will not, in the opinion of the
management, either individually or in the aggregate result in a material adverse
effect on Dynea Chemicals' results of operations and financial position.
Operating lease commitments--The future aggregate minimum lease payments at
December 31, 2004, under non-cancelable operating leases were as follows:
December 31, 2004
-----------------
2005 (euro) 3.1
2006 -2009 8.3
Thereafter 12.4
-----------
Total (euro) 23.8
===========
The operating lease commitments relate to leases for autos, buildings, land,
office space, support services and equipment.
Mortgages, pledges and other guarantees given - Substantially all of the assets
of Dynea Chemicals Oy and its subsidiaries, including all of its property, plant
and equipment, are pledged as collateral of its loan obligations (Note 13).
Mortgages, pledges and guarantees given consist of:
December 31, 2004 December 31, 2003
----------------- -----------------
Chattel mortgages (euro) 90.3 (euro) 90.3
Real estate mortgages 193.1 199.3
Investments in subsidiaries at historical cost 705.1 703.5
Other pledges given 206.7 201.3
Guarantees given 256.0 254.1
Other commitments-- Dynea Chemicals has both a land lease agreement through
December 31, 2030 and a supply agreement with Fortum Oil and Gas Oy on process
cooling water tunnel system, steam, electricity, and drinking water through
December 31, 2006. Fortum Oil and Gas Oy sets the prices on a monthly basis
based on costs incurred. In addition, Dynea Chemicals has a supply agreement
with Borealis Polymers Oy on process cooling water, salt free water, compressed
air, and wastewater treatment through December 31, 2008. Borealis Polymers Oy
sets the prices on a monthly basis based on costs incurred.
Dynea Chemicals has several long-term Methanol purchase contract. The contracts
with Celanese, Methanex and Statoil are for around 310,000 tons in 2005, 410,000
tons in 2006 and 200,000 tons in 2007, and the pricing is tied to a formula
based on a given benchmark reported by independent sources, such as the
Independent Commodity Information Service (ICIS) or Chemical Market Associates
Inc. (CMAI). The contracts with Celanese and Statoil are valid until December
31, 2006 and the contract with Methanex is valid until December 31, 2007. Dynea
Chemicals has several long-term Phenol purchase contracts. The contracts with
Borealis and Novapex are totally for approximately 30,000 tons and the contracts
with Georgia Gulf and Shell are totally for 50,000 thousands of kilograms per
year and the pricing is based on ICIS or market prices. The contracts with
Borealis and Novapex are through December 31, 2007, the contract with Georgia
Gulf is through February 28, 2007 and the contract with Shell is valid until
December 31, 2006.
Dynea Chemicals had no material capital commitments at December 31, 2004. Dynea
Chemicals has a processing agreement, agreement on technical services, and
agreement on commercial services with Shin-Etsu PVC NV through December 31,
2005. Additionally Dynea Chemicals has R&T&D agreement with Perstorp AB, which
is valid for the time being.
Dynea Chemicals is subject to business risks that are actively managed against
exposures.
Financial Guarantees--Wholly owned subsidiaries have guaranteed long-term
borrowings of the parent company. Dynea Chemicals has letters of credit and
guarantees with financial institutions.
20. Staff costs
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Wages and salaries (euro) 96.4 (euro) 101.1 (euro) 99.0
Indirect employee costs 17.4 16.2 17.0
Pension costs--defined contribution plans 3.3 3.6 3.3
Pension costs--defined benefit plans 4.4 6.8 5.7
------------ ------------ ------------
Total staff costs (euro) 121.5 (euro) 127.7 (euro) 125.0
============ ============ ============
The average number of persons employed during the years ended December 31, 2004,
2003 and 2002 totaled 3,131, 3,151 and 3,009, respectively.
Total salaries, bonuses and other amounts paid to those current members of our
board and executive management who were employed by the Dynea Chemicals group
were approximately (euro)2.1 million and (euro)1.4 million during 2004 and 2003
respectively.No compensation was provided to these individuals in the form of
stock options or pursuant to a profit-sharing plan during 2004 and 2003.The
retirement age of the management of the group companies is between 60 and 65
years. For the Chief Executive Officer the retirement age is 62 years and other
three executive officers' retirement age is between 60 and 62 years.
21. Discontinued operations
On January 28, 2003, Oil Field Chemicals segment was disposed including business
in Norway, subsidiaries in Australia, Great Britain, Indonesia, Middle-East and
Singapore, and the shares of an associated company in India. The deal became
effective as of January 1, 2003.
Cash flows and net assets disposed for Oil Field Chemicals segment were as
follows:
Year Ended
December 31, 2002
-----------------
Operating cash flows (euro) 5.3
Investing cash flows (0.4)
Financing cash flows (3.4)
-----------
Total cash flows (euro) 1.5
===========
Total assets to be disposed 70.2
Total liabilities to be disposed (7.8)
-----------
Net assets to be disposed (euro) 62.4
===========
The pretax gain on sale of Oil Field Chemicals segment was (euro)1.4 million and
the tax expense of OFC disposal amounted to (euro)10.5 million in the year ended
December 31, 2003.
The net cash inflow on the sales was determined as follows:
Oil Field Chemicals
-------------------
Proceeds from sale (euro)75.6
Less:cash and cash equivalent in subsidiary sold (1.7)
----------
Net cash inflow on sale (euro)73.9
==========
In the year ended December 31, 2004 purchase price adjustment of (euro)4.3
million was paid related to the sale of the oil field chemicals business.
22. Finance costs
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---- ---- ----
Interest income (euro) (1.2) (euro) (2.4) (euro) (2.4)
Other financial income (0.2) (0.2) (2.8)
Net foreign exchange transaction (gains) losses 0.3 2.4 (16.5)
Interest expense 50.6 54.4 65.4
Other financial expense 5.5 5.7 5.5
Loss on early extinguishments of debt (Note 13) 0.1 0.8 --
---------- ---------- ----------
Net finance costs (euro)55.1 (euro)60.7 (euro)49.2
========== ========== ==========
23. Related party transactions
Dynea Oy owns 100% of Dynea International's shares and Dynea International Oy
owns 100% of Dynea Chemicals Oy's shares.The ultimate parent of Dynea Chemicals
is Industri Kapital, which controls 88% of the voting rights of Dynea Oy
indirectly through its two investment funds, Industri Kapital 1997 Limited and
Industri Kapital 2000 Limited.Management and other shareholders own the
remaining shares.
The following transactions were carried out with related parties:
Transactions with Dynea International Oy
- ----------------------------------------
A service agreement exists between Dynea Chemicals, and Dynea International Oy
to provide treasury management and support services. The management was
transferred from Dynea Chemicals Oy to Dynea International Oy in November 2000.
Dynea Chemicals Oy also receives intercompany loans from its parent company
Dynea International Oy. The total outstanding long-term loan payable as of
December 31, 2004 and 2003 were (euro)308.4 million and (euro)276.7 million,
respectively. As at December 31, 2004, there was also an outstanding short-term
loan liability to Dynea International amounting to (euro)5.0 million. Related
accrued interest payable of the loans as of December 31, 2004 and 2003 were
(euro)13.9 and (euro)13.2 million, respectively. During the years 2004 and 2003,
interest expenses on these loans were (euro)36.3 million and (euro)34.8 million,
respectively. The company also provided loans to the parent company.As at
December 31, 2004, there was an outstanding short-term loan receivable from
Dynea International Oy totalling to (euro)1.4 million. In 2003 Dynea
International Oy recorded a group contribution of (euro)8.8 million to Dynea
Chemicals Oy, which was outstanding as an accrued liability to Dynea Chemicals
Oy at December 31, 2004. In 2002 Dynea Finland Oy and Dynea Overlays Oy recorded
group contributions of (euro)0.8 million to Dynea International Oy, which was
outstanding as an accrued liability to Dynea International Oy at December 31,
2002.
Acquisitions
- ------------
Effective January 1, 2003, Dynea Chemicals acquired from its parent company
Dynea the Chemitec companies Dynea Erkner Gmbh and Dynea Holding B.V. with its
subsidiaries for a consideration of (euro)36.2 million (Note 1).
Sale of Shares
- --------------
In the year ended December 31 2004, Dynea Oy paid a purchase price adjustment
(euro)1.5 million to Dynea International relating to KCA Chemische Producte
GmbH.
Related Party Balances (in addition to the above mentioned)
- -----------------------------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
Loan receivables from associated companies (euro) 0.6 (euro) 0.7
Other current receivables from other related parties 11.5 6.0
Other current receivables from associated companies 0.9 --
Accounts receivables from associated companies 0.7 1.7
Accounts receivables from other related parties 1.2 2.5
Loan payables to other related parties 308.4 276.7
Interest liabilities to other related parties 13.9 13.2
Accounts payables to associated companies 2.3 2.0
Accounts payables to other related parties 4.1 4.9
Other current liabilities to other related parties 5.0 5.1
Guarantees given on behalf associated companies 0.2 0.2
Related Party Transactions (in addition to the above mentioned)
- ---------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Sales to associated companies (euro) 5.6 (euro) 7.1 (euro) 5.2
Sales to other related parties 10.7 13.4 13.8
Purchases from associated companies 19.8 24.4 19.2
Purchases from other related parties 15.2 12.0 6.7
Management service charges from related parties 9.5 7.9 3.2
Other income from associated companies 1.9 1.3 --
Other income from other related parties 0.1 0.5 --
Other expenses to related parties 0.1 -- --
Interest income from other related parties 0.1 0.4 --
Interest expenses to other related parties 36.3 34.9 --
Group Contributions
- -------------------
Group contributions amounting to (euro)38.2 million were made by Dynopart AS and
Dynopart Holding AS to Nordkem AS in 2001 of which (euro)30 million was paid in
cash during October 2001 and (euro)8.2 million during September 2002. The group
contribution received by Nordkem AS is not considered to be taxable and
therefore the total group contribution of (euro)38.2 million was taken to
shareholders' equity.In 2002, group contributions amounting to (euro)0.9 million
were made by Dynopart to Nordkem and a group contribution amounting to (euro)6.0
million was made by Dynea Finland Oy to Dynea Oy. In 2003, group contributions
amounting to (euro)0.2 million were made by Dynopart to Nordkem and a group
contribution amounting to (euro)5.0 million was made by Dynea Oy to Dynea
Chemicals. In 2004, group contribution amounting to (euro) 7.3 million was made
by Dynea Oy to Dynea Chemicals Oy. In 2004, group contribution amounting to
(euro) 0.2 million was made by Nordkem Dynopart Holding A/S, Dynopart Holding
A/S and Dynopart A/S to Nordkem AS.
In addition, Dynea Chemicals received a group contribution of (euro)0.6 million
from Dynea International Oy in 2003. Group contribution of (euro)0.8 and
(euro)1.4 million was made by the Dynea Chemicals group to Dynea International
Oy in 2002 and 2001, respectively. In 2004 Dynea International Oy made a group
contribution amounting to (euro) 1.4 million to Dynea Chemicals Oy.
24. Notes to the cash flow statement
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Notes 2004 2003 2002
----- ---- ---- ----
a.
Operating activities
Loss for the year (euro) (21.3) (euro) (66.0) (euro) (13.6)
Adjustments for:
Depreciation and amortization 5, 6 39.1 50.2 53.1
Impairment write downs 5, 6 8.1 4.4 --
(Profit)/loss on sale of discontinued operations 21 -- (1.4) --
Share in undistributed earnings of associated
companies and joint ventures 7 (15.7) (13.1) (3.9)
Finance costs 22 55.1 60.7 49.2
Income tax (benefit) 14 (0.7) 18.9 (5.0)
Minority interest 2 1.7 1.4 2.5
---------- ----------- -----------
Working capital changes:
(Increase) decrease in inventory 8 (13.0) 7.5 (6.6)
(Increase) decrease in accounts and related party
receivables 9 (12.5) 1.5 2.6
(Increase) decrease in other current assets (0.7) (1.9) 3.4
Decrease (increase) in other non-current assets 0.2 (0.7) 0.1
Increase in accounts and related party payables 17 18.3 0.7 15.4
(Decrease) increase in accrued liabilities 18 (0.6) 5.0 (1.3)
Increase (decrease) in other current liabilities 2.3 0.7 (4.6)
Increase in pension liabilities 15 0.1 2.0 1.8
(Decrease) increase in provisions (1.2) 4.5 (3.8)
(Decrease) in other non-current liabilities 16 (2.4) (1.2) (2.3)
Adjustment for disposals and acquisitions 0.2 (9.7) --
---------- ----------- -----------
Cash generated from operations (euro)57.0 (euro) 63.5 (euro) 87.0
========== =========== ===========
25. Other principal subsidiary undertakings
Principal subsidiary undertakings as at December 31, 2004:
Country of % Ownership
Subsidiary Incorporation December 31, 2004
---------------------------------------------------------------------------
Dynea ASA Norway 100
Dynea Austria GmbH Austria 100
Dynea B.V. Netherlands 100
Dynea Erkner GmbH Germany 100
Dynea Ireland Limited Ireland 100
Dynea NV Belgium 100
Dynea Finland Oy Finland 100
Dynea UK Limited UK 100
Dynea Resins France SAS France 100
Dynea Canada Ltd Canada 100
Dynea Overlays, Inc. USA 100
Dynea U.S.A. Inc. USA 100
Dynea NZ Limited New Zealand 100
Dynea Singapore Pte Ltd Singapore 100
PT Dynea Indria Indonesia 51
All holdings are in the ordinary share capital of the undertaking concerned.
26. Differences between IFRS and U.S. Generally Accepted Accounting Principles
Dynea Chemicals's consolidated financial statements are prepared in accordance
with IFRS, which differ in certain respects from accounting principles generally
accepted in the United States ("U.S. GAAP"). The principal differences between
IFRS and U.S. GAAP that affect the consolidated net loss and total shareholder's
equity are presented below together with explanations of those
differences.Various differences that have insignificant or no impact, such as
principals related to leases, impairments, and taxes, among others, have not
been presented.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---- ---- ----
Reconciliation of net income (loss):
Net (loss) reported under IFRS (1) (euro) (21.3) (euro) (66.0) (euro) (13.6)
U.S. GAAP adjustments:
Depreciation expense a 1.4 1.4 1.4
Pension expense b (0.1) 0.6 --
Marketable securities c -- (0.2) --
Reversal of amortization of goodwill e -- 8.9 14.6
Discontinued operations f -- (2.8) --
Treatment of excess of acquirer's interest in the g
net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost 2.1 2.1 --
One-time termination benefits h (1.2) 1.2 --
Major overhaul costs i (2.0) 1.6 (0.6)
Deferred tax effect of U.S. GAAP adjustments (0.0) (2.1) (0.2)
------------ ------------ ----------
Net (loss) income under U.S. GAAP (euro) (21.1) (euro) (55.3) (euro) 1.6
============ ============ ==========
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
Presentation of net loss in accordance with U.S. GAAP:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
(Loss) income from continuing operations (euro)(19.2) (euro)(40.7) (euro) 0.1
Discontinued operations: f
(Loss) income from discontinued operations, net
of taxes of (euro)0.0 million, (euro)10.5 million
and (euro)0.5 million, respectively (1.9) (14.6) 1.5
------------ ------------ ----------
Net (loss) income in accordance with U.S. GAAP (euro) (21.1) (euro) (55.3) (euro) 1.6
============ ============ ==========
December 31, 2004 December 31, 2003
----------------- -----------------
Reconciliation of shareholder's equity:
Total shareholder's equity reported under IFRS (1) (euro) 72.6 (euro) 72.4
U.S. GAAP adjustments:
Assets held for sale a 2.2 2.2
Depreciation of tangible assets a 7.5 6.1
Amortization of goodwill a 0.5 0.5
Pension expense b 1.4 1.5
Additional minimum pension liability b (10.9) (7.1)
Goodwill and fair value translation adjustments d (54.7) (35.3)
Reversal of amortization of goodwill e 23.5 23.5
Treatment of excess of acquirer's interest in the
net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost g 4.2 2.1
One-time termination benefits h -- 1.2
Major overhaul costs i (3.5) (1.5)
Deferred tax effect of U.S. GAAP adjustments 0.8 (0.3)
----------- -----------
Total shareholder's equity under U.S. GAAP (euro) 43.6 (euro) 65.3
=========== ===========
(1) Comparative figures have been adjusted for the retrospective application of
IAS 16 (revised).
(a) Assets Held For Sale
In 1999, under U.S. GAAP, Dynea Chemicals determined that there were businesses
which should be classified as assets held for sale in accordance with EITF 87-11
"Allocation of Purchase Price to Assets to be Sold."These businesses were
principally comprised of Oxo, Polyester, and NC Trading. The amount of net
profit/ (loss) on the sold operations that has been excluded from the income on
a U.S. GAAP basis is (euro) 3.7 million and (euro)(5.9) million, respectively
for 2000 and 1999 and gives rise to a total adjustment to equity of (euro)2.2
million
When goodwill was allocated to the assets to be sold at acquisition in order to
reflect them at their fair value, excess of acquirer's interest in the net fair
value of acquiree's identifiable assets, liabilities and contingent liabilities
over cost was created.Accordingly, the carrying value of long-lived assets was
reduced when that excess of acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities and contingent liabilities over cost
was eliminated under U.S. GAAP.This creates a difference between IFRS and U.S.
GAAP related to goodwill amortization ((euro)0.5 million adjustment to equity at
December 31, 2004 and December 31, 2003, respectively) and depreciation expense
((euro)7.5 million and (euro) 6.1 million adjustment to equity at December 31,
2004 and December 31, 2003, respectively). In 2002, the adjustment related to
goodwill amortization was discontinued due to a new adjustment to reverse all
goodwill amortization under U.S. GAAP.
(b)Pension Expense
Under IFRS the Company accounts for pension costs and similar obligations in
accordance with IAS 19 (revised 2002), "Employee Benefits."For purposes of U.S.
GAAP, pension costs for defined benefit plans are accounted for in accordance
with SFAS No. 87, "Employers' Accounting for Pensions". The Company has the
following differences in applying the two standards:
Certain subsidiaries maintain a "flat dollar" pension plan where benefit
increases may be granted periodically.Under IFRS, these increases are accrued
when calculating the projected benefit obligation and service cost, as they are
considered a constructive obligation arising from an informal practice to grant
such increases.However, under U.S. GAAP, these benefit increases are only
accrued when the employer is deemed to be substantively committed to granting
these increases. Otherwise, these increased benefits are treated as plan
amendments when they occur.
Company's benefit plans were amended in France in 2004, in the United States in
2004 and 2003 and in Canada in 2001. Under IFRS the plan amendments, to the
extent vested, are recognized through the income statement in the year they
occur. Under U.S. GAAP the impact is amortized over the expected services terms
of the related employees.
In addition, the two frameworks differ in the treatment of curtailments and
settlements.Under IFRS, gains or losses on a plan curtailment are recognized
when Dynea Chemicals is demonstrably committed to making a material reduction in
the future service benefits covered by a plan. U.S. GAAP, however, requires that
an enterprise recognize gains related to a curtailment when the related
employees terminate or the plan suspension or amendment is adopted, and
recognize losses when it is probable that the curtailment will occur and the
effects can be reasonably estimated. Both IFRS and U.S. GAAP allow for
accelerated recognition of unrecognized amounts on curtailments and
settlements.However, the methods used in determining the portion of unrecognized
amounts differ under the two frameworks.
Under U.S. GAAP, the employer should recognize an additional minimum pension
liability charged to other comprehensive income in shareholders' equity to the
extent that the unfunded accumulated benefit obligation ("ABO") exceeds the fair
value of the plan assets and this amount is not covered by the pension liability
already recognized in the balance sheet. The calculation of the ABO is based on
the actuarial present value of the vested benefits to which the employee is
currently entitled, based on the employee's expected date of separation or
retirement.IFRS does not require the recognition of an additional minimum
liability.
The following is a reconciliation of the balance sheet and income statement
amounts recognized for IFRS and U.S. GAAP for pensions as of December 31, 2004,
December 31, 2003 and December 31, 2002.
December 31, December 31, December 31,
2004 2003 2002
---------------------------------------------------
Liability recognized for IFRS (euro) (17.5) (euro) (17.3) (euro) (16.3)
Difference in actuarial value of scheme liabilities 1.1 1.0 0.2
Difference in unrecognized amounts 0.0 0.4 0.7
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Liability recognized for US GAAP before additional minimum pension liability (euro) (16.4) (euro) (15.9) (euro) (15.4)
Equity adjustment for minimum pension liability (10.9) (7.1) (7.6)
------------ ------------ ------------
Liability recognized for U.S. GAAP (euro) (27.3) (euro) (23.0) (euro) (23.0)
============ ============ ============
Net periodic post-employment benefit recognized for IFRS (euro) 5.3 (euro) 5.9 (euro) 5.2
Difference in service and interest cost (0.2) (0.1) --
Difference in recognition of unrecognized amounts 0.1 (0.3) --
Difference in settlements/curtailments 0.2 (0.2) --
------------ ------------ ------------
Net periodic pension benefit recognized for U.S. GAAP (euro) 5.4 (euro) 5.3 (euro) 5.2
============ ============ ============
(c) Marketable securities
Under U.S. GAAP, investments classified as available-for-sale are carried at
fair value, with any unrealized gain or loss recorded as a separate component of
equity. The decline in fair value below the amortized cost relating to
individual marketable securities should be recorded through earnings if
considered other than temporary. Therefore, in 2003 the fair value decline below
carrying value ((euro)0.2 million), which had been recorded as a separate
component of equity in 2000, was recorded to net income (loss) under U.S. GAAP.
(d) Goodwill and fair value translation adjustments
In connection with the revision of IAS 21 in 2003 the difference between IFRS
and US GAAP with regards to the translation of goodwill and fair value
adjustments arising from the acquisition of foreign entities was eliminated.
Dynea International applies the revised standard prospectively to all
acquisitions occuring on or after January 1, 2004. Goodwill and fair value
adjustments arising from the acquisition of foreign entities before January 1,
2004 were translated at the exchange rate at the date of acquisition.Under U.S.
GAAP, SFAS 52 "Foreign Currency Translation" requires these amounts to be
translated at the exchange rate at each balance sheet date.This remaining
translation adjustment is included in comprehensive income under U.S. GAAP.
On January 1, 2004, Dynea International early adopted IFRS 3 resulting in
derecognition of negative goodwill with a corresponding adjustment to the
opening balance of retained earnings under IFRS.The cumulative amount of excess
of acquirer's interest in the net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost recognized amounted to
(euro)14.1 million at December 31, 2003.Under SFAS 142, the excess of acquirer's
interest in the net fair value of acquiree's identifiable assets, liabilities
and contingent liabilities over cost is allocated to long-lived assets of
acquired companies and depreciated over their useful life. Therefore, the amount
recognized in retained earnings on January 1, 2004 under IFRS is reversed under
US GAAP.
(e) Reversal of Amortization of Goodwill
Amortization of Goodwill
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In accordance with IFRS, Dynea International amortized all intangible assets
including goodwill on a straight-line basis over the expected useful lives of
the assets until December 31, 2003. After the issuance of IFRS 3 in 2004,
goodwill and intangible assets with indefinite lives are no longer amortized
after January 1, 2004, but are subject to an annual impairment test similarly to
the provisions of SFAS 142, "Goodwill and Other Intangible Assets", which was
adopted by Dynea International on January 1, 2002. The U.S.GAAP adjustment still
remaining reverses the amortization expense recorded under IFRS before the
adoption of IFRS 3.
Impairment of Goodwill
- ----------------------
Dynea International has evaluated its existing goodwill relating to prior
business combinations and has determined that an adjustment or reclassification
to intangible assets as of January 1, 2002 was not required in order to conform
to the new requirements of SFAS 142. The company has also reassessed the useful
lives and carrying values of other intangible assets, and will continue to
amortize these over their remaining useful lives.
As of January 1, 2002, Dynea International performed the transitional impairment
test under FAS 142 and compared the carrying value for each reporting unit to
its fair value, which was determined based on discounted cash flows. Upon
completion of the transitional impairment test, Dynea International determined
that there was no impairment as of January 1, 2002, as the carrying value of
each reporting unit did not exceed its fair value.The Company also completed its
annual impairment test required by SFAS 142 during the fourth quarter of 2002,
2003 and 2004, which was also performed by comparing the carrying value of each
reporting unit to its fair value based on discounted cash flow. No impairment
was recognized.
(f) Discontinued operations
In December 2002, Dynea International's Board of Directors approved a detailed
formal plan to sell its Oil Field Chemicals business segment. On January 28,
2003 the disposal of the business segment to M-I L.C.C. was completed.The deal
became effective as of January 1, 2003 and included Oil Field Chemicals business
in Norway, the subsidiaries in Australia, Great Britain, Indonesia, Middle-East
and Singapore, and the shares of an associated company in India. The income from
discontinued operations is presented separately from the income from continuing
operations. The adjustment ((euro)2.8 million in 2003) relates to the
translation of goodwill relating to the units sold (see (d) Translation
Adjustments).
(g) Treatment of excess of acquirer's interest in the net fair value of
acquiree's identifiable assets, liabilities and contingent liabilities over cost
Effective January 1, 2003 Dynea International acquired from its parent company
Dynea the Chemitec companies consisting of Dynea Erkner Gmbh and Dynea Holding
B.V. with its subsidiaries for a consideration of (euro)36.2 million. The
acquisition was regarded as a transaction between parties under common control
and handled as uniting of interest. The transaction resulted in a excess of
acquirer's interest in the net fair value of acquiree's identifiable assets,
liabilities and contingent liabilities over cost of (euro)15.0 million, which
was credited against goodwill under IFRS and recognised as income in the line
depreciation and amortization over 17 years. Under SFAS 142 excess of acquirer's
interest in the net fair value of acquiree's identifiable assets, liabilities
and contingent liabilities over cost is allocated to long-lived assets of
acquired companies and depreciated over their useful life. This leads to lower
depreciation charges of these assets compared to IFRS. The difference between
IFRS and U.S. GAAP was therefore eliminated when IFRS 3 was issued in 2004.
However, as IFRS 3 is applied prospectively, an adjustment remains with the
acquisition of the Chemitec companies.
(h) One-time termination benefits
In December 2003, the Board of Directors of Dynea Chemicals approved a detailed
formal plan to relocate the production from Engene to Lillestr0m during 2004.
Under IFRS the company recognizes a liability for termination benefits when it
has a constructive obligation to provide these benefits, thus, a liability was
recognized in 2003. According to FAS 146 one-time termination benefits are
measured at the communication date and then recognized ratably over the future
service period. The employees were terminated in 2004 and thus, under US GAAP
the cost was recognized in its entirety in 2004.
(i) Major overhaul costs
Under IFRS, the early adoption of IAS 16 (revised) at January 1, 2004 resulted
in a change in the accounting for major overhaul costs: such costs are now
capitalized as part of the cost of an asset. Under U.S. GAAP the costs of major
overhauls are expensed as incurred. As the change in the IFRS accounting policy
is applied retrospectively starting from the earliest year presented, that is,
from January 1, 2002 onwards, an adjustment is shown in the U.S. GAAP
reconciliation for all years presented.
(j) New accounting standard
In January 2003, the FASB (Financial Accounting Standards Board) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46),
which was amended in December 2003 when the FASB issued FIN 46-R. Under the
interpretation, as amended, certain entities known as "Variable Interest
Entities" (VIE) must be consolidated by the "primary beneficiary" of the entity.
The primary beneficiary is generally defined as having the majority of the risks
and rewards arising from the VIE.
FIN 46-R is effective for Dynea International's December 31, 2004 financial
statements for any new arrangements created after December 31, 2003. Dynea
International has identified one new arrangement that was created late in 2004
and therefore is in the scope of the new standard already as of December 31,
2004. The impact of this arrangement on the Company's December 31, 2004
financial statements is however considered immaterial as the operations were
only started in December 2004. The new arrangement will be evaluated in
accordance with FIN 46-R starting from January 1, 2005. FIN 46-R is effective
also for possible VIEs created before December 31, 2003 for Dynea
International's December 31, 2005 financial statements and the Company is
currently evaluating the impact on its results of operations and financial
position under U.S. GAAP.
In November 2004 the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 151, Inventory Costs - an amendment of ARB No.
43, Chapter 4 (revised ) (FAS 151).FAS 151 amends the guidance in ARB No. 43,
Chapter 4, 'Inventory Pricing,' to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage).FAS 151 requires that those items be recognized as current-period
charges.In addition, FAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities.FAS 151 is effective for Dynea International for its year
ended December 31, 2006. The Company is currently investigating the impact of
the statement on the results of operations and financial position under U.S.
GAAP.
In December 2004 the FASB issued Financial Accounting Standard No. 123R,
Share-Based Payment (FAS 123R).FAS 123R requires that companies expense the
value of employee stock options and other awards.FAS 123R allows companies to
choose an option pricing model that appropriately reflects their specific
circumstances and the economics of their transactions, and allows companies to
select from three transition methods for adoption of the provisions of the
standard.FAS 123R is effective for Dynea International for its year ended
December 31, 2006. . The new standard is not expected to have material impact on
the Company's results of operations and financial position under U.S. GAAP. In
December 2004 the FASB issued Financial Accounting Standard No. 153, Exchanges
of Nonmonetary Assets (FAS 153).FAS 153 amends APB Opinion No. 29, Accounting
for Nonmonetary Transactions, to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange.FAS
153is effective for Dynea for nonmonetary exchanges occurring on or after
January 1, 2006. The new standard is not expected to have material impact on the
Company's results of operations and financial position under U.S. GAAP.
27. Subsequent Events
On January 21, 2005, Dynea Chemicals and senior lenders signed an amendment
letter to the senior credit agreement. The amendments include amended financial
covenants for fourth quarter 2004 to fourth quarter 2006 and a commitment from
the owners of Dynea International to make additional equity injections in cash
of (euro)11.0 million in both 2005 and 2006 to Dynea Chemicals Oy. Additionally,
a new redemption premium was included to the credit agreement, the redemption
premium will be an amount equal to 0.50 % of the principal amount repaid or
prepaid if such repayment or prepayment occurs after 30 November 2005 but prior
to 30 April 2006; and 1.50 % of the principal amount repaid or prepaid if such
repayment or prepayment occurs on or after 30 April 2006.
Based on the authorisation by the extra general meeting of the shareholders, the
Board of Directors of Dynea Oy have decided in January 2005 to grant an offer in
total 3.296.800 share options to the B-shareholders of Dynea Oy being current
key managers employed by Dynea Oy and its subsidiaries of Dynea ChemicalsOy.
Under IFRS 2, Share-based payment transactions require an expense to be
recognized in Dynea Chemicals Oy when share options are granted as part of the
remuneration package to its key managers. The share options in Dynea Oy are
measured at fair value and the charge will be reflected in the financial
statements of Dynea Chemicals Oy in 2005.
Dynea Chemicals' reportable primary business segments have been changed to four
geographical areas, Europe, North America, Asia Pacific and South America
following the new business structure announced on March 21, 2005.