* Schedules other than the one listed under this heading are omitted for the
reason that they are not required or are not applicable.
REPORT OF INDEPENDENT AUDITORS
To the Board of Management of Akzo Nobel N.V. and Supervisory Board:
We have audited the consolidated financial statements of Akzo Nobel N.V. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Akzo Nobel N.V. and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2002, in conformity with generally accepted accounting principles
in the Netherlands. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As more fully discussed in the Summary of Significant Accounting Policies
beginning on page 102, during 2002, the Company changed its methods of
accounting for the Dividend Proposal, and the Akzo Nobel Employee Share Plan.
Generally accepted accounting principles in the Netherlands differ in certain
significant respects from accounting principles generally accepted in the
United States of America. Application of generally accepted accounting
principles in the United States would have affected consolidated results of
operations for each of the years in the three-year period ended December 31,
2002 and consolidated shareholders' equity at December 31, 2002 and 2001 to the
extent summarized in Note 21 to the consolidated financial statements.
Arnhem, the Netherlands
February 10, 2003 KPMG Accountants N.V.
102
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USED IN PREPARING THE CONSOLIDATED
FINANCIAL STATEMENTS
General
The consolidated financial statements of Akzo Nobel N.V. ("Akzo Nobel") and
subsidiaries have been prepared in conformity with generally accepted
accounting principles in the Netherlands ("NL GAAP"), which differ in certain
significant respects from accounting principles generally accepted in the
United States of America ("US GAAP"). See Note 21 for a description of the
differences between NL GAAP and US GAAP affecting Akzo Nobel's net income and
shareholders' equity.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Change in Accounting Principles
In line with recently issued directives of the Netherlands Accounting Standards
Board, the Company changed its accounting for the final dividend proposal and
for the Akzo Nobel Employee Share Plan, effective January 1, 2002.
Dividend Proposal
The Company used to recognize the proposal for the final dividend as a
liability under current liabilities. Under the new standard, of which early
adoption is encouraged, a dividend shall not be recognized as a liability until
it has been approved by the General Meeting of Shareholders.
Comparative figures have been restated. The effect of this new principle on
shareholders' equity at December 31, 2001, was an increase of EUR 257 million.
Akzo Nobel Employee Share Plan
Under the Akzo Nobel Employee Share Plan, Akzo Nobel N.V. common shares are
granted for free to the employees after a certain vesting period. In accordance
with the new standard, effective for rights granted from 2002 onwards, the
value of the shares on the date of the grant is recognized as a charge in the
statement of income spread over the vesting period, which in general is 3
years. For 2002, the net charge to income amounted to EUR 2 million.
Consolidation
The consolidated financial statements include the accounts of Akzo Nobel N.V.
and its subsidiaries. Subsidiaries are companies of which Akzo Nobel directly
and/or indirectly has control.
All of the assets, liabilities, and results of the consolidated companies are
included. Minority interest in equity and earnings is shown separately.
Transactions between consolidated companies are eliminated.
Joint ventures where Akzo Nobel has joint control are proportionally
consolidated. Interests in companies where Akzo Nobel can exercise significant
influence are treated as nonconsolidated companies.
103
Valuation
The principles of valuation and determination of income used in the
consolidated financial statements are based on historical costs.
Translation of Foreign Currencies
In the balance sheet, amounts in foreign currencies are translated into euros
at year-end exchange rates. Foreign exchange differences are included in
income. Results on currency hedging contracts are also recognized in income to
offset the foreign exchange differences on the related hedged items. Exchange
differences on anticipatory hedges of firm commitments regarding sales and
purchases are deferred on the balance sheet until the hedged transactions have
been reflected in the accounts. The capitalized or accrued amount is included
in receivables or current liabilities.
Statements of income in foreign currencies are translated into euros at average
exchange rates. Foreign exchange differences resulting from translation into
euros of shareholders' equities and of intercompany loans of a permanent nature
with respect to affiliated companies outside the Euro region are directly added
to, or deducted from, equity.
Before being consolidated, the financial statements of affiliated companies
established in hyperinflationary countries are adjusted for the effects of
changing prices.
Principles of Valuation of Assets and Liabilities
Intangible Assets
Purchased goodwill is capitalized and amortized on a straight-line basis over
the estimated useful life, up to a maximum of 20 years. Goodwill is determined
as the difference between the fair value of the consideration paid for new
interests and the fair value of the purchased net assets at the date of
acquisition. Development costs are capitalized if it is probable that
sufficient future economic benefits will be generated by the intangible asset
arising from development, and amortized on a straight-line basis over the
estimated useful life, which in the majority of cases is 5 years.
Other intangible assets, such as licenses, know-how, and intellectual property
rights, are capitalized and amortized on a straight-line basis over their
estimated useful life, which in the majority of cases is 10 to 15 years.
In cases where the book value so computed permanently exceeds the value to the
business additional write-downs are made.
Property, Plant and Equipment
Property, plant and equipment are valued at cost less depreciation. Cost
includes the financing charges of capital investment projects under
construction. Capital investment grants are deducted from property, plant and
equipment.
Depreciation is computed by the straight-line method based on estimated useful
life, which in the majority of cases is 10 years for plant equipment and
machinery, and which ranges from 20 to 30 years for buildings. In cases where
the book value so computed permanently exceeds the value to the business
additional write-downs are made.
104
Financial Noncurrent Assets
Investments in nonconsolidated companies are stated at the amount of Akzo
Nobel's share in shareholders' equity. The calculation of shareholders' equity
is based as much as possible on the Akzo Nobel principles of valuation.
Loans to nonconsolidated companies are carried at face value less such
provisions as are considered necessary.
For the valuation of deferred tax assets reference is made to Deferred Taxes.
Other financial noncurrent assets are stated at face value, at cost, or at
lower market value. For pension prepayments reference is made to Pensions and
Other Postretirement Benefits.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost,
defined as the full manufacturing costs related to the stage of processing, is
determined by the first-in first-out (FIFO) method. Provisions are made for
obsolescence.
Receivables
Receivables are stated at face amounts less such provisions as are considered
necessary.
Cash and Cash Equivalents
Cash and cash equivalents are carried at face value, with the exception of
marketable private borrowings and marketable securities, which are valued at
the lower of cost or market value.
Provisions
Provisions are recorded when it is probable that a liability has been incurred,
and the amount involved is reasonably estimable. Provisions are stated at face
value, except for certain long-term provisions, which have been discounted.
Pensions and Other Postretirement Benefits
The Company accounts for the costs of pension plans and postretirement benefits
other than pensions in accordance with U.S. accounting standards SFAS 87 and
SFAS 106, respectively.
Most of the Company's defined-benefit pension plans are funded with plan assets
that have been segregated in a trust or foundation. For plans, which are not
separately funded, the Company recognizes a provision for such amounts.
Valuations of both funded and unfunded plans are carried out by independent
actuaries. Pension costs primarily represent the increase in the actuarial
present value of the obligation for projected pension benefits based on
employee service during the year and the interest on this obligation in respect
of employee service in previous years, net of the expected return on plan
assets. In the event, however, that at any date the accumulated benefit
obligation, calculated as the present value of the benefits attributed to
employee service rendered prior to that date and based on current and past
compensation levels, would be higher than the market value of the plan assets
and/or the existing level of the pension provision, the difference is, pursuant
to SFAS 87, added to provisions by means of recognition of an intangible asset
for prior service costs with the balance, net of taxes, being charged to
shareholders' equity.
In certain countries the Company also provides postretirement benefits other
than pensions to various employees. These plans are generally not funded.
Valuations of the obligations under these plans are carried out by independent
actuaries. The costs relating to such plans primarily consist of the present
value of the
105
benefits attributed on an equal basis to each year of service and the interest
on this obligation in respect of employee service in previous years.
Deferred Taxes
Deferred tax assets and liabilities are based on timing differences between the
valuation of assets and liabilities for accounting purposes and the valuation
for tax purposes. Measurement of deferred tax assets and liabilities is based
upon the enacted tax rates expected to apply to taxable income in the years in
which those timing differences are expected to be reversed. Deferred tax
assets, including assets arising from losses carried forward, are recognized if
it is more likely than not that the asset will be realized. Nonrefundable
dividend taxes are taken into account in the determination of provisions for
deferred taxes to the extent of earnings expected to be distributed by
affiliated companies.
Long-Term Borrowings and Short-Term Debt
Long-term borrowings and short-term debt are stated at face value.
Principles of Determination of Income
The determination of income is closely associated with the valuation of assets
and liabilities. In addition, the following principles are observed in the
preparation of the statement of income:
- Net sales is defined as the revenue from the sale and delivery of
goods and services, net of rebates, discounts, and similar allowances,
and net of sales tax. Net sales are recognized upon delivery of goods
or when services are rendered.
|
- Cost of sales comprises the manufacturing costs of the goods and services
sold and delivered, and any inventory write-downs to lower net realizable
value. Manufacturing costs include such items as:
- the costs of raw materials and supplies, energy, and other materials;
- depreciation and the costs of maintenance of the assets used in
production;
- salaries, wages, and social charges for the personnel involved in
manufacturing.
- Research costs and preparation and start-up expenses are charged to income
as incurred.
- Royalty income is recognized on an accrual basis under Other Results.
- Interest on interest swaps and forward rate agreements is included in the
statement of income under Financing Charges.
- Taxes on income comprise both current and deferred taxes, including effects
of changes in tax rates.
- Income from nonconsolidated companies consists of Akzo Nobel's equity in
earnings of these companies and interest on loans granted to them, with due
allowance being made for taxes relating to these items.
Earnings per Share
Earnings per common share are calculated by dividing net income by the weighted
average number of common shares outstanding during the year. The weighted
average number of shares outstanding used in the calculation for the basic
earnings per share was 285,827,092 for 2002 and 285,888,385 and 285,902,574 for
2001 and 2000, respectively. For the calculation of the diluted earnings per
share the weighted average number of shares was 286,331,205 for 2002 and
286,328,864 and 286,155,360 for 2001 and 2000, respectively.
106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(1) Industry Segment Information and Geographic Data
Akzo Nobel, headquartered in Arnhem, the Netherlands, is a market-driven and
technology-based company, serving customers throughout the world with
healthcare products, coatings, and chemicals.
(a) Industry Segment Information
The information presented below illustrates the relative importance of the
individual groups.
-----------------------------------------------------------------------------------------------------------------------------------
Net sales Operating income Operating income,
before nonrecurring after nonrecurring
items items
Millions of euros 2002 2001 2000 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Pharma 4,008 4,044 3,839 768 831 765 747 790 767
Coatings 5,521 5,591 5,568 465 426 447 446 226 434
Chemicals 4,598 4,604 4,740 344 340 445 248 122 368
Miscellaneous products, intragroup deliveries,
non-allocated items and eliminations (125) (129) (144) (85) (26) (16) (79) (16) (12)
-----------------------------------------------------------------------------------------------------------------------------------
Total 14,002 14,110 14,003 1,492 1,571 1,641 1,362 1,122 1,557
===================================================================================================================================
|
------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets Capital Depreciation
expenditures
Millions of euros 2002 2001 2000 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Pharma 3,195 3,333 2,964 297 317 214 152 148 146
Coatings 3,338 3,372 3,381 131 181 170 150 156 149
Chemicals 3,557 3,837 3,953 248 310 329 311 320 323
Miscellaneous products and nonallocated and
eliminations, including cash and cash
equivalents 2,208 1,808 1,736 13 14 12 9 11 13
-----------------------------------------------------------------------------------------------------------------------------------
12,298 12,350 12,034 689 822 725 622 635 631
Nonconsolidated companies 491 575 673
-----------------------------------------------------------------------------------------------------------------------------------
Total 12,789 12,925 12,707 689 822 725 622 635 631
===================================================================================================================================
|
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(b) Geographic Data
Below geographic information for Akzo Nobel is presented for net sales,
operating income, identifiable assets and expenditures for property, plant and
equipment.
------------------------------------------------------------------------------------------------------------------------
By region of destination By region of origin
Operating income
Net sales Net sales before nonrecurring items
Millions of euros 2002 2001 2000 2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
The Netherlands 816 720 787 2,662 2,533 2,214 191 219 360
Germany 1,084 1,052 1,064 1,051 1,070 1,134 78 82 83
Sweden 517 512 538 1,184 1,088 1,268 89 67 79
United Kingdom 963 1,036 1,052 911 924 966 13 38 55
Other European countries 3,951 3,964 3,879 3,016 3,266 3,025 654 712 558
USA and Canada 3,723 3,802 3,596 3,318 3,263 3,198 149 190 237
Latin America 767 917 944 506 660 704 99 104 91
Asia 1,513 1,429 1,466 1,064 1,039 1,132 161 113 122
Other regions 668 678 677 290 267 362 58 46 56
------------------------------------------------------------------------------------------------------------------------
Total 14,002 14,110 14,003 14,002 14,110 14,003 1,492 1,571 1,641
========================================================================================================================
|
------------------------------------------------------------------------------------------
Identifiable assets Capital expenditures
Millions of euros 2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------------------------
The Netherlands 2,618 2,595 2,860 197 235 156
Germany 819 931 1,599 36 52 51
Sweden 798 831 762 36 71 74
United Kingdom 1,134 1,365 1,198 25 36 56
Other European countries 2,210 1,842 2,017 136 104 96
USA and Canada 2,772 3,090 2,324 177 220 193
Latin America 424 589 592 31 33 35
Asia 838 859 865 41 54 35
Other regions 306 345 308 10 17 29
------------------------------------------------------------------------------------------
11,919 12,447 12,525 689 822 725
Eliminations and cash
and cash equivalents 379 (97) (491)
Nonconsolidated
Companies 491 575 673
------------------------------------------------------------------------------------------
Total 12,789 12,925 12,707 689 822 725
==========================================================================================
|
(2) Acquisitions and Dispositions
In April 2002, the Awlgrip(R) marine and aerospace coatings business was
acquired for EUR 27 million, including EUR 19 million goodwill.
At the end of June 2002, the Industrial Specialties business of Crompton
Corporation, including operations in the United States, Europe, and Asia, was
acquired for EUR 96 million, of which EUR 15 million will be paid in 2003.
Goodwill was nil.
111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
At the end of September 2002, the liquid pharmaceuticals manufacturing business
Rosemont Pharmaceuticals Ltd, United Kingdom, was divested for EUR 102 million.
The after-tax gain on this divestiture amounted to EUR 91 million.
Effective September 2002, Ferro's powder coatings businesses in the Americas
and Asia Pacific were acquired for EUR 70 million, including goodwill of EUR 45
million.
On June 15, 2001, Covance Biotechnology Services Inc., North Carolina, was
acquired for EUR 223 million, including goodwill of EUR 21 million.
At the end of June 2001, the Diagnostics business of Organon Teknika was
divested for EUR 334 million, resulting in a gain of EUR 56 million after
taxes.
Effective October 31, 2001, the activities of the business unit Printing Inks
were divested for EUR 75 million. The deal was finalized in January 2002. The
after-tax gain on this divestiture amounted to EUR 7 million.
At year-end 2000 Chefaro, Akzo Nobel's Over-The-Counter activity was divested
for EUR 140 million. The gain on this divestment was EUR 90 million.
During 2002, 2001 and 2000, Akzo Nobel acquired and deconsolidated various
other businesses, none of which were significant to the consolidated financial
statements.
The acquisitions were accounted for by the purchase accounting method.
(3) Cash and Cash Equivalents
--------------------------------------------------
Millions of euros 2002 2001
--------------------------------------------------
Cash in banks 276 319
Short-term investments 244 136
--------------------------------------------------
Total 520 455
==================================================
|
Short-term investments almost entirely consist of cash loans, time deposits,
marketable private borrowings, and marketable securities immediately
convertible into cash.
At December 31, 2002 and December 31, 2001, the amount of cash and cash
equivalents was freely available.
(4) Receivables
--------------------------------------------------
Millions of euros 2002 2001
--------------------------------------------------
Trade receivables 2,064 2,340
Taxes 293 345
Other receivables 286 339
------- ------
2,643 3,024
Discounted drafts with recourse (14) (13)
--------------------------------------------------
Total 2,629 3,011
==================================================
Allowances for doubtful accounts
included as a deduction from
receivables 182 180
==================================================
|
112
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
At December 31, 2001, other receivables included a receivable for the
divestment of Printing Inks of EUR 75 million.
5) Inventories
--------------------------------------------------
Millions of euros 2002 2001
--------------------------------------------------
Raw materials and supplies 684 672
Work in process 441 467
Finished products and goods
for resale 1,065 1,121
Inventory prepayments 16 10
--------------------------------------------------
Total 2,206 2,270
==================================================
Provisions for obsolescence
deducted from inventory
book values 151 199
==================================================
|
(6) Intangible Assets
------------------------------------------------------------------------------------------------------------------------
Total Goodwill Licenses, Prior service Development
Millions of euros know-how, and costs for costs
intellectual minimum
property rights pension liability
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999
Cost of acquisition 373 326 47
Accumulated amortization (47) (47)
------- ------- ------- -------
Book value 326 279 47
Changes in book value
Acquisitions 144 124 20
Investments 33 33
Disinvestments (15) (15)
Amortization (33) (3) (30)
Change related to minimum pension (29) (29)
liability
Reclassification (38) (38)
Change in exchange rates - - - -
------- ------- ------- -------
Total changes in 2000 62 121 (30) (29)
Balance at December 31, 2000
Cost of acquisition 463 124 321 18
Accumulated amortization (75) (3) (72)
------- ------- ------- -------
Book value 388 121 249 18
======= ======= ======= =======
|
113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
------------------------------------------------------------------------------------------------------------------------
Total Goodwill Licenses, Prior service Development
Millions of euros know-how, and costs for costs
intellectual minimum
property rights pension liability
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000
Cost of acquisition 463 124 321 18
Accumulated amortization (75) (3) (72)
------- ------- ------- -------
Book value 388 121 249 18
------- ------- ------- -------
Changes in book value
Acquisitions 105 94 11
Investments 59 52 7
Write-downs (18) (2) (16)
Amortization (39) (10) (28) (1)
Change related to minimum pension
liability 9 9
Change in exchange rates 4 - 4 -
------- ------- ------- ------- -------
Total changes in 2001 120 82 23 9 6
Balance at December 31, 2001
Cost of acquisition 623 218 371 27 7
Accumulated amortization (115) (15) (99) (1)
------- ------- ------- ------- -------
Book value 508 203 272 27 6
======= ======= ======= ======= =======
Changes in book value
Acquisitions 127 127
Divestments (4) (4)
Investments 19 19 -
Write-downs (82) (8) (74)
Amortization (59) (19) (39) (1)
Change related to minimum pension
liability 146 146
Change in exchange rates (26) (21) (5)
------- ------- ------- ------- -------
Total changes in 2002 121 75 (99) 146 (1)
Balance at December 31, 2002
Cost of acquisition 758 314 264 173 7
Accumulated amortization (129) (36) (91) (2)
------- ------- ------- ------- -------
Book value 629 278 173 173 5
======= ======= ======= ======= =======
|
114
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(7) Property, Plant and Equipment
--------------------------------------------------------------------------------------------------------------
Construction
Plant in progress Assets not
equipment and used in the
Buildings and Other prepayments production
Millions of euros Total and land machinery equipment on projects process
--------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999
Cost of acquisition 9,270 2,387 5,454 810 477 142
Accumulated depreciation (4,835) (820) (3,399) (546) (70)
------- ------- ------- ------- ------- -------
Book value 4,435 1,567 2,055 264 477 72
======= ======= ======= ======= ======= =======
Changes in book value
Acquisitions 88 76 1 11
Divestitures (30) (9) (10) (4) (7)
Capital expenditures 725 234 437 84 (46) 16
Depreciation (631) (108) (428) (79) (16)
Write-downs (73) (4) (67) (2)
Disinvestments (92) (7) (11) (6) (68)
Changes in exchange rates 79 37 36 6
------- ------- ------- ------- ------- -------
Total changes in 2000 66 219 (42) 8 (50) (69)
======= ======= ======= ======= ======= =======
Balance at December 31,
2000
Cost of acquisition 9,863 2,744 5,712 884 427 96
Accumulated depreciation (5,362) (958) (3,699) (612) (93)
------- ------- ------- ------- ------- -------
Book value 4,501 1,786 2,013 272 427 3
======= ======= ======= ======= ======= =======
Changes in book value
Acquisitions 165 54 97 14
Divestitures (151) (63) (30) (33) (23) (2)
Capital expenditures 822 161 428 85 131 17
Disinvestments (10) (5) (3) (1) (1)
Depreciation (635) (119) (436) (76) (4)
Write-downs (154) (65) (75) (13) (1)
Changes in exchange rates 30 6 23 1
------- ------- ------- ------- ------- -------
Total changes in 2001 67 (31) 4 (23) 108 9
Balance at December 31,
2001
Cost of acquisition 10,337 2,838 6,002 924 535 38
Accumulated depreciation (5,769) (1,083) (3,985) (675) (26)
------- ------- ------- ------- ------- -------
Book value 4,568 1,755 2,017 249 535 12
======= ======= ======= ======= ======= =======
|
115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
----------------------------------------------------------------------------------------------------
Construction
Plant in progress Assets not
equipment and used in the
Buildings and Other prepayments production
Millions of euros Total and land machinery equipment on projects process
----------------------------------------------------------------------------------------------------
Balance at
December 31, 2001
Cost of acquisition 10,337 2,838 6,002 924 535 38
Accumulated depreciation (5,769) (1,083) (3,985) (675) (26)
------- ------- ------- ------- ------- -------
Book value 4,568 1,755 2,017 249 535 12
======= ======= ======= ======= ======= =======
Changes in book
value
Acquisitions 159 31 123 5 - -
Divestitures (9) (3) (2) - (4)
Capital expenditures 689 260 413 91 (81) 6
Disinvestments (34) (17) (11) (4) - (2)
Depreciation (622) (112) (426) (83) (1)
Write-downs (28) (8) (19) (1) -
Changes in exchange rates (321) (137) (130) (13) (41) -
------- ------- ------- ------- ------- -------
Total changes in 2002 (166) 14 (52) (5) (126) 3
Balance at
December 31, 2002
Cost of acquisition 10,315 2,864 6,105 906 409 31
Accumulated depreciation (5,913) (1,095) (4,140) (662) (16)
------- ------- ------- ------- ------- -------
Book value 4,402 1,769 1,965 244 409 15
======= ======= ======= ======= ======= =======
|
The total book value of land at December 31, 2002 was EUR 278 million (at
December 31, 2001: EUR 293 million).
The book value of property, plant and equipment financed by installment buying
and leasing was
EUR 42 million at December 31, 2002 (at December 31, 2001: EUR 17 million).
(8) Nonconsolidated Companies
------------------------------------------------------------
Millions of euros 2002 2001
------------------------------------------------------------
Investments in nonconsolidated companies 466 561
Loans to nonconsolidated companies 25 14
------------------------------------------------------------
Total 491 575
============================================================
|
Dividends received from nonconsolidated companies in 2002, 2001 and 2000
amounted to EUR 82 million, EUR 67 million and EUR 32 million, respectively.
At December 31, 2002, consolidated retained earnings included EUR 261 million
(2001: EUR 228 million) of undistributed earnings from Akzo Nobel's investments
in nonconsolidated companies. Accounts receivable
116
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
from and payable to nonconsolidated companies are separately presented in the
Consolidated Balance Sheet.
The most important nonconsolidated companies are the 50 percent interest in
Flexsys, the 21 percent interest in Acordis and the 30 percent interest in
Methanor.
Summarized information of nonconsolidated companies on a 100-percent basis
follows:
--------------------------------------------------
Millions of euros 2002 2001
--------------------------------------------------
Current assets 1,208 1,386
Noncurrent assets 1,472 1,902
------- -------
Total assets 2,680 3,288
======= =======
Current liabilities 683 926
Noncurrent liabilities 639 735
Shareholders' equity 1,358 1,627
------- -------
Total liabilities and equity 2,680 3,288
======= =======
--------------------------------------------------
|
------------------------------------------------------------
Millions of euros 2002 2001 2000
------------------------------------------------------------
Net sales 3,283 3,745 4,309
Income before tax 34 223 699
Net income 31 172 615
------------------------------------------------------------
|
The lower 2002 statement of income figures predominantly relate to lower
earnings for Acordis, Flexsys and Methanor. The decrease of the 2001 statement
of income figures predominantly relates to the divestments made by Acordis in
2000.
Certain nonconsolidated companies sell goods and provide services to
consolidated Akzo Nobel companies. In addition, consolidated Akzo Nobel
companies sell goods and provide services to certain nonconsolidated companies.
Such transactions were not significant. Terms of these transactions were
generally comparable to transactions with third parties.
117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(9) Short-term Borrowings
----------------------------------------------------------------------------------------------------
Balance at end of year Weighted average interest
in millions of euros rate at end of year
----------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Banks 370 7%
Commercial paper 1,585 6%
Borrowings from nonconsolidated companies 12 5%
Year ended December 31, 2001
Banks 704 5%
Commercial paper 1,455 4%
Borrowings from nonconsolidated companies 108 5%
Year ended December 31, 2002
Banks 517 6%
Commercial paper 396 3%
Borrowings from nonconsolidated companies 66 5%
----------------------------------------------------------------------------------------------------
|
Commercial paper relates to Akzo Nobel's commercial paper program in the United
States, which at December 31, 2002, as at December 31, 2001, had a maximum of
USD 1.0 billion (year-end 2002: EUR 1.0 billion; year-end 2001: EUR 1.1
billion), and to Akzo Nobel's Euro commercial paper program, which at
December 31, 2002, as at December 31, 2001, had a maximum of EUR 1.5 billion.
At December 31, 2002 and 2001, borrowings under the U.S. commercial paper were
EUR 156 million and EUR 576 million, respectively, and under Akzo Nobel's Euro
commercial paper EUR 240 million and EUR 874 million, respectively.
(10) Current Liabilities
------------------------------------------------------------------------------------------
Millions of euros 2002 2001
------------------------------------------------------------------------------------------
Prepayments by customers 21 23
Payable to suppliers 1,277 1,411
Taxes and social security contributions 350 302
Amounts payable to employees 351 301
Dividends 2 5
Pensions 198 197
Current portion of long-term liabilities related
to restructurings 216 213
Current portion of other long-term liabilities 137 132
Other 392 387
------------------------------------------------------------------------------------------
Total 2,944 2,971
==========================================================================================
|
118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(11) Long-term Borrowings
-------------------------------------------------------------------------------
Millions of euros 2002 2001
--------------------------------------------------------------------------------
Debentures 2,600 1,970
Debt to credit institutions 87 153
Other borrowings 110 112
------ ------
2,797 2,235
Current portion (734) (294)
------------------------------------------------------------------------------
Total 2,063 1,941
==============================================================================
|
Debentures and other borrowings can be specified as follows:
Millions of euros 2002 2001
---------------------------------------------------------------------------------------
Debentures
8 % 1992 maturing 2002 136
6.38 % 1993 maturing 2003 136 136
7 % 1995 maturing 2005 227 227
5.38 % 1998 maturing 2008 512 512
5.63 % 2002 maturing 2009 924
6 % 1998 maturing 2003 (USD) 478 568
6.44 % 1997 maturing 2007 (USD) 100 120
6.54 % 1997 maturing 2012 (USD) 139 167
Other debenture loans with various currencies, rates approximately 6%
and various maturities 84 104
------ ------
2,600 1,970
------ ------
Debt to credit institutions
Debt with various currencies, and various rates 87 153
------ ------
87 153
====== ======
Other borrowings
Borrowings with various currencies, various rates and
various maturities, including capital lease obligations 110 112
----- -----
110 112
====== =====
|
119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Aggregate maturity is as follows:
--------------------------------------------------------------------------------
Millions of euros
--------------------------------------------------------------------------------
2003 734
2004 21
2005 278
2006 8
2007 102
Later 1,654
--------------------------------------------------------------------------------
Total 2,797
================================================================================
|
The average interest rate was 5.9 percent in 2002, 6.1 percent in 2001 and 5.8
percent in 2000.
Other borrowings and debt to credit institutions have been secured by mortgages
aggregating EUR 7 million at December 31, 2002 (at December 31, 2001: EUR 10
million).
At December 31, 2002, the total amount of the committed standby multicurrency
loan facility with floating interest rates arranged by Akzo Nobel was USD 1.0
billion (at December 31, 2002: EUR 1.0 billion, at December 31, 2001: EUR 1.1
billion), which expires on October 15, 2003. The total amount and the
conditions of the facility were not changed in 2002. Both at the end of 2002
and 2001, the facility was not used. Furthermore, the Company has a
EUR 1.0 billion short-term back-up facility, expiring on November 28, 2003.
(12) Long-term Liabilities
--------------------------------------------------------------------------------
Millions of euros 2002 2001
--------------------------------------------------------------------------------
Deferred taxes 513 560
Pension obligations 2,795 1,289
Restructuring of activities 116 187
Environmental costs 102 176
Other 223 218
--------------------------------------------------------------------------------
Total 3,829 2,430
================================================================================
|
For details on provisions for deferred taxes reference is made to Note 17. For
details on provisions for pension obligations reference is made to Note 20.
Other long-term liabilities include provisions for antitrust cases of EUR 72
million. Reference is made to Note 14.
Restructuring of activities
Provisions for restructuring of activities comprise accruals for certain
employee termination benefits and for costs which are directly associated with
plans to exit specific activities, primarily related to costs associated with
closing down facilities. The changes in these provisions (including the short-
term portion) are summarized as follows.
120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
---------------------------------------------------------------------------------------
Termination Exit Total
Millions of euros benefits costs provision
---------------------------------------------------------------------------------------
Balance at December 31, 1999 215 105 320
Changes in exchange rates - 3 3
Additions charged to income as nonrecurring item 32 4 36
Other additions charged to income 10 12 22
Consolidations 31 1 32
Utilization (115) (30) (145)
---------------------------------------------------------------------------------------
Balance at December 31, 2000 173 95 268
Changes in exchange rates - 1 1
Additions charged to income as nonrecurring item 163 108 271
Other additions charged to income 7 5 12
Utilization (118) (34) (152)
---------------------------------------------------------------------------------------
Balance at December 31, 2001 225 175 400
Changes in exchange rates (3) (11) (14)
Additions charged to income as nonrecurring item 68 55 123
Other additions charged to income 15 9 24
Utilization (123) (78) (201)
---------------------------------------------------------------------------------------
Balance at December 31, 2002 182 150 332
=======================================================================================
|
At December 31, 2002, the provision for termination benefits involves
3,300 employees that either already have been terminated or will be terminated
in the near future (December 31, 2001: 3,500).
(13) Shareholders' Equity
Capital Stock
Authorized capital stock of Akzo Nobel N.V. is EUR 1,600,019,200 and consists
of 48 priority shares of EUR 400, 600 million common shares of EUR 2 and 200
million cumulative preferred shares of EUR 2. Subscribed share capital consists
of 48 priority shares, 286,147,260 common shares, and no preferred shares. In
2002, 102,960 common shares were issued in connection with the exercise of
options.
In connection with Akzo Nobel's Employee Share Plan and stock option plan, the
Company has purchased 295,479 common shares in 8 blocks during the period May-
August 2002, at the prevailing stock market price at that time, which averaged
EUR 34.55. During 2002, in total 29,663 common shares were transferred to
outside trust funds of Akzo Nobel's employees in the United Kingdom and
Denmark. Taking
121
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
into account the 189,487 common shares, which the Company held at December 31,
2001, the Company held 455,303 common shares at December 31, 2002.
The priority shares are held by "AKZO NOBEL STICHTING" (Akzo Nobel Foundation),
an organization controlled by the Supervisory Board and the Board of Management
of Akzo Nobel N.V. The meeting of holders of priority shares submits lists of
nominees for the appointment to the Supervisory Board and the Board of
Management of Akzo Nobel N.V. The general meeting of shareholders votes upon
these lists of nominees. Amendment of the Articles of Association and
dissolution of the Company shall require the approval of the meeting of holders
of priority shares.
The Board of Management is authorized to determine, with the approval of the
Supervisory Board, the share of the profits to be added to retained earnings.
The remainder of the profits shall be available for dividends to shareholders
as follows: first to priority shares at 6 percent or the statutory interest
whichever is lower, of their par value, with the balance available to common
shares.
In case of liquidation, from the balance remaining after payment of debts, the
holders of priority shares and common shares shall in that order be repaid the
par value of their shares. From the balance remaining thereafter, accrued and
unpaid dividends, if any, shall be paid first on the priority shares. Any
balance remaining thereafter shall be distributed among the holders of common
shares, pro rata according to the number of common shares.
According to Netherlands law, each holder of common shares has a preemptive
right to acquire any issue of shares pro rata to the aggregate amount of his
shares.
Each common share is entitled to one vote.
2002 dividend proposal
A dividend of EUR 1.20 per common share (2001: EUR 1.20) was approved by the
General Meeting of Shareholders on April 17, 2003. In November 2002 an interim
dividend of EUR 0.30 was declared and paid. Adoption of this proposal resulted
in a dividend payment of EUR 343 million, a payout ratio of 38 percent relative
to net income excluding extraordinary and nonrecurring items, compared with 37
percent in 2001.
Statutory reserves
At the Annual Meeting of Shareholders of April 26, 2001, an amendment of the
Articles of Association was approved whereby the par value of the priority
shares was adjusted from NLG 1,000 to EUR 400 and of the common shares and the
cumulative preferred shares from NLG 5 to EUR 2. As the revised par values are
somewhat lower than the original par values, in accordance with section 67a of
Book 2 of the Netherlands Civil Code, the Company recognized a statutory
reserve of EUR 77 million for this reduction in subscribed share capital.
Statutory reserves also include EUR 5 million for capitalized development
costs, as well as the reserves relating to the earnings retained by affiliated
companies after 1983. The latter statutory reserves have been calculated by the
so-called collective method.
122
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Stock Options/Stock Appreciation Rights
Stock Options
Options are granted to all members of the Board of Management, Senior Vice
Presidents and Executives. The number of participants was approximately 775 in
2002 (2001: 760). The options for Senior Vice Presidents and Executives expire
after five years; as options granted from 2002 expire after seven years.
Options (conditional) granted to members of the Board of Management as from
2000 expire after ten years. The options issued under the plan in 1998 were
exercisable immediately upon grant. Options issued as from 1999 cannot be
exercised during the first three years.
No financing facilities exist for option rights or tax payable thereon. One
option entitles the holder thereof to buy one Akzo Nobel N.V. common share of
EUR 2 or one American Depositary Share (ADS).
The exercise price is the Euronext Amsterdam opening price on the first day
that the Akzo Nobel share is quoted ex dividend, or the opening price for an
ADS on NASDAQ/NMS on the first day that the Akzo Nobel ADS is quoted ex
dividend.
Stock option activity during the periods indicated was as follows:
--------------------------------------------------------------------------------
Weighted-
Number of average
Number of options or EUR options exercise price
--------------------------------------------------------------------------------
Balance at December 31, 1999 1,799,552 41.89
Granted 1,057,420 44.82
Exercised (55,584) 28.29
Forfeited (33,700) 43.18
-----------
Balance at December 31, 2000 2,767,688 43.27
Granted 1,193,170 46.82
Exercised (103,412) 25.93
Forfeited (50,600) 42.97
-----------
Balance at December 31, 2001 3,806,846 44.86
Granted 1,217,420 45.73
Exercised (106,056) 36.66
Forfeited (44,520) 45.26
-----------
Balance at December 31, 2002 4,873,690 45.25
================================================================================
|
At December 31, 2002, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was EUR 40.16 - EUR 47.40 and
3.6 years, respectively.
123
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
At December 31, 2002 and 2001, the number of options exercisable was 1,458,700
and 485,156, respectively, and the weighted-average exercise price of those
options was EUR 43.88 and EUR 45.40, respectively.
In accordance with APB 25, the compensation expenses for these stock
appreciation rights, including the change in the liability for the difference
between the exercise and the market price, for 2002 amounted to EUR (21)
million (2001: EUR (16) million), whereas the charge against shareholders'
equity in 2002 in accordance with NL GAAP amounted to EUR 1 million (2001: EUR
2 million).
Under Dutch GAAP, stock compensation costs are charged to equity upon exercise
of the stock appreciation rights.
No pro forma information is required, as the compensation expenses calculated
pursuant to the provisions of FAS 123 are the same as those for APB 25, due to
the cash settlement feature of the Company's stock option scheme.
Employee Share Plan
In 2001, the Company introduced the Akzo Nobel Employee Share Plan, whereby
Akzo Nobel N.V. common shares are conditionally granted to the employees.
Generally, these rights vest if the employee
has remained in the Company's service for a period of three years. The number
of shares granted varies from country to country. At December 31, 2002, the
following conditional rights on shares were outstanding:
--------------------------------------------------------------------------------
Outstanding shares Date unconditional
conditional rights on
Year of issue shares
--------------------------------------------------------------------------------
2001 214,000 May 1, 2004
2002 215,000 Various dates during 2005
================================================================================
|
124
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Shareholders' equity
------------------------------------------------------------------------------------------------------------------------------------
Thousands of euros Millions of euros
------------------------------------------------------------------------------------------------------------------------------------
Priority shares Common shares
------------------------------------------------------------------------------------------------------------------------------------
Number Share Number of Share Additional Statutory Foreign Retained Capital Minimum Total
of capital shares capital paid-in reserves currency earnings and pension
shares capital translation reserves liability
adjustments
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
1999 48 22 285,885,524 649 1,795 (586) 228 2,086 (4) 2,082
------------------------------------------------------------------------------------------------------------------------------------
Net income 947 947 947
Dividends* (286) (286) (286)
Issuance of
common stock
due to
Exercise
of options 52,176 1 1 1
Changes in
minimum
pension
liability (4) (4)
Foreign
currency
translation
adjustments (30) (30) (30)
Acquired
goodwill (16) (16) (16)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2000 48 22 285,937,700 649 1,796 - (616) 873 2,702 (8) 2,694
------------------------------------------------------------------------------------------------------------------------------------
Net income 671 671 671
Dividends** (343) (343) (343)
Issuance of
common stock
due to
Exercise
of options 106,600 3 3 3
Purchase of
common
shares, net (10) (10) (10)
Reduction of
par value (2) (77) 77
Changes in
minimum
pension
liability (32) (32)
Capitalized
development
cost 6 (6)
Foreign
currency
translation
adjustments (105) (105) (105)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2001 48 20 286,044,300 572 1,799 83 (721) 1,185 2,918 (40) 2,878
------------------------------------------------------------------------------------------------------------------------------------
Net income 818 818 818
Dividends*** (343) (343) (343)
Issuance of
common stock
due to
exercise
of options 102,960 4 4 4
Purchase of
common
shares, net (6) (6) (6)
Reduction of
par value
Changes in
minimum
pension
liability (1,078) (1,078)
Capitalized
development
cost (1) 1 -
Foreign
currency
translation
adjustments (175) (175) (175)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2002 48 20 286,147,260 572 1,803 82 (896) 1,655 3,216 (1,118) 2,098
------------------------------------------------------------------------------------------------------------------------------------
|
* EUR 0.70 per ordinary share and EUR 13.62 per priority share as final
dividend for previous year, and EUR 0.30 and EUR 13.61, respectively, was
declared as interim dividend for current year.
** EUR 0.90 per ordinary share and EUR 13.62 per priority share as final
dividend for previous year, and EUR 0.30 and EUR 12.00, respectively, was
declared as interim dividend for current year.
*** EUR 0.90 per ordinary share and EUR 12.00 per priority share as final
dividend for previous year, and EUR 0.30 and EUR 12.00, respectively, was
declared as interim dividend for current year.
125
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(14) Commitments and Contingent Liabilities
Environmental Matters
The Company is subject to extensive European Union, national and local laws and
regulations governing discharges to the air and water as well as the handling
and disposal of solid and hazardous wastes. In addition, the Company is subject
to regulatory requirements governing the remediation of environmental
contamination associated with past releases of hazardous substances.
Governmental authorities have the power to enforce compliance with these
requirements, and violators may be subject to civil or criminal penalties,
injunctions, or both. Third parties also may have the right to sue to enforce
compliance. The Company is involved in (legal) proceedings with regulatory
authorities in various countries that may require the Company to pay fines
relating to violations of environmental laws and regulations, comply with more
rigorous standards or other requirements, and incur capital and operating
expenses to meet such obligations.
The Company is subject to hazardous substance cleanup laws in various countries
that impose liability for the costs of cleaning up contamination resulting from
past spills, disposal or other releases of hazardous substances. In particular,
the Company may be subject to liability under the United States
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund") and similar laws that impose liability-without a showing of
fault, negligence or regulatory violation-on the generators of hazardous
substances that have caused, or may cause, environmental contamination.
Pursuant to CERCLA, in certain circumstances, the United States Environmental
Protection Agency ("EPA") may order one or more potentially responsible parties
("PRPs") to clean up environmental contamination. In other cases, the EPA may
clean up a site and then seek reimbursement of expenditures of federal funds
from PRPs. Courts have interpreted CERCLA generally to impose joint and several
liability without regard to fault for cleanup (and certain other) costs on all
PRPs. This means that each PRP conceivably could be held liable for the entire
amount of necessary cleanup costs. As a practical matter, however, liability is
often apportioned among PRPs based on the volume and/or toxicity of the wastes
disposed by each PRP.
It is the Company's policy to accrue and charge against earnings environmental
cleanup costs when it is probable that a liability has been incurred and an
amount is reasonably estimable. These accruals are reviewed periodically and
adjusted, if necessary, as assessments and cleanups proceed and additional
information becomes available. Environmental liabilities can change
substantially by the emergence of additional information on the nature or
extent of contamination, the necessity of employing particular methods of
remediation, actions by governmental agencies or private parties, or other
factors of a similar nature. Cash expenditures often lag behind the period in
which an accrual is recorded by a number of years.
In accordance with the aforementioned policies, as of December 31, 2002, the
aggregate environmental related long-term liabilities and accruals accounted
for amounted to EUR 204 million (December 31, 2001: EUR 211 million).
Although the Company believes that over the years it and its predecessors
utilized operating practices that were standard in the relevant industry and
were in compliance with existing environmental regulations, hazardous materials
may have been released in or under currently-or previously-operated sites.
Consequently, the Company may be required to remediate contamination at some of
these sites. Although the Company does not have sufficient information to
estimate its potential liability in connection with any potential future
remediation, it believes that if any such remediation is required, it will
occur over an extended period of time. The Company anticipates that there may
be a need for future provisions for
126
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
environmental costs which, in management's opinion based on information
currently available, would not have a material adverse effect on the Company's
financial position and liquidity, but could be materially adverse to the
Company's results of operations in any one accounting period. Environmental
liabilities can change substantially by the emergence of additional information
on the nature or extent of contamination, the necessity of employing particular
methods of remediation, actions by governmental agencies or private parties or
other factors of a similar nature.
While it is not feasible to predict the outcome of all pending environmental
exposures, it is reasonably possible that there will be a need for future
provisions for environmental costs which, in management's opinion based on
information currently available, would not have a material effect on the
Company's financial position but could be material to the Company's results of
operations in any one accounting period.
Antitrust Cases
Akzo Nobel is involved in investigations by the antitrust authorities in the
United States, Canada, and the European Union into alleged violations of the
respective antitrust laws for some products in these jurisdictions. In
addition, the Company is involved in civil damage claims in relation to some of
these alleged antitrust violations. Fines, civil damage settlements, and legal
costs incurred in 2002 in connection with these cases amounted to EUR 9 million
(2001: EUR 59 million). Based on an estimate of the probable fines, civil
damages, and costs to be paid over a number of years to come-taking into
account legal advice and the current facts and circumstances-the Company has a
provision amounting to EUR 102 million (2001: EUR 111 million).
However, it should be understood, that in light of future developments such as
(a) the outcome of the investigations of the various antitrust authorities, (b)
potential additional lawsuits by (indirect) purchasers, (c) possible future
civil settlements, (d) the failure to satisfy the conditions of any future
class action settlement, and (e) adverse rulings or judgments in the pending
investigations or in related civil suits, the antitrust matters could result in
additional liabilities and related costs. The Company at this point in time
cannot estimate any additional amount of loss or range of loss in excess of the
recorded amounts with sufficient certainty to allow such amount or range of
amounts to be meaningful. Moreover, the aforementioned liabilities are
typically paid over a number of years and the timing of such payments cannot be
predicted with confidence. The Company believes that the potential aggregate
amount of any additional fines and civil damages to be paid will not materially
affect the Company's financial position. The aggregate amount, however, could
be material to the Company's results of operations in any one accounting
period.
With regard to Flexsys, a 50/50 joint venture with Solutia Inc. for rubber
chemicals, authorities in the USA, Canada and Europe are investigating past
commercial practices in this industry. We have been informed by Flexsys
management that it is fully cooperating with the authorities and will continue
to do so. We are also aware of a number of purported class actions that have
been filed against Flexsys in various state courts in the United States.
Other Contingent Liabilities (including Remeron(R) Cases)
The Company brought claims against certain generic drug manufacturers in the
United States under the U.S. Hatch-Waxman Act, alleging infringement by such
manufacturers of the Company's U.S. patent protecting the use of mirtazapine
(Remeron(R)) in combination with one or more SSRI's for the treatment of
depression. In two of the patent infringement cases brought by the Company, the
Court granted summary judgment of noninfringement in favor of the defendants.
In light of recent new case law in an unrelated case providing guidance
regarding inducement to infringe issue under the Hatch-Waxman Act, the Company
has decided not to further pursue any actions and to withdraw all pending cases
based on infringement of the above reference patent against the generic drug
manufacturers.
127
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Some generic drug manufacturers sued by the Company have brought antitrust
counterclaims against the Company in the United States. In addition, antitrust
claims have been filed against the Company in the United States on behalf of
classes of (in)direct purchasers of Remeron(R). The Company is aggressively
defending these claims.
There are pending against Akzo Nobel N.V. and its subsidiaries a number of
other claims, all of which are contested. The Company is also involved in
disputes with tax authorities in several jurisdictions.
While the outcome of these claims and disputes cannot be predicted with
certainty, management believes, based upon legal advice and information
received, that the final outcome will not materially affect the consolidated
financial position but could be material to the Company's result of operations
in any one accounting period.
Commitments
Purchase commitments for property, plant and equipment aggregated EUR 127
million at December 31, 2002. At December 31, 2001, these commitments totaled
EUR 140 million. In addition, the Company has purchase commitments for raw
materials and supplies incident to the ordinary conduct of business.
Long-term liabilities contracted in respect of leasehold, rental, operational
leases, research, etc., aggregated EUR 647 million at December 31, 2002 (at
December 31, 2001: EUR 561 million). Payments due within one year amount to
EUR 188 million (2001: EUR 141 million); payments due after more than five
years amount to EUR 99 million (2001: EUR 167 million).
Expenses for non-cancelable operating leases and other commitments in 2002,
2001 and 2000 were EUR 141 million, EUR 143 million and EUR 168 million,
respectively.
Obligations under long-term non-cancelable operating leases and other
commitments for each of the next five years and thereafter are as follows.
---------------------------------------------
Millions of euros
---------------------------------------------
2003 188
2004 209
2005 75
2006 44
2007 32
Later 99
---------------------------------------------
Total 647
=============================================
|
Guarantees
In November 2002, the FASB issued interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtness to Others.
Akzo Nobel N.V. has declared in writing that it accepts joint and several
liability for contractual debts of certain Netherlands consolidated companies.
These debts, at December 31, 2002, aggregating EUR 1.8 billion (at December 31,
2001: EUR 1.2 billion), are included in the consolidated balance sheet.
128
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Additionally, at December 31, 2002, guarantees were issued on behalf of
consolidated companies in the amount of EUR 2.4 billion (at December 31, 2001:
EUR 3.2 billion). The debts and liabilities of the consolidated companies
underlying these guarantees are included in the Consolidated Balance Sheet or
in the amount of long-term liabilities contracted in respect of leasehold,
rental, operational leases, research, etc.
Guarantees relating to nonconsolidated companies amounted to EUR 9 million (at
December 31, 2001: EUR 11 million). As general partner in several partnerships,
Akzo Nobel companies are liable for obligations incurred by these partnerships.
At December 31, 2002, the risk ensuing from these liabilities was EUR 159
million (at December 31, 2001: EUR 156 million).
There are agreements to provide additional consideration in a business
combination to the seller if contractually specified conditions related to the
acquired entity are achieved. At December 31, 2002, we had recognized
contingent liabilities for estimated payments amounting to EUR 21 million,
which are included in the obligations under long-term non-cancelable operating
leases and other commitments, as reported above under Commitments. The total
exposure amounted to EUR 41 million.
(15) Information about Financial Instruments
For information on the commercial paper programs reference is made to Note 9.
For information on the standby multicurrency loan facility reference is made to
Note 11.
Foreign Exchange Risk Management
The Company routinely enters into forward exchange contracts to hedge
transaction exposures.
These principally arise with respect to assets and liabilities or firm
commitments related to sales and purchases. The purpose of Akzo Nobel's foreign
currency hedging activities is to protect the Company from the risk that the
eventual functional currency net cash flows resulting from trade transactions
are adversely affected by changes in exchange rates.
At December 31, 2002, outstanding contracts to buy currencies totaled EUR 1.0
billion (at December 31, 2001: EUR 0.8 billion), while contracts to sell
currencies totaled EUR 2.1 billion (at December 31, 2001: EUR 2.2 billion).
These contracts mainly relate to pounds sterling, U.S. dollars, Canadian
dollars, Swedish kronor, and Japanese yen.
The Company does not use financial instruments to hedge the translation risk
related to equity, intercompany loans of a permanent nature, and earnings of
foreign subsidiaries and nonconsolidated companies.
Interest Risk Management
In principle, the Company manages interest risk by financing noncurrent assets
and a certain portion of current assets with equity, provisions, and long-term
borrowings with fixed interest rates. The remainder of current assets is
financed with short-term debt, including floating rate short-term borrowings.
In line with this policy, a number of swap contracts and forward rate
agreements have been entered into.
129
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The Company swapped EUR 500 million fixed rate liabilities with an interest
rate of 5.625 percent with floating rate LIBOR-related liabilities of USD 445
million and a remaining maturity of 6 years.
The Company concluded forward rate agreements covering USD 440 million whereby
interest percentages are fixed in a range from 1.895 percent to 2.176 percent
for the period January 1 - November 7, 2003, and covering EUR 50 million with
an interest percentage of 3.17 percent for the period January 1 - March 6, 2003
and of 3.05 percent for May 6 - August 6, 2003.
Fixed rate liabilities with an interest rate of 6.3 percent were swapped with
floating rate EURIBOR-related liabilities for an amount of EUR 145 million and
a remaining maturity of 3 years. Floating rate EURIBOR-related liabilities were
swapped with fixed rate liabilities with an interest rate of 5.3 percent for an
amount of EUR 145 million and a remaining maturity of 3 years.
The Company has entered into interest rate cap agreements with a cap rate of
8.5 percent for an amount of USD 200 million (year-end 2002: EUR 191 million;
year-end 2001: EUR 227 million) to protect itself against the risk of excessive
increases in interest rates on short-term U.S. dollar borrowings. These
contracts will expire in 2003.
Akzo Nobel has swap agreements related to a 9 percent pound sterling loan with
an outstanding amount of EUR 7 million at December 31, 2002. Under the terms of
these agreements Akzo Nobel will pay to financial institutions the euro
equivalent of the original amount of the loan and interest on such amount at a
fixed rate of 7.6 percent in exchange for its obligations under this loan
agreement.
The above-mentioned Akzo Nobel financial instruments are accounted for as
follows:
(a) In the balance sheet, amounts in foreign currencies are translated into
euros at year-end exchange rates. Foreign exchange differences are
included in income. Results on currency hedging contracts are also
recognized in income to offset the foreign exchange differences on the
related hedged items. Exchange differences on anticipatory hedges of firm
commitments regarding sales and purchases are deferred on the balance
sheet until the hedged transactions have been reflected in the accounts.
The capitalized or accrued amount is included in receivables or current
liabilities;
(b) interest swaps contracts: interest is accrued in the statement of income
as part of interest expense.
Credit Risk
Under the agreements concluded for its financial instruments, the Company is
exposed to credit loss in the event of nonperformance by the counterparty to
any one of these agreements. In the event of a counterparty's default, the
resulting exposure would equal the difference between (a) the prevailing market
interest rate and exchange rate and (b) the agreed swap interest and exchange
rate.
The Company has no reason to expect nonperformance by the counterparties to
these agreements,
given their high credit ratings.
Commodities
In order to hedge the price risk of natural gas, the Company has entered into
an accumulating swap for 100,000 barrels of petroleum for each month of 2003,
whereby the price per barrel is fixed at USD 21.00, but only in case the market
price is below USD 27.00.
130
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments do not
differ materially with the exception of the following:
--------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
Millions of euros Carrying Estimated Carrying Estimated
Asset/(liability) amount fair value amount fair value
--------------------------------------------------------------------------------
Foreign currency contracts 108 113 (35) (30)
Interest rate currency swap 76 131
Interest swap contracts - 4 - 6
Interest rate cap contracts - - 1 -
Forward rate agreements - (1)
Long-term borrowings (2,797) (2,947) (2,220) (2,262)
Petroleum swap - - - 1
================================================================================
|
The fair value of foreign currency contracts, swap contracts, and petroleum
options is estimated by obtaining quotes from brokers.
The fair value of interest rate currency swaps is obtained from dealer quotes.
The fair value of interest swap contracts was estimated from discounted
anticipated cash flows at prevailing market rates.
The fair value of interest rate cap contracts is obtained from dealer quotes.
This value represents the estimated amount the Company would receive to
terminate the contracts, taking into consideration current interest rates and
the credit worthiness of the counterparties.
The fair value of the Company's long-term borrowings is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt with similar maturities.
The carrying amounts of cash and cash equivalents, receivables, short-term
borrowings and other current liabilities approximate fair value due to the
short maturity period of those instruments.
The Company has other financial instruments, which are not significant.
(16) Financing Charges
Interest expense was reduced by EUR 7 million, EUR 5 million, and EUR 9 million
in 2002, 2001 and 2000, respectively, due to the capitalization of financing
expenses of capital investment projects under construction.
131
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(17) Income Taxes
The Company recognizes deferred tax assets in so far as their realization is
more likely than not.
Tax charges/(benefits) are included in the statements of income as follows:
--------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
--------------------------------------------------------------------------------
Operating income less financing charges 335 281 440
Nonconsolidated companies* (1) 9 (8)
Extraordinary items - 13 (45)
--------------------------------------------------------------------------------
Total 334 303 387
================================================================================
|
* Includes nonrefundable withholding taxes for dividends and income taxes
relating to the Company's share in partnership earnings.
Pre-tax income (including extraordinary items and earnings from nonconsolidated
companies) in the Netherlands and from foreign operations is as follows:
--------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
--------------------------------------------------------------------------------
The Netherlands 122 46 231
Foreign 1,065 959 1,146
--------------------------------------------------------------------------------
Total 1,187 1,005 1,377
================================================================================
|
The tax charges/(benefits) in the Netherlands and from foreign operations were as follows:
--------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
--------------------------------------------------------------------------------
The Netherlands
Current tax 48 7 85
Deferred tax (6) 9 (51)
---- ---- ----
42 16 34
Foreign
Current tax 322 177 236
Deferred tax (30) 110 117
---- ---- ----
292 287 353
--------------------------------------------------------------------------------
Total 334 303 387
================================================================================
|
132
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The table below reconciles the normal corporation tax rates in the Netherlands
to the effective consolidated rates.
--------------------------------------------------------------------------------------------------------------------
Percentages 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Corporate tax rate in the Netherlands 35 35 35
Nontaxable income from nonconsolidated companies (excluding partnerships) (4) (1) (1)
Effect of lower tax rates in specific countries (4) (3) (2)
Tax exempt income/loss (1) (3) (5)
Change in valuation allowance 2 2 1
--------------------------------------------------------------------------------------------------------------------
Total 28 30 28
====================================================================================================================
|
At December 31, 2002, losses carried forward amounted to EUR 786 million, of
which EUR 123 million will expire within five years. For an amount of EUR 373
million of losses, there is no expiration date.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002
and 2001, are presented below.
-----------------------------------------------------------
Millions of euros 2002 2001
-----------------------------------------------------------
Net operating loss carry forwards 204 233
Provisions 393 387
Intangible assets 85 86
Property, plant and equipment (255) (239)
Overfunding at pension funds (162) (182)
Others (308) (381)
----- -----
(43) (96)
Valuation allowance (65) (45)
-----------------------------------------------------------
Net deferred taxes (108) (141)
===========================================================
|
The valuation allowance for deferred tax assets as of January 1, 2002 and 2001,
was EUR 65 million and EUR 45 million, respectively. The net change in the
valuation allowance for the years ended December 31, 2002 and 2001, was an
increase of EUR 20 million and of EUR 13 million, respectively. In assessing
the valuation of deferred tax assets, management considers whether it is more
likely than not that these deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which these temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 2002. The amount of the deferred
tax assets considered realizable, however, could be reduced in the near term if
future estimates of projected taxable income during the carry forward period
are lower.
133
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
No taxes have been provided for approximately EUR 0.7 billion of unremitted
earnings of certain foreign subsidiaries as of December 31, 2002 (2001: EUR 2.0
billion). The remittance of these amounts would not lead to an income tax
charge in the Netherlands and, in case of nonrefundable withholding taxes, part
of these withholding taxes would be available for tax credits.
(18) Other Results
The following items are included as other results:
Millions of euros 2002 2001 2000
--------------------------------------------------------------------------------
Royalties 57 48 66
Results on sale of redundant assets 5 3 2
Currency exchange differences (15) 4 2
Other items 6 9 18
--------------------------------------------------------------------------------
Total 53 64 88
================================================================================
|
(19) Extraordinary and Nonrecurring Items
Extraordinary items
In 2002, no extraordinary items were recognized.
In 2001, the following extraordinary items were recognized:
--------------------------------------------------------------------------------
Millions of euros Gross Taxes Net
--------------------------------------------------------------------------------
Divestiture
- Diagnostics business 79 (23) 56
- Printing Inks (3) 10 7
--------------------------------------------------------------------------------
Total 76 (13) 63
================================================================================
|
For information on the divestiture of the Diagnostics business and Printing
Inks reference is made to Other Changes in Consolidated Interests in Note 2.
In 2000, the following extraordinary items were recognized:
--------------------------------------------------------------------------------
Millions of euros Gross Taxes Net
--------------------------------------------------------------------------------
Divestiture
- Chefaro 90 90
- Other 40 (5) 35
Antitrust cases (200) 50 (150)
--------------------------------------------------------------------------------
Total (70) 45 (25)
================================================================================
|
134
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
For information on the divestiture of Chefaro, reference is made to Other
Changes in Consolidated Interests in Note 2. For information on the antitrust
cases reference is made to Note 14.
Nonrecurring items
In 2002, 2001 and 2000, the following nonrecurring charges
for consolidated companies were included:
--------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
--------------------------------------------------------------------------------
Gains on divestments 91 26
Pension premium refund Sweden 15 19 11
Asset impairments and restructurings at:
- Pharma (111) (36)
- Coatings (26) (201) (18)
- Chemicals (99) (257) (77)
--------------------------------------------------------------------------------
Total (130) (449) (84)
================================================================================
|
The net nonrecurring after-tax gain for nonconsolidated companies in 2001
include a net profit on the gain of the divestment of the Company's
participation in Akzo PQ-Silica and results relating to Acordis.
The net nonrecurring after-tax gain for nonconsolidated companies in 2000
related to the gain on the divestment of the Company's participation in Tosoh
Akzo Corporation and the Company's share in the gain on the divestment of
Twaron Products by Acordis, partially offset by the effect of the settlement
for the Acordis divestment.
(20) Provisions for Pensions and Postretirement Benefits other than Pensions
Akzo Nobel has a number of defined benefit pension plans covering the majority
of employees.
The benefits for these plans are based primarily on years of service and
employees' compensation.
The funding policy for the plans is consistent with local requirements in the
countries of establishment.
Obligations under the defined benefit plans are systematically provided for by
depositing funds with trustees or separate foundations, under insurance
policies, or by financial statement provisions. Plan assets principally consist
of long-term interest-earning investments, quoted equity securities, and real
estate.
Akzo Nobel also provides certain healthcare and life insurance benefits for
most of the Company's retired employees in the United States and the
Netherlands. The Company accrues for the expected costs of providing such
postretirement benefits during the years that the employee renders the
necessary service.
Below a table is provided with a summary of the changes in the pension benefit
obligations and plan assets for 2002 and 2001. Also provided is a table with a
summary of the changes in the accumulated postretirement benefit obligations
and plan assets for 2002 and 2001.
135
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
-------------------------------------------------------------------------------------------------
Pensions Other postretirement
benefits
Millions of euros 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------
Benefit obligation
Balance at beginning of year (7,950) (7,507) (412) (334)
Acquisitions (38) (1) (10)
Divestments/curtailments 37 26 1 13
Service cost (238) (250) (15) (13)
Interest cost (448) (449) (28) (25)
Plan amendments 3 (1) (10)
Benefits paid 436 416 23 21
Actuarial gains and losses (436) (107) (142) (50)
Changes in exchange rates 279 (77) 59 (14)
------ ------ ---- -----
Balance at end of year (8,355) (7,950) (524) (412)
Plan assets
Balance at beginning of year 6,707 7,380 2 2
Acquisitions 31 -
Divestments/curtailments (10) (6)
Contribution by employer 340 145
Contribution by employees 12 23
Benefits paid (393) (361) - -
Actual return on plan assets (477) (556) - -
Changes in exchange rates (228) 82 - -
------ ------ ---- -----
Balance at end of year 5,982 6,707 2 2
------ ------ ---- -----
Funded status (2,373) (1,243) (522) (410)
Unrecognized net loss/(gain) 2,179 916 127 (9)
Unrecognized prior service costs 170 203 11 5
Unrecognized net transition obligation - (2)
Minimum pension liability (1,794) (93)
--------------------------------------------------------------------------------------------------
Net balances (1,818) (219) (384) (414)
==================================================================================================
The net balance of the pension plans is recognized in the Consolidated Balance Sheet as follows:
--------------------------------------------------------------------------------------------------
Millions of 2002 2001
--------------------------------------------------------------------------------------------------
- Prepaid pension costs under other
financial noncurrent assets 579 656
- Provisions for pensions and other
postretirement benefits under provisions (2,397) (875)
--------------------------------------------------------------------------------------------------
(1,818) (219)
==================================================================================================
|
136
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The weighted average assumptions underlying the pension computation
at December 31 were:
----------------------------------------------------------------------------------------------
Percent 2002 2001
Discount rate 5.6 6.0
Rate of compensation increase 3.6 3.8
Expected return on plan assets 6.8 7.2
----------------------------------------------------------------------------------------------
The 2002, 2001, and 2000 net periodic pension cost for the defined benefit pension plans was as follows:
----------------------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
----------------------------------------------------------------------------------------------
Service cost for benefits earned during the period
226 227 199
Interest cost on projected benefit obligation
448 449 418
Expected return on plan assets (460) (521) (498)
Net amortization of unrecognized net transition obligation
- - (4)
Amortization of prior service cost 16 20 15
Net actuarial (gain) / loss
recognized 36 (2) (2)
Settlement/curtailment loss 1 - 7
----------------------------------------------------------------------------------------------
Net pension cost 267 173 135
==============================================================================================
|
The principal defined benefit plans referred to above cover approximately
60 percent of Akzo Nobel's employees. The remaining plans primarily represent
defined contribution plans. Expenses for these plans totaled EUR 31 million in
2002, EUR 48 million in 2001 and EUR 44 million in 2000.
Due to the substantial decline in stock markets, at December 31, 2002, the
accumulated benefit obligation for all pension plans exceeded the value of plan
assets. As a consequence, the Company recognized additional provisions for
minimum pension liabilities in 2002 of EUR 1,701 million, through a direct
charge against shareholders' equity of EUR 1,555 million (EUR 1,078 million
after taxes) and of intangible assets for prior service costs of EUR 146
million. The situation at December 31, 2001, resulted in additional provisions
in 2001 of EUR 62 million, which were recognized by means of charge against
shareholders' equity of EUR 53 million (EUR 32 million after taxes) and as
intangible assets for prior service costs of EUR 9 million.
137
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
Net periodic other postretirement benefit costs are as follows:
----------------------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
----------------------------------------------------------------------------------------------
Service cost for benefits
allocated 15 13 12
Interest cost on accumulated
postretirement obligation 28 25 22
Amortization of prior service cost - (1) (1)
Net actuarial (gain)/loss
recognized - (3) (2)
Curtailment (gain)/loss 1 (13) 7
----------------------------------------------------------------------------------------------
Net other postretirement cost 44 21 38
==============================================================================================
|
For postretirement healthcare benefit plans in the United States, representing
approximately 70 percent of the obligations, accruals have been calculated
using a healthcare cost increase rate of 10.0 percent decreasing gradually to
5.0 percent over the next 4 years and remaining at that level thereafter (for
December 31, 2001: 7.5 percent gradually decreasing to 5.5 percent over the
next 4 years and remaining at that level thereafter; for December 31, 2000:
7.15 percent decreasing gradually to 5.0 percent over the next 4 years and
remaining at that level thereafter). The discount rate was 6.75 percent for
December 31, 2002, 7.5 percent at December 31, 2001 and 7.75 percent for 2000.
For the plans in the Netherlands a healthcare cost increase rate of 4.0 percent
per year was used with a 5.25 percent discount rate for December 31, 2002
(December 31, 2001: 4.0 percent and 5.5 percent, respectively; 2000: 4.0
percent and 5.5 percent, respectively).
A 1-percent increase in the assumed healthcare cost increase rate would have
increased the 2002 postretirement healthcare cost by EUR 7 million and the
accumulated benefit obligation at December 31, 2002 by EUR 60 million.
(21) Application of Generally Accepted Accounting Principles in the United
States of America
The accounting principles followed in the preparation of the consolidated
financial statements (NL GAAP) differ in some respects from those generally
accepted in the United States of America (US GAAP).
Those differences, which have an effect on net income and/or shareholders'
equity, are as follows:
(a) For NL GAAP purposes, until 1999 goodwill was charged directly to
shareholders' equity. Since 2000,
goodwill is capitalized and amortized over its estimated useful life not
exceeding 20 years.
For US GAAP, until 2001 goodwill was capitalized and amortized over its
estimated useful life not exceeding 40 years.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
of SFAS No. 142 effective January 1, 2002. As of January 1, 2002, goodwill
is determined to have an indefinite useful life, and therefor no longer
amortized. Annually goodwill is tested for impairment in accordance with
the provisions of SFAS No. 142.
138
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
As a consequence, the unamortized goodwill balances per January 1, 2002, of pre
2000 acquisitions are to be capitalized for US GAAP and are no longer
amortized. Starting in 2002, the NL GAAP amortization of goodwill related
to post 1999 acquisitions has to be reversed for US GAAP. For 2002 this was
an amount of EUR 19 million.
The impairment test in accordance with the provisions of SFAS No. 142 did not
result in additional charges in the Company's statement of income, except
for the items mentioned under caption (b).
An analysis of the change in goodwill under US GAAP during 2002, 2001 and 2000
is as follows:
------------------------------------------------------------------------------------
Millions of euros
------------------------------------------------------------------------------------
Balance at December 31, 1999 3,802
NL GAAP goodwill written off against equity on companies acquired in 1999 16
Amortization for the year (147)
Additional write-downs (see (b) below) (27)
Foreign currency translation adjustments 48
------------------------------------------------------------------------------------
Balance at December 31, 2000 3,692
Amortization for the year (140)
Additional write-downs (see (b) below) (102)
Foreign currency translation adjustments 26
------------------------------------------------------------------------------------
Balance at December 31, 2001 3,476
Reversal of NL GAAP amortization 19
Additional write-downs (see (b) below) (17)
Foreign currency translation adjustments (168)
------------------------------------------------------------------------------------
Balance at December 31, 2002 3,310
====================================================================================
|
(b) The Company annually tests the US GAAP goodwill for impairment. This
adjustment also includes the write-down of any remaining unamortized
goodwill associated with businesses disposed of during the year. For 2002
the write down concerns the unamortized goodwill of a part of the Akcros
business, which was divested in April 2002. For 2001 the write-down mainly
concerns unamortized goodwill related to the Diagnostics business of
Organon Teknika, and Printing Inks, divested at the end of June and the
end of October, respectively. For 2000, the write down is mainly related
to unamortized goodwill for Chefaro, divested at year-end 2000.
(c) During 1995, the Company transferred its rubber chemicals activities into
a 50-50 joint venture, Flexsys, with Solutia Inc. Under NL GAAP the
carrying value of the investment at December 31, 2002, was EUR 155 million
and under US GAAP EUR 158 million, (at December 31, 2001: EUR 201 million
and EUR 209 million, respectively). The higher carrying value under US
GAAP is principally related to the goodwill associated with the Akzo Nobel
businesses transferred into the joint venture. Such goodwill had been
previously charged directly to equity for NL GAAP purposes.
(d) In accordance with NL GAAP, stock compensation costs are charged to equity
upon exercise of the stock appreciation rights. In accordance with APB 25,
compensation costs, including the change in the liability for the
difference between the exercise and the market price, should be recognized
as a charge/credit against income.
139
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
(e) In accordance with NL GAAP development costs are to be capitalized and
amortized, if certain conditions have been met. US GAAP does not allow
capitalization and amortization of development costs. For US GAAP purposes,
these costs have to be expensed as incurred. During 2002, the Company did
not capitalize additional development costs and recognized an amortization
charge of EUR 1 million for NL GAAP purposes.
(f) In 2002, the Company extended restructuring programs at all three groups.
Included in the charge were provisions for exit costs of EUR 8 million
(EUR 5 million after taxes) for restructuring plans which were announced
before the date of the financial statements, but after December 31, 2002,
which is allowed under NL GAAP. In accordance with US GAAP, recognition of
these provisions is reversed, since these are not allowed until
restructuring plans are announced. In 2001, provisions for exit costs of
EUR 27 million (EUR 16 million after taxes) were reversed, which have been
taken into account in 2002 for US GAAP purposes.
(g) In accordance with the new standards under NL GAAP, the value of the
shares granted under the Akzo Nobel Employee Share Plan on the date of the
grant is recognized as a charge in the statement of income spread over the
vesting period, which in general is 3 years. This standard is effective
for rights granted from 2002 onwards. No charge was recognized for the
shares granted under the Akzo Nobel Employee Share Plan in 2001. In
accordance with US GAAP the fair value of these shares granted in 2001
(i.e. the share price at the date of grant) also has to be recognized as a
charge against income over the vesting period of the grant. For 2002, the
additional charge amounted to EUR 3 million (EUR 2 million after taxes).
(h) In accordance with NL GAAP, results on foreign currency forward hedging
contracts (determined at year-end exchange rates) are recognized in income
to offset the foreign exchange differences on the related hedged items.
Exchange differences on anticipatory hedges of firm commitments regarding
sales and purchases are deferred on the balance sheet until the hedged
transactions have been reflected in the accounts. For interest swap
contracts, interest is accrued in the statement of income as part of
interest expense.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments ("SFAS 133"), as amended by SFAS's 137 and 138, is
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000 and was therefore adopted by Akzo Nobel in 2001. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
Statement requires every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS 133
requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
The Company does not designate its derivatives for hedge accounting in
accordance with US GAAP. Accordingly, changes in fair value of derivative
instruments are recognized currently in earnings.
The cumulative effect for US GAAP purposes at January 1, 2001 of the
implementation of SFAS 133 on net income was a gain of EUR 3 million for
the foreign currency forward contracts and a gain of EUR 15 million for
interest-rate swap contracts, as well as a loss of EUR 1 million for the
interest rate cap contract and a loss of EUR 2 million relating to certain
futures contracts to purchase electricity, all figures before taxes. The
net after-tax cumulative effect was a gain of EUR 10 million.
140
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The effect on US GAAP net income for 2002 is nil for the foreign currency
contracts, and the interest rate swap contracts, a gain of EUR 1 million
for the interest rate cap contract and a gain of EUR 55 million on the
interest rate currency swap, a loss of EUR 1 million for the forward rate
agreements, nil for the future contracts to purchase electricity, and a
loss of EUR 1 million for the petroleum options. The net after-tax effect
was a gain of EUR 35 million.
The effect on US GAAP net income for 2001 is a gain of EUR 2 million for
the foreign currency forward contracts, a loss of EUR 9 million for the
interest rate swap contracts, nil for the interest rate cap contract, a
gain of EUR 3 million for the futures contracts to purchase electricity,
and a gain of EUR 1 million for the petroleum options. The net after-tax
effect was a loss of EUR 5 million.
(i) Represents the income tax effects of the aforementioned adjustments.
(j) The Company holds or held 50 percent interests in the following companies:
- Akzo Nobel Chang Cheng Ltd, China;
- Akzo Nobel Chang Cheng Coatings (Beijing) Co. Ltd.;
- Akzo Nobel Chang Cheng (Vietnam) Ltd.;
- Interpon Powder Coatings Ltd.;
- Akzo Nobel Chang Cheng Ltd. (Powder);
- Akzo Nobel Chang Cheng (Taiwan) Ltd;
- Akzo Nobel Inda SA de CV; and.
- International Paint (Korea) Ltd., Korea (in 2002 interest increased to
60 percent).
The abovementioned companies have been fully consolidated into the
consolidated financial statements of Akzo Nobel, taking into account the
minority interest. This treatment is allowed for NL GAAP purposes, as
these companies are considered so-called group companies. The effect of
the difference with US GAAP-which requires accounting under the equity
method of such interests-on shareholders' equity and net income is nil.
If these interests had been treated as nonconsolidated companies on a US
GAAP basis the Consolidated Statement of Income for the year ended
December 31, 2002 would have shown a decrease in net sales of EUR 122
million, in operating income of EUR 21 million, in earnings of
consolidated companies less income taxes of EUR 16 million, and in
minority interest of EUR 8 million. On the other hand earnings from
nonconsolidated companies would have increased by EUR 8 million.
The Consolidated Statement of Income for the year ended December 31, 2001
would have shown a decrease in net sales of EUR 228 million, in operating
income of EUR 41 million, in earnings of consolidated companies less
income taxes of EUR 30 million, and in minority interest of
EUR 15 million. On the other hand earnings from nonconsolidated companies
would have increased by EUR 15 million.
The Consolidated Statement of Income for the year ended December 31, 2000,
would have shown a decrease in net sales of EUR 191 million, in operating
income of EUR 28 million, in earnings of consolidated companies less
income taxes of EUR 24 million, and in minority interest of
EUR 12 million. On the other hand, earnings from nonconsolidated companies
would have increased by EUR 12 million.
141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The major effects on the Consolidated Balance Sheet as at December 31,
2002 would have been a decrease in current assets of EUR 70 million, in
property, plant and equipment of EUR 28 million, in short-term liabilities
of EUR 44 million, and in minority interest of EUR 28 million, and an
increase in long-term borrowings of EUR 2 million. On the other hand,
nonconsolidated companies would have increased by EUR 28 million.
The major effects on the Consolidated Balance Sheet as at December 31,
2001 would have been a decrease in current assets of EUR 119 million, in
property, plant and equipment of EUR 44 million, in short-term liabilities
of EUR 67 million, in long-term borrowings of EUR 8 million, and in
minority interest of EUR 37 million. On the other hand, nonconsolidated
companies would have increased by EUR 37 million.
(k) The Company holds a 50 percent interest in the joint venture with Sanofi-
Synthelabo, which is included in the consolidated financial statements of
Akzo Nobel on a proportional basis, which is allowed for NL GAAP purposes.
The effect of the difference with US GAAP - which requires accounting as
nonconsolidated companies of such interests - on shareholders' equity and
net income is nil.
If Sanofi-Synthelabo had been treated as nonconsolidated company on a US
GAAP basis the Consolidated Statement of Income for the year ended December
31, 2002 would have shown an increase in operating income of EUR 49
million, and in earnings of consolidated companies less income taxes of EUR
31 million. On the other hand earnings of nonconsolidated companies would
have decreased by EUR 31 million.
The Consolidated Statement of Income for the year ended December 31, 2001
would have shown an increase in operating income of EUR 33 million, and in
earnings of consolidated companies less income taxes of EUR 31 million. On
the other hand earnings of nonconsolidated companies would have decreased
by EUR 31 million.
The major effects on the balance sheet as at December 31, 2002, would have
been a decrease in property, plant and equipment of EUR 2 million, in
current assets of EUR 21 million and in short term liabilities of EUR 12
million. Provisions would have increased by EUR 11 million.
The major effect on the balance sheet as at December 31, 2001, would have
been a decrease in current assets of EUR 14 million, and in short term
liabilities of EUR 24 million. On the other hand provisions would have
increased by EUR 10 million.
142
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The reconciliation of net income is as follows:
---------------------------------------------------------------------------------------------
For the year ended December 31,
Millions of euros 2002 2001 2000
---------------------------------------------------------------------------------------------
Net income in accordance with NL GAAP 818 671 947
Adjustments to reported income:
US GAAP amortization of goodwill (a) (140) (147)
Reversal NL GAAP amortization of goodwill (a) 19
Goodwill write-downs (b) (17) (102) (27)
Joint venture (c) 3 (6) (10)
Stock compensation (d) 21 16 (27)
Development costs (e) 1 (6)
Restructuring provisions (f) (19) 27
Employee share plan (g) (3) (3)
Derivatives cumulative effect (h) 15
Derivatives effect 2002/2001 (h) 54 (7)
Income taxes (i) (17) (17) 9
---------------------------------------------------------------------------------------------
Net income / (loss) in accordance with US GAAP 860 448 745
Per share and ADS in accordance with US GAAP, in euros:
Basic earnings / (loss) per share/ADS 3.01 1.57 2.61
Diluted earnings / (loss) per share/ADS 3.00 1.56 2.60
---------------------------------------------------------------------------------------------
|
Comprehensive income is as follows:
---------------------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
---------------------------------------------------------------------------------------------
Net income / (loss) in accordance with US GAAP 860 448 745
Other comprehensive income / (loss), net of taxes
- Foreign currency translation adjustments (348) (72) 14
- Excess of minimum liability over unrecognized
prior service cost, before taxes (1,555) (40) (8)
- Tax on excess of minimum liability over
unrecognized prior service cost 477 8 4
---------------------------------------------------------------------------------------------
Comprehensive income / (loss) (566) 344 755
=============================================================================================
|
143
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The accumulated other comprehensive income / (loss) balances are as follows:
-----------------------------------------------------------------------
Foreign Minimum Accumulated
currency pension other
translation liability comprehensive
Millions of euros adjustments adjustment income
-----------------------------------------------------------------------
Balance at December 31, 1999 (346) (4) (350)
2000 change 14 (4) 10
-----------------------------------------
Balance at December 31, 2000 (332) (8) (340)
2001 change (72) (32) (104)
-----------------------------------------
Balance at December 31, 2001 (404) (40) (444)
2002 change (348) (1,078) (1,426)
-----------------------------------------
Balance at December 31, 2002 (752) (1,118) (1,870)
=======================================================================
|
The reconciliation of shareholders' equity is as follows:
-------------------------------------------------------------------------
December 31,
Millions of euros 2002 2001
-------------------------------------------------------------------------
Shareholders' equity in accordance with NL GAAP 2,098 2,878
Adjustments to reported shareholders' equity:
Goodwill (a) 3,310 3,476
Joint venture (c) 3 8
Stock-compensation (d) (22)
Development costs (e) (5) (6)
Restructuring provisions (f) 8 27
Employee share plan (g) (3)
Derivatives (h) 62 8
Income taxes (i) (21) (4)
-------------------------------------------------------------------------
Shareholders' equity in accordance with US GAAP 5,455 6,362
=========================================================================
|
An analysis of the change of shareholders' equity under US GAAP is as follows:
--------------------------------------------------------------------------------
Millions of euros 2002 2001 2000
--------------------------------------------------------------------------------
Balance at beginning of year 6,362 6,368 5,897
Net income / (loss) 860 448 745
Dividends paid (343) (343) (286)
Issuance of common shares 5 3 2
Purchase of common shares, net (3) (10)
Foreign currency translation adjustments (348) (72) 14
Excess of minimum liability over unrecognized prior
service cost, net of income taxes (1,078) (32) (4)
--------------------------------------------------------------------------------
Balance at end of year 5,455 6,362 6,368
================================================================================
|
144
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL
The reconciliation of the elements of the earnings per share computation is as
follows.
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2002 2001 2000
--------------------------------------------------------------------------------
Shares for basic earnings per share 285,827,092 285,888,385 285,902,574
Effect of dilutive securities 504,113 440,479 252,786
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Shares for diluted earnings per share 286,331,205 286,328,864 286,155,360
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(22) Supplemental Cash Flow Disclosures
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Millions of euros 2002 2001 2000
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Cash paid during the year for:
Interest 208 284 315
Income taxes 231 246 362
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|
145
Schedule II VALUATION AND QUALIFYING ACCOUNTS
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Foreign
Balance at Additions currency Balance
Millions of euros beginning of charged to translation at end of
period income results Deductions Other* period
------------------------------------------------------------------------------------------------------------------------
Reserves for doubtful accounts
Year ended
December 31, 2000 165 35 1 (28) 3 176
Year ended
December 31, 2001 176 44 1 (20) (21) 180
2001
Year ended
December 31, 180 43 (17) (25) 1 182
2002
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* Other is principally due to divestments.
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